CHAIRMAN’S AND 20 CHIEF EXECUTIVE’S 2 REPORT Impact and It’s been an implications [extra]ordinary On 29 March 2004, publicly announced the decision not to proceed with year … Project Aqua.

We’ve consented and almost completed construction of our fi rst wind farm; we’ve made signifi cant gains in encouraging energy effi ciency, and we faced claims around our water rights. ENERGY EFFICIENCY 12 EXECUTIVE SUMMARY 6 A key part of the equation

[EXTRA]ORDINARY EVENTS Energy effi ciency is an important element in solving ’s energy supply issues.

A four part section reporting on four key aspects of our business. WATER ALLOCATION 16 MERIDIAN’S PURPOSE 24

A national Our goal – to be a “Peak Performing Organisation”. During the year we have done issue a lot of work to develop our purpose further Growing pressure on New Zealand’s precious and ensure that all Meridian staff are united water resources looms as a serious threat to in a common focus. Meridian and to New Zealand’s future electricity supply. STRATEGY AND PERFORMANCE 26

Our challenges, strategies, achievements and progress.

OUR OPERATIONS 28 TE ÄPITI 8 Where we’re located in Australasia. An extraordinary asset

Te Äpiti is Meridian Energy’s fi rst wind farm, and New Zealand’s largest. The progress made on Te Äpiti has been one of our most signifi cant achievements this year.

COVER: MICAH PURTON, FROM AT .

2 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 OUR MANAGEMENT TEAM 8 POWERFUL 54 RESPONSIBILITIES 46 THOUGHTS 29 BOARD OF We answer to you. Because ultimately, DIRECTORS 56 Our performance is presented in line with we work for you. the 8 powerful thoughts that encompass the fi nancial, social and environmental FINANCIAL philosophies that shape our approach. INFORMATION 59

OVERVIEW OUR GROWTH 30 60 We are growing. That means getting better, CORPORATE not just bigger. GOVERNANCE 61

BOARD OF OUR CUSTOMERS 33 DIRECTORS 64 We won’t just mind our business. We’ll mind DIRECTORS’ our customers’ too. RESPONSIBILITY STATEMENT 65 OUR KNOWLEDGE 50 Knowledge equals power. When it is STATEMENT OF equally shared. FINANCIAL PERFORMANCE 66

STATEMENT OF MOVEMENTS IN EQUITY 66

STATEMENT OF FINANCIAL POSITION 67

STATEMENT OF CASH FLOWS 68 OUR PEOPLE 36 People make our world go round. And give NOTES TO THE OUR REPUTATION us a competitive advantage. 52 FINANCIAL STATEMENTS 69 We have a name to live up to. Meridian means “the peak of achievement”. OUR ENVIRONMENT REPORT OF THE 39 AUDIT OFFICE 90 Our power comes from nature. And we’re making it work for us. STATUTORY INFORMATION 91

SUSTAINABILITY APPENDIX AND BALANCE 43 94

If you take something out, you’ve got to put VERIFICATION something back. Balance is a life necessity. STATEMENT 96 DIRECTORY 99

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 3 CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT An extraordinary year

MERIDIAN ENERGY HAS ACHIEVED A NUMBER OF EXTRAORDINARY OUTCOMES THIS YEAR. WE’VE CONSENTED AND ALMOST COMPLETED CONSTRUCTION OF OUR FIRST WIND FARM; WE’VE MADE SIGNIFICANT GAINS IN ENCOURAGING ENERGY EFFICIENCY; WE FACED CLAIMS AGAINST OUR WATER RIGHTS; AND WE PRODUCED AN EXCELLENT, ABOVE PLAN FINANCIAL RESULT.

Financial Performance in a reorganisation of existing borrowings. The longer The surplus of $132.9 million (after tax) refl ects very term debt better refl ects the long-term nature of careful hydrological and risk management. High our business. infl ows during February were unprecedented and Te Äpiti continued to be high through the autumn and winter A major highlight for the year was the consenting and months, further improving fi nancial results. commencement of construction of Meridian’s 90 MW Meridian’s fi nancial performance is healthier in times Te Äpiti wind farm. Thorough consultation and an of good hydro conditions, rather than in dry years effi cient process meant that there were no appeals to when prices spike up but production is down and our applications for resource consents for Te Äpiti, and supply is constrained. This is because in dry years our consents were granted four days after hearings began. fi nancial performance is adversely affected by The effi ciency of the consenting process was mirrored the need to purchase electricity from the spot market by the speed and meticulous compliance in the at high prices to meet our fi xed price commitments project’s development. Te Äpiti was announced in to customers. May 2003, with construction beginning in November. One of the year’s fi nancial highlights was the During severe storms in February there was not a successful issue of $US400 million of unsecured notes single breach of our resource consents, an outstanding into the United States private placement market. achievement for Meridian and Higgins Construction With an average maturity of 12.5 years the issue was Ltd, the civil contractors working on the project. oversubscribed, an acknowledgement of the quality A safety audit resulted in an “Ideal” rating, and of our business. Proceeds of the issue have been used testifi ed to the quality of work being done on the

2 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 project. In spite of signifi cant downtime due to Winstone Pulp at its Karioi plant, which has resulted ”Meridian’s fi nancial the extremely wet summer, the fi rst power was in major energy effi ciency and environmental gains; performance is healthier in times of good hydro conditions, produced on 26 July 2004, only nine months and the construction of an emergency power supply at rather than in dry years when after commencement of construction. the redeveloped Auckland Hospital, which is expected prices spike up but production to achieve notable advances in energy effi ciency for is down and supply is Wind development constrained. This is because in the site once completed. The business case for Te Äpiti was developed dry years our fi nancial performance is adversely alongside the business case for another 90 MW Australian assets affected by the need to Meridian wind farm project, Wattle Point in South In Australia we have undertaken a comprehensive purchase electricity from the Australia. Using access to Australia’s renewable asset management review and have upgraded the spot market at high prices to meet our fi xed price energy subsidies, we have achieved crucial economies McKay Creek Power Station from 120 MW to commitments to customers.” of scale that can make wind farms economic. This is 150 MW, a high value improvement. Meridian has but one example of where our expansion in Australia also taken advantage of subsidies for renewable has brought benefi ts to New Zealand that would not energy projects, developing the 12.5 MW Banimboola otherwise be available. Power Station, another hydro project.

Te Äpiti is sited on a superb location for wind In contrast to New Zealand, Australia is currently generation and is one of few existing wind farms in experiencing an extreme dry period, with 90 percent the world that is economic on a stand-alone basis. of New South Wales declared a drought zone. While generation levels were well down on long term Our aim is to be a major player in the wind market. averages, informed trading meant that the operating As we continue to execute our wind strategy and fi nancial performance achieved budget. extract value from wind developments, wind is expected to be a major energy contributor for Southern Hydro is renowned for its trading skills, Meridian. We think there is potential for over which have had a benefi cial infl uence on trading 3,000 GWh of new wind prospects capable of strategies in New Zealand. It has also developed a being on line over the next three to fi ve years. valuable risk management instrument in the form of weather hedging. Energy effi ciency Providing customers at all levels with new products At a time when Australian energy companies are and helping them to be more energy effi cient have investing in New Zealand, we are pleased to be been key initiatives throughout the year. In leading the way across the Tasman. Christchurch we provided energy saving products to Transmission lower income customers through the Energy Saving The failure of the HVDC link (also known as the Vans initiative. Cook Strait Cable) in January brought a high Our goal of encouraging energy effi ciency and our commercial cost to Meridian, and to New Zealand, commitment to recognising our broader obligations to as no electricity could be transmitted between the the community converged when we made $150,000 North and South Islands. The failure was temporary, worth of energy saving installations in 21 Plunket but it exposed the signifi cant risk of total failure Family Centres throughout New Zealand. and the urgent need for substantial investment in transmission infrastructure. Meridian Solutions delivered a number of impressive energy effi ciency projects for corporate clients this There has been underinvestment in transmission for year. These include a $12 million project with many years. Constraints are common and have a

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 3 CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT

major infl uence on optimal use of generation. New Zealand’s energy future Transpower has put forward an extensive development Residential and commercial demand for electricity programme. Although this is ambitious from a consent both continue to grow, fuelled by immigration, and funding point of view, it is critical if New Zealand tourism and surging primary production, particularly is to have a reliable transmission system. We are in the dairy sector. It has been diffi cult to see the pleased to see the Electricity Commission is reviewing impact of these increased demands because of the pricing of transmission, which will provide electricity shortages in previous years, but we estimate Transpower with a reliable basis for investment. growth in underlying demand to be in excess of two Project Aqua percent per annum. High hydro infl ows over the last year have avoided high spot prices, but another dry A number of uncertainties led to the decision to year could change this quickly. withdraw from Project Aqua and these were widely publicised at the time. Concerns about the nature of Since the decision not to proceed with Project Aqua, existing and likely future water rights and increasing debate on demand and supply has intensifi ed. Coal delays in resolving Aqua’s consent process and likely has been identifi ed as having the potential to partly outcomes were central to the decision. meet the growing demand for electricity, but Kyoto commitments and the Government’s emphasis on From the time the Resource Management (Waitaki effi ciency and renewables seem to have been Catchment) Amendment Bill 2003 was tabled in overlooked in considering this option. Meeting Parliament in September 2003, there was great New Zealand’s future demand for electricity will uncertainty about the proposed allocation and present a challenge to the Government’s commitment consent processes and what they might deliver. This to energy effi ciency, and will require signifi cant provided the opportunity for public misinformation resource reallocation. and speculation, leading to emotional, rather than fact-driven debate. Uncertainty about consents in Meridian believes that in the long term hydro, wind the upper Waitaki Valley in turn created uncertainty and coal will be key supply options, and that at least about Meridian’s fi nancial capacity to deliver half of the growth in demand can be met by Project Aqua. Eventually the cost of delays became renewable projects. We see further development commercially unacceptable. opportunities in wind, which appear to be able to be delivered at costs below those of other energy sources. Cancelling Project Aqua was an unsatisfactory Despite the cancellation of Project Aqua, future hydro outcome for the Government’s policy targets around developments remain a viable proposition for renewable energy. It is also unsatisfactory for New Zealand. Meridian from a commercial perspective, and for New Zealand in terms of its impact on future security Meridian will continue to investigate new of supply. opportunities for growth. We will also continue to investigate ways to increase our contribution to While the cost of cancellation for Meridian was high supply by enhancing our existing assets. ($31 million after tax), this is less than three percent of the estimated total project cost. Had we proceeded Ready for the future to more detailed design before the consent was In the midst of the tough decisions of the last year lodged this write-down could have been two or three we underwent a reorganisation to align resources to times greater. strategic objectives. The reorganisation is the fi rst in

4 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 the fi ve years since Meridian’s inception, and refl ects The results that we have achieved this year in a a signifi cantly changed business and operating challenging industry environment while our own environment. Thorough consultation ensured that business adapts are a testament to the dedication staff were involved in the structure re-design. of everyone at Meridian.

During the year we said farewell to founding We believe we have an extraordinary story to tell and Board Member Phil Lough, who made an enormous that we have created many exciting opportunities for contribution to Meridian. We welcome Anne the years ahead. Blackburn to the Board with her wealth of fi nancial and business experience. Neil Cochrane left Meridian and we acknowledge his signifi cant achievements as Chief Financial Offi cer since 1999. We are pleased to Francis Small Keith Turner welcome Paul Smart and Chris Jones to the Executive CHAIRMAN CHIEF EXECUTIVE Management team.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 5 EXECUTIVE SUMMARY

Signifi cant Meridian Energy Events Signifi cant Industry Events

• Project Te Äpiti obtained resource consent within four days with • Underinvestment in transmission was again highlighted through fi rst power generated less than 11 months later. The construction the winter constraints in the upper . process stayed on track despite losing 85 days to bad weather • Demand for electricity continued to increase. conditions. • We were again able to run the Energy Saving Vans initiative with EnergySmart and the Community Energy Action Trust, visiting and installing energy saving products in approximately 590 homes in Christchurch. • Meridian’s existing rights to use water from the Waitaki catchment was challenged through proposed regulatory changes and court actions. • On 29 March 2004, Meridian Energy publicly announced the decision not to proceed with Project Aqua, our proposed hydro- irrigation development project on the lower . • Secured US$400 million fi nancing from Private Placement in the United States, achieving the key objectives of extending the maturity profi le of Meridian’s debt portfolio to better refl ect the long life of our assets. • Achieved several key milestones from our Australian Assets. • Developed new corporate and residential products giving customers greater fl exibility in how they buy and pay for electricity. • Realigned Meridian’s organisational structure to better suit our growth targets and other priorities such as health and safety. • Continued to work closely with stakeholders on environmental matters. • Favourable infl ows and careful water management resulted in a positive after-tax profi t of $132.9 million. • Whisper Tech, an innovative technology company that Meridian invests in, secured a NZ$300 million contract in the United Kingdom.

6 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 SCI Performance Comparison Table

RATIO OF SHAREHOLDERS’ FUNDS TO TOTAL ASSETS AS AT 30 JUNE 2004

ACTUAL TARGET FIND MORE DETAIL ON PAGE Total Debt $1,334.9 million $1,291 million 77

Equity $2,401.8 million $2,247 million 76

Total Assets $4,145.7 million $3,965 million 67

Equity to Total Assets 57.9% 56.7% 67

FINANCIAL PERFORMANCE MEASURES FOR THE YEAR ENDED 30 JUNE 2004

ACTUAL TARGET FIND MORE DETAIL ON PAGE EBITDA to Total (Net) Revenue 47.3% 28.5% 60

Return on Average Equity 5.7% 5.3% 60

Gross Debt to Gross Debt Plus Equity 35.7% 36.5% 60

EBITDA Interest Cover 5.1x 4.4x 60

NON-FINANCIAL PERFORMANCE MEASURES FOR THE YEAR ENDED 30 JUNE 2004

ACTUAL TARGET FIND MORE DETAIL ON PAGE Plant availability 94% 93.2% –

Forced outage factor 0.21% 0.6% –

Number of lost time injuries 2 <5 38

Calls answered within 20 seconds 81.7% 80% 34

Residential customer satisfaction – excellent, very good, good 88% 80% 35

Complaint resolution – % resolved within 10 working days 91.5% 80% –

Switchouts that are compliant with industry standards 99.6% 100% –

Publication of this integrated annual sustainability report to demonstrate environmental progress 39– 42

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 7 TE ÄPITI An extraordinary asset

TE ÄPITI IS MERIDIAN ENERGY’S FIRST WIND FARM, AND NEW ZEALAND’S LARGEST. THE PROGRESS MADE ON TE ÄPITI HAS BEEN ONE OF OUR MOST SIGNIFICANT ACHIEVEMENTS THIS YEAR.

JAMIE MOAR, TE ÄPITI.

8 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Building generation assets enables us to contribute talk things over with them and make appropriate TIMELINE to meeting New Zealand’s growing demand for adjustments to the wind farm design. electricity while increasing the value of our business. 8 May 2003 The time in which Te Äpiti gained approval attests to Growth is a key plank of Meridian’s business strategy, Meridian Energy announces plans the effectiveness of our consultation. On 4 September to develop Project Te Äpiti and one way in which we are pursuing this is by 2003, just four days after resource consent hearings making use of New Zealand’s superb wind resource. 9 May 2003 began, the Tararua District Council granted consents Public consultation and open New Zealand’s wind resource is among the best in the for Te Äpiti to proceed without imposing any days begin world for power generation. Meridian’s Trans-Tasman additional conditions. This is an exceptional outcome 20 June 2003 wind development strategy has successfully lowered and timeframe for approval of a project of this Resource consents are lodged the cost of wind production to make it economically magnitude. 1 September 2003 viable in New Zealand for the fi rst time. We continue to keep stakeholders and the community Resource consent hearing begins

One of the most signifi cant achievements for Meridian informed of progress through formal channels such 4 September 2003 this year is the progress made on the Te Äpiti wind as community newsletters. But some of the most Resource consent obtained farm on the north side of the Manawatu Gorge, the valuable contact with the community has been 7 November 2003 fi rst major project developed under Meridian’s wind informal. Throughout the project, Meridian staff and Karakia and turning of the fi rst sod development strategy. Te Äpiti’s development has contractors have been living as well as working 10 November 2003 been an overwhelmingly successful demonstration around Ashhurst, Woodville and Palmerston North. Construction begins of our commitment to wind energy and to the They have enjoyed the social contact with other communities where we have generation assets. residents through events such as the Contractor 26 April 2004 Turbines begin arriving in of the Month celebrations held at local venues. About Te Äpiti New Zealand

As New Zealand’s largest wind farm, Te Äpiti’s Supporting communities 27 May 2004 55 turbines and 90 MW capacity are anticipated to Meridian supports the communities in which we own First turbine installed produce enough electricity to power around 45,000 and operate assets. With Te Äpiti’s construction well 26 July 2004 homes when completed and operating to full advanced, we are making a positive contribution to First power generated from capacity1. The importance of the project is not just local communities in a number of ways, including one turbine in the power generated. Te Äpiti has set new sponsorship of the Ashhurst Community Ball. During 5 August 2004 benchmarks in community consultation, ongoing the devastating fl ooding in the region in February Hon Pete Hodgson fl icks the communication with stakeholders, environmental 2004, our contractors’ equipment was used to help switch to celebrate the fi rst power from Te Äpiti. 26 turbines installed, management, health and safety, and engineering. re-open Saddle Road and repair other fl ood damage 17 supplying power to the in the area. We leveraged our role as National Community consultation national grid Sponsor of the Royal New Zealand Ballet and Stakeholders have commended our approach Mid-October 2004 provided local fl ood victims with free tickets to the to consultation as open, honest and thorough. Expected date for completion Palmerston North performance of Saltarello. It was a of turbine installation and Throughout a series of open days and meetings to gesture of solidarity that was greatly appreciated by commissioning cover specifi c areas related to the project, Meridian the local community. was willing to discuss issues about the Te Äpiti Early December 2004 Opening ceremony for Te Äpiti proposal and talk to people about their concerns. Landowners are key stakeholders in this project. wind farm For example, there was a small number of people They have demonstrated genuine understanding and who supported the wind farm in principle but who cooperation as construction activities have impacted had concerns about the placement of a few turbines. on their regular farm work. Landowners take part in We were happy to listen to what they had to say, project meetings and have regular off-site meetings

1 Based on an average household consumption of 8000 kWh per year.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 9 TE ÄPITI

with Meridian staff. Some have been employed The heavy fl ooding experienced this year served to FAST FACTS ABOUT TE ÄPITI directly on the project, building new fences or highlight the exceptional environmental standards • 55 turbines contributing other services. operating on site – Te Äpiti had no loss of land or

• 70 metre towers, each with signifi cant damage. The effectiveness of the Other stakeholders such as Rangitane O Tamaki Nui three 35 metre blades environmental measures we have taken has been a Rua have understood the wider benefi ts that wind • 90 MW capacity recognised by letters of commendation from the power generation brings to the community and to Horizons Regional Council Environmental • Enough power for an estimated New Zealand. They communicated these benefi ts 45,000 average homes when Compliance Offi cer. generating at full capacity throughout the iwi and have been valued supporters of the Te Äpiti wind farm. With an average of 150 people working on site, • 400 cubic metres of concrete occupational safety and health is a priority. OSH in each foundation Nearby communities have enthusiastically embraced inspectors gave the work at Te Äpiti the top “Ideal” • Construction started wind power development and the construction of rating, stating “management and delivery of health 7 November 2003 Te Äpiti. While the potential visual effects of a wind and safety at Project Te Äpiti is a role model approach • First power generated on farm are often cited as a signifi cant issue, several for the greater construction industry to mirror”. This 26 July 2004 individuals expressed disappointment that they would is a tribute to the Meridian team and contractors • All turbines expected to be not have a direct sight of the turbines from their fully operational by end 2004 working on the project. homes and businesses. A coach line is already running regular trips along Saddle Road so locals and visitors Wind power generation in can see Te Äpiti’s progress. A wind farm of this scale New Zealand is a fascinating sight and we understand people’s The growing use of wind power generation heralds interest. We have provided a temporary viewing area a new era for the country’s electricity future. Wind ACHIEVEMENTS to allow people a closer view of the turbines without power is no longer an “alternative” source of energy – There are some extraordinary compromising road safety, and have a long-term view it is now a mainstream and economic form of utility- achievements on this project: to provide an interpretive area for visitors. scale electricity generation. While wind energy alone • Consent granted four days after cannot solve the country’s energy challenges, it is set Te Äpiti is bringing employment to the area and hearings to become a new and major contributor to the local businesses are contributing to the success of • No appeals to consent solution. It is an ideal fi t with Meridian’s renewable the project. Higgins Contractors Limited of Palmerston generation portfolio, which includes signifi cant • Construction started three North provides civil engineering services, including months after consent granted hydro assets. (November 2003) construction of access roads and the preparation of turbine foundations. Electrix Limited’s Palmerston Meridian has made a signifi cant contribution to • First power nine months after the start of construction North offi ce is the electrical contractor for Te Äpiti. making wind power economic for New Zealand. With wind farm projects planned for both sides of • Project on time despite 85 days The success of Project Te Äpiti shows other lost due to adverse weather the Tasman, Meridian has negotiated an innovative communities that there are many positives to having conditions over 270 working umbrella agreement with Vestas (formerly NEG Micon) such a project in their region. days our preferred turbine supplier. Over time this will • Occupational Safety and Health Setting standards reduce the cost of wind farms, meaning marginal “Ideal” rating for construction Environmental management has been a major projects will become economic. safety standards consideration during the construction process. • No environmental breaches Te Äpiti is an important fi rst step in Meridian’s Meridian has worked closely with Tonkin & Taylor despite February 2004 (and ambitious and ongoing wind programme, and its many other) unseasonable Limited and the Horizons Regional Council to success will provide critical guidelines and practice storms minimise impacts such as sediment, and to benchmarks for future projects. rehabilitate the land from the effects of construction.

10 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 “Because people have felt well informed, they actually haven’t felt that they need to make huge amounts of statements through resource consents processes. They have felt totally involved. The process Meridian has taken has been progressive, so that while things have changed, they have been informing people of how things have changed. Instead of feeling that consultation has been a process of saying “Now this is what we’re going to do, take it or leave it”, they’ve actually entered into a dialogue, which is an entirely more sophisticated form of consultation.”

Marilyn Craig, Ashhurst Ward Councillor, Palmerston North City Council

Te Äpiti is the Maori name for the Manawatu Gorge. One meaning of the Maori word Te Äpiti is “to connect”, making Te Äpiti a highly appropriate name for a new wind power scheme. The name was selected after consultation with Rangitane O Tamaki Nui a Rua.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 11 ENERGY EFFICIENCY A key part of the equation

ENERGY EFFICIENCY IS AN IMPORTANT ELEMENT IN SOLVING NEW ZEALAND’S ENERGY SUPPLY ISSUES.

12 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 For many years New Zealanders have enjoyed some effective initiatives can help customers to keep costs ENERGY EFFICIENCY TIPS of the cheapest electricity in the world, as historical under control. More advanced initiatives can also levels of demand have not tested a relatively help commercial customers achieve greater levels • Use your microwave instead of the oven or stovetop – abundant supply. However, New Zealand’s population of effi ciency, and reduce production costs. it uses 70% less power and economy have expanded and continue to grow Coping with transmission problems • Use lids – uncovered pots and Maui gas supplies are diminishing, putting Another issue brought about by growing demand for use 3 times more energy pressure on supply of fuel resources. electricity is the status and capacity of New Zealand’s • Run your dishwasher with While one element of the solution to this problem is transmission infrastructure. During the year this was full loads only – and use the economy cycle the development of new generation assets, this is only highlighted in the upper South Island, where there • Turn off your heated towel part of the equation. An equally important part is was potential for involuntary electricity shortages rails in summer months and improving energy effi ciency. At a government level due to network overloading. In response, Meridian when you’re not using them partnered with other retailers in an initiative led this has been recognised in the Energy Effi ciency and • Shower with the windows Conservation Authority’s (EECA) National Energy by the Electricity Commission, producing a series open or vent on to avoid Effi ciency and Conservation Strategy targets, which of advertisements to encourage practical electricity moisture build-up aim for a 20 percent improvement in energy effi ciency saving behaviours and reduce usage at peak • Damp homes take more by 2012. load times. energy to heat. Reduce condensation by leaving If targets like this can be met, the benefi ts are clear. Helping households curtains, windows and doors open when you’re home Our emphasis on providing practical ways for For residential consumers an immediate benefi t would during the day. Dry air is be reduced power bills. For businesses, the same customers to be more energy effi cient has included easier to heat and better benefi t can translate into reduced overall production continuing to run the Energy Saver Van visits in for your health costs and increased competitiveness. On a national Christchurch, in partnership with EnergySmart Limited • Capture as much sunlight as possible, for example keep level, the incremental gains of household and and the Community Energy Action Trust. Begun last windows clean and free of year, the initiative involves visiting lower income corporate effi ciencies can amount to signifi cant overhanging trees households to distribute and install energy saving electricity savings, delaying the need to build new • Turn off computers, monitors products. The teams also provide customers with generation assets. and printers when you’re electricity saving tips, and have visited over 2000 not using them – monitors New Zealanders are beginning to have a greater households in the last two years (see case study). use well over half of the appreciation of the value of electricity. It is a valuable total energy used to run a We have also provided residential customers with the computer resource that we have long taken for granted. The opportunity to be more energy effi cient by offering • Switch off the TV, video and low cost of electricity has meant that actions such as discounted energy saving products, including: set-top box, then turn them leaving appliances on standby tend not to be thought off at the wall when you’re • Hot water cylinder wraps of as important. However, the steps we take – which not using them. Using the • Water saving shower heads remote puts the appliance can be as small as turning off a light when not in a • Energy saving lightbulbs in standby mode, costing room – can have a signifi cant cumulative impact. The the average home around • Plug-in timers to turn on lights and appliances at challenge for all New Zealanders is to change the way $100 per year specifi ed times we think about electricity. • Do you have a second • Weather excluders to stop draughts from external fridge/freezer? Turn it off Helping customers to be more energy effi cient is a key doors if you don’t need it all the part of Meridian’s business. As the price of electricity • Window weatherproofi ng strips time, and keep doors open to prevent mustiness rises across the industry to accommodate the cost of • Ceiling insulation. developing new generation capacity, simple but

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 13 ENERGY EFFICIENCY

A discounted heat pump offer was also made to In addition to operational cost savings, the benefi ts to staff and customers in conjunction with Panasonic WPI from this partnership include a reduction in LPG New Zealand Limited. Heat pumps provide warmth fuel consumption by more than four million litres per in winter and, using a reverse cycle, cool air in year, and the conversion into fuel of 30,000 tonnes summer. The heat pumps are very effi cient compared of pulp mill sludge per year that would otherwise to other heating sources and were offered at a have been disposed of in landfi ll. discounted rate, making this an effective and Construction of a new energy centre at the expanded affordable way for staff and customers to become Auckland City Hospital commenced during the year more energy effi cient. and will be commissioned in late 2004. Auckland To help customers see the potential cost benefi ts District Health Board (ADHB) selected Meridian of energy savings before they happen, we have Solutions as their preferred partner to build, own developed an on-line home energy savings calculator, and operate a 3.8 MW cogeneration plant to provide which has also been adopted as a customer service heat, baseload electricity and standby power to tool in our call centres this year. New Zealand’s largest hospital.

