wellington electricity distribution network limited...

Wellington Electricity Distribution Network Limited Financial Statements for the year ended 31 December 2017

Wellington Electricity Distribution Network Limited Consolidated Statement of Profit or Loss and Other Comprehensive Income for the financial year ended 31 December 2017

Revenue

Other losses Operating expenses Earnings before interest taxation depreciation and amortisation (EBITDA)

Depreciation and amortisation Earnings before interest and taxation (EBIT)

Interest income Interest expense Profit/(loss) before tax

Tax expense Loss for the year

Other comprehensive income, net of tax Items that may be reclassified subsequently to profit or loss: Net change in cash flow hedges Other comprehensive income for the year, net of tax

Total comprehensive income for the year, net of tax

Loss for the year is attributable to: Equity holders of the parent Total comprehensive income is attributable to: Equity holders of the parent

The Group have no discontinued operations for the year (2016: nil)

These financial statements should be read in conjunction with the accompanying notes.

2

Note

2

3 4

9/11

5 5

6

15

Group 2017 2016

$'000 $'000

193,377 180,181

(3,338) (1,044) (106,332) (102,388}

83,707 76,749

(31,869) {31,382} 51,838 45,367

1,287 1,386 (50,242) (48,106)

2,883 {1,353}

(3,732) {559) (849) {1,912)

(2,217) 127 (2,217) 127

(3,066) {1,785)

(849) {1,912}

(3,066) {1,785}

Wellington Electricity Distribution Network Limited Consolidated Statement of Changes in Equity for the financial year ended 31 December 2017

Fully paid Cash flow ordinary hedge

Group shares reserve $'000 $'000

Balance at 1 January 2016 172,000 (12,362) Loss for the year Other comprehensive income for the year, net of tax 127 Balance at 31 December 2016 172,000 (12,235)

Balance at 1 January 2017 172,000 (12,235) Loss for the year Other comprehensive income for the year, net of tax (2,217) Balance at 31 December 2017 172,000 (14,452)

As at 31 December 2017 there are 172,000,100 fully paid ordinary shares (2016: 172,000,100)


3

Retained Total deficit equity $'000 $'000

(71,744) 87,894 (1,912) (1,912)

127 (73,656) 86,109

(73,656) 86,109 (849) (849)

(2,217)(74,505) 83,043

Wellington Electricity Distribution Network Limited Consolidated Statement of Financial Position as at 31 December 2017

ASSETS Current assets Cash and cash equivalents Trade and other receivables Finance lease receivable Derivative financial instruments Total current assets

Non-current assets Finance lease receivable Property, plant and equipment Goodwill Intangible assets Derivative financial instruments Total non-current assets

Total assets

LIABILITIES Current liabilities Trade and other payables Borrowings Provisions Derivative financial instruments Total current liabilities

Non-current liabilities Borrowings Deferred tax liabilities Derivative financial instruments Total non-current liabilities

Total liabilities

Net assets

EQUITY Share capital Cash flow hedge reserve Retained deficit Total equity


R.C. Pearson

Chairman

28 February 2018

4

'

Director

28 February 2018

Note

7 8

18

8 9

10 11 18

12 13 14 18

13 6

18

15

Group 2017 2016

$'000 $'000

12,211 21,807 16,165 16,277

329 329 4

28,705 38,417

6,670 6,999 592,548 584,806 256,454 256,454

6,724 8,411 18,861 25,106

881,257 881,776

909,962 920,193

28,692 29,355 9,749 208,981

769 798 2

39,212 239,134

712,533 523,892 54,872 51,006 20,302 20,052

787,707 594,950

828,919 834,084

83,043 86,109

172,000 172,000 (14,452) (12,235) (74,505) (73,656) 83,043 86,109

Wellington Electricity Distribution Network Limited Consolidated Statement of Cash Flows for the financial year ended 31 December 2017

Cash flows from operating activities Receipts from customers Interest received from third parties Payments to suppliers and employees Interest paid to related party - International Infrastructure Services Company Limited Interest paid to third parties Subvention payment received net of tax paid Net cash flow from operating activities

Cash flows from investing activities Payments for property, plant and equipment Proceeds from disposal of property, plant and equipment Payments for intangible assets Proceeds from finance lease asset Net cash flow from investing activities

Cash flows from financing activities Proceeds of borrowings from third parties Repayment of borrowings from third parties Payment for debt issue costs Net cash flow from financing activities

Net cash flow Cash at the beginning of the year Cash at the end of the year

Reconciliation of loss for the year to net cash flow from operating activities Loss for the year: Adjustments for: Tax expense Net interest expense Loss on disposal of property, plant and equipment Loss/(gain) on the fair value of derivative instruments Depreciation and amortisation

Movements in working capital: Decrease/(increase in trade and other receivables (Decrease)lincrease in trade and other payables Less movement in capital accruals included in trade and other payables Decrease in finance lease liabilities net of disposals (Decrease)lincrease in provisions Cash generated from operations Net interest paid Subvention payments received Net cash flow from operating activities


