connecting the future annual report 2007...steve nicholls was appointed as the network service...

A N N U A L R E P O R T 2 0 0 7C O N N E C T I N G T H E F U T U R E

1 Letter from the Chief Executive

2 Directors Profiles

4 Executive Profiles

6 Corporate Governance

FINANCIAL STATEMENTS

8 Statutory Information

10 Consolidated Income Statement

11 Consolidated Statement of Changes In Equity

13 Consolidated Balance Sheet

14 Consolidated Cash Flows Statement

15 Reconciliation of Consolidated Profit for the Period to Net Cash Flows from Operating Activities

16 Statement of Accounting Policies

24 Notes to and Forming Part of the Financial Statements

56 Audit Report

IBC Directory

Contents

1

On behalf of the Executive ManagementTeam I am pleased to present security-holders with this annual report covering the full year to June 2007.

Internally Powerco continues to focus on improvement of systems and processesto fully capture the benefits of our scale.Externally Powerco continues to be actively involved in the development of the new regulatory framework for the gas distribution sector in New Zealand.

In Tasmania, stage two of the gasdistribution network build has been completed successfully and residential consumer connection inquiries areincreasing at a steady rate.

In New Zealand Powerco continues to lead the way in the electricity and gas distribution sector, working with industry peers and the Government to ensure New Zealand’s energy industry continues to provide a sustainable platform on whichthe economy can continue to grow.

For the full year ended 30 June 2007, net profit after tax was $67.6 million from total revenues of $376.4 million. Powerco’s operating EBITDA for the full year to 30 June 2007 was $208.7 million excludingnon-cash gains and losses.

We enter the next year with a highly capable team, focused on innovation,improvement and the delivery of sustainable results for the benefit of our customers, shareholders, other stakeholders and the wider communities we serve.

Richard Krogh Chief Executive

Letter to security holders for Powerco annual report 2007

Powerco Directors Profiles

Richard Krogh Bachelor of Electrical Engineering (Honours), M.IPENZ

Richard Krogh is the Chief Executive of Powerco Limited, leading the executive management team and managing the company’s broad range of business interests.

Mr Krogh is an electrical engineer with over 15 years experience in the electricity and gas utility sector. He has significant experience in utility strategy, management and operating. He also has extensive experience in both gas and electricity asset management and engineering.

He joined Powerco in September 2000 during the merger with CentralPower where he held executive and management positions. Before joining CentralPower he had held a variety of engineering positions within the electricity industry. At Powerco he has held the positions of General Manager Network Assets, Chief Operating Officer, and was appointed Chief Executive in 2006.

Mr Krogh is a member of the New Zealand Institute of Directors, the Electricity Engineers’ Association, a Board member of the Electricity Networks Association, a Board member of the Institute for the Study of Competition and Regulation and is a director of a number of Babcock and Brown Infrastructure related companies in New Zealand, Great Britain and the USA.

Note: Mr Krogh is currently on a secondment at Babcock and Brown Infrastructure as acting Chief Operating Officer - Energy.

Jeff Kendrew MBA (Tech Mgmt), BEng, MIPENZ

Mr Kendrew is Acting Chief Executive of Babcock and Brown Infrastructure. Prior to that Mr Kendrew held the position of Chief Operating Officer - Energy - at Babcock & Brown Infrastructure.

Before moving to Babcock and Brown Infrastructure Mr Kendrew was 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 20 years.

2

Nigel Barbour B.Com/LLB, Barrister & Solicitor of the High Court of New Zealand

Nigel Barbour joined Powerco in October 2002 and is General Manager Commercial and Corporate and a Director of Powerco. His portfolio of responsibilities includes: electricity and gas line pricing; revenue forecasting; customer relations management; gas and electricity marketing; electricity and gas industry regulation; corporate affairs; risk management; insurance; legal compliance; legal services; and property. Mr Barbour’s professional training is in law and economics.

Note: Mr Barbour is currently Acting Chief Executive of Powerco

Elanga Ekanayake FCA (SL), ACIS, CMA (AUS)

Mr Ekanayake is Powerco’s Chief Financial Officer and is a Fellow Chartered Accountant, a Fellow Chartered Secretary and a Certified 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.

Jonathon Sellar B Bus; CA

Jonathon Sellar is the Chief Financial Officer 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 was the Project Controller of InterGen’s Australian power stations and was a Senior Audit Manager (Energy & Mining) at PriceWaterhouseCoopers 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.

Note: Following the resignation of Powerco Chairman Steven Boulton in June 2007, Adrian van Jaarsveldt was appointed to the board of Powerco Limited in July 2007. Jeff Kendrew was also appointed as Chairman of the Board in August 2007. 3

Blane Evans-Parker Information Services Manager BSc(Hons), MBA

Blane Evans-Parker is responsible for the management of Powerco’s Information Technology and Telecommunications. This includes managing the IT&T operation while also developing and implementing a company wide information management strategy.

Mr Evans-Parker studied Mathematical Sciences for his first degree and has worked in the UK for several high-tech companies such as BNFL, Ministry of Defense and Digital Equipment Co. Mr Evans-Parker then completed an MBA before emigrating to New Zealand in 1993.

In New Zealand, Blane has worked for businesses including Progressive Enterprises as Group Development Manager and Fletcher Challenge where he was Director of Technology. During this time Mr Evans-Parker has managed several diverse business areas including IT, Environment, Health and Safety, Payroll, Engineering, Plant Maintenance, Shared Services and major projects.

Richard Krogh Chief Executive Bachelor of Electrical Engineering (Honours), M.IPENZ

Richard 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.

Nigel Barbour General Manager Commercial and Corporate B.Com/LLB, Barrister & Solicitor of the High Court of New Zealand

Nigel 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.

Powerco Executive Profiles

4

Richie Sheather General Manager Tasmania BBS (Acctg)

Richie Sheather joined Powerco’s Executive Management Team in April 2006, having previous worked for Powerco as a project manager in Tasmania and as Strategic Investment Manager in New Zealand.

Mr Sheather is responsible for the management of Powerco’s three businesses associated with the Tasmanian gas project, namely Option One Pty Limited, Powerco Energy Services Pty Limited and Powerco Tasmania Pty Limited.

Prior to working for Powerco, Mr Sheather worked for Genesis Energy, a leading New Zealand energy generator and retailer, as retail finance manager from 1999-2001, prior to working for Genesis Energy, Mr Sheather worked for Powerco in finance, treasury and energy trading roles.

Stephen Nicholls Network Service Delivery Manager MBA (Tech. Mgmt.) B.E.

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.

Michael Whaley General Manager Network Assets BEng, MIPENZ

Michael Whaley was appointed General Manager Network Assets 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 General Manager Network Assets, 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.

Elanga Ekanayake Chief Financial Officer FCA (SL) ACIS, CMA (AUS)

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

5

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

BBIL means Babcock & Brown Infrastructure Limited (ABN 61 100 364 234)

Babcock & Brown Infrastructure

means:

(a) BBIL; and

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

BBIS means Babcock & Brown Investor Services Limited (ACN 099 717 638)

BBI Networks (NZ) means BBI Networks (New Zealand) Limited

Board means the Board of Directors of Powerco

Company means Powerco Limited

Powerco means Powerco Limited

Powerco GlossaryThis section sets out the meanings of a number of capitalised terms used in this section of the annual report

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. Itdoes this through establishing Powerco’s objectives and the major strategies for achieving these objectives,whilst meeting the key Babcock & Brown Infrastructurecorporate governance policies within which the business of the Company is conducted (including, for example, systems and processes for monitoringperformance, compliance, disclosure, internal control and risk management).

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 governancepolicies, practices and procedures adopted by its ultimate parent company, Babcock & Brown Infrastructure, including policies in relation to:

Corporate Governance PoliciesThe capitalised terms used in this section of the annual report have defined meanings that are explained at the end of this section.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).

conflicts of interest;

continuous disclosure;

related party transactions;

trading in Babcock & Brown Infrastructure stapledsecurities; and

external auditors.

Corporate Governance

6

7

Financial Statements for the twelve months ended 30 June 2007

8

Equity Security Holder Information

Directors’ Equity Securities

Quoted Security Holder SpreadAs at 1 August 2007:

As at 1 August 2007:

Name Ordinary Shares

Percentage of Issued

Ordinary Shares

BBI Networks(New Zealand) Limited

316,186,775 100%

The Directors of Powerco Limited held no relevant interests in Equity Securities in the Company as at 30 June 2007.

Size of Holding Number ofHolders

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 100,000 921 21,818,000

Over 100,000 144 228,182,000

Total 1065 250,000,000

Subordinated Bonds (issued 15 April 2005)

5,000 to 100,000 1134 27,853,000

Over 100,000 131 72,147,000

Total 1265 100,000,000

Guaranteed Bonds (issued 28 September 2005)

5,000 to 100,000 164 4,673,000

Over 100,000 46 175,327,000

Total 210 180,000,000

Substantial Security HoldersThe Company’s register of substantial security holders,prepared in accordance with section 25 of the SecuritiesMarkets Act 1988 recorded the following information as at thedate of this Annual Report:

Name Type of VotingSecurities

Numberof Voting

Securities

BBI Networks(New Zealand) Limited

OrdinaryShares

316,186,775

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

Statutory Information

9

No waivers have been granted to the Company byNew Zealand Exchange Limited (NZX) in the 12 months priorto 25 July 2007.

Credit Rating

NZX Waivers

Enforcement Action by NZX

Companies Act 1993

No enforcement action has been taken by NZX during the 12 months ended 30 June 2007 under Listing Rule 5.4.2.

In accordance with section 211(3) of the Companies Act1993 (the Act), BBI Networks (New Zealand) Limited, as theCompany’s sole shareholder, has resolved that the Company’sannual report for the 12 months ended 30 June 2007 need notcomply with sections 211(1)(a), 211(1)(e) to (j) and 211(2) ofthe Act and accordingly this Annual Report does not state theparticulars required by those sections.