We also completed the second part of the reward Meridian Solutions has also continued to invest in offered as part of last year’s winter energy savings the upgrading of the Dunedin Energy Centre. campaign, installing $150,000 worth of energy Meridian Solutions owns and operates the energy effi ciency equipment into Plunket’s 21 Family Centres centre located in downtown Dunedin, supplying around New Zealand. The installations are helping steam to Dunedin Hospital, Cadbury Confectionery the centres reduce their energy use and costs while Limited, University, Alsco Limited and others. making centres drier, healthier and more comfortable The recent upgrade included the installation of a for babies and families. “baghouse” to reduce particulate emissions and replacement of the boiler control systems. This Helping business customers investment has removed around 40 tonnes of ash Through Meridian Solutions, our strategic business emission per year from Dunedin’s air and improved unit providing specialist energy and utility solutions, the effi ciency of the facility by 3.5 percent. we provide high energy users the opportunity to realise signifi cant effi ciency gains with Meridian In addition to developing on-site generation projects, Solutions investing in, owning, and operating their Meridian Solutions continues to work with customers on-site energy assets. Meridian Solutions develops to provide energy optimisation assessments that can innovative and sustainable solutions for clients, be tagged to benefi t sharing agreements, and providing them with fi nancial as well as specialist supply services and contracts. environmental benefi ts, while freeing them Meridian also provides a strong incentive for business to concentrate on their core business. customers to reduce energy consumption at times of This year Meridian Solutions has progressed and high prices or potential shortages through a web- completed a number of key projects. One of these based Demand Exchange System. Supported by has been the construction and commissioning of a distributed generation purchase contracts, the system new 12 MW biomass-fi red heat plant at Winstone allows business customers to track prices and, when Pulp International Limited’s (WPI) Karioi pulp mill. The prices are high, reduce consumption and sell heat plant, developed in conjunction with Easteel electricity back to us. Customers can either reduce Industries Limited, burns wood residues and the mill’s demand or self-generate. In some instances we also pulp sludges, generating heat to dry the wet pulp, contract customers to run standby diesel sets, ready for export. offsetting the demand.

14 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 CASE STUDY “It is really encouraging to Energy Saver Vans see Meridian Energy working closely with Community Energy The 2004 Energy Saver Van campaign was a huge • 280 interior door draught excluders Action Trust and EnergySmart success. As with the 2003 campaign, Meridian • 107 exterior door draught excluders to install free energy effi ciency partnered with EnergySmart Limited, with support • 4 water saving shower roses. measures in more than 2000 Christchurch households over from Community Energy Action Trust and Based on an average household consumption the past couple of years. This Christchurch Mayor Garry Moore, to install energy programme is an excellent way of 8000 kWh per year, the installations will allow saving products and provide practical advice to to show the benefi ts of energy customers to save a up to a combined total of effi ciency in the home, which lower income customers in Christchurch on how approximately $26,000 this year on their power includes reduced power usage to save on their power bills. as well as warmer and more bills (based on an energy cost of 15 cents per comfortable homes, which In two weeks the Energy Saver Vans visited kWh). They were a hit with customers, with health experts tell us results approximately 590 homes – well over the 500 Meridian receiving many grateful phone calls in better health for families.” target planned for the project. Each visit involved and emails. Garry Moore, Christchurch Mayor. an energy audit, checking the hot water temperature and adjusting if necessary, checking shower water fl ow and installing a range of products, including: • 51 hot water cylinder wraps • 254 metres of hot water pipe lagging

(insulation) MAYOR GARRY MOORE AND MRS BETTY SMITH INSPECT A • 1174 energy saving light bulbs HOT WATER CYLINDER WRAP

CASE STUDY How New Zealanders think we should grow The Government has recognised New Zealand’s Wind and hydro were also by far the most popular growing demand for electricity in the Energy as future generation options, with over 40 percent Effi ciency and Conservation Authority’s (EECA) saying they wanted to see more of each, compared National Energy Effi ciency and Conservation with fi ve percent or less for geothermal, coal and gas. Strategy targets. These aim for a 20 percent improvement in energy effi ciency and a 30 petajoule increase in renewables by 2012.

If the New Zealand economy grew at 2.5 percent annually to 2012, all economic growth could be fuelled by renewables. Research by EECA1 shows that among sources of electricity generation including wind, hydro, geothermal, gas and coal, 1 Statistics quoted in presentation by Heather Staley, Chief Executive of EECA, at Meridian Energy Electricity Future wind and hydro were most approved of by Forum: The Future of Renewables at Te Papa in Wellington New Zealanders. on 22 July 2004.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 15 WATER ALLOCATION A national issue

GROWING PRESSURE ON NEW ZEALAND’S PRECIOUS WATER RESOURCES LOOMS AS A SERIOUS THREAT TO MERIDIAN AND TO NEW ZEALAND’S FUTURE ELECTRICITY SUPPLY.

MICAH AND KYLE PURTON FROM TWIZEL AT .

16 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Meridian’s eight hydro power stations along the Developing policy solutions USEFUL WEBSITES Waitaki River provide approximately 20 percent of the Water allocation issues are not unique to New electricity our modern economy and society requires, Zealand. For example, water demands in Chile are www.waternz.co.nz and are the cornerstones of Meridian’s electricity similar to those in New Zealand, with electricity www.mfe.govt.nz supply. Without water, we cannot use the generation generators located in the upper reaches of rivers www.med.govt.nz assets on the Waitaki River to provide the country and farmers wanting water for irrigation in the lower www.maf.govt.nz with power. reaches. Chile has developed an allocation model www.niwa.co.nz where users are charged the full cost of the water As the graphic (overleaf) shows, Meridian’s dams, they use. This has led to more effi cient water use www.horizons.govt.nz canals and power stations in the Waitaki Catchment from industrial, agricultural and municipal users. www.ecan.govt.co.nz ensure the Tekapo and Pukaki infl ows are used many In Australia there is a sophisticated system of trading times over. A recent study commissioned by the in water rights. The trading system factors in Ministry of Economic Development1 confi rmed that environmental needs, and also accounts for the return the country’s interest is best served by using Tekapo of water not used by the rights holder back into the water for electricity generation rather than river system. Trading of water rights can be long term, for out-of-catchment irrigation. but is often temporary to refl ect demand during Current situation particular seasons or weather conditions (see At present, Meridian’s existing rights to use water Australian case study on page 18). from the Waitaki catchment for electricity generation New Zealand is at the beginning stages of a review are potentially at risk due to regulatory changes and of our water management system. The Government court actions. has initiated the Water Programme of Action. Among During the fi nancial year the Resource Management the main objectives of the Water Programme of Action (Waitaki Catchment) Amendment Bill 2003, an is development of an effective framework for making Environment Court declaration on our Waitaki decisions on how water is allocated and used. Options consents, and a High Court declaration sought by the being considered range from amendments to the Aoraki Water Trust raised many questions about the Resource Management Act 1991 (RMA) to entirely nature of water rights in New Zealand and the degree new mechanisms. of reliance anyone with a resource consent can place The stated aims of the Water Programme of Action’s on their water rights. These concerns were primary Allocation and Use project are to: causes for the termination of Project Aqua. • Identify the issues and problems with the current The water allocation issue is a matter of national ways of allocating and using water, including the importance with signifi cant economic, social and RMA’s “fi rst in, fi rst considered” model environmental implications. What we have seen in • Establish what should be achieved with water New Zealand in recent years is that the demand for allocation water is growing rapidly, and in many cases outstrips • Identify the types of legal rights associated with available water. This leads inevitably to competition water between applicants for water use. We believe the • Determine ways of improving water allocation seriousness of the water allocation issue facing processes New Zealand, and the need for environmentally and • Identify options that best meet environmental, socially sustainable solutions, require comprehensive social, cultural and economic outcomes. policy and legislative review.

1 Draft National Cost Benefi t Analysis of Proposals to take water from the Waitaki Catchment. Prepared by SKM 3 May 2004.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 17 WATER ALLOCATION

Meridian’s view users. It is also a matter of fairness that subsequent Meridian proposes that a future water management allocations of water should not impact on the regime would fi rst set aside suffi cient water resource water rights of existing allocation holders unless to meet primary needs: the environmental the holders give their consent or have the ability sustainability of the water system, public water to be compensated for their lost opportunity costs. supply, and water for stock. A fl ow regime, including We believe an important feature of the water a minimum fl ow established under existing RMA allocation regime should be a dynamic trading principles, would provide a useful starting point. mechanism in which both long term and temporary Existing entitlements must also be preserved or trading of water rights allow the water to be used transferred into the new system. Only water available where the economic benefi ts are highest. As well as beyond these needs could then be allocated. facilitating the economically effi cient allocation of We consider that entitlements to use water need to water, trading mechanisms reinforce to all users that be more clearly defi ned than they are now. They are water is a valuable commodity that should be used as currently expressed in various ways which in many effi ciently as possible. cases provide limited clarity to current and potential

CASE STUDY Water Trading in Australia Australia has developed a successful and still example in viticulture rather than cattle grazing. evolving system of water trading to manage its Pricing available water has also encouraged more scarce water resources. Since the early 1980s, water-effi cient practices such as drip-feed irrigation, water trading has been used to address rather than less effi cient technologies like border competition from different water users and the dykes or wild fl ooding. needs of the environment. There are a number of controls on how water can Having a workable regulatory framework for water be traded. Trades must go through a rigorous allocation has been critical. In particular, the vetting process and receive government approval ongoing clarifi cation of water rights has been before they are fi nalised, to ensure a trade does not essential for the market to be effective. Water users affect the entitlements of other water users and have clearly defi ned entitlements to specifi ed does not have a detrimental impact on the volumes and reliability of supply. environment. There are also caps on water diversions and local restrictions in some areas to Rights to allocated water can be traded protect against potential social and economic permanently, but most volumes are traded impacts if water is diverted out of a region. temporarily, usually between individual irrigators. It is anticipated that there is likely to be more trade Water trading has now gained widespread between water uses in the future, for example from acceptance in Australia and is being further irrigation to industrial use, and between hydro and developed. generators, irrigators, irrigation use. environmentalists and other stakeholders have recognised water trading as an effective means Water trading has led to a discernible trend for of ensuring the sustainable use of a limited and water to be used for higher value purposes, for valuable resource.

18 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 CONDENSATION As the vapor rises, it cools and changes to droplets.

How the Waitaki system works

FACTS ABOUT ELECTRICITY GENERATION FROM MT COOK THROUGH THE WAITAKI SYSTEM.

PRECIPITATION Water falls to the earth in the form of rain, snow, sleet or hail.

Lake Tekapo Max Storage: 918.55GWh

Tekapo A Lake Pukaki Max Storage: 1744.955GWh Commissioned: 1951 Capacity: 25 MW *Annual Generation: 134GWh Storage: 42.62GWh Lake Ruataniwha Tekapo canal Storage: 1.05GWh Length: 25.5 km Commissioned: 1984 Capacity: 212 MW Annual Generation: 949GWh Aoraki Mt Cook Tekapo B Commissioned: 1979 Commissioned: 1977 Storage: 24.45GWh Storage: 4.04GWh 3754m Capacity: 264 MW Capacity: 160 MW canal *Annual Generation: *Annual Generation: 848GWh Pukaki canal Length: 8 km 1131GWh Aviemore Length: 12 km Commissioned: 1968 Ohau C Capacity: 220 MW Benmore Commissioned: 1985 *Annual Generation: 928GWh Commissioned: 1965 Capacity: 212 MW TEKAPO Capacity: 560 MW *Annual Generation: 945GWH EVAPORATION *Annual Generation: Storage: 0.54GWh Water evaporates from 2222GWh the surface of the ocean. TWIZEL Waitaki Commissioned: 1931 Capacity: 90 MW Ohau B canal *Annual Generation: 492GWh Length: 2.4 km Ohau C to Benmore KUROW Canal length: 0.5 km DUNTROON Pacific Ocean

INFLOWS CAN VARY FROM YEAR TO YEAR KEY ENERGY EXPLAINED SPILL TYPES 2001-2004

Lake Cumec = one cubic metre of Four main categories for spill 5500 1958 145 Managing the Waitaki Generation water flowing past a 400 5403.34 GWh High flow: Water is spilled when high inflows 5000 hydro-electric system given point every 350 125 is a highly complex Canal bring the threat of flooding. 75-year average 4500 second. 3616.34 GWh task which aims to 300 2004 105 * Average Annual 3929.91 GWh Operational: Water may need to be spilled 4000 balance inflows and Generation 250 2002 GWh Daily kW = 1,000 watts. past one or more stations if they are 3379.72GWh 85 lake levels with 3500 200 undergoing maintenance. electricity demand, GWh 2003 GWh Weekly GWh 65 3361.8GWh 2001 3000 while ensuring no MW = 1,000 kW. 2641.3 GWh FACT 150 Compliance: Spill may be required under water is wasted. 45 local bylaws or as a condition of our 2500 100 1992 One cubic metre of water passing 2108.9 GWh GWh = 1,000 MW passing resource consents. 25 through the eight power stations 2000 through a given point 50 of the Waitaki system generates Recreational: We work with recreational 1500 5 over an hour. 0 0 10203040506070 2,500 kWh – about 30% of an average 2001 2002 2003 2004 organisations to provide water flows for Historical ranking based on number of years household’s annual power needs. special events.

JESSE PURTON FROM TWIZEL, AT LAKE PUKAKI.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 19 PROJECT AQUA Impact and implications

ON 29 MARCH 2004, MERIDIAN PUBLICLY ANNOUNCED THE DECISION NOT TO PROCEED WITH PROJECT AQUA, OUR PROPOSED HYDRO-IRRIGATION DEVELOPMENT PROJECT ON THE LOWER WAITAKI RIVER.

JIM AND NANCY SINTON WITH DOG TURBO, WAITAKI RIVER, KUROW.

20 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 A number of factors, including uncertainty over Meridian proposed extensive environmental water rights principally created by the introduction mitigation and improvement opportunities in the of the Resource Management (Waitaki Catchment) Lower Waitaki from its current poor state. The project Amendment Bill 2003, meant that it was no longer aimed at enhancing the recreational value of the river, prudent or responsible to continue with Project Aqua. which would have remained a major waterway with a minimum fl ow similar to the Rakaia River. Project Aqua would have made a major contribution towards greater security of our energy supply and Community consultation been a valuable asset to New Zealand for many years We announced Project Aqua publicly in April 2001 to come. and started a comprehensive consultation process with local communities. Through a series of open Project Aqua was encouraged by signifi cant changes days, Community Liaison Forums and other means, to energy policy in 2000 and 2001. The National local people were able to contribute substantial input Energy Effi ciency and Conservation Strategy was that assisted in shaping the project. developed with a target of 30 petajoules of new renewable energy by 2010. It was also becoming Consultation helped Meridian establish the studies evident that New Zealand was facing a declining necessary to apply for consent for Project Aqua. gas supply for electricity generation, a situation that We commissioned many reports and put all of them is even more pressing now. out for public review and consultation well ahead of consent applications being fi led or notifi ed. This was The project’s cancellation is now forcing a reappraisal a very open approach not normally adopted by of more expensive coal fi red generation, with all the consent applicants. attendant air, water, dust and noise pollution that goes with it. With the project being of such major signifi cance for the Waitaki Valley it is natural that a wide spectrum About the project of views emerged. While a few vocal opponents of Project Aqua’s six hydro power stations, due to have Project Aqua grabbed the headlines, there were also progressively come on line between 2008 and 2011, many people who could see the benefi ts to the region would have generated about 10 petajoules of and were strongly in favour. This support was electricity per year, enough to power an estimated highlighted by the fact that we had reached 375,0001 houses, meet around one-third of New agreement with willing sellers for approximately two- Zealand’s renewable energy target, and help address thirds of the land needed for Project Aqua by the end the generation shortage as gas dwindles and energy of March 2004. demand rises. Project Aqua would have been the biggest project If Project Aqua had proceeded, it was anticipated that ever considered under the RMA. On 14 May 2003 the fi nancial benefi ts could also have been signifi cant. we formally lodged the resource consent applications The estimated $1.2 billion (2002 dollars) project needed for the project, supported by nearly 60 could have provided a net economic benefi t of volumes and 7500 pages of technical information. approximately $600 million (or around $500 per household)2, employed between 400 and 860 people Meridian set out to gain consent for Project Aqua by during construction, and created several thousand setting new best practice benchmarks under the RMA. jobs nationally over eight years. In addition, wholesale From the very start, environmental enhancements and electricity prices were expected to have been lower mitigation of the impacts on other users of the water than they will be without Project Aqua. and land resources were designed into the project.

1 Based on an average household consumption of 8000 kWh per year. 2 Assuming 1.2 million households.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 21 PROJECT AQUA

These measures were included prior to consultation (Waitaki Catchment) Amendment Bill 2003, as and were not forced on the project by the consenting originally drafted and as amended by Select process. With the care and effort we were taking, we Committee, would change existing RMA case law and anticipated that obtaining consents would be a two- practice and affect Meridian’s existing water rights. year process. Completing the preliminary design and complying with Changing regulatory environment consent requirements necessitated an investment of In September 2003 the consenting rules were altered. approximately $4 million per month. As the consenting The Minister for the Environment called in a number timeframe for Project Aqua extended, so too did the of applications for Waitaki catchment water use, risks related to the outgoings for the project. including applications for Project Aqua and from Financial reporting standards meant that the increasing irrigators. This decision extended Project Aqua’s uncertainties would have required all costs to be consenting timeframe. This was followed by the Resource Management (Waitaki Catchment) treated as expenses, with Meridian unable to capitalise Amendment Bill 2003 introduced to Parliament in the outgoings towards the cost of Project Aqua. December 2003, which created serious doubts about In the end it was the commercially responsible the durability of existing water consents, the process decision to end the project when we did. to be followed to consent the project, and the timing and costs of that process. What next? There are still many positives to emerge from Project The Bill and subsequent High Court decisions created Aqua for Meridian. For all New Zealanders, the a very uncertain environment regarding the nature of cancellation of the project highlighted the need to existing and likely future “water rights”, not just for think seriously about our energy future, and has Project Aqua but for water access in the upper Waitaki stimulated debate throughout the country. We have Catchment as well. They meant that there were no encouraged this discussion by hosting a series of guarantees that Project Aqua would have had access Electricity Future Forums during the year (see Our rights to suffi cient water volume to be feasible or the Reputation section, page 52). duration of such rights (for more detail see Water Allocation section on page 16). The decision not to proceed with the project certainly brought into sharp focus the choices and trade-offs From September 2003 to March 2004 we worked the country faces if New Zealanders want a secure, with offi cials to understand the new consenting affordable electricity supply based on renewable processes and how they would impact upon the sources as opposed to non-renewable imported fuels. feasibility and timing of the project. It became increasingly uncertain whether Meridian would receive It is clear that the absence of Project Aqua in the consents for Project Aqua, what consent conditions future make-up of New Zealand’s electricity there might be, when the consents might be available, generation assets leaves a signifi cant gap. However, and how much water the consents would provide. Meridian is committed to playing a major role in helping to meet the need for increased generation The decision not to proceed capacity in other ways. We are still committed to an Several other factors fi nalised the decision not to ambitious development programme, particularly in proceed with Project Aqua. wind farm developments such as Te Äpiti, which is the One was the decision in March 2004 by the High ideal renewable complement to our existing hydro Court which indicated that the Resource Management assets (see Te Äpiti section, page 8).

22 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Aoraki Mt Cook LAKE Tekapo PUKAKI Tekapo A Burkes Pass Tekapo B LAKE THE Fairlie LAKE Pukaki High Dam RUATANIWHA OHAU Twizel Ohau A Ruataniwha Dam Ohau C Ohau B Timaru LAKE BENMORE Pareora Omarama St Andrews

Otematata LAKE AVIEMORE Waitaki Dam LAKE Kurow WAITAKI Hakataramea Proposed Intake Waimate WAITAKI VALLEY

Duntroon Proposed Outfall 1 Black Point Glenavy Proposed Outfall 2 Georgetown

TIMELINE KEY

April 2001 14 May 2003 12 March 2004 Meridian announces Project Aqua, Meridian formally lodges the resource Submissions on the Project Aqua Proposed Canal Alignment begins consultation with the local consent applications needed for resource applications close Proposed Power Stations community, and commissions Project Aqua. Technical information extensive scientifi c and technical supporting the applications is 24 March 2004 Existing Power Stations The High Court declines Meridian’s investigations contained in nearly 60 volumes, Information Centres totalling 7500 pages request to strike out an application December 2001 – April 2002 for a declaration on existing water Canals Meridian runs a series of Open Days 11 September 2003 rights in communities throughout the lower The Minister for the Environment calls Waitaki Valley in applications for Waitaki catchment 29 March 2004 water use, including Project Aqua and Meridian publicly announces it will July 2002 irrigation applications not proceed with Project Aqua Meridian runs a series of low-fl ow trials over several days in the lower 3 December 2003 Waitaki River The Government introduces to Parliament the Resource Management Mid-2002 (Waitaki Catchment) Amendment Bill Meridian releases the many environmental and impact reports it 6 December 2003 had commissioned on Project Aqua, Notifi cation of the Project Aqua and seeks further consultation resource applications, beginning the formal submission period

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 23 MERIDIAN’S PURPOSE Our Goal

OUR GOAL – TO BE A “PEAK PERFORMING ORGANISATION”. DURING THE YEAR WE HAVE DONE A LOT OF WORK TO DEVELOP OUR PURPOSE FURTHER AND ENSURE THAT ALL MERIDIAN STAFF ARE UNITED IN A COMMON FOCUS.

MERIDIAN’S PURPOSE At Meridian, we are focused on becoming and sustaining our performance as a “Peak Performing Organisation” (PPO). We express our vision according to the PPO framework, and our strategic direction and intent are captured in our Purpose. It has four facets, expressing our strategic direction in terms of: FOCUS

• WHO we are (Spirit) • HOW we will achieve our goals (Focus) • WHY we come to work every day (Inspirational Dream) SPIRIT

• WHAT tangible things we will achieve – Greatest Imaginable Challenge (GIC). GREATEST IMAGINABLE INSPIRATIONAL CHALLENGE DREAM

SPIRIT

FOCUS INSPIRATIONAL DREAM

WHO WE ARE HOW WE WILL ACHIEVE OUR GOALS WHY WE COME TO WORK EACH DAY

Creative in working with energy Live the Meridian Way Enhancing life with sustainable power Meridian Energy people are energetic and The Meridian Way is a set of behaviours that were As with any great team, we have determined imaginative. They bring their creativity to work to developed at Meridian’s inception as qualities that what inspires us, what lifts us to greater levels of embody our spirit statement ”creative in working demonstrate Peak Performance. They are: hot performance and what enables us to sustain peak with energy”. wired, commercially driven, agile, imaginative, performance as an organisation. We call this our building rapport and working like you own the Inspirational Dream. Meridian’s beliefs include company. During the year we realised that the improving people’s lives – by including “Enhancing Meridian Way has always been our focus and Life” in our Inspirational Dream we are illustrating this year articulated it in our Purpose model. By how we place stakeholders at the forefront of consciously behaving in the Meridian Way we can our thinking. The emphasis on enhancing life deliver performance that lives out our Inspirational is both expansive and enduring and embraces Dream and GIC. environmental and social engagement.

