This is the annual report of WEL Networks Limited
Dated this 20th day of May 2008 Signed for and on behalf of the Board of Directors
RODGER FISHER JOHN SPENCER Chairman Director
WEL Networks Ltd is in the business of supplying electricity infrastructure, delivering energy to over 81,000 homes, businesses and organisations throughout the Waikato region. Our network incorporates more than 5,000 kilometres of lines and has an annual throughput of over 1,130GWh. WEL Networks Ltd has total assets in excess of $330 million. The company employs over 160 staff and has bases from Maramarua to Makomako, with its headquarters in Hamilton city. WEL Networks Ltd operates under strong commercial principles and is fortunate to have in place a highly-skilled and experienced Board of Directors. Chaired by Rodger Fisher, the Board brings substantial business acumen and applies high standards of corporate governance. WEL Networks Ltd is committed to providing reliable power at good prices and is focused on being a world class supplier of energy services. This commitment was reflected recently when the Commerce Commission ranked WEL Networks Ltd second out of 28 in a review of New Zealand’s network companies’ Asset Management Plans. WEL Networks Ltd is taking steps to help achieve the national target of 90% renewable energy generation by 2025. The company is currently exploring alternative power generation to complement its core business. It operates a 1MW landfill gas generation plant at Horotiu, and is working through the consent stages of a $200 million wind park project at Te Uku. WEL Networks Ltd has one shareholder, the WEL Energy Trust. The capital beneficiaries are the region’s local councils; Hamilton City Council, Waikato District Council and Waipa District Council. The Trust has tasked the company with prudently managing its assets at the lowest possible cost to its customers. Consequently, the company introduced an annual discount programme, resulting in discounts of approximately $104 million (incl. GST) to customers over the past six years.
Financial Highlights
WEL Networks Ltd (WEL) produced another very good result for the financial year ended 31 March 2008 with profit of $15.8 million (this includes a one-off profit of $950K from the sale of WEL House) (2006/07 $15.1 million). WEL has moved to an annual revaluation of the distribution assets which has resulted in a $13 million increase in assets for the year ended 31 March 2008. All numbers are adjusted for the adoption of NZ IFRS. Adoption of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS)
WEL adopted NZ IFRS for the financial reporting period beginning 1 April 2007. The new reporting standards change how certain asset, liability, revenue and expense items are treated. We have described the significant impacts of the adoption of NZ IFRS in the notes to our financial statements. We have included a full set of new accounting policies that reflect the impact of adopting these new accounting standards. Prices
Depreciation increased during the year by $4 million as a result of the 31 March 2007 asset revaluation process where the asset base of WEL increased by $50 million, taking the total to $334 million. We continue to see significant increases in labour and material costs, with the cost of carrying out capital works increasing by over 8%. With lower growth than forecast, even though we experienced a large increase in peak loads on the network, WEL was forced to raise its prices for the first time in 9 years. A price increase of 6.2% was introduced effective from 1 October 2007.
Transpower reached a settlement with the Commerce Commission and has advised its price increases effective from 1 April 2008. For WEL the Transpower cost increase is 17.8%. While this is lower than originally proposed by Transpower it is still very significant and we have had to pass this on, it is included in our published tariffs, effective 1 April 2008. This cost pass through represents an average increase in lines charges of 3.4%. Discounts
Following consultation with the WEL Energy Trust, the Company increased the discount by 3% to an average of $275 per household, with the total paid out reaching $22.9 million (incl. GST). The discount was paid from April 2008. Renewable Generation Developments
In addition to the 1MW landfill gas generation plant that we currently operate, WEL continues to investigate renewable energy projects within the Waikato area. Our largest initiative to date is the proposed Te Uku Wind Park. The hearing on our resource consent application has now been completed and we are waiting for the Commissioners’ decision. While support is very high for this project we do expect that some objectors will appeal a favourable decision. We continue to believe in the appropriateness of this project and the significant benefits that will result from its operation. The project will strengthen the security of supply to Raglan and the western Waikato. Once implemented the Te Uku Wind Park alone will help New Zealand to avoid approximately 190,000 tonnes per annum of carbon emissions.
The economics of wind generation continue to be sensitive to equipment costs and the value of carbon emissions. WEL will be re-evaluating the economics prior to making a final decision to proceed. Regulatory Issues
This year has seen the Commerce Commission commence its process leading to the Threshold Reset to be effective from 1 April 2009. This is the process that will set the rules applying to price and quality for Electricity Lines Businesses (ELB’s) for the next 5 year period. At the same time the Ministry of Economic Development (MED) has been continuing its review of the Commerce Act parts 4, 4A and 5 which are the parts that currently apply to ELB’s and under which the current thresholds have been set.
WEL led submissions to the MED to argue that trust-owned lines businesses have very strong incentives to meet the needs of their communities and consumers. The argument was that local community pressure will provide a more efficient and lower cost mechanism of ensuring the behaviour of lines companies is in the best interest of the local customers than central government regulation. We have been successful in this approach being included in the draft bill which is in the process of going to the Select Committee. The WEL Energy Trust
I am pleased to report that the company has continued to maintain an excellent relationship with the WEL Energy Trust and I thank the Trustees for their support during this year. Acknowledgements
In September Brian Walsh, who had been a Director since 1999, retired from the Board and has been replaced by Margaret Devlin. I take this opportunity to thank Brian for his contribution, both as a Director and also as Chairman of the Audit Committee and welcome Margaret to the Board. Chief Executive
With the resignation of Mike Underhill in April 2007 Dr Julian Elder was appointed Chief Executive. Julian has settled into the job well and I thank him and his management team and staff for a very good performance during the 2007/08 financial year. Looking Forward
The Waikato has experienced very strong economic growth in recent years. While this has slowed to some degree in the past few months, WEL needs to continue to make significant investment in the network.
We will continue to focus on improving reliability of supply, and we are committed to ensuring WEL continues to deliver a quality service to all our customers, while maintaining a good level of profitability. Operational Highlights
My first year has been an interesting and challenging one. I am pleased with the transition from Mike Underhill and Kevin Palmer to myself, David Smith and John van Brink, with Russell Shaw providing great support as the point of continuity on the Executive Team. It has been a pleasure to work with the excellent staff at WEL and with the highly capable and experienced Board led by our Chairman, Rodger Fisher.
In this annual report we have included a number of news items providing information on what the business and our staff have been up to during the year. Health and Safety of our staff and the public continues to be a key focus. We have had many incidents relating to people stealing cable and putting themselves at risk of being killed through electrocution. We have issued a number of reports and warnings through various media to highlight the risks around electrical cables and lines. Reliability
While our SAIDI figure for the year of 80 minutes is an improvement over last year’s result of 99 minutes we have seen an increasing trend of car accidents where our poles and lines have been damaged. These are a significant cost, which we recover a large proportion of from the driver involved, and, depending on what assets are involved, can result in power outages lasting up to eight hours. Options to improve quality and security of supply are part of our ongoing business improvement processes. Growth
The increase in energy passing through our network was lower than expected at 2.4%. However we still saw large increases in peak demand. This continues to reinforce the need to invest in new capacity within the existing network as well as servicing new developments and maintaining system reliability. Costs and Efficiency
We, as with most infrastructure companies, continue to face rapidly increasing costs, transformers increased in cost by 65% in one 18 month period. This is forcing us to raise prices as we are in a period of quite high capital expenditure. We continue to focus on driving efficiencies and have recently completed a redesign of internal processes to reduce cost and improve service delivery. Service Delivery
It is important to “keep the lights on” and a critical part of this is restoring the power as quickly as possible after an event. To do this our staff respond at any time of the day and in any conditions, often the work they carry out is dangerous. Since in-sourcing Field Services we have seen an improvement in our response times and in customer compliments which is a real credit to our staff. Our goal is to continue to improve in these areas. The Coming Year
There are a number of significant things happening for WEL in the 2008/09 year. Firstly we will be moving to our new location in Maui Street. This promises to provide a much better working environment, particularly for the field services and distribution centre functions. WEL has been operating out of three separate main locations with none of them being ideal for optimum operating efficiency.
One of the key tools we use to allow us to operate the network efficiently and safely is our SCADA system in the control room. This system is now over 15 years old and we have been experiencing increasing problems with it, including the reduced availability of support. A replacement programme will commence. This will also allow us to improve our response times to outages.
We will hear about the outcome of our resource consent application for the Te Uku Wind Park and expect to be making a decision on the development of that project. We continue to investigate other renewable energy generation projects and are interested in demand side initiatives as well as distributed generation as ways of reducing the cost of energy to consumers.
The Commerce Commission’s Threshold Reset process and the Ministry for Economic Development’s proposed amendments to the Commerce Act itself and to the Electricity Industry Reform Act will require considerable effort. It is important that we participate in these processes and ensure that they do not negatively impact on our business going forward.
RODGER FISHER (Chairman)
Rodger is a Management Consultant, and was previously Managing Director, from 1987 to 1999, of the Owens Group Limited. He is Chairman of Lyttelton Port Company Limited and Eurotech Group Limited. Rodger is also a Director of Tenon Limited (formerly Fletcher Challenge Forests Limited) and The Property Group Limited. Rodger is a Fellow of the Chartered Institute of Secretaries, the Chartered Institute of Transport, the Institute of Directors and the New Zealand Institute of Management. Rodger was appointed to the Board as Deputy Chairman in 1999 and was appointed to the role of Chairman in 2005.
JEFF WILLIAMS
Jeff was the Chief Executive of TrustPower Limited for nine years from 1992 to 2001. Whilst leading that company he oversaw the transition from a power board to a publicly listed company with a successful generation portfolio and related customer base. Prior to that Jeff was Managing Director of ABB (NZ) Limited after having managed a number of ABB subsidiary companies, including David Fraser Limited and ABB Transformers. Jeff is a Director of Comvita New Zealand Limited, a number of private companies and runs a business consultancy company. Jeff was appointed to the Board in 2002.