This Annual Report is dated 10 September 2007 and is signedon behalf of the Board by:

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)

Richard Krogh Director

10

Powerco Limited

Consolidated Income Statement For the year ended 30 June 2007

Groupyear to

30 June 07NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Continuing Operations

Revenue 1 351,438 323,683 343,645 318,016

Cost of sales (73,881) (62,748) (68,067) (58,286)

Gross profit 277,557 260,935 275,578 259,730

Other income 1 24,961 15,913 27,069 15,769

Operating expenses 2 (39,159) (34,588) (39,159) (36,962)

Administration expenses 2 (29,723) (26,225) (24,358) (29,164)

Other expenses 2 (77,579) (76,112) (75,043) (68,909)

Earnings before interest and taxation 156,057 139,923 164,087 140,464

Finance costs 3 (86,259) (89,364) (83,733) (86,729)

Operating surplus before taxation 69,798 50,559 80,354 53,735

Income tax expense 4 (2,202) (10,123) (5,739) (11,508)

Profit for the period from continuing operations 67,596 40,436 74,615 42,227

Discontinued Operation

Profit for the year from discontinued operations 6 - 1,464 - -

Profit for the period 67,596 41,900 74,615 42,227

Attributed to:

Equity holders of parent 67,596 41,899 74,615 42,227

Minority interest 9 - 1 - -

67,596 41,900 74,615 42,227

The accompanying notes form part of these Financial Statements

11

Powerco Limited

Consolidated Statement Of Changes In Equity For the year ended 30 June 2007

Notes

ShareCapitalNZ$000

RetainedEarnings

NZ$000

Foreign Exchange

ReserveNZ$000

HedgeReserveNZ$000

MinorityInterestNZ$000

TotalNZ$000

Group

Balance as at 30 June 2005 570,300 (8,279) (51) (8,908) 38 553,100

Exchange differences arising on translationof foreign operations 8 - - 4,858 - - 4,858

Cash flow hedges:

Gain taken to equity 8 - - - 4,508 - 4,508

Income tax on items taken directly to or transferred from equity 4 - - - (1,093) - (1,093)

Net income recognised directly in equity - - 4,858 3,415 - 8,273

Cash flow hedges:

Transferred to profit or loss for the period - - - (1,196) - (1,196)

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

Profit for the period - 41,899 - - 1 41,900

Total recognised income and expense - 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

Exchange differences arising on translationof foreign operations 8 - - (5,587) - - (5,587)

Cash flow hedges:


Income tax on items taken directly to or transferred from equity 4 - - - (4,326) - (4,326)

Net income recognised directly in equity - - (5,587) 10,491 - 4,904

Cash flow hedges:


Profit for the period - 67,596 - - - 67,596

Total recognised income and expense - 67,596 (5,587) 8,782 - 70,791

Dividends 10 - (69,356) - - - (69,356)

Balance as at 30 June 2007 570,300 (37,040) (780) 2,093 - 534,573


12

Notes

Share CapitalNZ$000

RetainedEarnings

NZ$000

ForeignExchange Reserve

NZ$000

HedgeReserveNZ$000

MinorityInterestNZ$000

TotalNZ$000

Parent

Balance as at 30 June 2005 570,300 (33,048) - (8,908) - 528,344

Cash flow hedges:


Income tax on items taken directly to ortransferred from equity 4 - - - (1,093) - (1,093)

Net income recognised directly in equity - - - 3,415 - 3,415

Cash flow hedges:



Total recognised income and expense - 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

Additions through business amalgamations 21 - 10,570 - - - 10,570

As restated 570,300 (49,151) - (6,689) - 514,460

Cash flow hedges:


Income tax on items taken directly to ortransferred from equity 4 - - - (4,326) - (4,326)

Net income recognised directly in equity - - - 10,491 - 10,491

Cash flow hedges:



Total recognised income and expense - 74,615 - 8,782 - 83,397

Dividends 10 - (69,356) - - - (69,356)

Balance as at 30 June 2007 570,300 (43,892) - 2,093 - 528,501


Powerco Limited

Consolidated Statement Of Changes In Equity For the year ended 30 June 2007

13

Powerco Limited

Consolidated Balance Sheet As at 30 June 2007

Notes

GroupAs at

30 June 07NZ$000

GroupAs at

30 June 06NZ$000

ParentAs at

30 June 07NZ$000

ParentAs at

30 June 06NZ$000

Equity

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

Reserves (35,727) (37,162) (41,799) (66,410)

Parent equity interest 534,573 533,138 528,501 503,890

Non-current Liabilities

Borrowings 12 975,116 1,020,176 862,661 929,591

Other financial liabilities 23 112,773 47,284 112,773 47,284

Deferred tax liability 4 128,869 118,807 128,869 119,368

Provisions 13 337 425 337 425

Other non-current liabilities 11 49,167 34,022 - -

1,266,262 1,220,714 1,104,640 1,096,668

Current Liabilities

Borrowings 12 208,544 175,740 208,544 175,740

Provisions 13 2,976 2,257 2,656 1,945

Trade and other payables 14 37,000 37,245 29,270 27,195

Income tax payable 2,393 3,594 - -

Other current liabilities 15 3,134 4,824 1,828 2,938

254,047 223,660 242,298 207,818

Total Equity and Liabilities 2,054,882 1,977,512 1,875,439 1,808,376

Non-current Assets

Property, plant and equipment 17 1,950,829 1,906,830 1,734,729 1,721,798

Intangible assets 18 12,808 11,430 10,043 11,430

Other financial assets 23 39,767 6,141 39,767 6,141

Deferred tax asset 4 11,302 5,798 - -

2,014,706 1,930,199 1,784,539 1,739,369

Current Assets

Intercompany accounts and intercompany loan 32 - - 55,503 36,735

Inventories 3,166 3,258 21 22

Trade and other receivables 22 34,272 36,672 32,497 28,836

Other current assets 20 1,904 2,938 2,879 2,938

Cash and cash equivalents 16 834 4,445 - 476

40,176 47,313 90,900 69,007

Total Assets 2,054,882 1,977,512 1,875,439 1,808,376

Richard Krogh DIRECTOR

10 September 2007 10 September 2007The accompanying notes form part of these Financial Statements

14

Powerco Limited

Consolidated Cash Flow Statement For the year ended 30 June 2007

Notes

Groupyear to

30 June 07NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Cash Flows from Operating Activities

Cash receipts from customers 383,439 403,692 362,765 355,918

Cash paid to suppliers and employees (151,393) (185,298) (134,790) (152,284)

232,046 218,394 227,975 203,634

Dividends received 7 9 7 9

Interest received 211 283 87 139

GST paid (13,110) (17,629) (19,879) (18,576)

Tasmanian government contribution 18,670 20,600 - -

Income taxes paid (3,451) (76) - (74)

Interest paid (86,796) (87,658) (84,971) (85,024)

(84,469) (84,471) (104,756) (103,526)

Net cash provided by operating activities 147,577 133,923 123,219 100,108

Cash Flows from Investing Activities

Proceeds from intercompany balances - - - 23,044

Loans advanced to subsidiaries - - (20,895) -

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

Proceeds from sale of subsidiary 28 - 18,108 - -

Proceeds from sale of property, plant and equipment 1,607 23 1,607 23

Purchase of property, plant and equipment (140,776) (155,784) (68,111) (60,984)

Capitalised interest paid 17 (6,043) (3,191) - -

Net cash used in investing activities (145,212) (131,021) (87,399) (28,094)

Cash Flows from Financing Activities

Proceeds from borrowings 60,319 70,898 30,000 -

Loan establishment costs paid - (5,125) - (5,125)

Repayment of borrowings - (449) - (224)

Dividend paid (69,356) (68,900) (69,357) (68,900)

Net cash used in financing activities (9,037) (3,576) (39,357) (74,249)

Net decrease in cash and cash equivalents (6,672) (674) (3,537) (2,235)

Cash and cash equivalents at the beginning of the period (24,055) (23,381) (28,024) (25,789)

Cash and cash equivalents at the end of the period (30,727) (24,055) (31,561) (28,024)

Comprises of the following:

Bank overdraft (31,561) (28,500) (31,561) (28,500)

Cash and deposits 834 4,445 - 476

(30,727) (24,055) (31,561) (28,024)


15

Powerco Limited

Reconciliation Of Consolidated Profit For The Period To Net Cash Flows From Operating Activities For the year ended 30 June 2007

Groupyear to

30 June 07NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Profit after taxation 67,596 41,900 74,615 42,227

Add/(Less) Non-cash Items

Depreciation and amortisation 68,637 68,038 65,537 60,372

Impairment of goodwill - 906 - 906

Loss on sale of assets 9,506 7,772 9,506 7,631

Non-cash component of finance costs 2,791 2,603 2,791 2,603

Unrealised gain on hedges (24,750) (7,546) (24,750) (7,546)

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

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

Non-cash items in relation to investing/financingactivities

3,072 45,860 (11,968) 44,688

Decrease in current tax payable balances (1,201) (3,539) - (6,790)

Increase in deferred tax balances 4,559 9,830 9,501 14,929

Changes in Net Asset and Liabilities

(Increase)/Decrease in assets

Trade and other receivables 2,400 56,760 (3,661) 408

Inventories 92 4,031 1 37

Other current assets 1,034 588 59 589

Increase/(Decrease) in liabilities

Trade and other payables (245) (61,962) 2,075 (48,675)

Current provisions 719 (1,419) 711 (2,598)

Other current liabilities (1,690) 1,225 (1,110) (589)

Non-current provisions (88) (1,051) (88) -

Other non-current liabilities 15,145 (16,609) - -

Net Cash Flow from Operating Activities 147,577 133,923 123,219 100,108


16

General informationPowerco Limited is a Limited company incorporated in New Zealand. The addresses of its registered office and principal place of business are disclosed in the directory ofthe annual report. The principal activities of the Company andits subsidiaries are described in note 21.

These financial statements have been prepared to comply with the provisions of section 44 of the Energy CompaniesAct 1992, the New Zealand Companies Act 1993 and theFinancial Reporting Act 1993. Powerco Limited is a profit-oriented entity. The financial 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 profit-orientated entities.

Compliance with NZ IFRS ensures that the consolidatedfinancial statements comply with International Financial Reporting Standards (‘IFRS’)

Basis of preparationThe financial statements have been prepared on the historicalcost basis, except for certain borrowings and financialinstruments. 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 accountingpolicies adopted are set out below.

Critical accounting estimates and judgementsIn the process of applying the Group's accounting policies, management have made no judgements that have had a significant effect on the amounts recognised in the financialstatements.

There are no key assumptions concerning the future andother key sources of estimation uncertainty at 30 June 2007, that have had a significant risk of causing a materialadjustment to the carrying amount of assets and liabilities.

Significant accounting policies

a) Basis of consolidationThe consolidated financial statements include those ofPowerco Limited and its subsidiaries (listed in note 21).The group financial statements incorporate the financialstatements of the Company and its subsidiaries, which have been consolidated using the purchase method. All significant inter-company transactions and balances are eliminated on consolidation. In the Parent Company financial statements investments in subsidiaries arestated at cost.

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

On acquisition, fair values reflecting conditions at thedate of acquisition are attributed to the identifiable separate assets and liabilities acquired. Where the fairvalue of the consideration paid exceeds the fair value ofthe identifiable 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 acquisitionover the Group’s interest in the net fair value of theidentifiable assets, liabilities and contingent liabilitiesof the subsidiary recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost andis subsequently measured at cost less any accumulatedimpairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit 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 thecash-generating unit is less than the carrying amount ofthe unit, the impairment loss is allocated first to reducethe carrying amount of any goodwill allocated to the unitand then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Animpairment loss recognised for goodwill is not reversed ina subsequent period.

b) Borrowing costsBorrowing 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 IncomeStatement in the period in which they are incurred.

c) Cash and cash equivalentsCash 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.

d) Comparative amounts1) During the preparation of the current year financial

statements it was identified that there were a number of reclassifications required in relation to income taxbalances for the Group, summarised as follows ($’000):

Powerco Limited

Statement of Accounting Policies for the Consolidated Financial Statements for the Year ended 30 June 2007

17

Originaldisclosure Adjustment

Reviseddisclosure Ref

Deferred taxliability (125,940) 7,133 (118,807) a

Current tax payables - (3,594) (3,594) b

Income tax receivable 3,539 (3,539) - a, b

The adjustments can be summarised as follows:

a) $7.133 million reclassification of the future income tax asset of Powerco Limited which was incorrectly classified as income tax receivable in 2006.

b) A reclassification of the $3.594 million currenttax payable of the Powerco Tasmania group fromincome tax receivable to current tax payable uponthe reclassification described in (a) above.

