ASX Release For personal use only2008/08/29 · Consolidated EBITDA for the twelve months to 30 June 2008 was $331.0 million (June 2007: $117.6 million), which incorporates the earnings

ASX Release 29 August 2008 RESULTS FOR ANNOUNCEMENT TO THE MARKET UNDER ASX LR 4.3A

BBP APPENDIX 4E AND ANNUAL FINANCIAL REPORT TO 30 JUNE 2008 Attached are the following financial reports relating to Babcock & Brown Power (ASX:BBP):

• Appendix 4E for the year ended 30 June 2008; and • Annual Financial Report of Babcock & Brown Power Limited and Babcock

& Brown Power Trust (together Babcock & Brown Power) for the year ended 30 June 2008.

ENDS Further Information: Fiona Osler Investor Relations Babcock & Brown Power Ph + 61 2 9216 1383 About Babcock & Brown Power Babcock & Brown Power (ASX:BBP) is a power generation business, with assets diversified by geographic location, fuel source, customers, contract types and operating mode. Its aim is to grow returns to its securityholders through optimisation of its existing power generation business and the addition of further generation assets and associated businesses via a combination of new construction and strategic acquisitions. The portfolio has interests in 12 operating power stations representing over 3,000MW1 of installed generation capacity and two power stations under construction. BBP has interests in a number of other associated power assets including the WA retail assets Alinta. Babcock & Brown has been developing, operating and acquiring the generation portfolio over a period of 10 years.

1 Some assets have minority shareholders.

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Portfolio Summary

For further information please visit our website: www.bbpower.com

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http://www.bbpower.com/

http://www.bbpower.com/

BABCOCK & BROWN POWER

APPENDIX 4E

Preliminary Final Report

Name of entity: Babcock & Brown Power (“BBP”), a stapled entity comprising

Babcock & Brown Power Limited (ABN 67 116 665 608) and the Babcock & Brown Power Trust (ARSN 122 375 562)

ABN: As Above

Details of the reporting period

Current Period: 1 July 2007 - 30 June 2008 Previous Corresponding Period: 1 July 2006 - 30 June 2007

Results for announcement to the market % Movement 2008

A$’000 2007

A$’000

2.1 Revenues from ordinary activities 186.7% 1,527,420 532,800

2.2 Profit / (Loss) from ordinary activities after tax

attributable to members (503.6) % ($426,515) ($70,666)

2.3 Profit / (Loss) for the period attributable to members (503.6) % ($426,515) ($70,666)

2.4 Distributions Amount per security

Franked amount per security

Current period Final distribution Interim distribution (paid)

N/A 0.13

N/A

-

Previous corresponding period Final distribution (paid)

0.14

-

2.5 Record date for determining entitlement to the Final Distribution N/A

2.6 Provide a brief explanation of any of the figures reported above necessary to enable the figures to be understood:

Refer to section 14

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APPENDIX 4E


3. Income Statement with notes Refer to the Income Statements in the attached financial statements. 4. Balance Sheet with notes Refer to the Balance Sheet in the attached financial statements. 5. Cash Flows Statements with notes Refer to the Cash Flows Statements in the attached financial statements. 6. Details of distributions

Record Date Payment Date 2008 Interim Distribution 31 December 2008 17 March 2008 2008 Final Distribution N/A N/A

In March 2008, BBP paid an interim distribution of 13 cents per stapled security. This distribution was paid on 17 March 2008 and was fully tax deferred. On 19 June 2008, BBP announced that it would be prudent to not make a distribution for the six month period ending 30 June 2008. This decision was made in light of the need to strengthen the balance sheet, reduce debt and move to an appropriate capital structure. On 18 August BBP advised that it was finalising the appointment of UBS to undertake a full strategic review including advice on the optimal capital structure and options to maximise value for security holders. As part of this process the distribution policy is under review and the Board expects to provide further clarification and guidance on distributions following the outcome of this review. 7. Details of distribution reinvestment plan Babcock & Brown Power established a Distribution Reinvestment Plan (DRP) in December 2007 under which eligible stapled security holders were invited to reinvest part or all of any distribution received in additional stapled securities. The price of stapled securities issued under the DRP is determined by the market price formula detailed in the DRP Terms and Conditions booklet. For the 2008 Interim Distribution, 17,007,015 new stapled securities were allotted under the DRP to participating security holders at a discount of 2.5% to the weighted average market price of the stapled securities ($1.7648 per security) as calculated in accordance with the terms and conditions of the DRP. The continued operation of the distribution reinvestment plan is under consideration as part of the strategic review noted above. 8. Statement of retained earnings showing movements Refer to the attached financial statements (Note 22, Retained Earnings).

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APPENDIX 4E


9. Net tangible asset backing per security Net tangible assets backing per stapled security

Current Period

($1.05)

Previous Period

$2.02

At 30 June 2008, BBP had negative net tangible assets per security of $1.05 compared to a positive $2.02 as at June 2007. The large negative net tangible asset value is attributable to the full acquisition of the Alinta retail business completed in December 2007. The nature and value of the retail energy business is in its brand position as the pre-eminent West Australian gas retailer and its customer base (both existing and potential future growth). As such the business has a smaller fixed asset base and relies on efficient and effective working capital management as a key component of profitability. This business is inherently different to the power generation business as it relies on its branding and customer base to produce cash flows as compared to the operation of tangible assets (such as power plants) that characterise the power generation business. Therefore, while the acquired intangibles and goodwill of the retail business in particular represent future economic value to the Group, they are deducted for the purposes of calculating net tangible assets per security. Net assets per security at 30 June 2008 was $1.92 (30 June 2007: $2.52).

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10. Control gained or lost over entities during the period 10.1 Name of entity (or group of entities) over which control was gained

10.2 Date control was gained

BBP ONE Pty Limited July 2007 BBP Uranquinty Power Pty Limited July 2007 Alinta Energy Power Generation Pty Limited September 2007 Alinta Energy (Tamar Valley) Pty Limited September 2007 Alinta EATM Pty Limited September 2007 Alinta Energy (New Zealand) Ltd September 2007 Alinta Pty Limited September 2007 Alinta Sales Pty Limited September 2007 Alinta Cogeneration (Pinjarra) Pty Limited September 2007 Alinta Cogeneration (Wagerup) Pty Limited September 2007 Alinta Cogeneration Finance Pty September 2007 Alinta APG Pty Limited September 2007 Alinta APGMW Pty Limited September 2007 Alinta ACP Pty Limited September 2007 Alinta ENZ Ltd September 2007 Alinta ENZF Pty Limited September 2007 Alinta DVP Pty Limited September 2007 Alinta DEBH Pty Limited September 2007 Alinta DEBP Pty Limited September 2007 Alinta DEBO Pty Limited September 2007 BB Power Unit Trust No 1 September 2007 Alinta ED Limited September 2007 Alinta Power Trust September 2007 Alinta DAPH Pty Limited September 2007 Alinta DAPF Pty Limited September 2007 Alinta DEWAH Pty Limited September 2007 Alinta DEWAP Pty Limited September 2007 Alinta DIC Pty Limited September 2007 Alinta Power Sub Pty Limited September 2007 Alinta Energy (LPG) Pty Limited September 2007 Alinta Electricity Trading Pty Limited September 2007 BBP Neerabup Power Pty Limited February 2008

10.3 Consolidated profit (loss) after tax from ordinary activities

and extraordinary items after tax of the controlled entity (or group of entities) since the date in the current period on which control was acquired

A$’000

(28,805)

10.4 Profit (loss) from ordinary activities and extraordinary items after tax of the controlled entity (or group of entities) for the whole of the previous corresponding period

A$’000

96,656

Refer to the attached financial statements (Note 28, Subsidiaries and Note 30, Changes in the composition of the consolidated Group) for further information regarding the subsidiary entities.

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11. Details of associates and joint venture entities

11.1 Name of entity (or group of entities) over which significant influence was gained

NewGen Neerabup Partnership

11.2 Date significant influence was gained 12 February 2008

11.3 Percentage holding in the partnership 50%

11.4 Consolidated profit after tax from ordinary activities and extraordinary items after tax of the associate (or group of entities) since the date in the current period.

Not applicable

11.5 Profit (loss) from ordinary activities and extraordinary items after tax of the associate (or group of entities) for the whole of the previous corresponding period

Not applicable

12. Other significant information Refer to the attached Directors’ Report and ASX announcement. 13. Accounting standards used by foreign entities Refer to the attached financial statements Note 1, Summary of Accounting Policies.

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14. Commentary on results Key Points relating to the 12 months ended 30 June 2008

• EBITDA of $331.0 million • Gearing (net debt to net debt plus equity) of 74% • Acquisition of Alinta businesses effective September 2007. Integration process largely complete. • Purchase of outstanding 33% interest in Alinta (formerly AlintaAGL) in December 2007 • Alinta results reduced by $10.8m due to the Varanus Island gas disruption on 3 June 2008 • BBP Finance Australia (BBPF) $2.7 billion refinancing closed June 2008 • Impairment loss of $410 million in relation to Alinta assets acquired • Recognition of $42 million impairment to carrying value of Tamar prior to its sale in FY09 • No final 2008 distribution declared as part of an ongoing capital management program • Asset sales of Uranquinty and Ecogen completed post FY08

Financial Results Summary ($ million unless otherwise stated) June 08 June 07 Revenue Power generation 869.9 533.8 Energy markets 707.2 - Unallocated and eliminations (49.7) (1.0) Total Revenue 1,527.4 532.8 Fair value (loss)/gain on interest rate and electricity derivatives (7.4) 1.7 Operating Costs - Power generation (613.5) (412.3) Operating Costs - Energy markets (589.0) - Operating Costs - Power projects (0.9) - Corporate costs (31.4) (10.9) Eliminations 39.9 - Total Operating and Corporate Costs (1,194.9) (423.2) Earnings before interest, tax, depreciation & amortisation 325.1 111.3 Share of net profit in associates 5.9 6.3 EBITDA after associates 331.0 117.6 Depreciation & amortisation (152.9) (55.6) Transition & set up expenses (15.9) - Non cash items - Redbank derivative 82.8 (66.4) Non cash items - Incentive fee 23.4 (23.4) Non cash items - Impairment & asset write-down (452.0) - Earnings before interest and tax (183.6) (27.8) Net borrowing costs (200.4) (67.5) Profit before tax (384.0) (95.3) Tax expense (42.5) 24.6 Net profit after tax (426.5) (70.7) Outside equity interest 0.5 (4.9) Net profit after tax attributable to BBP members (426.0) (75.6) Net profit after tax attributable to BBP members excluding non cash Redbank derivative, incentive fee, impairment and asset write-down (48.3) (12.8) Gearing 74.0% 50.6%

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Overview Consolidated EBITDA for the twelve months to 30 June 2008 was $331.0 million (June 2007: $117.6 million), which incorporates the earnings from the Alinta businesses from 1 September 2007. The operations of BBP have been structured to reflect an integrated energy company, with a weighting toward electricity generation. The following results are presented in a manner that is consistent with how BBP is managed. The group comprises the operating power stations which are managed on a regional basis. The Energy Markets group comprises fuel management, portfolio development and the retail and trading businesses which are managed on a total energy portfolio basis. Both groups are supported by the BBP Services Group with these costs allocated and absorbed by the relevant business. The Power Projects division is responsible for the development and project management of power developments. The costs shown represent that portion of costs that are not capitalised to projects. The Corporate costs reflects those costs of the corporate office as provided by the manager, and all associated fees, and charges, including the base fee from Babcock & Brown, legal, statutory audit and corporate secretarial costs. Power Generation Power Generation delivered EBITDA of $241.4 million. Energy trading and support costs are allocated to each of the power generating business on a direct cost base or, for more general support costs on a prescribed allocation methodology. In May 2008, BBP increased its ownership interest in the 455MW Braemar Power Station located in southern Queensland from 85% to 100%. The plant operated at 48% capacity throughout the year, despite the major unplanned outage of Unit 12 due to a machine manufacture fault which required the unit to be offline October 2007 to 26 January 2008. This outage led to a different scheduling and running profile to maintain capacity output. The second half of the year saw consistently soft pool prices in the Queensland market as a result of milder summer temperatures and increased generation capacity. Average revenue achieved for the six months to 30 June 2008 was $61.8 per MWh versus the comparable period of $95.4 per MWh. The Flinders generation performance for the year was characterised by soft pool prices through the year, with sustained high spot prices occurring in February 2008 and March 2008 due to hot weather conditions. The sustained high pool prices during this period provided the over performance for the year with average spot prices achieved in the year of $73.5 per MWh versus $51.6 per MWh in the prior year. Following this period of high prices, prices drifted lower from April 2008 to June 2008. Impacting the latter portion of the second half of FY2008 was the extension of a planned outage at the Northern plant. This extended the outage by 4 days followed by a forced outage of 6 days reducing revenues and increasing maintenance costs. With the exception of the Northern outage, both Northern and Playford performed well with availability factors of 88% and 50% respectively and capacity for the year of 85% and 40% respectively for Northern and Playford. The Redbank Power station revenue performance was stable and in line with contractual obligations. As this business operates under a Power Purchase Agreement, availability and capacity are more important to its contribution. Redbank had an availability of 89% and a capacity factor of 90% during the 12 month period which was in line with its contractual requirements. The WA Power business acquired from Alinta and comprising the Newman Power Station and the Port Hedland Power Station performed in line with budget. In December 2007 the group committed to expand the Newman Power station with the installation of a new 51MW Rolls Royce Trent turbine

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which is expected to be operational by February 2009. The additional plant output has been contracted to BHP. The Bairnsdale Power station located in north eastern Victoria and acquired as part of the Alinta acquisition operates as a peaking plant and its revenue stream is largely fixed to support its operating and capital costs. The plant had a capacity factor of 27% and availability of 96% during the year. The Glenbrook Power Station in New Zealand operates within the New Zealand Steel plant (a subsidiary of BlueScope Steel Limited), using gas and heat from the steel plant to provide electricity to the plant with limited excess electricity sold into the New Zealand grid. As a result of the embedded nature of the plant and the contractual arrangements in place, the revenue streams of Glenbrook are akin to finance lease payments whereby a portion is classified as interest revenue within Net Borrowing Costs. The Ecogen business which was sold in August 2008, consisting of the Newport and Jeeralang Power Stations in Victoria, performed well during the year. Ecogen has a pass through revenue and cost contract and operates as and when required by the contracting party, TRUenergy. As a result of the Yallourn open cut mine mishap in November 2007, the Newport plant ran consistently as a base load plant for period of 54 days. This provided greater running efficiency and lower plant maintenance demands (due to less frequency of starts). During the financial year, BBP acquired 100% of the 640MW Uranquinty Power Station (70% in July 2007 with the remaining 30% acquired in February 2008). BBP subsequently sold its 100% interest in Uranquinty in July 2008 (refer Subsequent Events note 37). In February 2008, BBP announced the financial close of the 330MW Neerabup Power Station (“Neerabup”) located 50 kilometres north of Perth, WA. BBP holds 50% of the interest in the partnership which owns the project with ERM holding the remaining 50%. Energy Markets Energy Markets delivered EBITDA of $125.3 million. The key components of this business comprise of the acquired Alinta gas retail and integrated electricity retail and co-generation plant, and the LPG partnership with Wesfarmers. The Energy Markets results have been impacted by the Varanus Island gas disruption in Western Australia which represents 40% - 50% of Alinta’s peak demand gas supply. The 30 June 2008 earnings for the Alinta retail business have been negatively impacted by approximately $10.8 million. This loss is inclusive of the related impacts on the LPG and electricity businesses. Prior to the Varanus Island outage, the underlying operations had been adversely impacted by milder weather conditions over the WA calendar 2007 spring and calendar 2008 autumn which led to lower than forecast gas demands. Prior to the Varanus Island outage and its related impacts, the electricity business performed in line with expectations. The growth and contribution of the business in June was adversely impacted by the related effects of the Varanus Island outage. The Varanus Island outage coincided with planned maintenance outages of several coal fired generators. With reduced gas supplies, Alinta’s gas fired generators either had to significantly reduce output and/or switch to diesel fuel. The combined effects of this was to push wholesale electricity prices in the balancing market to sustained pricing in excess of $400 per MWh. In order to satisfy its customer contracts, Alinta was required at various times to procure spot electricity from the SWIS at significantly higher prices, as opposed to sourcing electricity from its co-generation plants. The effect of this has been captured in the aforementioned Varanus Island loss of $10.8 million. Prior to the Varanus Island outage, LPG was performing ahead of plan due to larger than anticipated export volumes in early calendar 2008 and higher LPG prices.

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Corporate Costs Corporate costs of $31.4 million include the base management fee and the manager’s expenses as well as other statutory, regulatory and legal costs. The accrual for the incentive fee ($23.4 million) required to be made in the 30 June 2007 accounts was reversed in FY2008 following the actual calculation completed in accordance with the management agreement, with the deficit to be carried forward for a period no greater than three years (to December 2010). Transition and Start Up As at 30 June 2008, $15.9 million has been expensed on integration, new business implementation and new business establishment. These costs include $4.4 million in redundancy payments and provisions. The Alinta transition for the power generation assets has progressed on schedule with the operational and technical integration largely completed. The transition to common financial, personnel, and risk systems will be completed by December 2008, along with the consolidation and centralisation of existing BBP energy trading systems. The transition of the Alinta retail business commenced in January 2008 following the acquisition of the outstanding 33% minority interest. The management structure and operational aspects have been transitioned to the BBP model, with the financial and personnel systems to be transitioned and centralised to the Adelaide Business Services group by December 2008. The set up costs relate to the start up operations of Our Neighbourhood Energy, an electricity retailer located in Victoria. This business is part of the Energy Markets group and will be reported in the Energy Markets segment from FY09 onwards. The establishment of the BBP Business Services Group in Adelaide is continuing with key staff now in place. Capital and Balance Sheet During the period, BBP issued 334,887,162 stapled securities to fund the acquisition of the Alinta Assets. A further 15,144,681 units were issued through the Security Purchase Plan in November 2007 raising approximately $43.6 million. In March 2008, BBP issued 17,007,015 units as part of the Distribution Reinvestment Plan. As at 30 June 2008, there were 726,328,872 BBP stapled securities on issue. On 3 June 2008, BBP refinanced $2.7 billion of debt. The debt refinanced related to the Alinta acquisition debt together with the refinance of project debt relating to the Braemar and Flinders power generation assets. This facility is currently being syndicated. On 19 July 2008 the Federal Government released the Green Paper to address climate change through a reduction of greenhouse gases. The impact on BBP is currently being assessed and a response to the Green Paper being submitted. The Government has indicated that potentially various forms of compensation, subsidies or other measures will be accompanying the implementation of the Emission Trading Scheme (ETS). Upon the enacting of the legislation the size of the facility will be reassessed. Should the impact of the ETS be negative (taking into account any compensation), a reduction in the size of the facility within the agreed parameters may be required depending on materiality and severity of the impact. The facility agreement does not provide an option to increase the facility size as a result of ETS. Once clarity is achieved on the impacts and implications of the ETS, BBP will continue to seek a second rating to complement the BBB- debt rating already provided by Fitch. The achievement of a second investment grade debt is required under the BBPF facility by the first anniversary of the facility (3 June 2009).

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On 18 August 2008, BBP announced that it had obtained bank approval from the existing lenders in the BBPH facility to extend the maturity of the facility from 31 August 2008 to 31 March 2009. Following the post FY08 sales of the Uranquinty and Ecogen power stations, the facility commitments were reduced from $360 million to $122 million. With cancellation of undrawn commitments this has recently been further reduced to approximately $116 million. BBP intends to repay the extended BBPH facility prior to the next distribution payment date through use of a combination of existing cash balances, which are expected to reduce the facilities to below $90 million, and proceeds from planned asset sales and operating cashflow. Provisions within the renewed facility require such repayment in priority to payment of future distributions to BBP security holders. The sale of the Tamar Power Project anticipated to be completed during September will remove $98 million of debt from the balance sheet, and more significantly will eliminate the capital outlay of approximately $241 million required for the project completion. BBP’s facilities provided by Babcock & Brown have been amalgamated with a common repayment date of September 2009. Outlook Prior guidance provided to the market on 19 June that FY2009 EBITDA is likely to be at the lower end of the known analyst forecast range of $439 million to $528 million. This guidance was prior to the asset sales of Ecogen and Uranquinty. Taking into account the sale of the Ecogen and Uranquinty, and the impact of the Varanus Island gas disruption, management expect that EBITDA for FY09 to be in the range of $350 million to $360 million. This range is based on anticipated forward electricity prices in Queensland and South Australia, gas demand levels in West Australia (which are predicted on many factors but principally the level of heating days). Distributions In December 2007, BBP implemented a Distribution Reinvestment Plan (DRP) which was effective for the FY2008 interim distribution. BBP issued 17,007,015 units as part of the Distribution Reinvestment Plan. As announced to the ASX on 19 June 2008, BBP decided that it would be prudent to not make a distribution for the six month period ending 30 June 2008 amongst a range of capital initiatives considered to strengthen the balance sheet and enhance long term returns to security holders. 15. Audit / review of accounts upon which this report is based This report is based on accounts which have been audited, refer to the attached financial statements. 16. Qualification of audit / review Not applicable.

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Babcock & Brown Power

Consisting of: Babcock & Brown Power Limited

ABN 67 116 665 608 Babcock & Brown Power Trust

ARSN 122 375 562

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Babcock & Brown Power Annual Financial Report For the year ended 30 June 2008 Content Page

Directors’ report 3

Auditor’s independence declaration 19

Income statements 20

Balance sheets 21

Statements of recognised income and expense 23

Statements of cash flow 24

Notes to the financial statements 25

Directors’ declaration 88

Independent auditor’s report to the stapled security holders 89

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Babcock & Brown Power Directors’ report

3

Directors’ report

The Directors of Babcock & Brown Power Limited (BBPL or the Company) and its consolidated entities (BBP or the Group) present their Directors’ report together with the consolidated financial statements for the year ended 30 June 2008.

The Company together with Babcock & Brown Power Trust form Babcock & Brown Power, a stapled security traded on the Australian Stock Exchange.

Directors

The following persons were Directors of BBPL at any time during the year, up to the date of this Directors’ report.

Mr L F Gill (Chairman) – from 1 July 2008 appointed 29 October 2006 Mr W D Murphy (Chairman) – through to 1 July 2008 appointed 4 April 2006 Mr P F Hofbauer appointed 14 October 2005 Mr J Fletcher appointed 29 October 2006 Mr P M Kinsey appointed 29 October 2006 Mr M Garland (Alternate for Mr P F Hofbauer through to 23 November 2007, from 23 November 2007 Alternate for Mr W D Murphy)

appointed 9 November 2006

Mr G W Denton (Alternate for Mr W D Murphy through to 23 November 2007, from 23 November 2007 Alternate for Mr P F Hofbauer)


Particulars of the qualifications, experience and special responsibilities of the Directors at the date of this report are set out below:

Mr L F Gill – Independent Non-executive director – Chairman from 1 July 2008

Leonard (Len) Gill has extensive knowledge and over 29 years experience in the Australian energy industry. He is the former Chief Executive Officer of TXU Australia (now TRUenergy). Prior to his appointment as CEO, Len headed TXU’s wholesale energy division for five years, which included general management responsibility for power generation and gas storage assets. Len is also a former Non-Executive Director of Verve Energy. Len holds a Bachelor of Engineering (Hons) degree and is a Member of the Australian Institute of Company Directors.

Mr W D Murphy – Chairman till 1 July

Warren Murphy is the Head of Australian Energy in the Infrastructure & Project Finance group at Babcock & Brown, based in the Sydney office. Warren leads the development of Babcock & Brown’s energy sector capability in Australia and New Zealand, and has specialised in the development of new projects in the infrastructure sector.

Recent transactions include the co-development of Redbank, Oakey, NewGen Kwinana, Braemar and Uranquinty, and the co-development of a number of renewable energy projects, including the Alinta and Lake Bonney wind farms. Warren joined Babcock & Brown in 1997. Prior to joining Babcock & Brown, he was a director of the project finance division of AIDC and before that worked at Westpac Banking Corporation. He is also a director of Babcock & Brown Wind Partners and of the responsible entity of Babcock & Brown Wind Partners Trust, and Sydney Gas Limited.

Warren holds a Bachelor of Engineering (Hons) and a Bachelor of Commerce in Accounting and Economics.

Mr P F Hofbauer – Non-Executive director

Peter Hofbauer is the Global Head of Babcock & Brown’s Infrastructure group and co-ordinates the group’s Infrastructure activities worldwide. Peter is also a director of Babcock & Brown Wind Partners Limited and Babcock & Brown Infrastructure Limited.

Prior to joining Babcock & Brown in 1989, Peter worked with Price Waterhouse and Westpac Project and Advisory Services Limited. Peter worked in the Sydney office of Babcock & Brown until early 1996 covering a range of business areas including large scale asset, property and tax based structured financing transactions. From 1996 until 2000, Peter worked in the London office of Babcock & Brown where he was responsible for establishing Babcock & Brown’s European property and infrastructure principal finance group. This involved, amongst other things, the establishment and ongoing management of a wholesale investment fund for Babcock & Brown and its clients.

Peter has a Bachelor of Business from Swinburne University. He is a member of the Institute of Chartered Accountants in Australia, the Taxation Institute of Australia and the Financial Services Institute of Australasia.

