Contents · 2 Board of Directors Steven Boulton Chairman Master Tech Mgt, BBus, AFAIM, GAICD,...

06ANNUAL REPORT

Financial Highlights 1

Board of Directors 2

Executive Management 4

Corporate Governance 6

Financial Statements 10

Consolidated Income Statement 10

Consolidated Statement of Changes in Equity 11

Consolidate Balance Sheet 13

Consolidated Cash Flow Statement 14

Reconciliation of Consolidated Profi t for the period to Net Cash Flows from Operating Activities 15

Statement of Accounting Policies for the Consolidated Financial Statements 16

Notes to and forming part of the Financial Statements 25

Auditor’s report 56

Directors information IBC

Other statutory information IBC

Contents

“The strong fi nancial performance of the Powerco Group continued in the 12 months to June 2006.”

This Annual Report refl ects the audited fi nancial results of Powerco Limited and Group for the full year ended 30 June 2006.

The Company posted a Net Surplus for the period of $41.9 million or 13.25 cents per share. This net surplus was achieved from total income of $360.53 million and earnings before interest, tax, depreciation and amortizations (EBITDA) of $210.1 million.

The fi nancial performance for the period under review can not be compared with the results announced in June 2005 as they covered a period of 15 months commencing 1 April 2004. Powerco has been an early adopter of International Financial Reporting Standards (IFRS). Under IFRS, the comparative fi nancial statements have been restated.

The sum of $7.55 million has been recognised as a gain on the mark to market value of fi nancial derivatives in a designated hedge accounting relationship and the fair value of hedges of $41.1 million is recognised in the Balance Sheet. Powerco has taken the available exemptions to not restate fi nancial instruments therefore comparable fi gures for these items are not included in this Annual Report.

The current year’s fi nancial performance has also been affected by one-off capital gains from the sale of the Company’s fi eld service and contracting activities and an investment in a NZ listed security totalling $13.46 million.

During the period under review a total sum of $68.9 million or 21.8 cents per share was distributed to the shareholders of the Company.

The balance sheet of the Company refl ects Total Assets of $1.975 billion and Total Net Assets of $0.533 billion as at 30 June 2006 compared to $1.995 billion and $0.562 billion respectively as at 30 June 2005.

Powerco’s total revenue is derived from a balanced income stream, based on ownership of urban and rural electricity and gas network assets in New Zealand, and the operation of a number of other businesses including the Tasmanian gas network. The main focus in the coming years will be on further consolidation and improvement of the Company’s operations, capturing organic growth opportunities, improving network performance and dealing with the mass of industry issues.

Yours sincerely

Steven BoultonChairman

29 September 2006

2

Board of Directors

Steven BoultonChairmanMaster Tech Mgt, BBus, AFAIM, GAICD, CPAHRI

Nigel BarbourBCom/LLB, Barrister and Solicitor of the High Court of New Zealand

Elanga EkanayakeFCA (SL), FCIS, CMA (AUS)

Mr Boulton has been Chief Executive of Babcock & Brown Infrastructure since 1 August 2005. Prior to that appointment, Mr Boulton had held the position of Chief Executive of Powerco since January 2000, having previously been Chief Executive of Allgas Energy Limited, a listed Australian natural gas and LPG utility company. Mr Boulton is a board member of the Institute for the Study of Competition and Regulation.

Mr Boulton has qualifi cations and a professional background in business management, human resources and technology management. He commenced his career as an electrical fi tter/mechanic, working through various management and executive levels in the energy sector in Australia.

He has held executive positions in the electricity, gas and coal sectors and has been employed in the energy industry since 1977

Mr Barbour joined Powerco in October 2002 and is General Manager Commercial and Corporate. His portfolio of responsibilities includes: electricity and gas line pricing; revenue forecasting; customer relations management; gas and electricity marketing; corporate affairs; human resources; insurance; legal compliance; legal services; and property. In addition, Mr Barbour shares responsibility for electricity and gas industry regulation with Mr Broadhurst. Mr Barbour’s professional training is in law and economics.

Mr Ekanayake is Powerco’s Chief Financial Offi cer and is a Fellow Chartered Accountant, a Fellow Chartered Secretary and a Certifi ed Management Accountant of Australia. He has been with Powerco or its predecessors since 1988. Before that Mr Ekanayake was a consultant accountant for several years with an Asian Development Bank project in Papua New Guinea.

The Board is responsible for setting the objectives of Powerco and the strategies for achieving these objectives. The Board also sets the policy framework of Powerco within which business is conducted, and monitors the ongoing performance of Powerco and its senior management.

2

Mr Kendrew has been General Manager Assets and Development of Babcock & Brown Infrastructure since 1 August 2005. Prior to that appointment, Mr Kendrew held the position of Powerco’s General Manager Corporate Development. Mr Kendrew was previously General Manager of Operations for Wairarapa Electricity and joined Powerco following the acquisition of Wairarapa Electricity in 1998. Mr Kendrew has a professional engineering background and has held management and engineering positions in various sectors of the energy industry over the past 16 years.

Jonathon Sellar is the Chief Financial Offi cer of Babcock & Brown Infrastructure. He joined Babcock & Brown Infrastructure in November 2002 as the Group Financial Controller. Prior to his role at Babcock & Brown Infrastructure Mr Sellar worked as the Project Controller of InterGen’s Australian power stations and was a Senior Audit Manager (Energy & Mining) at Price Waterhouse Coopers Brisbane (including 30 month secondment to the United Kingdom).

Mr Sellar has a Bachelor of Business (Accountancy) from the Queensland University of Technology (Brisbane), and has been a member of the Institute of Chartered Accountants in Australia since 1996.

Nicholas O’Day is General Manager, Commercial of Babcock & Brown Infrastructure. He joined Babcock & Brown Infrastructure in October 2004 as General Manager Acquisitions and Investments and moved into his current position in December 2005 after a brief period with Babcock & Brown’s Infrastructure Group. He has more than 15 years’ experience in the energy and infrastructure sectors in Australia, Asia, Japan and Europe. Before joining Babcock & Brown Infrastructure, Mr O'Day was Managing Director of Lyon Group, a corporate advisory fi rm specialising in the energy sector. Previously, he was CEO of E Power, a Japan-based power development company. Mr O'Day also worked for several years as Vice President with Bankers Trust Australia.

Mr O'Day is admitted as a Solicitor in several Australian States, England, Wales and Hong Kong. He is formerly Chairman of the AFMA Electricity Committee, a member of the SFE Emissions Trading Committee and the US Chairman of the APEC Energy Working Group Business Network.

Jeff Kendrew MBA (Tech Mgt), BEng, MIPENZ

Jonathon SellarB Bus; CA

Nicholas O’DayB Com; LLB

Mr Krogh was appointed Chief Executive of Powerco in August 2005. Prior to that appointment, he was Powerco’s General Manager Network Assets. Mr Krogh is a professional engineer, having specialised in asset management and network planning in the electricity distribution industry. Mr Krogh has extensive experience in the economic operation of distribution systems, asset management and general management. Mr Krogh has held engineering, contract management and general management positions within the electricity industry since 1993.

Richard KroghBEng (Hons), MIPENZ, Reg Eng

3

4

Executive Management

Richard KroghChief Executive

Nigel BarbourGeneral Manager Commercial and Corporate

Ted BroadhurstCorporate Risk ManagerBSc (Hons), CEng, MIEE

Mr Krogh is Chief Executive of Powerco and is also an executive director on the Powerco Board. Please refer to page 3 for Mr Krogh’s biography.

Mr Barbour is Powerco’s General Manager Commercial and Corporate and is also an executive director on the Powerco Board. Please refer to page 2 for Mr Barbour’s biography.

Mr Broadhurst has a professional engineering background. He has been with Powerco or its predecessors since 1974 in a number of senior management positions.

4

Mr Ekanayake is Chief Financial Offi cer of Powerco and is also an executive director on the Powerco Board. Please refer to page 2 for Mr Ekanayake’s biography.

Steve Nicholls was appointed as the Network Service Delivery Manager in November 2005. He is responsible for the delivery of Powerco’s Network Services over its electricity and gas assets. This includes the management of Powerco’s outsourcing strategy, customer initiated works, network asset information and the real time operations of the network.

He has extensive international experience spanning the United Kingdom, Africa and North America.

Prior to his appointment, he led Powerco’s Customer Relations Team in securing Powerco’s revenue stream through its revenue contracts and addressed competitive threats to Powerco’s business. His career has included being the Plant Manager at the Taranaki Combined Cycle Power Station for NGC and Professional Engineering roles for both TransAlta and ECNZ. He has also performed Research and Development activities for Rolls Royce Aerospace.

Mr Whaley was appointed Network Asset Strategy Manager in August 2005. Mr Whaley has responsibility for asset management and operation of Powerco’s electricity and gas networks. Mr Whaley has extensive experience in the power industry. Prior to his appointment as Network Asset Strategy Manager, Mr Whaley led Powerco’s electricity planning team as Electricity Asset Strategy Manager overseeing preparation of concept designs for the Company’s capital works, schedules for asset maintenance, preparation of asset management plans, and technical standards. He previously worked at Maunsell, an engineering and management consultancy, carrying out a variety of power planning, asset valuation and capital expenditure assessment assignments both in New Zealand and internationally. Prior to that he led a team of engineers at GEC Alsthom in the United Kingdom, carrying out designs for High Voltage DC converter stations in India.

Ross Martin

Elanga EkanayakeChief Financial Offi cer

Stephen NichollsNetwork Service Delivery ManagerMBA (Tech. Mgmt.) B.E.

Michael WhaleyNetwork Asset Strategy ManagerBEng, MIPENZ

5

6

Corporate Governance Policies

The capitalised terms used in this section of the annual report have defi ned meanings that are explained at the end of this section.

Following the successful takeover offer for Powerco made by BBI Networks (NZ) in late 2004, Powerco is now a wholly owned subsidiary of BBI Networks (NZ) and a member of the Babcock & Brown Infrastructure Group. Accordingly, Powerco follows the corporate governance policies, practices and procedures adopted by its ultimate parent company, Babcock & Brown Infrastructure, including policies in relation to:

• confl icts of interest;

• continuous disclosure;

• related party transactions;

• trading in Babcock & Brown Infrastructure stapled securities; and

• external auditors.

For complete details of Babcock & Brown Infrastructure’s corporate governance statement and of the compliance of Babcock & Brown Infrastructure with the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations, please refer to Babcock & Brown Infrastructure’s most recent annual report (available from www.bbinfrastructure.com).

Role and Responsibility of the Powerco Board

Following the 2004 takeover, the Board is now appointed directly by BBIL. The role of the Board is to govern the Company within legal and ethical constraints and to supervise the management of the Company.

In carrying out its governance role, a key task of the Board is to drive the performance of the Company. It does this through establishing Powerco’s objectives and the major strategies for achieving these objectives, whilst meeting the key Babcock & Brown Infrastructure corporate governance policies within which the business of the Company is conducted (including, for example, systems and processes for monitoring performance, compliance, disclosure, internal control and risk management).

Powerco Glossary

This section sets out the meanings of a number of capitalised terms used in this section of the annual report.

ASXmeans the Australian Stock Exchange Limited (ABN 98 008 624 691)

BBIL

means Babcock & Brown Infrastructure Limited (ABN 61 100 364 234) (formerly Prime Infrastructure Management Limited)

Babcock & BrownInfrastructure

means:

(a) BBIL; and

(b) BBI Trust of which BBIS is the trustee and licensed responsible entity

BBI Networks (NZ)

means BBI Networks (New Zealand) Limited (formerly Prime Infrastructure Networks (New Zealand) Limited)

Boardmeans the Board of Directors of Powerco

Company means Powerco Limited

Powerco means Powerco Limited

Powerco Corporate Governance

6

Financial StatementsFor the twelve months ended 30 June 2006

88

STATUTORY INFORMATION

Substantial Security Holders

The Company’s register of substantial security holders, prepared in accordance with section 25 of the Securities Markets Act 1988 recorded the following information as at the date of this Annual Report:

NameType of Voting

SecuritiesNumber of Voting

Securities

BBI Networks (New Zealand) Limited Ordinary Shares 316,186,775

As at the date of this Annual Report, the total number of issued voting securities was 316,186,775 ordinary shares.

EQUITY SECURITY HOLDER INFORMATION

As at 1 August 2006:

Name Ordinary Shares

Percentage of Issued Ordinary

Shares

BBI Networks (New Zealand) Limited 316,186,775 100%

DIRECTORS’ EQUITY SECURITIES

The Directors of Powerco Limited held no relevant interests in Equity Securities in the Company as at 30 June 2006.

QUOTED SECURITY HOLDER SPREAD

As at 1 August 2006:

Size of HoldingNumber of

Holders Holding Quantity

Ordinary Shares

Over 100,000 1 316,186,775

Total 1 316,186,775

Guaranteed Bonds (issued 29 March 2004)

5,000 to 100,000 867 23,916,000

Over 100,000 119 226,084,000

Total 986 250,000,000

Subordinated Bonds (issued 15 April 2005)

5,000 to 100,000 1291 37,099,000

Over 100,000 78 62,901,000

Total 1369 100,000,000

Guaranteed Bonds (issued 28 September 2005)

5,000 to 100,000 172 5,605,000

Over 100,000 58 174,395,000

Total 230 180,000,000

CREDIT RATING

As at the date of this Annual Report, the Company has the following credit ratings:

Rating Agency Short term Long term

Standard & Poor’s A-2 BBB (stable)

9

NZX Waivers

In the 12 months prior to 25 July 2006 New Zealand Exchange Limited (NZX) granted the Company the following waivers:

Full year preliminary announcement

On 30 August 2005, the Company was granted a waiver by NZX from Listing Rule 10.4.1(a) allowing it to make its full year preliminary announcement 15 days later than the date specifi ed by the NZDX Listing Rules, due to the transition from NZ GAAP to IFRS accounting standards.

Disclosure of information

On 5 September 2005, the Company was granted a waiver by NZX from Listing Rule 10.1.1 allowing the disclosure of information which might constitute Material Information between Powerco Limited, BBI Networks (New Zealand) Limited, BBI Networks (Australia) Pty Limited and Babcock & Brown Infrastructure Limited, due to the intragroup management relationship between the parties.

Minimum holding of bonds

On 5 September 2005, the Company was granted a waiver by NZX from Listing Rule 11.1.1 in relation to its issue of guaranteed bonds, to allow a minimum holding of bonds with a face value of $5,000 and a requirement that transfer of the bonds is only permissible where both the transferee and the transferor will hold a minimum amount of $5,000 in bonds and thereafter multiples of $1,000.

Minimum spread requirement

On 27 September 2005, the Company was granted a waiver by NZX from Listing Rule 5.2.3 in relation to its issue of guaranteed bonds, providing that it would not be required to have at least 500 members of the public holdings the bonds.