JOHN BIRCH
John spent his early career managing major dairy and food industry capital projects. Until 2000 John was a shareholder and Director of McClunie Birch Limited (MBL), this company grew over a period of ten years to become New Zealand’s largest provider of process equipment and solutions to the dairy and food industries. During this time John was heavily involved in both the growth of the parent company, the development of off- shore subsidiaries and the acquisition of manufacturing operations. Subsequent to exiting MBL, John became a Director and Chairman of Innovation Waikato Limited, the organisation responsible for the establishment and operation of the proposed Innovation Park at Ruakura. John is a Director of Birch Holdings Limited, Habitat for Humanity (Waikato) Limited, Central Capital Management Limited, Waikato Regional Airport Limited and Chairman and Director of Combined Technologies Limited. John was appointed to the Board in 2002.
HON RICHARD PREBBLE
Richard is well known for his active role in New Zealand politics, which has spanned several decades. He retired as the leader of the ACT Party in 2005. His time in Parliament included his role as Minister of State Owned Enterprises. Richard by profession is a lawyer. He is now a professional Director being a Director and shareholder of Mainfreight, Deputy Chairman of McConnell Limited, and Chairman and Director of a number of private and family companies. Richard is a Fellow of the Chartered Institute of Transport. Richard was appointed to the Board in 2005.
JOHN SPENCER
John is Chairman of Tainui Group Holdings Limited, Telfer Young Limited and AsureQuality Limited. He is Deputy Chairman of Solid Energy Limited, a Director of Tower Limited, Waikato Regional Airport Limited, Allied Nationwide Finance Limited and Touchstone Capital Partners Limited. He was the Chief Executive of New Zealand Dairy Group prior to the formation of Fonterra, and has held a number of senior management positions in New Zealand and overseas. He is a Fellow of the Institute of Chartered Accountants. John was appointed to the Board in 2005.
MARGARET DEVLIN
Margaret has had significant experience in both the retail and infrastructure sectors in the UK and has held a number of senior management and Director positions in the water industry. She represented the water industry at local, National and European level, having contributed to the development of the water industry agenda through effective stakeholder management with Government, regulators and investors. Margaret is currently a Director of EPIC Limited, Metrowater Limited, Indepen Limited and the New Zealand Water and Wastes Association and is Chairman of CF Reese Limited and Filtra Limited (Australia). She is an accredited member of the Institute of Directors. Margaret was appointed to the Board in October 2007. Board of Directors The Board is appointed by the shareholder and is responsible for setting and monitoring the direction of the Company. It delegates day to day management of the Company to the Chief Executive. The Board operates in accordance with the WEL Networks Corporate Governance Charter, adopted in October 2005 and amended in October 2007 to reflect management changes. Additionally the Board endorses the principles set out in the Code of Proper Conduct for Directors approved and adopted by the Institute of Directors in New Zealand (Inc). The Board receives monthly reports from management and meets at least 8 times during each financial year. The Constitution specifies that there shall be no less than 4 and no more than 6 Directors of the Company at any time. The Board has two operating committees: (a) The Remuneration Committee; assists the Board to develop the Company’s remuneration policy, set the Chief Executive’s remuneration package and all other matters relevant to ensuring a committed and competent workforce; and (b) The Audit and Risk Committee; oversees the Company’s financial statements, treasury policy, preparation of the Annual Report, liaises with the external auditors and reviews internal and external controls relevant to financial reporting and associated matters, operating under a charter approved by the Board. Risk Management The Board oversees the Executive Risk Management Committee which reports directly to the Audit Committee. This Committee ensures that appropriate risks are identified and mitigated where possible and that all policies and procedures consider risks when drafted. In addition to normal Risk Management practices, key controls are reviewed to ensure they are effective in managing or mitigating known risks. Regulatory Compliance The Company has a programme in place to review compliance on an ongoing basis across all aspects of its business. In the 2007/08 year a review was completed in the area of electricity market compliance. Reviews of H R policies and processes and trade practices law have commenced. These reviews result in improved practices within the business. Environmental and Health and Safety Issues
The Board recognises the importance of environmental and health and safety issues. It is committed to the highest levels of performance in all areas of the Company. Health and safety and environmental management programmes have been adopted by the Company. The Company also seeks to assess and improve its performance and standards in these areas, to use energy and other natural resources efficiently, and requires the adoption of similar standards by its suppliers and contractors. Indemnification and Insurance of Officers and Directors The Company is entitled to indemnify Directors and officers and to effect insurance for them in respect of certain liabilities arising from their positions (excluding claims by the Company or a related party of the Company). The indemnities and insurances must be given and effected in accordance with the Constitution and the Companies Act. Information Used by Directors Information relating to items to be discussed by the Directors at a meeting is provided to Directors prior to the meeting. Directors must not use information received in their capacity as Director which would not otherwise be available to them without the prior consent of the Board. Directors are entitled to seek independent professional advice to assist them to meet their responsibilities. Conflicts of Interest Directors must identify any potential conflict of interest they may have in dealing with the Company’s affairs. Where a conflict arises, a Director may still attend a Directors’ meeting, but may not be counted in the quorum, partake in the debate or vote on a resolution or affix the seal to any document in which he is interested. Interests Register The Company maintains an interests register to record particulars of transactions or matters involving Directors. It is available for inspection at the Company’s registered office. Directors’ Disclosures of Interest
The following entries have been made in the interests register for the year ended 31 March 2008:
Hon Richard Prebble – As Director of Reef Bulk Fuels Limited and as Director of Tongariro Resources Limited, as Director of McConnell Developments Holdings Limited and as Director of The N.Z. House Company Limited.
John Spencer – As Chairman of AsureQuality Limited, as Director of Touchstone Three Limited, as Director of Touchstone Four Limited, as Director of Touchstone Five Limited, as Director of Touchstone Six Limited and as Director of Waikato-Tainui Fisheries Limited.
Margaret Devlin – As Director of Metrowater Limited, as Director of Indepen NZ Limited, as Director of Equity Partners Infrastructure Company No. 1 Limited, and as Director of Equity Partners Infrastructure Company No. 1 Investments Limited.
John Birch – As Director of Birch Mollard Capital Management Limited, as Director of Titanium Park Limited, as Director of Waikato Regional Airport Limited, as Director of Central Capital Management Limited, as Chairman and Director of Combined Technologies Limited.
Julian Elder Chief Executive
Julian completed a PhD in electrical engineering in the areas of Low Cost Power Generating Technologies.
Immediately prior to joining WEL he was the Chief Engineer for Watercare Services Ltd in Auckland for two years and prior to that the Asia Pacific Manager for CH2M HILL, a global infra-structure consulting, construction and operations company. Prior to this Julian has had a very active twenty years with a range of consulting firms, designing and managing hydro and other generation projects; 110kV and other subtransmission lines and commercial and industrial installations. Julian has also managed major water and wastewater projects.
He is also an enthusiastic glider pilot and was the 2006 national 18m glider champion.
Julian is married to Janet and has a son and a daughter.
Russell Shaw General Manager Operations
Russell is General Manager for Operations at WEL Networks. He is responsible for the safety, planning, development, and operational control of the network. He is also responsible for the delivery of network capital and maintenance programmes including the procurement of equipment. In addition to this he leads WEL’s internal Field Services group of over 100 staff who complete maintenance and capital works on WEL's network as well as providing services to other asset owners.
Prior to joining WEL Russell was a partner with UMS Group, a global utility management consulting group. During his seven years at UMS Group he consulted on performance improvement to over 100 water and electricity utilities in the UK, US and Australasia. Before joining UMS Group Russell undertook various roles as an engineer at East Midlands Electricity, a regional Electricity Company serving 2.2 million customers in the UK based in Nottingham, England.
Russell is a Chartered Electrical Engineer, a member of the IET and IPENZ. Russell joined WEL in 2003.
John van Brink General Manager Development and Regulatory
John joined WEL Networks in September 2007, taking on responsibilities for regulatory compliance, pricing and revenue assurance, legal, human resources, strategy, risk and business development. John’s extensive background in the electricity industry enables him to drive the development of new business initiatives whilst ensuring the integrity of the core distribution business is maintained.
Prior to joining WEL John headed up the Auckland power group of Beca, responsible for the growth and commercial success of the group’s engineering consultancy activities, managing contracts and relationships with transmission, distribution, and industrial clients in New Zealand, Australia and Indonesia. Previously, John held senior and executive management roles at UnitedNetworks and Vector, being responsible for commercial activities of the electricity and gas distribution businesses and participating in a number of acquisitions and divestments. This included the project management of Vector’s acquisition of NGC in 2005.
John is a chartered engineer and a member of the IET.
David Smith Chief Financial Officer
David joined WEL Networks in the role of Chief Financial Officer in July 2007. David’s responsibilities include the management and control of the finance, administration and information technology teams within WEL Networks. He also has responsibility for property management, including the development of the new offices in Te Rapa, and insurance aspects of the business.
Prior to his appointment he was based in Auckland for 11 years as Financial Controller with Watercare Services Limited. Watercare Services Limited was the network infrastructure company responsible for the delivery of water and wastewater services to the greater Auckland region. During his time at Watercare he was involved in all financial and funding aspects for a number of significant capital projects. David was also a key member of the teams that delivered many award winning annual reports for Watercare over the years. Prior to his time with Watercare David held a number of senior financial roles within the Fletcher Challenge Forests group of companies. 0:1 / Garry Mallett [Chairman] 0:2 / Tania Hennebry [Deputy Chairman] 0:3 / Mark Bunting 0:4 / Brad Chibnall 0:5 / John Easto 0:6 / David Kneebone 0:7 / Steve McLennan 0:8 / Michael West
PREPARATION WORK FOR V8s
WEL worked with the Hamilton City Council to prepare the track area for the V8 event. We re-engineered the electrical supply to the area, moving cables and transformers. The project resulted in strengthened supply to the local area as well as providing supply to the Pit Lane area to supplement generators brought in for the event. Further work will take place in subsequent years to support the on-going hosting of the event.