Mr J Fletcher - Independent Non-executive director

John Fletcher is currently a Director of APA Group and Sydney Water Corporation. His recent experience includes board positions with Foodland Associated Limited, Integral Energy and NGC Limited of New Zealand. He held a number of executive roles at The Australian Gas Light Company including that of CFO and has extensive experience of the energy industry. John has a Bachelor of Science and a Master of Business Administration. He is a Fellow of the Australian Institute of Company Directors.

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4

Directors (continued) Mr P M Kinsey - Independent Non-executive director

Peter Kinsey is the Regional Legal & Compliance Manager South Asia for the global ABB Limited Group and a Director of ABB Australia Pty Limited and ABB Limited (New Zealand). Peter has been a corporate lawyer for over 25 years in a number of major corporations. Peter has been involved in the negotiation of various types of commercial contracts including power projects and transportation projects in a number of countries, including Australia, New Zealand, the United States, Sweden, Japan, China, Thailand, Indonesia, Malaysia and India. Peter gives seminars on compliance and business ethics throughout Asia for ABB.

Prior to joining ABB, Peter was General Counsel at David’s Holdings Pty Ltd and prior to that Corporate Legal Manager of Alliance Holdings Ltd.

Peter holds a Bachelor of Law, Graduate Diploma in Financial Management and a Master of Commerce.

Mr M Garland - Alternate director for Mr P F Hofbauer

Mike Garland is head of Babcock & Brown’s North America Infrastructure & Project Finance group. Mike has over 25 years of experience developing, constructing, managing and investing in power and infrastructure in the United States and around the world. Mike’s experience includes renewable facilities, fossil power plants, transmission facilities and regulated, contracted and merchant assets. Mike has successfully closed power financings ranging in value from $10 million to over $3 billion. Mike holds a Bachelor of Arts in physics from the University of California at Berkeley and is a registered representative of NASD, Inc.

Mr G W Denton - Alternate director for Mr W D Murphy

Graham Denton is principally involved in project finance in the energy sector. Graham has had extensive involvement in the co-development of Oakey, Braemar, Redbank, NewGen Kwinana and Uranquinty as well as the Lake Bonney and Alinta wind farm developments. Prior to joining Babcock & Brown in 1997, Graham was employed by AIDC Ltd, in a project finance advisory role and before that Graham was employed by Eskom, the South African electricity utility. He has a Bachelor of Commerce (Honours) in Economics and a Master of Commerce degree.

Company Secretary The following persons were Company Secretary of BBPL at any time during the year, up to the date of this Directors’ report.

Mr J P Remedios Appointed 8 December 2006 Mr D E Richardson Appointed 3 April 2006

Particulars of the qualifications and experience of the Company Secretaries as at the date of this report are set out below:

Mr J P Remedios

John Remedios joined Babcock & Brown in November 2006 and is principally responsible for the company secretarial function and corporate governance requirements of Babcock & Brown Power. Prior to joining Babcock & Brown, John was a Senior Legal Counsel for AMP Capital Investors and held various company secretarial positions including Company Secretary of AMP Life Limited and Assistant Company Secretary of AMP Limited. John holds Bachelor of Economics and Bachelor of Law (Hons.) degrees from the University of Sydney and is a Member of the Law Society of New South Wales.

Mr D E Richardson

David Richardson joined Babcock & Brown in 2005 as Company Secretary for a number of the Specialised Funds and is now principally responsible for the company secretarial function and corporate governance requirements of Babcock & Brown Wind Partners. Prior to joining Babcock & Brown, David was a Company Secretary within the AMP Group, and at various stages was appointed Company Secretary for the AMP Capital Investors, Financial Services and Insurance divisions. David holds a Diploma of Law, Bachelor of Economics and a Graduate Diploma in Company Secretarial Practice. David is a Member of Chartered Secretaries Australia.

Principal activities The principal activity of BBP is the acquisition, construction, ownership and management of power generation assets, energy retail and related assets and activities.

Distributions The interim distribution of 13 cents was paid in March 2008. The Board of Directors of BBP announced on 19 June 2008 that no distribution for the six month period ended 30 June 2008 would be paid. This decision was made as part of a capital management plan to strengthen the balance sheet. The future distribution policy is under review as part of the Group’s strategic capital structure review.

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5

Review of operations Information on the operations and financial position of the BBP Group is set out in the review of operations attached and forming a part of this annual financial report.

Significant changes to the state of affairs During the year ended 30 June 2008 there was no other significant changes to the state of the affairs of the Group other than those disclosed in the financial statements and notes thereof.

Going Concern The Directors regularly monitor and review the debt facilities, the debt profile, the servicing of the debt and forecast cash flows which take into account the assumptions including but not limited to forward pricing of electricity and gas tariffs, fuel supply costs, gas shortfall positions, maintenance (both timing and cost) and capital expenditure.

After a detailed review of these factors and taking into account the post balance date assets sales, the Directors are of the opinion that the accounts are correctly prepared on the basis the Group is a going concern.

Matters subsequent to end of the financial year

Sale of Uranquinty On 4 July 2008, BBP sold its 100% interest in the 640MW Uranquinty Power Station near Wagga Wagga in southern NSW to Origin for an on-completion value of $700 million. Following the sale, the net proceeds of $159 million were used to repay part of the outstanding Babcock & Brown Power Holdings’ (BBPH) corporate debt facility. In addition, the Uranquinty construction debt facility of $510 million of which $404 million was drawn at 30 June 2008, has been assumed by Origin. The sale will generate a pre-tax accounting profit on disposal of approximately $104 million in FY09.

Sale of Ecogen On 18 July 2008, BBP announced that it had agreed to sell its 73% equity stake in the 959MW Ecogen power generation business (Newport and Jeeralang power stations) in Victoria to Industry Funds Management (“IFM”). The sale was completed on 5 August 2008 with the net proceeds of $79 million were used to repay part of the outstanding BBPH corporate debt facility. In addition, the Ecogen debt facility of $130 million (as at 30 June 2008) has been assumed by IFM. The sale will generate a pre-tax accounting profit on disposal of approximately $8 million in FY09.

Sale of Tamar On 18 August 2008 BBP announced the signing of a Heads of Agreement with the Tasmanian Government for the sale of the Tamar Power Project, which is currently under construction. The sale is contingent on several conditions precedent, including ACCC approvals and Royal Assent of authorising legislation. The construction asset has been written down to its recoverable amount (after taking into account the release of the onerous contract provision associated with the project. (Refer to Note 14 for details on the onerous provision). As such, there will be no gain/loss on sale in FY09. Proceeds of approximately $100 million (before transaction costs) will be used to repay corporate debt facilities. Strategic Capital Review As part of the stabilisation of the BBP capital structure, UBS have been appointed as an advisor to the Board to assist in determining the appropriate options to achieve the optimal capital structure. As part of this process all capital options are being considered including the distribution policy. Varanus Island Gas Explosion On the 3 June 2008, the gas terminal on Varanus Island suffered major damage as a result of an explosion which cut approximately 30% of West Australian gas supplies. Through this terminal Alinta was supplied half of its gas supplies for its residential and commercial customers as well as for its two cogeneration electricity generators. The impact of the gas shortage was exacerbated by the previously planned maintenance outage of some of the coal fired electricity generators in WA. The combination of gas shortage and lower generator availability pushed up energy prices to historically high levels. This had an impact on the Alinta operations with a loss of approximately $10 million being recorded in the FY08 financial results. Management expect the loss in the first half of FY09 to be approximately $18 million net of estimated insurance proceeds. Gas supplies from Varanus Island has been restored to approximately 70% capacity and expected to be fully restored by December 2008. BBP is not expecting a material change to the forecast. Future developments Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the Group.

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Remuneration report (audited) SPECIALISED FUND PLATFORM

Babcock & Brown has established a Specialised Funds platform which consists of entities (Funds) established and managed by Babcock & Brown wholly owned subsidiaries under long term Management Agreements. One of these Funds is Babcock & Brown Power (BBP). Under the terms of those Management Agreements, the Manager provides a Core Management Team which comprises Babcock & Brown employees who are seconded to the Manager on either a full or part time basis in relation to the management of a Fund. These employees are therefore remunerated in accordance with Babcock & Brown’s remuneration policies. Accordingly, this Remuneration Report details the philosophy and framework currently applicable to the Babcock & Brown Group (B&B Group). It should be noted that the employees of subsidiaries of BBP are remunerated on a different basis than that applicable to Babcock & Brown employees.

The following matters should be noted in understanding how the Executives1 in the BBP Core Management Team (BBP Executives) are remunerated and how their remuneration is aligned to the performance of BBP and Babcock & Brown:

Babcock & Brown meets the costs of employment (including bonuses) of the BBP Executives as these remuneration costs are a category of expenses under the Management Agreements that are not separately recoverable from BBP.

The recovery of expenses by the Manager (including the remuneration of the BBP Executives) is capped in accordance with the Management Agreements.

As employees of Babcock & Brown, the BBP Executives are remunerated on a calendar year basis with annual incentive remuneration payments made in relation to their performance for the 12 months ending 31 December. These incentive payments are paid in March each year following the previous 31 December financial year end of Babcock & Brown.

The remuneration of BBP Executives is made up of 3 components being fixed remuneration, short term incentives (STI) and long term incentive components (LTI)

- fixed remuneration comprises a cash salary and statutory entitlements including superannuation;

- STI comprises a cash bonus and Share Awards (see below for further details); and

- LTI comprises Bonus Deferral Rights and performance-based Options which are subject to various hurdle requirements as described below.

Where a Babcock & Brown employed BBP Executive is directly and solely involved in the management of BBP, 50% of any Bonus Deferral Right allocation will be invested in Babcock & Brown Bonus Deferral Rights and the remaining 50% in BBP Bonus Deferral Rights.

Subject to vesting arrangements and no disqualifying events, Bonus Deferral Rights vesting commences at year four after allocation.

Total remuneration of BBP Executives includes LTI of between 20% and 50% which is aligned to the security price of both BBP and Babcock & Brown.

Accordingly, the total remuneration disclosed in this Remuneration Report:

- is the remuneration paid for the performance of the BBP Executive during the 12 months ending 31 December 2007; and

- includes deferred equity components issued at prevailing prices as at their respective grant date in April 2008; i.e. Share Awards and Babcock & Brown Bonus Deferral Rights were issued at a price of $12.8233 per security, BBP Bonus Deferral Rights were issued at a price of $1.81 per security and TSR Hurdled Options were issued at a strike price of $12.95 per security.

Babcock & Brown’s and BBP’s security price closed on Friday 22 August 2008 at $2.48 and $0.225 respectively. The ultimate value of the LTI components of the BBP Executive’s total remuneration is linked to the security prices of Babcock & Brown and BBP. The securities allocated as LTI have lost approximately 80% of their total value based on the abovementioned closing prices on 22 August 2008 and accordingly the value of the BBP Executives LTI has declined by 80%. As noted above, the LTI components of the BBP Executives remuneration does not vest for four years.

The financial impact for each BBP Executive is highlighted in the table below:

1 In this report “BBP Executive” refers to the BBP Key Management Personnel who are not Directors, as well as the five most highly remunerated senior managers.

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Remuneration report (audited) (continued)

SPECIALISED FUND PLATFORM (CONTINUED)

Short-term employee benefits Post-employment

benefits

Other long-term

employee benefits

Share based payments2

Total

Year Salary STI Plan relating to

current period

Non-monetary benefits

Total of short-term employee benefits

Super-annuation

Long Service Leave

Equity settled

Cash settled

BBP Executive1 $ $ $ $ $ $ $ $ $

Paul Simshauser 20083 365,000 412,475 - 777,475 13,129 6,083 622,455 8,788 1,427,930

20074 365,000 412,475 - 777,475 13,129 6,083 104,885 3,090 904,662

James Brown 20083 294,900 350,000 - 644,900 13,129 4,915 168,592 1,952 833,488

20074 294,900 350,000 - 644,900 13,129 4,915 25,977 686 689,907

Brian Green 20083 294,900 350,000 - 644,900 13,129 4,915 189,449 2,420 854,813

20074 294,900 350,000 - 644,900 13,129 4,915 32,204 851 695,999

Andrew Kremor 20083 360,000 232,700 - 592,700 13,129 6,000 30,820 1,607 644,256

20074 360,000 232,700 - 592,700 13,129 6,000 3,339 565 615,733 1 These are the BBP Executives who received the highest emoluments in respect of the 2007 calendar year. 2 Share-based payments include LTI Plan options and Bonus Deferral Rights. 3 Remuneration for calendar year 2007 with LTI components based on the allocation prices as at the Grant Date on 21 April 2008. 4 Remuneration for calendar year 2007 with LTI components based on the closing prices of B&B and BBP security prices as at Friday, 22 August 2008. BBP EXECUTIVES

The following persons were BBP Executives during the financial year:

BBP Executives

Mr Paul Simshauser Chief Executive Officer2

Mr Brian Green Chief Operating Officer2

Mr James Brown Chief Financial Officer2 Ms Julia Oakley General Manager, Business Services2 (appointed 28 April 2008)

Mr Andrew Kremor General Manager, Energy Markets2 Mr Tom Richardson General Manager, Transition 3

REMUNERATION POLICY

The B&B Board recognises that Babcock & Brown operates in a global market place and its success is ultimately dependent on its people. In light of this, Babcock & Brown aims to attract, retain and motivate highly-specialised and skilled employees from a global pool of talent who have the expertise to manage BBP in the best interests of the security-holders of BBP. REMUNERATION STRUCTURE

During 2007, the B&B Board determined that remuneration would be assessed under a total annual remuneration model consisting of fixed remuneration and incentive remuneration (short-term incentives (STI) and long-term incentives (LTI)). The amount of incentive remuneration is determined after Babcock & Brown’s year-end (December) and is calculated as total annual remuneration approved by the B&B Board less fixed remuneration. Incentive remuneration is then allocated between the components in accordance with the criteria set out in further detail in this report.

2 These persons are employed by Babcock & Brown Australia Pty Limited. 3 Employed by BBP. Retired July 2008.

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OPERATION OF TOTAL ANNUAL REMUNERATION IN CALENDAR YEAR 2007

The process for determining the calendar year 2007 total annual remuneration allocation for BBP Executives is outlined below:

Step 1: During 2007, the BBP Nomination & Remuneration Committee agreed KPIs for the BBP Executives to establish criteria for assessing performance.

The BBP Nomination & Remuneration Committee consists of five Directors, of which three are independent Non-Executive Directors. Its members from the Committee’s inception on 25 June 2007 through to 30 June 2008 were:

• Mr P M Kinsey (Chair) • Mr L F Gill • Mr W D Murphy

• Mr P F Hofbauer • Mr J A Fletcher KPIs for the BBP Executive were refined during 2007 to further align their interests and behaviours with those of BBP’s security-holders. On a calendar year basis, each individual’s performance is assessed against their KPIs to establish their final total annual remuneration.

There are three sets of KPIs:

The first set focuses BBP Executives on outstanding role modelling of the B&B Group’s & BBP’s core values through:

• working together to maximise the short and long-term performance of BBP for investors, clients and employees;

• attracting, developing, motivating and retaining the best people to build, lead and sustain BBP’s businesses; and

• enhancing and protecting BBP’s unique assets and source of competitive advantage – people, relationships, capital and reputation.

The second set focuses BBP Executives’ contribution to the generation of short and long term profitability of BBP.

The third set focuses on the generation of long-term profitability of BBP. Longer term measures include each individual’s direct contribution to the performance of BBP.

Step 2: Independent members of the BBP Nomination & Remuneration Committee provided input to Babcock & Brown on the performance of BBP Executives to assist in determining the preliminary total annual remuneration allocation amount.

The recommendations for the BBP Executive were determined based upon their relative performance assessed in accordance with the KPIs outlined above in Step 1.

Step 3: The B&B Corporate Management Committee established individual allocations from the total incentive remuneration allocation amount and made recommendations to the B&B Remuneration Committee.

Summary of Incentive Plans

SHORT-TERM INCENTIVE (STI) PLAN

All B&B Group employees are eligible to participate in the STI plan. The B&B Board’s policy is to allocate at least 25% of an employee’s STI award above a threshold level to a grant of Bonus Deferral Rights (BDRs) with the balance paid in cash. For the remuneration period ending 31 December 2007, the B&B Board allocated 30% of an employee’s STI award above A$350,000 to a grant of BDRs. BDRs take the form of B&B BDRs and Fund BDRs (each further described below). The threshold level and allocation percentage are subject to annual review.

All short-term incentives below the threshold level are generally delivered entirely as cash. However, to encourage increased employee share ownership levels and a greater alignment of interests between employees, B&B shareholders and BBP security-holders, certain employees can voluntarily sacrifice up to 100% of their discretionary STI into Voluntary Bonus Deferral Rights (Voluntary BDRs). Only employees in locations where the tax regime allows deferral are eligible to participate in the Voluntary BDR Plan.

The following tables provide further information on the various equity and equity-based components of STI for the remuneration period ending 31 December 2007.

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Remuneration report (audited) (continued) SHARE AWARDS

The nature, eligibility and general terms of the Share Awards are outlined in the table below:

Nature Each fully vested Share Award entitles the participant to one share in Babcock & Brown at no cost. Fifty percent of the Share Awards are exercisable from August 2008 and the remaining 50% from February 2009.

Eligibility All employees who have total short-term incentive remuneration of more than $200,000.

Quantum of Share Awards to be allocated

The number of Share Awards granted is determined by dividing the amount of the Share Award allocation by the market value of Babcock & Brown shares at the time the Share Awards are granted. The grant of Share Awards occurred in April 2008.

Entitlement and treatment of dividends

Each Share Award is backed by a Babcock & Brown share either issued to or acquired by the Babcock & Brown Australian Incentive Trust or the Babcock & Brown Executive Achievement Share Trust, as applicable. Dividends received on these shares, less trust expenses and taxes as determined by the Trustee, will be applied towards acquiring additional Babcock & Brown shares (Dividend Reinvestment Plan (DRP) Shares). Any DRP Shares will also hold entitlements to future dividends, which will be treated in the same way. The DRP Shares will be held by the Trust until the time the B&B Share Awards are exercised. Once the Share Awards have been exercised, the employee is entitled to receive dividends on their shares, similar to any other Babcock & Brown shareholder.

BABCOCK & BROWN BONUS DEFERRAL RIGHTS (B&B BDRS)

B&B BDRs are designed to further align the interests of employees, B&B shareholders and BBP security-holders and act as a retention mechanism. The nature and general terms of the B&B BDRs are outlined in the table below:

Nature Each B&B BDR entitles the participant to one share in Babcock & Brown at no cost after a four year vesting period.

Eligibility If the participant only contributes to Babcock & Brown, and receives an STI award above the threshold level, they will receive all of their BDR allocation in B&B BDRs. If the participant makes a contribution to both Babcock & Brown and Babcock & Brown Listed Managed Fund(s), and receives an STI award above the threshold level, they will receive 50% of their BDR allocation as B&B BDRs and the remaining 50% in Fund BDRs (see below).

Quantum of B&B BDRs to be allocated

The number of B&B BDRs granted is determined by dividing the amount of the B&B BDR allocation by the market value of Babcock & Brown shares at the time the B&B BDRs are granted. The B&B BDRs were granted to BBP Executives during April 2008.

Entitlement and treatment of dividends

The same treatment as the Share Awards applies (see above section).

Forfeiture conditions of the B&B BDRs

Any participant leaving the B&B Group may forfeit their B&B BDRs if they terminate employment within the four year vesting period, unless the B&B Board exercises its discretion in certain circumstances, such as redundancy or retirement. The B&B Board also reserves the right to allow vesting in other circumstances which would include a participant leaving Babcock & Brown to pursue other interests which the B&B Board is satisfied will not compete with the B&B Group.

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FUND BONUS DEFERRAL RIGHTS (FUND BDRS)

The B&B Board believes that the B&B Managed Funds are central to Babcock & Brown’s long term strategy and business model. During 2007, the B&B Board introduced Fund BDRs to further align eligible employees’ interests with those of the applicable Listed Managed Fund’s security-holders. The nature, eligibility and general terms of the Fund BDRs are outlined in the table below:

Nature Each Fund BDR entitles the participant to a cash payment, linked to the performance of the applicable B&B Listed Managed Fund (reflected by the market price movement plus income reinvestment of the relevant Babcock & Brown Listed Managed Fund's securities, less any applicable withholdings) at the end of the four year vesting period. If the employee contributed to more than one Fund, the amount to be delivered in Fund BDRs will be allocated equally between the various Babcock & Brown Listed Managed Funds to which they make a contribution.

Eligibility If the employee only contributes to Babcock & Brown they are not eligible to receive Fund BDRs. If the employee makes a contribution to both Babcock & Brown and a Babcock & Brown Listed Managed Fund(s), and receives an STI award above the threshold level, they will receive 50% of their BDR allocation in B&B BDRs and the remaining 50% in Fund BDRs.

Quantum of Fund BDRs to be allocated

Similar to the B&B BDRs, the number of Fund BDRs granted is determined by dividing the amount of the Fund BDR allocation by the market value of the applicable Babcock & Brown Listed Managed Fund’s securities at the time the Fund BDRs are granted. The Fund BDRs were granted to BBP Executives during April 2008.

Entitlement to dividends / distributions

Any dividends / distributions paid during the vesting period are included in the calculation to determine the cash payment that will be paid to the participant at the end of the vesting period. No actual dividends / distributions are received by the participant as the Fund BDRs are not backed by equity in the applicable Fund.

Forfeiture Conditions The same forfeiture conditions that apply to B&B BDRs also apply to Fund BDRs (see above).

As short-term incentive allocations are determined after the end of B&B’s financial year (31 December) and are directly dependent on the B&B Group’s financial performance, employees are not able to be advised of a target STI amount. Accordingly, Babcock & Brown cannot specify the percentage of the BBP Executives’ target STI that was paid and forfeited during the financial year.

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Remuneration report (audited) (continued) LONG-TERM INCENTIVE (LTI) PLAN

The nature, eligibility and general terms of performance-based Options are outlined in the table below:

Nature Each performance-based Option entitles the participant to one share in Babcock & Brown upon vesting subject to the payment of an exercise price. The exercise price of each Option will generally be based on the market value of shares at the time of grant.

Eligibility All employees who have total annual remuneration which is more than double fixed remuneration and have total annual remuneration which is in excess of $250,000.

Quantum of performance-based options to be granted

The number of performance-based Options to be granted is determined by dividing the amount of the LTI allocation by the value of the performance-based Option at the time they are granted. The Performance-based Options are expected to be granted to Executives and other employees during April 2008.

Vesting and performance period

The B&B Board’s policy on the terms of vesting of LTI awards will typically include vesting at least three years after grant subject to the achievement of a performance hurdle. Performance-based Options to be granted for 2007 will have a three and a half-year vesting period, subject to achievement of a relative TSR hurdle.

Performance Hurdle The relative TSR hurdle set by the B&B Board measures Babcock & Brown’s TSR performance against all other ASX 100 index companies as at the date of grant measured over the three and a half year vesting period. The B&B Board has chosen Relative TSR ranking as the performance hurdle for the LTI awards because this hurdle ensures the greatest alignment between executive reward and the creation of shareholder value. By using ASX 100 index companies as the peer group, Babcock & Brown ensures that Executives and other senior executives will only be rewarded when Babcock & Brown’s TSR has exceeded the median of the broader Australian market. LTI awards will vest in accordance with the table below: Percentile % of options that vests Below 51st percentile Nil 51st to 74th percentile Progressive vesting on a straight line basis from 50 to 99% At or above 75th percentile 100%

The B&B Remuneration Committee has determined that it is appropriate to retest performance 12 months after the initial test date (i.e. after 4.5 years) for the 2008 grants if they are not fully vested at the initial test date (i.e. after 3.5 years). The B&B Remuneration Committee understands that some stakeholder and shareholder bodies are against more than one test date and conducted a review of the testing mechanism during 2006. After this review, and also because of the recent market volatility, the B&B Remuneration Committee determined that it was appropriate to keep two test dates in place.

The reasons for this included that the impacts of long-term decision making may not be reflected over the first 3.5 years and that stock market volatility means that Babcock & Brown’s share price on the first test date may not reflect its fundamental value on that day. In addition, Babcock & Brown believes that having two test dates still aligns Executives and other senior executives interests with those of shareholders and security-holders because performance is tested over the entire 4.5 year period and therefore relative performance in the year following the first test date would need to be strong to make up for any underperformance over the first 3.5 years. Executives and other senior executive are therefore only rewarded when shareholders are similarly rewarded.

To measure performance against the TSR performance hurdle Babcock & Brown’s external remuneration advisor will obtain, for each company in the ASX 100 as at the grant date, the TSR over the performance period and then rank these companies by their TSR performance. Babcock & Brown’s TSR will then be compared to the TSR of the companies in this peer group to determine its percentile ranking and the level of vesting that will occur. This analysis will then be presented to the B&B Remuneration Committee for approval. This method of assessment was chosen because it ensures independence when determining vesting levels.

Forfeiture Conditions Any participant leaving the B&B Group may forfeit their Options if they terminate employment within the 3.5 year vesting period, unless the B&B Board exercises its discretion in certain circumstances, such as redundancy or retirement. The B&B Board also reserves the right to allow vesting in other circumstances which would include a participant leaving Babcock & Brown to pursue other interests which the Board is satisfied will not compete with the B&B Group.

