Notes to and Forming Part of the Financial Statements

For the year ended 30 June 2007

POWERCO

GAS 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 United States 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 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 counter parties.

(a) Market Risk

(i) Foreign Exchange Exposures

The Group operates in New Zealand and Australia and has foreign exchange exposures arising from US dollar denominated debt and investments in Australian operations. This exposes the Group to potential gains and losses arising from currency movements. The Group policy relating to US dollar denominated debt is to minimise the exchange rate exposure by use of matching hedges taken out at the time the loans were drawn down. With regards to the independent foreign subsidiary, Powerco Australian Group Pty Limited, there is no net investment hedging.

(ii) Interest Rate Exposures

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

Powerco has entered into interest rate swap agreements to reduce the impact of the changes in interest rates on its borrowings. As at 30 June 2007, 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 6.70% 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 Prudential Supervision Policy which is used to manage the exposure to credit risk. As part of this policy, limits on exposures have been set and are monitored on a regular basis. Cash deposits are only made with registered banks. The maximum credit risk is the carrying value.

(c) Liquidity Risk

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

5. CASH & WORKING CAPITAL ADVANCES FACILITY

Powerco Limited has 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 $4.75 million). The facility is based on a revolving credit arrangement and such loans will 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 7.40% to 8.15%.

At year end the amount of bank overdraft allocated to the gas division was $4.883 million (2006: $4.390 million). The overdraft interest rate on this facility at that date was 10.1%.

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

6. PROVISIONS

This provision relates to employee entitlements such as accrued wages, bonuses, holiday pay and long service leave. The provision is affected by a number of estimates, including the expected employment period of employees and the timing of employees utilising the benefits.

7. PROPERTY, PLANT AND EQUIPMENT

| Accumulated depreciation | | | | |
| Balance at 30 June 2005 | 32,893 | - | - | 32,893 |
| Disposals | - | - | - | - |
| Depreciation expense | 9,440 | - | - | 9,440 |
| Balance at 30 June 2006 | 42,333 | - | - | 42,333 |
| Acquisition of plant & equipment (assets from inter-division) | - | 3,067 | - | 3,067 |
| Disposals | - | - | - | - |
| Depreciation expense | 9,804 | 1,086 | - | 10,890 |
| Balance at 30 June 2007 | 52,137 | 4,153 | - | 56,290 |

| Net book value | | | | |
| Net book value 30 June 2006 | 374,747 | - | 999 | 375,746 |
| Net book value 30 June 2007 | 371,622 | 5,334 | 2,149 | 379,105 |