2002 Annual Report

This page contains highlights from the 2002 Annual Report. Please contact the company if you would like to request a full copy of the report.

This is the Annual Report of WEL Networks Limited

Dated this 20th day of August 2002

Signed for and on behalf of the Board of Directors

Sir Dryden Spring	Rodger Fisher
Chairman	Deputy Chairman

This Year's Highlights

An $8.2m network capital investment was made to expand capacity and enhance network security.
Total dividend paid to Shareholders for the year was $11.2m.
SAIDI is a key measure of reliability. It is the number of minutes an average customer is without power over the whole year. This year there was a significant improvement in SAIDI from 144 minutes to 80 minutes.
WEL passed on to retailers the majority of transmission rental rebates - this was almost equivalent to a 3% reduction in prices.
A Benchmarking project undertaken by the international consulting company, UMS Group, resulted in a company restructure and a new focus on Asset Management.
WEL Networks was judged the 8th best place to work in New Zealand, according to the 2001 Unlimited Best Places to Work Survey.

Key Performance Indicators

Net Surplus After Tax was $23.9m for the year ended 30 June 2002, compared with $17.1m last year.
Return on Investment (ROI) shows a consistent level of value enhancing returns.
SAIDI for the year was 80 minutes, a 44% improvement on last year's result and our best result ever. The Weather Bomb experienced in June was the worst storm to hit the Waikato in 20 years, unfortunately this contributed 18 SAIDI minutes to the annual total.
CAIDI for the year improved to 48.5 minutes, compared to 51.5 minutes last year.
Low Voltage Complaint numbers have reduced 37% from 81 in the 00/01 year, to 51 for the year ended 30 June 2002.

Chairman's Report

Financial Highlights
For the year ended 30 June 2002, the Company achieved an after tax profit of $23.9m compared with $17.1m for the year ended 2001. This result includes a one-off increase due to interest received from WETSL not being offset by a subvention payment. Excluding this one-off increase the after tax profit is $17.3m.

Importantly, the Company's Return on Investment of 9.2% exceeds its cost of capital, thus continuing to create economic value for our Shareholder.

The Company continues to experience growth in its network area, with an underlying growth rate of 1.4% year-on-year.

Prices
I am proud to record that for the sixth year in succession, there has been no price increase. As well as holding prices constant, the Company decided to pass on 60% of its transmission loss rental rebates to retailers at the start of last year. Overall this has been equivalent to offering a 3% price reduction.

WEL Networks will continue to offer competitive prices, while working to further improve reliability of supply and customer service.

WEL Energy Trust - 100% Owner
At the recent triennial Trust election, six long serving members of the Trust were replaced. I must acknowledge the strong contribution that Chairman Russ Rimmington and his colleagues have made over the years. I look forward to working with Chairman Garry Mallet and his fellow Trustees.

WEL Networks has joined with major local retailer Genesis, to be part of the WEL Energy Trust local disputes facilitation service.

This scheme came into effect from May 2002 and Mr Arthur Muldoon has been appointed the inaugural disputes facilitator.

We look forward to the prompt and satisfactory resolution of issues that customers may have. This local disputes facilitation scheme will also complement the newly created National Complaints Scheme run by the Electricity Complaints Commission.

Dividend
The Company has declared a total dividend of $11.2m to its Shareholder, WEL Energy Trust. This gives effect to the Company's current dividend policy of returning 70% of funds to its shareholder for distribution back to the Waikato community, while retaining sufficient funds to ensure the continued enhancement of reliability and security of the network.

Industry Governance Reform
Once again, reform and regulatory issues have dominated the electricity industry. I believe that this is masking some serious trends in the industry.

Last winter the country came very close to an electricity shortage, which highlighted the need for further investment in generation. Transpower security reports show the need for investment in transmission facilities to avoid unacceptable load shedding.

New requirements that distribution lines can only be included in the ODV valuation if greater than 66% loaded, poses a significant challenge to provide a secure supply to our agricultural sector.

It is essential that investment continues to be made, to ensure that the country's economic development is not constrained.

Two major reform initiatives have moved closer to introduction. WEL strongly supported the proposed industry self-regulation model, with a backstop of regulation. I am concerned about the governance complexity and high costs of the emerging Electricity Governance Board model.