Annual report

On 3 October 2005, the Company was granted a waiver by NZX from Listing Rule 10.5.1 allowing it to send its annual report to Quoted Security Holders 10 business days later than the date specifi ed by the NZDX Listing Rules and to NZX 5 business days later than the date specifi ed by the NZDX Listing Rules.

Half year preliminary announcement

On 3 November 2005, NZX granted a class waiver from Listing Rule 10.4.1 applicable to all NZSX and NZDX issuers (including the Company) allowing issuers make their half year preliminary announcement 15 days later than the date specifi ed by the NZSX and NZDX Listing Rules, due to the transition from NZ GAAP to IFRS accounting standards.

Half yearly report

On 3 November 2005, NZX granted a class waiver from Listing Rule 10.5.2, applicable to all NZSX and NZDX issuers (including the Company) allowing issuers to release their half yearly report 15 days later than the date specifi ed by the NZSX and NZDX Listing Rules, due to the transition from NZ GAAP to IFRS accounting standards.

Enforcement Action by NZX

No enforcement action has been taken by NZX during the 12 months ended 30 June 2006 under Listing Rule 5.4.2.

Companies Act 1993

In accordance with section 211(3) of the Companies Act 1993 (the Act), BBI Networks (New Zealand) Limited, as the Company’s sole shareholder, has resolved that the Company’s annual report for the 12 months ended 30 June 2006 need not comply with sections 211(1)(a), 211(1)(e) to (j) and 211(2) of the Act and accordingly this Annual Report does not state the particulars required by those sections.

This Annual Report is dated 13 September 2006 and is signed on behalf of the Board by:

Chairman Director

10

Consolidated Income StatementFor the year ended 30 June 2006

Notes

Groupyear to

30 June 06NZ$000

Group15 months to

30 June 05NZ$000

Parentyear to

30 June 06NZ$000

Parent15 months to

30 June 05NZ$000

Continuing Operations

Revenue 1 323,683 419,607 318,016 382,574

Cost of goods sold 62,748 92,334 58,286 70,723

Gross profi t 260,935 327,273 259,730 311,851

Other income 1 15,913 677 15,769 354

Operating expenses 2 34,588 37,286 36,962 42,888

Administration expenses 2 26,225 39,042 29,164 39,278

Other expenses 2 76,112 79,409 68,909 71,562

Earnings before interest and taxation 139,923 172,213 140,464 158,477

Finance costs 3 89,364 109,905 86,729 109,675

Operating surplus before taxation 50,559 62,308 53,735 48,802

Income tax expense/(credit) 4 10,123 12,912 11,508 12,846

Profi t for the period from continuing operations 40,436 49,396 42,227 35,956

Discontinued operation

Profi t for the period from discontinued operations 6 1,464 (3,155) - -

Profi t for the period 41,900 46,241 42,227 35,956

Attributed to:

Equity holders of parent 41,899 46,227 42,227 35,956

Minority interest 9 1 14 - -

41,900 46,241 42,227 35,956

The accompanying notes form part of these fi nancial statements

11

Notes

Share CapitalNZ$000

RetainedEarnings

NZ$000

Foreign Exchange Reserve

NZ$000

HedgeReserveNZ$000

MinorityInterestNZ$000

TotalNZ$000

Group

Balance as at 1 April 2004 570,300 26,912 (426) - 24 596,810

Exchange differences arising on translation of foreign operations

8 - - 375 - - 375

Net income recognised directly in equity

- - 375 - - 375

Profi t for the period - 46,227 - - 14 46,241

Total recognised income and expense

- 46,227 375 - 14 46,616

Dividends 10 - (81,418) - - - (81,418)

Balance as at 30 June 2005 570,300 (8,279) (51) - 38 562,008

Effect of change in accounting policy

- - - (8,908) - (8,908)

As restated 570,300 (8,279) (51) (8,908) 38 553,100

Exchange differences arising on translation of foreign operations

8 - - 4,858 - - 4,858

Cash fl ow hedges

Gain/(loss) taken to equity 8 - - - 3,312 - 3,312

Income tax on items taken directly to or transferredfrom equity

4 - - - (1,093) - (1,093)


- - 4,858 2,219 - 7,077

Liquidation of EBNZ 9 - - - - (39) (39)

Profi t for the period - 41,899 - - 1 41,900


- 41,899 4,858 2,219 (38) 48,938

Dividends 10 - (68,900) - - - (68,900)

Balance as at 30 June 2006 570,300 (35,280) 4,807 (6,689) - 533,138

The accompanying notes form part of these fi nancial statements

Consolidated Statement Of Changes In EquityFor the year ended 30 June 2006

12

Notes

Share CapitalNZ$000

RetainedEarnings

NZ$000

Foreign Exchange Reserve

NZ$000

HedgeReserveNZ$000

MinorityInterestNZ$000

TotalNZ$000

Parent

Balance as at 1 April 2004 570,300 12,414 - - - 582,714

Profi t for the period - 35,956 - - - 35,956


- 35,956 - - - 35,956

Dividends 10 - (81,418) - - - (81,418)

Balance at 30 June 2005 570,300 (33,048) - - - 537,252

Effect of change in accounting policy

- - - (8,908) - (8,908)

As restated 570,300 (33,048) - (8,908) - 528,344

Cash fl ow hedges

Gain/(loss) taken to equity 8 - - - 3,312 - 3,312

Income tax on items taken directly to or transferred from equity

4 - - - (1,093) - (1,093)


- - - 2,219 - 2,219

Profi t for the period - 42,227 - - - 42,227


- 42,227 - 2,219 - 44,446

Dividends 10 - (68,900) - - - (68,900)

Balance as at 30 June 2006 570,300 (59,721) - (6,689) - 503,890

The accompanying notes from part of these fi nancial statement

Consolidated Statement Of Changes In EquityFor the year ended 30 June 2006

13

Notes

GroupAs at

30 June 06NZ$000

GroupAs at

30 June 05NZ$000

ParentAs at

30 June 06NZ$000

ParentAs at

30 June 05NZ$000

Equity

Issued capital 7 570,300 570,300 570,300 570,300

Reserves (37,162) (8,330) (66,410) (33,048)

Parent equity interest 533,138 561,970 503,890 537,252

Minority interest 9 - 38 - -

533,138 562,008 503,890 537,252

Non Current Liabilities

Borrowings 12 1,020,176 810,506 929,591 790,819

Other fi nancial liabilities 24 41,143 - 41,143 -

Deferred tax liability 4 125,940 110,312 126,158 111,229

Provisions 13 425 1,476 - -

Other non current liabilities 11 34,022 50,631 - -

1,221,706 972,925 1,096,892 902,048

Current Liabilities

Borrowings 12 175,740 353,890 175,740 353,890

Provisions 13 2,257 3,676 2,370 4,968

Trade and other payables 14 37,245 99,207 27,195 75,870

Other current liabilities 15 4,824 3,599 2,938 3,527

220,066 460,372 208,243 438,255

Total Equity and Liabilities 1,974,910 1,995,305 1,809,025 1,877,555

Non Current Assets

Property, plant and equipment 17 1,906,830 1,833,801 1,721,798 1,729,870

Intangible assets 18 11,430 7,488 11,430 7,488

Goodwill 19 - 906 - 906

Deferred tax asset 4 5,798 - - -

Investment in subsidiary 21 - - - 227

Investments 22 - 46,044 - 46,044

1,924,058 1,888,239 1,733,228 1,784,535

Current Assets

Intercompany accounts and intercompany loan - - 36,735 59,779

Inventories 3,258 7,289 22 59

Trade and other receivables 23 36,672 93,432 28,836 29,244

Income tax receivable 3,539 - 6,790 -

Other current assets 20 2,938 3,526 2,938 3,527

Cash and cash equivalents 16 4,445 2,819 476 411

50,852 107,066 75,797 93,020

Total Assets 1,974,910 1,995,305 1,809,025 1,877,555

Consolidated Balance SheetAs at 30 June 2006

Steven Boulton Chairman13 September 2006

Richard Krogh Director13 September 2006

14

Consolidated Cash Flow StatementFor the year ended 30 June 2006

Notes

Groupyear to

30 June 06NZ$000

Group15 months to

30 June 05NZ$000

Parentyear to

30 June 06NZ$000

Parent15 months to

30 June 05NZ$000

Cash Flows from Operating Activities

Cash receipts from customers 424,292 439,346 355,918 404,197

Cash paid to suppliers and employees (185,298) (160,061) (152,284) (142,006)

Cash generated from operations 238,994 279,285 203,634 262,191

Dividends received 9 - 9 -

Interest received 283 677 139 354

GST received / (paid) (17,629) (19,997) (18,576) (25,428)

Income taxes received - 225 - 225

Income taxes paid (76) (723) (74) (372)

Interest paid (87,658) (105,699) (85,024) (105,469)

(105,071) (125,517) (103,526) (130,690)

Net Cash Provided by Operating Activities 133,923 153,768 100,108 131,501

Cash Flows from Investing Activities

Proceeds from intercompany balances - - 23,044 -

Payment of intercompany balances - - - (48,424)

Proceeds from sale of investments 9,823 - 9,823 -

Proceeds from sale of subsidiary 27 18,108 - - -

Proceeds from sale of property, plant and equipment 23 10,005 23 9,937

Purchase of investments - (217) - (217)

Purchase of property, plant and equipment (158,975) (158,645) (60,984) (76,801)

Net Cash used in Investing Activities (131,021) (148,857) (28,094) (115,505)

Cash Flows from Financing Activities

Proceeds from borrowings 70,898 323,369 - 357,844

Loan establishment costs paid (5,125) (3,892) (5,125) (3,892)

Repayment of borrowings (449) (277,817) (224) (323,843)

Dividend paid (68,900) (81,418) (68,900) (81,418)

Net Cash Provided by Financing Activities (3,576) (39,758) (74,249) (51,309)

Net Increase/(Decrease) in Cash and Cash Equivalents (674) (34,847) (2,235) (35,313)

Cash and cash equivalents at the beginning of the period

(23,381) 11,466 (25,789) 9,524

Cash and Cash Equivalents at the End of the Period (24,055) (23,381) (28,024) (25,789)

Comprises of the following:

Bank overdraft (28,500) (26,200) (28,500) (26,200)

Cash and deposits 4,445 2,819 476 411

(24,055) (23,381) (28,024) (25,789)

15

Groupyear to

30 June 06NZ$000

Group15 months to

30 June 05NZ$000

Parentyear to

30 June 06NZ$000

Parent15 months to

30 June 05NZ$000

Profi t after Taxation 41,900 46,241 42,227 35,956

Add/(less) Non Cash Items

Depreciation and amortisation 68,038 79,381 60,372 70,468

Impairment of goodwill 906 3,493 906 1,342

Loss/(gain) on sale of assets 7,772 78 7,631 (249)

Loss/(gain) on sale of investments - (2,406) - (2,406)

Non cash component of interest 2,603 3,306 2,603 3,306

Unrealised loss/(gain) on hedges (7,546) - (7,546) -

(Gain)/loss on sale of subsidiary (5,380) - - -

(Gain)/loss on sale of equity shares (8,084) - (8,084) -

Non cash items in relation to investing / fi nancing activities 45,860 (36,783) 44,688 (40,680)

Increase / (decrease) in current tax payable balances (3,539) - (6,790) -

Increase / (decrease) in deferred tax balances 9,830 12,222 14,929 12,582

Changes in net asset and liabilities

(Increase)/decrease in assets

Trade and other receivables 56,760 (59,767) 408 (6,123)

Inventories 4,031 (5,721) 37 (59)

Other current assets 588 (3,526) 589 (3,527)

Increase/(decrease) in liabilities

Trade and other payables (61,962) 61,942 (48,675) 56,470

Current provisions (1,419) (398) (2,598) 894

Other current liabilities 1,225 3,599 (589) 3,527

Non current provisions (1,051) 1,476 - -

Other non-current liabilities (16,609) 50,631 - -

Net Cash Flow from Operating Activities 133,923 153,768 100,108 131,501

Reconciliation of Consolidated Profi t for the Period to Net Cash Flows from Operating ActivitiesFor the year ended 30 June 2006

16

Statement of Accounting Policies for the Consolidated Financial Statementsfor the Year ended 30 June 2006

General Information

Powerco Limited is a limited company incorporated in New Zealand. The address of its registered offi ce and principal place of business is disclosed in the directory of the annual report. The principal activities of the Company and its subsidiaries are described in note 21.

These fi nancial statements have been prepared to comply with the provisions of section 44 of the Energy Companies Act 1992, the New Zealand Companies Act 1993 and the Financial Reporting Act 1993. Powerco Limited is a profi t-orientated entity. The fi nancial statements have been prepared in accordance with NZ GAAP. They comply with New Zealand equivalents to International Financial Reporting Standards, and other applicable Financial Reporting Standards as appropriate for profi t-oriented entities.

Adoption of new and revised International Financial Reporting Standards

In the current year, the Group has adopted all of the applicable new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on or after 1 January 2005. The adoption of these new and revised Standards and Interpretations has resulted in changes to the Group’s accounting policies in the following areas that have affected the amounts reported for the current or prior years:

• Accounting for Income Tax

• Financial Instruments

• Goodwill

The transition to NZ IFRS is accounted for in accordance with NZ IFRS-1. Additional information is contained in Note 34 of the fi nancial statements and in accounting policy (ad) below.

Significant Accounting Policies

The fi nancial statements have been prepared on the historical cost basis, except for certain borrowings and fi nancial instruments. Financial derivatives are carried at fair value and borrowings which have effective fair value hedges are carried at amortised cost adjusted for the fair value of interest rate risk covered by the effective hedge. The principal accounting policies adopted are set out below.

a) Principles of Consolidation

The consolidated fi nancial statements include those of Powerco Limited and its subsidiaries (listed in Note 21). The Group fi nancial statements incorporate the fi nancial statements of the Company and its subsidiaries, which have been consolidated using the purchase method.

All signifi cant inter-company transactions and balances are eliminated on consolidation. In the parent company fi nancial statements investments in subsidiaries are stated at cost.

Accounting policies of subsidiaries are consistent with the policies of the Group and if that is not possible due to jurisdictional differences the policies are adjusted on consolidation for the Group fi nancial statements.

On acquisition, fair values refl ecting conditions at the date of acquisition are attributed to the identifi able separate assets and liabilities acquired. Where the fair value of the consideration paid exceeds the fair value of the identifi able separate assets and liabilities acquired, the difference is recognised as goodwill.

Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifi able assets, liabilities and contingent liabilities of the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefi t from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated fi rst to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

b) Critical Accounting Estimates and Judgements

In the process of applying the Group’s accounting policies management have made no judgements that have had a signifi cant effect on the amounts recognised in the fi nancial statements.

The key assumptions concerning the future and other key sources of estimation uncertainty at 30 June 2006, that have had a signifi cant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below.