Chief Executive Julian Elder and Commercial Manager David Wharmby receiving the Innovation Service Environmental Award.
SUSTAINABLE BUSINESS NETWORK AWARDS 2007
The Get Sustainable Challenge Business Awards 2007 took place on Thursday 20 September. The Innovation Service Environmental Award was won by WEL Networks for its WEL Green Energy Joint Venture. Whilst the technology wasn't new, the judges felt that the company had clearly demonstrated innovation through its desire to move beyond its core business. This joint venture project was set up to construct and operate facilities to generate renewable electricity from collected landfill gas at the Horotiu landfill. The project has resulted in the generation of 8GWh per year of renewable energy and helps to minimise the emission of harmful greenhouse gases. The project has generated approximately 21GWh of electricity to date and through the displacement of fossil fuelled generation alone this is equivalent to a reduction of over 13,000 tonnes of CO2 into the atmosphere.
WEL Networks also sponsored two awards in the Innovation Design Category; the Product Design Award and the Building Design Award.
SPRINGHILL PRISON
Preparation for the Springhill Prison site to the north of Hamilton required a Strengthening of supply for the Hamilton new 11kV network to be installed along with the provision of a 1250kW on-site 400 V8 event included a new transformer generator. This was a major project which interlinks with work that is now on the corner of Seddon and Mill Streets underway for the reticulation of the Hampton Downs Motor Park. The first inmates arrived at the newly completed prison in October 2007. FAULT RESPONSE
On the 11th and 12th of July 2007 a major storm hit the North Island. With an unusually large number of customers affected we doubled the shift staffing levels in our control room, and utilised every available person in the field to restore supply as quickly as possible. We credit a number of past reliability projects with significantly improved restoration times for our affected customers, and, although we still suffered a high reliability impact (SAIDI minutes lost), we were able to calculate that we saved 3.87 SAIDI minutes as a direct result of having earlier undertaken these projects.
All of our affected customers had supply restored to them well within one day.
RELATIONSHIP BETWEEN EXPENDITURE AND RELIABILITY 250 200 150 100 SAIDI 50 WEL (exceptionally good) 0 Better Performance $5,000 $10,000 $15,000 $20,000 $25,000 Capex & Opex / km
Points on the graph represent the results of the lines companies. Lower Cost Names have been removed to preserve anonymity.
BENCHMARKING
LEAPP (Leading Efficiencies and Performance Practices) is a benchmarking project involving 11 Australian and New Zealand lines companies, including WEL, Powerco and Vector. Marchment Hill Consulting have been engaged as the independent facilitators and organisers of the project. Benchmarking was undertaken for reliability performance, in which WEL excelled. The figure above shows that for most companies there is a diminishing return between reliability (SAIDI) improvement and expenditure on reliability. However, the graph shows that WEL very significantly outperforms this trend.
As part of the project we have hosted companies from Australia and New Zealand who want to learn from us to improve their performance in this area. EMPLOYEE AND TEAM OF THE QUARTER AWARDS
WEL recognises and rewards exceptional performance by individuals and teams within the business every quarter.
The criteria for the award is based around the contribution to one of the following categories; Customers, Teamwork, Innovation, Performance, Special Effort/Achievements and must also contribute towards at least one of WEL’s values; Agility, Building the Business, Caring, Doing the Right Thing and Every Day Home Safe.
The teams celebrate their win by taking part in a fun team based activity of their choice.
Winners for this year were:
April - June 07 Chris Puddle Has provided excellent service to the Distribution Centre - assisting on a variety of projects by providing reports with enthusiasm, speed and commitment. GIS & Data team (Roger Oed, Improving the quality of overhead line data and the age profile of assets Anne Pegler, Cang Li, Max Wu, recorded in the GIS system Glen Smales, Jim Ardern, Dave Wallace, Ron Jackson)
July - September 07 Tepene Te Wharau For outstanding customer service, going above and beyond his duties to resolve customer issues.
Maintenance Construction team For being well prepared when at the Distribution Centre, being happy to share (Marcus Fletcher, Jaydain Te knowledge and working well under pressure and as a team. Aho, Jason Haugh, Andrew King)
October - December 07
Ajith Fernando For his work on the first audit of risk management controls, developing the process and methodology from scratch and delivering results that will lead to process improvement.
Wind Farm team (Jack Ninnes, For co-ordinating a comprehensive dossier of evidence, with experts and legal Kylie McKee, Brendon Moloney, advisors, for the November wind farm hearing. For working long days, coping Selina Corboy) well with unexpected events and working together well.
January - March 08
For displaying outstanding commitment to professionalism with customers and Marcus Fletcher safety for himself and his team. In safety audits, never once displaying unsafe behaviour or non-compliance in wearing PPE (Personal Protective Equipment). AMP development team (Dave Improvements to the Asset Management Plan and being recognised by the Mollekin, Jarrod Cox, Tony Commerce Commission's AMP review (ranking second in the industry) and Zonneveld, Doug Pankhurst, the PAS 55 review. John Versluys, Huazhuo Lin (Ling) (ACC) ACCIDENT COMPENSATION CORPORATION ACCREDITATION / HEALTH AND SAFETY
As part of our commitment to having strong, demonstrable health and safety management practices in place, WEL decided to apply for ACC accreditation. This accreditation allows employers who have proven, effective in-house health and safety systems and practices to achieve lower ACC levies. After completing the Workplace Safe Management Practices Audit we were successful in receiving secondary level accreditation. As part of our on-going programme we will work towards gaining tertiary level accreditation when we are next audited in two years’ time.
Safety training day
ASSET MANAGEMENT PLAN
WEL has again been ranked second out of New Zealand’s 28 lines businesses for our 2007/08 Asset Management Plan (AMP) compliance. AMPs are reviewed for the Commerce Commission by independent engineering consultancy company, Parsons Brinckerhoff Associates.
Over and above this assessment WEL also retained Sinclair Knight Merz to carry out a review of the processes associated with the production of the AMP (rather than the AMP itself) to ascertain whether they meet currently regarded industry best practice. The review utilised one of the most widely recognised guidelines for this matter, the UK Institute of Asset Management’s Publicly Available Standards, PAS 55-1 and PAS 55-2, which provide a high level specification and an associated set of guidelines on the issue of good practice asset management. These standards were developed by an international team including Australian and New Zealand representatives and are currently the definitive international standard.
The philosophy behind PAS 55–1 is a comprehensive one, it is aimed at ensuring all items, aspects and processes necessary for best practice in managing assets are considered. This includes all support areas, such as ensuring there is an appropriate employment and training regime, (or an alternative set of arrangements), in place to ensure that the necessary work to maintain/refurbish/replace the assets will be carried out.
The conclusions of the review were that WEL substantially meets the requirements, is clearly focused to achieve the stated objective of good asset management and is generally in line with industry best practices. MOVE TO MAUI STREET
WEL staff are preparing to move to a single site, into purpose designed buildings at Maui Street. With the in- sourcing of our field services team and our distribution centre over the past few years we have grown in staff numbers and in the functions we undertake. We are currently located in three different premises; WEL House in the CBD and two industrial buildings in Te Rapa. Staff and management are enthusiastic about the move which will streamline business activities and bring the whole team together. Progress on the new building has been swift with the distribution centre and field services due to move before June and the staff from WEL House to follow by the end of the year. WEL House was sold late last year, WEL staff (at the time we were Waikato Electricity Limited) had moved into the building in 1991.