24 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 THE GIC AND OUR CHALLENGES

As the GIC part of our Purpose answers the “what – Asset Management Challenge – tangible things are we doing?” question, we have to maximise long-term value through broken it down to a series of more explicit excellence in asset management GREATEST IMAGINABLE challenges. Each of the challenges has an ultimate – Trading Challenge – Maximising wholesale CHALLENGE focus on Meridian’s value, with strong revenues within approved risk limits sustainability underpinnings. We agree with the – Customer Challenge – Customer Value ECOS2 Single Bottom Line concept that if a Growth by becoming leaders in our chosen ASSET MANAGEMENT business focuses on value creation when segments CHALLENGE undertaking actions and initiatives in the name of • Growth Challenge – Growth in Australasian sustainability, it is far more likely to create value – Generation capacity with a focus on

and succeed in gaining traction on the Renewables PORTFOLIO OPTIMISATION sustainability initiatives. • Enabling Challenge – enabling the four market TRADING CUSTOMER CHALLENGE CHALLENGE challenges by ensuring that we have the Our challenges as a company have been grouped appropriate people, resources, and systems in into three broad areas: an innovative culture, and a favourable • Portfolio Optimisation – maximising Meridian’s regulatory and political environment. value growth while remaining within approved GROWTH CHALLENGE risk limits. Integration of the retail and hedge In addition, we focus our strategic business positions with the physical assets to ensure we units through subsidiary challenges for each trade across the year to maximise the best of Meridian Energy Australia Pty Limited, the value position (yield) for Meridian. This will be Southern Hydro Group, DamWatch Services ENABLING CHALLENGE achieved through the integration and synergy and Meridian Solutions Limited. of the three market challenges (supported by the NZ Operations Challenge):

GREATEST IMAGINABLE CHALLENGE

WHAT TANGIBLE THINGS WE WILL ACHIEVE Core Business Organisational design Meridian’s core business is the generation, trading Meridian Energy commenced operations on To be the best-performing sustainable energy and retailing of energy and wider complementary 1 April 1999 and is a state-owned electricity company in Australasia products and solutions. We operate in both generator and retailer. From our initial Our GIC expresses the aspirations that we have New Zealand and Australia. Our core business establishment, we were determined to break the and encompasses what we are aiming for. The GIC activities are supported by functions for growing traditional utility company mould – we set out is the most demanding stretch achievement for the business and delivering corporate and to grow value by being a company based on Meridian. It draws together the major work technology requirements to support our relationships and creativity. We encourage our streams across the company, synthesising our overall “challenges”. people to work across functions and disciplines market and enabling challenges. in a way that we call “hot wiring”. To allow us to focus on our core business and to drive effi ciencies, we have key strategic sourcing relationships for signifi cant parts of our operations. These strategic alliances and partnerships are an integral part of our overall business framework.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 25 STRATEGY AND PERFORMANCE

Our Challenges Our Strategies

PORTFOLIO OPTIMISATION

Asset Management Challenge • Develop our asset management capability To set asset benchmarks for • Improve the performance of our existing assets excellence. • Excellence in natural resource management

Trading Challenge • Develop tools and systems for information and decision making To optimise scale and portfolio • Integrate our information to maximise the yield on our assets contribution

Customer Challenge • Focus on customer satisfaction improvements Achieve leadership in retail and • Achieve operational excellence increase value. • Achieve margin growth

BUSINESS GROWTH

Growth Challenge • Project Aqua Achieve generation growth • Develop our wind programme through acquisition, organic • Pursue new generation opportunities growth and plant enhancements. • Enhance existing plant

ENABLING SUPPORT

Enabling Challenge • Enhance organisational excellence through corporate initiatives Corporate and knowledge and • Knowledge and innovation platforms for staff innovation support. • Proactive management of our reputation and relationships

SUBSIDIARIES

Subsidiary Challenges • Meridian Solutions Achieve subsidiary challenges. • Damwatch Services • Southern Hydro • Arc Innovations

26 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Achievements and Progress

• Unit 5 completed and commissioned on the Manapouri half- • Achieved performance targets for Asset Management KPIs life refurbishment project, work now underway on Unit 6 • Southern Hydro Draft of Asset Management Plan completed • Aviemore – seismic load assessment review completed

• 1st draft of 20-Year Plan for Portfolio Management • New bilateral wholesale trading market established and completed increased hedge liquidity and purchase of base load thermal • CFD agreement reached with other industry players cover to manage hydrology and North Island transmission • Winter 2004 contingency planning and monitoring project risks completed and conservative hydro management trading strategy developed and implemented

• New brand positioning supported by TVC’s and sponsorship • Meter reading contracts transitioned to higher quality support packages provider • New Zealand’s fi rst on-line energy savings calculator • Upgraded Prepay Systems deployed in Christchurch launched incumbency • Energy effi ciency product offers launched and ‘On Farm’ energy effi ciency products trialled • Data Administration services transitioned in-house and ISO accreditation of Non-HH DA processes

• 90 MW Wind Farm (Te Äpiti) committed in September and • The Aqua Alliance was established and TOC phase construction started was initiated before Project Aqua was cancelled on • 90 MW Wind Farm (Wattle Point) due to start construction 29 March 2004 • Umbrella agreement signed with NEG-Micon (Vestas) for the supply of wind turbines over the next 6 years. Agreement places Meridian at the forefront of wind development economics

• Submissions made on Electricity Governance Rule Book • Initiated and secured additional funding for the business • Re-aligned the company’s debt portfolio, re-fi nanced the through a U.S. private placement initiative (USPP). The USPP Southern Hydro acquisition bridging facility at competitive was over-subscribed, an extremely successful result, both in rates terms of the excess demand for the placement and the favourable interest rate that was secured

• Meridian Solutions commenced operations at Auckland • DamWatch Services continued revenue growth in dam District Health Board and Winstone Pulp International; engineering and project management areas, and completed the Dunedin Energy centre emission reduction achievement of fi nancial targets upgrades ahead of schedule • Acquisition and establishment of ARC Innovations • Integration of Southern Hydro and MEAPL under way completed • Technical services agreement executed between Southern Hydro and Meridian

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 27 OUR OPERATIONS

AUSTRALIA BRISBANE SOUTHERN HYDRO

Plant Capacity (MW) Burrendong 19 Pindari Copeton Copeton 22 Glenbawn 5.5 Pindari 6 Yarrawonga 9.2 Glenbawn Dartmouth 150 Burrendong Wattle Point Eildon 130 McKay Creek 120 ADELAIDE West Kiewa 62 SYDNEY Clover 29 Rubicon 9 CANBERRA Yarrawonga Lower Rubicon 5 Banimboola Dartmouth Cairn Curran Kiewa Scheme (McKay Creek, Clover, West Kiewa) Rubicon Falls 1 Eildon Royston 1 MELBOURNE Rubicon Scheme (Rubicon, Lower Rubicon, Rubicon Falls, Royston) Cairn Curran 2 Dollar

PROPOSED DEVELOPMENTS

Proposed Max Capacity (MW) Wattle Point 90 Dollar 79 Banimboula 12.2

Tekapo A AUCKLAND NEW ZEALAND Tekapo B

Plant Capacity (MW) Ohau A TWIZEL Tekapo A 25 Ohau B Tekapo B 160 Ohau C Ohakune Ohau A 264 Benmore Aviemore Ohau B 212 Te Äpiti Waitaki Ohau C 212 Brooklyn Benmore 540 WELLINGTON Aviemore 220 Waitaki 105 Manapouri 710 Brooklyn 0 .23 CHRISTCHURCH Te Äpiti 90 Twizel Manapouri PROPOSED DEVELOPMENT Dunedin Energy Centre Proposed Max Capacity (MW) Project White Hill Blue Mountain Lumber Project White Hill 70

MERIDIAN SOLUTIONS ENERGY CENTRES

Blue Mountain Lumber KEY Dunedin Energy Centre Winstone Pulp International (WPI), Karioi Plant Capacity Size (MW) Approx number of average Under development at a glance New Zealand homes supplied Meridian Energy Assets Auckland Hospital 1 – 50 MW 1 – 17,000 Meridian Energy Offi ces Proposed developments 51 – 250 MW 17,001 – 85,000 Meridian Solutions Energy Centres

251 – 500 MW 85,001 – 170,000 Southern Hydro Assets

Areas where Meridian Energy is 501 – 750 MW 170,001 – 255,000 the incumbent electricity retailer

28 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 8 POWERFUL THOUGHTS Our Approach

OUR PERFORMANCE IS PRESENTED IN LINE WITH THE 8 POWERFUL THOUGHTS THAT ENCOMPASS THE FINANCIAL, SOCIAL AND ENVIRONMENTAL PHILOSOPHIES THAT SHAPE OUR APPROACH.

OUR GROWTH 30 OUR CUSTOMERS 33 OUR PEOPLE 36 OUR ENVIRONMENT 39

SUSTAINABILITY AND BALANCE 43

OUR RESPONSIBILITIES 46 OUR KNOWLEDGE 50 OUR REPUTATION 52

JOHN WYLIE, SOUTH ISLAND ROWING.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 29 Our Growth

OUR THOUGHT

We are growing. That means getting better, not just bigger.

HIGHLIGHTS • Substantial steps towards realising FUTURE • Signifi cant progress on the Te Äpiti portfolio optimisation, including • Further development of intelligent wind farm on the north side of the upgrades at the Manapouri Power metering equipment by Arc Innovations Manawatu Gorge. First power fl owed Station and McKay Creek and • Ongoing benefi ts from development on from Te Äpiti on 26 July Dartmouth Power Stations in Australia both sides of the Tasman • Successful issue of $US400 million of • Negotiation by subsidiary Southern • Continuing development in wind senior notes into the United States Hydro of a Power Purchase Agreement generation private placement market for Wattle Point, a wind farm planned for South Australia • Development of advanced metering solutions by Arc Innovations.

30 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 OUR REFERENCE POINT construction time being lost due to the effects Meridian believes a more measured approach of bad weather. It will be fully commissioned should be taken. The energy industry needs Meridian’s growth success is refl ected by the by Christmas 2004, and will be the largest to think strategically and suggest practical fact that, in fi ve years from its formation in wind farm in Australasia. improvements to the law rather than simply 1999, it is now almost double the size it was focus on perceived shortcomings. at start-up, increasing from $2.2 billion to $4.1 Te Äpiti marks the beginning of Meridian’s billion of assets in 2004. We think this is an wind development programme. We are Meridian has had positive experiences working extraordinary achievement and one that refl ects developing a pipeline of wind opportunities to under the RMA. Our success in gaining resource the incredible team we have at Meridian. deliver new wind farm projects over the next consents for the Te Äpiti wind farm four days three years and are actively investigating after hearings began demonstrates that the On average over the last 20 years, demand for opportunities for business growth in a number RMA consents process can work well. electricity has grown at about 2% per year – of additional generation technologies. the equivalent of adding a city the current size A key area where Meridian welcomes change of Dunedin to the country’s energy needs every As the capacity and capability of New is greater recognition of the national interest in year. Meridian is committed to developing Zealand’s transmission system become fully the consenting process for projects. Decisions sustainable energy solutions to meet New utilised, it is becoming clearer that a balanced on whether or not to grant resource consents Zealand’s rising demand for electricity, which energy future for New Zealand – one in which can require weighing up national benefi ts in turn fuels New Zealand’s economic growth. renewables are a key component – will require versus local impacts. Because decisions are signifi cant transmission investment. Because made at the local level, there is potential for they are based on the location of natural the balance to be disproportionately weighted OUR PROGRESS resources, renewable energy options are often towards local interests at the expense of Renewable Generation remote from local centres. A challenge for the national benefi ts. The current mechanism The development of new renewable generation industry going forward is to assess regional whereby independent commissioners may be assets and the upgrading of existing assets are potential when formulating transmission called in to assist with the process could be fundamental to Meridian’s growth and make investment plans so that policy objectives can better utilised to address this. a key contribution to the security of New be met and the most sustainable generation Where projects have national benefi ts that Zealand’s electricity supply. portfolio can be brought to market over time. clearly outweigh local impacts, an option of Research commissioned by the Energy Balancing competing demands for resources speeding up the consents process for the Effi ciency and Conservation Authority in will also continue to be an important project should be explored. Removing May 2004 showed that 82 percent of New consideration in planning new generation “roadblocks” in the RMA that slow decision- Zealanders approve of wind energy, making assets. Although the decision was made not to making would help to encourage greater it the most preferred form of electricity go ahead with Project Aqua, we have learned investment in generation and other generation1. Meridian is taking the lead in wind much more about integrating hydro generation infrastructure and thereby stimulate and energy in New Zealand with the development with irrigation and may be able to apply this support growth in the economy as a whole. of the Te Äpiti wind farm on the north side of knowledge in other hydro developments in the United States Private the Manawatu Gorge (see special section on future. Placement Te Äpiti wind farm, page 8). Resource Management Act A major fi nancial highlight has been the Te Äpiti has already delivered a number of review successful issue of $US400 million of senior “fi rsts”, including being the fi rst wind farm in The Government has recently announced notes into the United States private placement New Zealand to supply electricity directly to the proposed measures intended to improve market in May 2004. The response from the national grid and the fi rst to use megawatt- the RMA. market was overwhelmingly positive, with the class wind turbines. The fi rst power fl owed from issue being three times over-subscribed. This While many in the business community have Te Äpiti on 26 July 2004, less than a year after resulted in Meridian being able to refi nance called for wholesale changes to the RMA, consents were granted, despite 85 days of debt at very favourable rates.

1 Research quoted by Heather Staley, Chief Executive Offi cer of the Energy Effi ciency and Conservation Authority, at the Meridian Renewables Forum 22 July 2004.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 31 8 POWERFUL THOUGHTS: OUR GROWTH

Overall, the placement of four tranches of senior In particular, Southern Hydro brings to Meridian Agreement for Wattle Point’s electricity to notes raised just over $NZ580 million at an considerable knowledge in water trading, the underwrite the investment. average maturation of 12.5 years. The proceeds peaking market hydrology hedging, and The continuation of Australia’s Mandatory were used for the reorganisation of our existing insurance mechanisms. Meridian and Southern Renewable Energy Target until 2020 has made borrowings. Hydro also benefi t from a valuable exchange of other wind farm developments promising, and engineering expertise. Most importantly for Meridian, the success of we are currently well advanced with the public the issue has given our business a more robust All of our Australian hydro assets are now consultation phase for a 79 MW wind farm fi nancial structure. It achieved the key objective managed by Southern Hydro. Through a remote proposal near Dollar, Victoria. of changing Meridian’s debt portfolio to better control system, Southern Hydro is able to control Due to its cheap and plentiful coal resources refl ect the long life of our assets. dams such as Pindari in northern New South Australia has put considerable investment in base Wales, from an offi ce in Mount Beauty, Victoria. load assets. But what is now required is cheaper, Portfolio Optimisation As of 1 July 2004, our Australian wind develop- Meridian is concentrating closely on portfolio more fl exible, peaking power providers. Southern ment team also reports to Southern Hydro. This optimisation – determining how we can optimise Hydro has identifi ed the potential for further consolidation of all of our Australian business the yield from our existing asset base. This green fi eld generation projects that can profi t under one company brings greater effi ciency involves evaluating where we sell energy, how from the value of short duration peaking power. and enhances the overall capacity of new and we sell energy, weighing up the balance of risks future assets to benefi t Meridian as a whole. Arc Innovations between wholesale or retail markets, and Arc Innovations is a strategic business unit of identifying which segments within those markets Another milestone for the year was the Meridian focused on developing and delivering we should be selling to. Portfolio optimisation is development of a comprehensive asset metering solutions to the New Zealand energy a critical driver for Meridian’s value growth as we management plan. Meridian engineers have market. Arc Innovations has staff in Wellington seek to make the most of the resources we have. assessed Southern Hydro’s procedures, plans and development opportunities and provided and Christchurch and was established in May An example of this in practice is the recommendations for improvements to Southern 2003 following Meridian’s purchase of CIC refurbishment of the . Hydro for future implementation. The McKay Systems Limited. When completed, this has the potential to lift its Creek Power Station upgrade has proceeded very Arc Innovations has had an excellent year with peak output to 860 MW, subject to a new well and is being delivered on time and on its high quality prepayment metering solutions, discharge consent. Among our Australian assets, budget. The upgrade will increase the station’s and prototyping and evaluating advanced another example is the progressive upgrading of output from 120 MW to 150 MW, enable fast metering. We see a market opportunity to take the McKay Creek Power Station (outlined in the start-up (which is important for the peak advantage of modern, intelligent metering following section). Opportunities have also been electricity supply market) and improve reliability. equipment to transform relationships between identifi ed for further expansion of the capability energy retailers and customers. Meridian wishes of the Dartmouth Power Station. Another generating facility is being developed with the committal of the Banimboola power to be at the forefront of this change, to provide Australia station on the Dartmouth regulating pond. customers with very tangible benefi ts from The ongoing development of our assets in The new power station adds value to Southern electricity industry changes. Our efforts will seek Australia provides valuable opportunities for Hydro’s existing assets and will be a major to improve our ability to accurately bill and growth and benefi ts for all of Meridian’s achievement for the Australian business. monitor usage, service customers, in some cases operations, as we access new learnings and provide services remotely, and reduce the cost wider expertise and leverage economies of scale. The Wattle Point wind farm in South Australia is of service. During the fi nancial year our Australian assets another major milestone. Construction started at A core component of our offering is eSmart, a achieved several key milestones. the end of July 2004 and the fi rst electricity is expected to fl ow from the beginning of 2005. highly featured technology that has capacity for Since Meridian purchased Southern Hydro Pty By the end of 2005 Wattle Point is anticipated a range of new metering applications. eSmart Limited in May 2003 it has added considerable to reach its full capacity of 90 MW. Southern has already been used to enhance Arc’s existing strengths to our business. Hydro has already negotiated a Power Purchase prepayment solution.

32 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Our Customers

OUR THOUGHT

We won’t just mind our business. We’ll mind our customers’ too.

HIGHLIGHTS FUTURE • Smooth introduction and • Ongoing communications activities to understanding among customers keep customers informed of electricity of price increases to refl ect the cost issues of developing new generation • Further initiatives to ensure we provide • Development of new corporate and best-practice customer service residential products

• Successful testing of innovative energy saving farm products

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 33 8 POWERFUL THOUGHTS: OUR CUSTOMERS

OUR REFERENCE POINT Small and Medium Enterprise (SME) customer Over the year, 81% of calls were answered satisfaction levels remain stable. The Corporate within 20 seconds. New Zealand has enjoyed relatively low Customer and Business Services teams have electricity prices over the last few decades Another way that we have enhanced our increased their focus on these markets and compared with most other developed nations. service has been to respond to requests for improvements have been made to billing For example, the price of electricity for industrial more frequent meter readings. Our service has and metering systems. We are confi dent that users is more than three times greater in Japan changed to monthly readings in Christchurch, satisfaction levels will increase over the and Italy1, while New Zealand residential Oamaru and Dannevirke. coming months. customers pay signifi cantly less for electricity To further improve our understanding of than those of most of our trading partners. Residential customer satisfaction levels have customer needs we have initiated a brand- increased slightly, with 88% of customers The Ministry of Economic Development’s monitoring project. This will result in clearer rating our service as good, very good, or Energy Outlook to 2020 identifi es that New understanding of our customers’ and excellent2. This has been a very positive result, Zealand’s energy sector is in a period of major stakeholders’ perceptions (see Our Reputation particularly in the challenging context of price transition. It indicates that the era of relatively on page 52). increases we have made during the year. cheap energy compared with other countries is The price increases have been a signifi cant Customer communication now over, with new and replacement sources negative contributor to customer satisfaction Communicating the issues around security of becoming more expensive. While future prices levels in all three categories that we measure. supply and the importance of energy effi ciency will have to refl ect the cost of new electricity has remained a key focus in customer generation to ensure that new investment Price increases refl ect the growing supply and communications. A range of initiatives has will take place to provide security of supply, demand imbalance in New Zealand and the been used throughout the year to promote New Zealand’s electricity prices are likely to need for new generation. We understand the discussion and increase awareness of remain relatively modest by world standards. impact price increases have for customers, and New Zealand’s changing energy environment. to help counter the inevitable rising costs we Meridian’s retail operations now supply This has included a series of breakfast forums electricity to approximately 190,000 have introduced new products and worked throughout the country to engage with the commercial, industrial and residential customers, closely with customers to help them become business community, the creation of the including 40% of our output to one major more energy effi cient (see the Energy Effi ciency Electricity Future Forum website www.eff.co.nz customer, Comalco. Our focus is on providing section on page 12). (see Our Reputation), and features in existing quality service to our existing customers. It is also important to note that Meridian has channels such as our residential newsletter provided a low user tariff in all of our network Currents. OUR PROGRESS areas since 2002, in line with the Government’s policy. Communications have also continued to help Customer relationships customers make best use of our business and This year we have worked hard to position We have also actively communicated the corporate product offerings, including email ourselves so that we are better able to add reasons for price increases, resulting in a lower alerts on spot market pricing, a weekly market value to our customers in the coming year. number of calls than forecast received by our report, and The Meridian Report, a quarterly Our team has been restructured and enhanced customer service centre as increases took effect. newsletter on industry trends. and is now able to focus on engaging with Meridian has responded to customer needs by Another new initiative was our stand at A&P customers in a variety of ways. evolving our call centre into a ”contact centre”, shows, regional fi eld days, and the National The year has seen our relationships with recognising that customers now choose to Fieldays, which provided the opportunity to customers challenged, mainly due to it being communicate using a variety of different meet residential and farming customers face the third year in a row of signifi cant price channels, including the web, email and fax. to face. Our stand was a good way to engage increases, and this is refl ected in customer The centre follows call centre industry best with customers and present new farming satisfaction levels. practice standards for service quality. products and home energy effi ciency tips.

1 Industrial Prices, International Comparison, Ministry of Economic Development. 2 Surveyed during June 2004.

34 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 There was strong interest in heat pumps and Residential products One of the products we trialled and are now wind energy. At the National Fieldays, which During the year we have continued to develop promoting is the Varivac system developed by had an “energy effi cient” theme, we were our prepay system. Offered in Northland and Corkill Systems Limited. Varivac controls the presented with a silver award for our advice to, Christchurch, the prepay system allows level of vacuum in milking machines to suit the and products developed for, dairy farmers. customers to purchase their electricity in number of cows being milked at any one time. advance, making it easier to budget for Too much suction can be hard on cows, wastes Keeping customers well informed is an ongoing water, and can lead to stray voltage. Our trials process. We believe that there is a wider need electricity costs. found that Varivac reduces electricity usage for greater understanding of New Zealand’s Development of the next generation of our and noise levels, improving productivity by energy environment, and will continue to prepay platform, eSmart, has also continued, lowering stress levels among cows. promote this in the year to come. with promising future benefi ts. As eSmart The second product trialled and being Corporate products develops it will offer additional energy promoted by Meridian is Mahana Blue, This year has seen the continued development monitoring functionality and fl exibility for conceived by a New Zealand engineer and of products for the corporate and business residential customers (see Our Growth, developed by Danfoss New Zealand. Mahana market. In particular, customers have benefi ted page 30). Blue is a heat exchange unit that takes the from the increased control over electricity The LevelPay product introduced this year heat from the milk refrigeration process and usage and costs offered through the new enables residential customers to smooth out uses it to heat water to 85 degrees Celsius. Flexiplan and Easiplan products. their power bill over the year, removing billing Meridian’s trials of this product have also Flexiplan customers have benefi ted when spot spikes caused by increased winter consumption. shown impressive energy savings. prices have been low while still being able to Farm products In an independent initiative we examined the secure the bulk of their energy usage at fi xed Meridian has used a dairy farm acquired for cause of, and found a way to reduce, ‘stray price rates. Under Easiplan, customers are able Project Aqua to trial several energy effi ciency voltage’ in milking sheds. Stray voltage is to obtain a fi xed price for all of their electricity, initiatives, including two products developed by electricity that escapes from equipment in the providing protection from fl uctuations in the innovative New Zealand companies. Meridian dairy shed. It causes distress to cows and can spot market and certainty over monthly has agreed to promote these products to lead to prolonged milking times and reduced electricity costs. encourage energy effi ciency on farms and milk returns. Applied at our dairy farm in because of the opportunity they provide to Kurow, the outcome was a vastly improved interact with farming customers and deepen work environment and happier, healthier and relationships. more productive animals.

CUSTOMER SATISFACTION IN KEY MARKETS

100

90

80

70

60

50

40 % satisified 30

20

10

0 Residential Business Corporate

Good Very Good Excellent

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 35 Our People

OUR THOUGHT

People make our world go round. And give us a competitive advantage.

HIGHLIGHTS • Broadening our health and safety plan FUTURE • Providing staff with opportunities to include accountabilities throughout • Moving forward under the reorganised through a reorganisation across our business structure Meridian to position us for the future • A signifi cant reduction in the number • Continued focus on staff development, • Creation of a new People and of staff with greater than 20 days’ health and management through Performance directorate to increase our leave outstanding the new People and Performance focus on people directorate

36 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 OUR REFERENCE POINT OUR PROGRESS in December 2003. The reorganisation was designed to help us achieve portfolio Our focus is to live the Meridian Way. The Reorganisation optimisation, enable a dedicated focus on Meridian Way is a set of behaviours that were Meridian was established in 1999, when strategy, put greater emphasis on people, and developed at Meridian’s inception: hot wired, New Zealand’s energy environment was very support asset creation. A thorough process of commercially driven, agile, imaginative, different from what it is today. The market was consultation over several months ensured that building rapport, and working like you own new, generation was in surplus, and Meridian staff were involved in the organisation re-design. the company. was a small organisation with a start-up structure focused on organic retail growth. For staff, the reorganisation has seen changes The Meridian Way infl uences all of our human and benefi ts. Resources are now closely aligned resources policies and processes. It shapes Now, there are major regulatory changes with strategy. New skill sets have been created recruitment, development and retention taking place. Meridian operates in Australia, and opportunities have been enhanced, with activities and informs our decisions about we have a new Trans-Tasman wind total employee numbers increased. A key who we choose to work with. We ensure our development programme, and New Zealand change has also been the creation of a new partners and suppliers are committed to urgently needs new generation capacity. People and Performance directorate to ensure sharing our dream – and approach it in the To meet existing goals and future challenges, that we maintain a focus on staff development, same way that we do. we announced a programme of reorganisation health and safety.

