for the period ended 30 September 1996 for the period ended 30 September 1996 Note 1996 $000

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2 for the period ended 30 September Note Revenue ,261 Operating Expenses (259,552) Net Finance Expense (20,624) Tax on Operating Surplus (16,741) Adjustment of Assets and Liabilities acquired (after tax) & (88,915) for the period ended 30 September Note Net Deficit for the Period (32,571) Issues of Share Capital ,207,900 Revaluation of Business in accordance with Memorandum of Understanding (204,314) Capital Dividend paid to Shareholders 30 September (150,000) The accompanying notes form an integral part of these financial statements 31

3 as at 30 September Note Represented by: Short Term Deposits ,912 Receivables and Prepayments ,203 Taxation Receivable ,887 Inventories , Fixed Assets ,322, Bank Overdraft ,319 Payables and Accruals ,656 Borrowings , Provision for Restoration and Environmental Rehabilitation ,999 Borrowings , On behalf of the Board Phil Pryke John Milne Chairman Director 11 December 11 December 32 The accompanying notes form an integral part of these financial statements

4 Statement of cash flows Cash Flows from Operating Activities for the period ended 30 September Cash was provided from: Receipts from Customers ,928 Interest Received , ,427 Cash was applied to: Payments to Suppliers and Employees ,136 Interest paid ,935 Income Tax paid , ,752 Net Cash Inflow from Operating Activities ,675 Cash Flows used in Investing Activities Cash was provided from: Proceeds from sale of Fixed Assets , ,981 Cash was applied to: Purchase of Fixed Assets ,565,814 Purchase of Maui Gas Prepayment ,818 Purchase of Inventories , ,641,253 Net Cash Outflow to Investment Activities ,638,272 The accompanying notes form an integral part of these financial statements 33

5 Statement of cash flows Cash Flows from Financing Activities for the period ended 30 September Cash was provided from: Proceeds from the issue of Share Capital ,207,900 Proceeds from Short Term Borrowings ,819 Proceeds from Long Term Borrowings , ,732,023 Cash was applied to: Settlement of Short Term Borrowings ,819 Settlement of Long Term Borrowings ,014 Capital Dividend paid to Shareholders , ,833 Net Cash Inflow from Financing Activities ,546,190 NET INCREASE IN CASH HELD ,593 Cash is comprised of: Short Term Deposits ,912 less Bank Overdraft (2,319) CASH AT THE END OF THE PERIOD , The accompanying notes form an integral part of these financial statements

6 Statement of cash flows RECONCILIATION WITH OPERATING SURPLUS for the period ended 30 September Net Deficit for the Period (32,571) Adjust for: Items not involving Cash Flows Adjustment of Assets and Liabilities acquired 1 February ,915 Depreciation ,400 Bond Amortisation Capitalised Interest (2,305) Impact of changes in working capital items (Increase) in Receivables and Prepayments (46,203) (Increase) in Taxation Receivable (1,887) Decrease in Inventories Increase in Payables and Accruals ,165 Net Cash Inflow from Operating Activities ,675 The accompanying notes form an integral part of these financial statements 35

7 1 statement of accounting policies Reporting Entity Contact was incorporated on 8 November 1995 and became a state owned enterprise on 18 November 1995 pursuant to the State Owned Enterprises Act With effect from 1 February Contact acquired certain assets, staff and liabilities from the Electricity Corporation of New Zealand Limited, ECNZ, in accordance with a Memorandum of Understanding, MOU, dated 8 June 1995 between the Government and ECNZ and an Agreement of Sale and Purchase dated 13 November 1995 between ECNZ and Contact. In consideration for these assets Contact paid ECNZ $1,578 million and the Crown $49 million on 1 February. This was financed by way of a $1,208 million capital subscription from the Crown, and $419 million in Crown loans. The assets and liabilities acquired by Contact were recorded in the statement of financial position at book values stated in the financial statements of ECNZ and the Crown as at 1 February. These assets and liabilities were required to be revalued as explained in Note 7. Contact is wholly owned by Her Majesty the Queen in Right of New Zealand ( the Crown ) and has no subsidiary companies. Contact s liabilities are not guaranteed by the Crown. Contact s core business is primarily the generation, wholesale marketing and trading of electricity and the purchase, wholesale marketing and trading of gas from Maui and other gas fields. These financial statements have been prepared in accordance with the requirements of the Companies Act 1993, the Financial Reporting Act 1993 and the State Owned Enterprises Act General Accounting Policies The general accounting policies recognised as appropriate for the measurement and reporting of results, cashflows and financial position under the historical cost method, except for the revaluation of certain assets and liabilities as required by the MOU, have been followed in the preparation of these financial statements. Particular Accounting Policies The following particular accounting policies which are consistent with the Statement of Corporate Intent for the year ended 30 September 1997 and significantly affect the measurement of financial performance, financial position and cash flows, have been applied: (i) Fixed Assets Fixed assets are recorded at original purchase cost except where certain assets are revalued to reflect fair value in accordance with the MOU. Notes to the 36