As a result of these adjustments, the segment assets and liabilities of the prior year were also restated in note27 - Segmental reporting.

2) During the preparation of the current year financial statements it was identified that there was a $6.790million reclassification of the deferred tax assets ofPowerco Limited which was incorrectly offsetting the income tax receivable of the Parent company,summarised as follows ($’000):

Original disclosure Adjustment

Revised disclosure

Deferred tax liability (126,158) 6,790 (119,368)

Income tax receivable 6,790 (6,790) -

3) A further change has been made to the Group’s comparative numbers in the Cash Flow Statement in relation to grants received from the Tasmaniangovernment. This amount was previously included in cash receipts from customers, but it was decided that it would provide more clarity if disclosed separately. Theeffect of this reclassification is as follows ($’000):

Original disclosure Adjustment

Revised disclosure

Cash receipts fromcustomers 424,292 (20,600) 403,692

Tasmanian governmentcontribution - 20,600 20,600

4) A change has also been made to both the Group’s and Parent’s comparative numbers in the Balance Sheet in relation to other financial liabilities. Previously financialassets in relation to hedges were disclosed within other financial liabilities, but it was decided that it would

provide more clarity if disclosed separately. The effect of this reclassification is as follows ($’000):


Revised disclosure

Other financialliabilities (41,143) (6,141) (47,284)

Other financialassets - 6,141 6,141

The reclassification also affected the financial instrument disclosures in note 23 and segment assets and liabilities disclosed in note 27.

5) A change has also been made to the Parent’scomparative numbers in the Balance Sheet as areclassification between current and non-current liabilities. Previously all employee benefits were disclosed as current liabilities, however it has been decided that assome of this relates to long service leave, splitting this out into non-current liabilities would provide greater clarity.The effect of this reclassification is as follows ($’000):


Revised disclosure

Current liabilities provisions (2,370) 425 (1,945)

Non-currentliabilities provisions - (425) (425)

The reclassification also affected the provisionsdisclosure in note 13.

6) Segmental reporting

a) In accordance with NZ IAS-14 there has been areclassification of the segmental reporting for the Group. As a result of the amalgamation of Powerco Network Management Limited into the parentcompany, management services are no longerreported as a separate business operation. As a result the comparative disclosures have been adjusted to provide direct comparison between the financial years.

b) An amount of $136.625 million of borrowingswas also discovered to be incorrectly allocated to management services when in fact it should havebeen disclosed as unallocated.

c) The capital additions disclosure was undervalued by $5.074 million for electricity lines and $.967 million for gas lines.

d) In addition we have changed the unallocatedsegment disclosures for assets and liabilities by $2.602 million for the adjustments mentioned in d)(1) and d)(4) above.

18

e) Derivative financial instruments Financial derivatives are initially recognised in theBalance Sheet at fair value on the date a derivativecontract is entered into and are subsequently measured at their fair value on each Balance Sheet date, thoughthe method of recognising the resulting gains and losses is dependent on whether hedge accounting is applied.When derivative contracts are entered into, the groupdesignates them as either;

liabilities (fair value hedge); or

(cash flow hedge) which hedge exposures tovariability in cash flows; or

hedge accounting criteria.

The fair values of financial derivatives are determined by reference to the market quoted rates input into valuationmodels for interest and currency swaps, forwards and

options. Changes in fair value of derivatives are recognised:

movements are recorded in the Income Statement alongside any changes in the fair value of thehedged items;

be highly effective to the extent the hedges areeffective, the movements are recognised in equity with the ineffective portion recognised in the IncomeStatement; and for those that are ineffective themovements are recognised in the Income Statement;

that are highly effective, the effective portion ofthe movements is recorded in equity (currency translation reserve) and the ineffective portion is recognised in the Income Statement.

financial instruments are recorded in the IncomeStatement.

The effect of these reclassifications is as follows ($’000):

For the year ended 30 June 2006

Original disclosure

Electricitylines Gas lines

Management services Unallocated Eliminations

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

Total revenue - - 37,973 - (44,273)

Segment result from continuing operations 90,676 30,642 8,454 15,188 -

Capital additions 53,365 6,072 16,050 - -

Depreciation and amortisation 48,692 9,440 6,898 - -

Segment assets 1,359,405 381,641 19,078 20,319 -

Segment liabilities 5,863 169 152,824 1,233,181 -

Amended disclosure

Electricitylines Gas lines

Management services Unallocated Eliminations

Inter-segment sales - - - - (6,300)

Total revenue - - - - (6,300)

Segment result from continuing operations 92,306 30,953 - 21,701 -

Capital additions 71,921 9,607 - - -

Depreciation and amortisation 54,486 10,544 - - -

Segment assets 1,381,952 385,936 - 15,157 -

Segment liabilities 19,470 2,761 - 1,372,408 -

19

Cash flow hedges

the hedging instrument expires or is sold, terminated orexercised, or no longer qualifies for hedge accounting. At that point in time, if the forecast transaction is still expected to occur, any cumulative gain or loss on thehedging instrument is recognised in equity until theforecasted transaction occurs. If a hedged transactionis no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the IncomeStatement for the period.

Fair value hedges

instrument expires or is sold, terminated or no longerqualifies for hedge accounting. The adjustments to thecarrying amount of the hedge item arising from the hedged risk is amortised to the Income Statement fromthat date.

f) Dividend distributionDividend distribution to the Company’s shareholdersis recognised as a liability in the Group’s financialstatements in the period in which the dividends aredeclared.

g) Employee entitlementsProvision is made for benefits accruing to employees inrespect of wages and salaries, annual leave, long serviceleave and sick leave when it is probable that settlementwill be required and they are capable of being measured reliably.

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

Provisions made in respect of employee benefits which are not expected to be settled within 12 months aremeasured as the present value of the estimated future cash outflows to be made by the consolidated entityin respect of services provided by employees up toreporting date.

Defined superannuation plansFor defined contribution superannuation plans, the Group recognises and expenses the obligation during the periodthey arise.

There are a small number of employees that are part of a state defined benefit superannuation plan. TheGroup has no legal or constructive obligation to pay future benefits, the Crown guarantees these benefits, and as a result the plans are accounted for as a defined contribution plan.

h) Financial assetsFinancial assets are recognised and derecognised ontrade date where purchase or sale of an investment isunder a contract whose terms require delivery of the investment within the timeframe established by themarket concerned. They are initially measured at fairvalue, net of transaction costs.

Subsequent to initial recognition, investments in subsidiaries are measured at cost in accordance with NZIAS-27. Other financial assets are classified into one of fourcategories; financial assets at fair value through the IncomeStatement, held to maturity investments, available for salefinancial assets or loans and receivables. At balance date the Group had the following classes of financial assets:

Loans and receivablesTrade receivables and other receivables are recorded at amortised cost less impairment.

i) Financial liabilitiesFinancial liabilities are recognised when the entitybecame party to the contractual provisions of theinstrument.

j) Foreign currency

Foreign currency transactionsAll foreign currency transactions during the financial yearare 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 exchangerate existing at reporting date. Non-monetary assets andliabilities carried at fair value that are denominated inforeign currencies are translated at the rates prevailing atthe date when the fair value was determined.

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

construction for future productive use are included in the cost of those assets where they are regarded asan adjustment to interest costs on foreign currency borrowings;

order to hedge certain foreign currency risks;

from or payable to a foreign operation for whichsettlement 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 IncomeStatement on disposal of the net investment.

20

Foreign operationsAssets and liabilities of foreign operations are translated at the closing rate. Revenue and expense items aretranslated at a weighted average of exchange rates over the period, as a surrogate for the spot rates at transaction dates. Exchange differences arising fromtranslation are taken to the foreign currency translationreserve and recognised in the Statement of Changes in Equity. The foreign operations are trading operations bywholly owned subsidiaries.

k) Government grant liabilityGovernment grants received are initially recognised asdeferred income in the Balance Sheet. The deferred income is recognised in the Income Statement on asystematic basis over the useful life of the asset to whichthe funding relates, in accordance with the policy outlinedin (q)/(d) below.

l) ImpairmentIntangible assets that have indefinite useful lives are notsubject to amortisation and are assessed for impairment ateach reporting date. If the estimated recoverable amountof an asset is less than its carrying amount, the asset is written down to its estimated recoverable amount and animpairment loss is recognised in the Income Statement.

A cash generating unit is the smallest group of assets for which there are separately identified cash flows.

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

Goodwill, intangible assets with indefinite 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 lesscosts to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to theirpresent value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimatesof future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, thecarrying 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 wouldhave been determined had no impairment loss been recognised for the asset (cash-generating unit) in prioryears. A reversal of an impairment loss is recognised inthe 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.

m) Intangible assets Intangible assets are comprised of computer software,and incentive payment assets. Intangible assets arestated at cost less accumulated amortisation andimpairment losses.

Amortisation of intangibles is calculated on a diminishing value basis for computer software and residential incentive payments, and a straight line basis for commercial incentive payments, over their useful lives.

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

Computer software and intellectual capital 4 to 65 years

Incentive payments 4 to 40 years

The remaining amortisation period of any individual asset is not material to the financial statements of the Group.

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

o) LeasesOperating lease payments, where the lessors effectively retain substantially all the risks and rewards of ownershipof the leased items, are included in the determination ofprofit before taxation in equal instalments over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

p) Property, plant and equipmentAll 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 inthe case of donated or subsidised assets, and those costs directly attributable to bringing the item to working condition for its intended use.

21

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

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

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

Land Not depreciated

Buildings 50 years

Plant and Equipment 5 to 10 years

Network Systems 10 to 65 years

q) Revenue recognitionRevenue 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:

a) Rendering of servicesRevenue from services is recognised in the accounting period in which the services are rendered based upon usage or volume throughputduring that period.

b) Contracting revenue Represents revenue earned from contracting services and is recognised on percentage of completion basis.

c) Contributions for sub-divisions Contributions received from customers and grantstowards the costs of reticulating new sub-divisionsand contributions received in constructinguneconomic lines are recognised as revenue. Any identified impairment losses in respect ofuneconomic lines are recognised in the IncomeStatement and the asset component is written down to its fair value.

d) Tasmanian grant revenueGovernment grants received are initially recognisedas deferred income. Revenue is recognised by calculating a set percentage of the depreciationcharge of the capitalised project costs. The depreciation charge is used as a basis of revenuerecognition because the purpose of the funding wasto compensate for the cost of purchasing the asset.

r) Segment reportingA business segment is a group of assets and operations engaged in providing products or services that aresubject to risks and returns that are different from those of other segments.

A geographical segment is engaged in providing productsor 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 businesssegments and its secondary format is geographical.

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

Where expenses, assets and liabilities have been unableto be split between the electricity and gas segments, an allocation has been used based on the size and value ofthe assets and the percentage of revenue generated by each segment.

s) Share capitalOrdinary shares are classified as equity.