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LONG-TERM INCENTIVE (LTI) PLAN (CONTINUED)

The 2007 performance year was the first time that Options were used as a formal part of the executive remuneration framework. Accordingly, no information can be provided as yet on the percentage of Executive Option allocations that were vested or forfeited during the financial year.

TABLE 1: REMUNERATION OF THE EXECUTIVES FOR THE 2007 CALENDAR YEAR

Details of the nature and amount of each element of the emoluments of each Executive of BBP for the year ended 30 June 2008 and 2007 are set out in the table below.

Short-term employee benefits Post-Employment

benefits

Otherlong term employee

benefits

Share based payments

Total

Year Salary (cash)

STIP relating

to current period(cash)

STIP relating to prior

years

Non-monetary

benefits

Total of short-term employee

benefits(cash)

Super-annuation

Long Service

Leave

Equity settled2

Cash settled3

$ $ $ $ $ $ $ $ $ $ Executives Mr Paul Simshauser1 2008 365,000 412,475 - - 777,475 13,129 6,083 622,455 8,788 1,427,930 2007 253,011 165,000 - - 418,011 12,686 - 12,567 - 443,264 Mr James Brown1 2008 294,900 350,000 644,900 13,129 4,915 168,592 1,952 833,488 2007 212,241 65,200 - - 277,441 12,686 - 4,189 - 294,316 Mr Brian Green1 2008 294,900 350,000 - - 644,900 13,129 4,915 189,449 2,420 854,813 2007 187,665 - - 28,035 215,700 12,686 - - - 228,386 Mr Andrew Kremor1 2008 360,000 232,700 - - 592,700 13,129 6,000 30,820 1,607 644,256 2007 28,175 - - - 28,175 2,536 - - - 30,711 Mr Tom Richardson1 2008 334,255 150,000 - - 484,255 13,745 - - - 498,000 - - - - - - - - - - Mr Mark Williamson 2008 - - - - - - - - - - 2007 33,514 - - - 33,514 3,016 - - - 36,530 Mr John Remedios 2008 - - - - - - - - - - 2007 104,399 - - - 104,399 9,148 - - - 113,547 Total remuneration for Executives 2008 1,649,055 1,495,175 - -

3,144,230 66,261

21,913

1,011,316 14,767

4,258,487

2007 819,005 230,200 - 28,035 1,077,240 52,758 - 16,756 - 1,146,754

1 These are the five executives who received the highest emoluments in the 2007 calendar year.

2 Equity settled share based payments comprise Share Awards, B&B BDRs and performance-based Options.

3 Cash settled share based payments comprise BBP BDRs.

TABLE 2: REMUNERATION COMPONENTS AS A PROPORTION OF TOTAL REMUNERATION

The below remuneration mix is based upon the above remuneration table which includes the amortisation of prior year unvested equity awards and the current year’s amortisation for grants made in 2007. The actual remuneration mix pre-amortisation is outlined in the Remuneration Structure section on page 7 of this report.

Performance-based remuneration Total

Executives Fixed

remuneration1 Cash Share AwardsBonus deferral

rights2 Options (%) (%) (%) (%) (%) (%)

Mr Paul Simshauser 26.91 28.89 36.24 2.38 5.58 100Mr James Brown 37.55 41.99 15.45 0.91 4.10 100Mr Brian Green 36.61 40.94 18.68 1.10 2.67 100Mr Andrew Kremor 58.85 36.12 1.97 0.97 2.09 100Mr Tom Richardson 69.88 30.12 0.00 0.00 0.00 100

1. Fixed Remuneration consists of salary, non-monetary benefits, superannuation and long service leave. 2. Bonus Deferral Rights refers to both B&B BDRs and Fund BDRs.

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TABLE 3: VALUE OF REMUNERATION THAT VESTS IN FUTURE YEARS

Remuneration subject to vesting1 Executives 2008 2009 2010 2011 2012 Mr Paul Simshauser 631,243 113,772 113,772 113,772 68,339 Mr James Brown 170,544 41,747 41,747 41,747 24,067 Mr Brian Green 191,869 32,193 32,193 32,193 24,584 Mr Andrew Kremor 32,427 19,706 19,706 19,706 15,211

1. Remuneration amounts disclosed in the above table refer to the maximum value of Options, B&B BDRs and Fund BDRs, where relevant. These amounts have been determined at grant date by using an appropriate pricing model and amortised in accordance with AASB 2 “Share Based Payment”. The minimum value that may vest is $nil and no remuneration currently granted vests after 31 December 2012.

OUTSTANDING BABCOCK & BROWN SHARE AWARDS

Share Awards were granted to Executives during April 2008 with the number to be granted based on the market price of Babcock & Brown’s shares as at the grant date. The value per Share Award will be determined at the date of grant.

Upon exercise, the Share Awards entitle the holder to subscribe for one fully paid ordinary share in Babcock & Brown together with their related Dividend Reinvestment Shares and do not entitle the holder to participate in share issues made by Babcock & Brown. No exercise price is payable in relation to the Share Awards and no amounts will be paid, or payable by the recipient for the granting of these Share Awards. These Share Awards will be issued fully vested at the date of grant.

TABLE 4: TERMS AND CONDITIONS OF OUTSTANDING SHARE AWARDS

The table below provides the terms and conditions of outstanding Share Awards. Included in this table is an amount for Share Awards granted during April 2008.

% Exercisable from Executives Total Value ($) August 20081 February 2009 2 Mr Paul Simshauser 517,472 50 50 Mr James Brown 128,798 50 50 Mr Brian Green 159,676 50 50 Mr Andrew Kremor 12,720 50 50

1. The Share Awards are exercisable from the date immediately following the results release to the ASX for Babcock & Brown Limited for the half year ending 30 June 2008 on 21 August 2008.

2. The Share Awards are exercisable from the date immediately following results release to the ASX for Babcock & Brown Limited for the full year ending 31 December 2008 anticipated to be late February 2009.

OUTSTANDING BABCOCK & BROWN BONUS DEFERRAL RIGHTS (B&B BDRS)

Upon vesting, the B&B BDRs entitle the holder to subscribe for one fully paid ordinary share in Babcock & Brown together with their related Dividend Reinvestment Shares and do not entitle the holder to participate in share issues made by Babcock & Brown. No exercise price is payable in relation to the B&B BDRs and no amounts have been paid, or are payable by the recipient for the granting of these B&B BDRs. No B&B BDRs vested, were exercised or lapsed during the year and all B&B BDRs held at 31 December 2007 are unvested and unexercisable. Unless indicated otherwise all B&B BDRs do not have an expiry date as they are automatically converted to Babcock & Brown shares upon vesting. The BBP independent Non-Executive Directors do not hold any B&B BDRs.

TABLE 5: TERMS AND CONDITIONS OF OUTSTANDING B&B BONUS DEFERRAL RIGHTS

The table below provides the terms and conditions of outstanding B&B BDRs. Included in this table is an amount for B&B BDRs granted during April 2008.

Executives Granted Number

Grant date Value per B&B BDR

Total Value

Vesting Date1

($) ($) Mr Paul Simshauser 9,691 21/04/08 13.02 126,177 23/02/12 Mr James Brown 2,152 21/04/08 13.02 28,019 23/02/12 Mr Brian Green 2,668 21/04/08 13.02 34,737 23/02/12 Mr Andrew Kremor 1,772 21/04/08 13.02 23,071 23/02/12

1. B&B BDRs granted in 2008 will vest following the release to the ASX of Babcock & Brown’s full year results for the 2011 year, anticipated to be in late February 2012. B&B BDRs granted in 2007 will vest following the release to the ASX of Babcock & Brown’s full year results for the 2010 year, anticipated to be in late February 2011. B&B BDRs granted in 2006 will vest following the release to the ASX of Babcock & Brown’s full year results for the 2009 year, anticipated to be in late February 2010.

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Outstanding Fund Bonus Deferral Rights

The Fund BDRs represent 50% of the Executive’s total BDR allocation. Upon vesting, the Fund BDRs entitle the holder to a cash payment linked to the performance of the applicable fund over the period from grant date to vesting date. No Fund BDRs vested, were payable or lapsed during the year and all Fund BDRs held at 31 December 2007 are unvested and unexercisable. No exercise price is payable in relation to the Fund BDRs. The BBP independent Non-Executive Directors will not be granted any Fund BDRs.

TABLE 6: TERMS AND CONDITIONS OF OUTSTANDING FUND BONUS DEFERRAL RIGHTS

The grant date for these Fund BDRs was 10 April 2008 with the number granted based on the 5-day volume weighted average price of BBP securities prior to the grant date. The Fund BDRs vest following the release to the ASX of Babcock & Brown’s full year results for the 2011 year, anticipated to be in late February 2012.

BBP Executives Mr Paul Simshauser Total value ($) 43,942 Mr James Brown Total value ($) 9,759 Mr Brian Green Total value ($) 12,098 Mr Andrew Kremor Total value ($) 8,036

OUTSTANDING OPTIONS

The table below outlines the terms and conditions of all Options that are currently held by Executives. These Options were issued at no cost and no amounts have been paid, or are payable, by the recipient for the granting of these Options. Each Option entitles the holder to subscribe for one fully-paid ordinary share in Babcock & Brown. The Options do not entitle the Option holder to participate in share issues made by Babcock & Brown. No Options vested, were exercised or lapsed during the year and all Options held at 31 December 2007 are unvested and unexercisable. The BBP Independent Non-Executive Directors do not hold any Options.

TABLE 7: TERMS AND CONDITIONS OF OUTSTANDING OPTIONS

The table below provides the terms and conditions of outstanding Options. Included in this table is an amount for Options granted during April 2008.

Executives

Granted Number

Grant date Value per

Option

Total Value of Options

granted

First Exercise

Date

Last Exercise

Date ($) ($)

Mr Paul Simshauser 22,500 9/03/07 7.54 169,650 25/08/11 9/03/13 52,607 21/04/08 3.73 196,224 18/08/11 21/04/14 Mr James Brown 7,500 9/03/07 7.54 56,550 25/08/11 9/03/13 27,055 21/04/08 3.73 100,915 18/08/11 21/04/14 Mr Brian Green 28,558 21/04/08 3.73 106,521 18/08/11 21/04/14 Mr Andrew Kremor 16,871 21/04/08 3.73 62,929 18/08/11 21/04/14

1. The grant date for these performance-based Options was April 2008 with the number of Options granted based on the value per Option at the date of grant. The exercise price is based on the 5-day volume weighted average price of Babcock & Brown’s shares prior to the grant date to Executives.

2. The first exercise date for Options exercisable in 2011 is the date immediately following the results release to the ASX for Babcock & Brown for the half year ending 30 June 2011, anticipated to be in late August 2011, subject to the performance hurdle for these awards being achieved.

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EXECUTIVE EMPLOYMENT CONTRACTS

The base salaries for Executives as at 30 June 2008, in accordance with their employment contract, are shown below:

Executives Base Remuneration per Service Agreement Mr Paul Simshauser 365,000 Mr James Brown 330,000 Mr Brian Green 330,000

Mr Andrew Kremor 365,000 Mr Tom Richardson 334,255

All of the above Executive employment contracts contain the conditions below, with the exception of Tom Richardson (who retired on 31 July 2008):

Length of contract • Open-ended Frequency of base remuneration review

• Annual

Benefits • Executives are entitled to participate in Babcock & Brown benefit plans that are made available.

Incentive Remuneration • Executives are eligible for an award of incentive remuneration (if any). Termination of employment • Employment is able to be terminated by either party on 3 months’ written

notice. Babcock & Brown may elect to pay the Executive three months’ salary in lieu of notice.

NON-EXECUTIVE DIRECTORS

The following persons were Directors of BBP during the financial year:

Directors

Mr L F Gill Independent Chairman from 1 July 2008, and Independent Non-Executive Director

Mr W D Murphy Chairman from 23 November 2007 through to 1 July 2008, Non-Executive Director, Babcock & Brown Executive

Mr P F Hofbauer Chairman through to 23 November 2007, Non-Executive Director, Babcock & Brown Executive

Mr J Fletcher Independent Non-Executive Director Mr P M Kinsey Independent Non-Executive Director

REMUNERATION POLICY AND STRUCTURE

Independent Directors’ individual fees, including committee fees, are determined by the BBP Board within the aggregate amount approved by security-holders. The current maximum aggregate amount which may be paid to all Non-Executive Directors is $750,000 per annum. Babcock & Brown senior executives who are directors of BBP are allocated the same amount of remuneration as the independent directors, however these senior executives do not directly receive any remuneration for their role as director as these amounts are included as part of the fee paid to the Manager.

Independent Directors receive a cash fee for service. They do not receive any performance-based remuneration or any retirement benefits, other than receiving statutory superannuation.

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REMUNERATION POLICY AND STRUCTURE (CONTINUED)

Fees payable to Independent Directors during the year ended 30 June 2008 are set out below:

Board / Committee Role Fee Board Chair $Nil

Member $125,000 Lead Independent Director $10,000 Audit & Risk Management Committee Chair $13,000 Member $6,500 Nomination & Remuneration Committee Chair $4,000

Member $2,000

The fees above apply in aggregate to membership on both the BBPL and BBPS Boards/Committees.

DIRECTORS’ MEETINGS

The number of meetings of Directors (including meetings of committees of Directors) held during the year ended 30 June 2008, and the number of meetings attended by each Director, are as follows:

Meetings of Committees

Scheduled Directors’

Meetings in BBPL

Scheduled Directors’

Meetings in BBPS

Audit, Risk & Compliance Committee for BBPL and BBPS

Nomination & Remuneration for BBPL

Number of meetings held: 19 19 7 4

Number of meetings attended: Mr P F Hofbauer* 17 17 - 2 Mr W D Murphy 19 19 6 4 Mr P M Kinsey 18 18 7 3 Mr J Fletcher 19 19 7 4 Mr L F Gill* 19 - - 4

* Mr Hofbauer and Mr Gill are not currently a members of the Audit, Risk & Compliance Committee (ARCC). Mr Gill attended one ARCC meeting during the financial year ended 30

June 2008

Table 8: Remuneration of Independent Directors for the years ended 30 June 2008 and 2007

Details of the nature and amount of each element of the emoluments of each Independent Director of BBP for the years ended 30 June 2008 and 2007 are set out in the table below.

Short-term employee

benefits

Post-employment benefits

Year Fees Superannuation Total Independent Directors Mr L F Gill (Chairman) – from 1 July 2008

2008 127,001 11,430 138,431

Mr L F Gill 2007 37,083 3,338 40,421 Mr J A Fletcher 2008 140,000 12,600 152,600 Mr J A Fletcher 2007 79,561 7,161 86,722 Mr P M Kinsey 2008 145,500 13,095 158,595 Mr P M Kinsey 2007 82,258 7,403 89,661 Non-Executive Directors Mr P F Hofbauer 2008 127,000 N/A 127,000 Mr P F Hofbauer 2007 110,000 N/A 110,000 Mr W D Murphy 2008 133,500 N/A 133,500 Mr W D Murphy 2007 114,000 N/A 114,000

Total remuneration for Independent Directors 2008 673,001 37,125 710,126 2007 422,902 17,902 440,804

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Indemnification of officers and auditors BBP has agreed to indemnify each director, alternate and officer on a full indemnity basis against all losses and liabilities incurred in their role as a director, alternate or officer (including for legal costs incurred in preparing for, conducting or defending legal actions). This indemnity is subject to certain exclusions, including to the extent that such indemnity is prohibited by the Corporations Act 2001 or any other law, or to the extent that the loss or liability is covered by insurance. BBP has not been advised of any claims under any of the abovementioned indemnities.

BBP has not indemnified or agreed to indemnify the auditors of BBP at any time during the financial year.

During the financial year, BBP has paid insurance premiums for a directors’ and officers’ liability insurance contract that provides cover for current and former directors, secretaries and executives officers of BBP, its controlled entities and BBPS. The Directors have not included details of the nature or limit of the liabilities covered in this directors’ and officers’ liability insurance contract or the amount of the premium paid, as disclosure is prohibited under the terms of the contract.

Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings.

No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001.

Non-audit services The Board of directors has considered the position and, in accordance with advice received from the Audit, Risk & Compliance Committee, is satisfied that the provision of the non-audit services by the group’s external auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. Details of the amounts paid to the Auditor, which include amounts paid for non-audit services are set out in Note 34 of the Notes to the Financial Statements.

Auditor’s independence declaration PricewaterhouseCoopers were re-appointed auditors of the BBP group, effective 5 November 2007.

The auditor’s independence declaration is included on page 19 and forms a part of the Directors’ report.

Environmental regulation BBP’s assets are subject to environmental regulations under both Commonwealth and State legislation. The Directors are satisfied that BBP has adequate systems in place for the management of its environmental responsibilities and compliance under its various licence requirements and regulations. The Directors are not aware of any breaches of these environmental requirements as they apply to BBP and to the best of their knowledge and enquiries all activities have been undertaken in compliance with environmental regulations.

Emissions Trading Scheme In July 2008, the Federal Government issued the Green Paper outlining the approach to the design of a national emissions trading scheme (Carbon Pollution Reduction Scheme). The paper identified the key design decisions required, highlighting alternative approaches, the key questions to be resolved and indicates preferences amongst the options. Broad business and community stakeholder feedback is currently being sought to assist the Federal Government in the decisions that will shape the final scheme design. The government is producing a “White Paper” incorporating its decisions and an exposure draft of the legislation for Australia’s Carbon Pollution Reduction Scheme is expected to be released by the end of 2008. The Group notes it has both gas and coal fired generators in various markets and regions. Until further clarity is available as to the exact nature of the final scheme to be implemented, there is no certainty as to the positive or negative impacts to the Group. The Government plans to commence the scheme by 2010. The implementation of the scheme may give rise to further onerous contracts depending on the impact of emissions trading will have on energy prices, in particular the cost of gas. F

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Babcock & Brown Power Income statements For the year ended 30 June 2008

20

Consolidated Company

Note

2008 $’000

2007 $’000

2008 $’000

2007 $’000

Revenue 3 1,527,420 532,800 1,135 10,000 Financing income 3 34,035 12,686 381,065 146,581 Operating expenses 3 (1,171,270) (413,275) (9,749) (12,351)Depreciation and amortisation expense 3 (152,855) (55,588) - - Finance costs 3 (236,410) (80,242) (12,158) (28,995)Share of profits of associates accounted for using the equity method 9 5,915 6,280 - - Management charges 3 (21,732) (9,920) (17,210) (8,310)Fair value gain/(loss) on derivatives (i) 3 75,386 (64,653) - - Incentive fee 3 23,400 (23,400) 23,400 (23,400)Transition costs 3 (15,919) - - -Impairment loss 3 (452,000) - - - Total expense from ordinary activities (1,945,485) (640,798) (15,717) (73,056) Profit/(loss) before income tax (384,030) (95,312) 366,483 83,525 Income tax (expense) / benefit 4 (42,485) 24,646 (15,680) 8,186

Profit/(loss) for the year (426,515) (70,666) 350,803 91,711 Profit/(loss) attributable to stapled security holders as: Equity holders of the Company - BBPL (427,401) (79,002) 350,803 91,711 Equity holders of the Trust – BBPT (Minority interest) 1,424 3,376 - - (425,977) (75,626) 350,803 91,711 Subsidiary company minority interests 538 4,960 - - (426,515) (70,666) 350,803 91,711

Cents Cents

Earnings per share of the parent based on earnings attributable to the equity holders of the parent Basic earnings per share 23 (65.08) (46.84) Diluted earnings per share 23 (65.08) (46.84) (i) Fair Value loss on electricity derivative includes the movement in the PPHA derivative. Refer note 3 and note 10 for further information. The above income statements should be read in conjunction with the accompanying notes included in pages 26 to 87.

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Babcock & Brown Power Balance sheets As at 30 June 2008

21


Note 2008

$’000 2007 $’000

2008 $’000

2007 $’000

Current assets Cash and cash equivalents 25 290,571 249,259 13,939 57,988 Trade and other receivables 5 340,783 186,227 191,407 153,344Derivative financial instruments 10 26,244 33,555 - -Inventories 6 35,958 28,702 - -Other assets 7 71,752 7,781 180 - 765,308 505,524 205,526 211,332Non-current assets classified as held for sale 8 590,455 - - -Total current assets 1,355,763 505,524 205,526 211,332 Non-current assets Cash and cash equivalents 25 139,357 92,321 - -Trade and other receivables 5 126,321 44,992 1,689,092 264,727 Investments accounted for using the equity method 9 49,025 71,380 - -Investments in subsidiaries 28 - - 618,290 496,428 Investment in unlisted entity - - - 20,595 Derivative financial instruments 10 323,292 112,940 - -Property, plant and equipment 11 2,531,415 1,540,044 - - Intangibles 12 2,331,444 302,276 - - Deferred tax assets 4 271,556 33,309 2,929 10,997 Other assets 7 21,731 23,102 48,714 - Total non-current assets 5,794,141 2,220,364 2,359,025 792,747 Total assets 7,149,904 2,725,888 2,564,551 1,004,079 Current liabilities Trade and other payables 13 373,440 190,320 29,769 25,368Current tax payables 4 12,486 4,075 - - Derivative financial instruments 18 12,612 - - -Borrowings 16 592,276 40,399 229,569 100,107Employee benefits 15 20,720 16,616 - - Provisions 14 57,495 14,074 450 - 1,069,029 265,484 259,788 125,475Borrowings directly associated with non-current assets held for sale 8 533,987 - - -Total current liabilities 1,603,016 265,484 259,788 125,475 Non-current liabilities Borrowings 16 3,268,562 1,229,522 1,212,193 475,669Deferred tax liabilities 4 446,222 156,027 - 10Derivative financial instruments 18 10,642 4,902 1,000 - Other payables 13 - 11,298 - - Employee benefits 15 14,859 15,059 - - Provisions 14 411,350 136,953 - - Total non-current liabilities 4,151,635 1,553,761 1,213,193 475,679Total liabilities 5,754,651 1,819,245 1,472,581 601,154 Net assets 1,395,253 906,643 1,091,970 402,925

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Babcock & Brown Power Balance sheets As at 30 June 2008

22


Note 2008

$’000 2007 $’000

2008 $’000

2007 $’000

Equity holders of the Company – BBPL Contributed equity 20 656,218 317,976 656,218 317,976 Reserves 21 67,887 24,506 - - Retained profits/(accumulated losses) 22 (503,572) (78,219) 435,752 84,949 220,533 264,263 1,091,970 402,925 Equity holders of the Trust – BBPT (Minority interest) Contributed equity 20 1,115,713 551,924 Retained profits/(accumulated losses) 22 4,800 3,376 1,120,513 555,300 Total equity holding of Stapled Security holders – BBP 1,341,046 819,563 Subsidiary company minority interests 54,207 87,080 Total equity 1,395,253 906,643

The above balance sheets should be read in conjunction with the accompanying notes included in pages 26 to 87.

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Babcock & Brown Power Statements of recognised income and expense For the year ended 30 June 2008

23

Consolidated Parent Entity

2008 2007 2008 2007

Notes $’000 $’000 $’000 $’000

Movement in other reserve 21 (2,800) 82 - - Changes in the fair value of cash flow hedges, net of tax 21 43,087 30,790 - - Actuarial (loss)/gains on retirement benefit obligations, net of tax 22

2,048 8,235 - -

Net income recognised directly in equity 42,335 39,107 - -

Profit / (loss) for the period

(426,515) (70,666) 350,803 91,711 Total recognised income and expense for the year (384,180) (31,559) 350,803 91,711

Total recognised income and expense for the year is attributable to:

Equity holders of the Company - BBPL (392,542) (45,762) 350,803 91,711 Equity holders of the Trust – BBPT (Minority interest) 4,800 3,376 - - Sub-Total (387,742) (42,386) 350,803 91,711

Equity holders of the subsidiary company minority interests 3,562 10,827 - -

Total (384,180) (31,559) 350,803 91,711

The above statements of recognised income and expense should be read in conjunction with the accompanying notes included in pages 26 to 87.

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Babcock & Brown Power Statements of cash flows For the year ended 30 June 2008

24


Note

2008 $’000

2007 $’000

2008 $’000

2007 $’000

Cash flows from operating activities Receipts from customers (inclusive of GST) 1,823,908 471,096 3,310 104 Payments to suppliers and employees (inclusive of GST) (1,462,114) (370,000) (33,169) (7,262)Interest received 30,617 12,746 15,970 7,544 Interest and other costs of finance paid (including interest paid to minority interests) (213,001) (65,123) (7,912) (13,755)Dividends received 3,088 4,859 - -Income/withholding tax paid (10,950) (1,864) (21) (1,003) Net cash (outflow) inflow from operating activities 25 171,548 51,714 (21,822) (14,372) Cash flows from investing activities Payment for property, plant and equipment (537,837) (202,163) (100) - Proceeds from sale of property, plant and equipment 17 144 - -Payment for purchase of subsidiaries (net of cash acquired from subsidiaries, inclusive of GST on transaction costs) (i) 30 (1,932,663) (226,088) (32,022) (319,679)Loan repaid by related party 10,814 (935) 120,793 Net cash outflow from investing activities (2,459,669) (429,042) (32,122) (198,886) Cash flows from financing activities Distributions paid to security holders (142,513) - - -Distribution reinvestment plan 30,300 - 30,030 -Proceeds from issue of securities (net of transaction costs paid) 54,057 249,721 24,455 60,748 Proceeds from borrowings 5,455,832 637,226 593,880 432,229 Repayment of borrowings (2,980,176) (288,131) (638,470) (239,450)Loan establishment costs (41,031) - - -Net cash inflow from financing activities 2,376,469 598,816 9,895 253,527 Net increase in cash and cash equivalents 88,348 221,488 (44,049) 40,269 Cash and cash equivalents at the beginning of the year 341,580 120,092 57,988 17,719 Cash and cash equivalents at the end of the year (ii) 25 429,928 341,580 13,939 57,988 (i) Not reflected as a cash flow in this statement is $971 million in BBP securities issued to Alinta shareholders for the

acquisition of certain Alinta businesses on 31 August 2007.