17

Impairment of Goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which the goodwill has been allocated. The value in use calculation requires the group to estimate the future cash fl ows expected to arise from the cash-generating units and a suitable discount rate in order to calculate the present value. Details are provided in note 19.

c) Comparative Amounts

The results for the comparative period are for a fi fteen-month period, as the Company changed it’s balance date to 30 June to match that of the parent company. The comparatives for the Income Statement, Statement of Changes in Equity and the Statement of Cash Flows will not be entirely comparable to the current year results as a result of the longer period.

d) Cash and Cash Equivalents

Cash and cash equivalents comprise cash in hand, cash in banks and investments in money market instruments. Bank overdrafts are shown within borrowings in current liabilities in the Balance Sheet.

Unclaimed monies held on behalf of bondholders have not been included in cash and deposits.

e) Government Grant Liability

Government grants received are initially recognised as deferred income in the Balance Sheet. The deferred income is recognised in the Income Statement on a systematic basis over the useful life of the asset to which the funding relates.

f) Property, Plant and Equipment

All items of property, plant and equipment are initially recognised at cost in the Balance Sheet. Cost includes the value of consideration exchanged, or fair value in the case of donated or subsidised assets, and those costs directly attributable to bringing the item to working condition for its intended use.

Land and buildings are revalued from time to time for insurance purposes only. Valuations are obtained from an independent registered valuer. Any impairment is recognised for accounting purposes and recognised in the Income Statement.

g) Depreciation of Property, Plant and Equipment

Depreciation is calculated on a straight-line basis for Network Systems and on diminishing value for all other assets, to write off the cost of the assets (other than land) over the life of the assets.

Depreciation rates based on remaining useful life, for major classes of asset are:

Land Not depreciated

Buildings 50 years

Plant and Equipment 5 to 10 years

Network Systems 10 to 65 years

h) Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognised in the Income Statement in the period in which they are incurred.

i) Financial Assets

Financial assets are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, are initially measured at fair value, net of transaction costs.

Subsequent to initial recognition, investments in subsidiaries are measured at cost in accordance with NZ IAS-27. Other fi nancial assets are classifi ed into one of four categories; fi nancial assets at fair value through the profi t or loss, held to maturity investments, available for sale fi nancial assets or loan and receivables. At balance date the Group had the following classes of fi nancial assets:

Financial assets at fair value through the profi t or loss

The Group has classifi ed certain shares as fi nancial assets at fair value through profi t or loss. Financial assets held for trading purposes are classifi ed as current assets and are stated at fair value, with any resultant gain or loss recognised in the Income Statement. Fair value is determined with reference to quoted market prices.

Loans and receivables

Trade receivables and other receivables are recorded at amortised cost less impairment.

j) Financial Liabilities

Financial liabilities are recognised when the entity became party to the contractual provisions of the instrument.

18

k) Term Debt

All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. Subsequent to initial recognition, loans and borrowings are carried at amortised cost. Borrowing costs are recognised as an expense when incurred, except to the extent that they are capitalised in accordance with h) above.

All interest bearing loans and borrowings are measured at amortised cost using the effective interest rate method which allocates the cost through the expected life of the borrowing. Amortised cost is calculated taking account of issue costs, and any discounts or premiums on draw down.

After initial recognition for those interest-bearing loans and borrowings where fair value hedge accounting is applied, the loan balance is adjusted for the change in the hedge risk only. The Group policy is to hedge the interest/foreign currency risk associated with term debt with fi nancial instruments on matched terms.

Borrowings are classifi ed as current liabilities (either advances and deposits or current portion of term debt) unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

l) Trade and Other Payables

Trade payables and other accounts payable are recognised when the consolidated entity becomes obliged to make future payments resulting from the purchase of goods and services. Subsequent to initial recognition, trade payables and other accounts payable are recorded at amortised cost. Given the nature of these liabilities amortised cost equals their notional principal.

m) Derivative Financial Instruments

Financial derivatives are initially recognised in the Balance Sheet at fair value on the date a derivative contract is entered into and are subsequently measured at their fair value on each balance sheet date, though the method of recognising the resulting gains and losses is dependent on whether hedge accounting is applied. When derivative contracts are entered into, the Group designates them as either;

• Hedges of the fair value of recognised assets or liabilities (fair value hedge); or

• Hedges of forecast transactions or fi rm commitments (cash fl ow hedge) which hedge exposures to variability in cash fl ows; or

• Hedges of net investments in foreign entities; or

• Other derivative fi nancial instruments not meeting hedge accounting criteria.

The fair values of fi nancial derivatives are determined by reference to the market quoted rates input into valuation models for interest and currency swaps, forwards and options. Changes in fair value of derivatives are recognised:

• For fair value hedges which are highly effective, the movements are recorded in the Income Statement alongside any changes in the fair value of the hedged items;

• For cash fl ow hedges that are determined to be highly effective to the extent the hedges are effective, the movements are recognised in equity with the ineffective portion recognised in the Income Statement; and for those that are ineffective the movements are recognised in the Income Statement;

• For hedges of net investments in foreign entities that are highly effective, the effective portion of the movements is recorded in equity (currency translation reserve) and the ineffective portion is recognised in the Income Statement.

• All other movements in the fair value of derivative fi nancial instruments are recorded in the Income Statement.

Hedge accounting is discontinued prospectively when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifi es for hedge accounting. At that point in time, if the forecast transaction is still expected to occur, any cumulative gain or loss on the hedging instrument is recognised in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the Income Statement for the period.

n) Non-current Assets Held for Resale

Non-current assets (and disposal groups) classifi ed as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Non-current assets and disposal groups are classifi ed as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the assets (or disposal group) is available for immediate sale in its present condition. The sale of the asset (or disposal group) is expected to be completed within one year from the date of classifi cation.

19

o) Employee Entitlements

Provision is made for benefi ts accruing to employees in respect of wages and salaries, annual leave, long service leave and sick leave when it is probable that settlement will be required and they are capable of being measured reliably.

Provisions made in respect of employee benefi ts expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

Provisions made in respect of employee benefi ts which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outfl ows to be made by the consolidated entity in respect of services provided by employees up to reporting date.

p) Defined Superannuation Plans

For Defi ned Contribution Superannuation Plans, the Group recognises and expenses the obligation during the period they arise.

There are a small number of employees that are part of a state Defi ned Benefi t Superannuation plan. The Group has no legal or constructive obligation to pay future benefi ts, the Crown guarantees these benefi ts, as a result the plans are accounted for as a defi ned contribution plan.

q) Impairment

Intangible assets that have indefi nite useful lives are not subject to amortisation and are assessed for impairment at each reporting date. If the estimated recoverable amount of an asset is less than its carrying amount, the asset is written down to its estimated recoverable amount and an impairment loss is recognised in the Income Statement.

A cash generating unit is the lowest group of assets for which there are separately identifi ed cash fl ows.

At each reporting date, the consolidated entity reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash fl ows that are independent from other assets, the consolidated entity estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Goodwill, intangible assets with indefi nite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset for which the estimates of future cash fl ows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the Income Statement immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in the Income Statement immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase.

r) Inventory

Inventories are valued at the lower of cost and net realisable value. The only type of inventory the Group has is consumables.

s) Share Capital

Ordinary shares are classifi ed as equity.

Costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.

t) Dividend Distribution

Dividend distribution to the company’s shareholders is recognised as a liability in the Group’s fi nancial statements in the period in which the dividends are declared.

u) Leases

Operating lease payments, where the lessors effectively retain substantially all the risks and rewards of ownership of the leased items, are included in the determination of profi t before taxation in equal instalments over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefi ts from the leased asset are consumed.

20

v) Revenue Recognition

Revenue is recognised at the fair value of sales of goods and services, net of GST, rebates, discounts and capital contributions.

Revenue is recognised as follows:

(i) Rendering of Services Revenue from services is recognised in the

accounting period in which the services are rendered based upon useage or volume throughput during that period.

(ii) Contracting Revenue Represents revenue earned from contracting

services and is recognised on percentage of completion basis.

(iii) Contributions for Sub-divisions Revenue from contributions is recognised in

accordance with the policy outlined in w) below.

(iv) Tasmanian Grant Revenue Government grants received are initially recognised

as deferred income. Revenue is recognised by calculating a set percentage of the depreciation charge of the capitalised project costs. The depreciation charge is used as a basis of revenue recognition because the purpose of the funding was to compensate for the cost of purchasing the asset.

w) Contributions for Subdivisions/Uneconomic Lines

Contributions received from customers and grants towards the costs of reticulating new subdivisions and contributions received in constructing uneconomic lines are recognised as revenue. Any identifi ed impairment losses in respect of uneconomic lines are recognised in the Income Statement and the asset component is written down to its fair value.

x) Taxation

The amount recognised for current tax is based on the net profi t for the period as adjusted for non-assessable and non-deductible items. It is calculated using tax rates that have been enacted or substantively enacted by the reporting date.

Deferred income tax is provided, using the comprehensive balance sheet liability method, on all temporary differences at the balance sheet date between the tax base of the assets and liabilities and their carrying amounts in the consolidated fi nancial statements.

The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profi t, and the temporary differences relating to investments in

subsidiaries, where the consolidated entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that suffi cient taxable profi t will be available to allow all or part of the deferred income tax to be utilised.

Deferred income tax assets and liabilities are measured at tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at balance sheet date.

The measurement of deferred tax liabilities and assets refl ects the tax consequences that would follow the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/consolidated entity intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax is recognised as an expense or income in the Income Statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax or current tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess.

Income tax relating to items recognised directly in equity is recognised in equity and not in the Income Statement.

y) Foreign Currency Transactions

All foreign currency transactions during the fi nancial year are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at reporting date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined.

Exchange differences are recognised in the Income Statement in the period in which they arise except that:

• Exchange differences which relate to assets under construction for future productive use are included in the cost of those assets where they are regarded as an adjustment to interest costs on foreign currency borrowings;

• Exchange differences on transactions entered into in order to hedge certain foreign currency risks;

21

• Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation, are recognised in the foreign currency translation reserve and recognised in the Income Statement on disposal of the net investment.

z) Translation of Financial Statements of Foreign Operations

Assets and liabilities of foreign operations are translated at the closing rate. Revenue and expense items are translated at a weighted average of exchange rates over the period, as a surrogate for the spot rates at transaction dates. Exchange differences arising from translation are taken to the foreign currency translation reserve and recognised in the Consolidated Statement of Changes in Equity. The foreign operations are trading operations by wholly owned subsidiaries.

aa) Segment Reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other segments.

A geographical segment is engaged in providing products or services in a particular economic environment where the risks and returns are different from those of segments operating in other economic environments.

The Group’s primary reporting format is business segments and its secondary format is geographical.

Inter-segment sales are priced by charging a pre-determined mark-up on costs.

Where expenses have been unable to be split between the electricity and gas segments, an allocation has been used based on the percentage of revenue generated by each segment. Employee entitlements for New Zealand operations have been split based on employee numbers.

ab) Statement of Cash Flows

The Statement of Cash Flows is prepared exclusive of GST, which is consistent with the method used in the Income Statement. For the purposes of the Statement of Cash Flows, cash and cash equivalents includes cash on hand, cash in banks and investments in money market instruments, net of outstanding bank overdrafts.

Operating activities include all transactions and otherevents that are not investing or fi nancing activities.

Investing activities are those activities relating to the acquisition and disposal of current and non-current investments and any other non-current assets.

Financing activities are those activities relating to changes in the equity and debt capital structure of the company and group and those activities relating to the cost of servicing the company’s and the group’s equity capital.

ac) Intangible Assets

Intangible assets is comprised of computer software and are stated at cost less accumulated amortisation and impairment losses. Intangible assets are amortised on a diminishing value basis over their useful life of 4 years. The remaining amortisation period of any individual asset is not material to the fi nancial statements of the Group.

ad) Comparative Information – Financial Instruments

The Group has elected not to restate comparative information for fi nancial instruments within the scope of NZ IAS -32 ‘Financial Instruments: Disclosure and Presentation’ and NZ IAS -39 ‘Financial Instruments: Recognition and Measurement’, as permitted on the fi rst time adoption of NZ IFRS.

The accounting policies applied to accounting for fi nancial instruments in the current fi nancial year are detailed in notes 1 a) to ac). The following accounting policies were applied to accounting for fi nancial instruments in the comparative fi nancial year.

Receivables

Accounts receivable are valued at expected realisable value, after providing for doubtful debts. All known bad debts have been written off during the period under review.

Investments

Investments are valued at the lower of cost and net realisable value. Investments in listed shares are valued at fair value.

Financial Instruments

The Company has various fi nancial instruments with off-Balance Sheet risk for the primary purpose of reducing its exposure to fl uctuations in interest rates. Financial instruments as at 30 June 2005 consisted of interest rate swaps and cross currency swaps. While these fi nancial instruments are subject to risk that market rates may change subsequent to acquisition, such changes would generally be offset by opposite effects on the items being hedged.

For interest rate swap agreements entered into in connection with the management of interest rate exposure, the differential to be paid or received is accrued as interest rates change and is recognised as a component of interest income/expense over the life of the agreement.

22

Group 30 June 2005

NZ$000

Effect on Adoption

NZ$000 1 July 2005

NZ$000

Equity

Issued capital 570,300 - 570,300

Reserves (8,330) (8,907) (17,237)

Parent equity interest 561,970 (8,907) 553,063

Minority interest 38 - 38

Total Equity 562,008 (8,907) 553,101


Borrowings 810,506 (46,521) 763,985

Other fi nancial liabilities - 59,815 59,815

Deferred tax liability 110,312 (4,387) 105,925

Provisions 1,476 - 1,476

Other non current liabilities 50,631 - 50,631

972,925 8,907 981,832

Current Liabilities

Borrowings 353,890 - 353,890


Trade and other payables 99,207 - 99,207

Other current liabilities 3,599 - 3,599

460,372 - 460,372

Total Equity and Liabilities 1,995,305 - 1,995,305

Non Current Assets

Property, plant and equipment 1,833,801 - 1,833,801

Goodwill 906 - 906

Other intangibles 7,488 - 7,488

Deferred tax asset - - -

Investment in subsidiary - - -

Investments 46,044 - 46,044

1,888,239 - 1,888,239

Current Assets

Income tax receivable - - -

Inventories 7,289 - 7,289

Trade and other receivables 93,432 - 93,432

Other current assets 3,526 - 3,526

Cash and cash equivalents 2,819 - 2,819

107,066 - 107,066

Total Assets 1,995,305 - 1,995,305

23

Parent30 June 2005

NZ$000

Effect on Adoption NZ$000

1 July 2005 NZ$000

Equity

Issued capital 570,300 - 570,300

Reserves (33,048) (8,907) (41,955)

Parent equity interest 537,252 (8,907) 528,345

Minority interest - - -

Total Equity 537,252 (8,907) 528,345


Borrowings 790,819 (46,521) 744,298

Other fi nancial liabilities - 59,815 59,815

Deferred tax liability 111,229 (4,387) 106,842

Provisions - - -

Other non current liabilities - - -

902,048 8,907 910,955

Current Liabilities

Borrowings 353,890 - 353,890


Trade and other payables 75,870 - 75,870

Other current liabilities 3,527 - 3,527

438,255 - 438,255

Total Equity and Liabilities 1,877,555 - 1,877,555

Non Current Assets

Property, plant and equipment 1,729,870 - 1,729,870

Other intangibles 7,488 - 7,488

Goodwill 906 - 906

Deferred tax asset - - -

Investment in subsidiary 227 - 227

Investments 46,044 - 46,044

1,784,535 - 1,784,535

Current Assets

Intercompany accounts and intercompany loan 59,779 - 59,779

Inventories 59 - 59

Trade and other receivables 29,244 - 29,244

Income tax receivable - - -

Other current assets 3,527 - 3,527

Cash and cash equivalents 411 - 411

93,020 - 93,020

Total Assets 1,877,555 - 1,877,555

24

The $8.907 million adjustment shown above represents the recognition of interest rate swaps and cross currency swaps at 30 June 2005 ($59.815m), deferred tax on interest rate swaps ($4.387m) and the adjustment to the carrying value of loans covered by fair value hedges (adjustment for the fair value of interest rate risk on loans hedges by fair value hedges $46.521m). This adjustment has been made to the hedging reserve as the hedges were effective hedges under the superseded accounting policies.