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

t) Cash Flow StatementThe Cash Flow Statement is prepared inclusive of GST. For the purposes of the Cash Flow Statement, cash andcash equivalents includes cash on hand, cash in banksand investments in money market instruments, net of outstanding bank overdrafts.

Operating activities include all transactions and other events that are not investing or financing activities.

Investing activities are those activities relating to theacquisition and disposal of current and non-currentinvestments 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.

u) TaxationThe amount recognised for current tax is based on the net profit for the period as adjusted for non-assessableand non-deductible items. It is calculated using tax ratesthat have been enacted or substantively enacted by the reporting date.

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

22

The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilitiesthat affect neither accounting nor taxable profit, andthe temporary differences relating to investments in subsidiaries, where the consolidated entity is able to control the reversal of the temporary differences and it isprobable that the temporary differences will not reverse in the foreseeable future.

The carrying amount of deferred income tax assets isreviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxableprofit will be available to allow all or part of the deferredincome tax to be utilised.

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

The measurement of deferred tax liabilities and assets reflects 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 ofits assets and liabilities.

Deferred tax assets and liabilities are offset when theyrelate to income taxes levied by the same taxationauthority 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 toitems credited or debited directly to equity, in which case the deferred tax or current tax is also recognised directlyin equity, or where it arises from the initial accountingfor a business combination, in which case it is taken intoaccount in the determination of goodwill or excess.

v) Term debtAll 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 b) above.

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

After initial recognition for those interest bearing loansand borrowings where fair value hedge accounting is applied, the loan balance is adjusted for the change in the hedged risk only. The Group policy is to hedge the

interest/foreign currency risk associated with term debtwith financial instruments on matched terms.

Borrowings are classified as current liabilities (eitheradvances and deposits or current portion of term debt) unless the group has an unconditional right to defersettlement of the liability for at least 12 months after thebalance sheet date.

w) Trade and other payablesTrade payables and other accounts payable arerecognised when the consolidated entity becomes obliged to make future payments resulting from thepurchase of goods and services. Subsequent to initial recognition, trade payables and other accounts payable are recorded at amortised cost. Given the nature of theseliabilities amortised cost equals their notional principal.

Changes in Accounting PoliciesThere have been no changes in accounting policies during the year.

23

Standards, Amendments and Interpretations issued but not yet effectiveAt the date of authorisation of the financial report, a number of Standards and Interpretations were in issue but not yet effective.

Initial application of the following Standards will not affect any of the amounts recognised in the financial report, but will change the disclosures presently made in relation to the consolidated entity’s and the Company’s financial report:

Standard

Effective for annual reporting periods

beginning on or after

Expected to be initially applied in the financial

year ending

NZ IFRS-7 ‘Financial Instruments: Disclosures’ and consequential amendments toother accounting standards resulting from its issue’

1 January 2007 30 June 2008

NZ IFRS-8 ‘Operating Segments’ 1 January 2009 30 June 2010

Initial application of the following Standards and Interpretations is not expected to have any material impact to the financial reportof the consolidated entity and the Company:

Standard/Interpretation

Effective for annual reporting periods

beginning on or after

Expected to be initially applied in the financial

year ending

NZ IFRIC-10 ‘Interim Financial Reporting and Impairment’ 1 November 2006 30 June 2008

NZ IFRIC -11 ‘NZ IFRS-2 – Group and Treasury Share Transactions’ 1 March 2007 30 June 2008

NZ IFRIC-12 ‘Service Concession Arrangements’ 1 January 2008 30 June 2009

IFRIC-13 ‘Customer Loyalty Programmes’ 1 July 2008 30 June 2009

IFRIC-14 ‘IAS-19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’

1 January 2008 30 June 2009

NZ IAS-23 ‘Borrowing Costs’ – revised standard 1 January 2009 30 June 2010

24

1. IncomeGroup

year to 30 June 07

NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

REVENUE


Revenue from the rendering of services

Transmission services revenue 350,640 323,602 341,847 318,007

Dividends received 7 9 7 9

Other revenue

Tasmanian government contribution 791 72 - -

Management service fee revenue - - 1,791 -

Total revenue from continuing operations 351,438 323,683 343,645 318,016

Discontinued Operations

Revenue from the rendering of services (note 6) - 15,553 - -

Total revenue from continuing and discontinued operations 351,438 339,236 343,645 318,016

INVESTMENT REVENUE


Interest on bank deposits 211 283 87 139

Interest on inter-company loan - - 2,232 -

211 283 2,319 139

GAINS


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

24,750 7,546 24,750 7,546

24,750 15,630 24,750 15,630

Total other income from continuing operations 24,961 15,913 27,069 15,769

Discontinued Operations

Gain on disposal of subsidiary (note 6) - 5,380 - -

Total income from continuing and discontinued operations 376,399 360,529 370,714 333,785

Notes to and forming part of the Consolidated Financial StatementsFor the year ended 30 June 2007

25

2. Profit For The Period Group

year to 30 June 07

NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Depreciation (note 17)

buildings 400 433 400 433

plant and equipment 4,793 6,026 4,318 254

network systems 60,539 59,480 58,141 57,586

Amortisation of intangible assets 2,905 2,099 2,678 2,099

Employee benefits 14,560 28,440 13,101 3,674

Impairment of non-current assets (note 19) - 906 - 906

3. Finance CostsGroup

year to 30 June 07

NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Interest on bank overdrafts 73 3,469 73 834

Interest on senior debt 75,081 75,605 72,555 75,605

Interest on subordinated debt 7,514 7,687 7,514 7,687

Other finance costs 3,591 2,603 3,591 2,603

Total finance costs 86,259 89,364 83,733 86,729

4. TaxationGroup

year to 30 June 07

NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Income tax recognised in the Income Statement

Tax expense/(benefit) comprises:

Current tax expense/(benefit) 5,687 (10,534) 3,188 (13,505)

Adjustments recognised in current year in relation to the current tax of prior years (2,967) - (2,967) -

Deferred tax expense on temporary differences 19,899 13,524 25,983 18,223

Deferred tax benefit on tax losses (7,423) 7,133 (7,471) 6,790

Adjustments recognised in current year in relation to the deferred tax of prior years 264 - 264 -

Effect of changes in tax rates and laws (13,258) - (13,258) -

Total tax expense 2,202 10,123 5,739 11,508

Attributable to:

Continuing operations 2,202 10,123 5,739 11,508

Discontinued operations - - - -

2,202 10,123 5,739 11,508

26

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

Groupyear to

30 June 07NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Profit before tax:

Continuing operations 69,798 50,559 80,354 53,735

Discontinued operations - 1,464 - -

69,798 52,023 80,354 53,735

Tax at the New Zealand income tax rate of 33 per cent 23,033 17,168 26,517 17,733

Tax effect of revenue that are not deductible in determiningtaxable profit (4,563) (6,660) (4,817) (6,225)

Effect of different tax rates of subsidiaries operating in other jurisdictions (307) (385) - -

Effect on deferred tax balances due to the change in income tax rate from 33% to 30% (effective 1 April 2008) (13,258) - (13,258) -

4,905 10,123 8,442 11,508

Over provision of income tax in previous year (2,703) - (2,703) -

2,202 10,123 5,739 11,508

The tax rate used in the above reconciliation is the corporate tax rate of 33% payable by New Zealand corporate entities ontaxable profits under New Zealand tax law. The corporate tax rate in New Zealand is to change from 33% to 30% with effectfrom 1 April 2008. This revised rate has not impacted the current tax payable for the current year but will do so in future periods.

the reporting period.

All temporary differences have been recorded in the financial statements.

Income tax recognised directly in equityGroup

year to 30 June 07

NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Deferred tax

Revaluation of financial instruments treated as cash flow hedges 4,326 1,093 4,326 1,093

4,326 1,093 4,326 1,093

Deferred tax balancesGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Deferred tax assets comprise:

Tax losses 352 400 - -

Temporary differences 10,950 5,398 - -

11,302 5,798 - -

Deferred tax liabilities comprise:

Tax losses (14,604) (7,133) (14,604) (6,790)

Temporary differences 143,473 125,940 143,473 126,158

128,869 118,807 128,869 119,368

27

Deferred tax - temporary differences

Group - 2007 Opening balanceNZ$000

Charged to incomeNZ$000

Charged toequity

NZ$000

Exchangedifferences

NZ$000

Changes in tax rateNZ$000

ClosingbalanceNZ$000

Gross deferred tax liabilities

Property, plant and equipment 125,936 20,788 - (64) (13,191) 133,469

Cash flow hedges (804) 8,167 4,326 - - 11,689

Other 3,678 (696) - (275) (67) 2,640

128,810 28,259 4,326 (339) (13,258) 147,798

Set-off of deferred tax balances (4,325)

Net deferred tax liabilities - temporary differences 143,473

Gross deferred tax assets

Provisions 134 (93) - (9) - 32

Unamortised government grants 7,311 8,117 - (1,001) - 14,427

Other 823 72 - (79) - 816

8,268 8,096 - (1,089) - 15,275


Net deferred tax assets - temporary differences 10,950

Group - 2006 Opening balanceNZ$000


Charged toequity

NZ$000

Exchangedifferences

NZ$000

Changes in tax rateNZ$000



Property, plant and equipment 111,778 14,158 - - - 125,936

Cash flow hedges (4,387) 2,490 1,093 - - (804)

Other (1,466) 5,144 - - - 3,678

105,925 21,792 1,093 - - 128,810


Net deferred tax liabilities - temporary differences 125,940


Provisions - 134 - - - 134

Unamortised government grants - 7,311 - - - 7,311

Other - 823 - - - 823

- 8,268 - - - 8,268


Net deferred tax assets - temporary differences 5,398

28

Deferred tax - temporary differences

Parent - 2007OpeningbalanceNZ$000


Charged to equity

NZ$000

Exchangedifferences

NZ$000

Changes intax rateNZ$000



Property, plant and equipment 125,936 19,170 - - (13,191) 131,915

Cash flow hedges (804) 8,167 4,326 - - 11,689

Other 1,026 (1,090) - - (67) (131)

126,158 26,247 4,326 - (13,258) 143,473


Provisions - - - - - -

Unamortised government grants - - - - - -

Other - - - - - -

- - - - - -

Parent - 2006OpeningbalanceNZ$000


Charged to equity

NZ$000

Exchangedifferences

NZ$000

Changes intax rateNZ$000



Property, plant and equipment 112,524 13,412 - - - 125,936

Cash flow hedges (4,387) 2,490 1,093 - - (804)

Other (1,295) 2,321 - - - 1,026

106,842 18,223 1,093 - - 126,158


Provisions - - - - - -

Unamortised government grants - - - - - -

Other - - - - - -

- - - - - -

5. Imputation Credits AccountGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Opening balance 54 - 54 -

Imputation credits attached to dividends received during the period 2 3 2 3

Income tax payments made during the period - 51 - 51

Resident witholding tax on interest received 53 - 53 -

Imputation credits forfeited on loss of shareholder continuity (51) - (51) -

Closing balance 58 54 58 54

29

6. Discontinued Activities

Powerco Energy Services Limited (PES) and Powerco Energy Services Eastern Limited (PESE) were sold on 31 October2005 to Tenix Alliance New Zealand Limited. These businesses were both wholly owned subsidiaries of Powerco Limited andrepresented a separate segment. Their principal activity was electrical and gas contracting.

