COMPANY PROFILE WEL Networks is in the business of supplying electricity infrastructure, delivering energy to over 80,000 homes, businesses and organisations throughout the Waikato region. Our network covers over 4,900 kilometres of lines and has an annual throughput over 1,100GWh. WEL Networks is valued at over $300 million. The company employs over 150 staff and has bases from Maramarua to Makomako, with its head quarters in Hamilton city. WEL Networks 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 is committed to providing reliable power at good prices and works hard to be a world class supplier of energy. This commitment was reflected recently when the Commerce Commission ranked WEL Networks second out of 28 in a review of New Zealand’s network companies’ Asset Management Plans. WEL Networks 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 pilot 1MW landfill gas generation plant at Horotiu, and is working through the consent stages of a $200 million wind farm project at Te Uku. WEL Networks 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 has introduced an annual discount programme, resulting in discounts of $81.4 million (incl. GST) over the past five years. 0:2 CHAIRMAN’S REPORT Financial results The net profit after tax, but before the profit from the sale of WEL House, for the six months to 30 September 2007 was $7.8 million, compared to $8.6 million for the six months ended 30 September 2006. The lower level of profit is largely due to an increase in depreciation due to the significant increase in the network assets, resulting from the 31 March 2007 asset revaluation process. Expenses have also increased as a result of the high global demand for electrical goods and services. Net profit after tax and, after the one-off profit from the sale of WEL House, was $9.1 million for the period. Note: All comparative financial results have been restated in accordance with NZ IFRS accounting standards, following the adoption of the new standards from 1 April 2007. Adoption of New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) WEL adopted NZ IFRS for the current 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 adoption of NZ IFRS in the notes to our interim financial statements. We have included a full set of new accounting policies that reflect the impacts of adopting these new accounting standards. Pricing WEL has continued to invest heavily in our network to cater for both strong growth and the replacement of aging assets. This, coupled with increasing costs, has led us to announce a price increase effective from 1 October 2007. This increase will be the first that the Company has introduced (other than pass through costs) for nine years. Line charges will rise by 6.2% (approximately 82 cents per week including GST) for the average customer. The Company is proud of our record of improved performance while holding prices for such a long period. Discount In April 2007 WEL paid a total discount of $22.2 million (incl. GST) relating to the 2006/07 year. WEL has advised that there will be a 3% increase in total discount for the 2007/08 year. Regulatory Environment WEL has continued to meet our regulatory compliance requirements including the Commerce Commission’s price and quality thresholds, and is considered to be a top performer by the Commission. WEL was recently ranked second amongst the lines companies in the Commerce Commission review of compliance for network asset management plans. The regulatory environment remains unsettled. Recent announcements concerning a draft settlement with Transpower and draft control terms for the gas networks of Powerco and Vector have created further uncertainty in relation to the regulatory regime that will come into effect for electricity lines businesses on 1 April 2009. WEL’s approach is to continue to meet customer requirements in accordance with our direction as a trust owned company and to continue to build a strong relationship with the regulator rather than having to face industry-wide, regulator dictated direction. 0:4 Network Reliability WEL’s reliability target for the first six months of the year was a challenging 32.4 SAIDI minutes, compared with the actual result of 43.6 SAIDI minutes. The key reasons for missing the SAIDI target were, weather and vehicle related. We have experienced several significant storms. Although these have increased the number of outages I am pleased at the positive response of our line staff. Through their efforts WEL has managed to minimise the loss of electrical supplies to our customers. These storms impacted on many other lines companies across New Zealand, in particular in Northland, Auckland and the Coromandel. Vehicle accidents have risen significantly in frequency causing one third of all customer outages, this equates to 13.82 SAIDI minutes. Comparisons with other lines companies show that the Waikato has a very high rate of vehicle accidents. We are commissioning more research into this area in an endeavour to identify any underlying issues and potential solutions. Wind Farm WEL has lodged an application for a wind farm at Te Uku and consent hearings are scheduled for November 2007. We are encouraged by the recent announcements of the New Zealand Energy Strategy and the New Zealand Energy Efficiency and Conservation Strategy which promote the move to a greater use of renewable energy resources, targeting 90% by 2025. This future direction will improve the financial return from the Te Uku project. The wind farm, whilst strengthening the network and increasing the use of renewable resources in the Waikato, will only proceed if it proves to be economically viable. The value of carbon tax credits needs to be finalised to allow the Company to properly assess their contribution to the project. If implemented, the Te Uku wind farm alone will help the Waikato to avoid approximately 190,000 tonnes per annum of carbon emissions. Executive Management The new Executive Management team is now in place and my thanks go to Chief Executive Dr Julian Elder, who commenced with WEL in April, for facilitating this process. I would like to welcome new Executive Managers, David Smith, Chief Financial Officer and John van Brink, General Manager Development and Regulatory who have recently joined the Company and to farewell and thank Kevin Palmer, General Manager Corporate Services, who left WEL in May after 11 years with the Company. Acknowledgements My thanks go to Brian Walsh for almost nine years of service with the Company. Brian retired as a Director and as Chairman of the Audit and Risk Committee at the end of September. Welcome to Margaret Devlin as a new Director of the Company. Margaret has joined the Board following the retirement of Brian Walsh. I would like to express my appreciation to the WEL Energy Trust Chairman, Garry Mallett, and the trustees for their continued support. Finally, I would also like to thank Chief Executive Dr Julian Elder, the management team and the staff for their achievements during the six month period. FINANCIALS FINANCIALS Six months to 30 September 2007 Six months to 30 September 2007 Six months to 30 September Consolidated Balance Sheet 0:6 Consolidated Income Statement 0:7 Consolidated Statement of Changes in Equity 0:8 Consolidated Cash Flow Statement 0:9 Notes to the Financial Statements 10 Statement of Accounting Policies 10 Directory 23 0:6 CONSOLIDATED BALANCE SHEET As at 30 September 2007 (unaudited) Note September September March 2007 2006 2007 ($000) ($000) ($000) ASSETS Non-current assets Property, plant and equipment 320,183 249,161 308,194 Intangible assets 2,344 2,309 2,371 Other assets 19 28 24 322,546 251,498 310,589 Current assets Trade and other receivables 18,480 7,848 7,886 Assets classified as held for sale - - 8,621 Cash and bank 944 5,805 7,318 19,424 13,653 23,825 Total assets 341,970 265,151 334,414 EQUITY Capital and reserves attributable to equity holders of the Company Share capital 92,442 92,442 92,442 Other reserves 114,371 73,883 110,513 Retained earnings 12,326 (4,168) 2,281 Total equity 219,139 162,157 205,236 LIABILITIES Non-current liabilities Borrowings 5 18,700 37,400 37,400 Deferred income tax liabilities 9 53,070 41,182 59,094 Deferred revenue 1,253 1,080 1,268 73,023 79,662 97,762 Current liabilities Trade and other payables 9,066 11,182 11,666 Current income tax liabilities 1,461 1,281 - Customer discount payable 11,081 10,869 19,750 Borrowings 5 28,200 - - 49,808 23,332 31,417 Total liabilities 122,831 102,994 129,178 Total equity and liabilities 341,970 265,151 334,414 Rodger Fisher, Chairman John Spencer, Director 20 November 2007 20 November 2007 0:7 For the half year ended CONSOLIDATED INCOME STATEMENT 30 September 2007 (unaudited) Note September September March