Notes to and Forming Part of the Financial Statements

For the year ended 30 June 2006

POWERCO

ELECTRICITY DIVISION

(f) Financial Instruments

Risk Management

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

(a) Market risk

(i) Foreign exchange risk

(ii) Interest rate 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 both detailed policies and specific areas such as foreign exchange risk, interest rate risk, credit risk and liquidity risk as well as the use of derivatives and appropriateness of counterparties.

(a) Market Risk

(i) Foreign Exchange Exposures

The Group operates in New Zealand and Australia and has foreign exchange exposures arising from US dollar denominated debt and investments in Australian operations. This exposes the Group to potential gains and losses arising from currency movements.

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

(ii) Interest Rate Exposures

Interest rate risk is the risk that interest rates will fluctuate, increasing or decreasing the cost of borrowing or lending. The Company’s short-term borrowings are on a variable rate basis and the current debt is funded by the fixed coupon bonds and Powerco’s commercial paper programme based on 90 day Bank Bills.

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

(b) Credit Risk

Financial instruments which potentially subject the Company to credit risk principally consist of bank balances and accounts receivable. There are no significant concentrations of credit risk. These accounts are subject to a Board Prudent Financial Management Policy which sets limits for the exposure to credit risk. As part of the policy, limits on exposures have been set and are monitored on a regular basis. Cash deposits are only made with registered banks. The maximum credit risk is the carrying value.

(c) Liquidity Risk

Liquidity risk is the risk that the Group may be unable to meet its financial obligations as they fall due. This risk is managed by maintaining sufficient cash and access to committed credit facilities.

3. WORKING CAPITAL ADVANCES FACILITY

Powerco Limited operates a wholesale capital advances facility with the Commonwealth Bank of Australia for up to $30 million. The facility, dated 22 March 2005, replaced a similar facility held with Bank of New Zealand for up to $15 million. As at 30 June 2006, funds to the amount of $28.5 million have been drawn down on the facility, offset by unrealised deposits of $7.543 million (2005: funds drawn of $26.2 million, offset by unrealised deposits of $4.103 million). 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 the Security Trust Deed, as a Senior Secured Debt Facility. This facility had interest rates ranging from 6.50% to 7.50%.

At year end the amount of the bank overdraft allocated to the electricity division was $15.80 million.

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

4. PROPERTY, PLANT AND EQUIPMENT

Annual Valuation Reconciliation Report

5. TAXATION