INVESTIGATION INTO GENERATION OPPORTUNITIES The Waikato region has a large potential for generating electricity, mostly from renewable sources. The Government’s energy strategy calls for 90% of New Zealand’s generation to come from renewable sources, including biomass and use of waste gas streams, by 2020. As a result of proposed legislative changes WEL is appropriately placed to contribute to this national target. In addition to the development of our proposed 84 MW Te Uku Wind Park, a number of generation opportunities are under evaluation. WEL has experience in generation from waste gas, operating the highly successful Horotiu landfill gas generation plant. Landfill gas is trapped and fed into the generator to produce valuable electricity and methane, which is one of the worst greenhouse gas contributors, is not released into the atmosphere. We are always looking to build on this experience and seek out other suitable sites. Similar opportunities may exist in the agricultural sector, gases can be captured from farm wastes and diverted into small scale generators. Such ventures could provide valuable support to our rural lines, and help reduce transmission losses. Biomass generation, using wood waste such as tree trimmings or bark, or indeed a sustainable purposely grown wood crop, is gaining prominence overseas. WEL intends to investigate such potential for the Waikato region. Other small hydro and tidal schemes are always attractive, but generally not yet commercially viable to develop on a small scale, whilst large schemes can impact severely on the environment. Options under consideration include small scale run of river generation, where turbines are fully submerged to capture some of the fast flowing currents without obstructing the overall flow. 2007 : 08 FINANCIAL REPORT
Income Statement 25 Balance Sheet 26 Statement of Changes in Equity 27 Statement of Cash Flows 28
Notes to the Consolidated Financial Statements 30 - 50
1 . General information 30 2 . Summary of significant accounting policies 30 3 . Transition to New Zealand equivalents to International Financial Reporting Standards 36 4 . Financial risk management 36 5 . Critical accounting estimates and adjustments 39 6 . Property, plant and equipment 40 7 . Intangible assets 41 8 . Trade and other receivables 41 9 . Cash and cash equivalents 42 10 . Share capital 42 11 . Borrowings 42 12 . Deferred income tax 43 13 . Trade and other payables 43 14 . Provisions 43 15 . Revenue 43 16 . Other net (losses)/gains 43 17 . Operating expenses 44 18 . Borrowing costs 44 19 . Income tax expense 44 20 . Imputation credit memorandum account 45 21 . Contingencies 45 22 . Commitments 45 23 . Interest in joint venture 45 24 . Investments in subsidiaries 46 25 . Related-party transactions 46 26 . Events subsequent to balance date 47 27 . Impacts of adoption of New Zealand equivalents to International Financial Reporting Standards 47
Auditors' Report 51 Directors' report and Statutory Information 53 Directory 55
INCOME STATEMENT For the year ended 31 March 2008
Note Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000)
Revenue 15 69,821 64,807 69,821 64,807 Other net (losses)/gains 16 1,444 25 1,444 25 Operating expenses 17 (48,572) (42,413) (48,572) (42,413) Net operating profit 22,693 22,419 22,693 22,419 Borrowing costs 18 (3,267) (3,258) (3,267) (3,258) Net profit before income tax 19,426 19,161 19,426 19,161 Income tax expense 19 (3,613) (4,065) (3,613) (4,065) Net profit for the year 15,813 15,096 15,813 15,096
Net profit attributable to: Equity holders of the company 15,813 15,096 15,813 15,096 15,813 15,096 15,813 15,096
The notes on pages 30 to 50 are an integral part of these consolidated financial statements. BALANCE SHEET As at 31 March 2008
Note Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000)
ASSETS Non-current assets Property, plant and equipment 6 344,830 308,194 344,830 308,194 Intangible assets 7 2,162 2,371 2,162 2,371 Trade and other receivables 8 374 328 374 328 Other assets - 24 - 24 347,366 310,917 347,366 310,917 Current assets Trade and other receivables 8 8,242 6,517 8,242 6,517 Assets classified as held for sale - 8,621 - 8,621 Cash and cash equivalents 9 7,275 7,318 7,275 7,318 Current income tax asset - 1,041 - 1,041 15,517 23,497 15,517 23,497
Total assets 362,883 334,414 362,883 334,414
EQUITY Capital and reserves Share capital 10 111,142 92,442 111,142 92,442 Other reserves 123,388 110,513 121,280 108,405 Retained earnings 19,030 2,281 21,138 4,389 Total equity 253,560 205,236 253,560 205,236
LIABILITIES Non-current liabilities Borrowings 11 18,700 37,400 18,700 37,400 Deferred income tax liabilities 12 56,257 59,094 56,257 59,094 Deferred income 1,238 1,268 1,238 1,268 Provisions 14 254 - 254 - 76,449 97,762 76,449 97,762 Current liabilities Trade and other payables 13 10,202 11,666 10,202 11,666 Provisions 14 249 - 249 - Current income tax liabilities 2,083 - 2,083 - Customer discount payable 20,340 19,750 20,340 19,750 32,874 31,416 32,874 31,416
Total liabilities 109,323 129,178 109,323 129,178
Total equity and liabilities 362,883 334,414 362,883 334,414
RODGER FISHER, Chairman JOHN SPENCER, Director 20 May 2008 20 May 2008
The notes on pages 30 to 50 are an integral part of these consolidated financial statements. STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2008
Attributable to equity holders of the Company Note Share capital Revaluation Retained Total reserve earnings equity
Group Balance at 1 April 2006 92,442 73,883 (12,726) 153,599 Fair value gains and (losses): - land and buildings - 3,862 (89) 3,773 - distribution network - 49,851 - 49,851 Movement in deferred tax - (17,083) - (17,083) Net income/(expense) recognised directly in equity - 36,630 (89) 36,541 Net profit for the year - - 15,096 15,096 Total recognised income for 2006/2007 - 36,630 15,007 51,637
Balance at 31 March 2007 92,442 110,513 2,281 205,236
Balance at 1 April 2007 92,442 110,513 2,281 205,236 Fair value gains and (losses): - land and buildings - (943) 936 (7) - distribution network - 12,882 - 12,882 Movement in deferred tax on revaluation 12 - (3,866) - (3,866) Effect of reduction in tax rate 12 - 4,802 - 4,802 Net income/(expense) recognised directly in equity - 12,875 936 13,811 Net profit for the year - - 15,813 15,813 Total recognised income for 2007/2008 - 12,875 16,749 29,624
Issue of share capital 18,700 - - 18,700
Balance at 31 March 2008 111,142 123,388 19,030 253,560
Parent Balance at 1 April 2006 92,442 71,775 (10,618) 153,599 Fair value gains and (losses): - land and buildings - 3,862 (89) 3,773 - distribution network - 49,851 - 49,851 Movement in deferred tax - (17,083) - (17,083) Net income/(expense) recognised directly in equity - 36,630 (89) 36,541 Net profit for the year - - 15,096 15,096 Total recognised income for 2006/2007 - 36,630 15,007 51,637
Balance at 31 March 2007 92,442 108,405 4,389 205,236
Balance at 1 April 2007 92,442 108,405 4,389 205,236 Fair value gains and (losses): - land and buildings - (943) 936 (7) - distribution network - 12,882 - 12,882 Movement in deferred tax on revaluation 12 - (3,866) - (3,866) Effect of reduction in tax rate 12 - 4,802 - 4,802 Net income/(expense) recognised directly in equity - 12,875 936 13,811 Net profit for the year 15,813 15,813 Total recognised income for 2007/2008 - 12,875 16,749 29,624
Issue of share capital 18,700 - - 18,700
Balance at 31 March 2008 111,142 121,280 21,138 253,560
The notes on pages 30 to 50 are an integral part of these consolidated financial statements. STATEMENT OF CASH FLOWS For the year ended 31 March 2008
Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000)
Cash flows from operating activities Receipts from customers 68,551 65,113 68,551 65,113 Payments to employees and suppliers (35,606) (30,952) (35,606) (30,952) Interest received 305 468 305 468 Interest paid (3,267) (3,258) (3,267) (3,258) Income tax paid (2,390) (3,978) (2,390) (3,978) Net cash from operating activities 27,593 27,393 27,593 27,393
Cash flows from investing activities Proceeds from sale of property, plant and equipment 10,879 16 10,879 16 Purchases of property, plant and equipment (37,836) (33,357) (37,836) (33,357) Purchases of intangible assets (703) (1,154) (703) (1,154) Proceeds from sale of investments 24 8 24 8
Net cash used in investing activities (27,636) (34,487) (27,636) (34,487)
Cash flows from financing activities Net cash used in financing activities - - --
Net increase/(decrease) in cash and cash equivalents (43) (7,094) (43) (7,094)
Cash and cash equivalents at the beginning of the year 7,318 14,412 7,318 14,412
Cash and cash equivalents at the end of the year 7,275 7,318 7,275 7,318
Comprises of the following: Bank overdraft - - - - Cash and deposits 7,275 7,318 7,275 7,318 7,275 7,318 7,275 7,318
The notes on pages 30 to 50 are an integral part of these consolidated financial statements. STATEMENT OF CASH FLOWS (CONTINUED) For the year ended 31 March 2008
Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000)
Reconciliation of net profit after tax to net cash flows - operating activities
Net profit after tax 15,813 15,096 15,813 15,096
Adjustments for items not involving cash flows:
Depreciation 12,217 8,020 12,217 8,020 Amortisation 911 1,063 911 1,063 (Profit)/loss on sale of property, plant and equipment (311) 823 (311) 823 Net movements in provision for liabilities and charges 474 375 474 375 Deferred tax liability (1,900) (59) (1,900) (59)
Changes in working capital:
Trade and other receivables (2,325) 391 (2,325) 391 Work in progress - 151 - 151 Trade and other payables (1,555) 239 (1,555) 239 Customer discount payable 1,146 1,146 1,146 1,146 Current income tax liabilities 3,123 148 3,123 148
Net cash inflow from operating activities 27,593 27,393 27,593 27,393
The notes on pages 30 to 50 are an integral part of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2008
1. General information
WEL Networks Limited is a profit-oriented company incorporated in New Zealand under the Companies Act 1993. The group consists of WEL Networks Limited ('the Company') and its subsidiaries (together 'the Group'). The Group is an electricity network business, delivering energy to customers in the Waikato Region.
The Company is a limited liability company incorporated in New Zealand. The address of its registered office is WEL House, 711 Victoria Street, Hamilton.
These consolidated financial statements have been approved for issue by the Board of Directors on 20 May 2008. Once issued the entity's owners do not have the power to amend these financial statements.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
(a) Basis of preparation
The consolidated financial statements of WEL Networks Limited have been prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) (as applicable for profit orientated entities). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land, buildings and distribution network as disclosed in the specific accounting policies below.
(b) Estimates and judgement
The preparation of financial statements in conformity with NZ IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The estimates and associated assumptions have been based on historical experience and other factors that are believed to be reasonable under the circumstances. These estimates and assumptions have formed the basis for making judgements about the carrying values of assets and liabilities where these are not readily apparent from other sources. Estimates and underlying assumptions are regularly reviewed. Any change to estimates is recognised in the period if the change affects only that period, or into future periods if it also affects future periods. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 5.
(c) Consolidation
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of WEL Networks Limited ('Company' or 'Parent') as at 31 March 2008 and the results of all subsidiaries for the year then ended. WEL Networks Limited Subsidiaries are all those 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.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values 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 fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group’s interests in jointly controlled entities are accounted for by proportionate consolidation. The Group combines its share of the joint ventures’ individual income and expenses, assets and liabilities, and cash flows on a line-by-line basis with similar items in the Group’s financial statements. The Group recognises the portion of gains or losses on the sale of assets by the Group to the joint venture that it is attributable to the other ventures. The Group does not recognise its share of profits or losses from the joint venture that result from the Group’s purchase of assets from the joint venture until it resells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss.