Group30 June 07

NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Revenue - 15,553 - -

Cost of sales - 18,123 - -

Operating expenses - 537 - -

Administration expenses - 205 - -

- 18,865 - -

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

Depreciation - 604 - -

Loss before tax - (3,916) - -

Tax expense - - - -

Loss after tax - (3,916) - -

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

Tax attributable to gain on disposal - - - -

Profit for the year from discontinued operations - 1,464 - -

During the previous financial year, PES and PESE contributed negative $5.2 million to the Group's net operating cash flows,received $17.8 million in respect of investing activities, and made nil contribution to financing activities.

A gain of $5.4 million arose in 2006 on the disposal of PES and PESE, being the proceeds of disposal less the carrying amountof the subsidiaries' net assets and attributable goodwill, which is included in the line item, profit for the year from discontinuedoperations for the 2006 year from the Group discontinued operations in the Income Statement.

7. Share Capital

Total number of ordinary shares authorised, issued and fully paid at 30 June 2007 was 316,186,775 (2006: 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.

8. Reserves

Foreign exchange reserveExchange 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 reserveThe hedge reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The cumulativedeferred gain or loss on the hedge is recognised in the Income Statement when the hedged transaction impacts the IncomeStatement, or is included as a basis adjustment to the non-financial hedged item, consistent with the applicable accounting policy.

30

9. Minority Interest Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Opening balance - 38 - -

Share of profit for the year - 1 - -

Disposal of minority interest - (39) - -

Closing balance - - - -

10. Dividends Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Dividends paid on ordinary shares 69,356 68,900 69,356 68,900

Cents per share 21.9 21.8 21.9 21.8

11. Other Non-Current Liabilities Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Deferred government grant 49,167 34,022 - -

A proportion of the deferred government grant is recognised as revenue in the Income Statement each month. This amountis determined by calculating a set percentage of the depreciation charge of the capitalised project costs. The income is beingrecognised over 40 years.

Further details regarding this government grant is given in note 30.

12. BorrowingsGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Non-current liabilities at amortised cost

Subordinated bonds 94,219 96,733 94,219 96,733

Guaranteed bonds 400,888 410,415 400,888 410,415

US dollar private placement notes 207,554 262,443 207,554 262,443

Commercial bank debt 272,455 250,585 160,000 160,000

975,116 1,020,176 862,661 929,591

Current liabilities at amortised cost

Bank overdraft (note 16) 31,561 28,500 31,561 28,500

Commercial paper facility 146,983 147,240 146,983 147,240

Commercial bank debt 30,000 - 30,000 -

208,544 175,740 208,544 175,740

31

a) Subordinated bonds Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000


Adjustment for the fair value of the interest rate risk (3,764) (413) (3,764) (413)

96,236 99,587 96,236 99,587

Deferred funding costs (2,017) (2,854) (2,017) (2,854)

Carrying value of subordinated bonds 94,219 96,733 94,219 96,733

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. fixed until expiry on 15 April 2010.

b) Guaranteed bondsGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

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

Adjustment for the fair value of the interest rate risk (6,697) (3,227) (6,697) (3,227)

Deferred funding cost (1,835) (2,325) (1,835) (2,325)











Carrying value of guaranteed bonds 400,888 410,415 400,888 410,415

$250 million of guaranteed bonds were issued on 29 March 2004 as unsecured debt obligations of Powerco Limited. Thescheduled payments by Powerco Limited of interest and principal are guaranteed on an unsecured basis by US-based XLCapital Assurance Inc, a specialist financial 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 fixed 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 unsecuredbasis 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 fixed until maturity. – 7 year guaranteed bonds 6.59%– 12 year guaranteed bonds 6.74%

32

Under the trust documents constituting the guaranteed bonds, Powerco Limited has covenanted to ensure that, if XLCA defaults on its obligations under the Financial Guaranty, Powerco Limited will procure sufficient number of its subsidiaries to guaranteeits 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 2007, nosubsidiary guarantee had been executed.

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

c) US dollar private placementGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

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

Adjustment for fair value of the interest rate and currency risk (27,026) (9,671) (27,026) (9,671)

Deferred funding costs (594) (674) (594) (674)







Carrying value of the US dollar private placement 207,554 262,443 207,554 262,443

The US dollar private placement note issue took place on 25 November 2003 to private US investors. The US dollar 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 thenetwork assets of Powerco Limited through the Security Trust Deed.

The interest rates on the notes are fixed 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 facilityPowerco 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. This facility was due to expire in August 2007 but has been extended until August 2009. The facility has the benefit of the Security Trust Deed dated 10 March 2005 as a Senior Secured Debtor Facility, and as such the principal is secured against the network assets of Powerco Limited. At 30 June 2007 a sum of$150,000,000, which includes an interest portion of $3,017,076 of 90 day bills at a weighted average interest rate of 8.15%, withvarying maturity dates, had been drawn down under the commercial paper programme (2006: $150,000,000 was drawn down under the commercial paper programme which included an interest portion of $2,759,645 at a weighted average interest rate of 7.52%). No amount has been drawn on the standby facility. As at year end the carrying value approximates the fair value.

e) Commercial bank debtA $160 million Term Loan Facility agreed and drawn in August 2004, expiring August 2009, which was used to refinance 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 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 8.71%. The Term Loan Facility has the benefit of the Security Trust Deed, for the purposes of which it is designated as a Senior SecuredDebt Facility and thus secured against the network assets of Powerco Limited. As at 30 June 2007 a sum of $160 million had been drawn (2006 : $160 million with an interest rate of 8.12%).

As at 30 June 2007 Powerco Tasmania, a wholly-owned subsidiary of Powerco Limited, operated a cash advance facility withAAsAs Westpac Banking Corporation, expiring in August 07. During June 07 this facility was increased from AUD$100 million to AUD$130 WWWeWeesmillion through to the expiry date, before which it will be refinanced with AUD$130 million of bank debt. As at 30 June 2007 mmmillio

33

Powerco Tasmania had drawings of NZD$112.5 million (AUD$102 million) on this facility. As at 30 June 2007 the facility hadinterest rates ranging from 6.71% to 6.72%. As at 30 June 2006 the facility was drawn to NZD$90.6 million (AUD$74.5 million).

During the period Powerco added a revolving cash advances tranche of $30 million to the existing $200 million standby facility (refer Commercial Paper note). The purpose of this facility is the short term funding of development capital expenditure, and the facility will be drawn down and repaid as funding is required. This additional amount of the facility is jointly provided by WestpacBanking Corporation, ANZ National Bank and Commonwealth Bank of Australia and is due to expire on 3 August 2009. As at 30June 2007 the interest on this facility was 8.59%.

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

f) CovenantsPowerco Limited has covenanted with all counterparties to ensure certain financial criteria are met throughout the term of thedebt agreements. There have been no covenant breaches to date.

g) Financial assets and liabilitiesThe following tables detail the fair value of financial assets and liabilities

30 June 07 30 June 06

CarryingamountNZ$000

Fairvalue

NZ$000

CarryingamountNZ$000

Fairvalue

NZ$000

Group

Financial assets

Interest rate swaps 39,767 39,767 6,141 6,141

39,767 39,767 6,141 6,141

Financial liabilities




Commercial paper facilities 146,983 146,983 147,240 147,240


US cross currency interest rate swap 84,780 84,780 29,662 29,662


1,264,872 1,252,161 1,214,700 1,214,700

Parent

Financial assets


39,767 39,767 6,141 6,141





Commercial paper facilities 146,983 146,983 147,240 147,240




1,152,417 1,139,706 1,124,115 1,124,1155515

34

The fair value of financial assets and financial liabilities are determined as follows:

- For floating rate debt carrying value approximates fair value due to continuing interest rate reset.- For fixed rate debt opposing floating 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.- The fair value of financial derivatives and fixed rate debt are determined by reference to the market quoted rates input into

valuation models.

13. Provisions Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Non-current liabilities:

Employee entitlements 337 425 337 425

Current liabilities:

Employee entitlements 2,186 2,257 1,866 1,945

Disconnection of gas ICP's 790 - 790 -

Total current liabilities 2,976 2,257 2,656 1,945

The provision for employee entitlements relates to employee benefits 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 employeesand the timing of employees utilising the benefits. The majority of the provision is expected to be realised within the next two years.

Movements in provisions

Disconnectionsof gas ICP's

NZ$000TOTAL

NZ$000

As at 30 June 2005 - -

Arising during the year - -

Utilised amounts - -

As at 30 June 2006 - -

Arising during the year 790 790

Utilised amounts - -

As at 30 June 2007 790 790

14. Trade And Other Payables

Group30 June 07

NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Trade payables and accruals 27,644 29,760 19,914 15,367

Interest payable 7,431 7,485 7,431 7,485

Management service fee payable (note 32) 1,925 - 1,925 -

Goods and Service Tax (GST) payable - - - 4,343

37,000 37,245 29,270 27,195

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

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

35

15. Other Current Liabilities Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Deferred government grant 1,306 1,886 - -

Unclaimed monies (note 20) 1,828 2,938 1,828 2,938

3,134 4,824 1,828 2,938

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 over40 years. Further details of this government grant is given in note 30.

Unclaimed monies are funds held on behalf of shareholders who cannot currently be located. The corresponding asset for thesefunds has been shown at note 20.

16. Working Capital Advances Facility

Powerco Limited operates a wholesale capital advance facility with the Commonwealth Bank of Australia for up to $30 million.As at 30 June 2007, the full $30 million was drawn down on the facility (2006: funds drawn of $28.5 million, offset by unrealised deposits of $475,643). 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 benefit of theSecurity Trust Deed, as a Senior Secured Debt Facility. This facility had interest rates ranging from 7.40% to 8.15%.

At 30 June 2007 Powerco Limited's operating bank account was overdrawn to the extent of $1.561 million. The overdraft interest rate on this facility at that date was 10.0%.

As at 30 June 2007, Powerco Tasmania, a wholly-owned subsidiary of Powerco Limited, had cash and deposits of $0.834 million (AUD $0.757 million ). In the comparative period, there were cash and deposits of $3.970 million (AUD $3.265 million)). Theinterest rates ranged from 2.00% to 4.85%.

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

36

17. Property, Plant & Equipment Land andbuildings

NZ$000

Plant andequipment

NZ$000

NetworksystemsNZ$000

Work in progress

NZ$000TOTAL

NZ$000

Group

Gross carrying value

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

Transfers 294 (6,956) 230,675 (224,013) -

Additions 21 291 1,753 139,429 141,494

Disposals (805) (59) (12,386) (2,221) (15,471)

Net foreign currency exchange differences (16) (273) (52,765) 34,083 (18,971)

Balance at 30 June 2007 10,557 23,042 2,205,056 53,807 2,292,462

Accumulated depreciation

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

Transfers - (3,336) 3,336 - -

Disposals (55) (13) (2,083) - (2,151)


Net foreign currency exchange differences - (97) (431) - (528)

Balance at 30 June 2007 2,080 16,063 323,490 - 341,633

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


Aggregate depreciation allocated during the year is recognised as an expense and disclosed in (note 2) to the financial 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.