Since the electricity industry was deregulated in 1998, a significant improvement in operating efficiency has been achieved. These improvements have been shared with consumers.

Lines companies have significantly improved the quality and reliability of supply. WEL's reliability improved 44% last year.

This major improvement demonstrates the effectiveness of WEL's reliability centered maintenance and upgrade programmes.

As the Commerce Commission considers the need for further regulation, it must avoid prescriptive input regulation and concentrate on performance. It must carefully consider the long-term consequences of any proposed action, and in particular, how the quality and reliability of supplymight be affected.

The electricity industry is delicately poised. The likelihood of rationing or brownouts in dry years has increased, as investment in generation and transmission has been curtailed. The Commerce Commission needs to ensure that any action it takes will not result in under investment in either generation or distribution facilities, as that will risk impairing the reliability and quality of supply. Neither Government, nor the Commerce Commission, will receive any thanks from consumers, should their actions result in a lowering of quality and reliability of supply.

Acknowledgements
I would like to acknowledge the strong contributions from my fellow Directors, in particular, the contribution of Keiran Devine who left the Board of Directors on 31 January 2001 to take up a position with Transpower NZ Ltd. I also take this opportunity to welcome to the Board, John Green, who was appointed a Director on 10 August 2001, and Jeff Williams, who was appointed on 4 June 2002, both of whom bring with them strong commercial and industry experience.

My thanks and appreciation go to Mike Underhill, Chief Executive, and his management team for their support.

Chief Executive's Report

WEL's vision is to be an energy distribution company giving world-class service to customers and creating value for our Shareholder. As a result we have focused the Company on:

Reliability and quality of supply;
Service to customers;
Competitive pricing;
Creating shareholder value.

During the year we embarked on a major project to enable us to lift the Company's performance to the highest standards in these areas. The project has resulted in a restructuring of the Company and changes to the way we contract out our fieldwork. These changes will more closely align the performance of contractors with the Company's objectives.

Reliability of Supply
Reliability is the critical measure of quality of supply. Last year was our best year ever with an average annual customer outage time of only 80 minutes. This is the first visible measure of the performance of our refocused company.

Network Development
Growing and improving the network continues to be a major part of the Company's capital programme, with the installation of proven measures, new technologies and a comprehensive network improvement programme. The Company has undertaken a number of significant capital projects this year including fifteen major capital projects, highlights of which include:

Matangi Road 11kV line re-conducting;
Bryce Street 11kV switchgear replacement;
Protection signalling on the 33kV system;
Zone substation transformer thermal protection;
Reinforcement of 11kV system in central Hamilton;
Rearrangement of the 33kV at the Transpower Hamilton substation.

There has been a major review of medium and long-term security of supply in our region. As a result, we have committed Transpower to new up-rated transformers at the Hamilton point of supply and these will be installed in the coming year.

Together with Transpower we have committed to a new point of supply west of Hamilton. Our investment in this point of supply and the associated major changes to our network, will represent the most significant investment in the network in the last 20 years. The new point of supply is due to be commissioned in 2005. The completion of this project will resolve our growing concern about the long-term security of supply in our region and will offer two strong supply routes into Hamilton City.

Reduction in system losses
As a result of meshing the 33kV system and the embedding of distributed generation our line losses have reduced by 12%. This counts as a significant reduction in the amount of electricity wasted during its delivery throughout our region.

Customer / Community
As the Waikato region's largest electricity network operator, WEL Networks is committed to providing a reliable and safe supply at a competitive price, to existing and future customers.

Along with improving reliability and safety and providing a competitive price, we are committed to providing a high level of customer service, particularly in network fault situations. Our 'Response Plus' call centre operates 24 hours, seven days a week and is responsible for ensuring all customer fault calls are dealt with quickly and efficiently.

The Company's asset management framework is strucutred to ensure that future customer needs are met. We have a strong focus on improving reliability and this requires both the development of the physical network and the use of new technology. Examples of these practices include:

Automation of our network, to ensure faster restoration of supply;
Pre-fault identification, using thermal imaging and ultra sound technology;
Meshing of network circuits, to ensure there is no loss of supply when a fault occurs;
Outage reduction, via the use of computer-based technology to quickly locate faults;
Live line network maintenance, to ensure continuity of supply to customers.