5

Group 2017 2016 $'000 $'000

195,071 1,286

(110,061) (22,599) (26,766)

997 37,928

(39,231) 16

(139) 329

(39,025)

200,000 (208,000)

(499)

(8,499)

(9,596) 21,807

12,211

(849)

3,732 48,955

3,195 166

31,869 87,068

112 (663)

(1,478)

(29) 85,010

(48,079) 997

37,928

178,008 1,386

(97,511) (20,687) (27,492)

1,028 34,732

(32,215)

(796) 329

(32,682)

(4,000) (54)

(4,054)

(2,004) 23,811 21,807

(1,912)

559 46,720

1,064 (11)

31,382 77,802

(2,411) 6,421

(2,028) (1)

714 80,497 (46,793)

1,028 34,732

Wellington Electricity Distribution Network Limited Notes to the Financial Statements for the financial year ended 31 December 2017

1 Summary of accounting policies

Statement of compliance

The financial statements presented are those of Wellington Electricity Distribution Network Limited (the 'Company') together with its subsidiaries (the 'Group'). The company and its subsidiaries are profit-oriented entities incorporated and domiciled in New Zealand. The Group is responsible for the supply of electricity to approximately 167,000 distribution customers in Wellington, Porirua and Hutt Valley regions of New Zealand. The primary role of the Group is the management of a largely underground electricity distribution network, which spans some 4,700 kilometres and delivers electricity distribution services to business and residential customers. The Group is a reporting entity for the purpose of the Financial Reporting Act 2013 and its financial statements comply with that Act.

The Group has elected to be in Tier 1 and applied NZ IFRS as specified in XRB A1 (For-Profit Entities Update). The financial statements have been prepared in accordance with NZ GAAP. They comply with International Financial Reporting Standards and also comply with New Zealand Equivalents to International Financial Reporting Standards.

The financial statements were authorised for issue by the Directors on 28 February 2018.

Standards and interpretations adopted in the current period

All newly effective financial reporting standards applicable to the Group for the first time for the year ended 31 December 2017 have had no material impact on the financial statements of the Group.

Standards/interpretations and other new amendments in issue not yet adopted

The following standards/interpretations and new amendments which are considered relevant to the Group but not yet effective for the year ended 31 December 2017 have not been applied in preparing these consolidated financial statements.

The standards/amendments listed below are not expected to materially impact the group:

NZ IFRS 9 Financial Instruments (effective 1 January 2018)

NZ IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)

NZ IFRS 16 Leases (effective 1 January 2019)

Annual improvements to NZ IFRS: 2014-2016 cycle

Basis of preparation

The measurement basis adopted in the preparation of these financial statements is historical cost, modified by the revaluation of financial instruments as identified in the specific accounting policies below and the accompanying notes.

The Directors believe the continued adoption of the going concern assumption based on the current business plan is warranted and that the Group will be able to pay its debts as and when they fall due within the next 12 months.

Functional and presentation currency

These financial statements are presented in New Zealand dollars ($), which is the Group's functional currency. All financial information presented in New Zealand dollars has been rounded to the nearest thousand, unless otherwise stated.

Significant accounting policies

No changes to accounting policies have been made during the year, and policies have been consistently applied to all years presented in these financial statements. Certain comparative amounts have been reclassified to conform to the current year's presentation. The following significant accounting policies have been adopted in the preparation and presentation of the financial statements:

6


1 Summary of accounting policies (continued)

(a) Basis of consolidation

The Group financial statements are prepared by combining the financial statements of all entities that comprise the Group, being the Company and its subsidiaries Wellington Electricity Lines Limited and Wellington Electricity Lines Management Limited. Subsidiaries are entities over which the Group has power to govern the financial and operating policies so as to obtain benefits from their activities. Consistent accounting policies are employed in the preparation and presentation of the Group financial statements.

The Group financial statements include information and results of the subsidiaries from the date on which the Company obtains control and until such time as the Company ceases to control such entities.

In preparing the Group financial statements, all intragroup balances and transactions, and unrealised profits arising within the Group are eliminated in full.

Details of the Company's subsidiaries at 31 December are as follows:

Name of subsidiaries

Wellington Electricity Lines Limited

Wellington Electricity Lines Management Limited

(b) Business combinations

Country of incorporation

New Zealand

New Zealand

Equity holding 2017

100%

100%

Equity holding 2016

100%

100%

Acquisitions of subsidiaries and businesses are accounted for using the purchase method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under NZ IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

The Group has no discontinued operations for the years presented in these financial statements.

(c) Acquisition of assets

Cost method

The purchase method of accounting is used for all acquisitions of assets. Cost is determined as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition.

Construction work in progress

Construction work in progress is stated at cost plus attributable overheads. Cost includes all costs directly related to specific projects and an allocation of overhead expenses associated with the construction work in progress.

(d) Borrowing costs

Bank loans and other loans are recorded initially at fair value, net of transaction costs. Subsequently these are recognised at amortised cost. Borrowing costs include interest on short-term and long-term borrowings and are recognised using the effective interest method. Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are capitalised as part of the cost of that asset. Qualifying assets are those assets which take a substantial period of time, being three months or more, to enter service. All other borrowing costs are recognised as expenses in the period in which they are incurred.