OUR PEOPLE 2004 Wellington Retail Ops Christchurch ce Christchurch Offi Twizel Manapouri Tapanui Dunedin Total excluding Australia Australia TOTAL

Meridian Staff 125 62 62 36 5 1 6 297 94 391 Contractors 17 1 4 5 1 28 28 HP 5 2 1 8 8 ABB 5 7 12 12 Areva 32 8 40 40 Zelko 22 11 33 33 Bearing Point 7 7 7 Teletech 71 71 71

Total as at 30 June 2004 147 141 73 103 24 1 7 496 94 590 Approximate number of people working full time for Meridian at 30 June 2004

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 37 8 POWERFUL THOUGHTS: OUR PEOPLE

UNSCHEDULED ABSENCE RATE Recruitment, development Health and Safety and retention Health and safety have remained a focus 7 Meridian recognises that investing in people is area for the year. In injury prevention we 6 essential to the success of our business, and is have introduced a plan to help us achieve 5 particularly important in the context of current our ultimate goal of zero lost time incidents.

4 labour market constraints. Adding value The plan has included a broadening of our % 3 through training and development will be a health and safety structure to include

2 key goal for the People and Performance accountabilities throughout the business and directorate. new reporting tools as we strive for best 1 practice. There were 20 days lost due to two 0 Over the year our emphasis on developing incidents this year. 2004 Industry Benchmark capability has continued, with an average of $2,702 per full-time equivalent (FTE) employee An ongoing emphasis on corporate wellness spent on training and development. will also be central to the directorate, and a dedicated position has been created to focus Further opportunities for staff development on this. were created as part of the reorganisation, with % OF STAFF WITH >20 DAYS’ new positions open to applicants from across Our unscheduled absence rate is well below ANNUAL LEAVE OUTSTANDING Meridian. The gradual implementation of the the industry benchmark of 6.01 days per FTE

25 process has also allowed staff to evaluate how per annum. This year’s calculation includes new opportunities might align with their own bereavement, discretionary and sick leave, a 20 career aspirations. change from previous years’ fi gures which only

15 included sick leave. Some staff have chosen Meridian’s transition to %

10 a new structure as a time to make a career We have made signifi cant progress in reducing change, as refl ected in a voluntary staff the percentage of staff with greater than 5 turnover this year of 13.1 percent. The year’s 20 days’ annual leave outstanding from

0 strong economy and extremely competitive 23 percent of staff last year to just under 2002 2003 2004 labour market have also contributed to this. 10 percent this year. This greatly exceeds our aim of 15 percent of staff and shows that the work we have done to encourage, and make it possible for, staff to take leave is working.

INVESTMENT IN TRAINING % OF COMPENSATION

3.5

3.0

2.5

2.0 % 1.5

1.0

0.5

0.0 2002 2003 2004

38 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Our Environment

OUR THOUGHT

Our power comes from nature. And we’re making it work for us.

HIGHLIGHTS • Initiation of a research project with key FUTURE • Close work with diverse stakeholders stakeholders to better understand the • Implementation of environmental to achieve excellent compliance and migratory habits of long fi n eels from research projects environmental outcomes Lake Manapouri • Implementation of the adaptive • Comprehensive activities as part of • The signing of a memorandum of approach to monitoring and Project River Recovery to protect the understanding between Meridian management programmes attached braided river habitat in the upper and Land Information New Zealand to resource consents Waitaki Basin (LINZ) to formalise our relationship for ongoing work on aquatic weed control • A very successful young eel (elver) programmes in the Waitaki Catchment transfer programme

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 39 8 POWERFUL THOUGHTS: OUR ENVIRONMENT

OUR REFERENCE POINT • Completion of a paper based on data The outcomes of the Manapouri and Waitaki previously collected on eggshell fragments research projects will help us to develop ways The careful environmental management and in nests. Information was collected through to assist the life cycles of eels. Findings from excellent performance of our generating assets video observations and analysis was the fi rst phase of each project are being are essential to Meridian’s success as a carried out to determine nest fate and formalised and will inform the next phase sustainable business. We work closely with predator identity. of research in the year to come. stakeholders to go beyond ordinary • Completion of a report on a survey of commitments. Our operational experience Lagarosiphon containment threatened plants in the Tasman, Godley is refl ected in the extraordinary achievements We have continued to work with Land and Ahuriri valleys. on the Te Äpiti wind farm (see page 8). Information New Zealand (LINZ) to contain the Manapouri and Waitaki eel research aquatic weed Lagarosiphon major discovered in A key activity for the year has been Meridian’s Lake Benmore last year. In addition to activities OUR PROGRESS involvement in initiating a research project to around Lake Benmore, an intensive surveillance Strong stakeholder relationships provide the better understand the migratory habits of long programme to monitor other areas for signs of platform for our environmental compliance and fi n eels from Lake Manapouri. The fi rst phase of the weed also forms a part of the containment management programmes. the study was carried out this year and involved project. the tagging and surveying of eels over a three- Protecting and enhancing the Together with other agencies such as LINZ, the month period. environment Department of Conservation, and Southland Project River Recovery The research was the recommendation of a and Canterbury Regional Councils, Meridian As part of a stakeholder relationship with the National Institute of Water and Atmospheric supports an annual public awareness Department of Conservation (DOC), Meridian Research (NIWA) report commissioned by campaign, which was carried out again over funds Project River Recovery, which focuses on Meridian and was agreed to by a focus group the 2003/2004 summer around the Waitaki protecting the braided river habitat in the established to ensure broad stakeholder Lakes. The campaign aims to increase Upper Waitaki Basin. Highlights for the year consensus on the best way to improve wider awareness and more precautionary efforts from include: understanding of local eel populations. recreational users of the lakes to help prevent • 6467 person hours spent protecting some The group includes representatives from the the spread of the weed. This is done in practical 30,000 hectares of braided river from Ministry of Fisheries, the Department of ways, such as stationing people at boat ramps, invasive weeds as part of an intensive Conservation, the Waiau Fisheries and Wildlife talking to users about the importance of weed control programme. Habitat Enhancement Trust, Fish & Game cleaning their equipment, and distributing • Completion of the fi rst stage of a large- New Zealand, commercial eelers and NIWA. fl yers to recreational users and groups. scale willow removal programme in the upper . This involved the Meridian has also been involved in a separate Monitoring removal of scattered trees and small research project in partnership with Ngai Tahu Consent compliance programme saplings. The removal of large stands will and the Waitaki Native Fish Committee to Meridian has a comprehensive environmental begin in August 2004. evaluate the status of long fi n eels in the mid and management system to ensure consent • Completion and submission for publication upper Waitaki catchment. The fi rst stage of the compliance. A broad range of monitoring of a paper on the Ruataniwha wetland research, carried out directly by members of the programmes is used to ensure that our assets experiment. This tested the effects of a Committee including a Meridian representative, perform in compliance with our operating predator exclusion fence on predator took place from November 2003 to April consents, and extend to include initiatives to abundance and wetland bird breeding 2004. This involved trapping, weighing and encourage the protection and development of success. measuring eels, recording their locations the surrounding environment. Activities and • Submission for publication of a paper on and transferring the migratory eels caught events for the year include: hedgehog diet resulting from an earlier downstream to continue their migration to • A very successful young eel (elver) transfer Project River Recovery study. the sea. programme, with approximately 110,000

40 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 young eels transferred upstream of the Responsible operator Planning for the future Manapouri Lake Control structure to the Managing high infl ows National, regional and district plans have a Lake Te Anau area In March this year we had very high infl ows signifi cant effect on Meridian. For this reason • Further refi nement of our extensive marine into the Waitaki catchment. This meant that we take an active part in the plan development monitoring programme in Doubtful Sound. unlike in most years when there is little, if any and review process. We continue to work with a stakeholder spill, a certain amount of water had to be Activities over the last year include: focus group to develop future monitoring spilled down spillways and riverbeds. During • Taking an active role in commenting on initiatives, and the programme is due to this time Meridian took special care to ensure Environment Canterbury’s Draft NRRP and be fi nalised by January 2005 that the environmental impacts of spilling were Environment Southland’s Freshwater Plan • Working closely with the Department considered, including efforts to ensure that the • Participating in the hearings on the of Conservation and Fish & Game timing of spills did not coincide with critical Fiordland National Park Management Plan New Zealand when timing maintenance trout spawning times in the . programmes to take into account key times • Submitting on Plan Change 32 and 33 of year for different species and habitats Consent compliance (Renewable Energy and Ridgelines and • Aerial surveys of trout spawning beds in There were no signifi cant non-compliance Hilltops) of the Wellington City Council the upper Ohau River to assess whether events in respect of our resource consents City Plan. the benefi ts of minimum fl ows have been this year. Overall there was a high level of realised compliance with the hydrological requirements • As in previous years, working with Fish & of over 75 operating consents for the Waitaki Game New Zealand in managing fl ows in and Manapouri power schemes. Excellent the upper , an effort that compliance was also achieved for the large helped result in the highest fi sh spawning number of maintenance and other supporting “I wish to express my appreciation of numbers recorded in recent times. consents related to the schemes. Meridian Energy’s Environmental Team’s input and assistance into the eel study Manapouri resource consent review The establishment of Meridian’s Te Äpiti wind group. The Wairua (spirit) and Eweewe (relation) between the team and the study During the year Meridian has continued to work farm means over 1.1 million cubic metres of group can only really be understood by excavated material has been moved to allow closely with stakeholders, notably the Guardians those taking part, for to do so allows one of Lakes Manapouri, Monowai and Te Anau and the construction of 21 kilometres of access to understand the holistic nature of the Waiau Working Party, to carry out the seven- track and 55 foundation pits. A robust erosion, Tangata Whenua in relation to the environment. year review of the monitoring programmes sediment and dust management plan at attached to our Manapouri resource consents. Te Äpiti during this time has underpinned all He toa taua he toa pahekeheke he toa mahi kai he toa pumau (to be famous in war is earth-moving and site stabilisation works. The groups have agreed on several key soon forgotten, but fame in producing food It has ensured highly effective protection of will always remain).” initiatives that will result in future refi nements waterways and air quality, with no incidents John Wilkie, Chairperson Te Ruranga o Waihao to the monitoring processes. These are: reported to date. • A major eel research programme • A refocused bird research programme, including co-sponsorship with the Department of Conservation of a doctoral student studying black billed gulls (see case study) • A study on the ecosystems and monitoring programmes for the Waiau Arm, the stretch of water between Lake Manapouri and the Manapouri Lake Control Structure.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 41 8 POWERFUL THOUGHTS: OUR ENVIRONMENT

HYDROLOGICAL OPERATING COMPLIANCE INCIDENTS FOR THE YEAR ENDED 30 JUNE 2004

Manapouri Number Scale Details [Several] Minor Turbidity events associated with releasing fl ows at MLC1 during turbid (discoloured) water events to avoid turbid water entering Lake Manapouri. The events were typically the result of debris/algae build up on the sensors, or the lag time between instrumentation and MLC gate opening, or both. In all events no turbid water entered the lake. [Several] Minor Relate to fl ow ramping rates under normal conditions where maximum fl ow change is 20 cumecs2 per hour, and fl ows are not to be both increased and decreased within a 24 hour period. [Several] Minor Events occurred in September and November and related to the stage/discharge relationship to ensure minimum fl ows at MLC are maintained. Some events occurred during the testing of revised systems to add reliability to gate response times. The remainder of minor events are believed to be the result of an encoder failure. 5 Minor Relate to maximum freshwater discharge limit of 510 cumecs to Deep Cove. All events were considered minor and well within measurement error limits. Waitaki Number Scale Details 2 Minor Relate to requirements for set canal fl ows of 200 cumecs when Ohau lake levels are above 520.40m (fl ood operating range). These are considered minor events with each lasting no more than 2-3 days. Adhering exactly to the required discharge rate is diffi cult to comply with given the large scale of operations and water volumes involved. 8 Minor Discharge fl ow limits at Benmore power station were exceeded at separate times, each no longer than 0.5 – 3.5 hours. The discharge fl ow limit was complied with 99.9% of the time. 2 Minor Relate to load changes at the Waitaki power station for fl ows below 200 cumecs and the 5 MW load limit. Both were exceeded for short durations during periods of spill events (less than 0.1% for the 12 month period).

1 MLC – Manapouri Lake Control. 2 Cumec – cubic metre per second.

CASE STUDY Black Billed Gull study Since 1997 Meridian has been monitoring Meridian already maintains a breeding area at the bird populations on the lower Waiau River in confl uence of the Waiau and Mararoa rivers to help Southland. This year we joined with DOC to sponsor the bird’s chances of breeding and chick rearing Rachel McClellan, a PhD student, to study Black success. Rachel’s research will use this site and one Billed Gulls in the Southland region. or two others, particularly managed areas of riverbed along the lower Waiau River. Meridian will Using the lower Waiau River as her main area be helping Rachel by providing resources, research for feedback, Rachel’s study will help improve equipment, river fl ow and local environment understanding of the ecology and conservation information and travel needs. requirements of the gull. It will also provide insights as to why the national population of the gull is in decline and how new conservation efforts can be developed by resource managers.

42 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Sustainability and Balance

OUR THOUGHT

If you take something out, you’ve got to put something back. Balance is a life necessity.

HIGHLIGHTS • Signifi cant progress on the Manapouri FUTURE • Participation in industry initiatives, Half-Life Refurbishment Project, which • Continued involvement in industry taking a holistic approach to key sector will give the station the potential to activities to achieve best outcomes issues generate an additional 70 gigawatt for customers and New Zealand hours each year • Sale of Te Äpiti emission reduction • Ongoing projects to optimise all credits to the Netherlands Government existing generation assets

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 43 8 POWERFUL THOUGHTS: SUSTAINABILITY AND BALANCE

Planning for a dry year Te Äpiti emission reduction given us a more complete perspective of our In Autumn 2003 the electricity system faced credits sale emissions profi le, allowing us to gauge our a shortage of both hydro and thermal fuels. During the year we participated in New performance more effectively. The Target 10% campaign was successful in Zealand’s fi rst trade of emission reduction Using the same methodology as last year, encouraging New Zealanders to conserve credits, entering into a contract to sell carbon Landcare’s EBEX21 model shows an 18% electricity until unseasonable early winter credits from our Te Äpiti Wind Farm to the increase over last year’s total tonnes of CO rain returned the situation to normal. Netherlands Government’s ERUPT programme. 2 equivalent, due to an increase in FTE numbers This year we continued to manage water Through its Project Agreement with the Crown, and travel. These calculations include Meridian resources carefully to allow us to optimise our Meridian was allocated emission reduction Energy’s core business, Meridian Solutions and capacity to contribute to electricity supply in credits in recognition of some of Te Äpiti’s Damwatch. They do not include direct winter if New Zealand experienced another dry emission reduction benefi ts expected during emissions from any other subsidiaries or year. This was achieved by adopting a more the fi rst Kyoto commitment period, 2008-2012. external contractors. conservative trading strategy. By purchasing The ERUPT (Emissions Reduction Unit electricity at reduced costs over the low There has been a slight reduction in diesel Procurement Tender) programme provides a demand period, we were able to preserve usage from the previous year, as favourable mechanism for the Netherlands Government to storage levels to provide contingency hydrology during the year negated the use of offset its Kyoto Protocol obligations by buying generation capacity if we experienced a extra diesel stocks at the Manapouri Station. credits from companies with projects that dry period. Diesel utilised in the boats used on Lake reduce greenhouse gas emissions. Manapouri has also been included. These are Ultimately we did not have a dry year, and The contract with the Netherlands Government not operated directly by Meridian, but as wholesale prices across the market have been is independent of the Kyoto Protocol coming Meridian is the major user of the service a lower as a result of good infl ows and high lake into force. It will provide an additional revenue decision has been taken to include this data. storage levels. stream for Te Äpiti and is an example of the Emissions as a result of air travel, both way carbon credit trading provides economic Industry initiatives domestic and international, have increased During the year we participated in a number of incentives for environmentally sustainable signifi cantly. In particular the majority of industry initiatives. electricity generation. emissions associated with international air • Working closely with the Ministry of CO footprint travel relate to the Trans-Tasman sector, and Economic Development to provide 2 Last year Meridian broadened the scope of this refl ects Meridian’s acquisition of Southern assurance of the measures we were taking what is included in calculating the CO Hydro at the end of the 2002/3 fi nancial year to contribute to security of supply if New 2 footprint of our operations. A new benchmark and our much increased commitment to our Zealand had a dry year. was established by extending the measurement subsidiaries in Australia. Emission from petrol • Partnering with other retailers to produce to include a fuller range of activities. This has used in vehicles has also increased markedly. advertisements in the upper South Island about how people could save electricity

when it appeared there might be CO2 FOOTPRINT involuntary shortages due to network Energy Type 2004 Unit TCO2 2003 Unit TCO2 % Change overloading. • Close involvement in establishing a short- Electricity 2,674,791 kWh 390 2,570,590 kWh 375 4 term electricity hedging market with other Air – International 2,628,054 km 289 1,739,896 km 191 51 Air – Domestic 3,170,449 km 571 2,294,736 km 413 38 retailers, with prices and trading Petrol 96,158 L 221 66,275 L 152 45 information publicly available on-line after Diesel 299,664 L 784 328,277 L 859 -9 Petrol Vehicle Mileage 311,773 km 94 N/A km N/A N/A trading has fi nished, providing greater (Business Trips) transparency of prices and trading levels to Total CO2 2,349 1,990 18 the market.

44 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 This is due to much increased use of both INFLOWS AND SPOT PRICES JULY–JUNE Meridian and rental vehicles during the

fi nancial year 2003/4. 100 2000

90 1800

Making the most of our assets 80 1600 Following the commissioning of the second 70 1400 Manapouri tailrace tunnel in early 2002, we 60 1200 50 1000 began the Manapouri Half-Life Refurbishment GWh 40 800 Average Spot Price $ Project this year. This project will increase the 30 600 effi ciency of water use at Manapouri even 20 400 200 further. The project involves upgrading the 10 0 0 Jul Oct Jan Jun Apr Feb Sep Dec Nov Mar Aug seven generator units at the Manapouri power May station, which is expected to add another Typical Waitaki Inflow Pattern Waitaki Inflows 2003/4 Average Spot Price $ 2003/4 Waitaki Inflows 2002/3 13.5 MW to the generating capacity of each unit. When turbine upgrades are completed in December 2005, the station will have the potential to generate an additional 70 GWh each year.

We have also been assessing the benefi ts of installing new turbine runners at Benmore CASE STUDY power station. Similar work at the Aviemore A sustainable solution for Winstone Pulp International power station, completed in 2000, increased With a focus on developing innovative and The project reduces WPI’s dependence on the generation capacity of the station by sustainable solutions, Meridian’s strategic a non-renewable fuel (LPG). It also reduces making more effi cient use of the water. business unit Meridian Solutions delivers the adverse environmental effects of By installing new technology and making environmental as well as fi nancial benefi ts leachates and methane emissions caused by ongoing improvements to our generation to clients. This year Meridian Solutions has the landfi lling of the pulp sludge. Methane assets, we are able to generate more electricity invested in and built its second bio-mass is a greenhouse gas with a global warming using the same or less water, ensuring that fuelled energy plant with the construction potential 21 times that of carbon dioxide. we optimise our use of this valuable resource and commissioning of a new 12 MW wood- The equivalent reduction in carbon dioxide (for more information on the importance of waste-fi red heat plant at Winstone Pulp emissions that will result from the new managing water resources, see the Water International’s (WPI) Karioi pulp mill. The process is estimated to be in the order of

Allocation section, page 16). heat plant burns on-site and imported wood 25,000 tonnes of CO2 per year. residues as well as the mill’s pulp sludges, generating heat to dry the wet pulp, ready for export.

In addition to operational cost savings, the benefi ts to WPI from this partnership include the reduction in LPG fuel consumption by more than four million litres per year and the conversion into fuel of 30,000 tonnes of pulp mill sludge per year that would

otherwise have been disposed of in landfi ll. WINSTONE PULP INTERNATIONAL’S HEAT PLANT

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 45 Our Responsibilities

OUR THOUGHT

We answer to you. Because ultimately, we work for you.

HIGHLIGHTS • Donation of $500,000 to Plunket and FUTURE • Improved fi nancial performance, with completion of $150,000 worth of • Improve annualised return on equity after-tax profi t of $132.9 million, up energy savings installations at Plunket • Further develop strong relationships from $109.3 million the previous year Family Centres throughout New with sponsored individuals, groups and Zealand to reward New Zealanders for • Helping swimmer Helen Norfolk and organisations energy savings efforts during the 2003 John Wylie, manager of South Island energy savings campaign • Continue to build strong stakeholder Rowing, get to the Olympics relationships • Sponsorship of the very successful Royal New Zealand Ballet national tour of Saltarello

46 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 OUR REFERENCE POINT In Victoria, we have also experienced ongoing Project Aqua drought with infl ows below long-term average, While cancellation of the project was a very Meridian takes its responsibility as a State resulting in production from the Southern diffi cult decision, it was the responsible course Owned Enterprise (SOE) seriously. Being an Hydro assets being approximately 60 percent of action for the company to take. SOE means we have to operate as a successful of long-term average for those assets. However, business and be: the trading skills of Southern Hydro’s team In many respects the fi nancial impacts of the • As profi table and effi cient as comparable have largely offset the low infl ows. For decision have been positive for Meridian. businesses not owned by the Crown example, they have produced the available We will no longer have to fi nance the project • A good employer water at the very highest priced times of the which would have had a delayed revenue • An organisation that exhibits a sense of year. Consequently, the Southern Hydro EBIT, stream, and our goal of maintaining a BBB+ social responsibility by having regard to before movements in the company’s forward Standard & Poors credit rating remains well the interests of the community in which energy trading book, was exactly to plan. This within our scope. we operate and by endeavouring to was an excellent result given the circumstances The consequences of Project Aqua’s accommodate or encourage those interests for hydrology. We expect a signifi cant upturn in cancellation cannot be ignored. The 3000 when able to do so. the performance of our Australian hydro assets gigawatt hours of electricity Project Aqua was (Part One of the State-Owned Enterprises when infl ows return to long-term average or expected to provide to the market will now Act 1986) above. need to be supplied by new capacity from other

We are mindful of the challenges ahead. sources much of which may come at a higher OUR PROGRESS Fluctuations in New Zealand infl ows, fi nancial and environmental cost. transmission constraints, the bedding-in of a Our profi t Community responsibilities: new regulatory regime under the Electricity Meridian achieved an improved performance Sponsorships Commission, potential delays for development Meridian is a major supporter of the arts, sports for the year. Our after-tax profi t was $132.9 projects and above all the uncertainty over and communities around the country through million, up from $109.3 million the previous water rights could all have a signifi cant our sponsorship programme. Our sponsorships year. infl uence on future fi nancial performance. are a great fi t with our brand qualities: This was an excellent outcome and was We are now operating around our desired creativity, innovation and energy. 14 percent ahead of budgeted profi t. Several gearing ratio and are at a stage in the industry During the year we brought the management factors contributed to this. Good infl ows into investment cycle where further capital needs to of our corporate sponsorships in-house, which our hydro lakes enabled us to generate far be invested in generation and customer service has helped to create even closer bonds with the greater volumes of electricity than we had initiatives. Meridian’s capital requirements for individuals, teams, and organisations we anticipated. Our strong hydrology position also wind development are considerable and further sponsor. We work together on joint marketing meant that Meridian did not have to purchase equity may be required to support renewable initiatives and in planning activities that additional electricity from the spot market, as development, in line with the Government’s deliver mutual benefi ts. had been the case in previous years. energy policy direction. Sports In Australia, we have experienced extreme and We are pleased to make a substantial 2004 is an Olympic year and our backing has prolonged drought conditions affecting the contribution to the New Zealand economy helped make the road to Athens a little easier New South Wales assets, and their production through return to shareholders as well as taxes for some of our athletes and offi cials. We was only 45 percent of the long-term average and our wider support of the communities we support Helen Norfolk, who took to the pool for those assets. Despite this, close attention to operate, as required of an SOE. in the 400 metre relay and 200 metre operating costs resulted in the EBIT (earnings breaststroke. John Wylie, the manager of before interest and tax) performance of the Meridian-sponsored South Island Rowing, went New South Wales assets being closely in line to Athens as an event judge. South Island with plan.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 47 8 POWERFUL THOUGHTS: OUR RESPONSIBILITIES

Rowing trains and holds regattas on Lake writing while staying for six months in The diary of a poet on his way to be Ruataniwha: an example of the sporting and Katherine Mansfi eld’s former residence in astonished at the Royal New Zealand Ballet’s production of Romeo and recreational value of Meridian’s hydro lakes. Menton, France. Juliet in Sadler’s Wells. Meridian is backing a winner in Melissa Moon. A third work will soon be added to the “…they do their fi ghts as if they’re Last year in Alaska Melissa Moon regained the Meridian Wellington Wind Sculpture series with auditioning for The Matrix. Tybalt’s bloody hand marks title of World Mountain Running Champion, the commissioning of “Tower of Light” from Romeo’s white shirt. Lady and she has been instrumental in bringing the Christchurch sculptor Andrew Drummond. It Capulet (Juliet’s mum), who championships to Wellington in 2005. Many of will join “Zephyrometer” and “Pacifi c Grass” seems to have been having it off with Tybalt, does a wonderful our Wellington staff have benefi ted from her along the Meridian Wind Sculpture Walk on piece of agonised dance – really, training tips in their preparation for the Round Cobham Drive in Wellington. “Tower of Light” the music is extraordinary, the Bays Run. will harness the power of the wind to light up commanding the way these bodies move… neon rings within the work – a great use of We have continued to sponsor rugby in the sustainable energy and one of Wellington’s Actually, I do dance a bit. There’s province where most of our staff and customers a little poem by William Carlos most abundant natural resources. are based, supporting Canterbury Rugby from Williams where he describes himself dancing, naked, in front junior level through to NPC. Community of his mirror: Meridian continues to support a number of Arts Who shall say I am not the happy community groups. A highlight for this year This year we have continued with four main genius of my household? was a payment of $500,000 to Plunket as our arts sponsorships: the Royal New Zealand I don’t do that, of course. But recognition of the 2003 Target 10% Ballet, the Katherine Mansfi eld Memorial sometimes my toes have small, campaign. The additional part of this reward, astonishing moments, safe inside Fellowship, the Wellington Sculpture Trust and the installation of $150,000 worth of energy my shoes. the New Zealand String Quartet. effi ciency equipment in Plunket Family Centres …but it looks wonderful, the The Royal New Zealand Ballet had a throughout New Zealand, was also undertaken onstage crowd scenes are great inside their frame, and the during the year. remarkable year that featured a well-received ballroom scene, especially, is a tour of Europe and a very successful national dazzling piece of mobile In another initiative, Meridian compiled images tour of The Meridian Energy Season of composition. The programme has from Plunket Family Fun Days to create a 2004 a synopsis, of course, but we Saltarello. Part of our support of the Ballet calendar. We produced 10,000 of these hardly need it: everyone knows involved assistance with Saltarello publicity calendars to be sold for fund-raising for the the story. The marriage bed will activities that included chalk art on city become the lovers’ tomb. But Plunket Society. footpaths and creative lighting effects for that’s how it goes: love will win by losing in the end. There are buildings. During the fl ooding in Manawatu in We have continued our joint initiative with cheers, bravoes and whistles: February 2004, we purchased 300 tickets for a EnergySmart Limited and the Community vast applause.”