(d) Compliance with International Financial Reporting Standards
The separate and consolidated financial statements of WEL Networks Limited also comply with International Financial Reporting Standards (IFRS).
(e) Entities reporting
The financial statements of the 'Parent' or 'Company' are for WEL Networks Limited as a separate legal entity. The consolidated financial statements of the 'Consolidated' or 'Group' entity are for the economic entity comprising WEL Networks Limited and its subsidiaries. The Parent and the consolidated entity are designated as profit oriented entities for financial reporting purposes.
(f) Statutory base
WEL Networks Limited is a limited liability company which is domiciled and incorporated in New Zealand. It is registered under the Companies Act 1993. The financial statements have been prepared in accordance with the requirements of the Financial Reporting Act 1993 and the Companies Act 1993.
(g) Application of NZ IFRS 1 First-time Adoption of New Zealand equivalents to International Financial Reporting Standards
These financial statements are the first WEL Networks Limited financial statements to be prepared in accordance with NZ IFRS. NZ IFRS 1 First-time Adoption of New Zealand equivalents to International Financial Reporting Standards has been applied in preparing these financial statements.
2.2 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency’). The consolidated and parent financial statements are presented in New Zealand dollars, rounded to the nearest $1,000, which is the Company’s functional and presentation currency.
2.3 Property, plant and equipment
Land and buildings comprise mainly substations, while the electricity distribution network comprises mainly cables, poles and transformers.
Land and buildings are valued at fair value. Fair value is determined by a periodic independent valuation prepared by external valuers on the basis of market value for highest and best use. The valuations are performed on at least a triennial period. The fair values are recognised in the financial statements, and are reviewed at the end of each reporting period to ensure that the carrying value of land and buildings is not materially different from fair value.
The electricity distribution network is valued at fair value. Fair value is determined on the basis of an independent valuation prepared by external valuers, based on a depreciated replacement cost methodology. The valuations are performed on at least a triennial period. The fair values are recognised in the financial statements, and are reviewed at the end of each reporting period to ensure that the carrying value of the distribution network is not materially different from fair value.
Any revaluation increase arising on revaluation of land and buildings and the distribution network is credited to the asset revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense in the income statement, in which case the increase is credited to the profit and loss account to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of land and buildings and the distribution system is charged as an expense in the income statement to the extent that it exceeds the balance, if any, held in the asset revaluation reserve relating to a previous revaluation of that asset. All other property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Depreciation is provided on property, plant and equipment, including freehold buildings but excluding land.
Depreciation on revalued buildings and the distribution network is charged to the income statement. On subsequent sale or retirement of a revalued item, the attributable revaluation surplus remaining in the asset revaluation reserve, net of any related deferred taxes, is transferred directly to retained earnings. Other plant and equipment and leasehold improvements are carried at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. The cost of self-constructed assets includes the cost of materials and direct labour and an allowance for overheads.
Depreciation on buildings and the distribution network is calculated using the straight-line method with other assets depreciated using the diminishing value basis, to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows: Buildings 3% Distribution network 4% Computer equipment 35% Furniture, plant and equipment 20% - 50% Vehicles 25% Generation assets 20%
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance 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 2.6).
2.4 Fair value estimation
The fair value of financial assets and liabilities must be estimated for recognition and measurement or for disclosure purposes.
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 Group for similar financial instruments.
2.5 Intangible assets
(a) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (three to five years).
Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads.
Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding four years).
(b) Easements
Acquired easement rights are capitalised on the basis of the costs incurred. These costs are amortised over their estimated useful lives (33 years).
2.6 Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount 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 purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (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.
2.7 Financial assets
The Group classifies its financial assets as loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date.
(a) 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 are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are classified as ‘trade and other receivables’ in the balance sheet (Note 2.8).
2.8 Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impaired receivables.
Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement.
2.9 Trade and other payables
These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.10 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.11 Contributed equity
Ordinary shares 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.
2.12 Income tax
The income tax expense or revenue for the period is the total of the current period’s taxable income based on the national income tax rate, plus/minus movements in the deferred tax balance except where the movement in deferred tax is attributable to a movement in reserves.
Movements in deferred tax are attributable to temporary differences between the tax base of assets and liabilities and their carrying amounts in the financial statements and any unused tax losses or credits. 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. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or loss or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only to the extent that 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 is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.
The income tax expense or revenue attributable to amounts recognised directly in equity are also recognised directly in equity. The associated current or deferred tax balances are recognised in these accounts as usual.
Current and deferred tax assets and liabilities of individual entities are reported separately in the consolidated financial statements unless the entities have a legally enforceable right to make or receive a single net payment of tax and the entities intend to make or receive such a net payment or to recover the current tax asset or settle the current tax liability simultaneously.
2.13 Goods and Services Tax (GST)
The income statement has been prepared so that all components are stated exclusive of GST. All items in the balance sheet are stated net of GST, with the exception of receivables and payables, which include GST invoiced.
2.14 Employee benefits
(a) Wages and salaries, annual leave and sick leave
Liabilities for wages and salaries, including non monetary benefits, annual leave and accumulated sick leave expected to be settled within 12 months of the reporting date are recognised in 'other payables' in respect of employees' service up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled.
(b) Termination benefits
Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to present value.
(c) Bonus plans
The Group recognises a liability and an expense for bonuses, based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.
2.15 Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is more likely than not 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.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
2.16 Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown, net of GST, estimated returns, rebates and discounts and after eliminated sales within the Group. Revenue is recognised as follows:
(a) Line revenue
The Company invoices its customers (predominantly electricity retailers) monthly for the electricity delivery services across the regions lines network. The reported net line revenue includes the provision for the annual customer discounts that are accrued on a monthly basis but only paid to customers once a year. (b) Sales of services, contracting sales and third party contributions
Sales of services, contracting sales and third party contributions are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.
(c) Interest income
Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.
(d) Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to property, plant and equipment are included in non-current liabilities as deferred income and are credited to the income statement on a straight-line basis over the expected lives of the related assets.
2.17 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
2.18 Dividends
Provision is made for the amount of any dividend declared on or before the end of the financial year but not distributed at balance date.
2.19 Non-current assets (or disposal groups) held for sale
Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is recovered principally through a sale transaction rather than through a continuing use.
2.20 Construction contracts
Contract costs are recognised when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable.
When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
The Group uses the ‘percentage of completion method' to determine the appropriate amount to recognise in a given period. The stage of completion is measured by reference to the contract costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature.
The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within ‘trade and other receivables'.
The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). 2.21 New Standards
(a) Standards, interpretations and amendments to published standards that are not yet effective are not yet adopted:
Certain new standards, amendments and interpretations issued by the IASB and the New Zealand equivalents to those standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 April 2008 or later periods but which the Group has not early adopted.
(b) Not yet adopted:
Amendments to IAS 1: Presentation of Financial Statements which are mandatory for reporting periods beginning on or after 1 January 2009 – The revised IAS 1 requires an entity to present all owner changes in equity, separately from non-owner changes in equity, in a statement of changes in equity. All non owner changes in equity (i.e. comprehensive income) are required to be presented in one statement of comprehensive income or in two statements (an income statement and a statement of comprehensive income). Components of comprehensive income are not permitted to be presented in the statement of changes in equity.
NZ IAS 23: Borrowing Costs (Revised) effective from 1 January 2009. The option to expense borrowing costs has been removed. Borrowing costs related to a qualifying asset must be capitalised.
3. Transition to New Zealand equivalents to International Financial Reporting Standards
Basis of transition to NZ IFRS
(a) Application of NZ IFRS 1
The Group’s financial statements for the year ended 31 March 2008 are the first annual financial statements that comply with NZ IFRS. These financial statements have been prepared as described in note 2(a). The Group has applied NZ IFRS 1 in preparing these consolidated and parent financial statements.
WEL Networks Limited transition date is 1 April 2006. The Group prepared its opening NZ IFRS balance sheet at that date. The reporting date of these financial statements is 31 March 2008. The Group’s NZ IFRS adoption date is 1 April 2007.
In preparing these consolidated and parent financial statements in accordance with NZ IFRS 1, the Group has applied the mandatory exemptions and certain of the optional exemptions from full retrospective application of NZ IFRS.
(b) Exemptions from full retrospective application elected by the Group
WEL Networks Limited has elected to apply the following optional exemptions from full retrospective application.
(i) Business combinations exemption
WEL Networks Limited has applied the business combinations exemption in NZ IFRS 1. It has not restated business combinations that took place prior to the 1 April 2006 transition date. The application of this exemption is detailed in note 27.
(c) Reconciliations between NZ FRS and NZ IFRS
The reconciliations in note 27 provide a quantification of the effect of the transition to NZ IFRS. The reconciliations provide an overview of the impact on the financial statements of the transition at 1 April 2006, and 31 March 2007. The schedules on pages 48 to 50 provide details of the impact of the transition on:
- the comparative group and parent income statement for the year ended 31 March 2007 - the group and parent opening balance sheet at 1 April 2006 - the group and parent balance sheet at 31 March 2007
4. Financial risk management
4.1 Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group’s overall financial risk management objectives are to ensure that the Group creates value and maximises returns to its shareholders as well as ensuring that adequate financial resources are available for the development of the Group’s businesses whilst managing its financial risks. It is, and has been throughout the financial year under review, the Group’s policy that no trading in derivative financial instruments shall be undertaken. The major areas of the financial risks faced by the Group and the information on the management of the related exposures are detailed below:
(a) Market Risk
(i) Foreign Exchange Risk
The Group is not significantly affected by movements in foreign exchange rates. The Group does not currently utilise derivatives for foreign exchange movements. Foreign exchange gains or losses on the purchase of goods and services are taken to the income statement.
(ii) Interest Rate Risk
The Group’s exposure to the risk of changes in the market interest risk relates primarily to the Group’s short-term debt obligations with floating interest rates and the Group's short-term investment rates.