(e) Cash and cash equivalents

Cash and cash equivalents are held at amortised cost and include cash on hand, cash at bank and deposits at call with financial institutions. Any bank overdrafts are shown within borrowings in current liabilities in the Statement of Financial Position.

7



(f) Contributions for capital works

Contributions from customers towards the cost of constructing augmentation assets are accounted for as revenue in profit or loss by applying the stage of completion method where the outcome can be estimated reliably. Any money received in advance is recognised in liabilities as a deferred contribution.

(g) Creditors and accruals

Trade creditors and accruals are recognised when there is an obligation to make future payments resulting from the purchase of goods and services. Trade creditors and accruals are initially measured at fair value and subsequently measured at amortised cost using the effective interest method.

(h) Employee benefits

Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave and sick leave when it is probable that settlement will be required and they are capable of being measured reliably.

Provisions made in respect of employee benefits expected to be settled within 12 months are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made in respect of the services provided by the employees up to the reporting date.

(i) Financial assets

Investments are recognised and derecognised on trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs.

Other financial assets are classified as 'loans and receivables'.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating interest income and interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or financial liability, or, where appropriate, a shorter period.

Income is recognised on an effective interest rate basis for debt instruments.

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method less impairment. Interest is recognised by applying the effective interest rate.

Impairment of financial assets

Financial assets are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset's carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance provision. When a trade receivable is uncollectible, it is written off against the allowance account. A trade receivable is deemed to be uncollectible upon notification of insolvency of the debtor or upon receipt of similar evidence that the Group will be unable to collect the trade receivable. Changes in the carrying amount of the allowance account are recognised in profit or loss.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognised, the previously recognised impairment loss is reversed.

In respect of financial assets carried at amortised cost, with the exception of trade receivables, the impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Subsequent recoveries of trade receivables previously written off are recognised in profit or loss.

8



(j) Financial liabilities and equity instruments

Debt and equity instruments

Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement.

Financial liabilities

Financial liabilities are classified as 'other financial liabilities'.

Interest and dividends

Interest and dividends are classified as expenses or as distributions of profit consistent with the Statement of Financial Position classification of the related debt or equity instruments.

Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method.

(k) Derivative financial instruments

The Group enters into interest rate swaps, cross currency swaps and foreign currency forward contracts to manage its exposure to interest rate and foreign exchange rate risk. Further details of derivative financial instruments are disclosed in note 18.

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedges), or hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges).

A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.

Hedge accounting

The Group designates certain hedging instruments, which include derivatives, embedded derivatives and non-derivatives in respect of foreign currency risk, as either fair value hedges or cash flow hedges. Hedges of foreign currency risk on firm commitments are accounted for as cash flow hedges.

At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item.

Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with any changes in the fair value of the hedged item that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognised in finance expenses and any ineffectiveness recognised in other gains and losses.

Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to profit or loss from that date.

9



(k) Derivative financial instruments (continued)

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the 'other gains and losses' line.

Amounts recognised in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss, in the same line as the recognised hedged item. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses recognised in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability.

Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss recognised in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in equity is recognised immediately in profit or loss.

(I) Foreign currency transactions

All foreign currency transactions during the financial period are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated using the exchange rate at that date.

Exchange rate differences are brought to account in profit or loss in the period in which they arise.

(m) Goods and services tax ('GST')

Revenues, expenses, assets and liabilities are recognised net of the amount of GST, except:

(i) where the amount of GST incurred is not recoverable from the Inland Revenue Department (the 'IRD'), it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or

(ii) for receivables and payables which are recognised inclusive of GST.

The net amount of GST recoverable from, or payable to, the IRD is included as part of receivables or payables.

(n) Impairment of other tangible and intangible assets

At each reporting date, the carrying amounts of the tangible and intangible assets (including goodwill) are reviewed to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the recoverable amount of the cash generating unit to which the asset belongs is estimated.

Intangible assets with indefinite useful lives are tested for impairment at each reporting date and whenever there is an indication that the assets may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase.

10



(o) Income tax

Current tax

Current tax is calculated with reference to the amount of income tax payable or recoverable in respect of the taxable profit or taxable loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

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

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them, arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income or accounting profit.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the intent is to settle current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items credited or debited directly to equity, in which case the deferred tax is recognised in the Statement of Comprehensive Income, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill.

(p) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

(q) Leasing

Leased assets are classified as finance leases whenever the terms of the lease transfer all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Group as lessor

Amounts due from lessees under finance leases are recognised as receivables at the amount of the Group's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group's net investment outstanding in respect of the lease.

Rental income from operating leases is recognised on a straight line basis over the term of the relevant lease.

The Group as lessee

Operating lease payments are recognised as an expense on a straight line basis over the term of the lease, except where another systematic basis is more representative of the time pattern in which the economic benefits of the leased asset are consumed.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on a straight line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

11



(r) Maintenance and repairs

Maintenance and repair costs and minor renewals are charged as expenses as incurred, except where they relate to the replacement of a component of an asset, in which case the costs are capitalised and depreciated.