WEL's future is closely aligned to the ongoing economic development of the region and for this reason we are an active participant and financial contributor to the economic development of the Waikato. Last year WEL's network connection base grew by 1,400 to a total of 73,400 connections. To add to this, WEL's new commercial and industrial load increased by a further 10.5 GWh. We are constantly implementing initiatives to assist with business growth and development, as we recognise the valuable contribution that successful businesses make to the region.

Staff
WEL Networks has recently completed a major restructure of the organisation to result in a greater focus on best practice asset management. Last year WEL was recognised as the 8th best place to work in New Zealand, according to a survey by Unlimited Magazine. This achievement demonstrates WEL's ongoing commitment to its staff.

Conclusion
I look forward to the continuing improvement in our quality of supply and service to customers as the structual changes to our organisation take effect.

I would like to acknowledge the commitment and dedication of the Company's staff and express my appreciation of their skills right across the organisation, as this ensures we are well equipped for a successful year ahead.

Directors Profile

Sir Dryden Spring
(Chairman since 1999)
Sir Dryden is Chairman of Ericsson Communications Limited (NZ), Fletcher Challenge Forests Limited, Asia 2000 Foundation of New Zealand, and the NZ Delegation to the APEC Business Advisory Council. He is Deputy Chairman of Goodman Fielder Limited, and a director of the National Bank of New Zealand Limited, Maersk New Zealand Limited, NZ APEC Business Coalition CEO Summit and Fletcher Building Limited. Sir Dryden has had a long and distinguished career in the dairy industry. He was chairman of the NZ Co-operative Dairy Company Limited from 1982 to 1989, during which time the company's turnover more than doubled. He became chairman of the New Zealand Dairy Board in 1989 and during his 10 year leadership, turnover almost tripled to NZ$7.8 billion. In 1994/95 he was a member of the APEC Eminent Persons Group, which drafted the APEC Vision. He was knighted in 1994 for services to New Zealand and the dairy industry.

Rodger Fisher
(Deputy Chairman since 1999)
Rodger is Chairman of the Civil Aviation Authority and of the Aviation Security Service and a Director of Fletcher Forests Limited and Waste Management New Zealand Limited. He 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 the managing director of the Owens Group Limited between 1987 and 1999.

Shane Solomon
Shane is a Director of Raukura Moana Seafoods Quota Limited, Raukura Moana Seafoods Limited and Innovation Waikato Limited. He was part of the negotiating team responsible for settling the Waikato Raupatu Claim and helped draft the Raupatu Settlement Legislation. Shane has a law degree from Auckland University.

Brian Walsh
Brian is an Auckland-based financial consultant specialising in capital raisings and equity valuations. He holds directorships in Kwan Holdings Limited, CapitalGroup Finance Limited, Austral Distributors Limited, Annaghdown Holdings Limited, Moore Business Forms and Systems Limited and Gallagher Communications Holdings Limited. He is a former director of investment banking at Merrill Lynch (New Zealand) Limited.
Previously, he held senior management positions with Countrywide Bank and was a director of its operating lease subsidiary, Fleetlease Limited. He is a member of the Institute of Chartered Accountants and has a MA (Hons) in economics and a law degree from Otago University.

John Green
John is the Managing Director of Greens Industries, a manufacturing company based in Hamilton with a strong hold on the New Zealand market, exporting into the UK, USA, Australia, Japan and the Pacific. John also holds directorships in Greens Enterprises, Greens Industries Australia, Greens Industries UK, and Ginley Holdings.

Jeff Williams
Jeff currently holds Directorships with Comvita Limited, Tauranga Around Alone Limited and Manu Moana Sanctuary Limited.
Jeff was the CEO of TrustPower Limited for 9 years from 1992 to 2001. During his time with TrustPower Jeff handled the transition of that organisation from a local power board to a publicly listed company, leading a number of successful mergers and acquisitions. The company emerged from the 1998 Government dictated split as a retailer/generator, with a customer base that grew from 39,000 to 290,000 and with a portfolio of 32 generation schemes. He was previously Managing Director of ABB New Zealand Limited, and chaired a number of ABB companies, and prior to that was Managing Director of David Fraser Limited, a subsidiary of ABB.

