NEW ZEALAND GAZETTE, No. 191

9 DECEMBER 2008

Notes to and Forming Part of the Financial Statements
For the year ended 30 June 2008

GAS DIVISION

1. REVENUE AND EXPENDITURE

Operating Revenue

Line charge revenue
Interest revenues | 50,565 | 54,563 |

EXPENDITURE

Operating expenses
Repairs and maintenance costs| 5,780 | 8,158 |

Administrative expenses
Human resource costs | 171 | 160 |
Bad debts | | 57 |
Corporate & administration | 7,326 | 6,547 |
Marketing & advertising | 229 | 205 |
Consulting & legal expenses | 824 | 615 |
Other expenses | 8,549 | 7,564 |
Depreciation on network assets| 9,744 | 9,804 |
Depreciation on plant and equipment| 863 | 1,986 |
Amortisation of intangibles | 279 | 453 |
| 10,676 | 11,343 |

Finance costs
Interest expense | 21,647 | 19,660 |

Other losses/(gains)
Change in fair value of assets and liabilities classified as held for trading| 3,040 | (5,350) |

Total expenditure | 46,792 | 41,388 |

2. TAXATION

Income tax recognised in the Income Statement
Tax (expense) / benefit (current)| (5,340) | (5,495) |
Deferred tax on temporary differences| 6,301 | 7,507 |
Effect of changes in tax rates and law| (766) | (2,885) |
| 275 | (703) |

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

Operating surplus before taxation| 773 | 13,168 |

Permanent differences
Prima facie taxation @ 33% | 255 | 4,346 |
Tax effect of expenditure (revenue) that is not deductible in determining taxable profit| 1,006 | (2,394) |
Effect of changes in tax rates| (766) | (2,885) |
Taxation expense / (benefit) | 795 | (1,073) |

The tax rate used in the above reconciliation is the corporate tax rate of 33% payable by New Zealand corporate entities on taxable profits under New Zealand tax law. The corporate tax rate in New Zealand is to change from 33% to 30% with effect from 1 April 2008. This revised rate has not impacted the current tax payable for the current year but next year the current tax will be calculated on the corporate tax rate of 30%. However, the impact of the change in tax rate has been taken into account in the measurement of deferred taxes at the end of the reporting period.

All temporary differences have been recorded in the financial statements.

Income Tax - Resolution of IRD Tax Dispute Risk

There is currently an Inland Revenue Department (“IRD”) investigation of the purchase price allocation of the business assets between more observable and the tangible depreciable assets of the Central Power (“CP”) and former Powerco networks, amalgamation in 2000. The IRD view also challenges the ACL NZ Energy Limited (“ACL”) acquisition in 2001 and the related Newtown Trust (“NTL”) acquisition in 2002. The IRD queried Powerco’s use of the market value of assets at the dates for calculating depreciation and the goodwill attributed to the transactions.

The IRD issued two Notices of Proposed Adjustment which proposed disallowing deductions calculated using the market value of the former Powerco and CP assets acquired by what is now Powerco Limited through the CP amalgamation.

Since November 2007 Powerco and its advisors have been in discussions with the IRD way of resolving this dispute reaching an agreement on an amount that both the CP and former Powerco networks and the ACL/NTL acquisitions. This agreement has now been formalised by way of a written “Agreed Settlement” between Powerco Limited and the IRD.

This agreement reflects an amount attributed to goodwill of $50 million (with a commensurate reduction in tax deductible assets) for the CP and former Powerco networks as at 1 September 2000. The written down value of the goodwill amount as at 30 June 2008 was $29.479 million, of which $27.275 million relates to the gas division. Subject to the outcome of that adjustment, the adjustment to the financial statements for the prior year will reflect a reduction of future tax depreciation entitlements. The IRD has advised that it will not be pursuing an adjustment in respect of the ACL and NTL acquisitions. This agreement with the IRD has been recognised in the financial statements as at 30 June 2008 and an amount of $53.483 million ($32.972 million relates to the gas division) has been debited to the Profit & Loss Statement tax expense account to adjust for the tax effect of the embattled goodwill amount at the tax depreciable asset.

In addition to the agreed Powerco tax issue, small outstanding issues re resolve with the IRD being the depreciation claimed on the zone substations and the tax treatment of customer contributions in the 2002 to 2006 income tax years.

Income tax recognised directly in equity

Deferred tax - revaluation of financial instruments treated as cash flow hedges| (318) | 486 |