(s) Property, plant and equipment

Property, plant and equipment is stated at cost (represented by the fair value on acquisition) less accumulated depreciation and impairment (if any). Cost includes expenditure that is directly attributable to the acquisition of the item.

Depreciation is provided on property, plant and equipment, including buildings but excluding freehold land. Depreciation is calculated on a straight line basis so as to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period. The following estimated useful lives are used in the calculation of depreciation:

Category Buildings Plant and equipment Distribution system

(t) Intangible assets

Useful life 3 - 45 years 3 - 20 years up to 80 years

Computer software and intellectual property are finite life intangibles and are recorded at cost less accumulated amortisation and accumulated impairment losses. Amortisation commences when the asset is available for use. This is when the computer software, system software or intellectual property is in the location and condition necessary to operate in a manner intended by management.

Category Computer software Intellectual property

(u) Revenue recognition

Useful life 3 - 10 years 15 years

Network revenue is recognised at the point of consumption. Network revenue is determined with reference to accounts rendered and a net accrual for unbilled revenue. Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract. Revenue from customer contributions is recognised in accordance with the accounting policy as outlined in note 1 (f).

Dividend revenue

Dividend revenue from investments is recognised when the shareholder's right to receive payment has been established.

Interest revenue

Interest revenue is accrued on a time basis, by reference to the principal and the effective interest rate.

Rental income

The Group's policy for recognition of revenue from operating leases is described in note 1 (q).

(v) Provisions

Provisions are recognised when there is a present obligation (legal or constructive) as a result of a past event, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

12



(w) Critical accounting estimates and judgements

In the application of the Group's accounting policies the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Critical accounting estimates and assumptions

In applying the accounting policies to the preparation of the financial statements, the Directors have not identified any critical judgements or judgements having an impact on amounts apart from those involving estimation as noted below.

Key sources of estimation uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Impairment of goodwill

Determining whether goodwill is impaired required an estimation of the recoverable amount of the cash-generating unit to which the goodwill belongs. The recoverable amount is the higher of fair value less costs to sell and value in use. The estimation of recoverable amount required the Directors to estimate the future cash flows expected to arise from the cashgenerating unit and to determine a suitable discount rate in order to calculate present value. Details regarding the key assumptions and basis of calculations are contained in note 10.

Useful lives of property, plant and equipment

Details regarding the estimated useful lives of property, plant and equipment are contained in note 1 (s). There were no significant changes in these estimates during the year.

Valuation of financial instruments

As described in note 18 the Group uses valuation techniques that include inputs that are not based on observable market data to estimate the fair value of certain types of financial instruments. Note 18 provides detailed information about the key assumptions used in the determination of the fair value of financial instruments, as well as the detailed sensitivity analysis for these assumptions. The Directors believe that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of the financial instruments.

13


2 Revenue

Network revenue Contributions for capital works Other revenue including rental income

3 Other losses

Loss on disposal of property, plant and equipment (Loss)/gain on ineffectiveness of fair value hedge relationships Foreign exchange gain

4 Operating expenses

Transmission charges Rates charged on network assets External services Remuneration of the auditor: - audit services- taxation services- other servicesPersonnel expensesManagement services charge with related party - International Infrastructure Services CompanyLimited - NZ Branch (net of capitalised expenditure)Fees and chargesOther expenses

The auditor of the Group is Deloitte.

5 Interest income and expenses

Interest income Interest income - third parties

Interest expenses Interest and finance charges paid/payable to third parties Interest and finance charges paid/payable to related party - International Infrastructure Services Company Limited Interest expense capitalised

Gain arising on derivatives in a designated fair value hedge accounting relationship Loss arising on adjustment to hedged item in a designated fair value hedge accounting relationship

Group 2017

$'000

175,837 11,352

6,188

193,377

Group 2017

$'000

(3,195) (166)

23

(3,338)

Group 2017

$'000

68,699 3,442

18,570

170 62

179 770

10,593

3,652 195

106,332

Group

2017 $'000

1,287

27,873 22,655

(286) 50,242

(317)

317 50,242

2016 $'000

169,501 6,945 3,735

180,181

2016 $'000

(1,064) 11

9 (1,044)

2016 $'000

67,175 3,202

16,310

179 52 73

748 10,194

3,041 1,414

102,388

2016 $'000

1,386

27,710 20,575

(179) 48,106

(7)

7 48,106

Interest is capitalised on qualifying assets under construction at the effective interest rate of 7.00% per annum (2016: 6.59%).

The loss arising on derivatives in a designated fair value hedge accounting relationship excludes credit risk. Gain or losses on credit risk are recognised in other gains and losses as ineffectiveness of fair value hedge relationships. The total gain arising on derivatives in a designated fair value hedge including credit risk is $2,000 (2016: gain of $18,000).