The $59.8m adjustment above represents the fair value of hedges at 30 June 2005. This adjustment was done to record the derivatives as a separate class of liability. The $46.521m adjustment represents the fair value adjustment to hedged loans. The $4.387m relates to deferred tax on the hedges.

The following transitional provisions have an effect on future profi ts:

• The effectiveness of hedging relationships are assessed from

1 July 2005, no adjustment is made in relation to hedges under

the superseded policies which were not highly effective before

1 July 2005.

The main adjustments necessary that would make the comparative

fi nancial statements comply with NZ IAS -32 and NZ IAS -39

are listed below. Similar adjustments were made at 1 July 2005

to restate the opening fi nancial position of the company and

consolidated entity to a position consistent with the accounting

policies specifi ed in note 1a) to ac):

• The recognition and measurement of all derivatives (including

any embedded derivatives) at fair value;

• The recognition in the Income Statement of the movement

in the fair value of derivatives which did not qualify for hedge

accounting or were not designated as hedging instruments;

• The transfer of deferred hedging gains and losses recognised

as assets and liabilities arising from a cash fl ow hedge of a

forecast transaction to the hedging reserve;

• The deferral in equity of the effective portion of the movement

in fair value of derivatives accounted for as a cash fl ow hedge;

• The recognition in the Income Statement of the movement in

fair value of derivatives accounted for as a fair value hedge

and the fair valuing of hedge items;

• The adjustment to the carrying amount of items that would

qualify as a fair value hedge under NZ IFRS and were

designated as a hedge under previous GAAP for the lower of

the cumulative change in fair value of the hedge item for the

designated risk and the cumulative change in fair value of the

hedging instrument;

• The recognition of any current or deferred taxes in relation to

the adjustments described above.

It is not practicable for the Company and Group to detail the

amounts of the adjustments to the Income Statement and to opening

retained earnings for the comparative period had the new accounting

policies been applied from the beginning of the comparative period.

In addition, it is not practicable for the Company and Group to detail

for the current period, the amounts of the adjustments resulting to

each fi nancial statement line item as a consequence of applying

the accounting policies specifi ed elsewhere in the Statement of

Accounting Policies.

ae)Standards, Amendments and Interpretations Issued But Not Yet Effective

The Group has not applied the following Standards, Amendments and Interpretations that have been issued but are not yet effective.

• Amendments to NZ IFRS 4 and IFRS 4 Appendices

C and D

• NZ IFRS 7 and IFRS 7 Financial Instruments: Disclosures

and complementary amendments to NZ IAS 1 and IAS 1

Presentation of Financial Statements – Capital Disclosures

(effective for annual periods beginning on or after 1 January

2007)

• Amendments to NZ IFRS 7 and IFRS 7 Financial Instruments:

Disclosures – Disclosure and Measurement of Day One Profi t


2007)

• Amendment to NZ IAS 1 and IAS 1 Presentation of Financial

Statements: Added disclosures about an entity’s capital


2007)

• Amendment to the scope of NZ IAS 14 Segment Reporting

• Amendments to NZ IAS 19 and IAS 19 Employee Benefi ts

– Actuarial Gains and Losses, Group Plans and Disclosures;

Actuarial Assumptions – Allowance for Taxes in Defi ned

Benefi t Plans

• Amendments to NZ IAS 36 Impairment of Assets – Impairment

of Non Cash Generating Assets by Public Benefi t Entities.

• Amendments to NZ IAS 39 and IAS 39 Financial Instruments:

Recognition and Measurement – Cash Flow Hedge

Accounting of Forecast Intragroup Transactions; The Fair Value

Option

• Amendment to NZ IAS 39 and IAS 39 Financial Instrument:

Recognition and Measurement and NZ IFRS 4 and IFRS 4

Insurance Contracts: Financial Guarantee Contracts

• NZ IFRIC 4 and IFRIC 4 Determining Whether an Arrangement

Contains a Lease

• NZ IFRIC 5 and IFRIC 5 Rights to Interests Arising From

Decommissioning, Restoration Environmental Rehabilitation

Funds

• IFRIC 8 Scope of IFRS 2 (effective for annual reporting

periods on or after 1 May 2006)

• IFRIC 9 Reassessment of Embedded Derivatives (effective for

annual reporting periods on or after 1 June 2006)

All of these Standards, Amendments and Interpretations are

effective for annual periods beginning on or after 1 January

2006, except where noted above.

Application of the Standards, Amendments and Interpretations

is not expected to have a material impact on the fi nancial

statement account balances of the Group, but will require

additional fi nancial statement disclosures. In many cases, those

relating to measurement that apply to the Group provide further

options or restrict options which are not presently in use.

25

1 INCOME

Notes

Group30 June 06

NZ$00012 months

Group30 June 05

NZ$00015 months

Parent30 June 06

NZ$00012 months

Parent30 June 05

NZ$00015 months

REVENUE


Revenue from the rendering of services

Transmission services revenue 323,602 412,316 318,007 382,574

Dividends received 9 - 9 -

Other revenue

Tasmanian government contribution 72 7,291 - -

Total revenue from continuing operations 323,683 419,607 318,016 382,574

Discontinued Operations

Revenue from the rendering of services 6 15,553 22,070 - -

Total revenue from continuing and discontinued operations

339,236 441,677 318,016 382,574

INVESTMENT REVENUE


Interest on bank deposits 283 677 139 354

283 677 139 354

GAINS


Net gain arising from sale of equity shares 8,084 - 8,084 -

Hedging gain/(loss) 7,546 - 7,546 -

15,630 - 15,630 -

Total other income from continuing operations 15,913 677 15,769 354

Discontinued Operations

Gain on disposal of subsidiary 6 5,380 - - -

Total Income From Continuing And Discontinued Operations 360,529 442,354 333,785 382,928

Notes to and forming part of the Consolidated Financial StatementsFor the year ended 30 June 2006

26

2 PROFIT FOR THE PERIOD

Group30 June 06

NZ$00012 months

Group30 June 05

NZ$00015 months

Parent30 June 06

NZ$00012 months

Parent30 June 05

NZ$00015 months

Profi t before taxation has been arrived at after charging / crediting

Depreciation on:

buildings 433 470 433 468

plant and equipment 6,026 8,269 254 136

network systems 59,480 70,161 57,586 69,383

Amortisation of intangible assets 2,099 481 2,099 481

Employee benefi ts 28,440 25,323 3,674 5,485

Impairment of non current assets (note 19) 906 3,493 906 1,342

3 FINANCE COSTS

Group30 June 06

NZ$00012 months

Group30 June 05

NZ$00015 months

Parent30 June 06

NZ$00012 months

Parent30 June 05

NZ$00015 months

Interest on bank overdrafts 3,469 2,458 834 2,228

Interest on senior debt 78,208 97,145 78,208 97,145

Interest on subordinated debt 7,687 10,302 7,687 10,302

Total Financial Costs 89,364 109,905 86,729 109,675

4 TAXATION

Group30 June 06

NZ$00012 months

Group30 June 05

NZ$00015 months

Parent30 June 06

NZ$00012 months

Parent30 June 05

NZ$00015 months

Income tax recognised in the Income Statement

Tax expense/(income) comprises:

Current tax expense/(income) (3,001) 690 (6,715) 264

Deferred tax expense/(income) on temporary differences 13,124 12,222 18,223 12,582

Total tax expense/(income) 10,123 12,912 11,508 12,846

Attributable to:

Continuing operations 10,123 12,912 11,508 12,846

Discontinued operations - - - -

10,123 12,912 11,508 12,846

Income tax is calculated at an average effective group tax rate of 33 per cent of the estimated assessable profi t for the year. Tax in relation to the New Zealand Group is calculated at 33 per cent.

27

The total charge for the period can be reconciled to the accounting profi t as follows:

30 June 06Group

NZ$00012 months

30 June 05Group

NZ$00015 months

30 June 06Parent

NZ$00012 months

30 June 05Parent

NZ$00015 months

Profi t before tax:

Continuing operations 50,559 62,308 53,735 48,802

Discontinued operations 1,464 (3,155) - -

52,023 59,153 53,735 48,802

Tax at the New Zealand income tax rate at 33 per cent 17,168 19,520 17,733 16,105

Tax effect of expenses/(revenue) that are not deductible in determining taxable profi t

(6,660) (6,745) (6,225) (3,259)

Effect of different tax rates of subsidiaries operating in other jurisdictions (385) 137 - -

10,123 12,912 11,508 12,846

All temporary differences have been recorded in the fi nancial statements. There are no deferred tax benefi ts arising from losses.

Income tax recognised directly in equity

Group30 June 06

NZ$00012 months

Group30 June 05

NZ$00015 months

Parent30 June 06

NZ$00012 months

Parent30 June 05

NZ$00015 months

Deferred tax

Revaluation of fi nancial instruments treated as cash fl ow hedges 1,093 - 1,093 -

1,093 - 1,093 -

Deferred income tax

Group

Accelerated tax

depreciation NZ$000

HedgesNZ$000

OtherNZ$000

TotalNZ$000

Deferred tax liability

At 1 April 2004 97,613 - 477 98,090

Charged/(credited) to the Income Statement 14,165 - (1,943) 12,222

Charged to equity - - - -

At 30 June 2005 111,778 - (1,466) 110,312

Change in accounting policy - (4,387) - (4,387)

As restated 111,778 (4,387) (1,466) 105,925

Charged/(credited) to the Income Statement 14,158 2,490 2,274 18,922

Charged to equity - 1,093 - 1,093

At 30 June 2006 125,936 (804) 808 125,940

28

GroupProvisions

NZ$000

Doubtful debts

NZ$000HedgesNZ$000

TotalNZ$000

Deferred tax asset

At 1 April 2004 - - - -

Charged/(credited) to the Income Statement - - - -


At 30 June 2005 - - - -

Charged/(credited) to the Income Statement 134 7,311 (1,647) 5,798


At 30 June 2006 134 7,311 (1,647) 5,798

Deferred income tax

Parent

Accelerated tax

depreciation NZ$000

HedgesNZ$000

OtherNZ$000

TotalNZ$000

Deferred tax liability

At 1 April 2004 97,817 - 830 98,647

Charged/(credited) to the Income Statement 14,707 - (2,125) 12,582


At 30 June 2005 112,524 - (1,295) 111,229

Change in accounting policy - (4,387) - (4,387)

As restated 112,524 (4,387) (1,295) 106,842

Charged/(credited) to the Income Statement 13,412 2,490 2,321 18,223

Charged to equity - 1,093 - 1,093

At 30 June 2006 125,936 (804) 1,026 126,158

ParentProvisions

NZ$000

Doubtful debts

NZ$000HedgesNZ$000

TotalNZ$000

Deferred tax asset

At 1 April 2004 - - - -



At 30 June 2005 - - - -



At 30 June 2006 - - - -

29

5 IMPUTATION CREDITS ACCOUNT

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Opening balance - 159 - 159

Imputation credits attached to dividends received during the period 3 - 3 -

Income tax payments made during the period 51 182 51 182

Imputation credits forfeited on loss of shareholder continuity - (341) - (341)

Closing balance 54 - 54 -

6 DISCONTINUED ACTIVITIES

Powerco Energy Services Limited (PES) and Powerco Energy Services Eastern Limited (PESE) were sold on 31 October 2005 to Tenix Alliance New Zealand Limited. These businesses were both wholly owned subsidiaries of Powerco Limited and represented a separate segment. Their principle activity was electrical and gas contracting.

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Revenue 15,553 22,070 - -

Cost of sales 18,123 23,341 - -

Operating expenses 537 - - -

Administration expenses 205 - - -

18,865 23,341 - -

Loss before taxation and depreciation (3,312) (1,271) - -

Depreciation 604 1,884 - -

Loss before tax (3,916) (3,155) - -

Tax expense - - - -

Loss after tax (3,916) (3,155) - -

Gain on disposal of discontinued operations 5,380 - - -

Tax attributable to gain on disposal - - - -

Profi t for the period from discontinued operations 1,464 (3,155) - -

During the year, PES and PESE contributed negative $5.2 million (2005: negative $1.5 million) to the Group’s net operating cash fl ows, received $17.8 million (2005: paid out $592,000) in respect of investing actvities, and made nil (2005: nil) contribution to fi nancing activities.

A gain of $5.4 million arose on the disposal of PES and PESE, being the proceeds of disposal less the carrying amount of the subsidiaries’ net assets and attributable goodwill, which is included in the line item, post tax profi t for the year from discontinued operations in the Income Statement.

7 SHARE CAPITAL

Total number of ordinary shares authorised, issued and fully paid at 30 June 2006 was 316,186,775 (2005: 316,186,775).

Each ordinary share in the Company confers on the holder:

(a) the right to one vote on a poll at a meeting of the Company on any resolution;(b) the right to an equal share in the distributions approved by the Board of Directors;(c) the right to an equal share in distribution of the surplus assets of the Company.

The shares are at no par value.

30

8 RESERVES

Foreign exchange reserve

Exchange differences relating to the translation from Australian dollars, being the functional currency of the consolidated entity’s Australian subsidiaries, into New Zealand dollars are brought to account by entries made directly to the foreign currency translation reserve.

Hedge reserve

The hedge reserve represents hedging gains and losses recognised on the effective portion of cash fl ow hedges. The cumulative deferred gain or loss on the hedge is recognised in the Income Statement when the hedged transaction impacts the Income Statement, or is included as a basis adjustment to the non-fi nancial hedged item,consistent with the applicable accounting policy.