8 The cost of purchased fixed assets is the value of the consideration given to acquire the assets and the value of other directly attributable costs which have been incurred in bringing the assets to the location and condition necessary for their intended service. The cost of assets constructed by the company, including capital work in progress, includes the cost of all materials used in construction, direct labour specifically associated, resource management consent costs, and an appropriate proportion of variable and fixed overheads. Costs cease to be capitalised as soon as the asset is ready for productive use and do not include any inefficiency costs. Financing costs on uncompleted capital work in progress are capitalised at the specific project finance interest rate, where these meet certain time and monetary materiality limits. Land and buildings are revalued periodically by independent registered valuers on the basis of open market value for existing use on a willing buyer-willing seller basis. An impairment loss is recognised immediately the carrying value of an asset is, in the opinion of the Directors, greater than its fair value. (ii) Leased Assets Contact leases certain plant, equipment, land and buildings. Leases under which Contact assumes substantially all the risks and rewards incidental to ownership have been classified as finance leases and are capitalised. The asset and corresponding liability are recorded at inception of the lease at the fair value of the leased asset, at amounts equivalent to the value of minimum lease payments, including residual values. The cost of improvements to leasehold property is capitalised and amortised over the estimated useful life of the improvements, or over the unexpired portion of the lease, whichever is shorter. Finance charges are apportioned over the terms on the respective leases using the actuarial method. Capitalised leased assets are depreciated over their expected lives in accordance with rates adopted for other similar asset categories. Operating lease payments are representative of the pattern of benefits derived from the leased assets and accordingly are charged to the Statement of Financial Performance in the periods of expected benefit. financial statements for the period ended 30 September 37

9 (iii) (iv) (v) (vi) (vii) (viii) Depreciation Depreciation of fixed assets, other than freehold land, is charged on a straight line basis so as to allocate the cost of the assets, or the revalued amounts, to their estimated residual value over their expected remaining useful lives. The annual depreciation rates shown below are calculated on a weighted average basis for each classification of asset: Freehold buildings % Generation plant % Other plant and equipment % Research and Development Expenditure Research and development expenditure is charged to expense as incurred, until formal Board approval for any particular project is obtained. Project costs thereafter are recognised as development assets where such costs are expected to be recoverable. Development assets are amortised from the commencement of commercial operations on a straight line basis over the period of their expected benefit. Gas Entitlements Under the terms of the Maui gas purchase contract, Contact is required to pay a margin to the Crown in respect of maintenance of Contact s rights to the gas resource and for a right to nominate for a minimum quantity of gas in each contract year. These payments are expensed when incurred. Where Contact has take-or-pay gas sale contracts such receipts are recorded as short or long term liabilities respectively depending on the contracted terms applicable to such tranche quantities. These liabilities are credited to the Statement of Financial Performance as customers uplift their prepaid gas. Inventories Inventories of fuel are stated at the lower of cost and net realisable value. The cost of inventories of materials, consumable supplies and maintenance spares are determined on a weighted average basis. Debtors Debtors are stated at estimated realisable value after providing for debts where collection is doubtful. Restoration and Environmental Rehabilitation Liabilities are estimated for the abandonment and restoration of areas from which natural 38

10 (ix) (x) (xi) (xii) (xiii) resources are extracted. The expected restoration costs based on current costs, or discounted estimates of future costs where appropriate, are provided for over the period during which the proven economically recoverable natural resources have been and are expected to be extracted. In the event a project or site is abandoned costs are written off in the year in which the decision is made. The costs represent primarily Geothermal field restorations. Estimations are also made for the expected cost of environmental rehabilitation of commercial sites which require reinstatement of conditions resulting from present operations. The liability is immediately recognised when exposure is identified and rehabilitation costs can be reasonably estimated. Debt Debt is stated at face value less unamortised discounts, premiums and prepaid interest. Discounts, premiums and unpaid interest and borrowing costs such as origination, commitment and transaction fees are amortised to interest expense on a yield-to-maturity basis over the period of the borrowing. Taxation Contact follows the liability method of accounting for deferred tax. The taxation charge against the surplus for the year is the estimated liability in respect of that surplus after allowance for permanent differences and timing differences, to the extent the timing differences are not, on a cumulative basis, expected to reverse in the foreseeable future. This is the partial basis for the calculation of deferred taxation. Future taxation benefits attributable to timing differences or losses carried forward are recognised in the financial statements only where there is virtual certainty that the benefits will be utilised. Employee Entitlements Annual, long service and retirement leave entitlements estimated to be payable to employees are accounted for on the basis of statutory and contractual requirements. Sales Sales shown in the Statement of Financial Performance comprise the amounts received and receivable for gas, electricity and related services supplied to customers in the ordinary course of business. Sales are stated exclusive of Goods and Services Tax collected from customers. Foreign Currencies Foreign currency transactions are recorded at the exchange rates in effect at the date of the 39