The Group’s policy to manage interest rate risk is to fund ongoing activities with short-term borrowings funded at floating interest rates. Borrowings are drawn to fund ongoing operations and capital expenditure programmes.
The other financial instruments of the Group are not subject to interest rate risk. The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk.
Interest rate risk
+ 1% - 1 % Group & Parent Carrying Effect on Effect on amounts profit before profit before tax and tax and equity equity ($000) ($000) ($000) As at 31 March 2008
Financial assets Trade and other receivables 8,242 - - Cash and cash equivalents 7,275 73 (73)
Financial liabilities Borrowings 18,700 (187) 187 Trade and other payables 10,202 - - Provisions 503 - - Customer discount payable 20,340 - -
Total increase / (decrease) (114) 114
As at 31 March 2007
Financial assets Trade and other receivables 6,517 - - Cash and cash equivalents 7,318 73 (73)
Financial liabilities Borrowings 37,400 (374) 374 Trade and other payables 11,666 - - Provisions - - - Customer discount payable 19,750 - -
Total increase / (decrease) (301) 301 (b) Credit Risk
Credit risk is the potential risk of financial loss arising from the failure of a customer or counter party to settle its financial and contractual obligations to the Group, as and when they fall due. The credit risk attributable to receivables is managed and monitored on an ongoing basis via Group’s management reporting procedures and internal credit review procedures.
In the normal course of its business, the Group incurs credit risk from trade receivables from energy customers and transactions with financial institutions. A provision has been set up for trade receivables which are unlikely to be collected.
The Group has a credit policy which is used to manage this exposure to credit risk. As part of this policy, limits on exposures with counterparties have been set and are monitored on a regular basis.
The Group has in excess of 80% of its trade debtors owing from the incumbent retailer, Genesis Energy Limited. This debt is subject to a written agreement that requires an investment grade credit rating to be maintained. If the credit rating falls below investment grade then a bond will be required as collateral.
The Group’s historical experience in collection of trade receivables falls within the recorded allowances. Due to these factors, the Directors believe that no additional credit risk beyond amounts provided for doubtful debts is inherent in the Group’s trade receivables.
In respect of the fixed deposits, cash and bank balances placed with major financial institutions, the Directors believe that the possibility of non-performance by these financial institutions is remote on the basis of their financial strength. Other than as mentioned above (in addition to those mentioned elsewhere in the financial statements), the Group has no significant concentration of credit risk on its financial assets. The maximum exposures to credit risk are represented by the carrying amounts of other financial assets in the balance sheets. Except for the financial guarantees given by the Group, the Group does not provide any other financial guarantees which would expose the Group or the Parent to credit risk.
(c) Liquidity Risk
The Group’s policy is to regularly monitor its liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.
The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
Less than 1 Between 1 Unspecified year and 5 years term Group & Parent ($000) ($000) ($000)
At 31 March 2008 Borrowings - - 18,700 Trade and other payables 10,202 - - Provisions 249 254 - Customer discount payable 20,340 - - 30,791 254 18,700 At 31 March 2007 Borrowings - - 37,400 Trade and other payables 11,666 - - Customer discount payable 19,750 - - 31,416 - 37,400
4.2 Capital Risk Management
The primary objective of the Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholder value.
The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended 31 March 2008 and 2007. The Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. The Group includes within net debt, borrowings and term liabilities less cash and cash equivalents. Total capital includes equity attributable to the equity holders of the Parent.
The gearing ratios are as follows: Group Group 2008 2007 ($000) ($000)
Borrowings 18,700 37,400 Less: cash and cash equivalents (7,275) (7,318) Net debt 11,425 30,082
Equity 253,560 205,236
Capital and net debt 264,985 235,318
Gearing ratio 4% 13%
4.3 Fair Values
The Directors estimate that the carrying amounts of financial instruments in the consolidated balance sheet equal their fair values.
5. Critical accounting estimates and adjustments
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Revenue recognition for line revenue
The company invoices its customers (predominantly electricity retailers) monthly for the electricity delivery services on the basis of an estimation of usage, adjusted for the latest data available from the electricity wholesale market and certain metering data from electricity retailers. Management has made an allowance in revenue and in current assets and liabilities for any amounts which are estimated to be under or over charged during the reporting period. However, as final metering data is not available for in excess of twelve months, it is possible that the final amounts payable or receivable may vary from that calculated.
Line revenue discounts are paid to customers once a year. A provision for line revenue discounts is established on a monthly basis. The discounts are agreed between the directors and shareholders on an annual basis having regard to the forecast level of company earnings and estimated future capital expenditure programmes.
(b) Revenue recognition for sale of services
The Group uses the percentage-of-completion method in accounting for its sales of services. Use of the percentage-of completion method requires the Group to estimate the services performed to date as a proportion of the total services to be performed.
(c) Estimated fair value and useful lives of distribution network assets
The Group estimates the fair value of the distribution network by using independent valuers in accordance with the accounting policy stated in notes 2.3 above. The fair value is based on an optimised depreciation replacement cost. The useful lives of the components of the distribution network are estimated based on their respective tenure period. These calculations require the use of estimates. Changes of the valuation in the future could have a material effect on the carrying amount of distribution network (see note 6). 6. Property, plant and equipment Land and Distribution Plant and Generation Total Buildings Network Equipment Assets Group and Parent ($000) ($000) ($000) ($000) ($000)
At 1 April 2006 Cost or valuation 12,336 233,950 5,665 1,774 253,725 Accumulated depreciation (549) (12,009) (4,225) (224) (17,007) Net book amount 11,787 221,941 1,440 1,550 236,718
Year ended 31 March 2007 Opening net book amount 11,787 221,941 1,440 1,550 236,718 Transfers (8,621) - - -(8,621) Revaluation surplus 3,753 49,852 - - 53,605 Additions 1,176 30,220 3,364 - 34,760 Disposals (105) (80) (62) - (247) Depreciation charge (295) (6,937) (649) (140) (8,021) Closing net book amount 7,695 294,996 4,093 1,410 308,194
At 31 March 2007 Cost or valuation 7,695 294,996 8,575 1,774 313,040 Accumulated depreciation - - (4,482) (364) (4,846) Net book amount 7,695 294,996 4,093 1,410 308,194
Year ended 31 March 2008 Opening net book amount 7,695 294,996 4,093 1,410 308,194 Revaluation surplus - 12,882 - - 12,882 Additions 609 31,569 4,051 13 36,242 Disposals 40 (80) (231) - (271) Depreciation charge (163) (11,315) (611) (128) (12,217) Closing net book amount 8,181 328,052 7,302 1,295 344,830
At 31 March 2008 Cost or valuation 8,304 328,224 11,794 1,787 350,109 Accumulated depreciation (123) (172) (4,492) (492) (5,279) Net book amount 8,181 328,052 7,302 1,295 344,830
Land and Buildings were revalued to market value on 31 March 2007 by independent valuers, DTZ New Zealand Ltd Registered Valuers. The distribution network was revalued on 31 March 2007 by independent valuers, Sinclair Knight Merz (NZ) Limited Registered Engineers. The valuation of the distribution network was updated on 31 March 2008 by Sinclair Knight Merz (NZ) Limited using a depreciated replacement cost methodology. Additions from 1 April 2007 to 31 March 2008 have been included at cost.
If property, plant and equipment were stated on the historical cost basis, the amounts would be as follows:
Land and Distribution Plant and Generation Total Buildings Network Equipment Asset ($000) ($000) ($000) ($000) ($000)
Cost 3,137 243,691 11,794 1,787 260,409 Accumulated depreciation (540) (124,257) (4,492) (492) (129,781) Net book amount at 31 March 2008 2,597 119,434 7,302 1,295 130,628
Cost 13,259 212,138 8,575 1,774 235,746 Accumulated depreciation (3,509) (118,611) (4,482) (364) (126,966) Net book amount at 31 March 2007 9,750 93,527 4,093 1,410 108,780 7. Intangible assets Software Easements Total ($000) ($000) ($000) Group and Parent
At 1 April 2006 Cost 9,746 1,355 11,101 Accumulated amortisation (8,143) (677) (8,820) Net book amount 1,603 678 2,281
Year ended 31 March 2007 Opening net book amount 1,603 678 2,281 Additions 1,153 - 1,153 Amortisation expense (1,022) (41) (1,063) Closing net book amount 1,734 637 2,371
At 31 March 2007 Cost 10,899 1,355 12,254 Accumulated amortisation (9,165) (718) (9,883) Net book amount 1,734 637 2,371
Year ended 31 March 2008 Opening net book amount 1,734 637 2,371 Additions 702 - 702 Amortisation expense (891) (20) (911) Closing net book amount 1,545 617 2,162
At 31 March 2008 Cost 11,601 1,355 12,956 Accumulated amortisation (10,056) (738) (10,794) Net book amount 1,545 617 2,162
8. Trade and other receivables Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000)
Trade receivables 6,848 6,457 6,848 6,457 Trade receivables - related parties 110 57 110 57 Less: provision for impairment of receivables (178) (164) (178) (164) Trade receivables - net 6,780 6,350 6,780 6,350 Amounts due from customer for contract work 1,685 324 1,685 324 Prepayments 151 171 151 171 8,616 6,845 8,616 6,845
Current 8,242 6,517 8,242 6,517 Non-current 374 328 374 328 8,616 6,845 8,616 6,845
(a) Impaired receivables As at 31 March 2008 current trade receivables of the Group with a nominal value of $2.6 million (2007 $1.8 million) were impaired. The amount of the provision was $0.18 million (2007: $0.16 million). The individually impaired receivables mainly relate to damage to the network caused by third parties.