9 MINORITY INTEREST

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Opening balance 38 24 - -

Share of profi t for the period 1 14 - -

Disposal of minority interest (39) - - -

Closing balance - 38 - -

10 DIVIDENDS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Dividends paid on ordinary shares 68,900 81,418 68,900 81,418

Cents per share 21.8 25.7 21.8 25.7

11 OTHER NON CURRENT LIABILITIES

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Deferred government grant 34,022 50,631 - -

A proportion of the deferred government grant is recognised as revenue in the Income Statement each month. This amount is determined by calculating a set percentage of the depreciation charge of the capitalised project costs. The income is being recognised over 40 years. The fair value of the grant equates to the carrying value.

Further details regarding this government grant is given in Note 31.

31

12 BORROWINGS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Non-current liabilities at amortised cost

Subordinated bonds 96,733 96,426 96,733 96,426

Guaranteed bonds 410,415 242,518 410,415 242,518

US dollar private placement notes 262,443 291,875 262,443 291,875

Commercial bank debt 250,585 179,687 160,000 160,000

1,020,176 810,506 929,591 790,819

Current liabilities at amortised cost

Bank overdraft (note 16 and 27) 28,500 26,200 28,500 26,200

Commercial paper facility 147,240 147,690 147,240 147,690

Commercial bank debt - 180,000 - 180,000

175,740 353,890 175,740 353,890

a) Subordinated bonds

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000


Adjustment for the fair value of the interest rate risk (413) - (413) -

99,587 100,000 99,587 100,000

Deferred funding costs (2,854) (3,574) (2,854) (3,574)

Carrying value of subordinated bonds 96,733 96,426 96,733 96,426

The Subordinated Bonds were issued on 15 April 2005 and are unsecured, subordinated debt obligations of Powerco Limited. They have a tenure of 5 years and have an interest rate of 7.64% p.a. fi xed until expiry on 15 April 2010.

b) Guaranteed bonds

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

7 year guaranteed bonds 100,000 100,000 100,000 100,000

Adjustment for the fair value of the interest rate risk (3,227) - (3,227) -





7 year guaranteed bonds 130,000 - 130,000 -

12 year guaranteed bonds 50,000 - 50,000 -

421,368 250,000 421,368 250,000


Carrying value of guaranteed bonds 410,415 242,518 410,415 242,518

32

$250 million of Guaranteed Bonds were issued on 29 March 2004 as unsecured debt obligations of Powerco Limited. The scheduled payments by Powerco Limited of interest and principal are guaranteed on an unsecured basis by US-based XL Capital Assurance Inc, a specialist fi nancial guaranty organisation. The bonds expire on 29 March 2011 (7 year bonds), 29 March 2013 (9 year bonds) and 29 June 2015 (11 year bonds). The interest rates on the bonds are fi xed until maturity.

7 year guaranteed bonds 6.22% 9 year guaranteed bonds 6.39% 11 year guaranteed bonds 6.53%

On 28 September 2005 a $180 million issue of guaranteed bonds took place, as secured unsubordinated obligations of Powerco Limited. The scheduled payments of interest and principal payable by Powerco Limited were again guaranteed on an unsecured basis by XL Capital Assurance. The bonds expire on 28 September 2012 (7 year bonds) and 28 September 2017 (12 year bonds). The interest rates on the bonds are fi xed until maturity.

7 year guaranteed bonds 6.59% 12 year guaranteed bonds 6.74%

Under the trust documents constituting the Guaranteed Bonds, Powerco Limited has covenanted to ensure that, if XLCA defaults on its obligations under the fi nancial guarantee, Powerco Limited will procure suffi cient of its subsidiaries to guarantee its obligations under the Guaranteed Bonds by signing a Subsidiary Guarantee so that at all times the total tangible assets of the Company and all guaranteeing subsidiaries exceeds 85% of the total tangible assets of the Group. As at 30 June 2006, no Subsidiary Guarantee had been executed.

The guarantee bonds are secured against the network assets of Powerco Limited through the Security Trust Deed.

c) US dollar private placement

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

11 year USD private placement notes 94,165 94,165 94,165 94,165



Adjustment for fair value of the interest rate risk (29,662) - (29,662) -


Carrying value of the US dollar private placement 262,443 291,875 262,443 291,875

The USD Private Placement note issue took place on 25 November 2003 to private US investors. The USD Private Placement notes are debt obligations of Powerco Limited. The coupon payments are semi-annual and the note issue expires 25 November 2014 (11 year), 25 November 2015 (12 year), and 25 November 2016 (13 year). The notes are secured against the network assets of Powerco Ltd through the Security Trust Deed.

The interest rates on the notes are fi xed until maturity.

11 year USD private placement notes 5.47% 12 year USD private placement notes 5.57% 13 year USD private placement notes 5.67%

d) Commercial paper facility

Powerco Limited has established a commercial paper facility to enable Powerco Limited to borrow money from the capital market. The programme is supported by a cash advance facility of $200 million with a syndicate of banks made up of the Commonwealth Bank of Australia, Westpac Banking Corporation and ANZ National Bank, which continues until 2 August 2007. The facility has the benefi t of the Security Trust Deed dated 10 March 2005 as a Senior Secured Debt Facility, and as such the principal is secured against the network assets of Powerco Limited. At 30 June 2006 a sum of $150,000,000 which includes an interest portion of $2,759,645 of 90 day bills at a weighted average interest of 7.52%, with varying maturity dates, had been drawn down under the commercial paper programme (2005: $150,000,000 was drawn down under the commercial paper programme which included an interest portion of $2,310,162 at weighted average interest rate of 7.08%). As at year end the carrying value approximates the fair value.

e) Commercial bank debt

As at 30 June 2006 the balance of Commercial Bank Debt of Powerco Limited was $160 million which relates to a Term Loan Facility agreed and drawn in August 2004, expiring August 2009, which was used to refi nance the remaining tranche of the Asset Purchase Facility used to fund the acquisition by Powerco Limited of United Networks Limited (UNL) assets. The Term Loan

33

Facility is jointly provided through Commonwealth Bank of Australia, Westpac Banking Corporation and ANZ National Bank, each with an equal share. The interest rate on the $160 million Term Loan Facility is currently 8.12%. The Term Loan Facility has the benefi t of the Security Trust Deed, for the purposes of which it is designated as a Senior Secured Debt Facility and thus secured against the Network assets of Powerco Limited. As at 30 June 2005 a sum of $160 million had been drawn. In the previous year the Group had $180 million commercial bank debt which had an interest rate of 7.24%.

Powerco Tasmania, a wholly-owned subsidiary of Powerco Limited, operates a cash advance facility for up to AUD$100 million with Westpac Banking Corporation (2005: AUD$30 million). The facility expires in August 2007 and is secured against the network assets of Powerco Limited. As at 30 June 2006, Powerco Tasmania had drawings of NZD$90.6 million (AUD$74.5 million) on this facility. This facility had interest rates ranging from 6.04% to 6.27%. As at 30 June 2005 the facility was drawn to NZD$19.7 million (AUD $18 million).

As at the reporting date the carrying value approximates the fair value as interest rates are reset each quarter.Group

30 June 06NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Comprises:

Current liabilities - 180,000 - 180,000

Term liabilities 250,585 179,687 160,000 160,000

Total commercial bank debt 250,585 359,687 160,000 340,000

f) Covenants

Powerco Limited has covenants with all counterparties to ensure certain fi nancial criteria are met throughout the term of the debt agreements. There have been no covenant breaches to date.

g) Financial liabilities

The following tables detail the fair value of fi nancial liabilities30 June 06 NZ$000 30 June 05 NZ$000

Carrying Amount NZ$000

Fair Value NZ$000

Carrying Amount NZ$000

Fair Value NZ$000

Group




Commercial paper facilities 147,240 147,240 147,690 147,690

Commerical bank debt 250,585 250,585 359,687 359,687

US cross currency interest rate swap 29,662 29,662 - 40,231

Interest rate swap 11,481 11,481 - 19,584

Investments - - 46,044 52,556

1,208,559 1,208,559 1,184,240 1,243,092

Parent




Commercial paper facilities 147,240 147,240 147,690 147,690

Commerical bank debt 160,000 160,000 340,000 340,000

US cross currency interest rate swap 29,662 29,662 - 40,231

Interest rate swap 11,481 11,481 - 19,584

Investments - - 46,044 52,556

1,117,974 1,117,974 1,164,553 1,223,405

34

The fair value of fi nancial assets and fi nancial liabilities are determined as follows:– For fl oating rate debt carrying value approximates fair value due to continuing interest rate reset.– For fi xed rate debt opposing fl oating rate derivative instruments matching tenor and term are used in offset position

to calculate fair values. The movements in these derivatives approximate movements in market values.– For derivative instruments fair value is based on quoted prices.

13 PROVISIONS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Non current liabilities 425 1,476 - -

Current liabilities 2,257 3,676 2,370 4,968

2,682 5,152 2,370 4,968

The provision for employee entitlements relates to employee benefi ts such as accrued wages, bonuses, accrued holiday pay, and long service leave. The provision is affected by a number of estimates including the expected employment period of employees and the timing of employees utilising the benefi ts. The majority of the provision is expected to be realised within the next two years.

14 TRADE AND OTHER PAYABLES

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Trade payables and accruals 37,245 96,766 22,852 74,726

Goods and Service Tax (GST) payable - 2,441 4,343 1,144

37,245 99,207 27,195 75,870

Trade payables and accruals principally comprise of amounts outstanding for trade purchases and ongoing costs.

The directors consider that the carrying amount of trade payables approximates their fair value.

15 OTHER CURRENT LIABILITIES

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Deferred government grant 1,886 73 - -

Unclaimed monies (note 20) 2,938 3,526 2,938 3,527

4,824 3,599 2,938 3,527

A proportion of revenue in advance is recognised as revenue in the Income Statement each month. This amount is determined by calculating a set percentage of the depreciation charge of the capitalised project costs. The income is being recognised over 40 years. The fair value of the grant equates to the carrying value. Further details of this government grant is given in note 31.

16 WORKING CAPITAL ADVANCES FACILITY

Powerco Limited operates a wholesale capital advance facility with the Commonwealth Bank of Australia for up to $30 million. The facility, dated 22 March 2005, replaced a similar facility held with Bank of New Zealand for up to $15 million. As at 30 June 2006, funds to the amount of $28.5 million were drawn down on the facility, offset by unrealised deposits of $475,643 (2005: funds drawn of $26.2 million, offset by unrealised deposits of $410,894). The facility is based on a revolving credit arrangement and as such does not have set repayment dates. The facility expires on 22 March 2008 but is subject to automatic renewal for a further period. The facility has the benefi t of the Security Trust Deed, as a Senior Secured Debt Facility. This facility had interest rates ranging from 6.90% to 7.40%.

As at 30 June 2006, Powerco Tasmania, a wholly-owned subsidiary of Powerco Limited, had cash and deposits of NZD$3,969,623 (AUD$3,264,761). In the comparative period, there were deposits on call of NZD$2.171 million (AUD$1.985 million) and cash and deposits of NZD$120,763 (AUD$110,417). The interest rates ranged from 2.00% to 4.85%.

In the comparative period, Energy Brokers New Zealand Limited had cash and deposits of $115,734.

35

There is no right of set-off between any of the facilities.

17 PROPERTY, PLANT & EQUIPMENT

Land and Buildings

NZ$000

Plant and Equipment

NZ$000

Network Systems NZ$000

WIP NZ$000

TOTAL NZ$000

Group

Gross carrying value

Balance at 1 April 2004 10,695 28,154 1,847,650 30,507 1,917,006

Transfers - - - - -

Additions 2,892 6,872 85,434 50,518 145,716

Disposals (2,618) (2,983) (221) - (5,822)

Net foreign currency exchange differences (3) (287) - - (290)

Balance at 30 June 2005 10,966 31,756 1,932,863 81,025 2,056,610

Transfers - 11,424 247 (11,671) -

Additions 165 2,511 108,301 32,683 143,660

Disposals (85) (15,818) (9,162) - (25,065)

Net foreign currency exchange differences 17 166 5,530 4,492 10,205

Balance at 30 June 2006 11,063 30,039 2,037,779 106,529 2,185,410

Accumulated depreciation

Balance at 1 April 2004 1,155 13,248 132,568 - 146,971

Transfers - - - - -

Disposals (305) (2,598) (64) - (2,967)

Depreciation expense 470 8,269 70,161 - 78,900

Net foreign currency exchange differences - (95) - - (95)

Balance at 30 June 2005 1,320 18,824 202,665 - 222,809

Transfers - (180) 180 - -

Disposals (18) (9,987) (614) - (10,619)

Depreciation expense 433 6,026 59,480 - 65,939

Net foreign currency exchange differences - 33 418 - 451

Balance at 30 June 2006 1,735 14,716 262,129 - 278,580

Net Book Value at 30 June 2006 9,328 15,323 1,775,650 106,529 1,906,830

Net Book Value at 30 June 2005 9,646 12,932 1,730,198 81,025 1,833,801

Aggregate depreication allocated during the year is recognised as an expense and disclosed in note 2 to the fi nancial statements.

There are no restrictions in titles relating to property, plant and equipment or items pledged as security for liabilities.

The Government Valuation of land and buildings is $6.97 million. There have been no land or buildings added since the last Government Valuation in September 2003.

Borrowing costs of $3.2 million have been capitalised as part of property, plant and equipment during the period. The effective rate of interest applied is 6.10%.

36

Land and Buildings

NZ$000

Plant and Equipment

NZ$000

Network Systems NZ$000

WIP NZ$000

TOTAL NZ$000

Parent

Gross carrying value

Balance at 1 April 2004 10,625 1,391 1,845,138 14,470 1,871,624

Transfers - - - - -

Additions 2,537 90 38,177 24,717 65,521

Disposals (2,339) (33) (175) - (2,547)

Balance at 30 June 2005 10,823 1,448 1,883,140 39,187 1,934,598

Transfers - (283) 283 - -

Additions 158 103 56,275 1,413 57,949

Disposals (83) (491) (9,162) - (9,736)

Balance at 30 June 2006 10,898 777 1,930,536 40,600 1,982,811


Balance at 1 April 2004 1,155 1,044 133,022 - 135,221

Disposals (303) (14) (163) - (480)

Depreciation expense 468 136 69,383 - 69,987

Balance at 30 June 2005 1,320 1,166 202,242 - 204,728

Transfers - (180) 180 - -

Disposals (18) (641) (1,329) - (1,988)

Depreciation expense 433 254 57,586 - 58,273

Balance at 30 June 2006 1,735 599 258,679 - 261,013

Net Book Value at 30 June 2006 9,163 178 1,671,857 40,600 1,721,798

Net Book Value at 30 June 2005 9,503 282 1,680,898 39,187 1,729,870

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Capitalised borrowing costs

Borrowing costs capitalised during the fi nancial period 3,191 268 - -

Weighted average capitalisation rate on funds borrowed generally 6.10% 6.10% - -

37

18 OTHER INTANGIBLE ASSETS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Group

Gross carrying amount

Opening balance 9,397 9,397 9,397 9,397

Additions 6,041 - 6,041 -

Closing balance 15,438 9,397 15,438 9,397


Opening balance 1,909 1,428 1,909 1,428

Amortisation for the period 2,099 481 2,099 481

Closing balance 4,008 1,909 4,008 1,909

Net Book Value 11,430 7,488 11,430 7,488

Intangible assets comprises of intellectual capital in the Peoplesoft database systems and intellectual capital in the Geographic database system.