37

Land andbuildings

NZ$000

Plant andequipment

NZ$000

NetworksystemsNZ$000

Work inProgress

NZ$000TOTAL

NZ$000

Parent


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

Additions through business amalgamations - 26,459 448 286 27,193

Transfers 294 (6,955) 69,145 (62,484) -

Additions - (3) 1,753 71,059 72,809

Disposals (805) (59) (12,387) - (13,251)

Balance at 30 June 2007 10,387 20,219 1,989,495 49,461 2,069,562


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

Additions through business amalgamations - 13,277 (166) - 13,111

Transfers - (3,336) 3,336 - -

Disposals (55) (13) (2,082) - (2,150)


Balance at 30 June 2007 2,080 14,845 317,908 - 334,833

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


Capitalised borrowing costs

Group30 June 07

NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Borrowing costs capitalised during the financial year 6,043 3,191 - -

Weighted average capitalisation rate on funds borrowed generally 6.49% 6.10% - -

38

18. Other Intangible Assets

SoftwareNZ$000

Incentivepayments -

commercialNZ$000

Incentivepayments - residential

NZ$000TOTAL

NZ$000

Group


Balance at 30 June 2005 7,969 - - 7,969

Additions 6,041 - - 6,041

Balance at 30 June 2006 14,010 - - 14,010

Additions 1,291 2,940 166 4,397

Net foreign currency exchange differences - (116) (7) (123)

Balance at 30 June 2007 15,301 2,824 159 18,284


Balance at 30 June 2005 481 - - 481

Amortisation during the period 2,099 - - 2,099

Balance at 30 June 2006 2,580 - - 2,580

Amortisation during the period 2,678 149 78 2,905

Net foreign currency exchange differences - (6) (3) (9)

Balance at 30 June 2007 5,258 143 75 5,476

Net book value at 30 June 2006 11,430 - - 11,430

Net book value at 30 June 2007 10,043 2,681 84 12,808

SoftwareNZ$000

TOTALNZ$000

Parent


Balance at 30 June 2005 7,969 7,969

Additions 6,041 6,041

Balance at 30 June 2006 14,010 14,010

Additions 1,291 1,291

Net foreign currency exchange differences - -

Balance at 30 June 2007 15,301 15,301


Balance at 30 June 2005 481 481

Amortisation during the period 2,099 2,099

Balance at 30 June 2006 2,580 2,580

Amortisation during the period 2,678 2,678

Net foreign currency exchange differences - -

Balance at 30 June 2007 5,258 5,258

Net book value at 30 June 2006NNe 11,430 11,430

Net book value at 30 June 2007NNe 10,043 10,043

39

19. GoodwillGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Gross carrying amount

Opening balance - 4,399 - 2,248

Additions - - - -

Closing balance - 4,399 - 2,248

Accumulated impairment losses

Opening balance - 3,493 - 1,342

Impairment loss for the year - 906 - 906

Closing balance - 4,399 - 2,248

Net book value - - - -

In the previous financial year, the Group assessed the recoverable amount of goodwill and determined that the goodwill associated with past acquisitions was impaired by $906,000. 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% 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 ofthe business. No write-down of the carrying amount of other assets in the cash generating unit was required.

20. Other Current Assets

Group30 June 07

NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Unclaimed monies 1,828 2,938 1,828 2,938

Related party receivables 76 - 1,051 -

1,904 2,938 2,879 2,938

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 SubsidiariesPowerco Limited's principal activity is electricity and gas line distribution and Powerco Limited has invested in the following significant subsidiaries:

Ownership interest and voting rights

Subsidiary companies Principle activity LocationBalance

Date30 June

0730 June

06

Non-trading and consolidating New Zealand 30 June 100 100

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

Powerco Tasmania Pty Limited Gas reticulation and distribution Australia 30 June 100 100

Powerco Energy Services Pty LimitedElectrical/gas field services andcontracting

Australia 30 June 100 100

Option One Pty Limited Gas retailing Australia 30 June 100 100

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

Powerline Limited Non-trading New Zealand 30 June 100 100

The following entity was amalgamated into Powerco Limited on 20 April 2007:

Powerco Network Management LimitedProvision of management services

New Zealand 30 June - 100000

40

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

Group financial statements are presented in New Zealand dollars.

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

As at balance date, Powerco Energy Services Pty Limited was in the process of being liquidated. Energy Brokers New ZealandLimited was liquidated during the financial year.

The effect of the amalgamation of Powerco Network Management Limited on the Parent numbers was as follows:

Book valueNZ$000

Current assets

GST receivable 6,353

Non-current assets

Property, plant and equipment 13,182

Current liabilities

Trade and other payables (887)

Intercompany account and intercompany loans (8,078)

Equity

Retained earnings (10,570)

The effect of the amalgamation on net profit was $1.350 million.

22. Trade And Other Receivables Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Trade receivables 6,484 10,300 1,402 2,475

Provision for doubtful debts (2,277) (2,490) (200) (200)

Unbilled sales 28,117 26,162 28,117 26,162

Prepayments 584 399 584 399

Management service fee receivable (note 32) - - 1,791 -

Goods and Service Tax (GST) receivable 1,364 2,301 803 -

34,272 36,672 32,497 28,836

23. Derivative Financial Instruments

a) Powerco Limited enters into New Zealand dollar floating to fixed interest rate swap agreements to reduce the impact of changes in floating interest rates on its borrowings and thus reduce variability in cash flows. Fixed to floating instruments are entered into in order to hedge the changes in fair value of fixed rate New Zealand dollar debt. Powerco Limited also utilises cross currency interest swaps to hedge against the variations in interest costs and fair value of the US dollar private placement debt.

Derivative instruments are initially recognised at fair value on the contract date and subsequently measured at their fairvalue on each balance sheet. The method of recognising the resulting gain or loss depends on whether the derivativeis 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 flow hedges), or (ii) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges).

41

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 highlyeffective in offsetting changes in fair values or cash flows of hedged items.

(i) Cash flow hedgesThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow 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 isultimately recognised in the Income Statement. When a forecast transaction is no longer expected to occur, the cumulativegain or loss reported in equity is immediately transferred to the Income Statement.

(ii) Fair value hedgesChanges 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 accountingCertain 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 immediatelyin the Income Statement.

The fair value of financial derivatives and fixed rate debt are determined by reference to the market quoted rates input intovaluation models.

All derivative instruments are carried on balance sheet at their fair values. Movements in the hedging reserve are shown in the Statement of Changes in Equity.

The Group holds the following financial instruments:

1. Interest rate swapsThe Group receives New Zealand fixed interest rates and pays New Zealand dollar floating interest rates. The hedge is a fair value hedge and was entered into on terms matched to the underlying obligation.

The notional value of the hedge is $350,000,000 (2006: $350,000,000)The fair value of the hedge is -$23,646,929 (2006: -$9,044,900)

2. US cross currency interest rate swapsThe Group receives US dollar fixed interest and pays New Zealand dollar floating interest. The hedge is both a fair value hedge and hedges the movements in currency that would affect interest payments and final repayment at maturity, these were entered into at terms to match the underlying obligation.

The notional value of the hedge is $294,266,016 (2006: $294,266,016)The fair value of the hedge is -$84,780,222 (2006: -$29,662,165)

3. Interest rate swapsThe Group receives New Zealand dollar floating interest rates and pays New Zealand dollar fixed interest. The hedge is tofix the variable floating obligations efficiently as per the hedge policy and the treasury policy and is on matched terms. Thehedge is a cash flow hedge.

The notional value of the hedge is $325,000,000 (2006: $225,000,000)The fair value of the hedge is $13,782,891 (2006: -$2,820,453)

4. Interest rate swapTo swap back fixed New Zealand dollar debt converted to floating back to fixed debt. The swap is used to match the interest

The notional value of the hedge is $515,000,000 (2006: $497,000,000)The fair value of the hedge is $9,183,527 (2006: $1,304,405)

42

5. Interest rate swapTo convert New Zealand dollar floating debt from number 2 above to New Zealand dollar fixed debt. The swap is used to modify

The notional value of the hedge is $475,000,000 (2006: $555,000,000)The fair value of the hedge is $13,001,901 (2006: -$265,838)

6. Interest rate swapsTo unwind floating to fixed swaps which existed when the hedging policy was changed. These are to offset previous interest rate

The notional value of the swap is $80,000,000 (2006: $80,000,000)The fair value of the swap is -$4,345,532 (2006: -$891,411)

7. Interest rate swaps

applied to these swaps.

The notional value of the swap is $80,000,000 (2006: $80,000,000)The fair value of the swap is $3,799,140 (2006: $236,964)

Total notional principal of instruments recognised is $2,119,266,016 (2006: $2,081,266,016)Total fair value of instruments recognised is -$73,005,224 (2006: -$41,143,398)

All cash flow hedges above are on matched terms. The maturities are the same as the financial liabilities recorded in note 12. The Group's policy is to refloat any fixed rate debt, thus giving a totally floating portfolio, then re-hedge as per parameters in thetreasury policy. This has the effect that some fixed rate hedges are applied against floating rate hedges. In line with NZ IAS-39these are not able to be designated as hedges for accounting purposes and thus movements in the mark to market value of these is passed through to the Income Statement.

The Group's New Zealand dollar and foreign currency fixed rate debt is converted to floating New Zealand dollar 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 aconstant credit rating.

The fair value of financial instruments is disclosed in the financial statements as follows:

Group30 June 07

NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Other non-current financial assets

Interest rate swap 39,767 6,141 39,767 6,141

39,767 6,141 39,767 6,141

Other non-current financial liabilities


Interest rate swap 27,993 17,622 27,993 17,622

112,773 47,284 112,773 47,284

Fair value of assets and liabilities 73,006 41,143 73,006 41,143

b) Currency swapsUnder currency swap contracts, the consolidated entity agrees to exchange specified principal and interest foreign currencyamounts at an agreed future date at a specified exchange rate (fixed for floating). Such contracts enable the consolidated entity to mitigate the risk of adverse movements in foreign exchange rates.

43

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

Outstanding contracts as at 30 June 2007Group and Parent

Averageinterest rate %

Averageexchange rate

Contract valueNZ$000

Fair valueNZ$000

Over five years BKBM + 88 basis points 0.5947 294,266 (84,780)

Outstanding contracts as at 30 June 2006Group and Parent

Averageinterest rate %

Averageexchange rate

Contract valueNZ$000

Fair valueNZ$000

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

c) Interest rate swap contractsUnder interest rate swap contracts, the consolidated entity agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the consolidated entity tomitigate 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 outstandingbalances at the end of the financial year.