(ii) Cash at end of period for 30 June 2008 includes $264.6 million (30 June 2007: $288.7 million) of restricted cash related to debt service reserve accounts and maintenance reserve accounts. Refer to note 25.

The above statements of cash flows should be read in conjunction with the accompanying notes included in pages 26 to 87.

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Babcock & Brown Power Content of the notes to the financial statements For the year ended 30 June 2008

25

Content Page

1. Summary of accounting policies 26 2. New accounting standards and interpretations 38 3. Profit/(loss) from operations 39 4. Income tax expense 41 5. Trade and other receivables 45 6. Inventories 45 7. Other assets 46 8. Non-current assets held for sale 46 9. Investments accounted for using the equity method 47 10. Derivative financial instruments 48 11. Property, plant and equipment 49 12. Intangibles 50 13. Trade and other payables 52 14. Provisions 52 15. Employee benefits 54 16. Borrowings 56 17. Assets pledged as security 59 18. Derivative financial instruments – liabilities 59 19. Borrowing costs 59 20. Contributed equity 60 21. Reserves 61 22. Retained earnings 61 23. Earnings per share 62 24. Distributions 62 25. Notes to the cash flow statements 62 26. Commitments for expenditure - capital 63 27. Leases 64 28. Subsidiaries 65 29. Segment information 67 30. Changes in the composition of the consolidated Group 71 31. Related party disclosures 74 32. Financial risk management 78 33. Material interests in entities which are not controlled entities 85 34. Remuneration of auditors 85 35. Net assets per security 86 36. Contingent assets and liabilities 86 37. Subsequent events 86 38. Additional information 87

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Babcock & Brown Power Notes to the financial statements For the year ended 30 June 2008

26

1. Summary of accounting policies

The principal accounting policies adopted in the presentation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

This report should be read in conjunction with any public announcements made by BBP during the year in accordance with the continuous disclosure requirements of the Corporations Act 2001 and the ASX Listing Rules.

(a) Basis of preparation

This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, including Australian Interpretations and the Corporations Act 2001 and as a going concern.

The financial statements were approved by the Board of Directors on 29 August 2008.

Going Concern

At balance date, the Group had a net current liability to current asset deficiency of $247.2 million. The Directors regularly monitor and review the debt facilities, the debt profile, the servicing of the debt and forecast cash flows which take into account the assumptions including but not limited to forward pricing of electricity and gas tariffs, fuel supply costs, gas shortfall positions, maintenance (both timing and cost) and capital expenditure.

After a detailed review of these factors and taking into account the post balance date assets sales, the Directors are of the opinion that the accounts are correctly prepared on the basis the Group is a going concern.

Compliance with IFRS

Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (A-IFRS). Compliance with A-IFRS ensures that the consolidated financial statements and notes of BBPL comply with International Financial Reporting Standards (IFRS). The parent entity financial statements and notes also comply with IFRS.

Stapled security

The shares of Babcock & Brown Power Limited (BBPL or the Company) and the units in Babcock & Brown Power Trust (BBPT or the Trust) are combined and issued as Stapled Securities in the Babcock & Brown Power Group (BBP or the Group). The shares in the Company and the units of the Trust cannot be traded separately and can only be traded as Stapled Securities.

The shares in the Company and the units of the Trust will remain stapled commencing from 9 November 2006 until the earlier of the Company ceasing to exist or being wound up, or the Trust being dissolved in accordance with the provisions of the Trust Constitution.

This financial report consists of the consolidated financial statements of Babcock & Brown Power Limited and its controlled entities and the Babcock & Brown Power Trust.

Consolidated accounts

Australian Accounting Standards Board (“AASB”) Interpretation 1002 Post-Date-of-Transition Stapling Arrangements requires one of the stapled entities of an existing stapled structure to be identified as the parent entity for the purpose of preparing consolidated financial reports. In accordance with this requirement, Babcock & Brown Power Limited has been identified as the parent entity of the consolidated Group comprising Babcock & Brown Power Limited and its controlled entities and Babcock & Brown Power Trust.

In accordance with AASB Interpretation 1002, consolidated financial statements have been prepared by Babcock & Brown Power Limited as the identified parent of the consolidated Group. As a consequence of the stapling arrangement involving no acquisition consideration and no ownership interest being acquired by the combining entities, no goodwill is recognised in relation to the stapling arrangement and the interests of the unitholders in the Trust are treated as minority interests.

Historical cost convention

These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets and financial assets and liabilities (including derivative instruments) at fair value through the income statement.

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1. Summary of accounting policies (continued)

(a) Basis of preparation (continued)

Critical accounting estimates and judgements

The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It requires management to exercise its judgement in the process of applying accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. Certain areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements include impairment testing of goodwill (Note 12), valuation of defined benefit obligations (Note 15), valuation of restoration provisions (Note 14), valuation of electricity derivatives (Note 32) and valuation of provision for contract losses (Note 14). The assumptions used in calculating the above estimates are disclosed in the relevant accounting policies and notes to the financial statements. The actual results may differ from these estimates.

(b) Principles of consolidation

Subsidiaries

The consolidated financial statements are those of the consolidated entity, comprising Babcock & Brown Power Limited (the “Company” or “parent entity”) including all subsidiaries that Babcock & Brown Power Ltd controlled from time to time during the period and at the reporting date and Babcock & Brown Power Trust. Babcock & Brown Power Ltd, its subsidiaries and Babcock & Brown Power Trust together are referred to in this financial report as the Group or consolidated entity.

Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Where an entity either began or ceased to be controlled during the financial period, the results are included only from the date control commenced or up to the date control ceased.

All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

The financial statements of subsidiaries are prepared for the same reporting period as the parent, using consistent accounting policies. Minority interests in the results and equity of subsidiaries are shown separately in the consolidated income statement and balance sheet respectively.

Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting. Investments in associates are accounted for in the parent entity financial statements using the cost method, and disclosed in the balance sheet as an investment in unlisted entity. The Group’s investment in associates includes goodwill (net of any impairment loss) identified on acquisition.

The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised in the consolidated financial statements by reducing the carrying amount of the investment.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the investment.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

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(c) Business combinations

The purchase method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. Costs are measured as the fair value of the assets given shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is the published market price at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transactions costs arising on the issue of equity instruments are recognised directly in equity.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair value at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired.

(d) Segment reporting

A business segment is identified for a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is identified when products or services are provided within a particular economic environment subject to risks and returns that are different from those of segments operating in other economic environments.

(e) Foreign currency translation

Functional and presentation currency

The consolidated financial statements are presented in Australian dollars, which is the Group’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except where deferred in equity as qualifying cash flow hedges.

(f) Rounding

The Company is of a kind referred to in Class order 98/0100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar.

(g) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, deposits held at call with financial institutions, and other short-term highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, net of any bank overdrafts.

These assets are stated at nominal values. Bank overdrafts are shown within Borrowings in the Current Liabilities on the Balance Sheet and are carried at the principal amount. Interest on bank overdrafts is recognised as an expense as it occurs.

Cash that is reserved and its use specifically restricted for maintenance and/or debt servicing under the Group’s borrowing agreements is defined as restricted cash. Restricted cash is shown in the balance sheet according to the timing of its release. Accordingly cash that cannot be applied or used within the next 12 months is shown as a Non-Current Asset. All other cash and cash equivalents are shown as Current Assets.

(h) Trade receivables

All trade debtors are recognised initially at fair value, less any subsequent provision for doubtful debts. Collectability of trade debtors is reviewed on an ongoing basis. Debts, which are known to be uncollectible, are written off. A provision for doubtful debts is established when some doubt exists as to collection of all outstanding amounts. The amount of the provision is recognised in the income statement.

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(i) Inventories

Inventories are valued at the lower of cost and net realisable value. Where inventory is sold in the ordinary course of business net realisable value is the estimated selling price, less the estimated cost of completion and selling expenses.

Cost is measured in the following manner depending on the nature of inventory:

(i) Coal from production

Coal stocks which are produced are valued using unit cost of production and include direct material, labour, transportation costs and other fixed and variable overhead costs directly related to production.

(ii) Purchased fuel

Purchased fuel is valued at cost using First In First Out (FIFO).

(iii) Inventory – gas

Take or pay prepaid gas is stated at the lower of cost and net realisable value. Cost comprises payments made under contract for quantities of gas which have not yet been drawn down. Costs are accounted for on a FIFO basis.

(iv) Stores

All other inventory including stores are valued on weighted average cost basis.

(j) Investments and other financial instruments

The Group classifies its investments in the following categories: derivatives, loans and receivables, and available-for-sale financial assets. Investments in subsidiaries are classified separately and are held at cost. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at each reporting date.

(i) Derivatives

Derivatives are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in the income statement immediately unless the derivative is designated as a hedging instrument. In this case the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The consolidated entity designates certain derivatives as hedges of highly probable forecast transactions (cash flow hedges). Derivatives which are in a hedging relationship are classified as current if the maturity of the contract is within 12 months, or non-current where the contract maturity is greater than 12 months.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and receivables are carried at amortised cost using the effective interest method.

(iii) Available for sale financial assets

Available for sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Recognition and derecognition

Regular purchases and sales of financial assets are recognised on the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss.

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

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(j) Investments and other financial instruments (continued)

Subsequent measurement

Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method.

Available-for-sale financial assets are subsequently carried at fair value. Changes in the fair value of securities classified as available-for-sale are recognised in equity in the available for sale investments revaluation reserve.

Fair value

If the market for a financial asset or an unlisted security is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs.

Impairment

The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered an as indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classified as available for sale are not reversed through the income statement.

(k) Hedge Accounting

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. 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 have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within other income or other expense.

Amounts deferred in equity are recycled in the income statement in revenue in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, 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 is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is immediately transferred to the income statement.

Derivatives that do not qualify for hedge accounting

Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement.

Embedded derivatives

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not measured at fair value with changes in fair value recognised in the income statement.

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(l) Fair value estimation

The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.

The fair value of financial instruments traded in active markets (such as publicly traded derivatives, trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the entity is the current bid price. The appropriate quoted market price for financial liabilities is the current ask price.

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods, such as estimated discounted cash flows, and makes assumptions that are based on the market conditions existing at each balance date. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being present value of the quoted forward price.

The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the entity for similar financial instruments.

(m) Property, plant and equipment

Property, plant and equipment are initially measured at historical cost less depreciation. Land and buildings are shown at historical cost, less depreciation for buildings. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.

Subsequent costs are included in the assets carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance expenses are charged to the income statement during the financial period in which they are incurred.

Land is not depreciated. Depreciation on the other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows:

Plant and equipment: Buildings 25 - 40 years Leasehold improvements Remaining lease term Plant, tools and equipment 5 - 20 years Vehicles 3 - 10 years Power generation plant 20 - 40 years Railway infrastructure Remaining lease term (15 years) Other mine assets 5 - 20 years

IT Equipment 3 – 5 years Furniture and fittings 5 years

The carrying value of Power Generation plant includes any capital work in progress.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1(u))

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement.

(n) Assets under construction

Costs incurred in relation to assets under construction are deferred to future periods. Deferred costs are transferred to plant and equipment from the time the asset is held ready for use on a commercial basis.

Deferred costs are amortised from the commencement of the project to which they relate on a straight-line basis over the period of the expected benefit.

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1. Summary of accounting policies (continued) (o) Intangible assets

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised but reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

As at the acquisition date, any goodwill is allocated to each of the cash generating units expected to benefit from the Group’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Licences

Licences have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of trademarks and licences over their estimated useful lives. Depending on the individual trademark or licence, the estimated useful life ranges between 3 and 40 years.

Trademarks

Trademarks have an indefinite useful life and carried at cost and will be subject to an annual impairment review.

Development costs

Costs incurred in relation to the development of a project, excluding the cost of construction, have been capitalised as development costs. Development costs are amortised over the period relevant to when the economic benefits arising from those expenditures are realised. Development costs may include legal fees, insurance costs, independent engineer costs, financing fees, environmental impact study fees and pre-commissioning operating costs.

Customer contracts

Customer contracts acquired as part of a business combination are recognised separately from goodwill. The customer contracts are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated under the straight line method over their estimated useful lives, which currently vary from 4.5 to 6 years.

Customer Relationships

Customer relationships acquired as part of a business combination are recognised separately from goodwill. Customer relationships are recorded at cost less accumulated amortisation and impairment losses. Amortisation is calculated under the straight line method over their estimated useful lives, which vary from 9.2 years for churn customers to 20 years for non-churn customers.

Other

Other intangibles include computer software and Gas Electricity Certificates (‘GECs’). Computer software is either purchased or developed within the organisation and is recorded at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method over the estimated useful lives. Depending on the individual software, the estimated useful life ranges between 1 and 20 years.

A Gas Electricity Certificate (a 'GEC') is a certificate created by accredited generators for each whole MWh of eligible gas-fired electricity. GECs are a mechanism for providing an incentive to the power stations to generate electricity using eligible fuels (non fossil fuels). The accredited parties can trade GECs to other registered scheme participants (retailers). GEC’s are recognised when the generation and entitlement has occurred, and measured at market value.

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(o) Intangible assets (continued) (p) Leased assets

Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership.

Operating leases

(i) BBPL and its controlled entities as lessee

The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight line basis over the term of the lease. Lease incentives received are recognised in the income statements as part of the total lease expense.

(ii) BBPL and its controlled entities as lessor

Where long-term power supply agreements are treated as operating leases and BBP is the lessor, income is recognised on a straight line basis over the term of the lease. The total lease income is determined by the net present value of all future lease payments under the power supply agreement. This total is then recognised on straight line basis over the term of the lease as revenue.

The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as income on a straight line basis over the term of the lease.

Finance leases

(i) BBPL and its controlled entities as lessor

Investment in direct finance leases consists of lease receivables, plus the estimated residual value of the equipment at the lease termination dates and initial direct costs incurred in acquiring the leases, less unearned income. Lease receivables represent the total rent to be received over the term of the lease reduced by rent already collected. Initial unearned income is the amount by which the original sum of the lease receivable and the estimated residual value exceeds the original cost of the leased equipment. Unearned income is amortised to lease income over the lease term in a manner that produces a constant rate of return on the net investment in the lease.

(q) Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to end of financial period, which are unpaid. The amounts are unsecured and are usually paid within 60 days of recognition.

(r) Borrowings

Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest rate.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date

Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses.

(s) Provisions

Provisions are recognised when the consolidated entity has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. The discount rate reflects current market assessments of the time value of money and the risks specific to the liability. The increase in provision due to the passage of time is recognised as interest expense.

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(s) Provisions (continued)

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably.

Restoration / Rehabilitation and Environmental expenditure

The estimated cost of dismantling and removing an asset and restoring the site are included in the cost of the asset as at the date the contractual or environmental obligation first arises and to the extent that it is first recognised as a provision.

The cost is capitalised where it gives rise to future benefits, whether rehabilitation is expected to occur over the life of the plant or at the time of closure. The capitalised cost is amortised over the life of the plant and the increase in the net present value of the provision, due to one less time period of discounting, is included in borrowing costs.

The provision is reviewed at each balance sheet date and the liability is measured at the amount required to settle the present obligation at the reporting date, discounted where material. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability.

Remediation costs associated with unforeseen circumstances, such as oil leakages are recognised as incurred.

Onerous contracts

A provision for onerous contracts is recognised when the expected benefits from a contract are less than the unavoidable costs of meeting the obligations under the contract, and only after any impairment losses to assets dedicated to that contract have been recognised.

Expected financial losses of any such “onerous” commercial contracts are recognised at the present value of future cash flows using a risk adjusted discount rate that reflects the current market assessment of the time value of money and the risks specific to the liability.

(t) Employee benefits Wages and salaries, annual leave, long service leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave, long service leave and accumulating sick leave are recognised in provision for employee entitlements in respect of employee’s services up to the reporting date when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable.

Provisions made in respect of employee benefits that can be reasonably expected to be settled within 12 months, and reliably measured at 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 are measured at the present value of the estimated future cash outflows to be made by the Group in respect of expected future wage and salary levels, experience of employee departure and the period of service provided by employees. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.

Bonus plans A liability for employee benefits in the form of bonus plans is recognised in liabilities when it is probable that the liability will be settled and there are formal terms in place to determine the amount of the benefit, or the amount of the benefit has been determined before the time of completion of the annual report. Liabilities for bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled.

Retirement benefit obligation All employees of the Group are entitled to benefits from various superannuation plans on retirement, disability or death. Within the retirement benefit plans in the subsidiaries in the Group there is both a defined benefit section and a defined contribution section within the plans. The defined benefit section provides defined lump sum benefits based on years of service and final average salary. The defined contribution section receives fixed contributions from the Group companies and the Group’s legal or constructive obligation is limited to these contributions. The parent does not have any employees.

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Retirement benefit obligation (continued) (i) Defined contribution plan

Contributions to the defined contribution fund are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payment is available.

(ii) Defined benefit plan

Defined benefit superannuation plans determine the cost of providing benefits using the Projected Unit Credit Method, with actuarial valuations being carried out at each reporting date. Consideration is given to expected future wage and salary levels, experience of employee departure and periods of service. Actuarial gains and losses are recognised in full, directly in retained earnings, in the period in which they occur.

Past Service cost is the increase in the present value of the defined benefit obligation for employee services in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past Service Costs may either be positive (where the benefits are introduced or improved) or negative (where existing benefits are reduced). Past Service Costs are recognised immediately to the extent that the benefits are already vested, and otherwise are amortised on a straight-line basis over the average period until the benefits become vested.

A liability or asset in respect of defined benefit superannuation plan is recognised in the balance sheet, and is measured as the present value of the defined benefit obligation at the reporting date less the fair value of the superannuation fund’s assets at that date and any unrecognised past service cost. The discount rate is a government bond rate, refer to assumptions at Note 15.

Employee benefit on-costs

Employee benefit on-costs, including payroll tax are recognised and included in employee benefit liabilities and costs when the employee benefits to which they relate are recognised as liabilities.

Termination benefits

Liabilities for termination benefits, not in connection with the acquisition of an entity or operation, are recognised when a detailed plan for the terminations has been developed and a valid expectation has been raised in those employees affected that the terminations will be carried out.

(u) Impairment of assets

Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.

For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

(v) Contributed equity

Ordinary securities are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new share for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration.

(w) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The amount recognised is the fair value of consideration received. In addition:

• When revenues are generated by an asset under construction, to the extent they are earned before the asset is ready for commercial use, they are set off against the carrying value of that asset. This revenue is only recognised when the significant risks and rewards of the product have passed to the buyer and the entity attains the right to be compensated.

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(w) Revenue recognition (continued)

• Electricity Generation revenue is recognised on the delivery of energy and/or in accordance with individual contracts as appropriate. Revenue from electricity generation is categorised as either contracted revenue, rolling hedge revenue or unhedged revenue. Revenue from rolling hedges is recognised as the underlying hedge transaction occurs. For further information refer to segment information at Note 29.

• Sale of Asset revenue is recognised at the time title is transferred or when an irrevocable contract to deliver the asset has been signed, the price is fixed and determinable, and collectability is highly probable. This occurs when risk and reward have been transferred and there is no longer effective control or continuing managerial involvement in the asset.

• Interest income is recognised using effective interest method. Dividend income is recognised when the dividend is received.

• Sales revenue is recognised on delivery which coincides with transfer of risks and rewards. Customers are billed for sales on a periodic and regular basis. However, as at each balance date, sales and receivables include an estimation of sales delivered to customers but not yet billed (“unread sales”). This estimation is based on previous consumption patterns and meter reading dates.

(x) Repairs and maintenance

Generating plants are required to be overhauled on a regular basis. This is managed as part of a continuous major maintenance program. The cost of this maintenance is charged as an expense as incurred. Where significant parts are replaced the cost of these parts are capitalised and amortised in line with their useful life. Any residual carrying amounts of parts previously capitalised which are replaced are written off immediately.

(y) Borrowing costs

Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs associated with the construction assets are expensed.

(z) Dividends or distributions

Provision is only made for the amount of any dividend or distribution when they are declared by the Directors and no longer at the discretion of the entity, on or before balance date but not distributed at balance date.

(aa) Tax

Income tax

The income tax expense or benefit for the period is the tax payable or receivable on the current period’s taxable income or loss. It is calculated using the tax rates and tax laws that have been enacted (or substantively enacted) by the reporting date, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and for unused tax losses.

Deferred tax

Deferred tax is accounted for using the comprehensive balance sheet method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted by the reporting date. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences; no deferred tax asset or liability is recognised in relation to those temporary differences that arose in a transaction, other than business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary difference and it is probable that the differences will not reverse in the foreseeable future.

Current and deferred tax balances which have arisen on amounts recognised directly in equity are also recognised directly in equity. Hence the equity transaction is shown net of tax.

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(aa) Tax (continued)

Income tax (continued)

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset tax assets and liabilities and when the deferred tax balances relate to the same taxation authority.

Tax consolidation

BBPL and its wholly owned Australian controlled entities have implemented the tax consolidation legislation. Due to the existence of minority interests and the requirements of project debt facilities, there are five other tax groups within the overall BBP group structure in addition to the BBPL tax consolidation group.

The head entity and the controlled entities in the respective tax consolidated groups continue to account for their own current and deferred tax amounts. These tax amounts are initially measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right.

In addition to its own current and deferred amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group.

Assets or liabilities arising under tax funding agreements with the tax-consolidated entities are recognised as amounts receivable from or payable to other entities in the group. Details about the tax funding agreement are disclosed in note 4.

Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities.

(ab) GST

Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other current receivables or payables in the balance sheet.

Cash flows are included in the consolidated statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.

(ac) Earning per security

Basic earnings per security is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary securities, by the weighted average number of ordinary securities outstanding during the financial year, adjusted for bonus elements in ordinary securities issued during the year.

Diluted earnings per security adjusts the figures used in the determination of basic earnings per security to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary security and the weighted average number of securities assumed to have been issued for no consideration in relation to dilutive potential ordinary securities.

In calculating diluted earning per security, the profit from continuing operations attributable to ordinary equity holders of BBP is adjusted for interest savings on convertible notes.

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2. New accounting standards and interpretations Certain new accounting standards and Australian interpretations have been published that are not mandatory for 30 June 2008 reporting periods. BBP’s assessment of the impact of these new standards and interpretations is set out below.

(a) AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8

AASB 8 and AASB 2007-3 are effective for annual reporting periods commencing on or after 1 January 2009. BBP has not adopted the standard early. AASB 8 may result in a significant change in the approach to segment reporting, as it requires adoption of a "management approach" to reporting on the financial performance. The information being reported will be based on what the key decision-makers use internally for evaluating segment performance and deciding how to allocate resources to operating segments. The timing of the adoption has not been determined. Application of AASB 8 may result in different segments, segment results and different type of information being reported in the segment note of the financial report. However, it will not affect any of the amounts recognised in the financial statements.

(b) Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting Standards arising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 & AASB 138 and Interpretations 1 & 12]

Revised AASB 123 is applicable to annual reporting periods commencing on or after 1 January 2009. It has removed the option to expense all borrowing costs and - when adopted - will require the capitalisation of all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. This will not impact BBP because the current accounting policy is for all borrowing costs relating to qualifying assets to be capitalised.

(c) AASB-I 14 The Limit on a Defined Benefit Asset, Minimum Funding requirements and their Interaction

AASB-I 14 will be effective for annual reporting periods commencing on or after 1 January 2008. It provides guidance on the maximum amount that may be recognised as an asset in relation to a defined benefit plan and the impact of minimum funding requirements on such an asset. The Group will apply AASB-I 14 from 1 July 2008, but it is not expected to have any impact on the Group’s financial statements.

(d) Revised AASB101 Presentation of Financial Statements and AASB 2007-8 amendments to Australian Accounting Standards arising from AASB 101

A revised AASB 101 was issued in September 2007 and is applicable for annual reporting periods beginning on or after 1 January 2009. It requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity, but it will not affect any of the amounts recognised in the financial statements. If an entity has made a prior period adjustment or has reclassified items in the financial statements, it will need to disclose a third balance sheet (statement of financial position), this one being as at the beginning of the comparative period. The Group intends to apply the revised standard from 1 July 2009.

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3. Profit/(loss) from operations


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Revenue Revenue from the sale of energy and products 1,456,940 518,761 - - Revenue from lease of plant and equipment 3,641 6,411 - - Other revenue 66,839 7,628 1,135 10,000 1,527,420 532,800 1,135 10,000 Derivative movement Fair value gains/(losses) on interest rate derivative taken to profit & loss 1,922 4,798 - -

Fair value gain/(loss) on Redbank PPHA derivative (i) 82,789 (66,389) - - Fair value gain/(loss) on other electricity derivatives (9,325) (3,062) - -

Fair value gain/(loss) on electricity derivatives 73,464 (69,451) - - 75,386 (64,653) - -

Financing Income Dividend income Related parties – wholly owned subs - - - 4,859 Interest income Bank deposits 34,035 12,686 7,821 3,308 Related parties – BBPT and wholly owned subs - - 22,340 15,370 Fair value adjustment on BBP Group interest free loans - - 350,904 123,044 34,035 12,686 381,065 146,581 (i) Fair value loss on electricity derivative includes the Redbank PPHA

The Redbank non cash derivative movement reported in the accounts represents an assessment of the present value of the difference between the Energy Australia contract (Redbank PPHA) value and the projected value of the gross revenue Redbank could potentially achieve if they sold electricity on market over the theoretical whole of remaining life of the contract. The prices utilised for this calculation were based on projected future average pool prices to the year 2023.