19 GOODWILL

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Gross carrying amount

Opening balance 4,399 4,399 2,248 2,248

Additions - - - -

Closing balance 4,399 4,399 2,248 2,248

Accumulated impairment losses

Opening balance 3,493 - 1,342 -

Impairment loss for the period 906 3,493 906 1,342

Closing balance 4,399 3,493 2,248 1,342

Net Book Value - 906 - 906

During the fi nancial year, the Group assessed the recoverable amount of goodwill and determined that the goodwill associated with past acquisitions was impaired by $906,000 (2005: $3,493,000 group and $1,342,000 for the parent). Impairment losses are included in the line item ‘impairment of non-current assets’ in note 2. The recoverable amount of the cash generating unit was assessed by reference to the cash generating unit’s value in use. A discount factor of 7.5% (2005: 7.5%) was applied to the value in use model. The main factor contributing to the impairment of the cash generating unit was that the intellectual capital acquired during business acquisitions has already been absorbed into the value of the business. No writedown of the carrying amount of other assets in the cash generating unit was required.

All goodwill recorded has been acquired in a business combination and is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefi t from that business combination. The carrying amount of goodwill has been allocated as follows:

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Electricity - 666 - 666

Gas - 240 - 240

- 906 - 906

38

The carrying value of Goodwill of $906,000 as refl ected in the comparative Powerco Limited Balance Sheet was based on and allocated to the core distribution business activities of electricity and gas.

Key assumptions in determining the economic value of each of these CGUs at Powerco Limited were as follows;

1. Revenue drivers are based on regulated price path thresholds established by the electricity and gas regulatory regimes and are for rolling periods of up to 5 years. These regulatory price path thresholds create certainty in the revenue generating ability of each CGU. Therefore, it could be said that each CGU’s forecast revenue is based on reliable and sustainable prices, which results in certainty in cash fl ow generating abilities.

2. Expenditure forecasts are based on current expenditure levels adjusted for infl ationary increases and as the revenue price paths are also based on such concepts any cost increases would be matched by revenue increases, which would mitigate any cash fl ow limitations.

20 OTHER CURRENT ASSETS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Unclaimed monies 2,938 3,526 2,938 3,527

2,938 3,526 2,938 3,527

Unclaimed monies are funds held on behalf of shareholders and bondholders who cannot currently be located. The liability for these funds has been shown at note 15.

21 INVESTMENT IN SUBSIDIARY

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Investment in Energy Brokers New Zealand Limited - - - 227

Powerco Limited’s principle activity is electricity and gas line distribution and Powerco Limited has invested in the following signifi cant subsidiaries:

Ownership interest and voting rights

Subsidiary companies Principle activityBalance

Date30 June

0630 June

05

Powerco Holdings Limited (NZ) Non-trading and consolidating 30 June 100 100

Powerco Network Management Limited Provision of management services 30 June 100 100

Powerco Australia Group Pty Limited Non-trading and consolidating 30 June 100 100

Powerco Tasmania Pty Ltd Gas reticulation and distribution 30 June 100 100

Powerco Energy Services Pty Limited Electrical/gas fi eld services and contracting 30 June 100 100

Option One Pty Limited Gas retailing 30 June 100 100

Energy Brokers New Zealand Limited Non-trading 30 June 66.3 66.3

Powerline Limited Non-trading 30 June 100 100

During the year the following subsidiaries were sold:

Powerco Energy Services Limited Electrical/gas fi eld services and contracting 30 June - 100

Powerco Energy Services Eastern Limited Electrical services and contracting 30 June - 100

The parent entity of the group is Powerco Limited. The ultimate parent of the Group is Babcock & Brown Infrastructure Pty Limited (BBIL).

Group fi nancial statements are presented in New Zealand dollars.

39

As at balance date, Energy Brokers New Zealand Limited, a non trading entity, was in the process of being liquidated.

The amount of dividends paid from Powerco Limited to BBI Network (NZ) Limited is not restricted, as long as certain covenants are satisfi ed as detailed in the Security Trust Deed.

22 INVESTMENTS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Investments in New Zealand equity shares - 45,826 - 45,826

Other - 218 - 218

- 46,044 - 46,044

The market value of the New Zealand equity shares as at 30 June 2005 was $52.556 million. The directors consider that the carrying amount of other investments approximates their fair value.

23 TRADE AND OTHER RECEIVABLES

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Trade receivables 10,300 66,043 2,475 895

Unbilled sales 26,162 28,233 26,162 28,233

Prepayments 399 316 399 316

Provision for doubtful debts (2,490) (1,160) (200) (200)

Good and Service Tax (GST) receivable 2,301 - - -

36,672 93,432 28,836 29,244

24 DERIVATIVE FINANCIAL INSTRUMENTS

a) Powerco Limited enters into NZD fl oating to fi xed interest rate swap agreements to reduce the impact of changes in fl oating interest rates on its borrowings and thus reduce variability in cash fl ows. Fixed to fl oating instruments are entered into in order to hedge the changes in fair value of fi xed rate NZD debt. Powerco Limited also utilises Cross Currency interest swaps to hedge against the variations in interest costs and fair value of the USD private placement debt.

Derivative instruments are initially recognised at fair value on the contract date and subsequently measured at their fair value on each balance sheet date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either (i) hedges of highly probable forecast transactions (cash fl ow hedges), or (ii) hedges of the fair value of recognised assets or liabilities or a fi rm commitment (fair value hedges).

The Group documents, at the inception of the hedge transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and hedging strategy. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash fl ows of hedged items.

(i) Cash fl ow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash fl ow hedges

are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the Income Statement. Amounts accumulated in equity are transferred to the Income Statement in the same period in which the hedged item affects the Income Statement.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss reported in equity is immediately transferred to the Income Statement.

40

(ii) Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Income

Statement, together with any changes in the fair value of the hedged risk.

(iii) Derivatives that do not qualify for hedge accounting Certain derivative instruments are undertaken as hedges of economic exposures but do not qualify for hedge

accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the Income Statement.

The fair value of fi nancial instruments are determined by reference to the market quoted rates. All derivative instruments are carried on balance sheet at their fair values. Movements on the hedging reserve are shown in

the Statement of Shareholders’ Equity.

The Group holds the following fi nancial instruments:

1 Interest rate swaps The Group receives New Zealand fi xed interest rates and pays New Zealand dollar fl oating interest rates. The hedge is

a fair value hedge and was entered into on terms matched to the underlying obligation. The notional principal value of the hedge is $350,000,000 (2005: $350,000,000)

The fair value of the hedge is ($9,044,900) (2005: ($6,289,520))

2 US cross currency interest rate swaps The Group receives US dollar fi xed interest and pays NZ dollar fl oating interest. The hedge is both a fair value hedge

and hedges the movements in currency that would affect interest payments and fi nal repayment at maturity, these were entered into at terms to match the underlying obligation.

The notional principal value of the hedge is $294,266,016 (2005: $294,266,016) The fair value of the hedge is ($29,662,165) (2005: ($40,231,183))

3 Interest rate swaps The Group receives NZ dollar fl oating interest rates and pays NZ dollar fi xed interest. The hedge is to fi x the variable

fl oating obligations effi ciently as per the hedge policy and the treasury policy and is on matched terms. The hedge is a cash fl ow hedge.

The notional principal value of the hedge is $225,000,000 (2005: $250,000,000) The fair value of the hedge is ($2,820,453) (2005: ($6,254,695))

4 Interest rate swap To swap back fi xed New Zealand dollar debt converted to fl oating back to fi xed debt. The swap is used to match the

interest rate profi le in accordance with the Board strategy and is on matched terms. Hedge accounting is not applied to these swaps.

The notional principal value of the hedge is $497,000,000 (2005: $627,000,000) The fair value of the hedge is $1,304,405 (2005: ($5,034,576))

5 Interest rate swap To convert fl oating New Zealand debt from US dollar fi xed debt to fi xed New Zealand dollar debt. The swap is used to

modify the debt profi le in accordance with the Board strategy and is on matched terms. Hedge accounting is not applied to these swaps.

The notional principal value of the hedge is $555,000,000 (2005: $93,000,000) The fair value of the hedge is ($265,838) (2005: ($324,469))

6 Interest rate swaps To unwind fl oating to fi xed swaps which existed when the hedging policy was changed. These are to cancel previous

interest rate swaps and match the terms of those including termination date and rolls. Hedge accounting is not applied to these swaps.

The notional principal value of the swap is $80,000,000 (2005: $235,000,000) The fair value of the swap is ($891,411) (2005: $1,987,709)

7 Interest rate swaps Historical swaps fl oating to fi xed swaps which are cancelled by number six above on match term and rolls basis. Hedge

accounting is not applied to these swaps. The notional principal value of the swap is $80,000,000 (2005: $235,000,000) The fair value of the swap is $236,964 (2005: ($4,317,286))

41

Total notional principal of instruments recognised $2,081,266,016 (2005: 2,084,266,016) Total fair value of instruments recognised ($41,143,398) (2005: ($59,815,082))

All cash fl ow hedges above are on matched terms. The maturities are the same as the fi nancial liabilities recorded in note 12. The Group’s policy is to refl oat any fi xed rate debt, thus giving a totally fl oating portfolio, then re hedge as per parameters in the treasury policy. This has the effect that some fi xed rate hedges are applied against fl oating rate hedges. In line with NZ IAS 39 these are not hedge accountable and thus movements in the mark to market value of these is passed through to the Income Statement.

The Group’s New Zealand Dollar (NZD) and foreign currency fi xed rate debt is converted to fl oating NZD debt through the use of derivatives, with these exactly matching the term and nominal value of the debt. At the point of issue the nominal value of the bonds was equivalent to the fair value, and the fair value of the derivative was zero. The marking to market of the derivatives outlines movements in interest rates or currency rates.

Powerco bonds are able to be traded on the NZDX and an active secondary market exists. This valuation method assumes a constant credit rating.

b) Currency swaps

Under currency swap contracts, the consolidated entity agrees to exchange specifi ed principal and interest foreign currency amounts at an agreed future date at a specifi ed exchange rate (fi xed for fl oating). Such contracts enable the consolidated entity to mitigate the risk of adverse movements in foreign exchange rates.

The following table details the currency swaps outstanding as at balance date.

Outstanding contracts as at 30 June 2006

Group and Parent

Average interest rate %

Average exchange rate

Contract Value NZ$000

Fair Value NZ$000

Over fi ve years BKBM + 88 basis points 0.5947 294,266 (29,662)

Outstanding contracts as at 30 June 2005

Group and Parent

Average interest rate %

Average exchange rate

Contract Value NZ$000

Fair Value NZ$000

Over fi ve years BKBM + 88 basis points 0.5947 294,266 (40,231)

c) Interest rate swap contracts

Under interest rate swap contracts, the consolidated entity agrees to exchange the difference between fi xed and fl oating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the consolidated entity to mitigate the risk of changing interest rates on debt held. The fair value of interest rate swaps are based on market values of equivalent instruments at the reporting date and are disclosed below. The average interest rate is based on the outstanding balances at the start of the fi nancial year.

42

The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding at balance date:

Group and Parent 30 June 2006 Group and Parent 30 June 2005

Average contracted

fi xed interest rate

%

Notional principal

amount NZ$000

Fair value NZ$000

Average contracted

fi xed interest rate

%

Notional principal

amount NZ$000

Fair value NZ$000

Floating to fi xed contracts:

Less than 1 year 6.51% 171,000 935 6.38% 403,000 (1,548)

1 to 2 years 6.38% 291,000 2,384 6.55% 171,000 497

2 to 3 years 6.49% 40,000 323 6.53% 51,000 53

3 to 4 years 6.94% 40,000 17 6.62% 30,000 (167)

4 to 5 years 6.71% 40,000 161 6.94% 40,000 (684)

5 years + 6.83% 775,000 (5,365) 6.87% 510,000 (13,433)

Fixed to fl oating contracts:

Less than 1 year - - - - - -

1 to 2 years - - - - - -

2 to 3 years - - - - - -

3 to 4 years 7.45% 120,000 (693) - - -

4 to 5 years 6.22% 100,000 (3,227) 7.45% 120,000 (1,292)

5 years + 6.47% 210,000 (6,016) 6.45% 465,000 (3,010)

Total interest rate swaps 1,787,000 (11,481) - 1,790,000 (19,584)

Total cross currency swaps (b) 294,266 (29,662) - 294,266 (40,231)

Total swaps (a) 2,081,266 (41,143) - 2,084,266 (59,815)

d) Fair value hedges

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

The following fair value hedges have been recorded in the Income Statement (7,814) - (7,814) -

Interest expense on fair value hedge loans 56,327 70,409 56,327 70,409

No items have been reclassifi ed as measured at cost or amortised cost during the period.

e) Maturity profi le of fi nancial instruments

The following table details the exposure to interest rate risk as at 30 June 2006:

This table uses repricing dates and as such does not refl ect the actual maturity of any fl oating rate debt or other debt that is repriced prior to maturity.

43

Weightedaverageeffectiveinterest

rate %

Variableinterest

rateNZ$000

Maturity datesLessthan

1 yearNZ$000

1-2years

NZ$000

2-3years

NZ$000

3-4years

NZ$000

4-5years

NZ$000

Morethan

5 yearsNZ$000

Non interestbearingNZ$000

Total NZ$000

Group

Financial assets:

Cash and cash equivalents 1.40% 4,445 - - - - - - - 4,445

Trade and other receivables - - - - - - - - 36,672 36,672

Other current assets - - - - - - - - 2,938 2,938

4,445 - - - - - - 39,610 44,055

Financial liabilities:

Trade and other payables - - - - - - - - 37,245 37,245

Bank overdraft 7.40% 28,500 - - - - - - - 28,500

Subordinated bonds 7.64% - - - - 96,733 - - - 96,733

Guaranteed bonds 6.47% - - - - - 96,773 313,642 - 410,415

US dollar private placement notes 5.56% - - - - - - 262,443 - 262,443

Commercial paper facility 7.52% - 147,240 - - - - - - 147,240

Commercial bank debt 7.41% - 250,585 - - - - - - 250,585

Interest rate swaps - - - - - - - - 11,481 11,481

US cross currency interest rate swaps - - - - - - - - 29,662 29,662

Employee benefi ts - - - - - - - - 2,682 2,682

Other current liabilities - - - - - - - - 4,824 4,824

28,500 397,825 - - 96,733 96,773 576,085 85,894 1,281,810

Parent

Financial assets:

Cash and cash equivalents 0.00% 476 - - - - - - - 476



476 - - - - - - 31,774 32,250



Bank overdraft 7.40% 28,500 - - - - - - - 28,500

Subordinated bonds 7.64% - - - - 96,733 - - - 96,733

Guaranteed bonds 6.47% - - - - - 96,773 313,642 - 410,415




Interest rate swaps - - - - - - - - 11,481 11,481

US cross currency interest rate swaps - - - - - - - - 29,662 29,662



28,500 307,240 - 96,733 96,773 576,085 73,646 1,178,977

The carrying value of cash and cash equivalents, trade and other receivables, other current assets, trade and other payables, bank overdraft and employee entitlements is equivalent to the fair value of these assets and liabilities.