14


6 Taxation

(a) Tax expense recognised in profit and loss

Tax expense is reconciled to accounting profit as follows: ProfiU(loss) before tax Tax at the New Zealand tax rate of 28% Tax effect of amounts which are not deductible in calculating taxable income:

Thin capitalisation Tax losses made available to related company for no consideration Non-deductible expenses Prior period adjustment

Total tax expense

Current tax Deferred tax

Group 2017 $'000

2,883 807

1,145 1,743

47 (10)

3,732

3,732

At balance date the imputation credits available for use in future periods were $924,000 (2016: $924,000).

(b) Deferred tax balances

The movement in deferred tax balances is provided below:

Group

Temporary differences

2017 Property, plant and equipment Provisions Doubtful debts and impairment losses Tax losses Cash flow hedges Deferred tax (liability)/asset

2016 Property, plant and equipment Provisions Doubtful debts and impairment losses Tax losses Cash flow hedges Deferred tax (liability)/asset

7 Trade and other receivables

Trade receivables Receivable from related party - Enviro (NZ) Limited Accrued revenue Prepayments Provision for doubtful receivables

Impaired trade receivables

Opening balance

$'000

(67,927) 993

54 11,116

4,758 (51,006)

(66,700) 184

54 12,285

4,808 (49,369)

Recognised in Recognised other Refunds in profit and comprehensive and other

loss income adjustments $'000 $'000 $'000

(1,557) (404)

35 (1,806) (997)

863 (3,732) 863 (997)

(1,227) 809

(141) (1,028) (50)

(559) (50) (1,028)

Group 2017 $'000

3,141

12,277 1,066 (319)

16,165

2016 $'000

(1,353) (379)

1,173 1,694

14 {1,943)

559

559

Closing balance

$'000

(69,484) 589

89 8,313 5,621

(54,872)

(67,927) 993

54 11,116

4,758 (51,006)

2016 $'000

3,198 9

12,405 859

(194) 16,277

Trade receivables are primarily for network revenue which is received from electricity retailers. The credit risk on the majority of receivables is considered low. The Group manages credit risk with respect to electricity retailers consistent with prudential obligations in use of system agreements and its credit policy, which includes regular review of retailer credit ratings.

15


8 Finance lease receivable

Group Not later than one year Later than one year and not later than five years Later than five years

Less: unearned finance income Present value of minimum lease payments

Included in the finance statements as: Current finance lease receivable Non-current finance lease receivable

Minimum lease payments

2017 2016 $'000 $'000

1,283 1,329 4,673 4,856

11,438 12,538 17,394 18,723

(10,395) (11,395) 6,999 7,328

Present value of minimum lease

payments 2017 2016

$'000 $'000

329 329 1,316 1,316 5,354 5,683 6,999 7,328

6,999 7,328

329 329 6,670 6,999 6,999 7,328

Finance lease receivable relates to the lease of transmission assets with a remaining term of 22 years (2016: 23 years). The interest rate inherent in the lease is fixed at the contract date for the entire lease term. The average effective interest rate is approximately 10.50% (2016: 10.50%) per annum.

9 Property, plant and equipment

Freehold Plant and Distribution land Buildings equipment system Total

Group $'000 $'000 $'000 $'000 $'000 2017 Opening net book value - 1 January 17,805 794 928 565,279 584,806 Additions 930 592 39,474 40,996 Disposals (3,211) (3,211) Depreciation charge (216) (440) (29,387) (30,043) Closing net book value - 31 December 17,805 1,508 1,080 572,155 592,548

At 31 December 2017 Cost 17,805 3,246 7,211 866,399 894,661 Accumulated depreciation (1,738) (6,131) (294,244) (302,113) Net book value 17,805 1,508 1,080 572,155 592,548

2016 Opening net book value - 1 January 17,805 1,194 1,196 560,922 581,117 Additions 172 34,248 34,420 Disposals (259) (26) (803) (1,088)Depreciation charge (141) (414) (29,088) (29,643)Closing net book value - 31 December 17,805 794 928 565,279 584,806

At 31 December 2016 Cost 17,805 2,316 6,619 837,177 863,917 Accumulated depreciation (1,522) (5,691) (271,898) (279,111) Net book value 17,805 794 928 565,279 584,806

Disposals are net of accumulated depreciation. There are no accumulated impairment losses.

16


10 Goodwill

Goodwill originated from the acquisition of 100% of the shares in Wellington Electricity Lines Limited in 2008.

Goodwill has been allocated to one cash-generating unit (which is the electricity distribution operations of the Group) for impairment testing purposes.

The impairment tests for this cash-generating unit are based on value in use discounted cash flow valuations. Cash flow projections are based on a five year business plan and are extrapolated using an average annual growth rate of 1. 76% to 2.10% (2016: 1.71% to 2.10%), and discounted using a pre-tax rate of 6.25% (2016: 6 .52%). This calculation is considered to be appropriate and reflective of the long term nature of the network assets.

Projections of electricity consumption are based on historical consumption trends and future forecasts. Projected electricity prices are based on the default price path Commerce Commission determination effective from 1 April 2015.

Reasonably possible changes in the key assumptions on which recoverable amount is based that would cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit, assuming everything else is held constant, are an increase in the discount rate to 6.40% or a reduction in the terminal growth rate to 1.88%.