The ageing of these impaired receivables is as follows: Less than 3 months 1,775 1,222 1,775 1,222 3 to 6 months 522 211 522 211 Over 6 months 307 411 307 411 As of 31 March 2008, there were no trade receivables past due, but not impaired.
Movements in the provision for impairment of receivables are as follows: Opening balance 1 April 2007 164 117 164 117 Movement in provision for impairment recognised during the year 223 279 223 279 Receivables written off during the year as uncollectible (209) (232) (209) (232) Closing balance 31 March 2008 178 164 178 164 The creation and release of the provision for impaired receivables has been included in ‘other expenses' in the income statement. Amounts charged to the to the provision for impairment of receivables account are generally written off when there is no expectation of recovering additional cash
The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due.
(b) Foreign exchange and interest rate risk
The Group is not exposed to foreign currency risk or interest rate risk in relation to trade and other receivables. A summarised analysis of the sensitivity of trade and other receivables to foreign exchange and interest rate risk can be found in note 4.
(c) Fair value and credit risk
Due to the short-term nature of these receivables, their carrying value is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivables mentioned above.The Group does not hold any collateral as security. Refer to note 4 – Financial risk management for more information on the risk management policy of the Group.
9. Cash and cash equivalents
(a) Cash on hand and bank deposit balances at call
The deposits are bearing floating interest rates between 7.50% and 8.75%. These deposits have an average maturity of 20 days.
(b) Fair value
The carrying amount for cash and cash equivalents equals the fair value.
Number Group Group Parent Parent of Shares 2008 2007 2008 2007 ($000) ($000) ($000) ($000) 10. Share capital
Authorised issued and fully paid ordinary shares
Balance at 1 April 2007 7,801,754 92,442 92,442 92,442 92,442 Shares issued during the year (note 11) 351,246 18,700 - 18,700 - Closing balance at 31 March 2008 8,153,000 111,142 92,442 111,142 92,442 All ordinary shares carry equal voting rights.
11. Borrowings
Non-current Convertible Note 18,700 37,400 18,700 37,400 18,700 37,400 18,700 37,400 Current Bank borrowings ------
Total borrowings 18,700 37,400 18,700 37,400
On 30 June 2004 the Company paid a dividend of $37.4 million to its 100% shareholder, WEL Energy Trust. On the same day the Company issued $37.4 million of convertible notes to the WEL Energy Trust. The Notes are subordinated to all other forms of debt. They are unsecured and bear interest of 9.3% p.a for 2007/08, accrued monthly. The Notes are convertible into an amount of ordinary shares equal to the face value of the Notes, divided by the assessed fair value of WEL shares at the date of conversion. Conversion is at the discretion of the Directors, having provided 30 business days notice.
On 1 October 2007 50% of the convertible notes were converted into 351,246 fully paid ordinary shares. 12. Deferred income tax Accelerated Revaluation Provisions Total tax of property, Group and Parent depreciation plant and equipment ($000) ($000) ($000) ($000) Deferred tax liabilities / (assets)
At 1 April 2006 6,174 36,040 (185) 42,029 Charged/(credited) to the income statement (18) - - (18) Charged to equity - revaluation - 17,083 - 17,083 At 31 March 2007 6,156 53,123 (185) 59,094 Charged/(credited) to the income statement (1,777) - (124) (1,901) Charged to equity - revaluation - 3,866 - 3,866 Effect of reduction in tax rate - (4,802) - (4,802) At 31 March 2008 4,379 52,187 (309) 56,257
Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000) 13. Trade and other payables
Trade creditors and accruals 7,773 10,286 7,773 10,286 Advances received for contract work 1,899 969 1,899 969 Other accruals 530 411 530 411 Balance at 31 March 2008 10,202 11,666 10,202 11,666
14. Provisions
Carrying amount at 1 April 2007 - - - - Onerous lease provision 338 - 338 - Make good provision 165 - 165 - Amounts used - - - - Carry amount at 31 March 2008 503 - 503 -
Current 249 - 249 - Non-current 254 - 254 - 503 - 503 -
The onerous lease provision results from contracting to move to new premises while the existing premises lease obligations remain. The Company will attempt to sublease the WEL House premises to remove the existing lease liability. The move to the new premises takes place in December 2008 and the provision is expected to be released between 1 January 2009 and 30 June 2010.
The make good provision relates to contracted repairs and maintenance costs required to return the current three leased premises back to their original state when the existing leases were agreed. The provision is expected to be released during the 2009 financial year.
15. Revenue
Gross line revenues 73,205 67,697 73,205 67,697 Discount (19,970) (19,198) (19,970) (19,198) Net line revenues 53,235 48,499 53,235 48,499 Third party contributions 9,061 9,198 9,061 9,598 Contracting revenue 4,182 3,452 4,182 3,052 Rental income 538 892 538 892 Interest on investments 305 468 305 468 Other income 2,500 2,298 2,500 2,298 Total revenue 69,821 64,807 69,821 64,807
16. Other net (losses)/gains
Government grants 29 25 29 25 Gain on disposal of WEL House 1,415 - 1,415 - 1,444 25 1,444 25 Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000) 17. Operating expenses
Transmission costs 16,035 15,032 16,035 15,032 Wages and salaries 4,422 4,036 4,422 4,036 Materials and services 5,492 5,119 5,492 5,119 Contracting cost of sales 3,873 3,208 3,873 3,208
Depreciation of property, plant and equipment Buildings 163 296 163 296 Vehicles 156 193 156 193 Computers, furniture, plant and equipment 455 454 455 454 Distribution network 11,315 6,937 11,315 6,937 Land fill generation 128 140 128 140 Total depreciation 12,217 8,020 12,217 8,020
Amortisation expense 911 1,063 911 1,063 Directors' fees 270 240 270 240
Net loss/(gain) on disposal of property plant and equipment 1,104 823 1,104 823 Research and development 3 273 3 273 Bad debts written off 209 244 209 244 Change in provision for impaired receivables 15 (12) 15 (12) Rental and operating lease payments 476 239 476 239 Other expenses 3,431 4,006 3,431 4,006
Remuneration of Auditors Auditing the financial statements 53 54 53 54 Other assurance services 46 66 46 66 Other services 15 2 15 2 Total remuneration 114 122 114 122 PricewaterhouseCoopers were the only auditors employed during the year.
Total operating expenses 48,572 42,413 48,572 42,413
Wages and salaries capitalised to property, plant and equipment 4,309 2,888 4,309 2,888
18. Borrowing costs
Interest expense related to: Bank borrowings 744 154 744 154 Convertible note 2,523 3,104 2,523 3,104 3,267 3,258 3,267 3,258
19. Income tax expense
Current tax 5,092 2,400 5,092 2,400 Deferred tax (1,479) 1,665 (1,479) 1,665 3,613 4,065 3,613 4,065
The tax on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated companies as follows:
Net profit before tax 19,426 19,161 19,426 19,161
Tax calculated at domestic tax rates applicable to profits 6,411 6,323 6,411 6,323 Income not subject to tax (2,399) (2,400) (2,399) (2,400) Expenses not deductible for tax purposes 38 142 38 142 Tax adjustment for future company tax rate reduction to 30% (437) - (437) - Tax charge 3,613 4,065 3,613 4,065
The weighted average applicable tax rate was 18% (2007: 21%). The reduction is caused by the decrease in the future company tax rate from 33% to 30% from 1 April 2008. On 17 May 2007, the New Zealand Government announced in its annual budget that the corporate tax rate will be reduced from 33% to 30% effective 1 April 2008. Accordingly the deferred tax liability as at 31 March 2008 reflects the impact of this change. $437,000 of the change has reduced income tax expense and $4,802,000 has been accounted for directly in asset revaluation reserve. The asset revaluation reserve movements also include a transfer to retained earnings of $937,000 for sale of assets as well as a $7,000 adjustment to asset valuations completed in March 2007.
Parent Parent 2008 2007 ($000) ($000)
20. Imputation credit memorandum account
Balance at the beginning of the year 5,965 1,987 Taxation paid 3,000 4,005 Taxation refunds received (643) (27) Balance at the end of the year 8,322 5,965
21. Contingencies
There are no contingent liabilities as at 31 March 2008 (2007 Nil).
22. Commitments Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000)
Capital expenditure Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:
Property, plant and equipment 1,324 1,082 1,324 1,082 Intangible assets - 42 - 42 1,324 1,124 1,324 1,124
Operating lease commitments The Group leases land and premises. Operating leases held over properties give the Group the right to renew the lease subject to a predetermination of the lease rental by the lessor. There are no options to purchase in respect of land and premises held under operating leases.
In February 2007 the company entered into 12 year leases for new company premises in Te Rapa.
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
No later than one year 1,025 246 1,025 246 Later than one year and no later than two years 1,294 785 1,294 785 Later than two, not later than five years 3,146 2,344 3,146 2,344 Later than five years 7,722 6,449 7,722 6,449 13,187 9,824 13,187 9,824
23. Interest in joint venture
The Company has a 99.9% interest in a land fill gas generation venture called Horotiu Landfill Gas Project. The venture was formed to operate the landfill gas generation plant owned by the Company. The venture commenced operation in November 2004.
Assets: Trade receivables 45 165 45 165 Net assets 45 165 45 165
Income 473 360 473 360 Expenses (384) (375) (384) (375) Net profit after income tax 89 (15) 89 (15)
There are no contingent liabilities relating to the Group’s interest in the joint venture, and no contingent liabilities of the venture itself. 24. Investments in subsidiaries
Operating Subsidiaries There are no operating subsidiaries
Non Operating Subsidiaries WEL International Limited WEL Electricity Limited WEL Power Limited WEL Energy Group Limited (formerly WEL Networks Limited) WEL Resource Limited Waikato Electricity Limited WEL Generation Limited
All subsidiaries have balance dates of 31 March are incorporated in New Zealand and are dormant. The parent company has a 100% interest in all subsidiaries.