Palmerston North performance of Saltarello, Energy Action Trust to have Energy Saver Vans Bill Manhire, Meridian Energy giving them free of charge to relief workers and visit lower income Christchurch households Katherine Mansfi eld 2004 fellow. Excerpts from the New Zealand Listener, people affected by the fl oods. This was great (see Energy Effi ciency on page 12). May 22-28, 2004. exposure for the Ballet and a welcome morale- Meridian has also assisted Kiwi Can in the boost for the community. Wellington region. Kiwi Can is a self-esteem Katherine Mansfi eld Fellow Bill Manhire gave a programme in primary schools. Our staff have wonderful account in the New Zealand Listener visited classrooms to teach children how energy of his backstage experiences with the Royal is generated, as well as how to make their own New Zealand Ballet as they toured the United wind turbines. Staff welcome opportunities Kingdom performing Romeo and Juliet. The such as this to get directly involved in the Fellowship allows Bill Manhire to pursue his programmes we sponsor.

48 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Local Events young chefs. Proceeds go to the Tuatapere agreement, and work closely with iwi We have an extensive community support Hump Track Charitable Trust. representatives in a range of programmes programme in the areas where we own and relating to the environmental operation of our Meridian’s generation assets are often in operate generating assets. Meridian has South Island hydro assets. This includes the locations with magnifi cent backdrops in great provided backing to many local community annual trap and transfer of eels at the Waitaki demand by fi lm crews. For example, our canal events during the year through sponsorships, Power Station, and other projects undertaken roads in the Mackenzie Basin have been used donations and participation. through the Waitaki Native Fish committee for advertisements for both BMW and Mercedes (see also Our Environment, page 39). A new local event sponsorship for us was the Benz. We donate the fees we receive for using Waimate Strawberry Fare in December 2003. our canal roads to local charities including Another very close relationship we have is with The event attracted around 10,000 people and kindergartens, Lions clubs, schools and the Department of Conservation, with whom was an extraordinary success for the local emergency services. we share a commitment to raising awareness community. in the community about conservation and Our community sponsorship programme is our the environment. Meridian sponsors the In the Mackenzie district, Twizel’s ”Hard Labour way of giving back to communities some of the Department of Conservation’s Summer Holiday Weekend” is another occasion that draws support they give us. Programme of environmental education held in people to the region. Meridian sponsors the the Mackenzie district annually over the three major events over the Labour Day Relationships weekend: the Twizel Pyramid Run involving Meridian has strong partnerships with several Christmas/New Year Period. 18 kilometres of off-road running; the Meridian community organisations, iwi and government Kayak Challenge on the region’s canals and agencies. Our relationships with stakeholder lakes; and the appropriately-named Totara groups are very important to us, both in Peaks Gutbuster Mountain Bike Race. Many of enhancing the everyday interaction we have “The support of Meridian Energy plays a our staff are keen competitors in these events. with stakeholders as part of our operations and tremendously signifi cant role in providing in providing open channels of communication a vehicle for me to focus on my dance work, Another local event we sponsor, the Meridian and to take advantage of the excellent during consultation. training available. I can never thank you Celebrity Walk Week, is a great opportunity for enough Meridian Energy – you have made trampers to see a wonderful part of Southland One of these relationships is with Ngai Tahu. my dreams possible.” while sharing their experience with celebrities We have an excellent relationship with Ngai Marysa Dalton, Royal New Zealand Ballet dancer partnered and being catered for by the country’s top Tahu, formalised through a relationship by Meridian Energy.

CASE STUDY The Meridian Energy Season of Saltarello The central feature of our promotion of the three pieces in Saltarello); live spotlights Saltarello was an image of a ballet dancer on bus shelter Saltarello posters; a chalk inside a light bulb dancing to the Saltarello version of the print ad in high foot traffi c music. This was used to great effect as a areas (in Palmerston North, Auckland, projected image outside and inside the Wellington, Christchurch, and Dunedin); theatres. and a radio advertisement.

Other visuals emphasised the links between Helped by our leverage campaign, Saltarello’s dance and electricity. In addition to the attendance fi gures were much higher than the striking projection, advertising for print was Royal New Zealand Ballet had budgeted and of three spotlights on a stage (representing they had an outstandingly successful season.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 49 Our Knowledge

OUR THOUGHT

Knowledge equals power. When it is equally shared.

HIGHLIGHTS • Development of new technologies FUTURE • Key developments for innovative through our Technology Products • Ongoing monitoring of new products technology companies Meridian invests Development Programme and technologies to ensure that we in. This includes a NZ$300 million stay on the edge of new developments agreement between Whisper Tech and • Continued development of internal E-ON UK, and the securing of a key information management and market patent for a superconductor material modelling systems by Meridian’s joint venture company with Industrial Research Limited

50 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 OUR REFERENCE POINT We have also been pleased to see the Market modelling establishment of a spin-off company from IRL Meridian maintains and continues to further The Meridian Way behaviours are at the heart to develop commercial applications for develop a comprehensive strategic and of our approach to knowledge sharing. We are superconducting wire that uses BSCCO 2223. operational New Zealand market modelling committed to building rapport between staff Based in Wellington, this could be a crucial fi rst framework. This allows us to forecast and and with other stakeholders. To do so, we need step in New Zealand becoming a world-leader assess the impact of matters critical to to be able to share information easily and in a signifi cant emerging market. Meridian’s decision making. seamlessly. Product development To stay on the competitive edge of other new OUR PROGRESS and developing technologies, Meridian has Investing in innovation maintained its relationships with companies Our investment in Whisper Tech Limited, such as Nth Power Technologies, a US-based a Christchurch-based developer of a new venture fund specialising in the energy industry technology known as Whispergen, has with an emphasis on renewable energy, continued. Whispergen is a residential-sized demand reduction and pollution control combined heat and power device that replaces systems. We have also continued our a conventional boiler with a unit that can investment in Australian company Ceramic Fuel generate base-load electricity while meeting Cells Limited, which recently completed its IPO the heating requirements of a home at a lower and listed on the Australian Stock Exchange. cost, and with lower CO2 emissions. Electricity Internally, we have continued to develop produced by the unit not used in the home products for key customer segments through fl ows back to the electricity grid, and the our Technology Products Development consumer is credited for this surplus generation. Programme. This includes a heat exchanger A key development for Whisper Tech has been for dairy farms, technology to improve power an agreement with E.ON UK, the company that quality for customer sites, and a controller owns Powergen, the United Kingdom’s second to optimise energy use, with one potential largest energy retailer. Under the agreement, application being cold store sites. We are worth $NZ300 million, Whisper Tech will also investigating opportunities to integrate supply 80,000 Whispergen units over a fi ve different technologies and innovations in year period. The agreement is the outcome of a the home. fi ve year trial by Powergen, and is a signifi cant Developing systems milestone for Whisper Tech. Initiated as a prototype, Meridian’s Retail Data Meridian’s joint venture with leading industrial Warehouse now supports fi nancial reporting science and technology company Industrial and the reconciliation process between market Research Limited (IRL) also marked a sales and purchases. In the last year, we have signifi cant achievement during the year, initiated work to expand the functionality of with the granting of a key patent for a the Retail Data Warehouse. In support of this superconductor material, BSCCO 2223. expanded target, work has also been This has been the basis of an exclusive licence undertaken to improve the quality of the data agreement with NASDAQ-listed company in the warehouse and key source systems. American Superconductor to use the material in commercial high temperature superconductor (HTS) wire.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 51 Our Reputation

OUR THOUGHT

We have a name to live up to. Meridian means the peak of achievement.

HIGHLIGHTS • Establishing an online forum for FUTURE • Extensive community engagement as debate and stimulating dialogue • Development of a protocol with the part of the consultation process for on New Zealand’s electricity future Christchurch Consumers’ Advocacy Project Aqua through a series of national Electricity Panel to help elderly customers who Future Forums may have been unable to pay their • Working with the Christchurch electricity bills due to hospitalisation Consumers’ Advocacy Panel to help • Introducing a brand monitoring project customers having diffi culty paying to further develop our understanding of • Continuing to foster dialogue on their power bill and to help customers how customers think about electricity New Zealand’s electricity future with hearing impairments

52 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 OUR REFERENCE POINT Customer initiatives To support the forums Meridian also In Christchurch we have actively worked to established a website, www.eff.co.nz, designed Meridian means “the peak of achievement” and build stronger relationships with customers. to facilitate discussion on a range of electricity also “reference point”. We chose this ambitious As demand for electricity increases and prices topics. The website will continue to be a vehicle name for ourselves as we want to set the across New Zealand rise, we have helped for ongoing debate as New Zealanders make standard as an Australasian energy company – people to be more energy effi cient and control important decisions about our electricity future. in both fi nancial performance and behaviour. costs in a number of ways, including the A&P shows and fi eld days popular Energy Saver Van visits (see Energy We also increased our level of interaction OUR PROGRESS Effi ciency section, page 12). with the rural community through our stand Managing our reputation is more important In partnership with the Christchurch at A&P shows, regional fi eld days and the than ever as New Zealand’s electricity future, Consumers’ Advocacy Panel we offer assistance National Fieldays (see the Our Customers and the energy industry, receive increasing to customers who are receiving budgeting section on page 33). The stand was a great public attention. Meridian recognises this and advice to make arrangements to pay their way for us to engage with customers has undertaken a comprehensive programme power bills. In some cases assistance may also face-to-face and promote the energy of engagement with stakeholders at all levels come from the Winter Assistance Fund, which effi ciency message. this year. may pay part of the customer’s bill. The Gaining insights and sharing information outcome is a win-win situation, where payment A key challenge for the year for Meridian as This year we introduced a brand monitoring is achievable for the customer and Meridian a retailer was an increase in electricity prices project to further develop our understanding gains assurance that the bill will be paid. necessitated by an increasingly pressured of how customers and stakeholders think about demand and supply situation. Meridian was We are currently working with the Panel to electricity. The project uses focus groups to proactive in conveying the reasons behind price offer similar services to elderly customers who evaluate consumers’ general views on rises, necessary if new generation is to be built may have been unable to pay their electricity electricity, their understanding and perceptions to maintain security of supply. bills because they have been in hospital. of the processes used to produce it, and New Zealand’s supply situation. The project Community initiatives Another highlight for the year has been the allows us to gauge the effectiveness of Project Aqua consultation development of a protocol for helping communications activities and brand Meridian undertook a comprehensive customers with hearing impediments, enabling awareness, and will provide further insights consultation process for Project Aqua. We us to communicate effectively while upholding into what shape future initiatives may take. went beyond formal consultation requirements, their rights under the Privacy Act, 1993. using a range of initiatives to engage with the National initiatives “The Wellington Regional Chamber of community, including opening a new offi ce and Electricity Future Forums Commerce has been glad to partner with information centre at Kurow in December. Meridian in co-hosting this year’s electricity We believe that there is a need for wider future forum breakfasts. It’s great to see Another key initiative was Project Summer, dialogue on New Zealand’s electricity future, a dynamic infrastructure and resources which involved a team from Meridian visiting and have taken a lead role in stimulating this organisation such as Meridian investing in the bigger picture – putting together high- camping grounds in the Waitaki Valley to throughout the year by hosting a series of quality opportunities for presentations provide information about Project Aqua. At the Electricity Future Forums. Held in centres and discussions, about topics such as hydro same time we helped to promote an important across the country, the forums have featured development and alternative energy sources. These are themes of vital importance, which summer safety message, distributing 10,000 expert speakers from the electricity industry will affect all of our businesses and sun safe kits to campers. We worked with local with strong attendance by a broad spectrum communities more and more.” radio station Port FM to make sure that people of businesspeople, stakeholders and Philip Lewin, Chief Executive, Wellington Regional knew where we were going and where to fi nd us. interested parties. Chamber of Commerce.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 53 MANAGEMENT TEAM

Dr Keith Turner Chief Executive Dr Turner has 35 years’ experience in the electricity of the industry, including being on the Transpower industry and since 1985 has held a number of senior Establishment Board, an M-Co Founding Director, a executive positions in ECNZ and its predecessor member of Contact Energy Establishment Team and NZED before becoming Chief Executive of Meridian a member of the Market Surveillance Committee Energy. He has had extensive involvement in reform before establishing Meridian Energy in 1998.

Grenville Gaskell New Zealand Operations Director Grenville joined Meridian in 2002 as Retail Director Team Role and was formerly with a major bank where he was The Operations Team is responsible for maximising General Manager Retail Markets responsible for the long term value of our New Zealand business. personal customer strategy and core banking They do this by optimising our portfolio through products. Grenville has considerable experience in focusing on excellence in asset management, developing and implementing customer and product wholesale trading, and building long term valuable strategies including the launch of a number of new relationships with customers by providing quality products and the management of major change solutions that exceed their expectations. programmes.

Ken Smales Growth & Development Director Ken was formerly ECNZ’s Group Manager, Northern Development role in January 2004. He is also on the Generation, following a three-year group boards of DamWatch and Southern Hydro. management role with Southern Generation in which Team Role he set up the group offi ce at Twizel. Starting work as The Growth and Development Team is responsible an engineering cadet with NZED, Ken has more than for all major new asset projects from investigation thirty years’ experience in the New Zealand electricity to build and handover to NZ Operations. The team generation industry including design, construction/ also includes Natural Resources, who manage and commissioning and operations/maintenance. Ken enhance Meridian Energy’s access to water, and was Generation Director from the company’s consent new generation projects. establishment until taking up his Growth and

Matthew Jansen Corporate Affairs Director Matthew joined Meridian Energy in 2002 after eight Team Role years as a senior advisor with a leading corporate The Corporate Affairs team is responsible for communications fi rm, working with national, regional overseeing Meridian Energy’s reputation and and international clients. Prior to this, he worked as a relationships, working closely with all other teams Strategic and International Policy Analyst with the to provide best practice communications advice. Ministry of Defence.

Jason McDonald Executive Advisor to the Chief Executive Jason has held a number of positions across Prior to joining Meridian Energy Jason was part of Meridian’s information technology, special projects, the establishment team that designed and developed and strategy initiatives. He has been responsible for Meridian Energy in its interim development group managing business expansion opportunities stages, and has had a variety of trading, wholesale including Meridian’s venture investment portfolio market and engineering roles within the energy and direct investments in new technology companies. industry.

54 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Paul Smart Chief Financial Offi cer Paul has had a successful business career, particularly Before joining Sky, Paul spent seven years with during his 12 years with Sky Network Television the rental, retail and consumer fi nance company, Limited where he was Chief Financial Offi cer. During Visionhire Holdings Limited, fi rstly as its Chief this time, Paul was a key member of the team that Financial Offi cer and then as an Executive Director. established the dominant pay TV force in New Team Role Zealand, and Sky’s subsequent listing as a top 10 The Chief Financial Offi cer and his team are company on the NZSX. Paul was also instrumental in responsible for supporting the organisation’s growth Sky’s listing on the NASDAQ Stock Exchange in the plans, Business Planning, Finance, Taxation, Treasury United States and the Australian Stock Exchange. Services, Enterprise Resourcing and Enterprise Risk.

Ari Sargent Strategy Director Ari has extensive experience in the New Zealand market rule development. Ari is currently a member electricity industry. Prior to taking on his current role, of the NZEM Rules Committee, and the Electricity Ari spent several years as Meridian’s Risk Portfolio Commission’s Security Advisory Group. Director managing electricity trading and risk. Before Team Role joining Meridian, Ari held numerous roles with ECNZ, The Strategy Team is responsible for the ongoing including Wholesale Market Manager. Ari has spent development of Meridian’s strategy by providing a good part of the past decade involved with advice and recommendations on strategic issues and electricity industry reform, both internally developing options that will best position the establishing organisational trading and risk company within the energy industry. management capabilities, and externally in

Chris Jones People and Performance Director Chris has joined the team from the UK where he built upon his own sports coaching experience to gained extensive experience in HR in senior develop effective managerial coaching processes for management roles and as a consultant – the latter individuals and teams. primarily in the project management, engineering Team Role and construction fi elds. Chris was very involved in the The People and Performance Team is focused on people side of the transition of the UK railways to maximising the effectiveness of our people through private ownership and the subsequent development development and direct support – the Team’s own of key organisations created after the change, as well effectiveness will be measured by the confi dence as working with senior management teams across a and trust placed in them by our people. broad spectrum of businesses. In recent years, he has

James Hay General Counsel James has been General Counsel and Company Team Role Secretary of Meridian Energy since commencement The General Counsel Team provides advice to of operations in April 1999. Prior to joining Meridian, all parts of the Company in respect of legal James worked in private legal practice and in-house and regulatory matters, and implements governance business roles in the telecommunications sector both structures and processes. The Team also oversees the in New Zealand and the United Kingdom. Company’s relationship with the Crown and with the regulatory bodies such as the Electricity Commission.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 55 BOARD OF DIRECTORS

Dr Francis Small Chair CNZM Appointed: 1999 Committees: Executive Francis Small is a professional company director and Engineers of New Zealand and Chairman of the consultant. Formerly Managing Director of Tranz Rail Centre for Advanced Engineering at the University Ltd (1990 to 2000), he played a major role in the of Canterbury. restructuring and privatisation of that company. Francis is, and has been, involved in a number He is Chairman of Met Services Ltd, a director of of professional and community organisations. the Standards Authority of New Zealand Ltd and He is a former National President of Scouting Antarctica New Zealand Ltd, and has been a director New Zealand. of a number of transportation companies. Francis is a Past President of the Institute of Professional

Susan Sheldon Deputy Chair Appointed: 1999 Committees: Executive, Audit and Finance Sue Sheldon is a chartered accountant and consults Holdings Corporation Ltd, Asure New Zealand Ltd, from her Christchurch practice, Sue Sheldon Advisory. Freightways Ltd and CanWest Media Works Ltd. Sue She is Deputy Chair of Christchurch International is a former President of the Institute of Chartered Airport Ltd, Chair of the Board of Trustees of the Accountants of New Zealand and a Board Member National Provident Fund and a director of Ngai Tahu of Guides New Zealand.

Anne Blackburn Appointed: 2004 Committees: Audit & Finance Since 1996 Anne Blackburn has been a senior Foreign Affairs. She is Deputy Chair of AgResearch, executive in the Bank of New Zealand. Before that a director of its subsidiary Celentis, a Director of the she spent a dozen years in international investment Technical Advisory Board to the Export Credit Offi ce banks in New York and London as well as fi ve years and of Wellington Regional Holdings and each of its in the New Zealand public service with Treasury and subsidiaries.

Charles Chauvel Appointed: 2002 Committees: Risk and Compliance Charles Chauvel joined the Board of Meridian Energy of the Public Health Commission. He has served Ltd in April 2002. He is a partner in the Minter on several Law Society committees and is also Ellison Legal Group. Charles was formerly Crown Deputy Chair of the New Zealand Lotteries Counsel with the Crown Law Offi ce and a director Commission.

56 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Steven Gentry Appointed: 1999 Committees: Executive, Risk and Compliance Steven Gentry is a previous Executive Chair of New Zealand as well as a former director of ECNZ Kingston Morrison, and Director of PT Kingston and Energy Direct Ltd. His current directorships Morrison Indonesia and Business Continuance include BRANZ Inc, WhisperTech Ltd and Whispergen Planning Ltd. He is a Past President of the Ltd. He is currently a trustee of the Katherine International Federation of Consulting Engineers Mansfi eld Memorial Fellowship, the Red Cross and the Association of Consulting Engineers Foundation and IPENZ Foundation.

Kepa Morgan Appointed: 2002 Committees: Aqua

Kepa Morgan joined the Board of Meridian Energy Professionals), specialising in Mäori asset Ltd in November 2002. He is Associate Dean Mäori development (marae and papakainga). He is for the Faculty of Engineering at the University of Chairman of Haumingi 10a2b Papakainga Trust, Auckland and is a senior lecturer in the Department a Principal Investigator for the Mäori Centre of of Civil and Environmental Engineering. Kepa is Research Excellence and a Ministerial Appointee Principal of his own consultancy (Mahi Maioro to the Engineering Associates Registration Board.

Sir Tipene O’Regan Appointed: 1999 Committees: Remuneration and HR Sir Tipene O’Regan is a professional company director Services and associated companies. He is currently a and a well-known national fi gure. He is a past long- director of Whale Watch Kaikoura Ltd, Clifford Bay serving Chair of the Ngai Tahu Mäori Trust Board Marine Farms Ltd, Kutai Investments Ltd, The Stehr and served as the foundation Chair of the Ngai Tahu Group Pty Ltd, and the National Centre Holdings Corporation and as a director of a number for Advanced Bio-Protection Technologies. He is a of Ngai Tahu companies until he retired from the Distinguished Fellow of the Institute of Directors, Ngai Tahu Group in 2000. From 1989 until 2000 an Assistant Vice Chancellor of the University of he was Chair of the Treaty of Waitangi Fisheries Canterbury and a Member of the Advisory Board Commission and, from 1992 until 2002, Chair of of the University of Otago School of Business. the Sealord Group Ltd. He is a past director of TVNZ. Sir Tipene is also Trustee Director of the Marine He currently serves as Deputy Chair of Transit Stewardship council. New Zealand and is a director of Hanover Financial

Joan Withers Appointed: 1999 Committees: Remuneration and HR Joan Withers is a professional company director and Tourism Holdings Ltd, Chair of the Clinical Research a former Chief Executive of The Radio Network of and Effective Practice Foundation, and a Board New Zealand Ltd. She is a director of The Warehouse Member of the Royal New Zealand Ballet. Group Ltd, Auckland International Airport Ltd, and

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 57 24510 New financial disclaimer 9/11/04 10:56 AM Page 1

Matters Relating to the Electronic Presentation of the Audited Financial Statements

The audit report on page 90 relates to the financial statements of the company and group for the year ended 30 June 2004 included on the company’s web-site. The company’s Board of Directors is responsible for the maintenance and integrity of the company’s web site. We have not been engaged to report on the integrity of the company’s web site. We accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.

The audit report refers only to the financial statements named above. It does not provide an opinion on any other information which may have been hyperlinked to / from these financial statements. If readers of this report are concerned with the inherent risks arising from electronic data communication they should refer to the published hard copy of the audited financial statements and related audit report dated 7 September 2004 to confirm the information included in the audited financial statements presented on this web site.

Legislation in New Zealand governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 58 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 FINANCIALS

OVERVIEW 60

CORPORATE GOVERNANCE 61

BOARD OF DIRECTORS 64

DIRECTORS’ RESPONSIBILITY 65 STATEMENT

STATEMENT OF FINANCIAL 66 PERFORMANCE

STATEMENT OF MOVEMENTS IN 66 EQUITY

STATEMENT OF FINANCIAL 67 POSITION

STATEMENT OF CASH FLOWS 68

NOTES TO THE FINANCIAL 69 STATEMENTS

REPORT OF THE AUDIT OFFICE 90

STATUTORY INFORMATION 91

APPENDIX 94

SCOPE AND METHODOLOGY 96

DIRECTORY 99

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 59 OVERVIEW

Meridian Energy’s core business is the generation of electricity (including the management of related assets) and the marketing, trading and retailing of energy and wider complementary products and solutions within and outside New Zealand.