There are no accumulated impairment losses.

11 Intangible assets

Group 2017 Opening net book value - 1 January Additions Amortisation expense Net carrying amount - 31 December

As at 31 December 2017 Gross carrying amount Accumulated amortisation Net carrying amount

2016 Opening net book value - 1 January Additions Amortisation expense Net carrying amount - 31 December

As at 31 December 2016 Gross carrying amount Accumulated amortisation Net carrying amount

There are no accumulated impairment losses.

12 Trade and other payables

Trade creditors and accruals

Computer Intellectual Software Property

$'000 $'000

6,129 139

(1,484) 4,784

17,230 (12,446)

4,784

6,729 796

(1,396) 6,129

17,091 (10,962)

6,129

2,282

(342) 1,940

5,173 (3,233) 1,940

2,625

(343) 2,282

5,173 (2,891) 2,282

Group 2017 $'000

24,331 Payable to related party - International Infrastructure Services Company Limited - NZ Branch Payable to related party - CHED Services Pty Limited

1,091

GST payable 653 Deferred contributions for capital works 2,617

28,692

Total $'000

8,411 139

(1,826) 6,724

22,403 (15,679)

6,724

9,354 796

(1,739) 8,411

22,264 (13,853)

8,411

2016 $'000

25,474 1,252

407 803

1,419 29,355

The average credit period on purchases is 30 days (2016: 27 days). The Group have financial risk management policies in place to ensure that all payables are paid within the credit timeframe.

17


13 Borrowings

Current Accrued interest on loan from related party - International Infrastructure Services Company Limited Accrued interest on bank loans and US senior notes Bank loans

Non-current Bank loans US senior notes Loan from related party - International Infrastructure Services Company Limited

Total borrowings

Summary of borrowing arrangements:

Group 2017 2016

$'000 $'000

3,879 3,823

5,870 5,253 199,905

9,749 208,981

308,524 116,747 169,509 172,645 234,500 234,500 712,533 523,892

722,282 732,873

In June 2017 the Group refinanced the unsecured bank loan facilities of $200 million (tranche A) due to mature in September 2017 with unsecured bank loan facilities of $230 million that mature in June 2020 (tranche A 1 - $100 million) and December 2020 (tranche A2 - $130 million). The Group also have an unsecured bank loan facility of $150 million (tranche B) due to mature in September 2019.

The Group also have US$120 million of unsecured US senior notes that mature in October 2020 (tranche A - US$60 million) and October 2022 (tranche B - US$60 million). This was transacted at NZ$151.1 million and at the period end spot rate it is NZ$169.3 million (2016: NZ$172.8 million).

Bank loan interest is paid quarterly and the US senior notes interest is paid semi-annually. The weighted average effective interest rate is 5.39% (2016: 5.36%).

The Group have a 10-year subordinated loan facility for $234.5 million with International Infrastructure Services Company Limited. The subordinated loan facility is at an interest rate of 8.75% and matures on 23 January 2023.

The fair value of borrowings calculated based on the present value of future principal and interest cash flows, discounted at market interest rates at balance date was $780.7 million (2016: $800.2 million), compared to a carrying value of $722.3 million (2016: $732.9 million). This fair value has been determined using Level 2 of the fair value hierarchy as described in note 18 (k).

14 Provisions Employee Onerous

Group benefits lease Total 2017 $'000 $'000 $'000 Balance at the start of the year 82 716 798 Additional provisions recognised 45 45 Reductions arising from payments/other sacrifices of future economic benefits {74} {74} Balance at the end of the year 53 716 769

2016 Balance at the start of the year 84 84 Additional provisions recognised 45 716 761 Reductions arising from payments/other sacrifices of future economic benefits {47} {47} Balance at the end of the year 82 716 798

18


15 Cash flow hedge reserve

Balance at start of the year Forward foreign exchange contracts Interest rate swaps Cross currency interest rate swaps Cross currency interest rate swaps recognised in profit or loss Income tax related to losses/(gains) recognised in other comprehensive income Balance at the end of the year

Group 2017

$'000

(12,235) (6)

(250) (6,563) 3,739

863 (14,452)

2016 $'000

(12,362) 6

1,524 (3,589) 2,236

(50) (12,235)

The cash flow hedge reserve represents gains and losses recognised on the effective portion of cash flow hedges. The cumulative gain or loss on the hedge is recognised in profit or loss when the hedged transaction impacts the profit or loss, or is included as a basis adjustment to a non-financial hedged item, consistent with the applicable accounting policy.

The cross currency interest rate swaps movement recognised in profit or loss relates to the foreign currency movement on the US senior notes. The amount recognised in profit and loss has subsequently been recognised against the value of the US senior notes included in borrowings.

The Group has interest rate swap agreements to manage interest rate risk, cross currency interest rates swap to manage the foreign exchange and interest rate risk and forward foreign exchange contracts to manage foreign exchange risk.