This exercise is carried out on a bi-annual basis for accounting purposes only and has no impact on the operations or cash flows of the business. Any further increase in the assessment of pool prices from the projected future average pool prices used at acquisition date will result in a non cash fluctuation in the income statement to the extent they have not been already recorded.

At no time can and will this derivative instrument calculation impact the cash position or underlying profits generated by the operations of BBP.

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3. Profit/(loss) from operations (continued)

(Loss)/profit before income tax has been arrived at after charging the following expenses: Operating expenses: Operating costs 1,028,386 345,357 368 - Corporate and administrative costs 46,141 12,944 9,381 12,351 Employee benefit expenses Salaries and wages 94,191 52,273 - - Defined benefit plan 2,552 2,701 - - 1,171,270 413,275 9,749 12,351 Management charges (Note 31): Base fees 14,381 6,137 10,510 4,875

Manager expense amount 6,700 3,435 6,700 3,435 Custodian fee 93 43 - - Responsible entity fees 558 305 - -

21,732 9,920 17,210 8,310 Impairment Loss Goodwill (note 12) 410,000 - - - Property, plant and equipment (note 11) 42,000 - - - 452,000 - - - Incentive fee (fair value movement) (Note 31) (23,400) 23,400 (23,400) 23,400 Depreciation and amortisation

Depreciation of property, plant and equipment 117,082 52,436 - - Amortisation of intangible assets 35,773 3,152 - -

152,855 55,588 - - Finance costs: Interest expense – 3rd parties 215,271 54,451 4,599 - Interest expense – Power Convertible Securities - 17,569 - 17,569 Interest expense – related parties 8 3,405 4,092 8,053 Less: Interest expense capitalised (note 19) (9,044) (11,265) 5,553 - Other finance charges – 3rd parties 72 16,082 - 3,373 Amortisation Costs 1,111 - - - Unwinding of discount on provisions 14,149 - - - Other borrowing costs 2,593 - 3,467 - Borrowing costs written off at BBPF refinance 12,250 - - - 236,410 80,242 12,158 28,995 Transitional Costs Compliance 8,975 - - - Other Transitional Costs 6,944 - - - 15,919 - - -


2008 $’000

2007 $’000

2008 $’000

2007 $’000

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4. Income tax expense

(a) Income tax expense / (benefit)

Current tax expense 17,651 5,335 7,189 (273)Deferred tax 24,903 (29,835) 8,560 (7,766)Under/(over) provided in prior year (69) (146) (69) (146)

42,485 (24,646) 15,680 (8,185) Deferred income tax (revenue)/expense included in income tax expense comprises: Decrease/(increase) in deferred tax assets (15,590) (9,275) 8,570 (7,776)(Decrease)/increase in deferred tax liabilities 40,493 (20,560) (10) 10 -

24,903 (29,835) 8,560 (7,766)

(b) Reconciliation of income tax expense to prima facie tax payable

Net profit / (loss) before income tax (384,030) (95,312) 366,483 83,525 Tax at the Australian tax rate of 30% (2007: 30%) (115,209) (28,594) 109,945 25,057 Tax effect of amounts which are not deductible (taxable) in calculating taxable income:

Entertainment 21 (9) - - Share of net profit of associates (1,775) (1,884) - - Interest income – fair value of interest free loans - - (105,271) (36,913)Tax offset for franked dividends - - - (1,458)Impairment of goodwill 123,000 - - -Interest paid to Power Convertible securities holders - 5,340 - 5,340 Other 36,517 647 11,075 (66) 157,763 4,094 (94,196) (33,097) Under/ (over) provision in prior years (69) (146) (69) (146)

Income tax expense 42,485 (24,646) 15,680 (8,186)

(c) Amounts recognised directly in equity

Revaluations of financial instruments treated as cash flow hedges 13,006 (12,621) - - Others (14,678) (2,076) 362 2,633

(1,672) (14,697) 362 2,633

(d) Tax consolidation legislation

Babcock & Brown Power Limited and its wholly owned Australian resident subsidiaries have formed a tax-consolidated group effective from 1 July 2006. The accounting policy in relation to this legislation is set out in note 1(aa).

On adoption of the tax consolidation legislation, the tax consolidated group entered into a tax sharing agreement which, in the opinion of the directors, limits the joint and several liability of the wholly owned entities in the case of a default by the head entity, BBPL.

Due to the existence of minority interests and the requirements of project debt facilities, there are five other tax groups within the overall BBP group structure as follows:


2008 $’000

2007 $’000

2008 $’000

2007 $’000

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4. Income tax expense (continued) (d) Tax consolidation legislation (continued)

Flinders – Comprising all Australian resident entities in the Flinders group with the exception of Babcock & Brown Osborne Pty Limited

Braemar – Comprising the legal entities holding the Braemar investments

Ecogen – Comprising the legal entities holding the Ecogen investments

Redbank – Comprising the legal entities holding the Redbank investments.

BB Power Cat – comprising all Australian resident entities in the BB Power Cat group.

The remaining legal entities that are wholly owned Australian resident entities are part of the BBPL tax consolidated group.

The entities have entered into a tax funding agreement under which the wholly owned entities fully compensate BBPL for any current tax payable assumed and are compensated by BBPL for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to BBPL under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly owned entities financial statements.

The amounts receivable/payable under the tax funding agreement is due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables see note 5 and 13.

(e) Current tax liabilities


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Income tax payable 12,486 4,075 - - (f) Deferred tax balances

Deferred tax liabilities comprise: Expenses capitalised 18,244 3,043 - -Investments in subsidiaries - 10 - 10Accounts receivable 109 125 - -Effect of hedge movements 72,222 9,519 - -Intangibles 58,427 13,819 - - Operating lease rent receivable 14,594 10,914 - -Borrowing costs 13,976 9,914 - -Land, plant and equipment 208,837 218,063 - -Inventory 6,204 4,309 - -Other 53,609 1,035 - -Total DTL 446,222 270,751 - 10Offset against DTA - (114,724) - -

446,222 156,027 - 10 Deferred tax assets comprise: Unused revenue tax losses – corporate 78,857 75,716 557 1,392 Deductible equity raising costs 1,617 2,148 1,617 2,148 Accruals 443 1,979 258 538Expenses capitalised 12 12 12 12Provisions 58,322 45,297 135 -Borrowing costs 317 6,251 - 862Incentive fee 342 7,020 - 7,020Other 131,646 9,610 350 (975)Total DTA 271,556 148,033 2,929 10,997Offset against DTL - (114,724) - -

271,556 33,309 2,929 10,997

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4. Income tax expense (continued)

(f) Deferred tax balances (continued)

Taxable and deductible temporary differences arise from the following:

Consolidated Opening balance

Charged to income

Charged to equity

Acquisitions/ disposals

Closing balance

$’000 $’000 $’000 $’000 $’000 2008 Gross deferred tax liabilities: Expenses capitalised (3,043) (13,254) (1,947) - (18,244)Investments in subsidiaries (10) 10 - - -Accounts receivable (125) 20 - (4) (109)Effect of hedge movements (9,519) (64,379) 4,161 (2,485) (72,222)Intangibles (13,819) 7,208 (11,877) (39,939) (58,427)Operating lease rent receivable (10,914) (345) - (3,335) (14,594)Borrowing costs (9,914) (4,062) - - (13,976)Land, Plant and Equipment (218,063) 39,005 (11,310) (18,469) (208,837)Inventory (4,309) (1,616) - (279) (6,204)Other (1,035) (3,080) (49,494) (53,609)

(270,751) (40,493) (20,973) (114,005) (446,222)


Charged to income

Charged to equity


Closing balance

$’000 $’000 $’000 $’000 $’000 2008 Gross deferred tax assets: Unused revenue tax losses 75,716 (5,182) - 8,323 78,857Deductible equity raising costs 2,148 (543) 12 - 1,617Accruals 1,979 (1,536) - - 443Expenses capitalised 12 342 - - 354Provisions 45,297 6,884 - 6,140 58,321Borrowing cost 6,251 (5,934) - - 317Incentive fee 7,020 (7,020) - - -Other 9,610 31,667 19,289 71,081 131,647

148,033 18,678 19,301 85,544 271,556


Charged to income

Charged to equity


Closing balance

$’000 $’000 $’000 $’000 $’000 2007 Gross deferred tax liabilities: Expenses capitalised (441) (2,140) - (462) (3,043)Investments in subsidiaries - (10) - - (10)Accounts receivable - 61 - (186) (125)Effect of hedge movements (575) 60,158 (12,542) (56,560) (9,519)Intangibles - 4 - (13,823) (13,819)Operating lease rent receivable - (1,923) - (8,991) (10,914)Borrowing costs - (480) - (9,434) (9,914)Land, Plant and Equipment - (36,062) - (182,001) (218,063)Inventory - 768 - (5,077) (4,309)Other (1,006) 184 - (213) (1,035)

(2,022) 20,560 (12,542) (276,747) (270,751)

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4. Income tax expense (continued)

(f) Deferred tax balances (continued)


Charged to income

Charged to equity


Closing balance

$’000 $’000 $’000 $’000 $’000 2007 Gross deferred tax assets: Unused revenue tax losses 772 (2,024) - 76,968 75,716Deductible equity raising costs 56 (552) 2,633 11 2,148Hedge (79) 79 -Accruals - 1,775 - 204 1,979Expenses capitalised - 12 - - 12Provisions - (4,266) (306) 49,869 45,297Borrowing cost - 5,451 - 800 6,251Incentive fee - 7,020 - - 7,020Other 115 1,859 (4,403) 12,039 9,610

943 9,275 (2,155) 139,970 148,033

Company Opening balance

Charged to income

Charged to equity


Closing balance

$’000 $’000 $’000 $’000 $’000 2008 Gross deferred tax liabilities: Investments in subsidiaries 10 (10) - - -

10 (10) - - - Gross deferred tax assets: Unused revenue tax losses 418 139 - - 557Deductible equity raising costs 2,148 (543) 12 - 1,617Accruals 538 (280) - - 258Expenses capitalised 12 135 - - 147Mezzanine debt expenses 862 (862) - - -Incentive fee 7,020 (7,020) - - -Other (1) 1 350 - 350

10,997 (8,430) 362 - 2,929

Company Opening balance

Charged to income

Charged to equity


Closing balance

$’000 $’000 $’000 $’000 $’000 2007 Gross deferred tax liabilities: Investments in subsidiaries - 10 - - 10

- 10 - - 10 Gross deferred tax assets: Unused revenue tax losses - - - 418 418Deductible equity raising costs 56 (540) 2,632 - 2,148Accruals - 538 - - 538Expenses capitalised - 12 - - 12Mezzanine debt expenses - 862 - - 862Incentive fee - 7,020 - - 7,020Other 115 (116) - - (1)

171 7,776 2,632 418 10,997

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5. Trade and other receivables


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Trade receivables 203,499 128,540 25,895 159 Provision for impairment of receivables (106) (62) - 203,393 128,478 25,895 159 Accrued income 93,654 27,715 - - 3rd Party 9 - - - Related parties 175 - 175 - Goods and services tax receivable 18,235 19,706 646 728 Other receivables 3rd Party 17,627 5,650 - - Finance Lease 7,690 - - -Loans to related parties - 4,678 164,691 152,457

340,783 186,227 191,407 153,344 Non-current Trade Receivables - - - -Interest bearing loan within the wholly owned group - - - 69,909Operating lease receivable 40,021 36,379 - -Non-interest bearing loan within the wholly owned group - - 1,689,092 181,646Other receivables Finance Lease 78,330 - - - 3rd Party 7,970 120 - -Loans to related parties - 8,493 - 13,172

126,321 44,992 1,689,092 264,727

Information on credit risk and interest rate risk exposure of the Group is provided at note 32.

Loans to related parties in the consolidated group includes loans to associates. Loans to related parties in the Company include loans to subsidiaries and associates.

6. Inventories Consolidated Company

2008 $’000

2007 $’000

2008 $’000

2007 $’000

Stores 21,581 18,049 - -Raw materials including: Coal 11,355 10,073 - - Fuel oil 644 580 - - Natural Gas 45 - - - Other 2,333 - - -

35,958 28,702 - -

The amount of purchased inventories recognised as an expense during the year was $65.1 million (2007: $85.6 million). The amount of write down of inventories recognised as an expense in the year was $39,664 (2007: $291,000). F

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7. Other assets


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Prepayment of operations expenses 40,064 6,771 180 - Fuel prepayment 1,000 1,010 - - Deposits 30,688 - - -

71,752 7,781 180 - Non-current Prepayment of operations expenses 324 320 48,714 - Fuel prepayment 21,407 22,782 - -

21,731 23,102 48,714 -

Prepayments were made to purchase part of the future fuel requirements of the Redbank plant for a thirty year period. The prepayment is being amortised on a straight line basis over that period being the eligible service period.

8. Non current assets held for sale

During the year ended 30 June 2008, the directors of BBP decided to sell its equity interests in the Ecogen and Uranquinty power stations. These have been sold subsequent to year-end (note 37).


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Property, plant and equipment

Ecogen 217,846 - - -Uranquinty (i) 372,609 - - - 590,455 -

Borrowings Ecogen bank loans (ii) 130,138 - - - Uranquinty Construction Facility (iii) 403,849 - - - 533,987 -

(i) At 30 June 2008, Uranquinty also had $66.1 million of cash in bank representing amounts drawn under the construction facility yet to be utilised.

(ii) Bank loan – Ecogen Energy Pty Limited secured facilities with a total value of $130.1 million outstanding at 30

June 2008. This facility matures in 2015 and has an effective interest rate at 30 June 2008 of 7.58%. This loan was divested subsequent to 30 June 2008 as part of the sale of Ecogen.

(iii) Construction facility – Uranquinty construction facility was originally drawn down in July 2007 and continues to be

drawn down to finance construction activity until its sale. The total facility available is $520.0 million and is currently drawn down to $403.9 million at 30 June 2008 (30 June 2007: $Nil). The effective interest rate at 30 June 2008 was 8.03% (30 June 2007: $Nil). This loan was divested subsequent to 30 June 2008 as part of the sale of Uranquinty.

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9. Investments accounted for using the equity method


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Investment in associates 49,025 71,380 - -

Name of the entity Principal activity

Ownership interest Share of net profit

Equity accounted investment carrying

amount

2008

% 2007

% 2008 $’000

2007 $’000

2008 $’000

2007 $’000

ERM Power Investments Pty Limited

Power generation 40 40 816 1,780 - 22,361

Oakey Power Holdings Pty Ltd

Power generation 50 50 5,099 4,500 49,025 49,019

5,915 6,280 49,025 71,380

Each of the above associates is incorporated in Australia.

Investments in associates are accounted for in the consolidated financial statements using equity method of accounting and are carried at cost by the parent entity.

Oakey ERM 2008 2008 Movements in carrying amounts $’000 $’000 Carrying amount at the beginning of the financial year 49,019 22,361 Payment for shareholder loans and realisation of contingent purchase value - - Dividend received/receivable (3,088) - Share of profit 5,099 816 Amortisation (2,005) -

Reduction in investment in minority interest - (23,177)

Carrying amount at the end of the financial year 49,025 -

Oakey ERM 2007 2007 Movements in carrying amounts $’000 $’000 Carrying amount at the beginning of the financial year 30,000 20,581 Payment for shareholder loans and realisation of contingent purchase value 19,378 - Dividend received/receivable (4,859) - Share of profit 4,500 1,780 Carrying amount at the end of the financial year 49,019 22,361

Consolidated

2008 $’000

2007 $’000

Shares of associates’ profit or losses Profit before income tax 8,100 9,324 Income tax expense (2,185) (3,044)

Profit after income tax 5,915 6,280

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9. Investments accounted for using the equity method (continued)

Summarised financial information of associates: Group’s share of Assets

$’000 Liabilities

$’000 Revenues

$’000 Profit $’000

2008 ERM Power Investments Pty Limited 40,048 27,376 (9) 816Oakey Power Holdings Pty Ltd 68,963 55,939 17,854 5,099

68,963 55,939 17,854 5,915 2007 ERM Power Investments Pty Limited 107,600 85,313 9,335 1,780 Oakey Power Holdings Pty Ltd 71,746 60,733 17,170 4,500

179,346 146,046 26,505 6,280 Consolidated 2008

$’000 2007 $’000

Share of associates’ expenditure commitments Capital commitments - -Lease commitments - -

- -

Restrictions on Funds distributed to Shareholders

Oakey Power Holdings Pty Ltd may only distribute to its shareholders proceeds in the form of cash dividends and repayment of shareholder loans when the required levels have been met in the Debt Service Reserve Account (“DSRA”) and the Major Maintenance Reserve Account (“MMRA”), as required by the terms of its Credit Facility Agreement. The DSRA is an amount necessary to ensure it has a balance equal to the sum of the principal and interest amounts and the Bank Guarantee fees scheduled to be paid during the next six months. The MMRA is required to be maintained from financial close until the first major overhaul of the plant. As at 30 June 2008 the DSRA was $8.5 million, and the MMRA was $1.5 million. As at 30 June 2007 the DSRA was $8.7 million, and the MMRA was $1.3 million. With these reserve accounts maintained in accordance with the Credit Facility Agreement, there are no restrictions on funds distributed to shareholders at 30 June 2008.

10. Derivative financial assets


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Derivative financial instruments at fair value Interest rate derivatives 3,737 7,605 - - Foreign exchange derivatives 767 - - - Electricity derivatives 21,740 25,950 - -

26,244 33,555 - -


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Non-current Derivative financial instruments at fair value Interest rate derivatives 143,060 27,834 - - Foreign exchange derivatives 40 - - - Electricity derivatives 180,192 85,106 - -

323,292 112,940 - -

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10. Derivative financial instruments (continued)

Electricity Derivatives The hedge portfolio consists predominately of swaps, caps and option style contracts and non-derivative Power Purchase Agreements. Refer to note 32 for information on exposure and electricity price risk management. Specifically, electricity derivatives include the PPHA derivative relating to Redbank Project. The Redbank Project has a long term power purchase agreement with Energy Australia for the sale of power for a period of 30 years from the commencement of the power station’s operation. Under the terms of the contract, the fixed price per MWH is escalated annually using agreed CPI indices. There are contract provisions to ensure the supply of an agreed volume of energy into the grid with penalties should these conditions not be met. Under AASB 139, the Group recognises a derivative asset equal to the estimated fair value of the power purchase derivative. At 30 June 2008 the value of this derivative had increased by $82.8 million to $135.7 million. At 30 June 2007 the value of this derivative had decreased by $66.4 million to $52.9 million.

11. Property, plant and equipment

Consolidated Land Plant and equipment

Assets under construction

Furniture, fittings and equipment Total

$’000 $’000 $’000 $’000 $’000 Cost Balance at 1 July 2006 - - 72,661 - 72,661 Additions - 13,523 198,719 34 212,276Transfers - (335) - - (335)Acquisitions through business combinations 23,719 1,270,552 11,990 1,617 1,307,878

Balance at 30 June 2007 23,719 1,283,740 283,370 1,651 1,592,480 Additions - 62,333 668,219 1672 730,719Disposals - (14,200) - (422) (14,622)Impairment loss - - (42,000) - (42,000)Transfers 100 289,888 (289,988) - -Acquisitions through business combinations 14,972 685,391 270,981 53,359 1,024,703Assets Held For Sale (22,180) (204,593) (377,926) (317) (605,016)

Balance at 30 June 2008 16,611 2,102,559 512,656 54,593 2,686,420 Accumulated depreciation and impairment

Balance at 1 July 2006 - - - - -

Depreciation expense - (52,145) - (291) (52,436)

Balance at 30 June 2007 - (52,145) - (291) (52,436)Depreciation expense (116,495) - (587) (117,082)

Depreciation on Assets Held For Sale 14,508 5 14,513

Balance at 30 June 2008 - (101,987) - (582) (102,569) Net book value

As at 30 June 2007 23,719 1,231,595 283,370 1,360 1,540,044

As at 30 June 2008 16,611 2,152,401 512,656 54,884 2,531,415 Current and prior period property, plant and equipment balances as they relate to Ecogen and Uranquinty have been separately disclosed in note 8 as non-current assets held for sale. As part of the review of the recoverable amount of the Groups assets, the recoverable amount of the Tamar Valley Power Station was assessed after taking into account the sales price offered by the Tasmanian Government and the future onerous contract provision associated with the project once it became operational. As a result of the difference, the construction asset has been impaired by approximately $42 million.

The parent entity does not have property, plant and equipment.

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12. Intangibles

Consolidated Other $’000

Development costs $’000

Licences$’000

Customer Base $’000

Goodwill$’000

Total $’000

Balance at 1 July 2006 - - - - - - Additions 8,110 - - - - 8,110 Additions through business combinations 10,158 86,433 62,347 - 138,380 297,318 Balance at 30 June 2007 18,268 86,433 62,347 - 138,380 305,428 Additions - - - - - -Additions through business combinations - - 146,905 346,226 1,981,809 2,474,940

Balance at 30 June 2008 18,268 86,433 209,252 346,225 2,120,189 2,780,368 Accumulated amortisation and impairment Balance at 1 July 2006 - - - - - - Amortisation expense (192) (1,336) (1,623 ) - - (3,151)

Balance at 30 June 2007 (192) (1,336) (1,623) - - (3,151) Amortisation expense - (1,994) (7,733) (26,046) - (35,773)Impairment loss - - - - (410,000) (410,000)

Balance at 30 June 2008 (192) (3,331) (9,356) (26,046) (410,000) (448,923) Net book value

As at 30 June 2007 18,076 85,097 60,724 - 138,380 302,276

As at 30 June 2008 18,076 83,103 199,896 320,180 1,710,188 2,331,444

Impairment testing for cash-generating units (CGUs) containing goodwill

Goodwill has been allocated to operating divisions for impairment testing that represents the lowest possible level that is associated with cash generation and management reporting. Cash generating units and the aggregate carrying amount of goodwill allocated to each unit is as follows:

Consolidated

2008 $’000

2007 $’000

Braemar (i) 55,926 30,662 Redbank (ii) 37,630 34,054 Ecogen (ii) 20,596 12,597 Flinders(ii) 75,042 61,067 Uranquinty (iii) 25,018 - Alinta (iv) 1,272,827 - WA Power (v) 223,149 - (i) Braemar goodwill increased due to the acquisition of 15% minority interest. (ii) Goodwill movement due to finalisation of acquisition accounting. (ii) Uranquinty goodwill increased due to the acquisition of 30% minority interest (iv)The Alinta CGU includes the Alinta retail business, the integrated cogeneration Pinjarra and Wagerup power stations and the LPG joint venture. (v) Goodwill associated with the acquisition of the Alinta power generation assets on 31 August 2007. F

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12. Intangibles (continued) Key Assumptions used for value-in-use calculations

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on management approved annual financial budgets and forecasts covering a five year period as used for performance management. In determining the assumptions and estimates, refer to Note 1 (a) Crucial accounting estimates and judgement.

Generation CGU’s with Long Term Power Purchase Agreements (PPAs)

Cash flow projections for the five-year budget forecast period for generation assets with long term PPAs are in accordance with the contractual provisions of the PPA and gas supply agreements discounted using an after-tax discount rate of 8.0%. This discount rate reflects the stable operating margins under these long term contracts. Cash flow projections beyond the five year period have been extrapolated using a steady 2-3% p.a. growth rate. The Directors believe that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of these “PPA CGUs”.

Generation CGU’s with Merchant Pool Price Exposure

Cash flow projections for the five-year budget forecast period for generation assets with merchant pool price exposure are based on forward electricity prices forecast with reference to independent market sources including the futures market. These have been discounted using an after-tax discount rate of 9.1%. This discount rate reflects the higher margin volatility of these “Merchant CGUs” relative to the PPA CGUs. Cash flow projections beyond the five year period have been extrapolated using a steady 2-3% p.a. growth rate. The Directors believe that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of these CGUs.

Alinta

Cash flow projections for the five-year budget period forecast for the Alinta CGU includes reasonable market pricing reviews on electricity contracts and tiered tariff increases on the gas mass-market revenues. The cost of gas incorporates pricing in existing long-term contracts and management estimates of gas costs for supply shortfalls, new contracts and price resets. These have been discounted using an after-tax discount rate of 9.4% reflecting the nature of the integrated retail business operating in the WA market design (i.e. a bilateral gas market and a nett pool electricity market model). Cash flow projections beyond the five year period have been extrapolated using a steady 3% p.a. growth rate.

For the year ended 30 June 2008, an impairment charge of $410 million on goodwill in the Alinta CGU has been recognised. Post the acquisition of the Alinta assets, the tight credit environment and softening equity markets has led to an increase in the weighted average cost of capital (WACC) applied for valuation purposes. With all other variables constant, a 0.25% increase/decrease in the post-tax discount rate applied would increase/decrease the impairment charge by +/- $55 million. The Directors do not consider a detrimental change in any of the other key assumptions to be reasonably possible. Whilst the possible impact on key assumptions focuses on a change in the WACC, care should be taken while interpreting these sensitivities as movements in one assumption may have an offsetting or compounding effect on other variables or may also affect other variables which are not reflected in the sensitivity analysis results.