TREND STATEMENT for year ending 2004 20036 2002 $M $M $M Financial Performance Gross Revenue 1,308.0 1,366.9 1,126.6 Total Net Revenue1 937.9 752.1 602.3 Earnings Before Interest and Tax (EBIT)7 299.2 232.9 167.6 Net Surplus after Tax 132.9 109.3 84.0 Net Surplus after Tax Adjusted for One-Off Items2 163.5 111.9 101.1

Funds Employed Shareholders’ Funds3 2,401.8 2,299.8 1,662.3 Long-Term Debt, Deferred Tax and Lease Liability 1,328.4 798.3 683.5 Current Portion of Long-Term Debt 158.3 723.1 184.7 3,888.5 3,821.2 2,530.5

Utilisation of Funds Non-Current Assets 3,787.7 3,701.8 2,395.0 Customer Acquisition Costs 37.7 45.0 52.4 Net Working Capital5 63.1 74.4 83.1 3,888.5 3,821.2 2,530.5

RATIOS % % % Net Surplus after Tax to Average Equity 5.7 6.5 5.1 Net Surplus after Tax Adjusted for One-Off Items to Average Equity 7.0 6.7 6.2 EBIT to Average Total Assets 7.3 7.7 6.3 Weighted Average Cost of Interest 6.8 7.3 7.3

STATEMENT OF CORPORATE INTENT 2004 20044 2003 Actual Target Actual EBITDA Interest Cover Times 5.1 4.4 5.3 Return on Equity Including Revaluation % 5.7 5.3 5.5 Gross Debt to Gross Debt Plus Equity Ratio % 35.7 36.5 37.4 EBITDA to Total (Net) Revenue % 47.3 28.5 41.2

1 Total Net Revenue is gross revenue less direct supply purchases and interest received. 2 The 2004 amount includes the impact of the termination of Project Aqua with the write off of costs previously treated as capital work in progress. The 2003 comparative includes major project investigation costs of Project Aqua. The 2002 comparative includes the costs associated with the purchase of the South Island On Energy customer base, the Transpower transmission settlement and major project investigation costs. 3 Shareholders’ Funds includes a revaluation of $600m effective from 30 June 2003. 4 Performance targets included in the Statement of Corporate Intent for the year commencing July 2003. 5 Net working capital excludes current portion of term debt. 6 The Group acquired Southern Hydro Pty Ltd on 30 April 2003. The FY03 comparatives include the results of Southern Hydro for the period 30 April 2003 to 30 June 2003. 7 The EBIT calculation for 2004 includes the impact of the termination of Project Aqua.

60 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 CORPORATE GOVERNANCE

Governance at Meridian Energy Meridian Energy is a limited liability company and is New Zealand’s largest State-Owned Enterprise (SOE) in terms of shareholder equity.

Under the State-Owned Enterprises Act 1986 the principal objective of an SOE is to operate as a successful business which is: • As profitable and efficient as comparable businesses not owned by the Crown; • A good employer; • An organisation which exhibits a sense of social responsibility having regard to the interests of the communities in which it operates and by endeavouring to accommodate or encourage those interests when able to do so.

The Meridian Energy Board 1. Role The Board has a responsibility to protect and enhance the value of the Group in the interests of the Group and the Crown as shareholder.

In terms of the State-Owned Enterprises Act 1986 this includes responsibility for: • The preparation of and compliance with the Group’s Statement of Corporate Intent; • The overall management of the Group through the appointment of the Chief Executive and the monitoring of his or her performance and stakeholder perception.

More generally the Board meets to review and approve: • Strategic planning and corporate strategies; • The annual business plan and review of corporate performance; • Business opportunities and risks; • Financial and dividend policies; • Management’s performance against established goals and plans.

2. Appointment of Directors and Composition of Board The Meridian Energy Board of Directors comprises eight non-executive directors appointed by shareholding Ministers under the State-Owned Enterprises Act 1986.

Under the constitution directors may be appointed for a fixed term not exceeding three years and shareholding Ministers may choose to renew any such appointments for further fixed terms of up to three years. The roles of Chairman and Deputy Chairman are allocated by shareholding Ministers.

Profiles of the current members of the Board are set out on page 56 and 57 of this report.

3. Directors’ Remuneration Each year shareholding Ministers advise the Board of the total amount of fees which may be allocated to directors of the Group. The allocation of those fees in respect of the financial year ended 30 June 2004 is detailed on page 92 and is determined by the Board on advice from the Company Secretary.

4. Operations The Meridian Energy Board meets on a monthly basis and on other occasions as required.

In the year ended 30 June 2004 the full Board met 17 times, occasioned by a number of projects requiring special consideration.

To ensure efficiency the Board has delegated some of its powers to Board committees and other powers to the Chief Executive and management.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 61 CORPORATE GOVERNANCE (CONTINUED)

5. Board Committees The Board has four standing committees and one project committee as detailed below. The membership and terms of reference for the committees are reviewed regularly by the Board. The Chairman is Chair of the Executive Committee and an ex-officio member of all other committees.

Audit & Finance Committee The Audit & Finance Committee sets the principles and standards for internal controls, accounting policies and the nature, scope, objectives and functions of external and internal audit. It also evaluates post-implementation reviews of investments and major capital expenditure projects. This committee is currently chaired by Susan Sheldon and met seven times during the financial year.

The Risk & Compliance Committee The Risk & Compliance Committee is responsible for ensuring the efficient and effective management of all business risk and compliance with the relevant legal, market, and Group policy requirements.

The purpose of this committee is to emphasise the priority the Board places on risk management and compliance while maintaining the independence of the wider internal and external audit and control functions of the Audit & Finance Committee. There is no cross membership between this committee and the Audit & Finance Committee. However there are formal protocols to ensure communication between the two committees. This committee is currently chaired by Steven Gentry and met four times during the financial year.

Remuneration & Human Resources Committee The Remuneration & Human Resources Committee sets the principles and standards for remuneration structure, policy and practice and human resources policy. It approves company wide remuneration policy and reviews the remuneration of senior executives as well as reviewing the remuneration and succession strategy and conditions of employment. This committee is currently chaired by Joan Withers and met four times during the financial year.

Executive Committee The Executive Committee represents the Board in response to situations requiring immediate resolution of Group issues. It acts as an executive arm of the Board to consider matters and execute documentation within approved Board policy and delegations. It also responds to specific requests from the Chief Executive regarding Group issues or business. The committee is currently chaired by Francis Small and met three times during the financial year.

The Aqua Committee The Aqua Committee was responsible for considering matters related to Project Aqua on a regular basis and recommending appropriate action to the Board. Until 31 May 2004, the Aqua Committee was chaired by Phil Lough, and from 1 June until the end of the financial year was chaired by Steven Gentry. The committee met ten times during the financial year.

6. Key Policies The Board is responsible for setting and determining key policies. Approved policies cover matters such as the delegations of authority framework, sustainability, compliance, treasury, risk management and health and safety.

The delegations of authority policy together with the terms of reference for Board committees establish the key standing delegations of authority from the Board to management and Board committees. It also establishes links to more specific policies such as compliance and treasury.

The delegations of authority policy establishes authorities with respect to certain decision-making powers defined by reference to both subject matter and financial limits. These limits are reviewed periodically.

62 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 CORPORATE GOVERNANCE (CONTINUED)

The Group has a sustainability policy that reflects the Group’s environmental ethic and its commitment to a wider social responsibility in terms of the State-Owned Enterprises Act 1986. Meridian Energy was the first electricity generator and retailer in New Zealand to adopt and report annually on the basis of an established sustainability policy.

From the year ended 30 June 2002 the Group’s reporting against its sustainability objectives has been combined into this single integrated annual report, reflecting the Group’s commitment to a wider accountability to the communities within which it operates and to its customers.

Compliance with the many legal, regulatory and multilateral industry requirements in the electricity industry is of vital importance and is a priority for the Board. Meridian Energy takes its obligations seriously in this regard and constantly looks for initiatives to improve its standard of compliance.

The compliance policy ensures that effective compliance is primarily a line management responsibility, with executive management required to demonstrate they have effective processes in place.

7. Review of Performance The Meridian Energy Board of Directors reviews its performance and the performance of each director annually, including formal evaluations which are required to be submitted to shareholding Ministers every year.

8. Auditors In accordance with Section 15 of the Public Audit Act 2001, the Auditor-General is required to express an opinion on the Group’s financial statements. Pursuant to Section 29 of the Public Finance Act 1989 the Auditor-General has appointed Deloitte to undertake this audit on his behalf. The Auditor’s Report is set out on page 90 of this report.

The Board has adopted a strict policy to maintain the independence of the external auditors.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 63 BOARD OF DIRECTORS

Group Directors Subsidiary Company Directors Dr Francis Small CNZM DamWatch Services Ltd SHP1 Pty Ltd MEA Finance Pty Ltd Chair Keith Turner (Chair) Keith Turner Keith Turner Appointed in 1999 Murray Gillon (Managing Graham Ebbett Graham Ebbett Director) Kenneth Smales Kenneth Smales Susan Sheldon Kenneth Smales (appointed 06/08/03) (appointed 06/08/03) Deputy Chair Peter Menzies Neil Cochrane Neil Cochrane Appointed in 1999 Michael Campbell (appointed 06/08/03) (appointed 06/08/03) Timothy James Densem Steven Gentry SHP2 Pty Ltd Damwatch Pty Ltd Director Meridian Ltd Keith Turner Stanley Brogan Appointed in 1999 Keith Turner (Chair) Graham Ebbett Graham Ebbett Helen Bremner Kenneth Smales Murray Gillon Joan Withers Ari Sargent (appointed 06/08/03) Director Neil Cochrane Neil Cochrane Nirranda South Wind Farm Pty Ltd Appointed in 1999 (appointed 06/08/03) Darryl Rowell Woodville Windfarm Ltd (appointed 6/08/03) Philip Lough Keith Turner SHP3 Pty Ltd Brian Hall (appointed 6/08/03) Director Keith Turner Alistair Wilson Resigned 31/05/04 Meridian Energy Graham Ebbett (resigned 6/08/03) International Ltd Kenneth Smales Sheree Wilson (resigned 6/08/03) Sir Tipene O’Regan Keith Turner (Chair) (appointed 06/08/03) Director Neil Cochrane Neil Cochrane Dollar Wind Farm Pty Ltd Appointed in 1999 (appointed 06/08/03) Keith Turner Meridian Energy Australia (appointed 2/12/03) Charles Chauvel Holdings Ltd SHP3 Holdings Pty Ltd Neil Cochrane Director Keith Turner (Chair) Keith Turner (appointed 2/12/03) Appointed 1/04/02 Neil Cochrane Graham Ebbett Darryl Rowell Kenneth Smales (appointed 2/12/03) Te Kipa Kepa Brian Morgan Meridian Energy Australia (appointed 06/08/03) Brian Hall (appointed 2/12/03) Director Investments Pty Ltd Neil Cochrane Appointed 1/11/02 Stanley Brogan (appointed 06/08/03) Southern Hydro Operations Keith Turner Pty Ltd Anne Blackburn Kenneth Smales Southern Hydro Pty Ltd Keith Turner Director (appointed 06/08/03) Keith Turner Graham Ebbett Appointed 1/06/04 Neil Cochrane Graham Ebbett Kenneth Smales (appointed 06/08/03) (resigned 24/03/04) (appointed 06/08/03) Kenneth Smales Neil Cochrane Meridian Solutions Ltd (appointed 06/08/03) (appointed 06/08/03) Keith Turner Neil Cochrane Neil Cochrane (appointed 06/08/03) Wattle Point Wind Farm Pty Ltd Peter Lowe Keith Turner North Otago Irrigation (appointed 24/03/04) (appointed 4/11/03) Number 2 Company Mark Snape Neil Cochrane Kenneth Smales (appointed 24/03/04) (appointed 4/11/03) James Hay Darryl Rowell Andrew Robertson Southern Hydro Maintenance Brian Hall Services Ltd Alistair Wilson Meridian (Whisper Tech) Ltd Keith Turner (resigned 6/08/03) Keith Turner Graham Ebbett Sheree Wilson Neil Cochrane Kenneth Smales (resigned 6/08/03) James Hay (appointed 06/08/03) Neil Cochrane Macarthur Wind Farm Pty Ltd Meridian Energy Australia (appointed 06/08/03) Keith Turner Pty Ltd (appointed 30/12/03) Keith Turner (Chair) MEA General Partner Pty Ltd Neil Cochrane Stanley Brogan Keith Turner (appointed 30/12/03) Graham Ebbett Graham Ebbett Darryl Rowell Kenneth Smales (appointed 30/12/03) (appointed 06/08/03) Alistair Wilson Neil Cochrane (resigned 11/12/03) (appointed 06/08/03) Sheree Wilson (resigned 11/12/03)

64 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 DIRECTORS’ RESPONSIBILITY STATEMENT

The directors are responsible for ensuring that the financial statements give a true and fair view of the financial position of the Company and the Group as at 30 June 2004 and their financial performance and cash flows for the year ended on that date.

The directors consider that the financial statements of the Company and the Group have been prepared using appropriate accounting policies, consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed.

The directors consider that proper accounting records have been kept which enable the determination of the financial position of the Company and the Group and ensure compliance of the financial statements with the Financial Reporting Act 1993.

The directors consider that they have taken adequate steps to safeguard the assets of the Company and the Group and to prevent and detect fraud and other irregularities.

The directors have pleasure in presenting the financial statements, set out on pages 66 to 89, of Meridian Energy Ltd and Group for the year ended 30 June 2004.

The annual Financial Statements were authorised for issue by the Board on 7 September 2004.

For and on behalf of the Board.

Francis Small Susan Sheldon CHAIRMAN DEPUTY CHAIRMAN 7 SEPTEMBER 2004 7 SEPTEMBER 2004

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 65 STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 30 JUNE 2004

GROUP PARENT

2004 2003 2004 2003 NOTE $’000 $’000 $’000 $’000

Operating Revenue 2 1,308,012 1,366,892 1,232,531 1,363,994 Operating Expenses 3 (970,182) (1,134,176) (926,907) (1,117,167) Financing Costs 4 (86,945) (57,469) (26,825) (57,221) Equity Accounting of Associate (328) (3,235) – –

Operating Surplus Before Non Recurring Items 250,557 172,012 278,799 189,606

Project Aqua write off (38,660) – (38,660) –

Net Surplus Before Tax 211,897 172,012 240,139 189,606

Income Tax 5 (78,992) (62,698) (80,582) (65,623)

Net Surplus After Tax 132,905 109,314 159,557 123,983

STATEMENT OF MOVEMENTS IN EQUITY FOR THE YEAR ENDED 30 JUNE 2004

GROUP PARENT

2004 2003 2004 2003 NOTE $’000 $’000 $’000 $’000

Equity at Beginning of Year 2,299,802 1,662,247 2,323,141 1,676,388

Net Surplus After Tax 132,905 109,314 159,557 123,983

Movement in Revaluation Reserve 13 – 600,000 – 600,000

Movement in Foreign Currency Translation Reserve 9 (13,528) 5,471 – –

Total Recognised Gains and Losses 119,377 714,785 159,557 723,983

Distributions to Owners 8 (17,400) (77,230) (17,400) (77,230)

Equity at End of Year 7 2,401,779 2,299,802 2,465,298 2,323,141

The Statement of Accounting Policies and the Notes to the Financial Statements form an integral part of these Financial Statements.

66 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2004

GROUP PARENT

2004 2003 2004 2003 NOTE $’000 $’000 $’000 $’000

Equity Shareholders’ Equity 7 2,401,779 2,299,802 2,465,298 2,323,141

Liabilities Non-Current Liabilities Term Borrowings 10 1,176,566 653,178 754,649 652,949 Deferred Tax 11 145,260 138,871 111,868 102,765 Lease Liability 14 6,576 6,245 – – Total Non-Current Liabilities 1,328,402 798,294 866,517 755,714

Current Liabilities Payables and Accruals 12 254,691 205,709 184,040 154,341 Advance from Subsidiary – – 3,327 – Current Portion of Term Borrowings 10 158,310 723,098 26,700 722,869 Current Tax Payable 2,545 – – – Total Current Liabilities 415,546 928,807 214,067 877,210

Total Liabilities 1,743,948 1,727,101 1,080,584 1,632,924 Total Equity and Liabilities 4,145,727 4,026,903 3,545,882 3,956,065

Assets Non-Current Assets Investments 15 15,754 5,975 62,457 11,557 Advances to Subsidiary – – 247,536 796,366 Convertible Notes 1,890 1,162 1,890 1,162 Prepayments 9,282 4,804 9,282 4,804 Intangible Assets 16 179,537 195,489 325 401 Customer Acquisition Costs 17 37,658 45,020 37,658 45,020 Property, Plant and Equipment 13 3,581,302 3,494,369 2,977,560 2,890,144 Total Non-Current Assets 3,825,423 3,746,819 3,336,708 3,749,454

Current Assets Cash and Bank Balances 18 104,262 55,337 34,040 5,121 Advance to Subsidiaries – – – 27,022 Accounts Receivable and Prepayments 19 212,902 209,728 168,821 168,095 Current Tax Receivable – 12,135 3,173 3,489 Inventories 20 3,140 2,884 3,140 2,884 Total Current Assets 320,304 280,084 209,174 206,611 Total Assets 4,145,727 4,026,903 3,545,882 3,956,065

The Statement of Accounting Policies and the Notes to the Financial Statements form an integral part of these Financial Statements.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 67 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2004

GROUP PARENT

2004 2003 2004 2003 NOTE $’000 $’000 $’000 $’000

Operating Activities Cash was Provided from: Receipts from Customers 1,293,813 1,304,595 1,223,144 1,341,747 Interest Received 6,547 1,431 4,183 1,431 1,300,360 1,306,026 1,227,327 1,343,178 Cash was Applied to: Payments to Suppliers and Employees 847,527 930,770 839,892 996,791 Net GST Paid 4,125 750 4,266 531 Interest Paid 81,940 57,697 22,343 57,450 Income Tax Paid 57,923 32,811 71,162 31,253 991,515 1,022,028 937,663 1,086,025

Net Cash Inflows from Operating Activities 24 308,845 283,998 289,664 257,153

Investment Activities Cash was Provided from: Sale of Fixed Assets 172 178 117 178 Advances and Loans from Subsidiaries – – 525,852 – 172 178 525,969 178 Cash was Applied to: Purchase of Fixed Assets 185,318 563,240 165,105 71,677 Capitalised Interest 2,278 1,310 2,278 1,310 Purchase of Intangible Assets 2,562 195,477 – 471 Advances and Loans to Subsidiaries – – – 702,447 Advance to Associate 728 1,162 728 1,162 Purchase of Investments 10,107 2,648 6,435 2,648 Customer Acquisition Costs 326 247 326 247 201,319 764,084 174,872 779,962 Net Cash (Outflows)/Inflows from Investing Activities (201,147) (763,906) 351,097 (779,784)

Financing Activities Cash was Provided from: Short Term Debt – 607,369 – 607,369 Long Term Debt 523,388 95,156 101,700 95,391 523,388 702,525 101,700 702,760 Cash was Applied to: Long Term Debt – 100,012 – 100,012 Short Term Debt 564,761 – 696,142 – Dividends Paid 17,400 77,230 17,400 77,230 582,161 177,242 713,542 177,242

Net Cash (Outflows)/Inflows from Financing Activities (58,773) 525,283 (611,842) 525,518

Net Increase in Cash Held 48,925 45,375 28,919 2,887 Cash at Beginning of Year 55,337 9,962 5,121 2,234 Cash at End of Year 104,262 55,337 34,040 5,121

Composition of Cash Cash and Bank Balances 18 104,262 55,337 34,040 5,121 104,262 55,337 34,040 5,121

The Statement of Accounting Policies and the Notes to the Financial Statements form an integral part of these Financial Statements.

68 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2004

1 STATEMENT OF ACCOUNTING POLICIES ………………………………………………………………………………………………………………………………… page 70

2 OPERATING REVENUE …………………………………………………………………………………………………………………………………………………………………page 74

3 OPERATING EXPENSES …………………………………………………………………………………………………………………………………………………………………page 74

4 FINANCING COSTS ……………………………………………………………………………………………………………………………………………………………………… page 75

5 TAXATION ………………………………………………………………………………………………………………………………………………………………………………………page 75

6 SHARE CAPITAL …………………………………………………………………………………………………………………………………………………………………………… page 76

7 EQUITY ……………………………………………………………………………………………………………………………………………………………………………………………page 76

8 DIVIDENDS ……………………………………………………………………………………………………………………………………………………………………………………page 76

9 FOREIGN CURRENCY TRANSLATION RESERVE ……………………………………………………………………………………………………………………… page 77

10 TERM BORROWINGS ……………………………………………………………………………………………………………………………………………………………………page 77

11 DEFERRED TAX ………………………………………………………………………………………………………………………………………………………………………………page 77

12 PAYABLES AND ACCRUALS ………………………………………………………………………………………………………………………………………………………… page 78

13 PROPERTY, PLANT AND EQUIPMENT ……………………………………………………………………………………………………………………………………… page 78

14 COMMITMENTS ……………………………………………………………………………………………………………………………………………………………………………page 79

15 INVESTMENTS ………………………………………………………………………………………………………………………………………………………………………………page 80

16 INTANGIBLES …………………………………………………………………………………………………………………………………………………………………………………page 83

17 CUSTOMER ACQUISITION COSTS ……………………………………………………………………………………………………………………………………………… page 83

18 CASH AND BANK BALANCES …………………………………………………………………………………………………………………………………………………… page 84

19 ACCOUNTS RECEIVABLE AND PREPAYMENTS …………………………………………………………………………………………………………………………page 84

20 INVENTORIES …………………………………………………………………………………………………………………………………………………………………………………page 84

21 BORROWINGS AND THE USE OF FINANCIAL INSTRUMENTS ……………………………………………………………………………………………… page 84

22 LAND ………………………………………………………………………………………………………………………………………………………………………………………………page 87

23 RELATED PARTY TRANSACTIONS ………………………………………………………………………………………………………………………………………………page 87

24 NET CASH FLOW FROM OPERATING ACTIVITIES …………………………………………………………………………………………………………………… page 88

25 SEGMENT INFORMATION …………………………………………………………………………………………………………………………………………………………… page 89

26 CONTINGENT GAINS AND LOSSES …………………………………………………………………………………………………………………………………………… page 89

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 69 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

1. Statement of Accounting Policies Meridian Energy Ltd is registered under the Companies Act 1993. The shares in Meridian Energy are held by the Minister for State- Owned Enterprises and the Minister of Finance, on behalf of Her Majesty the Queen in Right of New Zealand (“The Crown”) under the State-Owned Enterprises Act 1986. The consolidated statements comprise the Parent and its subsidiaries (the “Group”) and the Group’s interest in Associates.

The financial statements comply with the Financial Reporting Act 1993 and comprise statements of the following: Significant Accounting Policies, Financial Performance, Movements in Equity, Financial Position, Cash Flows, as well as the notes to these statements.

The financial statements for the Group, including the consolidation of subsidiaries domiciled outside of New Zealand, have been prepared in accordance with generally accepted accounting practice in New Zealand. Where no financial reporting standard or statement of standard accounting practice exists in New Zealand in relation to a particular issue, the accounting policies and disclosures adopted have been determined having regard to authoritative support.

The financial statements are prepared on the basis of historical cost modified to include the revaluation of certain hydro assets, with the exception of certain items for which specific accounting policies are identified.

The Statement of Financial Performance and Statement of Cash Flows are prepared on a GST-exclusive basis. All items in the Statement of Financial Position are stated net of GST, except for receivables and payables, which include GST invoiced.

Basis of Preparing Group Financial Statements

Subsidiaries Subsidiaries are those entities controlled directly or indirectly by the Group. Subsidiaries are consolidated under the purchase method on a line-by-line basis.

All material intercompany transactions are eliminated on consolidation.

Associates Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies. Associates are accounted for using the equity method of accounting. The Group recognises its share of the associates’ net surplus or deficit for the year as operating revenue in its Statement of Financial Performance. The Group’s share of the associates’ surplus or deficit is adjusted for the amortisation of goodwill arising on acquisition and differences between the accounting policies of the Group and associates. The Group recognises its share of other post-acquisition movements in reserves in its Statement of Movements in Equity. Dividends received from associates are recognised directly against the carrying value of the investment. In the Statement of Financial Position the investment and the reserves are increased by the Group’s share of the post-acquisition retained surplus and other post-acquisition reserves of the associates. In assessing the Group’s share of earnings of associates, the Group’s share of any unrealised profits between Group companies and associates is eliminated.

Acquisition or Disposal During the Year Where an entity becomes or ceases to be a Group entity during the year, the results of that entity are included in the net surplus of the Group from the date that control or significant influence commenced or until the date that control or significant influence ceased. Where a Group entity is disposed of, the profit or loss recognised in the Statement of Financial Performance is calculated as the difference between the sale price and the carrying value of the Group entity at the date the entity was sold.

Goodwill Arising on Acquisition Goodwill, representing the excess of purchase consideration over the fair value of the net assets acquired at the date of acquisition, is shown as an intangible asset. Goodwill is amortised on a straight-line basis over the period of expected benefit. The carrying amount of goodwill is reviewed annually by the directors and adjusted where it is considered necessary.

70 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Foreign Currency Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Differences are accounted for through the Statement of Financial Performance.

The assets and liabilities of overseas operations, being independent foreign operations, are translated at the closing rate at balance date. The revenues and expenses of these operations are translated at rates approximating the exchange rates at the dates of the transactions. Exchange differences arising on the translation of the financial statements of independent foreign operations are recognised directly in the foreign currency translation reserve.

Financial Instruments The Group uses financial instruments with off-balance sheet risk for the primary purpose of reducing its exposure to fluctuations in interest rates, foreign exchange rates and revenue.

Financial instruments entered into as hedges of an underlying exposure are accounted for on the same basis as the underlying exposure.

Taxation Income tax expense is recognised on the operating surplus before taxation, adjusted for permanent differences between taxable and accounting income. Deferred tax is calculated using the comprehensive basis under the liability method. This method involves recognising the tax effect of all timing differences between accounting and taxable income as a deferred tax asset or liability in the Statement of Financial Position. The future tax benefit or provision for deferred tax is stated at the income tax rates prevailing at balance date.