16 Commitments for expenditure

(a) Capital expenditure commitments

Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities are as follows:

Property, plant and equipment

Payable: Not later than one year

(b) Operating lease commitments

Group 2017

$'000

4,211

2016 $'000

5,456

Operating leases relate to the rental of property and equipment with terms between 1 and 46 years (2016: 1 and 47 years).

Payments recognised as an expense:

Minimum lease payments Sub-lease payments received

Group 2017

$'000

681 (176) 505

2016 $'000

664 (139) 525

Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:

Not later than one year Later than one year but not later than five years Later than five years

19

260 851

1,961 3,072

457 1,384 2,206 4,047


17 Related party transactions

(a) Controlling entities

The immediate parent entity is Wellington Electricity Distribution Network Holdings Limited. The ultimate controlling party of Wellington Electricity Distribution Network Limited is CK Hutchison Holdings Limited (incorporated in Cayman Islands) who is listed on the Hong Kong Stock Exchange.

(b) Transactions with related parties

During the year, the Group entered into the following material transactions with related parties:

Cheung Kong Infrastructure Holdings Limited Back office and IT support services (expensed)

CHED Services Pty Limited Back office and IT support services (capitalised)

Enviro (NZ) Limited (previously Enviro Waste Services Limited) Cost recovery

International Infrastructure Services Company Limited - NZ Branch Back office and IT support services (expensed) Back office and IT support services (capitalised) Subvention payment received

International Infrastructure Services Company Limited Loan interest

Key management personnel Salary and other short term benefits

Amounts due and payable to other related parties are disclosed in notes 7, 12 and 13.

20

Group 2017 2016

$'000 $'000

72 164

296 545

(19) (14)

10,593 10,194 2,395 2,107

(997) (1,028)11,991 11,273

20,519 20,575

1,476 1,413


18 Financial instruments

(a) Capital risk management

The objective in managing capital is to safeguard the ability to continue as a going concern so that returns for shareholders and benefits for other stakeholders are provided and an optimal capital structure to minimise the cost of capital is maintained.

The capital s tructure of the Group consists of debt, which includes the borrowings disclosed in note 13, cash and cash equivalents disclosed in the Statement of Financial Position, and equity as disclosed in the Statement of Financial Position.

Management reviews the capital structure on a semi-annual basis. There has been no change in the capital structure during the year.

Under the bank loan, US senior notes and subordinated loan agreements the Group is required to meet certain covenants, which include debt to equity ratio and interest coverage ratio. The Group complied with all of its banking during the year.

(b) Significant accounting policies

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

(c) Categories of financial instruments

Financial assets Cash and cash equivalents Derivative instruments designated in a hedge accounting relationship Loans and receivables

Financial liabilities Derivative instruments designated in a hedge accounting relationship Borrowings Trade and other payables

Details of the derivative instruments designated in a hedge accounting relationship are:

Financial assets Current

Foreign currency forward contracts

Non-Current Cross currency interest rate swaps fair value hedge Cross currency interest rate swaps cash flow hedge

Total financial assets

Financial liabilities Current

Foreign currency forward contracts

Non-Current

Interest rate swaps

Total financial liabilities

Group 2017 $'000

12,211 18,861 22,098 53,170

20,304 722,282

28,692 771,278

665 18,196 18,861

18,861

2

20,302

20,304

2016 $'000

21,807 25,110 22,746

69,663

20,052 732,873

29,355

782,280

4

347 24,759

25,106

25,110

20,052

20,052

The Group have entered into interest rate swap agreements to fix the interest rate on debt issued. The Group entered into cross currency interest rate swap agreements to fix the exchange rate and swap the US senior notes to New Zealand floating interest rates. For hedge accounting purposes this is split into a fair value and a cash flow hedge relationship. The fair value hedge hedges the changes in the fair value of the debt due to movements in US interest rates. The cash flow hedge hedges the changes in the value of the principal and credit margins. These swaps have been entered into to manage future cash flows due to variations in market interest rates and exchange rates.

21


18 Financial instruments (continued)

(d) Financial risk management objectives

The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange, interest rate and price risk), credit risk and liquidity risk. The Group's overall risk management strategy focuses on monitoring and managing these financial risks such that potential adverse effects on the Group's financial performance are minimised. The Group uses a range of derivative financial instruments to hedge certain risk exposures. Derivative financial instruments are not entered into or traded for speculative purposes.

Financial risk management is carried out in accordance with the Group's Treasury Risk Management policy approved by the Board of Directors. The Group has written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk, liquidity risk, use of derivative and non-derivative financial instruments and the investment of excess liquidity.

(e) Market risk

The Group's activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rates. The Group enters into the following derivative financial instruments to manage its exposure to these risks:

• Cross Currency Interest Rate Swaps ('CCIRS') to eliminate foreign currency risks associated with foreign currencydenominated borrowings and to determine the interest rate reference for the life of the borrowing;

• Foreign currency forward contracts and options to hedge the exchange rate risk arising from payables and receivablesdenominated in foreign currencies; and

• Interest rate swaps to mitigate the risk of rising interest rates.