No write-down of the carrying amounts of other assets in the Alinta cash generating unit was necessary. The goodwill is included in the Energy Markets reportable segment disclosed in note 29.

Energy Trading Scheme

The Group notes it has both gas and coal fired generators in various markets and regions. Until further clarity is available as to the exact nature of the final Energy Trading Scheme to be implemented, there is no certainty as to the positive or negative impacts to the Group (note 37).

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13. Trade and other payables


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Trade payables 102,858 71,248 22,883 281Accruals 182,477 71,279 9,621 1,090GST payable 8,392 16,851 (2,735) - Accrued interest - 143 - - Capital expenditure payables 27,508 - - -Deferred Income 16,565 - - -Other payables 33,948 6,101 - - Management fee payable – related party (note 31) 1,692 1,298 - 597 Incentive fee – related party (note 31) - 23,400 - 23,400

373,440 190,320 29,769 25,368 Non-current Amounts payable to related parties (note 31) - 11,298 - -

- 11,298 - -

14. Provisions


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Provision for onerous contracts (i) (ii) 12,633 13,950 - - AEATM onerous provision (iii) 29,364 - - -Others 15,498 124 - -

57,495 14,074 - - Non-current Provision for onerous contracts (i) (ii) 198,370 110,190 - - AEATM onerous provision (iii) 137,636 - - -Site restoration 69,940 26,763 - - Other 5,404 - 450 -

411,350 136,953 450 -

The implementation of the Energy Trading Scheme may give rise to further onerous contracts depending on the impact of emissions trading will have on energy prices, in particular the cost of gas. Until further clarity is available as to the exact nature of the final scheme to be implemented, there is no certainty as to the positive or negative impacts to the Group.

(i) Provision for onerous contract – Osborne provision

The provisions for contract losses relate to the estimated future financial losses on contracts for the purchase of electricity and obligations relating to the supply and price of gas extending to 2019. The losses on electricity transactions are calculated as the net present value of the difference between the contracted purchase price and the estimated wholesale price. Inherent in estimating these losses is the uncertainty regarding the wholesale price in the National Electricity Market (NEM). The losses on the gas transactions are calculated as the net present value of cash flows arising from the difference between the contracted sale price and contracted purchase price on an anticipated volume. Inherent in estimating these cash flows is the uncertainty regarding future gas prices and the volumes used.

The current gas supply contract extends to 2010 allows for price reviews to be undertaken at three yearly intervals with additional contracts to be put in place for the period 2010 - 2019. The gas sale agreement does not permit additional costs arising from any of these reviews to be passed on. For the purposes of calculating the provision for contract losses, assumptions have been made regarding the outcomes of any future reviews.

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14. Provisions (continued)

(i) Provision for onerous contract – Osborne provision (continued)

Flinders has a Power Purchase Agreement with Osborne (Osborne PPA). Under the Osborne PPA, Flinders purchases all of the output of Osborne until 2019. Additionally, Flinders has a contract (which expires in 2010) to purchase gas which is then on-sold to Osborne under a Gas Sale Agreement. This gas sale agreement expires in 2013. Due to the pool prices prevailing in FY2007 and FY2008 (and in previous periods) there is a net shortfall between the cost of gas supplied to Osborne, the sale of gas to Osborne, the purchase of power from Osborne and the revenue from the sale of the electricity into the NEM. The provision is calculated as the net present value of expected future losses. The annual movement in this provision is recognised in the income statement. The electricity and gas sales associated with the Osborne contract are treated as revenue, whilst the gas supply costs and electricity purchases are treated as operating expenses. The reversal of the provision is also allocated against operating expenses.

(ii) Provision for onerous contract – Alinta gas customers

Alinta Sales has two material onerous contracts relating to commercial customers and the supply of gas to these customers at a value less than gas purchase cost. These contracts run off between 2013 and 2015. A review of the long term gas supply cost and these sales contracts was undertaken, with the resultant provision created and incorporated into the Alinta acquisition accounts and is reflected in the accounts.

(iii) Provision for onerous contract – AEATM

Following the acquisition of Alinta by the Consortium purchasers (BBP, Babcock & Brown Infrastructure and Singapore Power), the AEATM business was allocated to BBP. This business contained several onerous supply and customer contracts, the majority where either BBI or SP were the counterparty. The Consortium valued these contracts with the intention of providing cash, contract transfer, renegotiation or cancellation. The consortium members under the Umbrella Agreement that governed manner that the consortium dealt with matters pertaining to the acquisition of Alinta contributed their proportion of the agreed AEATM valuation. The BBP portion of the settlement was 17.5% of the agreed provision. At the date of this report the final settlement involving the cash reimbursement or contract cancellation or adjustment had not been received and the consortium parties contribution has been reflected as an asset (see Note 12). Over the life of the onerous contracts this provision will be applied against the losses generated by the remaining contracts held by AEATM. In addition, as noted in Events Subsequent to Balance Date, BBP announced the sale of the Tamar Power Project to the Tasmanian Government. This project was the subject to future onerous gas transmission contracts. Upon sale completion date approximately $81 million of the onerous provision representing future contract losses will be released. The provision as at 30 June contains the gross loss provision.

Reconciliation of movement in provisions

Site restoration provision

$’000

Onerous contract

provision $’000

Other provision

$’000

AEATM provision

$’000 Description Carrying amount at 1 July 2007 26,763 124,140 124 -Additions through business combinations 20,384 112,593 368,376 167,000Additional provision recognised 25,25,25,732 8,800 13,707 -Unused amounts reversed (3,165) (14,400) - -Amount used during the period - (22,330) (1,886) -Other 226 2,200 581 -

Total provisions at 30 June 2008 69,940 211,003 20,902 167,000

Site restoration provision

$’000

Onerous contract provision

$’000 Description Carrying amount at 1 July 2006 - -Additions through business combinations 25,534 145,070Additional provision recognised 1,229 -Unused amounts reversed - (4,720)Amount used during the period - (16,210)

Total provisions at 30 June 2007 26,763 124,140

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15. Employee benefits


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current

Provision for employee benefits 20,720 16,616 - - Non-current Provision for employee benefits 688 2,693 - - Defined benefit plan liability 14,171 12,366 - -

14,859 15,059 - -

Disclosure on defined benefit superannuation plan

Scheme Information Defined benefit members receive lump sum benefits on retirement, death, disablement and withdrawal. Some defined benefit members are also eligible for pension benefits in some cases. The defined benefit section of both plans are closed to new members. All new members receive accumulation only benefits, under a defined contribution plan. The following figures for the period ending 30 June 2008 relate to two Schemes – the Flinders Power Electricity Industry Superannuation Scheme and the Ecogen Energy Equipsuper Plan. An actuarial review of the Flinders Power Electricity Industry Superannuation Scheme will be completed during 2008. The Ecogen Energy Equipsuper Plan was assumed by IFM on acquisition in August 2008. Reconciliation of the Present Value of the Defined Benefit Obligation

Period ending 30 June 2008 30 June 2007 $'000 $'000 Present value of defined benefit obligations at the beginning of the period

121,976 119,880

(+) Current service cost 3,392 3,116 (+) Interest cost 6,084 4,540 (+) Contributions by Scheme participants 2,770 2,212 (+) Actuarial (gains)/losses (3,025) (3,442) (-) Benefits paid 4,645 3,301 (-) Taxes & premiums paid 991 1,145 (+) Transfers in 190 116 (+) Curtailments 231 -

Present value of defined benefit obligations at end of the year

125,982 121,976 Reconciliation of the Fair Value of Plan Assets Period ending 30 June 2008 30 June 2007 $'000 $'000 Fair value of plan assets at the beginning of the period 109,610 94,337 (+) Expected return on plan assets 6,924 4,734 (+) Actuarial gains/(losses) (7,229) 8,322 (+) Employer contributions 4,911 4,271 (+) Contributions by Scheme participants 2,770 2,276 (-) Benefits paid 4,645 3,301 (-) Taxes & premiums paid 991 1,145 (+) Transfers in 190 116 Fair value of plan assets at end of the year 111,540 109,610

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15. Employee benefits (continued)

Defined benefit superannuation plan (continued) Reconciliation of the Assets and Liabilities Recognised in the Balance Sheet

As at 30 June 2008 30 June 2007 $'000 $'000 Defined Benefit Obligation^ 125,982 121,976 (-) Fair value of plan assets 111,540 109,610 Deficit/(surplus) 14,442 12,366 Net superannuation liability/(asset) 14,442 12,366 ^ includes contributions tax provision

Expense Recognised in Income Statement

Financial year ending 30 June 2008 30 June 2007 $'000 $'000 Service cost 3,392 3,114 Interest cost 6,084 4,321 Expected return on assets (6,924) (4,734) Superannuation expense/(income) 2,552 2,701

Amounts Recognised in the Statement of Recognised Income and Expense

Financial year ending 30 June 2008 30 June 2007 $'000 $'000 Actuarial (gains)/losses (2,926) (11,764)

Cumulative Amount Recognised in the Statement of Recognised Income and Expense

As at 30 June 2008 30 June 2007 $'000 $'000 Cumulative amount of actuarial (gains)/losses (14,178) (11,252)

Scheme Assets

The percentage invested in each asset class at the balance sheet date was:

As at 30 June 2008 30 June 2007 Australian Equity 32% 34%International Equity 22% 21%Fixed Income 13% 13%Property 15% 14%Alternatives 4% - %Cash 11% 18%

Fair Value of Scheme Assets

The fair value of Scheme assets includes no amounts relating to:

• any of the Employer’s own financial instruments

• any property occupied by, or other assets used by, the Employer

Expected Rate of Return on Scheme Assets

The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of assets to each asset class and allowing for the correlations of the investment returns between asset classes. The returns used for each asset class are net of investment tax and investment fees. An allowance for administration expenses has also been deducted from the expected return.

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15. Employee benefits (continued)

Defined benefit superannuation plan (continued) Actual Return on Scheme Assets

Period ending 30 June 2008 30 June 2007 $'000 $'000 Actual return on Scheme assets 230 12,689

Principal Actuarial Assumptions at the Balance Sheet Date

As at 30 June 2008 30 June 2007 Discount rate (active members) 6.00% pa 5.25% - 6.10% pa Discount rate (pensioners) 6.50% pa 6.25% - 6.30% pa Expected rate of return on Scheme assets (active members) 6.40% - 7.00% pa 6.40% - 7.00% pa Expected rate of return on Scheme assets (pensioners) 6.90% - 7.50% pa 6.90% - 7.50% pa Expected salary increase rate 4.50% - 5.25% pa 4.00% - 5.50% pa Expected pension increase rate 3.00% pa 3.00% pa

Historical Information

Period ending 30 June 2008 30 June 2007 $'000 $'000

Present value of defined benefit obligation 121,874 121,976 Fair value of Scheme assets 107,432 109,610 (Surplus)/deficit in Scheme 14,442 12,366 Experience adjustments (gain)/loss - Scheme assets 3,834 (8,304) Experience adjustments (gain)/loss - Scheme liabilities 6,572 4,267

Expected Contributions

Period ending 30 June 2009 30 June 2008 $'000 $'000 Expected employer contributions 5,065 5,117

16. Borrowings


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Secured Bank loans

BBPL Syndicated Facility Agreement (i) 94,947 - 94,947 - BBPH Syndicated Facility Agreement (ii) 352,593 - - - Redbank Credit Facility Agreement (iii) 13,849 7,350 - - Ecogen bank loans (iv) - 8,538 - -Flinders Power syndicated facility (vii) - 5,020 - - Braemar Senior Debt (vii) - 9,388 - -

Other loans 3,387 6,698 6,722 - Total secured current borrowings 464,776 36,994 102,069 - Unsecured Other loans – related parties - Loans to subsidiaries - - - - - Loans to other related parties (viii) 127,500 3,405 127,100 100,107Total unsecured current borrowings 127,500 3,405 127,100 100,107 Total current borrowings 592,276 40,399 229,569 100,107

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16. Borrowings (continued)


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Non-current Secured At amortised cost Bank loans

BBPF Syndicated Facility Agreement (vii) 2,365,591 - - - Redbank Credit Facility Agreement (iii) 242,021 251,370 - - Ecogen bank loans (iv) - 129,921 Flinders Power syndicated facility (vii) - 211,998 - - Braemar Senior Debt (vi) - 192,541 - - Kwinana Construction Facility (v) 336,400 143,203 - - Neerabup Construction Facility (vi) 112,965 - - -

Other loans 11,308 2,414 - -

Total secured non-current borrowings 3,068,285 931,447 - - Unsecured At amortised cost - Loans to subsidiaries - - 1,011,916 177,594 - Other loans – related parties (ix) 200,277 298,075 200,277 298,075Total unsecured non-current borrowings 200,277 298,075 1,212,193 475,669

Total non-current borrowings 3,268,562 1,229,522 1,212,193 475,669

Information on credit risk, fair value and interest rate risk exposure of the group is provided at note 32.

(i) Corporate facility – BBP Limited Bridge Loan. This facility consists of three equal tranches maturing 15 October 2008, 15 April 2009 and 15 October 2009 respectively. Outstanding as at 30 June 2008 was $100.5 million. The weighted average interest rate as at 30 June 2008 was 11.05%. The full loan has been classified as current as it is expected to be repaid within 12 months.

(ii) Corporate facility – BBP Holdings Facility. This originally consisted of three facilities maturing 31 August 2008. These facilities have subsequently been combined into a single facility with the maturity date extended to 31 March 2009. Outstanding as at 30 June 2008 was $353.0 million. The effective interest rate as at 30 June 2008 was 8.65%.

Subsequent to 30 June 2008, proceeds from the sale of the Uranquinty and Ecogen power stations were used to repay $237.5 million of the BBP Holdings Facility.

(iii) Bank loan – Redbank Credit Facility Agreement. This facility consists of two tranches. Tranche 1, expiring in 2018 has $56.9 million outstanding as at 30 June 2008 (30 June 2007: $60.0 million). Tranche 2 expiring in 2023 had outstanding $194.4 million outstanding as at 30 June 2008 (30 June 2007: $198.7 million). The effective average interest rate was 8.04% as at 30 June 2008 (both tranches as at 30 June 2007 were 8.04%).

(iv) Bank loan – Ecogen Energy Pty Limited secured facilities with a total value of $130.1 million outstanding at 30 June 2008. This facility matures in 2015 and has an effective interest rate at 30 June 2008 of 7.58%. This loan was divested subsequent to 30 June 2008 as part of the sale of Ecogen. Also see note 8.

(v) Construction facility - Kwinana construction facility was originally drawn down in December 2005 and continues to be drawn down to finance construction activity. The total facility available is $394.0 million, and is currently drawn down to $362.6 million at 30 June 2008 (30 June 2007: $286.4 million). The effective interest rate at 30 June 2008 was 7.24% (30 June 2007: 7.24%).

(vi) Construction and Equity Bridge facilities - Neerabup construction and equity bridge facilities were originally drawn down in February 2008 and continue to be drawn down to finance construction activity. The total facility available is $425.6 million and is currently drawn down to $225.9 million at 30 June 2008 (30 June 2007: Nil). The effective interest rate at 30 June 2008 was 8.28% (30 June 2007: $Nil). It should be noted that BBP only has a 50% equity ownership in this project.

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16. Borrowings (continued)

(vii) Corporate facility – BBPF Syndicated Facility Agreement. On the 3rd June 2008, BBP Finance Australia entered into $2.7 billion of refinancing of existing debt facilities (including the Flinders Power Syndicated Facility and Braemar Senior Debt Facility). This facility consists of three cash tranches and one Letter of Credit trance maturing 3 June 2011, 3 June 2013, 3 June 2009 and 3 June 2009 respectively. Debt Outstanding as at 30 June 2008 was $2,426.9 million and $54.7 million in LC’s issued. The effective interest rate on the debt as at 30 June 2008 was 8.25%. The four facility tranches are weighted as follows:

$1,600 million maturing on 3 June 2011 $ 960 million maturing on 3 June 2013 $80 million revolving letter of credit facilities $60 million revolving Working Capital facility

The facility is subject to two main covenants being an interest coverage ratio (ICR) of 1.35 based on a rolling 12 month look back and a finance debt to total assets gearing ratio. These covenants are tested on an ongoing basis and reported to the financiers quarterly. In addition to these covenants there are two key future events that may impact the facility size and maturity profile. The first key event is a reassessment of the facility size following the clarification of the operation and potential compensation associated with the government proposed Energy Trading Scheme (ETS). The Green Paper issued by the Federal Government on 16 July 2008 outlines the general operation and approach of the scheme, but did not provide details on the matter of compensation and pricing of carbon into the market. Upon the enacting of the legislation the size of the facility will be reassessed. Should the impact of the ETS be a negative (taking into account any compensation), a reduction in the size of the facility within agreed parameters may be required depending on materiality and severity of impact. The facility agreement does not provide an option to increase the facility size as a result of ETS. The second key event in the facility agreement is the achievement of a second investment grade rating for the BBPF debt. Under the facility agreement, this second rating is required by the 3rd of June 2009. Should the second investment grade rating not be received by that date, a thirty day period of negotiation is provided for under the facility. Remedies may include but not limited to a fee or margin adjustment, a reduction of the facility use or no change to current or pricing and size. Process for the achievement of the second investment grade rating for the BBPF debt commenced in mid 2008 however due to the combined impact of managing the Varanus Island outage and more clarity to come with the White Paper, the rating process has been delayed until the start of 2009.

(viii) Unsecured Related Party Loan (current) – BBP Limited Facility. These facilities originally matured between December 2008 and March 2009 and have subsequently been amended to 30 September 2009. Principal outstanding as at 30 June 2008 was $123.4 million. The effective interest rate as at 30 June 2008 was 10.00%.

(ix) Unsecured Related Party Loan (non-current) – BBP Limited Facility. This facility consists of three tranches maturing 31 January 2010. Outstanding as at 30 June 2008 was $192.4 million. The effective interest rate as at 30 June 2008 was 13.29%.

Certain project level borrowings are subject to ICRs. The Group was in compliance with all ICR covenants at 30 June 2008.

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17. Assets pledged as security

Bank loans of project-level subsidiaries are secured by a combination of fixed and floating charges over the assets of these entities. Corporate level debt is secured by the shares in the underlying subsidiary companies.

Consolidated Parent Entity

2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Cash and cash equivalents 429,928 202,371 - - Receivables 340,612 174,065 - - Total Current assets pledged as security 770,540 376,436 - - Non-current Receivables 126,321 12,131 - - Property, plant and equipment 2,319,694 1,540,044 - - Total non-current assets pledged as security 2,446,015 1,552,175 - -

Total assets pledged as security 3,216,555 1,928,611 - -

18. Derivative financial instruments – liabilities


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Current Derivative financial instruments at fair value Foreign exchange derivatives 12,612 - - -Total current derivative financial instruments – liabilities 12,612 - - - Non-current Derivative financial instruments at fair value Foreign exchange derivatives 133 1,840 - - Electricity derivatives 10,509 3,062 - -Total non-current derivative financial instruments – liabilities 10,642 4,902 - -

Total derivative financial instruments – liabilities 23,254 4,902 - -

Refer note 32 for further information.

19. Borrowing costs


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Borrowing costs capitalised during the financial year 9,044 11,265 5,553 - Weighted average capitalisation rate on funds borrowed generally 8.26% 8.07% - -

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20. Contributed equity

Stapled Security in BBP Units in BBPT Parent - Shares in BBPL

Number Number Number

‘000

Issue Price per Security

($) $'000 ‘000

Issue Price ($)

per Security $'000 ‘000

Issue Price per Security

($) $'000 Balance as at 30 June 2006 30,001 30,001 30,001 30,001 Securities issued on staged acquisition of assets Various

dates 47,557 3.451 163,894 77,558 80,683 47,557 83,211

Conversion of BBPCS 19 Oct 06 & 11 Dec 06

163,912 2.50 409,780 163,912 1.75 286,846 163,912 0.75 122,934

Conversion of capitalised interest on BBPCS 11-Dec-06 6,601 2.50 16,503 6,601 1.75 11,552 6,601 0.75 4,951 Initial Public Offering 11-Dec-06 111,219 2.50 278,047 111,219 1.75 194,633 111,219 0.75 83,414 359,290 898,225 359,290 573,714 359,290 324,511 Less: IPO Transaction Costs (net of tax) (28,325) (21,790) (6,535) Balance 30 June 2007 359,290 869,900 359,290 551,924 359,290 317,976 Distribution (142,512) (142,512) - Securities issued on acquisition of Alinta Various

dates 334,887 2.90 2 971,173 334,887 1.97 658,067 334,887 0.93 313,106

Share purchase plan (note 31) 05-Dec-07 15,145 2.88 43,592 15,145 1.95 29,538 15,145 0.93 14,054 Share issue under distribution reinvestment plan 31-Mar-08 17,007 1.76 30,030 17,007 1.11 18,886 17,007 0.65 11,144 726,329 1,772,183 726,329 1,115,903 726,329 656,280 Less equity issuance costs (252) (190) (62) Balance 30 June 2008 726,329 1,771,931 726,329 1,115,713 726,329 656,218 Stapled securities attributable to Company - BBPL 656,218 Stapled securities attributable to Trust – BBPT 1,115,713 Total securities in consolidated group as at 30 June 2008 1,771,931

1. Represents average of various issue prices during the acquisition period. 2. Represents market price of securities at the date of acquisition.

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21. Reserves


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Hedging reserve 70,605 24,424 - - Foreign currency translation reserve (2,800) - - - Other reserves 82 82 - - Total Reserves 67,887 24,506 - - Attributable to: Equity holders of the Company - BBPL 67,887 24,506 - - Equity holders of the Trust - BBPT (minority interest) - - - -

67,887 24,506 - - Hedging reserve Balance at beginning of financial year 24,424 670 - - Gain/(loss) recognised 3,094 1,079 - - Cash flow hedges - movement in fair value of derivatives 61,553 32,798 - - Deferred tax arising on hedges (18,466) (10,123) - -

Balance at end of financial year 70,605 24,424 - - Foreign currency translation reserve Balance at beginning of financial year - - - - Translation of foreign operations (2,800) - - -

Balance at end of financial year (2,800) - - - Other reserve Balance at beginning of financial year 82 - - - Fair value movement of property, plant and equipment - 82 - -

Balance at end of financial year 82 82 - -

Other reserve has arisen due to fair value movement in assets in a subsidiary between the two dates of a step acquisition.

22. Retained earnings


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Balance at beginning of financial year (74,843) (7,452) 84,949 (6,762) Net (loss) / profit attributable to stapled security holders (425,977) (75,626) 350,803 91,711 Movement in Retirement Benefit Obligation (note 15) 2,048 8,235 - -

Balance at end of financial year (498,772) (74,843) 435,752 84,949 Attributable to: Equity holders of the Company – BBPL (503,572) (78,219) 435,752 84,949 Equity holders of the Trust - BBPT 4,800 3,376 - -

(498,772) (74,843) 435,752 84,949

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23. Earnings per security

Consolidated

2008 Cents per security

2007 Cents per security

Basic earnings per stapled security / parent entity share (65.08) (46.84) Diluted earnings per stapled security / parent entity share (65.08) (46.84) The earnings and weighted average number of securities/ shares used in the calculation of basic and diluted earnings per security/share are as follows: Earnings attributable to the parent entity share holders (426,515) (75,626) Weighted average number of securities/shares for the purposes of basic and diluted earnings per security/share 654,536,944 161,435,676

24. Distributions

2008 2007

Cents per Security

Total $’000

Cents per Security

Total $’000

Recognised Amounts Fully paid Securities FY07 Final distribution - Paid from contributed equity (September 2007) 14 50,301 - - FY08 Interim distribution - Paid from contributed equity (March 2008) 13 92,212 - -

142,513 - -

The Board of Directors of BBP have decided not to make a distribution for the six month period ended 30 June 2008 as part of a capital management plan to strengthen the balance sheet.

The parent entity, BBPL has a franking account balance of $3.5 million credit as at 30 June 2008 (30 June 2007: $2.2 million).

25. Notes to the cash flow statements

(a) Reconciliation of cash and cash equivalents

Cash and cash equivalents including: Restricted cash (i)

Current 125,289 196,455 - 44,800 Non-current 139,357 92,321 - -

Unrestricted cash 165,282 52,804 13,939 13,188

429,928 341,580 13,939 57,988 (i) Cash held on restricted deposit is interest bearing and its use is mainly restricted as a requirement of the

consolidated entities’ financing agreements. This can be released in relation to requirements to meet equity contribution commitments, establish reserve accounts for debt repayments, meet the cost of future capital expenditure or as a deposit supporting a letter of credit or guarantee issued on behalf of the consolidated entity.