The following tables details the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at reporting date:

Group and Parent 30 June 2007 Group and Parent 30 June 2006

Average contracted

fixed interestrate

%

Notional principal

amountNZ$000

Fair valueNZ$000

Averagecontracted

fixed interestrate

%

Notional principal

amountNZ$000

Fair value NZ$000

Floating to fixed contracts:

Less than 1 year 6.56% 330,000 3,920 6.51% 171,000 935

1 to 2 years 6.51% 140,000 2,858 6.38% 291,000 2,384

2 to 3 years 6.94% 40,000 1,132 6.49% 40,000 323

3 to 4 years 6.71% 40,000 1,605 6.94% 40,000 17

4 to 5 years 6.99% 85,000 3,283 6.71% 40,000 161

5 years + 6.76% 760,000 26,969 6.83% 775,000 (5,365)

Fixed to floating contracts:

Less than 1 year - - - - - -

1 to 2 years - - - - - -

2 to 3 years 7.45% 120,000 (4,553) - - -

3 to 4 years 6.22% 100,000 (6,697) 7.45% 120,000 (693)

4 to 5 years 6.54% 20,000 (1,120) 6.22% 100,000 (3,227)

5 years + 6.46% 190,000 (15,623) 6.47% 210,000 (6,016)

Total interest rate swaps 1,825,000 11,774 1,787,000 (11,481)

Total cross currency swaps (b) 294,266 (84,780) 294,266 (29,662)

Total swaps (a) 2,119,266 (73,006) 2,081,266 (41,143)

44

d) Hedge movements recognised in the Income StatementGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Gain on fair value hedges recognised in the Income Statement 69,720 (7,814) 69,720 (7,814)

Adjustment for the fair value of interest rate risk on borrowings (69,720) 7,814 (69,720) 7,814

Net effect on profit for the period - - - -

The fair value of cash flow hedges recognised in the Income Statement (24,750) (7,546) (24,750) (7,546)

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

e) Maturity profile of financial instrumentsThe following table details the exposure to interest rate risk as at 30 June 2007:

This table uses repricing dates and as such does not reflect the actual maturity of any floating rate debt or other debt that isrepriced prior to maturity.

Weightedaverage

effectiveinterest

rate%

Variableinterest

rateNZ$000

Maturity dates

less thanI year

NZ$0001-2 years

NZ$0002-3 years

NZ$0003-4 years

NZ$0004-5 years

NZ$000

More than 5 yearsNZ$000

Non- interest bearingNZ$000

TOTALNZ$000

Group

Financial assets

Cash and cash equivalents 5.25% 834 - - - - - - - 834

Trade and other receivables - - - - - - - 34,272 34,272

Interest rate swaps - - - - - - - 39,767 39,767

Other current assets - - - - - - - 1,904 1,904

834 - - - - - - 75,943 76,777


Trade and other payables - - - - - - - 37,000 37,000

Bank overdraft 8.24% 31,561 - - - - - - - 31,561

Subordinated bonds 7.64% - - - 94,219 - - - - 94,219

Guaranteed bonds 6.47% - - - - 91,468 - 309,420 - 400,888

US dollar private placementnotes 5.56% - - - - - - 207,554 - 207,554

Commercial paper facility 8.15% - 146,983 - - - - - - 146,983

Commercial bank debt 7.96% 30,000 272,455 - - - - - - 302,455


US cross currency interestrate swaps - - - - - - - 84,780 84,780

Employee benefits - - - - - - - 2,523 2,523

Other current liabilities - - - - - - - 3,134 3,134

61,561 419,438 - 94,219 91,468 - 516,974 155,430 1,339,090

45

Weightedaverage

effective interest

rate%

Variable interest

rateNZ$000

Maturity dates

less thanI year

NZ$0001-2 years

NZ$0002-3 years

NZ$0003-4 years

NZ$0004-5 years

NZ$000

More than5 yearsNZ$000

Non-interestbearingNZ$000

TOTALNZ$000

Parent

Financial assets

Trade and otherreceivables - - - - - - - 32,497 32,497



- - - - - - - 75,143 75,143



Bank overdraft 8.24% 31,561 - - - - - - - 31,561

Subordinated bonds 7.64% - - - 94,219 - - - - 94,219

Guaranteed bonds 6.47% - - - - 91,468 - 309,420 - 400,888

US dollar private placement notes 5.56% - - - - - - 207,554 - 207,554


Commercial bank debt 7.96% 30,000 160,000 - - - - - - 190,000


US cross currency interestrate swaps - - - - - - - 84,780 84,780



61,561 306,983 - 94,219 91,468 - 516,974 146,074 1,217,279

46

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

Weightedaverage

effectiveinterest

rate%

Variableinterest

rateNZ$000

Maturitydates

less thanI year

NZ$0001-2 years

NZ$0002-3 years

NZ$0003-4 years

NZ$0004-5 years

NZ$000

More than 5 yearsNZ$000


TOTALNZ$000

Group

Financial assets

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




4,445 - - - - - - 45,751 50,196



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 placementnotes 5.56% - - - - - - 262,443 - 262,443


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


US cross currency interest rateswaps - - - - - - - 29,662 29,662



28,500 397,825 - - 96,733 96,773 576,085 92,035 1,287,951

47

Weighted average

effective interest

rate %

Variableinterest

rateNZ$000

Maturitydates

less thanI year

NZ$0001-2 years

NZ$0002-3 years

NZ$0003-4 years

NZ$0004-5 years

NZ$000

More than 5 years

NZ$000


TOTALNZ$000

Parent

Financial assets

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




476 - - - - - - 37,915 38,391



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 bank debt 8.12% - 160,000 - - - - - - 160,000


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



28,500 307,240 - - 96,733 96,773 576,085 79,787 1,185,118

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.

f) Financial instrumentsRisk managementThe 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 unpredictability of financial markets and seeks to minimise the potential adverse effects of market movements. The Group uses derivative financial 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 bothdetailed policies and specific areas such as foreign exchange risk, interest rate risk, credit risk and liquidity risk as well asthe 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 dollardenominated debt and investments in Australian operations. This exposes the Group to potential gains and lossesarising from currency movements. The Group policy relating to US dollar denominated debt is to minimise the exchangeegegngrate 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.

48

(ii) Interest rate exposuresInterest rate risk is the risk that interest rates will change, increasing or decreasing the cost of borrowing or lending. TheCompany's and Group's short-term borrowings are on a floating daily interest rate. Non-current debt is funded by thefixed 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 onits borrowings. As at 30 June 2007, Powerco Limited had interest rate swap agreements with registered banks. Theweighted average of the interest rate swap agreements (excluding the reverse swap agreements) produce an interestrate of 6.70%p.a.

(b) Credit riskFinancial instruments which potentially subject the Company to credit risk principally consist of bank balances andaccounts receivable. There are no significant concentrations of credit risk. These accounts are subject to a Board PrudentialSupervision 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 isthe carrying value.

(c) Liquidity riskLiquidity risk is the risk that the Group may be unable to meet its financial obligations as they fall due. This risk is managedby maintaining sufficient cash and deposits together with access to committed credit facilities.

24. Auditors’ RemunerationGroup

year to30 June 07

NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Amounts paid or payable to the auditors for:

Audit of the financial statements 271 262 190 188

Audit services 36 105 36 105

Taxation services 705 357 705 357

Other non-audit services - 246 - 223

1,012 970 931 873

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

Audit services:- Audit of prospectus- Audit of regulatory disclosure statements- IFRS assistance (2006)

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

25. Lease Obligations Group

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

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

864 3,677 864 108

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

Within one year 639 3,709 639 1,858

Between 1-5 years 733 806 733 732

More than 5 years 189 238 189 212

1,561 4,753 1,561 2,802

49

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

26. Notes To The Cash Flow Statement

(a) Business disposedDuring the previous financial year, the consolidated entity disposed of its electrical and gas contracting business. Details of the disposal are as follows:

Group30 June 07

NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

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 - -

(b) Financing facilitiesGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

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

Amount used 142,455 90,585 30,000 -

Amount unused 30,870 31,005 - -

173,325 121,590 30,000 -

Wholesale capital advance facility with Commonwealth Bank of Australia (CBA):

Amount used 30,000 28,500 30,000 28,500

Amount unused - 1,500 - 1,500

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

Commercial paper programme, supported by a cash advance facility, supported by Westpac, 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

All other commercial bank facilities are fully drawn as at 30 June 2007 and 30 June 2006 (refer to note 12(e) for details).

50

27. Segmental Reporting

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

1) Electricity lines – electricity line distribution2) Gas lines – gas line distribution3) Gas reticulation, gas contracting and gas retailing – gas line distribution

– gas contracting services– retailing of gas

The electricity and gas field services and contracting segment was discontinued on 1 November 2005 (see notes 6 and 28).

During the current financial year the management services provided by Powerco Network Management Limited were amalgamated into the Parent Company. The comparative balances for the management services segment in 2006 have beenreclassified between electricity and gas to be comparable with 2007.


Electricity &gas fieldservicesNZ$000

Electricitylines

NZ$000

Gaslines

NZ$000

Gasreticulation,

contracting &retailingNZ$000

UnallocatedNZ$000

EliminationsNZ$000

TOTALNZ$000

Revenue

External sales - 284,965 54,927 9,221 2,325 - 351,438

Inter-segment sales - - - - 1,791 (1,791) -

Total revenue - 284,965 54,927 9,221 4,116 (1,791) 351,438

Result

Segment result fromcontinuing operations

- 105,542 30,626 (4,492) 24,381 - 156,057

Finance costs 86,259

Profit before tax 69,798

Income tax expense 2,202

Net profit for the period 67,596

Other Information

Capital additions - 65,793 8,305 71,793 - - 145,891

Depreciation and amortisation - 53,865 11,107 3,100 565 - 68,637

Balance Sheet

Assets

Segment assets - 1,383,560 380,873 225,849 64,600 - 2,054,882

Liabilities

Segment liabilities - 7,351 1,386 58,531 1,453,040 - 1,520,308

51


Electricity &gas fieldservicesNZ$000

Electricitylines

NZ$000

Gaslines

NZ$000

Gasreticulation,

contracting &retailingNZ$000

UnallocatedNZ$000

EliminationsNZ$000

TOTALNZ$000

Revenue

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

Inter-segment sales 6,300 - - - - (6,300) -

Total revenue 21,853 265,087 51,250 5,223 2,123 (6,300) 339,236

Result

Segment result from continuingoperations - 92,306 30,953 (5,037) 21,701 - 139,923

Finance costs 89,364

Profit before tax 50,559

Income tax expense 10,123

Profit for the period from continuing operations 40,436

Segment result from discontinuedoperations (see note 6) (3,916) - - - - - (3,916)

Gain on disposal (see note 6) 5,380

Profit for the period from discontinued operations (see note 6) 1,464

Net profit for the period 41,900

Other Information

Capital additions 556 71,921 9,607 67,617 - - 149,701

Depreciation and amortisation 604 54,486 10,544 2,404 - - 68,038

Balance Sheet

Assets

Segment assets - 1,381,952 385,936 194,467 15,157 - 1,977,512

Liabilities

Segment liabilities - 19,470 2,761 49,735 1,372,408 - 1,444,374

In April 2007 the subsidiary company Powerco Network Management Limited was amalgamated into the Parent Company. In accordance with NZ IAS-14 the segmental disclosure for the year ended 30 June 2006 has been reclassified to provide consist comparison. The changes are detailed in the comparative amounts section of the Statement of Accounting Policies for the Consolidated Financial Statements.