44

The following table details the exposure to interest rate risk as at 30 June 2005:

Weightedaverageeffectiveinterest

rate%

Variableinterest

rateNZ$000

Maturity datesLessthan

1 yearNZ$000

1-2years

NZ$000

2-3years

NZ$000

3-4years

NZ$000

4-5years

NZ$000

Morethan

5 yearsNZ$000

Non interestbearingNZ$000

Total NZ$000

Group

Financial assets:

Cash and cash equivalents 1.50% 2,819 - - - - - - - 2,819



Investments - - - - - - - - 46,044 46,044

2,819 - - - - - - 143,002 145,821



Bank overdraft 6.90% 26,200 - - - - - - - 26,200

Subordinated bonds 7.64% - - - - - 96,426 - - 96,426

Guaranteed bonds 6.47% - - - - - - 242,518 - 242,518






26,200 507,377 - - - 96,426 534,393 107,958 1,272,354

Parent

Financial assets:

Cash and cash equivalents 1.50% 411 - - - - - - - 411



Investments - - - - - - - - 46,044 46,044

411 - - - - - - 78,815 79,226



Bank overdraft 6.90% 26,200 - - - - - - - 26,200

Subordinated bonds 7.64% - - - - - 96,426 - - 96,426

Guaranteed Bonds 6.47% - - - - - - 242,518 - 242,518






26,200 487,690 - - - 96,426 534,393 84,365 1,229,074

The carrying value of cash and cash equivalents, trade and other receivables, other current assets, trade and other payables, bank overdraft and employee entitlements is equivalent to the fair value of these assets and liabilities.

45

f) Financial Instruments

Risk Management

The Group engages in business in Australia and New Zealand and has currency expenses relating to the Australian dollar and US dollar. In the normal course of events the Group is exposed to loss through

(a) Market risk (b) Credit risk (c) Liquidity risk

The Group’s risk programme recognises the unpredictibility of fi nancial markets and seeks to minimise the potential adverse effects of market movements. The Group uses derivative fi nancial instruments for this purpose, but does not engage in holding instruments for trading or speculation.

Management of this risk is performed in accordance with the policies approved by the Board of Directors. These cover both detailed policies and specifi c areas such as foreign exchange risk, interest rate risk, credit risk and liquidity risk as well as the use of derivatives and appropriateness of counter parties.

(a) Market Risk(i) Foreign Exchange Exposures The Group operates in New Zealand and Australia and has foreign exchange exposures arising from US dollar

denominated debt and investments in Australian operations. This exposes the Group to potential gains and losses arising from currency movements.

The Group policy relating to US dollar denominated debt is to minimise the exchange rate exposure by use of matching hedges taken out at the time the loans were drawn down. With regards to the independent foreign subsidiary, Powerco Australian Group Pty Limited, there is no net investment hedging.

(ii) Interest Rate Exposures Interest rate risk is the risk that interest rates will change, increasing or decreasing the cost of borrowing or lending.

The Group’s short-term borrowings are on a fl oating daily interest rate. Non-current debt is funded by the fi xed coupon bonds and Powerco’s commercial paper program based on 90 day Bank Bills.

Powerco has entered into interest rate swap agreements to reduce the impact of the changes in interest rates on its borrowings. As at 30 June 2006, Powerco Limited had interest rate swap agreements with registered banks. The weighted average of the interest rate swap agreements (excluding the reverse swap agreements) produce an interest rate of 6.68% p.a.

(b) Credit Risk Financial instruments which potentially subject the Group to credit risk principally consist of bank balances and

accounts receivable. There are no signifi cant concentrations of credit risk. These accounts are subject to a Board Prudential Supervision Policy which is used to manage the exposure to credit risk. As part of this policy, limits on exposures have been set and are monitored on a regular basis. Cash deposits are only made with registered banks. The maximum credit risk is the carrying value.

(c) Liquidity Risk Liquidity risk is the risk that the Group may be unable to meet its fi nancial obligations as they fall due. This risk is

managed by maintaining suffi cient cash and deposits together with access to committed credit facilties.

25 AUDITORS’ REMUNERATION

Group30 June 06

NZ$00012 months

Group30 June 05

NZ$00015 months

Parent30 June 06

NZ$00012 months

Parent30 June 05

NZ$00015 months

Amounts paid or payable to the auditors for:

Auditing fi nancial statements 262 209 188 174

Audit services 105 196 105 196

Taxation services 357 842 357 842

Other assurance services - 90 - 90

Other non audit services 246 112 223 112

970 1,449 873 1,414

46

The following types of services were performed for each category above:

Audit Services: – Audit of prospectus – Audit of regulatory disclosure statements – IFRS assistance

Taxation services: – Tax returns, depreciation review, due diligence assistance – Tax provision review, review of tax calculations, assurance on tax implications

Other non audit services: – Other tax compliance – Business acquisition advice (2005)

26 LEASE OBLIGATIONS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Lease payments under operating leases recognised as an expense in the period

3,677 4,741 108 342

Operating lease obligations payable after balance date on non-cancellable leases are as follows:

Within one year 3,709 9,202 1,858 1,773

Between 1-5 years 806 5,630 732 1,012

More than 5 years 238 2,897 212 295

4,753 17,729 2,802 3,080

Operating lease payments represent rentals payable by the Group for certain offi ce properties, vehicles and offi ce equipment. Property leases are negotiated for a term of 1 to 5 years, with rights of renewal on most leases. Offi ce equipment leases are for a term of three years, with rights of renewal.

27 NOTES TO THE CASH FLOW STATEMENT

(a) Business disposed

During the fi nancial year, the consolidated entity disposed of its electrical and gas contracting business. Details of the disposal are as follows:

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Consideration

Cash and cash equivalents 18,108 - - -

Book value of net assets sold

Current Assets

Cash and cash equivalents

Receivables 6,857 - - -

Inventories 5,396 - - -

Non-current assets

Property, plant and equipment 5,544 - - -

Current Liabilities

Payables (5,069) - - -

Net Assets disposed 12,728 - - -

Gain on disposal 5,380 - - -

18,108 - - -

47

(b) Financing facilities

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Secured cash advances facility, reviewed annually and payable at call:

– Amount used 90,585 19,687 - -

– Amount unused 31,005 13,124 - -

121,590 32,811 - -

Wholesale capital advance facility with Commonwealth Bank of Australia:

– Amount used 28,500 26,200 28,500 26,200

– Amount unused 1,500 3,800 1,500 3,800

30,000 30,000 30,000 30,000

Commercial paper programme, supported by a cash advance facility, supported by Wespac, ANZ and CBA:

– Amount used 150,000 150,000 150,000 150,000

– Amount unused 50,000 50,000 50,000 50,000

200,000 200,000 200,000 200,000

(c) Non cash items in relation to investing/fi nancing activities

During the year the Group sold its shares in NGC and repaid the fi nancing liability which was taken out to cover the purchase. The transaction was done by the Group’s ultimate parent company and the net cash fl ow was received by the Group, therefore only the net cash fl ow has been reported in the Cash Flow Statement.

During the year the Group disposed of two subsidaries which had negative working capital. The cash fl ow from the sale has been disclosed in investing activities and a transfer was made for the working capital balances from operating activities.

28 SEGMENTAL REPORTING

For management purposes, the Group is currently organised into fi ve operating divisions:

1) Electricity lines electricity line distribution

2) Gas lines gas line distribution

3) Management services provision of the following management and administration services:corporate managementlegal counselcorporate fi nance and debt managementasset managementinformation systemspricing and billingoperational fi nance and administration

4) Gas reticulation, gas contracting and gas retailing

gas line distributiongas contracting servicesretailing of gas

5) Electricity and gas fi eld services and contracting

electricity fi eld and contracting servicesgas fi eld and contracting services

48

The electricity and gas fi eld services and contracting segment was discontinued on 1 November 2005 (see notes 6 and 29).

For the year ended 30 June 2006

Electricity & Gas Field

Services NZ$000

Electricity Lines NZ$000

Gas Lines NZ$000

Management Services NZ$000

Gas reticulation,contracting &

retailing NZ$000Unallocated

NZ$000Eliminations

NZ$000Total

NZ$000

Revenue

External sales 15,553 265,087 51,250 - 5,223 2,123 - 339,236

Inter-segment sales 6,300 - - 37,973 - - (44,273) -

Total revenue 21,853 265,087 51,250 37,973 5,223 2,123 (44,273) 339,236

Result

Segment result from continuing operations 90,676 30,642 8,454 (5,037) 15,188 - 139,923

Finance costs 89,364

Profi t before tax 50,559

Income tax expense 10,123

Profi t for the year from continuing operations 40,436

Segment result from discontinued operations 6 (3,916) (3,916)

Gain on disposal 6 5,380

Profi t for the year from discontinued operations 6 1,464

Net profi t for the year 41,900

Other information

Capital additions 556 53,365 6,072 16,050 67,617 - - 143,660

Depreciation and amortisation 604 48,692 9,440 6,898 2,404 - - 68,038

Balance Sheet

Assets

Segment assets 1,359,405 381,641 19,078 194,467 20,319 - 1,974,910

Liabilities

Segment liabilities 5,863 169 152,824 49,735 1,233,181 - 1,441,772

The Group’s operations are located in New Zealand and Australia.

The Group’s New Zealand operations include:– electricity and gas line distribution– provision of the following management and administration services

corporate management legal counsel corporate fi nance and debt management asset management information systems pricing and billing operational fi nance and administration

The Group’s Australian operations include:– Gas reticulation, fi eld services contracting and gas retailing– Management services

49

The following table provides an analysis of the Group’s sales to external customers by geographical market, irrespective of the origin of the goods or services.

Continuing Operations Year Ended

30 June 06 NZ$000

Discontinued Operations Year Ended

30 June 06 NZ$000TOTAL NZ$000

New Zealand 318,460 15,553 334,013

Australia 5,223 - 5,223

323,683 15,553 339,236

The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment by the geographical area in which the assets are located.

Carrying amountof segment assets

30 June 2006 NZ$000

Additions to property, plant & equipment

30 June 2006 NZ$000

New Zealand 1,780,443 76,043

Australia 194,467 67,617

1,974,910 143,660

The total amount of signifi cant non-cash expenses included in the gas reticulation, contracting & retailing segment is $1.16 million and $2.96 million for the unallocated segment.

For the year ended 30 June 2005

Electricity & Gas Field

Services NZ$000

Electricity Lines

NZ$000Gas Lines

NZ$000

Management Services

NZ$000

Gasreticulation,

contracting & retailing NZ$000

Unallocated NZ$000

Eliminations NZ$000

TOTALNZ$000

Revenue

External sales 22,070 306,495 72,767 - 27,582 12,763 - 441,677

Inter-segment sales 36,941 - - 32,860 - - (69,801) -

Total revenue 59,011 306,495 72,767 32,860 27,582 12,763 (69,801) 441,677

Result

Segment result from continuing operations 109,665 46,383 5,961 (1,753) 11,957 - 172,213

Finance costs 109,905

Profi t before tax 62,308

Income tax expense 12,912

Profi t for the period from continuing operations 49,396

Segment result from discontinued operations 6 (3,155) (3,155)

Gain on disposal -

Profi t for the period from discontinued operations 6 (3,155)

Net profi t for the period 46,241

Other information

Capital additions 2,753 38,138 4,758 6,777 90,663 2,627 - 145,716

Depreciation and amortisation 1,884 56,445 12,630 5,389 2,457 576 - 79,381

Balance Sheet

Assets

Segment assets 30,311 1,236,117 512,489 70,397 135,101 10,890 - 1,995,305

Liabilities

Segment liabilities 6,897 17,744 11,454 3,209 64,641 1,329,352 - 1,433,297

50

Geographical Segments

The Group’s operations are located in New Zealand and Australia. The Group’s New Zealand operations include:

- electricity and gas line distribution- provision of the following management and administration services corporate management legal counsel corporate fi nance and debt management asset management information systems pricing and billing operational fi nance and administration

The Group’s Australian operations include:- Gas reticulation, fi eld services contracting and gas retailing- Management services

The following table provides an analysis of the Group’s sales to external customers by geographical market, irrespective of the origin of the goods or services.

Continuing Operations 15 months ended 30 June 05

NZ$000

Discontiued Operations 15 months ended 30 June 05

NZ$000 TOTAL NZ$000

New Zealand 387,025 27,070 414,095

Australia 27,582 - 27,582

414,607 27,070 441,677

The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment by the geographical area in which the assets are located.

Carrying amountof segment assets

30 June 2005 NZ$000

Additions to property,plant & equipment

30 June 2005 NZ$000

New Zealand 1,860,204 55,053

Australia 135,101 90,663

1,995,305 145,716

51

29 DISPOSAL OF SUBSIDIARY

As referred to in note 6, on 1 November 2005 the Group discontinued its electricity and gas fi eld services operations at the time of the disposal of its subsidiaries, Powerco Energy Services Limited and Powerco Energy Services Eastern Limited.

The net assets of Powerco Energy Services Limited and Powerco Energy Services Eastern Limited at the date of disposal were as follows:

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Property, plant and equipment 5,544 - - -

Inventory 5,396 - - -

Capital work in progress 3,308 - - -

Trade receivable 3,549 - - -

Trade payable (1,604) - - -

Employee entitlements (3,465) - - -

12,728 - - -

Gain on disposal 5,380 - - -

Total consideration 18,108 - - -

Consideration:

Cash 18,108 - - -

Net cash infl ow arising on disposal:

Cash consideration received 18,108 - - -

The impact of Powerco Energy Services Limited and Powerco Energy Services Eastern Limited on the Group’s results and cash fl ows is disclosed in note 6.

30 DEFINED CONTRIBUTION PLAN

Defi ned Contribution Plan

The Group operates defi ned contribution retirement plans for all qualifying employees. The assets of the plan are held separately from those of the Group in funds under the control of Trustees. Where employees leave the plan prior to vesting fully in the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions.