25. Related-party transactions
(a) Directors The names of persons who were directors of the company during the financial year are as follows: R J Fisher, J C Birch, J K Williams, J L Spencer, Hon R W Prebble and M P Devlin. All of these persons were also directors during the year ended 31 March 2007, except for M P Devlin who was appointed in October 2007 and B V Walsh who retired in September 2007. M C Underhill (alternate director) resigned in May 2007 and was replaced by Dr J M Elder as an alternate director in June 2007.
(b) Compensation of directors and key management and personnel The directors and key management personnel compensation for the years ended 31 March 2008 and 31 March 2007 is set out below. The directors and the four executives profiled in this report have the greatest authority for the strategic direction and management of the company.
Short-term Post- Other long-Termination Total benefits employment term benefits benefits benefits ($000) ($000) ($000) ($000) ($000)
Year ended 31 March 2008 1,293 - - - 1,293 Year ended 31 March 2007 1,220 - - - 1,220
(c) Other transactions with directors and key management personnel or entities related to them There are no other transactions with directors or key management personnel or entities.
(d) Subsidiaries Interests in subsidiaries are set out in note 24.
(e) Transactions with related parties The ultimate parent of WEL Networks Limited is the WEL Energy Trust which owns 100% of its shares.
All members of the Group are considered related parties of WEL Networks Limited. This includes the subsidiaries and associated companies listed in note 24.
Other than the payment of directors fees (refer note 17) the Group has not entered into any transactions with Directors. No related party debts were forgiven or written off during 2008 or 2007. 25. Related-party transactions - continued Group Group Parent Parent 2008 2007 2008 2007 ($000) ($000) ($000) ($000)
Related party transactions with WEL Energy Trust
Third party contributions 1,000 1,373 1,000 1,373 Contracting revenue 630 746 630 746 Rental income 25 43 25 43 Sales to related parties 1,655 2,162 1,655 2,162
Materials and services 87 126 87 126 Interest expense 16,814 3,208 16,814 3,208 Payments to related parties 16,901 3,334 16,901 3,334
Trade receivables 110 57 110 57 Trade payables 5 9 5 9
26. Events subsequent to balance date
No significant events have occurred since balance date requiring disclosure in the financial statements.
27. Impacts of adoption of New Zealand equivalents to International Financial Reporting Standards
Shown below are tables highlighting the impact of the transition to NZ IFRS, for the income statement and Group and Parent balance sheet as at 31 March 2007.
Notes to the reconciliation of NZ FRS to NZ IFRS
(a) Contributions by local councils relating to undergrounding of the network distribution assets are considered to be Government Grants which are treated as unearned revenue and amortised over the life of the underlying asset.
(b) Under NZ FRS deferred tax was recognised on a partial basis. Under NZ IFRS deferred tax is determined using the balance sheet method in respect of all temporary differences between the carrying amount of the assets and liabilities in the financial statements and their corresponding tax base.
(c) Under NZ IFRS computer software and easements are considered to be intangible assets rather than property plant and equipment. The method used to amortise these assets is not materially different to NZ FRS depreciation methods.
Effects of NZ IFRS on the statement of cash flows for the year ended 31 March 2007
There are no material differences between the cash flow statement presented under NZ IFRS and the cash flow statement presented under the superseded polices. 27. Impacts of adoption of New Zealand equivalents to International Financial Reporting Standards - continued
Immediately preceding financial year Income Statement Year ended 31 March 2007
Note NZ FRS Effect of NZ IFRS transition to NZ IFRS ($000) ($000) ($000)
Revenue 64,807 - 64,807 Other net (losses)/gains (a) 400 (375) 25 Operating expenses (42,413) - (42,413) Operating net profit 22,794 (375) 22,419 Borrowing costs (3,258) - (3,258) Net profit before income tax 19,536 (375) 19,161 Income tax expense (b) ( 5,119) 1,054 (4,065) Net profit for the year 14,417 679 15,096
Net profit attributable to: Equity holders of the company 14,417 679 15,096 14,417 679 15,096 27. Impacts of adoption of New Zealand equivalents to International Financial Reporting Standards - continued
Opening Balance Sheet Immediately preceding financial As at 1 April 2006 Balance Sheet As at 31 March 2007
GroupNote NZ FRS Effect of NZ IFRS NZ FRS Effect of NZ IFRS transition transition to NZ IFRS to NZ IFRS ($000) ($000) ($000) ($000) ($000) ($000) ASSETS Non-current assets
Property, plant and equipment (c) 238,999 (2,281) 236,718 310,565 (2,371) 308,194 Intangible assets (c) - 2,281 2,281 - 2,371 2,371 Other assets 32 - 32 24 - 24 239,031 - 239,031 310,589 - 310,589 Current assets Trade and other receivables 8,575 - 8,575 7,886 - 7,886 Property intended for sale - - - 8,621 - 8,621 Cash and cash equivalents 14,412 - 14,412 7,318 - 7,318 22,987 - 22,987 23,825 - 23,825
Total assets 262,018 - 262,018 334,414 - 334,414
EQUITY
Capital and reserves attributable to equity holders of the Company Share capital 92,442 - 92,442 92,442 - 92,442 Other reserves (b) 111,387 (37,504) 73,883 164,992 (54,479) 110,513 Retained earnings (b) (26,242) 13,516 (12,726) (11,825) 14,106 2,281 Total equity 177,587 (23,988) 153,599 245,609 (40,373) 205,236
LIABILITIES Non-current liabilities Borrowings 37,400 - 37,400 37,400 - 37,400 Deferred income tax liabilities (b) 18,996 23,096 42,092 19,989 39,105 59,094 Deferred income (a) - 892 892 - 1,268 1,268 56,396 23,988 80,384 57,389 40,373 97,762
Current liabilities Trade and other payables 9,431 - 9,431 11,666 - 11,666 Current income tax liabilities ------Customer discount payable 18,604 - 18,604 19,750 - 19,750 28,035 - 28,035 31,416 - 31,416
Total liabilities 84,431 23,988 108,419 88,805 40,373 129,178
Total equity and liabilities 262,018 - 262,018 334,414 - 334,414 27. Impacts of adoption of New Zealand equivalents to International Financial Reporting Standards - continued
Opening Balance Sheet Immediately preceding financial As as 1 April 2006 year Balance Sheet As at 31 March 2007
Note AUDITORS’ REPORT 31 March 2008 AUDITORS’ REPORT 31 March 2008 DIRECTORS' REPORT STATUTORY INFORMATION
1. Directors' Remuneration
Directors' fees and other remuneration paid during the year were:
Year Ended Year Ended 31 March 2008 31 March 2007 $ $
R H Fisher 77,500 72,500 B V Walsh (retired September 2007) 21,250 37,500 J C Birch 37,500 32,500 J K Williams 37,500 32,500 R W Prebble 37,500 32,500 J L Spencer 40,000 32,500 M P Devlin 18,750 -
270,000 240,000
2. Donations
There were no donations made by the Company during the year.
3. Directors' Indemnities and Insurance
The Deeds of Indemnity given by the Company in favour of those Directors who held office at the beginning of the financial year to which this report relates, and to Directors appointed since the beginning of the financial year and who still hold office as Directors of the Company, remain in full force and effect on the same terms and conditions under which they were given.
As permitted by, and to the extent permitted by, the Company's Constitution, the Company has effected insurance for Directors and officers which, together with the Deeds of Indemnity, generally ensures that the Directors will not incur any monetary loss as a result of actions undertaken by them as Directors. The Directors and officers insurance comprises a primary layer of $20 million and an excess layer of $15 million. Statutory liability insurance with a limit of $500,000 per claim and in the aggregate has also been effected. DIRECTORS' REPORT STATUTORY INFORMATION
4. Employees Remuneration
The number of employees (excluding Directors) whose income was within specified bands is as follows:
Year Ended Year Ended 31 March 2008 31 March 2007
Continuing Employees
$470,000 - $479,999 - 1 $300,000 - $309,999 1 - $280,000 - $289,999 1 1 $220,000 - $229,999 - 1 $160,000 - $169,999 1 - $150,000 - $159,999 - 1 $130,000 - $139,999 2 - $120,000 - $129,999 2 1 $110,000 - $119,999 5 2 $100,000 - $109,999 9 6
Discontinued Employees
$120,000 - $129,999 1
22 13
5. Shareholders
As at 31 March 2008 the Company's shareholder was: Number of Shares WEL Energy Trust 8,153,000 Total shares on issue: 8,153,000 DIRECTORY As at 31 March 2008
REGISTERED OFFICE
WEL House 711 Victoria Street PO Box 925 Hamilton New Zealand
Telephone 64-7-838 1399 Facsimile 64-7-858 1447 Website www.wel.co.nz Email:[email protected]
DIRECTORS HOLDING OFFICE DURING THE YEAR
Rodger H Fisher Chairman John C Birch Margaret P Devlin (Appointed October 2007) Hon Richard W Prebble John L Spencer Brian V Walsh (Resigned September 2007) Jeffrey K Williams Mike C Underhill (Alternate, resigned May 2007) Dr Julian M Elder (Alternate, from June 2007)
CHIEF EXECUTIVE Dr Julian M Elder BE(Elec), PhD, MIPENZ, CPEng, IntPE(NZ)
EXECUTIVE OFFICERS
Chief Financial Officer David E Smith BMS, CA
General Manager Operations Russell K Shaw BEng (Hons), MSc in Engineering Business Management, CEng, MIET, MIPENZ
General Manager Development and Regulatory John van Brink BE(Elec), ME(Dist), CEng, MIET
Auditors PricewaterhouseCoopers, Auckland
Solicitors DLA Phillips Fox, Auckland Loft Consulting Limited, Whakatane Tompkins Wake, Hamilton
Insurance Brokers AON New Zealand Limited, Auckland