Future tax benefits are not recognised unless realisation of the asset is virtually certain.

Non-Current Assets

Property, Plant and Equipment Fixed assets were initially allocated a fair value at inception of the Company. Subsequent fixed asset additions are recorded at cost including costs directly attributable to bringing the asset to the location and condition necessary for its intended service.

The cost of assets constructed includes all expenditure directly related to specific contracts including financing costs where these meet certain time and materiality limits. Financing costs for major projects are capitalised at the average cost of borrowing. Costs cease to be capitalised as soon as the asset is ready for use.

Meridian has chosen to revalue the generation assets to fair value from 30 June 2003. The underlying valuation will be reviewed by independent third party valuation experts at a minimum of five yearly intervals with the underlying assumptions being reviewed for reasonableness on an annual basis. Any increase in valuation is accounted for as an increase in the revaluation reserve and any decrease in valuation is accounted for as a reduction in the revaluation reserve. Where any reduction is in excess of the carrying value of the revaluation reserve then it is expensed to the Statement of Financial Performance.

Depreciation of fixed assets, other than Australian hydro assets and freehold land, is calculated on a straight line basis to allocate the cost or fair value amount of an asset, less any residual value, over its useful life. For the New Zealand hydro assets, straight line depreciation reflects the base load usage of the underlying assets.

Australian hydro assets are depreciated on a units of production basis which reflects that the underlying assets are used at peak times or are irrigation dependant. The measurement of levels of production refers to the expected gigawatt hours generated over the remaining useful life of the assets depreciated or amortised.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 71 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

The following depreciation and amortisation rates have been applied: Generation Structures and Plant Up to 80 years Other Freehold Buildings Up to 67 years Other Plant and Equipment Up to 20 years Resource Consents Up to 50 years Australian Hydro Assets Units of production basis

Formal reviews of the carrying value of assets are periodically carried out and where deemed appropriate, the Directors will approve the amendment of the carrying value of the relevant assets in the Statement of Financial Position.

Investments Investments are stated at cost, except where there is a permanent impairment in value, in which case the lower of cost or fair market value is adopted. Where there is no quoted market value, investments are stated at Directors’ valuation. Changes in the value of investments are recognised in the Statement of Financial Performance.

Intangibles

Licences Power generation licences are recorded at fair value on acquisition. They are amortised over their estimated useful lives either over 70 years or based on the units generated.

Customer Acquisition Costs Goodwill may be acquired through the acquisition of customers or through an organic marketing campaign (but only in relation to those campaign costs that are highly correlated with the number of customers acquired). This is amortised over a period between 5 and 10 years from the date of acquisition. The carrying value is reviewed annually by the Directors and adjusted where it is considered necessary.

Impairment of Assets Where the estimated recoverable amount of an asset is less than the carrying value, the asset is written down to its estimated recoverable amount.

Derivatives On acquisition of Southern Hydro, financial instrument derivatives were recorded in the consolidated Statement of Financial Position as either an asset or liability measured at fair value. To the extent that subsequent gains and losses on the instruments qualifying as hedges relate to the opening fair value, they are brought to account in the Statement of Financial Performance when the underlying event being hedged occurs.

Current Assets

Inventories Inventories are stated at the lower of cost or net realisable value.

Cost is determined on a weighted average basis and includes expenditure incurred in acquiring the inventories and bringing them to their existing condition and location.

Receivables Receivables are carried at anticipated realisable value. An estimate is made for doubtful receivables based on a review of all outstanding amounts at year-end. Bad debts are written off during the year in which they are identified.

Cash and Cash Equivalents For the purpose of the Statement of Cash Flows, cash comprises cash balances (net of bank overdrafts) and demand deposits.

72 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Prepaid Premiums/Unearned Income A current asset is recognised for premiums paid up front by Southern Hydro under forward derivative contracts. This prepaid expense is amortised over the period of the relevant contract.

Unearned income is recognised and recorded as a current liability for payments received by Southern Hydro that are paid up front under forward derivative contracts. This unearned income is amortised in the Statement of Financial Performance over the period of the relevant contract.

Debt Establishment Debt is initially stated at fair value. Debt incurred subsequent to 1 April 1999 is stated at face value less unamortised discounts, premiums and prepaid interest. Discounts, premiums and prepaid interest and borrowing costs such as origination, commitment and transaction fees are amortised to interest expense over the period of the borrowing.

Operating Leases Operating lease payments, where the lessors effectively retain substantially all the risks and benefits of ownership of the leased items, are included in the determination of the operating surplus in equal instalments over the lease term.

Finance Leases Finance leases, which effectively transfer to the lessee substantially all of the risks and benefits incidental to ownership of the leased item, are capitalised at the present value of the minimum lease payments.

Changes in Accounting Policies Effective from 30 June 2003 Meridian adopted fair value accounting for its generation assets. As a result of this change in accounting policy New Zealand fixed assets have been revalued upwards by $600 million effective from 30 June 2003. From this date the revalued component of fixed assets will be depreciated in line with Meridian’s depreciation methodology for the relevant class of assets. This change has given rise to an increased depreciation charge of $11.3 million during the year ended 30 June 2004 (2003 Nil).

There have been no other changes in accounting policies during the year. All accounting policies have been applied on bases consistent with those applied in Meridian Energy’s annual report for the previous year.

Comparatives Where necessary to facilitate comparison, comparative figures have been adjusted to conform with changes in presentation in the current period.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 73 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

2. Operating Revenue

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Trading Revenue Energy-Related Revenue 1,297,154 1,361,241 1,223,163 1,340,039

Other Revenue Interest Income 6,547 1,431 4,183 19,753 Net Gain on Sale of Fixed Assets 22 92 22 92 Other 4,289 4,128 5,163 4,110

Total Revenue from Continuing Activities 1,308,012 1,366,892 1,232,531 1,363,994

3. Operating Expenses Operating expenses include the following:

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Operating Expenses Amortisation of Fair Value at Acquisition – Derivatives 14,491 5,858 – – – Land leases 3,296 305 – – – Licences 726 71 76 71

Amortisation of Customer Acquisition Costs 7,688 7,644 7,688 7,644 Auditor’s Fees – Audit Fees 346 314 154 140 – Fees paid for Other Assurance Services 61 23 41 23

Bad and Doubtful Debts – Bad Debts Written Off 2,224 2,501 2,224 2,501 – Increase in Estimated Doubtful Debts 337 32 337 32

Depreciation – Buildings 366 271 333 256 – Generation Structures and Plant 66,642 50,895 60,148 48,517 – Other Plant and Equipment 7,537 8,520 6,950 8,401

Directors’ Fees 333 300 308 300 Foreign Exchange (Gain) (2,027) (481) (2,027) (3,102) Loss on Sale of Fixed Assets 425 22 14 – Operating Lease Expenses 3,822 3,307 3,320 2,973 Provision against Carrying Value of Investments 400 – 5,935 – Provision against Development Costs in Relation to Australian Wind Program 4,685 – 4,685 –

74 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

4. Financing Costs

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Finance Costs Interest on Borrowings 89,248 59,008 29,128 58,760 Less Capitalised Interest 2,278 1,310 2,278 1,310 Less Debt Repricing Amortisation 25 229 25 229

Total Financing Costs 86,945 57,469 26,825 57,221

5. Taxation

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

(A) INCOME TAX EXPENSE Net Surplus Before Tax 211,897 172,012 240,139 189,606

Permanent Differences Expenditure Not Deductible for Tax 7,962 3,257 4,122 1,145 Depreciation/Amortisation of Revaluation 14,911 (911) 11,193 4,901 Other 4,599 15,637 (11,267) 3,206 Surplus Subject to Tax 239,369 189,995 244,187 198,858

Tax @ 33% 78,992 62,698 80,582 65,623 Total Income Tax Expense 78,992 62,698 80,582 65,623

Comprising Current Period Tax 70,955 37,996 71,479 44,246 Deferred Income Tax Liability 11 8,037 24,702 9,103 21,377 78,992 62,698 80,582 65,623

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

(B) IMPUTATION CREDITS Balance at Beginning of Year 10,494 17,160 10,113 16,732 Net Income Tax 55,889 31,373 55,586 31,253 Credits Attached to Dividends Received – – – 167 Credits Attached to Dividends Paid (8,570) (38,039) (8,570) (38,039) Balance at End of Year 57,813 10,494 57,129 10,113

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 75 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

At balance date the imputation credits available to shareholders of the Companies of the Group were:

2004 2003 $’000 $’000

Through: Shareholding in Parent Company 57,129 10,113 Indirect Interests in Subsidiaries 684 381 57,813 10,494

6. Share Capital The share capital is represented by 1,600,000,002 ordinary shares issued and fully paid. These are held in equal numbers by the Minister of Finance and the Minister for State-Owned Enterprises on behalf of the Crown.

7. Equity

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Equity comprises of Share Capital 1,600,000 1,600,000 1,600,000 1,600,000 Retained Earnings 139,604 24,099 187,682 45,525 Revaluation Reserve 677,802 677,802 677,616 677,616 Foreign Currency Translation Reserve (15,627) (2,099) – – Equity at end of period 2,401,779 2,299,802 2,465,298 2,323,141

8. Dividends

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Distributions Made Interim Dividend – 53,600 – 53,600 2003 Final Dividend Paid 17,400 – 17,400 – 2002 Final Dividend Paid – 23,630 – 23,630 Total Dividends 17,400 77,230 17,400 77,230

76 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

9. Foreign Currency Translation Reserve

GROUP

2004 2003 $’000 $’000

Balance at Beginning of Year (2,099) (7,570) Difference arising from Translation of Foreign Operations (13,528) 5,471 Total Foreign Currency Translation Reserve (15,627) (2,099)

The foreign currency translation reserve results from the translation of the Australian Subsidiaries Statement of Financial Position at the closing rate at balance date. The closing rate at 30 June 2004 was $0.91 (30 June 2003 $0.87).

10. Term Borrowings

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Borrowings Due within 1 Year 158,310 723,098 26,700 722,869 Borrowings Due within 1-2 Years 229,987 26,700 – 26,700 Borrowings Due within 2-7 Years 241,930 626,478 50,000 626,249 Borrowings Due after 7 Years 704,649 – 704,649 – Total Borrowings 1,334,876 1,376,276 781,349 1,375,818

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Current Portion of Borrowings 158,310 723,098 26,700 722,869 Non-Current Portion of Borrowings 1,176,566 653,178 754,649 652,949 Total Borrowings 1,334,876 1,376,276 781,349 1,375,818

Security The borrowings are unsecured but subject to a negative pledge arrangement.

11. Deferred Tax

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Balance at Beginning of Period 138,871 92,031 102,765 81,387 Deferred Tax Acquired during the year – 21,576 – – Deferred Tax On Surplus for Period 8,037 24,702 9,103 21,378 Foreign Translation (1,648) 562 – – Balance at End of Period 145,260 138,871 111,868 102,765

The income tax effect of timing differences originating from the fair value review of assets and liabilities which has not been recognised as an asset in the deferred tax account is $186 million (2003 $247 million).

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 77 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

12. Payables and Accruals

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Current Trade Creditors 38,973 22,807 27,091 6,537 Employee Entitlements 5,067 6,642 4,798 2,987 Unearned Income 47,167 22,334 1,044 171 Accrued Expenses 166,865 153,040 154,389 143,725 GST (3,381) 886 (3,282) 921 254,691 205,709 184,040 154,341

13. Property, Plant and Equipment

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Generation Structures and Plant Fair Value 3,186,769 3,162,959 2,778,325 2,744,754 Less: Accumulated Depreciation 72,988 8,228 61,956 2,703 Closing Balance – Fair Value 3,113,781 3,154,731 2,716,369 2,742,051

Other Freehold Land Fair value 39,908 8,015 39,012 8,015

Other Leasehold Land Fair Value 168,699 176,073 – – Less: Accumulated Amortisation 3,607 305 – – Closing Balance – Fair Value 165,092 175,768 – –

Other Freehold Buildings Fair Value 14,632 6,470 13,068 6,470 Less: Accumulated Depreciation 1,299 926 1,260 926 Closing Balance – Fair Value 13,333 5,544 11,808 5,544

Other Plant and Equipment Fair Value 60,651 50,340 55,007 39,715 Less: Accumulated Depreciation 33,513 24,984 30,235 22,718 Closing Balance – Fair Value 27,138 25,356 24,772 16,997

Resource Consents Fair Value 7,482 7,482 7,482 7,482 Less: Accumulated Depreciation 806 653 806 653 Closing Balance – Fair Value 6,676 6,829 6,676 6,829

Total Property, Plant and Equipment Fair Value 3,478,141 3,411,339 2,892,894 2,806,436 Less: Accumulated Depreciation & Amort 112,213 35,096 94,257 27,000 Cost – WIP 215,374 118,126 178,923 110,708 Total Closing Balance – Fair Value 3,581,302 3,494,369 2,977,560 2,890,144

78 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

New Zealand fixed assets were revalued as at 30 June 2003. This was a Directors’ valuation based on an independent review of future revenue and expense streams forecast for the New Zealand hydro assets. The independent review was completed by PricewaterhouseCoopers who are business valuation experts. The full revaluation was applied to those assets classed as generation structures and plant. As a consequence of the revaluation, accumulated depreciation on these assets has been reset to nil at 1 July 2003 in line with treatment prescribed under FRS 3. Depreciation resumed as normal this year and is recorded in the Statement of Financial Performance.

14. Commitments The Group leases premises, motor vehicles and plant and equipment.

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Capital Expenditure Commitments for Contracts 317,744 27,095 99,951 11,408

Operating Lease Commitments Non-Cancellable operating lease rentals are payable as follows Not later than one year 3,195 3,445 2,204 1,998 Later than one year but not later than two years 2,853 2,639 2,036 1,805 Later than two years but not later than five years 7,009 6,705 5,459 5,358 Later than five years 4,036 8,210 – 1,810 Total Operating Lease Commitments 17,093 20,999 9,699 10,971

Finance Lease Commitments Non-Cancellable finance lease rentals are payable as follows Later than five years 195,703 204,445 – – Total minimum lease payments 195,703 204,445 – – Future finance charges (189,127) (198,200) – – Total Lease Liability 6,576 6,245 – –

Current Liability – – – – Non-Current Liability 6,576 6,245 – – 6,576 6,245 – –

The Group has entered into a number of agreements in relation to the development of wind generation projects in New Zealand and Australia. The capital commitment in relation to these projects has been included above where there is a signed contract and the price is agreed.

Finance leases have been capitalised for land and civil structures relating to the Kiewa and Rubicon schemes in Australia. The finance lease and any improvements to or on the leasehold property are amortised over a period of 60 years. The first 30 years of the lease have been prepaid. The company has a commitment for the future value of payments due under the lease from years 31-60.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 79 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

15. Investments

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Investments Investment in Subsidiaries – – 50,375 375 Investment in Associates – 328 – 5,535 Other Investments 15,754 5,647 12,082 5,647 15,754 5,975 62,457 11,557

(A) Investments in Subsidiaries and Controlled Entities

Subsidiaries Investments in subsidiaries comprise shares at cost. Significant subsidiaries as at 30 June 2004 comprise:

NAME OF ENTITY DATE1 PRINCIPAL ACTIVITY INTEREST HELD BY GROUP

2004 2003

Meridian Ltd Non-Trading Entity 100% 100% DamWatch Services Ltd Professional Services 100% 100% Woodville Windfarm Ltd Non-Trading Entity 100% 100% Meridian Energy International Ltd Investment Company 100% 100% Meridian Solutions Ltd Non-Trading Entity 100% 100% North Otago Irrigation Number 2 Company Ltd 12/02/04 Non-Trading Entity 100% – Meridian (Whisper Tech) Ltd 4/11/03 Investment Company 100% – MEA General Partner Pty Ltd* Investment Company 100% 100% Wattle Point Wind Farm Pty Ltd* 6/08/03 Power Generation 100% 50% Nirranda South Wind Farm Pty Ltd* 6/08/03 Non-Trading Entity 100% 50% Dollar Wind Farm Pty Ltd* 2/12/03 Non-Trading Entity 100% – Macarthur Wind Farm Pty Ltd* 11/12/03 Non-Trading Entity 100% –

1 The date that the subsidiary became part of the Group during the reporting period. * Incorporated in Australia.

80 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

All subsidiary entities have a balance date of 30 June

Controlled Entities

NAME OF ENTITY DATE2 PRINCIPAL ACTIVITY INTEREST HELD BY GROUP

2004 2003

Meridian Energy Australia Holdings Ltd Investment Company 100% 100% Meridian Energy Australia Pty Ltd* Hydro Power Generation 100% 100% Hydropower Group Pty Ltd* 21/06/04 Hydro Power Generation – 100% Yarrawonga Power Pty Ltd* 21/06/04 Hydro Power Generation – 100% N.T. Power Operations Pty Ltd* 21/06/04 Hydro Power Generation – 100% Union Reefs Power Pty Ltd* 21/06/04 Hydro Power Generation – 100% FES Power Pty Ltd* 21/06/04 Hydro Power Generation – 100% MLC Power Pty Ltd* 21/06/04 Hydro Power Generation – 100% Hydroco Partnership* 21/06/04 Hydro Power Generation – 100% MEA Limited Partnership* Investment Company 100% 100% MEA Finance Pty Ltd* Finance Company 100% 100% Meridian Energy Australia Investments Pty Ltd* Investment Company 100% 100% SHP 1 Pty Ltd* Hydro Power Generation 100% 100% SHP 2 Pty Ltd* Hydro Power Generation 100% 100% SHP 3 Pty Ltd* Hydro Power Generation 100% 100% SHP 3 Holdings Pty Ltd* Hydro Power Generation 100% 100% Southern Hydro Pty Ltd* Hydro Power Generation 100% 100% Southern Hydro Maintenance Services Pty Ltd* Hydro Power Generation 100% 100% Southern Hydro Operations Pty Ltd* Hydro Power Generation 100% 100% Damwatch Pty Ltd* Non-Trading Entity 100% 100%

2 The date that the controlled entity was deregistered and ceased to be part of the Group during the reporting period. * Incorporated in Australia

B) Investments in Associates At balance date the Company holds a 29.9% investment in Whisper Tech Ltd.

Whisper Tech Ltd, a company incorporated in New Zealand, has a balance date of 31 March. Equity accounted earnings have been aligned to a 30 June balance date for the Group. Whisper Tech Ltd was formed to design, develop, manufacture and distribute co- generation systems for residential and mobile markets. This business has now been transferred to the Whisper Tech joint venture with Whisper Tech Ltd receiving licence fees for the use of intellectual property and the assets of Whisper Tech Ltd. Meridian and the other major shareholder have entered into a Put Option with the existing minority shareholders. Whisper Tech Ltd has no material capital commitments or contingent liabilities as at 30 June 2004.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 81 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Goodwill Relating to Investment in Associate

GROUP

2004 2003 $’000 $’000

Carrying amount at beginning of year 328 2,314 Share of total recognised revenues and expenses (328) (3,235) Purchase of an additional 1.67% of Whisper Tech Ltd – 1,249 Carrying amount at end of year – 328

The carrying value is comprised of: Cost 850 850 Share of associate post-acquisition reserves (3,877) (4,180) Goodwill 3,027 3,658 – 328

Associate Share of Net Surplus

GROUP

2004 2003 $’000 $’000

Share of surplus before taxation 303 (2,376) Share of taxation expense – – Share of net deficit 303 (2,376) Amortisation of goodwill (631) (859) Share of total recognised revenues and expenses (328) (3,235)

Goodwill

GROUP

2004 2003 $’000 $’000

Cost at beginning and end of year 4,685 3,355 Goodwill arising on acquisition – 1,330 4,685 4,685 Accumulated amortisation: At beginning of year (1,027) (168) Amortisation expense for the year (631) (859) At end of year (1,658) (1,027)

Goodwill included within the Carrying Amount of the Investment in Associate 3,027 3,658

82 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

(C) Other Investments At balance date the Company holds investments in Nth Power Technologies Fund II, L.P, Fonterra and Whisper Tech Joint Venture. These investments do not give rise to consolidated or equity accounting treatment.

The investment in Fonterra arose with the purchase of land for Project Aqua. The market value of these investments at 30 June was $8.57 million.

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Other Investments Nth Power Technologies 5,686 5,647 5,686 5,647 Fonterra 6,396 – 6,396 – Whisper Tech Joint Venture 3,672 – – – 15,754 5,647 12,082 5,647

The Group also has interests in Ceramic Fuel Cells Ltd and in Superlink Developments Ltd. These interests were assigned to the Group from ECNZ at no cost and, as such, the carrying value of the interests is nil.

16. Intangibles

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Licences 133,511 140,164 325 401 Derivatives on acquisition of Southern Hydro 46,026 55,325 – – 179,537 195,489 325 401

17. Customer Acquisition Costs

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Customer acquisition costs (at cost) 67,375 67,049 65,174 64,848 Accumulated Amortisation (29,717) (22,029) (27,516) (19,828) Total Carrying Value 37,658 45,020 37,658 45,020

Reconciliation

Balance at beginning of year 45,020 52,417 45,020 52,417 Acquisition costs during year 326 247 326 247 Amortisation during year (7,688) (7,644) (7,688) (7,644) Balance at End of Year 37,658 45,020 37,658 45,020

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 83 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

18. Cash and Bank Balances

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Current Account 69,377 9,963 13,163 5,121 Money Market Account 34,885 45,374 20,877 – 104,262 55,337 34,040 5,121

19. Accounts Receivable and Prepayments

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Current Billed and Accrued Receivables 180,706 188,812 162,781 158,488 Less: Provision for Doubtful Debts 2,243 1,906 2,243 1,906 Net Trade Receivables 178,463 186,906 160,538 156,582 Prepayments 34,439 22,822 8,283 11,513 Total Accounts Receivable and Prepayments 212,902 209,728 168,821 168,095

20. Inventories

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Inventories Comprise Consumable Spares and Stores 3,140 2,884 3,140 2,884

21. Borrowings and the Use of Financial Instruments Exposure to currency, revenue, interest rate and credit risk arises in the normal course of the Group’s business. Within approved policy guidelines and authorisations set by the Board of Directors, derivative financial instruments are used as a means of reducing exposure to fluctuations in foreign exchange rates and interest rates. While these financial instruments are subject to the risk of market rates changing subsequent to acquisition, such changes would generally be offset by opposite effects on the items being hedged.

The principal or contract amounts of derivative financial instruments outstanding at balance date were:

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Cross Currency Interest Rate Swaps 704,649 123,000 704,649 123,000 Forward Exchange Contracts 206,609 33,057 206,609 33,057 Interest Rate Swaps 1,298,709 1,350,655 1,298,709 1,350,655 Interest Rate Options 85,000 100,000 85,000 100,000

84 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

(a) Foreign currency risk The Group incurs foreign currency risk as a result of purchases that are denominated in a currency other than the respective Group entity’s functional currency. The currencies giving rise to currency risk in which the Group primarily deals, are the Australian Dollar, Euro, and US Dollar.

The Group also incurs foreign currency risk from the revaluation of the net assets of overseas subsidiaries for external financial reporting purposes. Currently Meridian’s policy is not to hedge foreign currency denominated assets on the consolidated balance sheet.

The Group has accessed foreign capital markets to secure long dated financing and uses cross currency interest rate swaps to eliminate risk in relation to these borrowings.

(b) Interest rate risk It is Group policy to manage exposure to interest risk via the use of interest rate swaps, forward rate agreements and interest rate options and to maintain a fixed/floating profile within parameters prescribed by the Treasury Policy.

(c) Repricing analysis The tables below and on the following page identify the repricing period for financial instruments that are interest rate risk sensitive. The interest rate applicable to derivative financial instruments is incorporated into the effective interest rate of the underlying hedged items.

Repricing 2004 Group

$’000 EFFECTIVE TOTAL 6 MONTHS 6-12 1-2 2 OR NON-INTEREST INTEREST RATE OR LESS MONTHS YEARS MORE YEARS BEARING

Financial Assets Cash Balances (net) 4.92% 104,262 104,262 – – – – Receivables 212,902 – – – – 212,902 Investments 15,754 – – – – 15,754 Total Financial Assets 332,918 104,262 – – – 228,656

Financial Liabilities Total Borrowings* 6.78% 1,334,876 131,610 26,700 229,987 946,579 – Creditors 254,691 – – – – 254,691 Dividends Payable – – – – – – Total Financial Liabilities 1,589,567 131,610 26,700 229,987 946,579 254,691

Off Balance Sheet Cross Currency Interest Rate Swaps 704,649 – – – 704,649 – Interest Rate Swaps 1,298,709 25,000 15,000 229,512 1,029,197 – Interest Rate Options 85,000 50,000 25,000 10,000 – – Total Off Balance Sheet 2,088,358 75,000 40,000 239,512 1,733,846 –

*The debt is floating debt, but the repricing is shown in line with the maturity dates because the majority is hedged to fixed rates.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 85 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Repricing 2003 Group

$’000 EFFECTIVE TOTAL 6 MONTHS 6-12 1-2 2 OR NON-INTEREST INTEREST RATE OR LESS MONTHS YEARS MORE YEARS BEARING

Financial Assets Cash Balances (net) 4.69% 55,337 55,337 – – – – Receivables 209,728 – – – – 209,728 Investments 5,975 – – – – 5,975 Total Financial Assets 271,040 55,337 – – – 215,703

Financial Liabilities Total Borrowings 7.28% 1,376,276 1,249,320 49,987 26,969 50,000 – Creditors 205,708 – – – – 205,708 Dividends Payable – – – – – – Total Financial Liabilities 1,581,984 1,249,320 49,987 26,969 50,000 205,708

Off Balance Sheet Cross Currency Interest Rate Swaps 123,000 – – – 123,000 – Interest Rate Swaps 1,350,655 25,000 – 112,286 1,213,369 – Interest Rate Options 100,000 15,000 – 75,000 10,000 – Total Off Balance Sheet 1,573,655 40,000 – 187,286 1,346,369 –

Note: The repricing analysis for the Parent has not been presented, as there is no significant difference between the Group and the Parent pricing profile.