11 (xiv) (xv) transaction except where hedging contracts are taken out to cover short term forward currency commitments in which case the transaction is translated at the rate contained in the contract. Assets and liabilities denominated in a foreign currency are translated at the rates of exchange ruling at balance date. Exchange differences on translation are taken to the Statement of Financial Performance. Hedged assets and liabilities are translated at the rate of exchange determined by the underlying hedge contracts. Insurance Contact has fixed assets which are predominantly concentrated at power station locations and have the potential to sustain major losses through damage to plant and resultant consequential costs. To minimise the financial impact of such exposures, the major portion of the risk is transferred to insurance companies by taking out appropriate policies. Any uninsured loss is charged to the Statement of Financial Performance in the year in which the loss is incurred. Financial Instruments (a) Treasury Where Contact enters into financial instruments with off-balance sheet risk to reduce its exposure to fluctuations in interest and foreign exchange rates they are accounted for on the same basis as the underlying position being hedged. For interest rate swap agreements the differential to be paid or received is accrued as interest rates change and is recognised as a component of the interest expense over the life of the agreement. Premiums paid on interest rate options and the net settlement on maturity of forward rate agreements, futures and options are amortised over the period of the underlying asset or liability protected by the instrument. Financial instruments purchased with the intention to be held for the long term or until maturity are recorded at original cost, adjusted for amortisation of premiums and discounts to maturity. Forward exchange contracts entered into as a hedge for foreign currency transactions (other than offshore funding activities) are not revalued at balance date. Premiums paid on currency options are amortised over the period to maturity. 40

12 Contact does not undertake speculative trading transactions. Accordingly financial instruments are marked to market for disclosure purposes but not adjusted in the financial statements. (b) Electricity Contracts Surpluses and deficits on electricity hedging contracts for differences are recognised in the period to which an invoice relates. Contracts for differences are not undertaken for speculative purposes. (xvi) Statement of Cash Flows The following are the definitions used in the Statement of Cash Flows: cash is considered to be cash on hand and current accounts in banks, net of bank overdrafts; investing activities are those activities relating to the acquisition, holding and disposal of fixed assets and of investments; financing activities are those activities which result in changes in the size and composition of the capital structure of Contact. This includes both equity and debt not falling within the definition of cash. Dividends paid in relation to the capital structure are included in financing activities; and operating activities include all transactions and other events that are not investing or financing activities. (xvii) Distinction Between Capital and Revenue Expenditure Capital expenditure is defined as all expenditure on the creation of a new asset, and any expenditure which results in a material improvement of the original function of an existing asset. Revenue expenditure is defined as expenditure which restores an asset to its original condition and all expenditure incurred in maintaining and operating Contact. (xviii) Maintenance The estimated liability to incur future maintenance expenditure on Contact s fixed assets, is recognised in the Statement of Financial Position when: (a) it is probable that the future sacrifice of service potential or future economic benefits will be required; and (b) the amount of liability can be measured with reliability. 41

13 2 revenue Continuing Activities Sales of Electricity ,964 Sales of Gas ,301 Other Income ,996 Total Operating Revenue ,261 Contact operates predominantly in the industry of generation of electricity and wholesale marketing and trading of electricity and gas. Its operations are carried out in New Zealand and are therefore within one geographical segment for reporting purposes. 3 operating expenses Operating expenses include: Depreciation ,400 Rental Expense on Operating Leases Other Rental Costs Amounts received by the Auditors for: - auditing the Financial Statements other services nil Directors Fees Donations net finance expense Loan Interest ,477 Less: Interest Capitalised (2,305) Less: Investment Income (4,548) Net Finance Expense ,624 42

