CHAIRMAN’S AND PROJECT AQUA 20 CHIEF EXECUTIVE’S 2 REPORT Impact and It’s been an implications [extra]ordinary On 29 March 2004, Meridian Energy 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 New Zealand’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 TWIZEL AT LAKE PUKAKI. 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.