2008 $’000

2007 $’000

2008 $’000

2007 $’000

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25. Notes to the cash flow statements (continued)

(b) Reconciliation of profit for the period to net cash flows from operating activities


2008 $’000

2007 $’000

2008 $’000

2007 $’000

(Loss)/profit for the period (426,515) (70,666) 350,803 91,711 Share of associates’ profit (less dividends) (5,915) (1,780) (816) - Interest expense - 17,043 - 18,911 Impairment loss 452,000 - - - Depreciation and amortisation of non current assets 152,855 55,588 - - Decrement / (Increment) on revaluation of financial derivatives

9,325

20,580

-

-

Interest income – fair value of interest free loans - - (381,065) (123,044) Decrement on revaluation of PPHA derivative (82,789) 66,389 - - Profit on sale of non current assets - (21) - - Fair value change on incentive fee (23,400) 23,400 (23,400) 23,400 Amortisation of deferred borrowing costs 33,675 - 3,467 - Foreign exchange gain/(loss) 4,727 - - - Increase/(decrease) in current tax liability (15,864) 230 - (60) (Increase)/ decrease in deferred tax balances 8,411 (22,593) 8,588 (10,815) Changes in net assets and liabilities, net of effects from acquisition

80,035

(Increase)/decrease in assets 314,916 (151,394) 1,826 (24,972) Increase/ (decrease) in liabilities (329,913) 114,938 18,775 10,497 Net cash from operating activities 171,548 51,714 (21,822) (14,372)

(c) Financing facilities

Consolidated Company 2008

$’000 2007 $’000

2008 $’000

2007 $’000

Working capital facility payable at call: Amount used 2,000 - - - Amount unused 58,000 2,000 -

60,000 2,000 - - Facilities with maturities between current to 20 years: Amount used 4,461,599 - - - Amount unused 518,362 31,750 - -

4,979,961 31,750 - -

26. Commitments for expenditure

(a) Capital expenditure commitments


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Not longer than 1 year 547,595 43,876 - - Longer than 1 year and not longer than 5 years 93,336 45,902 - - Longer than 5 years - - -

637,931 89,778 - -

Following the sale of Uranquinty and Tamar, the capital expenditure commitments relating to only the Newman expansion, Kwinana and Neerabup will remain amounting to $238.8 million (as at 30 June 2008).

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26. Commitments for expenditure (continued)

(b) Lease commitments

BBP has commitments non-cancellable operating lease commitments. At 30 June 2008 BBP did not have any commitments under finance leases.

(c) Other expenditure commitments


2008 $’000

2007 $’000

2008 $’000

2007 $’000

Not longer than 1 year 65,087 64,800 - - Longer than 1 year and not longer than 5 years 151,804 148,475 - - Longer than 5 years 38,902 32,734 - -

255,793 246,009 - -

Other expenditure commitments relate to significant commitments as a result of existing contracts such as purchase of gas, purchase of SRA’s energy contracts, rail freight of coal and IT Infrastructure.

27. Leases

As a Lessee BBP subsidiaries are lessee under operating leases relating to certain land, motor vehicles and roads. Consolidated Company

2008 $’000

2007 $’000

2008 $’000

2007 $’000

Non-cancellable operating lease payments Not longer than 1 year 2,214 1,301 - -Longer than 1 year and not longer than 5 years 5,637 1,381 - -Longer than 5 years 4,026 5,374 - -

11,877 8,056 - -

As a Lessor

At certain power stations the contracts for sale of electricity to another party have been assessed as meeting the definition of an operating lease.

Total contingent rents recognised as income in the period was $66.3 million (2007: $59.2 million).

Future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periods: Consolidated Company

2008 $’000

2007 $’000

2008 $’000

2007 $’000

Not longer than 1 year 21,712 65,302 - -Longer than 1 year and not longer than 5 years 186,179 272,831 - -Longer than 5 years 348,492 604,839 - - 556,383 942,972 - -

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28. Subsidiaries

The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with accounting policy described in note 1. Ownership interest is equal to the proportion of voting power held. All ownership interest is through ordinary shares.

Name of the entity Ownership interest

Country of

incorporation 2008

% 2007

% Parent entity Babcock & Brown Power Limited * Australia Stapled entity Babcock & Brown Power Trust Australia Subsidiaries of BBP BBP Holdings Pty Limited * Australia 100 - CMO Energy NZ Ltd New Zealand 100 100 Babcock & Brown Power Advisory Pty Limited * Australia 100 100 Newgen Partnership Australia 70 70 Babcock & Brown Kwinana Pty Limited Australia 100 100 BBP Kwinana Power Pty Limited Australia 100 100 BBP Braemar Power Pty Limited Australia 100 100 Babcock & Brown Braemar 2 Pty Limited Australia 100 100 Braemar Power Partners Pty Limited Australia 100 70 Babcock & Brown Braemar 1 Pty Limited Australia 100 100 Babcock & Brown Braemar 3 Pty Limited Australia 100 100 Braemar Power Project Pty Limited Australia 100 85 Braemar Power Finance Pty Limited Australia 100 85 BBP Oakey Power Pty Limited* Australia 100 100 Babcock & Brown Flinders Pty Limited Australia 100 100 Flinders Operating Services Pty Limited Australia 100 100 Flinders Power Finance Pty Limited Australia 100 100 Flinders Power Partnership Australia 100 100 Flinders Coal Pty Limited Australia 100 100 Flinders Osborne Trading Pty Limited Australia 100 100 Babcock & Brown Osborne Pty Limited Australia 100 100 B&B Power Malta Holdings Ltd Malta 100 100 B&B Power Malta (Flinders) Ltd Malta 100 100 B&B Power Luxemburg SARL Luxemburg 100 100 Flinders Power Holdings GmbH Switzerland 100 100 Flinders Labuan (No.1) Ltd Australia 100 100 Flinders Labuan (No.2) Ltd Australia 100 100 NPP Redbank LLC* US 100 100 NPP Redbank 2 LLC* US 100 100 BBP Redbank Power Pty Limited Australia 100 100 Redbank Project Pty Limited Australia 100 100 Redbank Construction Pty Limited Australia 100 100 BBP Ecogen Power Pty Limited* Australia 100 100 Ecogen Holdings Pty Limited ** Australia 72.61 72.61 Ecogen Energy Pty Limited ** Australia 72.61 72.61 EcoHoldings Pty Limited ** Australia 72.61 72.61 Ecogen Investments Pty Limited ** Australia 72.61 72.61 Ecogen Power Pty Limited ** Australia 72.61 72.61 Ecogen Investments UK (UK tax resident) ** UK 72.61 72.61 Madison BV (Dutch tax resident) Netherlands 72.61 72.61 BB Power Cat Pty Ltd Australia 100 100 BBP Uranquinty Pty Limited * Australia 100 100 BBP ONE Pty Limited * Australia 100 100 BBP Energy Trading Pty Ltd * Australia 100 100 BBP Neerabup Holdings Pty Limited * Australia 100 - BBP Neerabup Power Pty Limited * Australia 100 - BBP Servco Pty Limited * Australia 100 - Our Neighbourhood Energy Pty Limited Australia 65 - BBP Uranquinty Power Pty Limited ** Australia 100 - BBB Finance Australia Pty Limited * Australia 100 -

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28. Subsidiaries (continued)

Name of the entity Ownership interest

Country of

incorporation 2008

% 2007

% BBP Energy Markets Pty Limited * Australia 100 - BB Power Cat Sub 1 Pty Limited Australia 100 - BB Power Cat Sub 2 Pty Limited Australia 100 - BB Power Cat Sub 3 Pty Limited Australia 100 - BB Power Cat Sub 4 Pty Limited Australia 100 - BB Power Cat Sub 5 Pty Limited * Australia 100 - Alinta Energy Power Generation Pty Limited * Australia 100 - Alinta Energy (Tamar Valley) Pty Limited Australia 100 - Alinta EATM Pty Limited * Australia 100 - Alinta Energy (New Zealand) Ltd New Zealand 100 - Alinta Pty Limited Australia 100 - Alinta Sales Pty Limited Australia 100 - Alinta Cogeneration (Pinjarra) Pty Limited Australia 100 - Alinta Cogeneration (Wagerup) Pty Limited Australia 100 - Alinta Cogeneration Finance Pty Limited Australia 100 - Alinta APG Pty Limited Australia 100 - Alinta APGMW Pty Limited Australia 100 - Alinta ACP Pty Limited Australia 100 - Alinta ENZ Ltd Bermuda Islands 100 - Alinta ENZF Pty Limited Australia 100 - Alinta DVP Pty Limited Australia 100 - Alinta DEBH Pty Limited Australia 100 - Alinta DEBP Pty Limited Australia 100 - Alinta DEBO Pty Limited Australia 100 - BB Power Unit Trust No 1 Australia 100 - Alinta ED Limited Australia 100 - Alinta Power Trust Australia 100 - Alinta DAPH Pty Limited Australia 100 - Alinta DAPF Pty Limited Australia 100 - Alinta DEWAH Pty Limited Australia 100 - Alinta DEWAP Pty Limited Australia 100 - Alinta DIC Pty Limited Australia 100 - Alinta Power Sub Pty Limited Australia 100 - Alinta Energy (LPG) Pty Limited Australia 100 - Alinta Electricity Trading Pty Limited Australia 100 -

* These companies are members of the tax consolidated group. Babcock & Brown Power Limited is the head entity in the tax consolidated group. ** These companies have been sold subsequent to 30 June 2008.

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29. Segment information

(a) Description of segments

Segment information is presented in respect of the Group’s business and geographical segments.

Business segments

Previously the segment information presented reflected a business model that segmented the business into generation categories (base load, peaking and intermediate). As the group evolved taking into the Alinta acquisition the Group’s management and internal reporting structure reflected the management of the business by region and business type. The Group comprises the following main business segments:

Generation:

This segment includes the gas and coal fired power generation assets of the Group.

Energy Markets:

This segment includes the sale of natural gas and electricity to retail, industrial and commercial customers. The retail operations, comprising Alinta and Our Neighbourhood Energy (ONE) were acquired during the year ended 30 June 2008, and as such, no comparative information is presented. Also included is merchant gas sales and transmission. The Alinta operations were acquired on 1 September 2007, and ONE legal entity was acquired on 3 July 2007 as a start up operation.

Geographical Segment

Although the Group’s operations are managed on a global basis, they operate in two principal geographical areas, the South/North West Interconnected System and the National Electricity Market.

The table below allocates each of the Group’s operations into the business and geographical segments.

Segment South/North West Interconnected System

National Electricity Market

Power Generation WA Power Cawse Kwinana Neerabup Power Projects

Flinders Braemar Ecogen * Redbank Glenbrook Tamar Oakey Bairnsdale Uranquinty *

Energy Markets Alinta LPG

AEATM

* Sold subsequent to 30 June 2008

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29. Segment information (continued)

(b) Primary reporting format – business segments

Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. The following information relates to the table below:

(i) Unallocated segment revenues represent parent entity fee revenue and consolidation eliminations. Unallocated segment EBITDA includes Parent entity overhead fees and costs, management fees and corporate expenses. Unallocated segment Profit before tax includes Parent Entity interest charges.

(ii) Generation Revenue includes:

Contract Revenue from electricity generation under an electricity supply agreement (PPA) including associated products such as GECs in the case of Braemar.

Rolling hedge revenue is revenue from electricity generation covered by hedge contracts, generally with a term of less than five years, although a small portion of Flinders' Rolling Hedges have terms greater than five years.

Derivative valuation movement represents the movement in derivative financial contracts that occur as a result of reassessments throughout the period of the value of hedge contracts as a result of changes in pool prices. The charge to revenue is applicable to contracts realised during the period as well as future dated contracts.

Unhedged Revenue includes Pool revenue payments from NEMMCO when there is no hedge in place that covers the electricity sold to earn that pool revenue.

PPA lease revenue

fly ash sales from generation assets

(iii) Energy markets revenue includes:

Retail, commercial and industrial gas and electricity sales

Wholesale gas and electricity sales

LPG sales

(iv) Total Assets for Unallocated and eliminations include Osborne guarantee, ERM investment, Oakey Investment and other Parent entity assets.

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(b) Primary reporting format – business segments (continued)

(i) Year ended 30 June 2008

Results Generation

Revenue Energy Markets

Inter segment Revenue

Intra Segment Revenue

Corporate & Unallocated

Total Revenue EBITDA

Profit Before Tax

$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Generation 819,778 38,612 9,838 1,552 123 869,903 241,412 106,745Energy Markets 12,166 657,727 7,953 19,687 9,679 707,212 125,282 3,990Corporate - - - - 3,275 3,275 (28,476) (727,003)Unallocated & Eliminations - - - - (52,970) (52,970) (12,204) 228,829Power Projects - - - - - - (920) 275Associates - - - - - - 5,915 3,134 Total 831,944 696,339 17,791 21,239 (39,893) 1,527,420 331,009 (384,030)

Other

Depreciation & Amortisation

CAPEX (Maintenance)

CAPEX (Construction)

Share of Associate

Profit

Assets Liabilities Investment Accounting in

Associates $’000 $’000 $’000 $’000 $’000 $’000 $’000 Generation (112,949) (160,533) (292,393) - 4,106,745 (3,113,289) - Energy Markets (37,813) - (84,502) - 1,705,893 (1,728,631) - Corporate (88) (409) - - 11,840,125 (10,754,596) - Unallocated & Eliminations - - - 816 (10,556,833) 9,846,777 - Power Projects - - - - - - - Associates (2,005) - - 5,099 53,974 (4,912) 49,025 Total (152,855) (160,942) (376,895) 5,915 7,149,904 (5,754,651) 49,025

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(b) Primary reporting format – business segments (continued)

(ii) Year ended 30 June 2007

Results Generation

Revenue Energy Markets

Inter Segment Rev

Intra Segment Revenue

Corporate & Unallocated

Total Revenue EBITDA

Profit Before Tax

$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Generation 472,357 - - 57,380 4,032 533,769 118,449 (96,603)Corporate - - - - - - (7,125) (3,228)Unallocated & Eliminations - - - - (969) (969) - - Associates - - - - - - 6,280 4,517 Total 472,357 - - 57,380 3,063 532,800 117,604 (95,314)

Other

Depreciation & Amortisation

CAPEX (Maintenance)

CAPEX (Construction)

Share of Associate

Profit

Assets Liabilities Investment Accounting in

Associates $’000 $’000 $’000 $’000 $’000 $’000 $’000 Generation 42,301 19,857 194,884 - 2,475,679 2,025,880 - Corporate 13,287 - 3,406 1,780 197,161 (210,655) 22,361Unallocated & Eliminations - - - - - - Associates - - 4,500 53,048 4,020 49,019 Total 55,588 19,857 198,290 6,280 2,725,888 1,819,245 71,380

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(c) Secondary reporting format – geographical segments

(i) Year ended 30 June 2008

SWIS/NWIS

$’000NEM$’000

Subtotal$’000

Unallocated and

Eliminations $’000

Consolidated$’000

Segment revenue 676,114 852,169 1,528,283 (863) 1,527,421Segment Assets 2,762,422 3,103,588 5,866,010 1,283,894 7,149,904Capital Expenditure (212,908) (324,519) (537,427) (410) (537,837)

(ii) Year ended 30 June 2007

SWIS/NWIS

$’000NEM$’000

Subtotal$’000

Unallocated and

Eliminations $’000

Consolidated$’000

Segment revenue - 529,737 529,737 3,063 532,800Segment Assets 399,542 2,129,184 2,528,727 197,162 2,725,888Capital Expenditure 194,884 19,857 214,741 3,405 218,147

30. Changes in the composition of the consolidated Group

Acquisition of business – Year ended 30 June 2008

During the year ended 30 June 2008, BBP acquired the following businesses.

Name of business acquired Note

Date of acquisition

Ownership interest in

shares/ units %

Cost of acquisition

$’000 Alinta (i) 1 (page 73) August 2007 100 2,327,941BBP Uranquinty Power Pty Limited (ii) July 2007 70 28,460Our Neighbourhood Energy (iii) July 2007 65 6,195BBP Neerabup Holdings Pty Limited (iv) May 2008 100 - (i) Alinta

The cost of acquisition of Alinta includes $1,776 million of equity acquired and $545 million to purchase a shareholder loan receivable between Alinta and AlintaAGL.

In addition, on 12th December 2007 BBP purchased the remaining interest in AlintaAGL Limited for $534 million from AGL Energy Limited (“AGL”). This includes $259 million to acquire the minority interest and $275 million to purchase a shareholder loan receivable between AGL and AlintaAGL.

The Group’s accounting policy is to recognise the difference between the cost of acquisition and the minority interest acquired as goodwill. Additional goodwill of $219 million was recognised as a result of the transaction of 12 December 2007. (ii) Uranquinty

On 13 July 2007, BBP acquired a 70% interest in NewGen Power Uranquinty Pty Limited (“Uranquinty”) from Babcock & Brown for $28.5 million.

In addition, on 15 January 2008 BBP acquired the remaining 30% interest in Uranquinty from ERM Uranquinty Power Pty Ltd for $25 million.

Goodwill recognised on the acquisition amounted to $25 million

Uranquinty is a 640MW power station under construction located near Wagga Wagga in Southern NSW.

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30. Changes in the composition of the consolidated Group (continued)

Acquisition of business – Year ended 30 June 2008 (continued)

(iii) Our Neighbourhood Energy

On 3 July 2007, BBP acquired a 65% interest in Our Neighbourhood Energy Pty Limited (ONE) for $6.2 million from private shareholders. Goodwill recognised on the acquisition amounted to $5.9 million. ONE is a start up electricity retailer servicing metropolitan Melbourne. (iv) Neerabup

In February 2008, BBP acquired 100% of BBP Neerabup Power Pty Limited for $100.00 from B&B Australia Infrastructure. BBP Neerabup Power Pty Limited holds a 50% interest in the NewGen Neerabup Partnership, which owns the Neerabup Power Station.

Neerabup is a 330MW power station under construction located 50 kilometres north of Perth, WA.

Acquisition of business – Year ended 30 June 2007

During the year ended 30 June 2007, BBP acquired certain businesses.

Name of business acquired Date of acquisition

Ownership interest in

shares/ units %

Cost of acquisition

$’000 Babcock & Brown Power Trust December 2006 - - Babcock & Brown Braemar Holdings Pty Ltd and its subsidiaries

October 2006December 2006

55.67 19.33

35,674 14,319

Babcock & Brown Power Redbank Pty Ltd and its subsidiaries NNP Redbank LLC NNP Redbank 2 LLC

October 2006December 2006

50 50

36,695 80,550

Babcock & Brown Power Ecogen Power Pty Ltd and its subsidiaries

December 2006 72.61 37,443

Babcock & Brown Flinders Pty Ltd and its subsidiaries Babcock & Brown Malta #1 and its subsidiaries

August 2006 100 217,131

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30. Changes in the composition of the consolidated Group (continued)

(1) Alinta

On 31 August 2007, BBP as part of a consortium including Babcock and Brown Infrastructure and Singapore Power International, acquired 100% of the issued capital of Alinta Limited, a company listed on the Australian Stock Exchange. The Alinta assets were consequently allocated between the consortium members in accordance with the Alinta Scheme Booklet.

The acquired businesses contributed revenues of $772.0 million, earnings before interest, tax, depreciation and amortisation (EBITDA) of $158.0 million and net profit before impairment, tax and minority interests of $17.1 million to the Group for the period from 1 September 2007 to 30 June 2008. If the acquisition had occurred on 1 July 2007, consolidated revenue and consolidated EBITDA for the year ended 30 June 2008 would have been $1.546.7 million and $349.0 million respectively. These amounts have been calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reflect the additional depreciation and amortisation that would otherwise have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 July 2007, together with associated tax effects.

BBP has paid a premium for this business combination, represented as purchased goodwill, as it believes the acquisitions have growth opportunities and cost savings that can be introduced to these operations.

The net assets and liabilities arising from the Alinta acquisition (which includes the assumption of the shareholder loans relating to AlintaAGL) and the provisional fair value attributable to the assets and liabilities are detailed below.

Carrying value$’000

Fair value $’000

Cash and cash equivalent 59,221 59,221 Receivables 597,558 572,007 Inventories 3,442 3,442 Derivative financial instruments 8,899 32,395 Property, plant and equipment & leasehold right 1,035,410 1,014,464 Deferred tax asset 85,456 88,596 Intangible assets 858,836 2,083,773 Other assets 1,324 1,324 Payables (432,764) (404,764) Provisions (194,628) (194,398) Deferred tax liabilities (63,966) (78,924) Derivative financial instruments (587) (587) Interest bearing liabilities (873,801) (833,313) Net assets 1,084,400 2,343,236 Minority interest (15,295) Net identifiable assets acquired 2,327,941 Consideration Cash paid and payable 1,339,791 Stapled securities issued (note 20) 971,173 Cost associated with the acquisition 16,977 Total consideration 2,327,941 The cash outflow on acquisition is as follows: Net cash acquired with subsidiary 59,853 Cash paid (1,356,768) Net cash (1,296,915)

The above assets and liabilities are subject to refinement as the valuation process (which incorporates the minority interest buy-out of AlintaAGL) and the consortium working capital and other purchase adjustments are finalised.

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31. Related parties disclosures

(a) Equity interests in related parties

Equity interests in subsidiaries

Details of the percentage ownership held in subsidiaries are disclosed in note 28 to the financial statements.

Equity interests in associates

Details of interests in associates are disclosed in note 9 to the financial statements.

(b) Key management personnel disclosures

As permitted by the Corporations Amendment Regulations 2001, the company has disclosed information required by paragraphs Aus 25.4 to Aus 25.7.2 of AASB 124 Related Party Disclosures under the heading “remuneration report” within the Directors’ Report and not within the financial report.

Details of key management personnel

The following persons were Directors of BBPL at any time during the year, up to the date of this Directors’ report.

Mr L F Gill (Chairman) – from 1 July 2008 appointed 29 October 2006 Mr W D Murphy (Chairman) – through to 1 July 2008 appointed 4 April 2006 Mr P F Hofbauer appointed 14 October 2005 Mr J Fletcher appointed 29 October 2006 Mr P M Kinsey appointed 29 October 2006 Mr M Garland (Alternate for Mr P F Hofbauer through to 23 November 2007, from 23 November 2007 Alternate for Mr W D Murphy)


Mr G W Denton (Alternate for Mr W D Murphy through to 23 November 2007, from 23 November 2007 Alternate for Mr P F Hofbauer)


The Key Management Personnel (KMP) of Babcock & Brown Power during the year were:

Mr Paul Simshauser Chief Executive Officer

Mr Brian Green Chief Operating Officer

Mr James Brown Chief Financial Officer Ms Julia Oakley General Manager, Business Services

Mr Andrew Kremor General Manager, Energy Markets Mr Tom Richardson General Manager, Transition Key management personnel remuneration

The aggregate remuneration of the KMP of BBP over the year ended 30 June 2008 and 2007 is set out below:

2008 $’000

2007 $’000

Short-term employee benefits

3,144,230 1,500,142 Post-employment benefits 66,261 70,659 Other long-term benefits 21,913 - Termination benefits - - Share-based payments 1,026,083 16,756 Total 4,258,487 1,587,557

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31. Related parties disclosures (continued)

(b) Key management personnel disclosures (continued)

The KMP information below covers both the Company and the Consolidated Group.

Options held in BBP

The KMP did not hold any Options in BBP over the periods ending 30 June 2007 and 30 June 2008.

Bonus deferral rights held in BBP

KMP held the following Bonus Deferral Rights in BBP over the periods ending 30 June 2007 and 30 June 2008. Further details of the BDR are disclosed in the Remuneration Report forming part of the Directors Report.

30 June 2007$’000

Granted during the year

$’000

30 June 2008$’000

Mr Paul Simshauser - 9 9Mr James Brown - 2 2Mr Brian Green - 2 2Ms Julia Oakley - 2 2Mr Andrew Kremor - - -Mr Tom Richardson - - -

Security holdings in BBP

Outlined below are the security holdings of the KMP over the periods ending 30 June 2007 and 30 June 2008 in BBP:

Balance 11 December

2006

Acquired during

the year

Sold during the

year

Balance 30 June

2007

Acquired during

the year

Sold during

the year

Balance 30 June

2008 Number Number Number Number Number Number Number Directors Mr John Fletcher 80,000 - - 80,000 28,767 - 108,767Mr Len Gill 40,000 - - 40,000 38,000 - 78,000Mr Peter Hofbauer 1,238,383 - - 1,238,383 636,581 - 1,874,964Mr Peter Kinsey 16,000 - - 16,000 - - 16,000Mr Warren Murphy 931,162 - - 931,162 674,294 - 1,605,456

KMP Mr Paul Simshauser 80,000 - - 80,000 94,523 - 174,523Mr Brian Green - - - - 300 - 300Mr James Brown 25,000 - - 25,000 - - 25,000Ms Julia Oakley - - - - - - -Mr Andrew Kremor - - - - - - -Mr Tom Richardson - - - - - - -

Securities granted as remuneration

No securities were granted as remuneration to the KMP during the financial year and no securities were acquired upon the exercise of options during the financial year.

Directors are not eligible for securities as remuneration.

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31. Related parties disclosures (continued) (b) Key management personnel disclosures (continued)

Loans to key management personnel and their personally related entities from Babcock & Brown Limited

No loans have been made by Babcock & Brown Limited to Key Management Personnel over the periods ending 30 June 2007 and 30 June 2008.

Loans to key management personnel and their personally related entities from BBP

No loans have been made by BBP to Key Management Personnel over the periods ending 30 June 2007 and 30 June 2008.

(c) Other related party transactions

Transactions involving the parent entity

During the financial year, various subsidiaries and associates received management services from BBPL. The total value of the services received was $271,724 (2007: $38,818).