Geographical segmentsThe Group's operations are located in New Zealand and Australia.

The Group's New Zealand operations include:- electricity and gas line distribution

The Group's Australian operations include:- gas reticulation, field services contracting and gas retailing

52

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.

Contuning operations Discontinued operations TOTAL

Year to30 June 07

NZ$000

Year to30 June 06

NZ$000

Year to30 June 07

NZ$000

Year to30 June 06

NZ$000

Year to30 June 07

NZ$000

Year to30 June 06

NZ$000

New Zealand 341,795 318,460 - 15,553 341,795 334,013

Australia 9,643 5,223 - - 9,643 5,223

351,438 323,683 - 15,553 351,438 339,236

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

Carrying amount of segment assetsAdditions to property plant

& equipment

As at30 June 07

NZ$000

As at30 June 06

NZ$000

Year to30 June 07

NZ$000

Year to30 June 06

NZ$000

New Zealand 1,829,033 1,783,045 74,098 82,084

Australia 225,849 194,467 71,793 67,617

2,054,882 1,977,512 145,891 149,701

The total amount of significant non-cash expenses was comprised of deferred funding costs of $2.8 million for the unallocated segment.

28. Disposal Of Subsidiary

As referred to in note 6, on 1 November 2005 the Group discontinued its electricity and gas field 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 07

NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Property, plant and equipment - 5,544 - -

Inventory - 5,396 - -

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 inflow 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 2006 results andcash flows is disclosed in note 6.

53

29. Defined Contribution Plan

Defined contribution planThe Group operates defined 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 $122,000 (30 June 2006: $264,000) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. As at 30 June 2007 there were no contributions that hadnot been paid over to the plans.

Defined benefit planThe Group has a small number of employees that are part of a multi-employer scheme. Under the plan, the employees are entitled to retirement benefits. No other post-retirement benefits are provided. The total expenses recognised in the IncomeStatement of $84,000 (30 June 2006: $143,000) represents contributions payable to the plan. The Group has no other liability inrespect to the scheme and should there be a deficit in the fund all benefit payments are guaranteed by the Crown.

30. Contingent Liabilities And Commitments

CONTINGENCIES

Legal claimsPowerco 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 unquantified. 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 financial statements.

Taxation riskThe IRD has issued a Notice of Proposed Adjustment dated 27 November 2006 which proposes to disallow depreciation calculated using the market value of former Powerco assets for the 2002, 2003, 2004 and 2005 income tax years. It proposesusing the original cost of the former Powerco assets as the basis for calculating the tax depreciation (the 2001 income tax year isstatute barred).

Powerco, along with it's tax advisors and senior legal counsel disagree with this treatment and has issued a Notice of Responseon 26 January 2007, stating that no adjustment is required.

The potential liability arising from the IRD's argument could range from between $nil to $22.4 million (including $5.9 million use of money interest).

In addition, the IRD has raised an issue of whether the proportion of the price paid by Powerco for the purchase of (1)

certain Bay of Plenty and Thames Valley electricity assets and lower North Island gas assets of United Networks Limited in 2002 attributed to fixed assets and goodwill is correct and as a consequence whether the value of depreciable property anddepreciable loss for the 2002, 2003, 2004, 2005 and 2006 tax years are correct.

The Commissioner is currently investigating this issue further. If, following the Commissioner’s further investigations, there is a dispute between the Commissioner and Powerco with respect to the foregoing and this dispute is not resolved by agreement, theCommissioner may issue a notice of proposed adjustment. If the Commissioner issues a notice of proposed adjustment, Powerco can challenge the adjustment. The potential total liability arising from this dispute can not be accurately estimated at this stage.

ContractsPowerco Limited has a contract with Tenix Alliance New Zealand Limited (Tenix), who provide electricity and gas field 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 predeterminedcalculation in the contract on an annual basis. At this time, any future payment to or from Powerco cannot be quantified.

54

Contribution from Tasmanian governmentIn January 2004, prior to the acquisition, Powerco received a contribution from the State Government of Tasmania amounting toAUD $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 entityis established with access to the necessary expertise, assets and financial 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 onsale of assets or the shares in the gas distribution entity whereby Powerco must repay the State an amount equal to the lesser ofthe establishment contribution and the asset/equity profit.

Powerco Tasmania has entered into a Deed of Settlement with the Tasmanian government indemnifying the government againstany losses or damages on the constructed gas network for a period of 10 years. The extent to which an outflow or cash will be required is dependent on any claims being made by the Tasmanian government in relation to this indemnity.

COMMITMENTSGroup

30 June 07NZ$000

Group30 June 06

NZ$000

Parent30 June 07

NZ$000

Parent30 June 06

NZ$000

Commitments for future capital expenditure resulting fromcontracts entered into:

Not longer than 1 year 23,671 100,413 23,671 23,590

Longer than 1 year and not longer than 5 years 48,845 146,646 48,845 64,226

Longer than 5 years - - - -

72,516 247,059 72,516 87,816

31. Subsequent Events

There have been no significant subsequent events since 30 June 2007.

32. Transactions With Related Parties

Trading transactionsPowerco Limited is a wholly owned subsidiary of BBI Networks (New Zealand) Limited (BBINNZ).

For the year ended 30 June 2007, Powerco Limited was charged management service fees of $1.925 million from BBI Networks (New Zealand) Limited, and Powerco Limited charged Powerco Tasmania Pty Limited management service fees of $1.791 million, as determined by the Service Agreements between the respective entities. As at 30 June 2007 these fees were still outstanding (refer notes 14 and 22). The payment terms are: “payment is required when an invoice is provided from BBINNZ 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 financial advice, strategic treasurymanagement advice, corporate revenue and risk management advice and other corporate policy formulation and advice”.

For the year ended 30 June 2006, Powerco Limited paid management service fees of $458,334 (30 June 2007: nil) toBabcock & Brown Infrastructure Management Pty Limited (BBIM). BBIM are deemed to be a related party as they provide management services to Babcock & Brown Infrastructure Limited. Powerco Limited 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 isset in recognition of the following services being provided: executive strategic management, corporate development and assetmanagement operational advice and direction, corporate financial advice, strategic treasury management advice, corporaterevenue and risk management advice and other corporate policy formulation and advice.”

Powerco Limited has intercompany accounts with its subsidiaries (2007: $1.603 million, 2006: $6.735 million) and an intercompany loan with Powerco Australia Group Pty Limited (2007: $53.9 million, 2006: $30 million). This intercompany loan is unsecured and interest was charged at market rates during the period. In the year ended 30 June 2007, this loan had incurred $2.356 million of interest.

55

Powerco Network Management Limited was a wholly owned subsidiary of Powerco Limited, which was amalgamated withPowerco Limited in April 2007. The company previously charged Powerco Limited at rates which reflected the quantity of services provided and the relationships between the parties, which includes the following activities in the prior year ended 30 June 2006(prior to amalgamation):- Asset management $15,528,290- Information systems $3,908,359- Buildings and insurance $8,088,171- Operational finance and billing $457,425

There are no outstanding balances payable as at 30 June 2007. There are no guarantees or bad debts.

Pty Limited, Powerco Energy Services Pty Limited, Option One Pty Limited, and Powerlines Limited during the 2006 and 2007financial periods.

No expense has been recognised during the period in respect of bad or doubtful debts due from related parties.

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

Groupyear to

30 June 07NZ$000

Groupyear to

30 June 06NZ$000

Parentyear to

30 June 07NZ$000

Parentyear to

30 June 06NZ$000

Short-term benefits 1,974 2,352 1,773 2,352

Post employment benefits 37 29 23 29

2,011 2,381 1,796 2,381

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

33. Approval Of Financial Statements

The financial statements were approved by the board of directors and authorised for issue on 10 September 2007.

56

Audit Report to the Shareholders of Powerco LimitedWe have audited the financial statements on pages 10 to 55. The financial statements provide information about the past financial performance and financial position of Powerco Limited and group as at 30 June 2007. This information is stated in accordance with the accounting policies set out on pages 16 to 23.

Board of Directors’ ResponsibilitiesThe Board of Directors is responsible for the preparation, in accordance with New Zealand law and generally accepted accounting practice, of financial statements which give a true and fair view of the financial position of Powerco Limited and groupas at 30 June 2007 and of the results of operations and cash flows for the year ended on that date.

Auditors’ ResponsibilitiesIt is our responsibility to express to you an independent opinion on the financial statements presented by the Board of Directors.

Basis of OpinionAn audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. Italso includes assessing:

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 sufficient evidence to obtain reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. Informing our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

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

Unqualified OpinionWe have obtained all the information and explanations we have required.

In our opinion:

- comply with generally accepted accounting practice in New Zealand;

- give a true and fair view of the financial position of Powerco Limited and group as at 30 June 2007 and the results oftheir operations and cash flows for the year ended on that date.

Our audit was completed on 11 September 2007 and our unqualified opinion is expressed as at that date.

Chartered AccountantsHamilton, New Zealand

This audit report relates to the financial statements of Powerco Limited for the year ended 30 June 2007 included on Powerco’s website. The Powerco Limited Board of Directors is responsible for the maintenance and integrity of Powerco’s website. We have not been engaged to report on the integrity of Powerco’s website. We accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. The audit report refers only to the financial statements named above. It does not provide an opinion on any other information which may have been hyperlinked to/from these financial statements. If readers of this report are concerned with the inherent risks arising from electronic data communication they should refer to the published hard copy of the audited financial statements and related audit report dated 11 September 2007 to confirm the information included in the audited financial statements presented on this website. Legislation in New Zealand governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors

DirectoryExecutive Management Team

Registered Office

Auditors

Bankers

Share Registry

J W Kendrew

N D Barbour

S E Ekanayake

E R Krogh

J Sellar

(Note: Jeff Kendrew was appointed acting Chief Executive of Babcock and Brown Infrastructure in June 2007 and Chairman of the Board of Powerco in August 2007 following the resignation of the previous Babcock and Brown Infrastructure Chief Executive and Powerco Chairman Steven Boulton in June 2007. Adrian van Jaarsveldt was appointed to the board of Powerco in July 2007.)

Richard Krogh - Chief Executive (Note: Mr Krogh is currently on a secondment at Babcock and Brown Infrastructure as acting Chief Operating Officer – Energy)

N D Barbour – General Manager Commercial and Corporate (Note: Mr Barbour is currently Acting Chief Executive of Powerco)

S E Ekanayake – Chief Financial Officer

B Evans-Parker – Chief Information officer

S Nicholls – Network Service Delivery Manager

R Sheather – General Manager Tasmania

M Whaley – Network Asset Strategy Manager

Level 2, Council Chambers 84 Liardet Street Private Bag 2061 New Plymouth 4310 New Zealand

Telephone 0800 769 372 Facsimile +64 6 759 6723 www.powerco.co.nz

Deloitte

Westpac Banking Corporation

Commonwealth Bank of Australia

ANZ Investment Bank

Computershare Investor Services Limited Private Bag 92 119 Auckland 1020

W W W. P O W E R C O . C O . N Z

connecting the future annual report 2007...steve nicholls was appointed as the network service...

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