(d) Credit risk The Group incurs credit risk from transactions with financial institutions and in relation to its trade receivables.

Apart from one major direct supply customer, the Group does not have any significant concentrations of credit risk. Amounts owed by trade receivables are unsecured but evaluations are performed for significant levels of credit. In limited cases bonds are withheld where credit risks are perceived to be above normal.

There is no requirement to hold collateral or security to support financial instruments, owing to the high credit rating of the financial institutions dealt with. The Group further limits its credit exposure by limiting the amount of funds placed with any one financial institution at any one time. The Group does not anticipate the non-performance of any obligations that existed at balance date.

The maximum exposure to credit risk is represented by the carrying value of each financial asset in the Statement of Financial Position and the fair value of financial instruments as shown in the table at part (f).

(e) Revenue risk As part of its portfolio contracts and as part of its wholesale risk management activities, the Group has electricity price hedges with customers and counterparties for various periods out to 2011. Under these contracts, the Group sells and buys electricity forward at a fixed price (hedge price). Any difference, during the period to which the invoice relates, between the hedge price and the spot price is settled between the parties, irrespective of the supply of electricity. If the spot price is greater than the hedge price, the Group must settle with the counterparty. Conversely, if the spot price is less than the hedged price, the counterparty must settle with Meridian Energy.

86 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

For the New Zealand parent it is not practicable to estimate the fair value of electricity hedge contracts as the secondary market for electricity price hedge products, namely seasonal hedge, monthly hedge and call options, is not sufficiently active. The face value of outstanding electricity hedge contracts in New Zealand at 30 June 2004 at hedge prices is $284.5 million (30 June 2003 $336.6 million). For the Australian subsidiaries, the fair value of electricity hedge contracts has been calculated on a mark to market basis against the forward price curve and is $38.3 million at 30 June 2004 (30 June 2003 $77.6m).

In addition to electricity hedge contracts, Southern Hydro has weather derivative contracts that mitigate the risks around hydrology expectations. These are carried at cost on the balance sheet.

(f) Fair values Fair values are estimated using the mark to market value methodology except for short-term and other investments where the carrying value of these items is equivalent to their fair value. The valuations were provided by the Group’s bankers and/or other independent advisors. For cash at bank, bank overdraft, receivables, weather derivatives and trade creditors the fair values are equivalent to their carrying values and therefore have been excluded from the table below. For term debt, including bonds with associated cross currency interest rate swaps, the fair values are equivalent to their carrying values and have been included in the table below.

2004 2003 $’000 $’000

FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE

Assets Investment in Unlisted Shares 15,754 15,754 5,975 5,975

Liabilities Term Debt 1,176,566 1,176,566 653,151 653,178

Off Balance Sheet Financial Instruments Group Forward Exchange Contracts (1,659) – (1,240) –

Interest Rate Swaps 9,851 – (59,961) –

Interest Rate Options (25) – (356) –

22. Land The Group is not yet formally registered as proprietor under the Land Transfer Act of significant portions of its land assets. However the Group has full beneficial ownership rights and the benefit of an obligation from the Crown to create titles under the Land Transfer Act and transfer them to the Group. This is also the basis on which ECNZ owned these assets prior to transfer to the Group. Titles will be issued once the surveying and land title processes have been completed.

23. Related Party Transactions The shareholder of the Company is the Crown. The Group undertakes many transactions with the Crown, state-owned companies and Government entities and with its subsidiary DamWatch Services Ltd, all of which are carried out on a commercial and arm’s-length basis.

Non Government Party Related Transactions Some Directors of the Group may be directors or officers of other companies or organisations with whom Meridian may transact. Such transactions are all carried out independently on an arm’s-length basis.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 87 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Entity Transaction $’000 Relationship Minter Ellison Rudd Watts Payments to Minter Ellison 331 Charles Chauvel, Meridian Energy director, Rudd Watts for legal services is a partner of Minter Ellison Rudd Watts Royal NZ Ballet Sponsorship grant. 250 Joan Withers, Meridian Energy director, is a trustee of the Royal New Zealand Ballet in her own personal capacity Christchurch International Airport Sales of electricity to 900 Sue Sheldon, Meridian Energy director, is a Christchurch International Airport director of Christchurch International Airport

24. Net Cash Flow from Operating Activities

GROUP PARENT

2004 2003 2004 2003 $’000 $’000 $’000 $’000

Reconciliation with Net Surplus after Tax

Net Surplus after Tax 132,905 109,314 159,557 123,983

Items Not Involving Cash Flows Depreciation Expense 74,120 59,686 67,417 57,174 Amortisation 26,201 13,878 7,764 7,715 Amortisation of Debt Revaluation (25) (229) (25) (229) Deferred Tax 6,388 46,840 9,103 21,378 Loss on Sale of Fixed Assets 425 22 14 – Write off of Aqua Prior Year Capital Expenditure 12,419 – 12,419 – Write Down of Investments 328 5,235 5,535 2,000 Other Non-Cash Items – 2 – – 119,856 125,434 102,227 88,038

Changes in Working Capital Items Accounts Receivable (7,653) (60,866) (5,204) (20,816) Inventory (256) 24 (256) 24 Trade Creditors and Accruals 49,313 103,721 33,024 53,178 Tax Provision 14,680 6,371 316 12,746 56,084 49,250 27,880 45,132

Net Cash Flow from Operating Activities 308,845 283,998 289,664 257,153

88 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

25. Segment Information Industry Segments Meridian Energy operates predominantly in one industry, the generation, wholesale marketing and retailing of electricity and complementary products and services. Its operations are carried out in New Zealand and Australia.

Geographical Segments AS AT AND FOR THE YEAR ENDED 30 JUNE 2004

New Zealand Australia Eliminations Consolidation

2004 2004 2004 2004 $’000 $’000 $’000 $’000

Revenue Derived From Outside Group 1,236,018 72,682 (688) 1,308,012 Total Revenue 1,236,018 72,682 (688) 1,308,012

Segment Net Surplus Before Tax and Finance Costs 268,649 17,776 12,417 298,842

Segment Total Assets 3,540,494 892,140 (286,907) 4,145,727

AS AT AND FOR THE YEAR ENDED 30 JUNE 2003

New Zealand Australia Eliminations Consolidation

2003 2003 2003 2003 $’000 $’000 $’000 $’000

Revenue Derived From Outside Group 1,345,868 21,506 (482) 1,366,892 Total Revenue 1,345,868 21,506 (482) 1,366,892

Segment Net Surplus Before Tax and Finance Costs 227,585 4,041 (2,145) 229,481

Segment Total Assets 3,357,689 859,533 (196,564) 4,020,658

The Group acquired Southern Hydro Pty Ltd on 30 April 2003. The FY03 comparatives include the results of Southern Hydro for the period 30 April 2003 to 30 June 2003.

26. Contingent Gains and Losses Other than contingent liabilities arising in the normal course of business, the contingent gains and losses of the Group arising in the financial year to 30 June 2004 are as follows:

• The Company has agreed to underwrite 25% of the proposed issue of shares for the North Otago Downlands irrigation scheme pursuant to a Subscription Agreement.

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 89 REPORT OF THE AUDIT OFFICE

TO THE READERS OF MERIDIAN ENERGY LTD AND GROUP’S FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2004 The Auditor-General is the auditor of Meridian Energy Ltd (the company) and group. The Auditor-General has appointed me, Ian C Marshall, using the staff and resources of Deloitte, to carry out the audit of the financial statements of the company and group, on his behalf, for the year ended 30 June 2004. Unqualified Opinion In our opinion: The financial statements of the company and group on pages 66 to 89: – comply with generally accepted accounting practice in New Zealand; and – give a true and fair view of: • the company and group’s financial position as at 30 June 2004; and • the results of operations and cash flows for the year ended on that date. Based on our examination the company and group kept proper accounting records. The audit was completed on 7 September 2004, and is the date at which our opinion is expressed. The basis of the opinion is explained below. In addition, we outline the responsibilities of the Board of Directors and the Auditor, and explain our independence. Basis of Opinion We carried out the audit in accordance with the Auditor-General’s Auditing Standards, which incorporate the New Zealand Auditing Standards. We planned and performed our audit to obtain all the information and explanations we considered necessary in order to obtain reasonable assurance that the financial statements did not have material misstatements, whether caused by fraud or error. Material misstatements are differences or omissions of amounts and disclosures that would affect a reader’s overall understanding of the financial statements. If we had found material misstatements that were not corrected, we would have referred to them in the opinion. Our audit involved performing procedures to test the information presented in the financial statements. We assessed the results of those procedures in forming our opinion. Audit procedures generally include: – determining whether significant financial and management controls are working and can be relied on to produce complete and accurate data; – verifying samples of transactions and account balances; – performing analyses to identify anomalies in the reported data; – reviewing significant estimates and judgements made by the Board of Directors; – confirming year-end balances; – determining whether accounting policies are appropriate and consistently applied; and – determining whether all financial statement disclosures are adequate. We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements. We evaluated the overall adequacy of the presentation of information in the financial statements. We obtained all the information and explanations we required to support the opinion above. Responsibilities of the Board of Directors and the Auditor The Board of Directors is responsible for preparing financial statements in accordance with generally accepted accounting practice in New Zealand. Those financial statements must give a true and fair view of the financial position of the company and group as at 30 June 2004. They must also give a true and fair view of the results of operations and cash flows for the year ended on that date. The Board of Directors’ responsibilities arise from the State-Owned Enterprises Act 1986 and the Financial Reporting Act 1993. We are responsible for expressing an independent opinion on the financial statements and reporting that opinion to you. This responsibility arises from section 15 of the Public Audit Act 2001 and section 19(1) of the State-Owned Enterprises Act 1986. Independence When carrying out the audit we followed the independence requirements of the Auditor-General, which incorporate the independence requirements of the Institute of Chartered Accountants of New Zealand. Other than the audit, we have no relationship with or interests in the company or any of its subsidiaries.

Ian C Marshall DELOITTE On behalf of the Auditor-General WELLINGTON, New Zealand

90 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 STATUTORY INFORMATION

General Disclosures Disclosure of Directors’ Interests Declaration of general interest by directors for the year ended 30 June 2004 in accordance with Section 140 (2) of the Companies Act 1993:

(Arthur) Francis Small Sir Tipene O’Regan Meteorological Service of NZ Ltd, Director/Chairman Whale Watch Kaikoura Ltd, Director Metra Information Ltd, Director Te Tapuae o Rehua Ltd, Director/Chairman Standards New Zealand, Council Member Kutai Investments Ltd, Director/Shareholder Antarctica NZ, Director Clifford Bay Marine Farms Ltd, Director/Shareholder Centre Advanced Engineering, Chairman The Escorial Company Limited, Director/Chairman Murray King & Francis Small Consulting Ltd, Shareholder/Director (resigned 16/6/04) Francis Small Consulting Ltd, Shareholder/Director Transit New Zealand, Director/Deputy Chairman Anglican Diocese of Wellington, Trustee Stehr Group Pty Ltd (Australia), Director Marine Stewardship Council (UK), Director Susan Sheldon University of Canterbury, Senior Research Fellow Asure New Zealand Ltd, Director School of Business, Board of Advisors, University of Otago, Member Christchurch International Airport Ltd, Director/Deputy Chairman National Centre for Advanced Bio-Protection Technologies, Director National Provident Fund Board of Trustees, Chairman Syft Technologies Ltd, Shareholder Ngai Tahu Holdings Corporation Ltd, Director Jade Software Ltd, Shareholder Freightways Ltd, Director Hanover Financial Services Ltd, Director (from 1/7/04) Canwest Media Works (NZ) Ltd, Director FibreTech New Zealand Ltd (previously Woolfill Corporation (NZ) Ltd), Charles Chauvel Director Minter Ellison Rudd Watts, Partner FibreTech Holdings Ltd (previously Woolknop Holdings Ltd), Minter Ellison Rudd Watts Ltd, Director Director/Shareholder Minter Ellison Rudd Watts Pty Ltd, Chair Nimbus Bedware Ltd, Director/Shareholder Minter Ellison Rudd Watts Solicitors Nominee Company Limited, Advanced Business Education Ltd, Director (resigned 17/5/04) Director Accounting Standards Review Board, Member (resigned 20/7/04) New Zealand Lotteries Commission, Deputy Chair Contact Energy, Shareholder Joan Withers Auckland International Airport Ltd, Director Te Kipa Kepa Morgan The Warehouse Group Ltd, Director University of Auckland, School of Engineering, Employee Counties Manukau Pacific Trust, Trustee Mahi Maioro Professionals, Managing Director Clinical Research & Effective Practice Foundation, Chairman Engineering Associates Registration Board (Ministerial Appointee) Tourism Holdings Ltd, Director Haumingi 10A 2B Papakainga Trust, Chairman Royal New Zealand Ballet, Trustee Fairfax NZ Advisory Board, Director Margaret Anne Blackburn Feltex Carpets Ltd, Director Ag Research Limited, Director Celentis Limited, Director Steven Gentry Wellington Regional Council Holdings Limited, Director Sinclair Knight Merz Group, Senior Consultant Pringle House Limited, Director Whisper Tech Limited, Director Port Investments Limited, Director BRANZ Inc, Director Technical Advisory Board to the Export Credit Office, Director Red Cross Foundation, Trustee Bank of New Zealand, Employee IPENZ Foundation, Trustee Contact Energy Limited, Shareholder Chartered Professional Engineers’ Council, Member Katherine Mansfield Memorial Fellowship, Trustee Contact Energy Ltd, Shareholder Whispergen Limited, Director

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 91 STATUTORY INFORMATION (CONTINUED)

There were no specific disclosures of interest under Section 140 (1) of the Companies Act 1993.

Information Used by Directors No member of the Board of Meridian Energy Ltd, or any subsidiary, issued a notice requesting the use of information received in their capacity as director which would not otherwise have been available to them.

Indemnification and Insurance of Officers and Directors The Parent indemnifies its directors and current executive officers of the Group against all liabilities (other than to the Parent or member of the Group) which arise out of the performance of their normal duties as director or executive officer, unless the liability relates to conduct involving lack of good faith. To manage this risk, the Group has indemnity insurance.

Directors’ Remuneration GROUP 2004 SUBSIDIARIES DIRECTORS’ FEES 2004 $’000 $’000

Dr Francis Small (Chairman) 61.0 – Susan Sheldon (Deputy Chairman) 44.0 – Steven Gentry 39.0 – Philip Lough (resigned 31 May 2004) 35.9 – Sir Tipene O’Regan 30.0 – Joan Withers 33.0 – Charles Chauvel 30.0 – Te Kipa Kepa Morgan 33.0 – Margaret Anne Blackburn 2.3 – Peter Lowe – 5.8 Mark Snape – 5.8 Stanley Brogan – 13.0 TOTAL 308.2 24.6

Shareholders

Shareholder Information All the issued ordinary shares in Meridian Energy Ltd are held equally by the Minister of Finance and the Minister for State-Owned Enterprises on behalf of Her Majesty the Queen in Right of New Zealand (the Crown).

Employees The Meridian Energy Group’s employment philosophy is to attract and retain high-calibre staff. The key staff attributes that the Company seeks to develop and reinforce across the Group are expected to reflect in the quality of service levels experienced by customers and stakeholders. The Company has streamlined, innovative HR policies and practices to support the delivery of excellent people performance.

92 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 STATUTORY INFORMATION (CONTINUED)

Executive Remuneration The number of employees within the Group receiving remuneration and benefits above $100,000 during the year are indicated in the following table.

2004

PARENT SUBSIDIARIES

$100,000 – 109,999 22 1 $110,000 – 119,999 15 4 $120,000 – 129,999 15 3 $130,000 – 139,999 3 3 $140,000 – 149,999 5 3 $150,000 – 159,999 6 – $160,000 – 169,999 3 1 $170,000 – 179,999 4 – $180,000 – 189,999 6 2 $200,000 – 210,000 2 1 $220,000 – 229,999 2 – $230,000 – 239,999 1 – $240,000 – 249,999 2 – $250,000 – 259,999 1 – $270,000 – 279,999 1 – $280,000 – 289,999 1 – $290,000 – 299,999 – 1 $300,000 – 309,999 1 – $310,000 – 319,999 2 1 $330,000 – 339,999 1 – $340,000 – 349,999 – 1 $410,000 – 419,999 – 1 $490,000 – 499,999 – 1 $780,000 – 789,999 1 –

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 93 APPENDIX

This appendix reports progress on Meridian Energy’s resource consumption, using the figures produced in last year’s report as a benchmark. Although overall consumption has increased, the per FTE figure has only increased marginally from last year. This section covers resources consumed in Meridian Energy’s New Zealand operations. Overall, travel has increased due to increased FTE numbers, Southern Hydro and Project Aqua activity.

Electricity consumption Our electricity consumption has only increased by 1.2%, which is very pleasing given that our staff numbers continue to increase, as has the size of our Wellington office. This has seen the consumption per FTE figure decrease to 5,393 kWh, indicating that the energy saving behaviours encouraged last year have become standard practice. We have included the Manapouri office this year and estimated consumption in previous years to give an accurate percentage change figure. The table below does not report on generation facilities as they predominantly self-supply.

Meridian Energy – Electricity Consumption in Non-Operational Facilities

Totals for Year to 30 June 2004 2004 kWh 2003 kWh

Christchurch Office Note 1 897,160 914,640 Wellington Office(s) (TOTAL) 655,051 570,050 Twizel Offices Note 2 1,056,039 1,085,900 Manapouri Stores, Offices & Hostels Note 3 66,541 72,600 Totals for Year to 30 June 2,674,791 2,643,190

Increase in Usage from 2003 1% Consumption per FTE (kWh) 5,393 6,443

Notes • # 1 – Sir William Pickering Office electricity consumption includes approx 110,000 kWh generation from emergency generator during the 2003 hydro shortage. SWP office was closed in early 2003. • #2 – Twizel office electricity includes the operations control centre. • #3 – Electricity consumption at Manapouri only covers ‘non-operational’ facilities. Manapouri offices & hostel usage were not included in the 2001, 2002 or 2003 annual reports but have been included for the 2004 report. (Data for 2001 & 2002 is estimates only).

Paper consumption The figures below show the volume of paper that was purchased by Meridian’s New Zealand operations. It does not include the paper used for offset and digital printing completed off site.

We have not met our target of reducing paper consumption and overall usage per FTE has actually increased. While disappointing, this can most probably be explained by the large amount of activity in which the company has been involved during the year, including the industry reforms and project consultation. Our printers have been set to default to double-sided printing, which we hope will encourage paper use to decrease.

Year reams of A4 total kg number of kg/FTE equivalent (1 ream = 2.6 kg) reams/FTE

2001/02 4,974 12,932.4 13 35 2002/03 5,951 15,472.6 15 39 2003/04 8,333 21,665.8 17 44

Waste and Recycling The following figures are based upon the findings of the recent Waste Audit performed during the month of July 2004. Each Meridian site was audited separately by removing one week’s waste, which was extrapolated to an annual basis.

For the purpose of showing volume all figures are measured in cubic metres. We believe this is a more meaningful measure of waste as it is relevant to landfills.

94 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 Office Total Total % of waste that Recycling calculated waste recycled could have per m3 per person (Based been recycled upon 496 staff) m3 m3 m3 m3

Wellington 91.572 86.4 40.04 0.174 per person Christchurch 175.5 365.76 93.49 0.737 per person Twizel 95.68 49.22 35.88 0.099 per person Total 362.75 501.38 169.41 1.010m3 per person

The total volume of recycled material over the year, which would have otherwise been sent to a landfill, is 501.38 cubic metres. That’s the same size as ten large commercial school buses.

We are pleased at our recycling efforts but there is still a long way to go, particularly in the Christchurch office.

We aim to reduce the amount of recyclable material in the waste stream by a further 40% (67.76m3) next year. To do this, each Meridian Energy staff member and contractor on site will need to recycle 0.1366m3 per person, or approximately half the volume of a green 240 litre wheelie bin, over the coming year.

Travel Our operations are now located across New Zealand and Australia and staff frequently travel between the two countries. For our South Island operations we have a fleet of 31 pool vehicles based in Twizel, Manapouri and Christchurch. We also use rental vehicles in conjunction with air travel.

Vehicle Use The figures below cover the kilometres travelled by all Meridian pool vehicles, and rental vehicles in New Zealand and internationally. We have separated trans-Tasman travel from international travel to take Australian activity into account. Our total per FTE crept up this year, but is likely to be the result of the increased activity in Australia, the lower Waitaki (for Project Aqua) and Manawatu (for Project Te Äpiti).

2004 2003 2002

Meridian Vehicles (km) 1,088,512 917,006 855,000 Rental Vehicles (NZ) 292,249 – – Rental Vehicles (international) 19,524 – – Rental Vehicles total 311,773 199,182 145,000 Total 1,400,285 1,116,188 1,000,000 km/FTE 2,823 2,797 2,617

Air Travel Air travel is again up on last year, and can be attributed to the increased need to travel for growth projects and to Australia, as a result of the purchase of Southern Hydro in 2003. We have separated trans-Tasman travel from international travel to take Australian activity into account. We continue to encourage the use of video-conferencing as an alternative way of bringing staff together.

Air Travel (km) 2004 2003

International 1,212,581 1,739,896 Trans-Tasman 1,415,473 – Domestic 3,170, 449 2,294,737 Total Air Travel 5,798,503 4,034,633 km/FTE 11,691 10,112

MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 95 VERIFICATION STATEMENT

Scope and Methodology URS New Zealand has carried out an independent audit of the Meridian Energy Report for the Year Ending June 2004 – to provide assurance to readers on the accuracy of the report content and to provide guidance on appropriateness and completeness of reporting.

The audit methodology was drawn from the AA1000 Assurance Standard (March 2003) – an international standard developed to ensure the credibility of an organisation’s public reporting on social, economic and environmental performance. Specifically, the audit was designed to investigate the “Evidence” – whether Meridian Energy has provided adequate evidence to support the information contained in the report. The AA1000 principles of Completeness, Materiality and Responsiveness guided feedback on enhancements to the current and future reports.

The audit methodology was to: • Review the draft Report – to identify statements of fact/claims and data requiring verification. • Conduct interviews with key personnel at Wellington and Christchurch offices. • Sight specific documented information, computer and hard-copy files, data sources and data. • Identify errors or weakness in the data, provide feedback to Meridian Energy and verify the Final Report.

The complete contents of the Report were investigated with the exception of financial reporting.

Independence There is no aspect of the relationship between URS New Zealand and Meridian Energy that has influenced the independent nature of these verification findings. URS New Zealand worked on a number of environmental projects for Meridian Energy during the period covered by the Report.

Findings On the basis of the described audit methodology, URS New Zealand Limited verifies that the content of the Meridian Energy Report for the Year Ending June 2004 provides an accurate description of the company’s environmental, social and economic performance.

Comment/Recommendations In our opinion the Report covers key performance areas that are of significance to stakeholders. It provides an open and transparent account of Meridian’s achievements with the inclusion of stakeholders’ voices adding significant value to the Report. There is still room for expansion in areas such as staff survey results, training, and health and safety.

There was also a clear focus on key issues and challenges facing Meridian, including water allocation, Project Aqua, renewable energy and energy efficiency. This focus reflected the high level at which Meridian is currently committed to participating in the national energy debate.

Inclusion of opposing voices would help to provide a more balanced view on issues such as Project Aqua and water allocation. Similarly, clearly delineating where Meridian is stating an opinion as opposed to a fact, would help achieve a balanced outcome.

Targeting systems for the compilation of data is also an area where improvements could be made. This would facilitate future report writing and the verification process itself.

Reorganisation at Meridian has seen a significant amount of change over the past year. It was evident throughout the verification process that this had not significantly impacted Meridian staff commitment to their stated challenge – “to be the best performing sustainable energy company in Australasia”.

We commend Meridian Energy on their impressive social and environmental performance as evidenced in this Report and look forward to future reports reflecting the sustainable development of all aspects of performance of Meridian Energy’s activities.

URS New Zealand Limited 20th September 2004

Kerry Griffiths Senior Sustainability Consultant

96 MERIDIAN ENERGY LIMITED REPORT FOR THE YEAR ENDING JUNE 2004 FEEDBACK FORM

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Communications and External Relations Meridian Energy PO Box 10840 WELLINGTON DIRECTORY

Registered Office Offices 15 Allen Street, Level 2 PO Box 10840 Wellington Wellington Telephone: 04 381 1200 Auditors Facsimile: 04 381 1201 Deloitte PO Box 1990 PO Box 2454 Wellington Christchurch Telephone: 03 357 9700 Bankers Facsimile: 03 357 9701 Westpac Wellington Private Bag 950 Twizel Directors Telephone: 03 435 0818 Dr Francis Small (Chairman) Facsimile: 03 435 0939 Susan Sheldon (Deputy Chairman) Charles Chauvel Level 22 Steven Gentry 600 Bourke Street Te Kipa Kepa Morgan Melbourne, Victoria 3000 Sir Tipene O’Regan Australia Joan Withers Margaret Anne Blackburn

Senior Management Group Dr Keith Turner (Chief Executive) Ari Sargent Chris Jones Grenville Gaskell James Hay Jason McDonald Ken Smales Matthew Jansen Paul Smart