The total expense recognised in the Income Statement of $264,000 (30 June 2005: $417,000) represents contributions payable to these plans by the Group at rates specifi ed in the rules of the plans. As at 30 June 2006 there were no contributions that had not been paid over to the plans.

Defi ned Benefi t Plan

The Group has a small number of employees that are part of a multi employer scheme. Under the plan, the employees are entitled to retirement benefi ts. No other post-retirement benefi ts are provided. The total expenses recognised in the Income Statement of $143,000 (30 June 2005: $219,000) represents contributions payable to the plan. The Group has no other liability in respect to the scheme as all benefi t payments are guaranteed by the Crown.

52

31 CONTINGENT LIABILITIES AND COMMITMENTS

CONTINGENCIES

Legal claim

Powerco Limited has been named as a second defendant in a claim issued by Todd Energy Limited against Transpower Limited. The plaintiffs allege various breaches of the Commerce Act 1986 and claim various declarations and injunctions together with damages. The damages amount is presently unquantifi ed. The claim is being defended by Powerco, which contends that it is not in breach of any of its obligations. No provision for the claim has been included in the fi nancial statements.

Powerco Energy Services Pty Limited is the respondent in an arbitration commenced by KT Pty Limited, a sub-contractor who was performing work on the Gas Distribution Network in Tasmania. The plaintiffs allege variations to the contract, delay costs and claim damages. The claim is currently being defended by Powerco Energy Services Pty Limited, which contends that it is not in breach of the contract and has brought a counter claim against the plaintiffs for the cost of defective work. The damages amount is presently unquantifi ed and no provision for the claim has been included in the fi nancial statements.

Contracts

Powerco Limited has a contract with Tenix Alliance New Zealand Limited (Tenix), who provide electricity and gas fi eld services. There is a condition in the contract that states that a payment is made to Tenix for performing better than budgeted and a payment is made to Powerco if performance does not meet budget. The amount of the payment is determined by a predetermined calculation in the contract. At this time, any payment to or from Powerco cannot be quantifi ed.

Contribution from Tasmanian Government

In January 2004, prior to the acquisition, Powerco received a contribution from the State Government of Tasmania amounting to AUD $8 million, for the building of a gas distribution network in Tasmania. This payment, known as an establishment contribution, is consideration for taking all necessary steps to incorporate a gas distribution entity and procuring that the gas distribution entity is established with access to the necessary expertise, assets and fi nancial capability to undertake the Stage 1 Development Agreement with the Crown in Right of the State Government of Tasmania dated 30 April 2003. There is a refund mechanism on sale of assets or the shares in the gas distribution entity whereby Powerco must repay the State an amount equal to the lesser of the establishment contribution and the asset/equity profi t.

In May 2005, Powerco Limited received a contribution from the State Government of Tasmania amounting to NZD $20.6 million (AUD $18.4 million), as an advance on the commencement of stage II of the gas distribution network built in Tasmania. An amount of NZD $72,000 (AUD $64,000) has been recognised as revenue in this fi nancial period, based on calculating a set percentage of the depreciation charge of the capitalised project costs. There is a refund mechanism whereby Powerco Limited must repay the State if Powerco fails to perform certain obligations under the agreeement. If this occurs Powerco is required to refund a pro rata amount based on uncompleted construction at the time of termination. Refer to notes 11 and 15 for income in advance.

COMMITMENTS

Group30 June 06

NZ$000

Group30 June 05

NZ$000

Parent30 June 06

NZ$000

Parent30 June 05

NZ$000

Commitments for future capital expenditure resulting from contracts entered into:

Not longer than 1 year 100,413 45,540 23,590 4,947

Longer than 1 year and not longer than 5 years 146,646 20,261 64,226 -

Longer than 5 years - - - -

247,059 65,801 87,816 4,947

32 SUBSEQUENT EVENTS

There have been no signifi cant subsequent events since 30 June 2006.

53

33 TRANSACTIONS WITH RELATED PARTIES

Trading Transactions

For the year ended 30 June 2006, Powerco Limited paid management fees of $458,334 (30 June 2005: nil) to Babcock & Brown Infrastructure Management Pty Limited (BBIM). BBIM are deemed to be a related party as they provide management services to Babcock & Brown Infrastructure Pty Limited (ultimate parent). Powerco is a wholly owned subsidiary of BBI Networks (New Zealand) Limited. The payment terms are: payment is required when an invoice is provided from BBIM and the amount is set in recognition of the following services being provided: executive strategic management, corporate development and asset management operational advice and direction, corporate fi nancial advice, strategic treasury manageement advice, corporate revenue and risk management advice and other coprorate policy formulation and advice. As at 30 June 2006, an amount of $458,334 was payable to BBIM for management fees.

Powerco Network Management Limited is a wholly owned subsidiary of Powerco. The company charges Powerco Limited at rates which refl ect the quantity of services provided and the relationships between the parties, which includes the following activities:

– Asset management $15,528,290 (30 June 2005: $15,528,290)– Information systems $3,908,359 (30 June 2005: $9,905,445)– Buildings and insurance $8,088,171 (30 June 2005: $993,792)– Operational fi nance and billing $457,425 (30 June 2005: $1,554,717)

There are no outstanding balances payable as at 30 June 2006. There are no guarantees or bad debts.

Powerco has intercompany accounts with its subsidaries (2006: $6.735 million, 2005: $29.779 million) and an intercompany loan with Powerco Australia Group Pty Limited (2006: $30 million, 2005: $30 million)

Powerco Energy Services Limited and Powerco Energy Services Eastern Limited were wholly owned subsidiaries of Powerco Limited which provided electrical and gas contracting services for Powerco, until the date of sale of these businesses on 1 November 2005.

During the fi nancial year, Powerco Limited received $78,661 from Energy Brokers New Zealand, which represent their surplus cash distributed.

There were no trading transactions with Powerco Holdings Limited, Powerco Australia Group Pty Limited, Powerco Tasmania Pty Limited, Powerco Energy Services Pty Limited, Option One Pty Limited, and Powerlines Limited during neither the 2005 nor 2006 fi nancial periods.

Compensation of key management personnel

Group30 June 06

NZ$00012 Months

Group30 June 05

NZ$00015 Months

Parent30 June 06

NZ$00012 Months

Parent30 June 05

NZ$00015 Months

The remuneration of directors and other members of key management during the year were as follows:

Short-term benefi ts 2,352 4,011 2,352 4,011

Post employment benefi ts 29 42 29 42

2,381 4,053 2,381 4,053

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.

34 RECONCILIATION OF NZ IFRS WITH AMOUNTS PREVIOUSLY RECORDED UNDER NZ GAAP

The consolidated entity changed its accounting policies on 1 April 2004 to comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS). The consolidated entity has elected not to restate comparative information for fi nancial instruments within the scope of NZ IAS-32 and NZ IAS-39 as permitted on fi rst time adoption to NZ IFRS. As a result of this election the comparatives for fi nancial instruments has not been restated. NZ IAS-32 and NZ IAS-39 have been adopted from 1 July 2005. Refer to accounting policy ad) for impact of transition to NZ IAS-32 and NZ IAS -39. The transition to NZ IFRS is accounted for in accordance with NZ IFRS1 First time Adoption of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS1).

54

An explanation of how the transition from superseded policies to NZ IFRS has affected the company and consolidated entity’s fi nancial position, fi nancial performance and cash fl ows is set out in the following tables and the notes that accompany the tables.

(a) Reconciliation of Net Profi t/(Loss) after Tax

Group15 months

to 30 June 05$000

Parent 15 months

to 30 Jun 05$000

Total reported under NZ GAAP 61,316 47,911

NZ IFRS adjustments:

Adjustment for recognition of taxation on a comprehensive basis (a) (12,882) (11,955)

Recognition of government grant (f) (2,193) -

(15,075) (11,955)

Restated balances under NZ IFRS 46,241 35,956

(b) Reconciliation of Equity with NZ GAAP

Group31 Mar 04

$000

Group 30 Jun 05

$000

Parent 31 Mar 04

$000

Parent 30 Jun 05

$000

Total reported under NZ GAAP 558,779 539,052 554,154 520,647


Fair value of network assets (b) 136,926 136,926 128,382 128,382

Deferred tax on a comprehensive basis (a) (98,895) (111,777) (99,821) (111,777)

Revenue recognition of government grant (f) - (2,193) - -

Restated balances under NZ IFRS 596,810 562,008 582,715 537,252

(c) Reconciliation of Liabilities with NZ GAAP

Group31 Mar 04

$000

Group 30 Jun 05

$000

Parent 31 Mar 04

$000

Parent 30 Jun 05

$000

Total reported under NZ GAAP 1,147,316 1,331,420 1,123,570 1,242,109


Deferred tax on a comprehensive basis (a) 98,895 111,777 99,821 111,777

Reclassifi cation of deferred funding (c) (12,860) (13,447) (12,860) (13,447)

Reclassifi cation of deferred tax asset (d) (805) (1,465) (1,174) (547)

Reclassifi cation of cash (e) - 2,819 - 411

Recognition of government grant (f) - 2,193 - -

Restated balances under NZ IFRS 1,232,546 1,433,297 1,209,357 1,340,303

55

(d) Reconciliation of Assets with NZ GAAP

Group31 Mar 04

$000

Group30 Jun 05

$000

Parent 31 Mar 04

$000

Parent30 Jun 05

$000

Total reported under NZ GAAP 1,706,095 1,870,472 1,677,724 1,762,756


Fair value of network assets (b) 136,926 136,926 128,382 128,382

Reclassifi cation of deferred funding (c) (12,860) (13,447) (12,860) (13,447)

Reclassifi cation of deferred tax asset (d) (805) (1,465) (1,174) (547)

Reclassifi cation of cash (e) - 2,819 - 411

Restated balances under NZ IFRS 1,829,356 1,995,305 1,792,072 1,877,555

Adjustments were made at 1 April 2004 to restate the opening fi nancial position of the company to a position consistent with the accounting policies specifi ed in the Statement of Accounting Policies.

(a) Under superseded policies deferred tax was recognised on a partial basis. Under NZ IFRS deferred tax is detemined using the balance sheet method in respect of temporary differences between the carrying amount of the asset and liabilities in the fi nancial statements and their corresponding tax base. The adjustment represents the shift from one tax base to another.

(b) The Group elected to measure network assets on transition to NZ IFRS at fair value and has used that fair value as the item’s deemed cost at that date. The effect of the revalution is to increase the carrying value by $136.9 million (parent $128.4 million).

(c) Under superseded policies deferred funding costs were recognised as non current assets. Under NZ IFRS deferred funding costs are included in borrowing to which they relate.

(d) The deferred tax asset under superseded policies has been reclassifi ed to liabilities as a result of the change in the balance due to reclassifi cation of deferred tax using the balance sheet approach.

(e) Under superseded policies cash balances were netted with the bank overdraft. Netting is not allowed under NZ IFRS unless it meets specifi c criteria. This criteria has not been met and as a result the cash and bank overdraft have been reported gross.

(f) Under the superceded policies the government grant funding was recognised on a milestone basis, whereas under NZ IFRS it is being recognised over the life of the asset to which the funding relates to.

Effect of NZ IFRS on the Cash Flow Statement

There are no material differences between the cash fl ow statement presented under NZ IFRS and the cash fl ow statement presented under the superseded policies.

35 APPROVAL OF FINANCIAL STATEMENTS

The Financial Statements were approved by the board of directors and authorised for issue on the 13 September 2006.

We have audited the fi nancial statements on pages 10 to 55. The fi nancial statements provide information about the past fi nancial performance and fi nancial position of Powerco Limited and group as at 30 June 2006. This information is stated in accordance with the accounting policies set out on pages 16 to 24.

Board of Directors’ Responsibilities

The Board of Directors is responsible for the preparation, in accordance with New Zealand law and generally accepted accounting practice, of fi nancial statements which give a true and fair view of the fi nancial position of Powerco Limited and group as at 30 June 2006 and of the results of operations and cash fl ows for the year ended on that date.

Auditors’ Responsibilities

It is our responsibility to express to you an independent opinion on the fi nancial statements presented by the Board of Directors.

Basis of Opinion

An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the fi nancial statements. It also includes assessing:

• the signifi cant estimates and judgements made by the Board of Directors in the preparation of the fi nancial statements, and

• whether the accounting policies are appropriate to the company and group circumstances, consistently applied and adequately disclosed.

We conducted our audit in accordance with New Zealand Auditing Standards. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with suffi cient evidence to obtain reasonable assurance that the fi nancial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the fi nancial statements.

Other than in our capacity as auditor and the provision of taxation and accounting advice, we have no relationship with or interests in Powerco Limited or any of its subsidiaries.

Unqualified Opinion

We have obtained all the information and explanations we have required.

In our opinion:

• proper accounting records have been kept by Powerco Limited as far as appears from our examination of those records; and

• the fi nancial statements on pages 10 to 55 :

- comply with generally accepted accounting practice in New Zealand;

- give a true and fair view of the fi nancial position of Powerco Limited and group as at 30 June 2006 and the results of their operations and cash fl ows for the year ended on that date.

Our audit was completed on 14 September 2006 and our unqualifi ed opinion is expressed as at that date.

Chartered AccountantsHamilton, New Zealand

56

This audit report relates to the fi nancial statements of Powerco Limited and group for the year ended 30 June 2006 included on Powerco Limited’s website. Powerco Limited’s Board of Directors is responsible for the maintenance and integrity of Powerco Limited’s website. We have not been engaged to report on the integrity of Powerco Limited’s website. We accept no responsibility for any changes that may have occurred to the fi nancial statements since they were initially presented on the website. The audit report refers only to the fi nancial statements named above. It does not provide an opinion on any other information which may have been hyperlinked to/from these fi nancial 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 fi nancial statements and related audit report dated 14 September 2006 to confi rm the information included in the audited fi nancial statements presented on this website. Legislation in New Zealand governing the preparation and dissemination of fi nancial statements may differ from legislation in other jurisdictions.

AUDIT REPORT TO THE SHAREHOLDERS OF POWERCO LIMITED

Directors

S R Boulton(Chairman)

N D Barbour

S E Ekanayake

J W Kendrew

E R Krogh

J Sellar

N O’Day

Executive Management TeamE R Krogh

Chief Executive

N D BarbourGeneral Manager

Commercial and Corporate

T S BroadhurstCorporate Risk Manager

S E EkanayakeChief Financial Offi cer

M WhaleyNetwork Asset Strategy Manager

S NichollsNetwork Service Delivery Manager

Registered Offi ceLevel 2, Council Chambers

84 Liardet StreetPrivate Bag 2061

New Plymouth 4310New Zealand

Telephone 0800 769 372Facsimile +64 6 759 6723

www.powerco.co.nz

AuditorsDeloitte

BankersWestpac Banking Corporation

Commonwealth Bank of AustraliaANZ Investment Bank

Share RegistryComputershare Investor

Services Limited Private Bag 92 119

Auckland 1020

www.powerco.co.nz

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