Transactions involving other related parties

Receivables from related parties are disclosed in note 5. Payables to related parties are disclosed in note 13. Transactions were made on normal commercial terms and conditions and under normal market rates.

BBP negotiated the terms of a consultancy arrangement with Independent Director, Len Gill, on normal market terms and conditions. The intent of the arrangement related to the provision of management consultancy services, with a term of 12 months expired on 30 June 2008. Fees were charged per hour, and for the period ended 30 June 2008 the total amount paid in relation to consultancy services was $26,730 (30 June 2007: $13,050). This consultancy arrangement has not been renewed.

Custodian, Responsible Entity and Manager fees and costs

Unless otherwise disclosed, the related party fee information below covers both the Company and the Consolidated Group.

Custodian fee

Under the terms of the Custodian Agreement with Babcock & Brown Asset Holdings Pty Limited (“BBAH”), which is a subsidiary of Babcock & Brown Limited, 0.0125% of the gross asset value of BBPT is payable. During the year ended 30 June 2008, fees paid or payable to the Custodian by the Group were $93,133 (30 June 2007: $42,909).

Responsible entity fees

Under the terms of the Trust Constitution the Responsible Entity, Babcock & Brown Power Services Limited (“BBPS”), which is a subsidiary of Babcock and Brown, is entitled to a management fee of 2% per annum of the value of the gross assets of BBPT. The Responsible Entity has waived its right to receive the management fee referred above in return for the payment to it of a fee of $550,000 per annum, increased by CPI. During the year ended 30 June 2008, fees paid or payable to the Responsible Entity by the Group were $559,350 (30 June 2007: $305,139, as the entitlement relates to only part of a year).

Base fees

The Manager, Babcock & Brown Power Management Pty Ltd (“BBPM”), which is a subsidiary of Babcock & Brown Limited, is entitled to receive Base Fees for services provided under the Management Agreements. The aggregate fees are equal to 1% of the Net Investment Value which is split between BBPL (0.8%) and BBPT (0.2%) under the Management Agreements, less, in the case of BBPT only, the Responsible Entity Fee. The Base Fees are payable to the Manager quarterly in arrears.

In addition, BBPM is entitled to a Manager Expense Amount of $6.7 million in respect of expenses. This fee for the first year has been calculated on a pro rata basis from Allotment Date.

During the year ended 30 June 2008, fees paid or payable to the Manager by the Group were $22.4 million (30 June 2007: $9.6 million).

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31. Related parties disclosures (continued)

(c) Other related party transactions (continued)

Incentive fee

The Manager may be entitled at the end of each calendar year to receive an Incentive Fee of up to 20% of the amount of the excess (if any) of the Stapled Security Return over the Benchmark Return for that year. An Incentive Fee for a particular year will only be payable where the Stapled Security return is greater than the Benchmark return for that year.

The Incentive Fee arrangement payable by BBP to Babcock & Brown under the management agreement has been classified as a financial liability under AASB 139. This requires BBP to make an assessment of the fair value of the arrangement as at 30 June 2008 in respect of the potential fee payable as at 31 December 2008.

The Incentive Fee is based on the relative performance of the BBP unit price to the S&P/ASX 200 Accumulation Index with any incremental outperformance attracting a fee of 20% of that outperformance as disclosed in the PDS and Alinta Scheme booklet.

After considering the various valuation options to determine a balance date liability as required by Accounting Standards, BBP have used a statistical approach to model the correlation of BBP security price performance leading up to 30 June 2008 to the S&P/ASX 200 Accumulation Index over the reporting period. Using this approach determined a fair value of $Nil (30 June 2007: $23.4 million) for the Incentive Fee for the full 2008 year. The incentive fee liability recognised at 30 June 2007 has been reversed to earnings. No incentive fee payments were paid/payable during the year ended 30 June 2008. This approach adopted assumes that the same correlation of performance will be maintained to December 2008.

Financial and Advisory Fees

The Manager is entitled to a fee in relation to services provided in the successful arranging and delivery of financing, for the advisory and financial work performed in the acquisition or disposal of assets.

These fees are generally either capitalised and amortised over the life of the financing arranged, capitalised as part of the acquired assets cost base or is part of the determination in the profit or loss on the sale of an asset.

During the financial year, the Manager:

• Was paid $17.5 million for arranging the BBP Finance Australia facility. This fee has been capitalised and is being amortised of the life of the BBPF facility (being three and five years).

• Charged a base fee of $2.4 million for Braemar and $5.2 million Uranquinty for the buy out of the minority interests in the Braemar and Uranquinty Power project. These fees were capitalised into cost base of the assets

• Was paid a development and financial advisory fee of $7.8 million dollars for the financial close of the Neerabup power project

• Was paid a development and financial advisory fee of $2.7 million dollars for the financial close of the Newman expansion project

• Was paid a facilitation fee of $0.5 million for the acquisition of ONE

• Was paid a development, facilitation and origination fee of $17.9 million for the financial close of the Uranquinty Power Station. This fee was capitalised into cost base of the project

• Was paid a facilitation fee of $29.4 million in respect to the acquisition of the 33% minority interest of AlintaAGL (now known as Alinta). This fee formed part of the cost base of the asset acquired

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32. Financial risk management

(A) Financial risk management objectives

The Group’s activities are exposed to a variety of financial risks, (including market risk, interest rate risk, equity price risk and currency risk), credit risk, and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures.

The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, and ageing analysis for credit risk.

The responsibility for operational risk management resides with the business units and is supported by a central risk group to ensure consistency and oversight in line with policies approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board has endorsed principles for overall risk management, as well as written policies covering specific areas, such as mitigating foreign exchange and interest rate risks.

There have been no significant changes in the types of financial risks; or the Group’s risk management program (including methods used to measure the risks) since the prior year.

(a) Market risk (i) Electricity Pool Price

Group

Exposure to fluctuations in wholesale market electricity prices is minimised through the use of various types of hedging contracts.

The BBP Energy Risk Management Policy prescribes active management of exposures arising from its forecast generation within prescribed limits. In doing so BBP has entered into various hedging contracts with individual market participants. Any unhedged position exposes BBP to variation in its revenue from variations in electricity pool prices.

The hedge portfolio consists predominantly of swaps, caps and option style contracts and non-derivative Power Purchase Agreements. Electricity derivatives are either entered into in separate agreements or arise as embedded derivatives.

The following table summarises the impact of increases/decreases of the relevant forward prices for wholesale market electricity prices for the Group, while all other variables were held constant:

2008 Increase by 10%

$’000 Decrease by 10%

$’000 Net profit/(loss) 10,909 131,297Equity increase/(decrease) (20,331) 16,3482007 Net profit/(loss) (184,882) 29,737Equity increase/(decrease) 469 11,314

Company

There would be no change in either net profit or equity at reporting date for the Company as the Company does not participate in the wholesale electricity market, thus has no exposure to pool prices.

(ii) Interest rate risk

The Group is exposed to interest rate risk on the funds it borrows at floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings, by entering into interest rate swap contracts.

The sensitivity analysis to net profit, (being profit before tax), and equity, have been determined based on the exposure to interest rates at the reporting date and assumes that there are concurrent movements in interest rates and parallel shifts in the yield curves. A sensitivity of 100 basis points has been selected as this is considered reasonable given the current level of short term and long term interest rates.

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32. Financial risk management (continued)

(A) Financial risk management objectives (continued)

Group

At reporting date, if interest rates had been 100 basis points higher/lower and all other variables were held constant, the impact of the Group would be:

2008 Increase by 1%


$’000 Net profit/(loss) 4,596 (4,713) Equity increase/(decrease) 125,085 (137,920) 2007 Net profit/(loss) (2,015) 2,015 Equity increase/(decrease) 29,725 (35,521)

The impact on net profit is largely due to the Group’s exposure to interest rates on its non hedged variable rate borrowings. The impact on equity is due to the effective portion of the change in fair value of derivatives that are designated as cashflow hedges.

Company

At reporting date, if interest rates had been 100 basis points higher/lower and all other variables were held constant, the impact of the Company would be:

2008 Increase by 1%


$’000 Net profit/(loss) (7,137) 7,137Equity increase/(decrease) - -2007 Net profit/(loss) (2,589) 2,589Equity increase/(decrease) - -

(iii) Equity price risk

The Manager may be entitled at the end of each calendar year to receive an Incentive Fee of up to 20% of the amount of the excess (if any) of the Stapled Security Return over the Benchmark Return for that year. An Incentive Fee for a particular year will only be payable where the Stapled Security return is greater than the Benchmark return for that year adjusted for any carry forward deficit.

The Incentive Fee is based on the relative performance of the BBP unit price to the S&P/ASX 200 Accumulation Index with any incremental outperformance attracting a fee of 20% of that outperformance.

Group

The incentive fee was in deficit at 30 June 2008. Any reasonably foreseeable change in the BBP stapled security price over the relevant calculation period would not have resulted in a financial liability being recognised at 30 June 2008.

Company

The impact to the net profit and equity of the Company would be the same as that for the Group.

(iv) Foreign exchange risk

BBP undertakes certain transactions denominated in foreign currencies, related to capital expenditure, which result in exposure to exchange rate fluctuations. Exchange rate exposures are managed utilising forward foreign exchange contracts transacted by Group Treasury.

For unhedged foreign exchange exposures, there would be no material impact on either the Group or Company net profit or equity as a result of a 10% change in the Australian dollar against the USD with all other variables held constant as at reporting date.

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(b) Credit risk

Credit risk refers to the loss that BBP would incur if a debtor or other counterparty fails to perform under its contractual obligations. The carrying amounts of financial assets recognised in the balance sheet best represents the Group’s and the Company’s maximum exposure to credit risk at reporting date. BBP seeks to limit its exposure to credit risks as follows:

• conducting appropriate due diligence on counterparties before entering into arrangements with them

• depending on the outcome of the credit assessment, obtaining collateral with a value of excess of the counterparties’ obligations to the Group – providing a ‘margin of safety’ against loss

• for derivative counterparties, using only high credit quality financial institutions. The Group also utilises ISDA agreements with all derivative counterparties in order to limit the exposure to credit risk.

The Group has no significant concentrations of credit risk. The credit of all financial assets are consistently monitored in order to identify any potential adverse changes in the credit quality.

Concentrations of credit risk

The Group minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a large number of customers from across the range of business segments in which the Group operates, such that there are no significant concentrations of credit risk within the Group at 30 June 2008.

Credit risk in trade debtors is managed through setting normal payment terms of 14 days and through continual risk assessment of customers with material balances. Credit risk in retail trade debtors is managed through system driven credit management process. The process commences after day 14. There are four stages of customer contact resulting in disconnection as a last resort.

Group

The following financial assets are past due as at reporting date, but not considered to be impaired:

2008 Days Overdue Collateral Held

Loans and receivables 1-30 $’000

31-60 $’000

61-90 $’000

91-120 $’000

Over 120

$’000

Overdue balances

description $’000 2008 19,083 2,840 1,394 428 5,588 NA -2007 33 17 77 693 2,045 NA -

There are no significant financial assets that have had renegotiated terms that would otherwise, without that renegotiation, have been past due or impaired.

Company

For the Company, there are no balances that are either overdue, or would be overdue if not renegotiated.

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(c) Liquidity risk

The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows.

The following tables detail the remaining contractual maturity for its financial liabilities, on an undiscounted basis.

Group

Financial Liabilities

Less than 1 year $’000

1 to 5 years$’000

5+ years$’000

Discount $’000

Total $’000

Trade Payables 2008 102,858 - - - 102,858 2007 71,248 - - - 71,248Other Payables 2008 254,017 - - - 254,017 2007 119,072 11,298 - - 130,370Interest Bearing Liabilities 2008 1,620,346 3,597,717 585,325 (1,408,563) 4,394,825 2007 97,692 926,128 767,882 (521,751) 1,269,951Interest rate SWAPs (i) 2008 (42,984) (126,848) (7,273) 30,308 (146,797) 2007 (2,986) (20,662) (14,025) 2,211 (35,439)Electricity derivatives 2008 5,650 4,859 - - 10,509 2007 - 3,062 - - 3,062Foreign exchange contracts 2008 12,612 134 - - 12,746 2007 - 1,840 - - 1,840

Company

Financial Liabilities

Less than 1 year $’000

1 to 5 years$’000

5+ years$’000

Discount $’000

Total $’000

Trade Payables 2008 22,883 - - 22,883 2007 281 - - 281Other Payables 2008 6,886 - - 6,886 2007 25,087 - - 25,087Interest Bearing Liabilities 2008 621,211 797,911 414,514 (392,274) 1,441,362 2007 150,408 396,685 143,248 (114,565) 575,776Interest rate SWAPs 2008 - - - - - 2007 - - - - -Electricity derivatives 2008 - - - - - 2007 - - - - -Foreign exchange contracts 2008 - - - - - 2007 - - - - -

(i) Interest swap difference payments/(receipts) are included in the table about as they form an integral part of the Group’s liquidity and interest rate risk management policies.

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(B) Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements.

(C) Fair value of financial instruments

The directors are of the opinion that the carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair values (2007: fair value).

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

• the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices;

• the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis;

• the fair value of derivative instruments, included in hedging assets and liabilities, are calculated using quoted prices. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The entity uses a variety of methods, such as estimated discounted cash flows, and makes assumptions that are based on market conditions existing at each balance date. These amounts reflect the estimated amount which the Group would be required to pay or receive to terminate (or replace) the contracts at their current market rates at the reporting date.

(D) Capital risk management

The Group manages its capital so that it will be able to continue as a going concern while maximising the return to stakeholders through an appropriate mix of debt and equity. The capital structure of the Group as at balance date consists of total corporate facilities, as listed in Note 25(c), and equity, comprising issued capital, reserves, and retained earnings as listed in Notes 20, 21 and 22. The quantitative analysis of each of these categories of capital is provided in their respective Notes to the Accounts.

The Board of Directors is undertaking a review of the Group’s capital structure with assistance from independent third parties. The strategic review is to determine the optimal capital structure and the appropriate options to achieve this which maximises value for security holders. As part of this process the distribution policy is under review

(E) Hedging instruments

(i) Electricity derivatives

While all derivatives are entered into for the purposes of hedging, only those derivatives that meet the strict criteria of effective hedges can be designated as cashflow hedges for accounting purposes. Gains and losses on cash flow hedges are recognised in the cash flow hedge reserve in equity on electricity derivatives and will be continuously released to the income statement in each period in which the underlying purchase or sale transactions are recognised in the income statement.

Hedge maturity profile (years)

Nature

Fair value of derivatives

30 June 2008

Asset / (Liability)

$’000

Fair value in

cash flow

hedges$’000

Fair value not in hedge relationship

$’000

Impact on income

statement loss/(gain)

$’000

Less than

1 year$’000

1 to 5 years $’000

5+ years$’000

Total $’000

Electricity derivatives 191,423 19,554 171,869 125,243 34,681 95,846 60,896 191,423F

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(E) Hedging instruments (continued)

(ii) Interest rate swap contracts

Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate 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 outstanding balances at the end of the financial year.

Interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated and effective as cash flow hedges.

Average contract fixed rate Notional principal amount Fair value

Fixed swaps 2008

% 2007

% 2008 $’000

2007 $’000

2008 $’000

2007 $’000

Less than 1 year 6.74 6.15 216,210 25,000 3,737 139 1-5 years 6.37 6.28 2,039,290 19,036 58,085 1,089 >5yrs 6.66 6.30 2,146,603 573,646 84,975 34,211

146,797 35,439

(iii) Interest rate swaption contracts

As at 30 June 2008, BBP did not have any purchased options over interest rate swaps (swaptions).

Average contract fixed rate Notional principal amount Fair value Outstanding options over floating for fixed contracts

2008 %

2007 %

2008 $’000

2007 $’000

2008 $’000

2007 $’000

Less than 1 year NIL 6.63 NIL 685,000 NIL 7,466

Hedge maturity profile (years)

Nature

Fair value of derivatives

30 June 2007

Asset / (Liability)

$’000

Fair value in

cash flow

hedges$’000

Fair value not in hedge relationship

$’000

Impact on income

statement loss/(gain)

$’000

Less than

1 year$’000

1 to 5 years $’000

5+ years$’000

Total $’000

Electricity derivatives 107,993 22,494 85,499 53,881 - 33,092 74,901 107,993

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(E) Hedging instruments (continued)

(iv) Foreign currency risk management

BBP undertakes certain transactions denominated in foreign currencies, related to capital expenditure, which result in exposure to exchange rate fluctuations. Exchange rate exposures are managed utilising forward foreign exchange contracts.

Notional principal amount Outstanding forward exchange contracts as at 30 June 2008

Weighted average rate $’000 $’000

Fair value $’000

Contract to sell AUD, Buy USD AUD USD

Less than 1 year 0.8727 (43,827) 38,248 (3,413)

From 1 to 5 years 0.8244 (2,455) 2,024 (128) Contract to sell AUD, Buy EUR AUD EUR

Less than 1 year 0.6147 (43,839) 26,946 767

From 1 to 5 years 0.5597 (268) 150 (5) Contract to sell AUD, Buy JPY AUD JPY

Less than 1 year 92.97 (118,108) 10,980,405 (9,199)

From 1 to 5 years 94.78 (13,260) 1,256,761 40

Notional principal amount Outstanding forward exchange contracts as at 30 June 2007

Weighted average rate $’000 $’000

Fair value $’000

Contract to sell AUD, Buy USD AUD USD

Less than 1 year 0.7391 (859) 635 (91) Contract to sell AUD, Buy JPY AUD JPY Less than 1 year 81.22 (9,488) 770,596 (1,749)

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33. Material interests in entities which are not controlled entities

Ownership

interest held

Contribution to net

profit/(loss) after tax

Ownership interest held

Contribution to net

profit/(loss) after tax

Name of equity accounted associates, joint ventures and other investments

Year ended30 June

2008 %

Year ended 30 June

2008 $'000

Year ended 30 June

2007 %

Year ended30 June

2007 $'000

Babcock & Brown Power Oakey Pty Ltd 50 5,099 50 4,500 ERM Power Investments Pty Ltd 40 816 40 1,780

5,915 6,280

The Group has entered into a Share Acquisition Deed with ERM Power Pty Ltd, the other 60% equity holder in ERM Investments Pty Ltd (ERMPI), to acquire its 40% investment in ERPMI at a purchase price determined by an independent expert. The option expires 30 days after the completion of the Kwinana Power Station, currently scheduled for December 2008. Should this option be exercised, it would reduce the Group’s ownership interest in Kwinana from 70% to 50%.

34. Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms.


2008 $’000

2007 $’000

2008 $’000

2007 $’000

(a) Audit services

PricewaterhouseCoopers (PwC) Australian firm Audit and review of financial reports 1,434 959 1,434 406 Other audit work under the Corporations Act 2001 28 - - - Non PwC audit firms for the audit or review of financial reports of any entity in the Group (i) 350 78 33 -

Total remuneration for audit services 1,812 1,037 1,467 406

(i) This amount includes the review of the completion accounts by Alinta’s previous auditors as well as the statutory audit and review costs of subsidiaries not audited by PwC.

(b) Non-audit services


2008 $’000

2007 $’000

2008 $’000

2007 $’000

PricewaterhouseCoopers Australian firm Due diligence services 792 15 491 - Legal services (ii) 1,411 - - - Tax services 101 499 104 - Other 166 Non PricewaterhouseCoopers audit firms - - Due diligence services (iii) 2,260 2,090 2,260 - Tax compliance services 867 326 834 220 Transition consulting and other services 1,304 113 1,287 70 Total remuneration for non-audit services 6,901 3,043 4,976 290

(ii) This amount represents fees paid to PwC for legal services in relation to Redbank. PwC was engaged by the previous owner of Redbank and does not perform the statutory audit of this asset in accordance with the Groups auditor independence policy. The fees are subsequently recovered from the previous owners.

(iii) This amount includes costs associated with the Alinta transaction including transitional and integration work, risk compliance reviews and provision of outsourced internal audit services.

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35. Net assets per security

30 June 2008 30 June 2007

Net tangible assets per stapled security (1.05) 2.02

Net assets per stapled security 1.92 2.52

At 30 June 2008, BBP had negative net tangible assets per security of $1.05. This is attributable to the acquisition of the Alinta retail business during the year. The nature, and value, of the retail business is in its brand position as the pre-eminent gas retailer and its customer base (both existing and potential future growth). This business inherently is different to the existing power generation business as it relies on these characteristics to produce cash flows as compared to tangible assets such as power plants that characterise the power generation business. While the acquired intangibles and goodwill of the retail business in particular represent future economic value to the Group, they are deducted for the purposes of calculating net tangible assets per security. Net assets per security at 30 June 2008 was $1.92.

36. Contingent assets and liabilities

Contingent liabilities

Reactive Capital

As a result of the Alinta acquisition, the Group is now responsible for the management and eventual resolution of several matters. One matter currently under discussion is between Western Power and Alinta in respect to connection support relating to the co-generation plants. The key issue is whether the responsibility hence cost for system stability and reliability is for the account of the developer and manager of new power plants (in this case Alinta) or is a network charge that should be reflected in the network tariffs which support the electricity SWIS network's operation.

Price Determinations

As a normal part of an energy company, there are prescribed contractual price determinations at regular intervals. These price reviews are normal in gas contracts and any retrospective adjustments arising out of the process would immediately crystalise into a liability. Contingent assets

There are no material contingent assets in existence at the date of this report.

37. Subsequent events

Sale of Uranquinty On 4 July 2008, BBP sold its 100% interest in the 640MW Uranquinty Power Station near Wagga Wagga in southern NSW to Origin for an on-completion value of $700 million. Following the sale, the net proceeds of $159 million were used to repay part of the outstanding Babcock & Brown Power Holdings’ (BBPH) corporate debt facility. In addition, the Uranquinty construction debt facility of $510 million of which $404 million was drawn at 30 June 2008, has been assumed by Origin. The sale will generate a pre-tax accounting profit on disposal of approximately $104 million in FY09.

Sale of Ecogen On 18 July 2008, BBP announced that it had agreed to sell its 73% equity stake in the 959MW Ecogen power generation business (Newport and Jeeralang power stations) in Victoria to Industry Funds Management (“IFM”). The sale was completed on 5 August 2008 with the net proceeds of $79 million were used to repay part of the outstanding BBPH corporate debt facility. In addition, the Ecogen debt facility of $130 million (as at 30 June 2008) has been assumed by IFM. The sale will generate a pre-tax accounting profit on disposal of approximately $8 million in FY09.

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37. Subsequent events (continued)

Sale of Tamar On 18 August 2008 BBP announced the signing of a Heads of Agreement with the Tasmanian Government for the sale of the Tamar Power Project, which is currently under construction. The sale is contingent on several conditions precedent, including ACCC approvals and Royal Assent of authorising legislation. The construction asset has been written down to its recoverable amount after taking into account the release of the onerous contract provision associated with the project. (Refer to Note 14 for details on the onerous provision). As such, there will be no gain/loss on sale in FY09. Proceeds of approximately $100 million (before transaction costs) will be used to repay corporate debt facilities. Emissions Trading Scheme In July 2008, the Federal Government issued the Green Paper outlining the approach to the design of a national emissions trading scheme (Carbon Pollution Reduction Scheme). The paper identified the key design decisions required, highlighting alternative approaches, the key questions to be resolved and indicates preferences amongst the options. Broad business and community stakeholder feedback is currently being sought to assist the Federal Government in the decisions that will shape the final scheme design. The government is producing a “White Paper” incorporating its decisions and an exposure draft of the legislation for Australia’s Carbon Pollution Reduction Scheme is expected to be released by the end of 2008. The Group notes it has both gas and coal fired generators in various markets and regions. Until further clarity is available as to the exact nature of the final scheme to be implemented, there is no certainty as to the positive or negative impacts to the Group.

The Government plans to commence the scheme by 2010. The implementation of the scheme may give rise to further onerous contracts depending on the impact of emissions trading will have on energy prices, in particular the cost of gas.

38. Additional information Babcock & Brown Power is a listed stapled security. Babcock & Brown Power Limited is incorporated and operates in Australia.

Registered Office of the Company Principal place of business

Level 23 Level 23 The Chifley Tower The Chifley Tower 2 Chifley Square 2 Chifley Square Sydney, New South Wales 2000 Sydney, New South Wales 2000 Telephone: +61 2 9229 1800 Telephone: +61 2 9229 1800

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This report is based on accounts to which one of the following applies.

The accounts have been audited. The accounts have been subject to review.

The accounts are in the process of being audited or subject to review.

The accounts have not yet been audited or reviewed.

Description of likely dispute or qualification if the accounts have not yet been audited or subject to review or are in the process of being audited or subjected to review:

Not applicable.

Description of dispute or qualification if the accounts have been audited or subjected to review:

None.

Unquoted equity securities shareholdings greater than 20%

NIL

Other stock exchanges on which securities are quoted

NIL

Company secretary

Mr John Remedios

Registered office Principal administration office Level 23, The Chifley Tower Level 23, The Chifley Tower 2 Chifley Square 2 Chifley Square Sydney NSW 2000 Sydney NSW 2000 Telephone: +61 2 9229 1800 Telephone: +61 2 9229 1800 Share registry Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Telephone: 1800 883 072 International: +61 2 8280 7183 Fax: +61 2 9287 0303

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Documents

ASX Release For personal use only2008/08/29 · Consolidated EBITDA for the twelve months to 30 June 2008 was $331.0 million (June 2007: $117.6 million), which incorporates the earnings