Disclosures of Interests by Directors

The following disclosures have been made to the Board and were recorded in the Company's Interests Register during the 2001/2002 year:

Sir Dryden Spring
(Chairman)
Chairman of Asia 2000 Foundation of New Zealand.

Rodger Fisher
(Deputy Chairman)
Chairman of Eurotech Group Limited

Brain Walsh
Director of Gallagher Communications Limited and Annaghdown Holdings Limited.

John Green
Director of Greens Industries Limited, Greens Enterprises Limited, Greens Industries Australia Limited, Greens Industries UK Limited and Ginley Holdings Limited.

Jeff Williams
Director of Tauranga Around Alone Limited, Manu Moana Sanctuary Limited and Comvita Limited.

All Directors during the year
Insured parties in respect of the renewal of Directors and Officers and Statutory Liabilities Insurance.

Directors holding office at the end of the accounting period
Sir Dryden Spring, Rodger Fisher, Shane Solomon, Brian Walsh, John Green and Jeff Williams. Mike Underhill as Alternate Director only.

Directors who ceased to hold office during the accounting period
Keiran Devine.

Directors of Subsidiary Companies
During the accounting period, Sir Dryden Spring and Mike Underhill were the Directors of all of the Company's subsidiary companies.

Interested Transactions
With the exception of the remuneration as detailed in this annual report, there were no other transactions with Directors during the year. No loans were made by the Company to the Directors.

Corporate Goverance

There have been no changes to the Company's corporate governance policies as outlined in last year's Annual Report. A brief summary of these policies is outlined below:

Board of Directors
The Board is appointed by the Shareholder and is responsible for setting and monitoring the direction of the Company. The Directors appoint a Chairman from amongst themselves, for a term of not more than 3 years. 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's operating committees, the Remuneration Committee; and the Audit Committee; comprise three Board members, and report to the full Board, operating under a charter approved by the Board. The Board regularly appraises its performance and that of the individual Directors.

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.

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, be counted in the quorum or vote on a resolution in which the Director is interested. Where appropriate or as determined by the Chairman, a Director shall abstain from voting or absents themself from the meeting whilst the relevant matter is being considered.

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.

Principal Activity
The Company's principal activity during the year was the operation of a lines network delivering electricity to Hamilton and the surrounding Waikato area.

Company Directory

Registered Office

WEL Energy House
Cnr Victoria and London Streets
PO Box 925
Hamilton
New Zealand

Telephone: 64-7-838 1399
Facsimile: 64-7-858 1451
Website: www.wel.co.nz
Email: connect@wel.co.nz

Auditors

PricewaterhouseCoopers, Auckland

Solicitors

Minter Ellison Rudd Watts, Auckland

Insurance Brokers

Willis New Zealand Limited, Auckland

Directors

Sir Dryden T. Spring - Chairman
Rodger Fisher - Deputy Chairman
Shane R. Solomon
Brian V. Walsh
Kerrin J Devine (until 31 January 2002)
John W. Green (from 10 August 2002)
Jeff K. Williams (from 4 June 2002)
Mike C. Underhill (Alternate)

Chief Executive

Mike Underhill BE (elect), MCom (Hons), FIPENZ

Executive Officers

Merrin A Coft LLB Legal/Regulatory Manager
Kevin J. Palmer BMS, CA Chief Financial Controller
Peter A. G. Burgess NZCE, REA General Manager, Network Services
Keith A. Edmonds NZCE, Dip BS General Manager, Strategic Asset Management
John H. A. Versluys BSC (Tech), BE (Hons), MIPENZ General Manager, IT Services
Jacqui A. Thorby BMS (Hons) (until 16 May 2002) Marketing Development Manager
Brian J. Rayner (until 29 May 2002) IT Development Manager
Chris G Doak BE (elect) (from 27 April 2002) General Manager, Growth and Development
Alan J Harrop NZCE (from 27 April 2002) Networks Performance Manager