14 5extraordinary item Adjustment Of Assets And Liabilities Acquired 1 February. The assets and liabilities acquired by Contact from ECNZ and the Crown were recorded in the Statement of Financial Position at book values stated in the financial statements of ECNZ and the Crown as at 1 February. These assets and liabilities were reviewed by Contact and adjusted to reflect generally accepted accounting principles and resulted in an adjustment for the period of $88.9 million after tax (inadequate provisions $41.1 million, reduction in carrying value of gas rights and obligations $47.8 million). 6 income tax (i) Tax on Operating Surplus Income Tax Expense has been calculated as follows: Operating Surplus before Taxation ,085 Taxation thereon at 33% (24,118) (ii) (iii) Add tax effect of: Timing Differences ,334 Permanent Differences Tax on Operating Surplus ,741 Income Tax Expense is represented by: Tax Payable in respect of the Current Period ,741 Deferred Income Tax Asset nil ,741 Deferred Income Tax Asset A deferred tax asset in relation to tax timing differences on the extraordinary item totalling $21.4 million has not been recognised this period on the basis that there is not virtual certainty of realisation of this asset in the foreseeable future. Current Income Tax Income Tax payable for the Current Period ,741 Income Tax on Extraordinary Item (947) Income Tax paid (17,681) Income Tax receivable 30 September ,887 43

15 (iv) Imputation Credit Memorandum Account Income Tax paid ,681 Balance at end of Period ,681 7 revaluation of business in accordance with memorandum of understanding In accordance with the Memorandum of Understanding between the Government and ECNZ dated 8 June 1995, Contact was required to revalue its business to fair value by February The valuation was completed effective 31 August and the methodology employed was based on the discounted net present value of future net cash flows. An independent adviser provided assistance with the task. The result, a reduction in the value of the fixed assets of the business by $204.3 million, has been accounted for through the Statement of Movements in Equity. The fair value exercise does not constitute the adoption of modified historical cost accounting. 8 share capital The authorised, issued and paid up capital is represented by 1,207,900,000 shares and is held jointly by the Minister of Finance and the Minister Responsible for Contact Energy, on behalf of the Crown. 9 inventories Fuel Stocks ,957 Consumables and Spare Parts ,870 Total Inventories ,827 44

16 10 fixed assets Cost Net Accumulated Revaluation Book Value 1 February Movements Depreciation Adjustment 30 September 30 September Land , , ,325 Buildings , , (573) ,873 Generation Plant ,452, , (37,251) (204,314) * ,256,795 Capital Work in Progress , (27,743) ,499 Other Plant and Equipment , , (1,576) ,326 Total Fixed Assets ,538, , (39,400) (204,314) ,322,818 *see Note 7 Some further development land will be progressively transferred to Contact from ECNZ upon clearance of all legal requirements. The aggregate of the latest available Government valuations of land is $18.0 million. Under the Treaty of Waitangi Act 1975, the Waitangi Tribunal has the power to recommend, in appropriate circumstances, that land purchased from ECNZ and now owned by Contact, be resumed by the Crown in order that it be returned to the Maori claimants. In the event that the Tribunal s initial recommendation is confirmed and the land is to be returned, compensation will be paid to Contact under the provisions of the Public Works Act If this is insufficient to cover the loss, certain additional compensation is payable pursuant to rights Contact holds under the Deed of Assumption and Release between the Crown, ECNZ and Contact dated 16 January. 11 payables and accruals Accounts Payable ,953 Accrued Employee Entitlements ,710 Other Payables and Accruals ,993 Total Payables and Accruals ,656 45

17 12 provision for restoration and environmental rehabilitation Liabilities have been estimated for the abandonment and restoration of areas from which natural resources are extracted, and for the expected cost of environmental rehabilitation of commercial sites which require remediation of conditions resulting from present operations. These total $23 million. 13 term borrowings & associated hedging Contact was established on February 1st with borrowings from the Debt Management Office ( DMO ). The interest rate profile on the DMO borrowings is a mixture of floating and fixed rate debt. Additional term borrowing has been raised from a number of banks as part of Contact s balance sheet restructuring. (i) Interest Rate Risk Contact enters into financial arrangements to manage the interest rate risk resulting from its borrowing. These arrangements include: Interest Rate Swaps Forward Rate Agreements Interest Rate Options The combination of the underlying borrowing and the financial arrangements produce an interest rate profile which maps to Contact s interest rate hedging policy. The following table depicts Contact s interest rate risk profile on floating rate borrowing until its maturity. Volume of debt subject to re-pricing* Volume of hedging transactions against upward interest rate movements* Year ,406, ,000 Year ,072, ,000 Year , ,000 Year , Nil Year , Nil Year , Nil * The volume of debt and hedging transactions is calculated by taking the face value of the instrument and multiplying it by the number of rate-sets within that year. By way of example, a $100 million borrowing repricing on a quarterly basis will result in $400 million of debt volume repricing in any given year until the borrowing matures. 46

18 In addition to the above floating rate debt Contact has approximately $100 million of fixed rate debt instruments. The interest rates on Contact s debt after taking into account the effect of hedging instruments range from 8.9% to 11.4% (ii) (iii) Maturity Profile As at 30 September Contact s debt totalled $488.7 million. This debt matures over the following years: 1 October - 30 September $11.0 million 1 October September $256.5 million 1 October September $11.0 million 1 October September $95.6 million 1 October September $66.6 million 1 October September $48.0 million Total $488.7 million Fair Value The estimated fair value of interest rate related financial instruments using the mark to market methodology is as follows: Instrument Type Carrying Value Market Value Face Value $million $million $million Short Term Investments Term Borrowing Interest Rate Swaps Nil Forward Rate Agreements Nil Interest Rate Options Nil (iv) Security Arrangements Contact borrows under a negative pledge arrangement. Accordingly, unless it is an exception permitted within the negative pledge, Contact will not grant security interests over its assets. The main exceptions referred to are security interests: resulting from law relating to a joint venture to secure project financing to which Contact s financiers consent to purchase a particular asset where recourse is limited to that asset on immaterial amounts being less than 5% of Contact s assets 47

19 14 foreign exchange hedging (i) (ii) Recognition Contact enters into foreign exchange contracts in order to protect the New Zealand Dollar cost of both capital purchases and revenue expenditure. Gains or losses on foreign exchange contracts are not recognised as income or expenditure. Rather, the underlying exposure is recorded at the foreign exchange contract rate (in the case of outright forward contracts) or the more favourable of the spot or strike rate (in the case of foreign exchange options). Fair Value The fair value of foreign exchange transactions using a mark to market methodology is as follows: Instrument Type Carrying Value Market Value Face Value $million $million $million Outright Forward Contracts Nil Foreign Exchange Options credit concentration on financial arrangements (i) (ii) Policy Contact will only enter into financial arrangements with entities that have a high credit standing. This credit standing requirement is instituted via a treasury policy which demands minimum credit ratings for both direct investments as well as off balance sheet transactions. Recognition and Measurement Contact assesses the credit exposures on balance sheet investments at face value. Exposure to off balance sheet financial arrangements such as interest rate swaps are measured using a combination of the market value of the transaction and adding on a market movement factor for the period until maturity. 16 electricity hedge contracts Contact has a number of financial contracts directly with power companies and electricity buying groups. These contracts last anywhere between 1 and 5 years. In a typical contract if the spot price goes higher than an agreed price, Contact reimburses the customer for the difference between the two prices. If the spot price goes below the agreed price, the customer reimburses Contact the difference. Due to lack of liquidity in the market as at 30 September, it is not practicable to assign a fair value to such contracts. These contracts give Contact certainty about electricity revenue and its customers certainty about electricity costs. 48

20 17 commitments (i) (ii) (iii) Capital Commitments Commitments in respect of contracts for capital expenditure at balance date total $1.5 million. Lease Commitments Operating lease commitments are payable: Within One Year One to Two Years Two to Five Years Total Operating Lease Commitments The operating leases are of a rental nature and are on normal commercial terms and conditions. The majority of the lease commitments are for building accommodation. The remainder relate to small plant and equipment. There are no finance leases. Gas Commitments Maui Contract Contact has entered into a contract with the Crown giving it rights to uplift gas from the Maui field. Contact is committed to pay for that right, irrespective of the amount of gas actually uplifted. As at 30 September the estimated future commitment for these rights up to 27 June 2009 is $1,655 million. TAW Contract Contact has also entered into a contract with Fletcher Challenge Energy Taranaki Limited, where Contact is required to pay for and uplift a minimum quantity of gas each year from the TAW field. As at 30 September the estimated future commitment for these rights up to the expected end of the contract term on 31 July 2005 is $177 million. 18 resource consents Contact requires water and air consents, obtained under the Resource Management Act 1991, to enable it to operate its geothermal, thermal and hydro power stations. The duration of consents vary up to 35 years. The renewable dates are fixed by the expiry date of the consent or, where there is no expiry date, by the renewal date of 1 October 2001 set by the Resource Management Act. Most consents are or will be subject to periodic reviews. 49