The Group measures the market risk exposures using cash flow forecasting. There has been no change from the prior year to the types of market risks the Group is exposed to or manner in which the risks are managed and measured.

(f) Foreign currency risk management

Foreign exchange risk arises from recognised assets and liabilities that are denominated in a currency that is not the entity's functional currency as well as obligations to make future payments for the provision of services and equipment. The Group undertakes certain transactions denominated in foreign currencies, primarily Australian dollars ('AUD') and United States dollars ('USD'), from which exposure to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising currency swap agreements and foreign currency forward contracts.

As at 31 December 2017 the Group had underlying foreign currency exposure to AUD and USD. The AUD exposures were to make future AUD payments for the provision of services and the USD exposures were to make future payments for USD denominated bonds.

Cross currency interest rate swaps

The Group has cross currency interest rate swaps designated into fair value and cash flow hedges to manage the foreign exchange and interest rate risk on foreign currency borrowings.

These currency swaps are an effective hedge of the USD denominated bonds from both an economic and accounting perspective. A small amount of hedge ineffectiveness may be recognised through the profit and loss.

Exchange rate Interest rate Group average average Contract value Fair value

2017 2016 2017 2016 2017 2016 2017 2016 $ $ % % $'000 $'000 $'000 $'000

Buy USD Later than two years but not later than five years 0.794 0.794 3.960 3.730 151,134 75,567 18,861 11,975 Later than five years 0.794 4.190 75,567 13,131

0.794 0.794 3.960 3.960 151,134 151,134 18,861 25,106

22



(f) Foreign currency risk management (continued)

Foreign exchange forward contracts

The FX forwards are effective hedges of their associated underlying exposures from both an economic and accounting perspective. A small amount of hedge ineffectiveness is recognised through the statement of comprehensive income due to some timing mis-matches.

It is the policy of the Group to enter into foreign currency forward contracts or options to cover significant foreign currency payments and receipts. These forward contracts and options are designated as cash flow hedges.

Group

Exchange rate

2017 $

average Foreign currency (AUD) 2016 2017 2016

$ $'000 $'000

Contract value (NZD) 2017 2016

$'000 $'000

Fair value 2017 2016 $'000 $'000

0 to 3 months 0.898 0.943 200 200 222 212 (2) 4--------------------------'--'-------

Foreign currency sensitivity

The following table details the Group's sensitivity to a 10% increase and decrease in the value of the NZD against the relevant foreign currencies. A sensitivity of 10% has been selected as it is considered reasonable given the current level of exchange rates and volatility observed both on an historical basis and in market expectations for future movements. The sensitivity analysis includes outstanding foreign currency denominated financial assets and liabilities (including derivatives) and adjusts their translation at period end for a 10% change in foreign exchange rates on a total portfolio basis with all other variables held constant.

Net profit Impact of 10% decrease in NZD Impact of 10% increase in NZD Equity - Hedging reserve Impact of 10% decrease in NZD Impact of 10% increase in NZD

Group 2017 2016

$'000 $'000

4 (45)

548 (526)

1

(4)

969 (735)

The foreign currency risk exposure from recognised assets and liabilities arises primarily from long term borrowings denominated in foreign currencies. There is no significant impact on profit from foreign currency movements associated with these borrowings because they are effectively hedged.

(g) Interest rate risk management

The Group is exposed to interest rate risk as it invests and borrows funds at both fixed and floating interest rates. The risks are managed by maintaining an appropriate mix between fixed and floating rate borrowings and through the use of interest rate swap contracts and forward interest rate contracts. Hedging activities are evaluated regularly to confirm alignment with the debt and liquidity management policy and ensure that the Group is not exposed to excess risk from interest rate volatility. The Group exposure to interest rates on financial assets and financial liabilities, including derivatives, are detailed under the interest rate swap contract section.

23



(g) Interest rate risk management (continued)

Interest rate sensitivity

The sensitivity analysis contained in the table below has been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the reporting date with the stipulated change taking place at the start of the financial year and held constant for the reporting period. A sensitivity of 1% (100 basis points) has been selected as this is considered reasonable given the current level of both short and long term interest rates.

Profit would have been affected mainly as a result of the ineffective portion of cash flow and fair value hedge transactions. Equity, through the cash flow hedge reserve, would have been affected mainly as a result of an increase/(decrease) in the fair value of cross currency and interest rate swaps which qualify for cash flow hedge accounting.

Net profit Impact of 1% increase in interest rate (NZO) Impact of 1% decrease in interest rate (NZO) Impact of 1% increase in interest rate (USO) Impact of 1% decrease in interest rate (USO) Equity - hedging reserve Impact of 1% increase in interest rate (NZO) Impact of 1% decrease in interest rate (NZO) Impact of 1 % increase in interest rate (USO) Impact of 1 % decrease in interest rate (USO)

Interest rate swap contracts

Group 2017 $'000

15 ( 15)

1

7,206 ( 7,371) (4,453) 4,656

2016 $'000

26 (26) 74

(74)

10,094 (10,427)

(4,131) 4,262

Under interest rate swap contracts the Group agrees to exchange the difference between fixed and floating interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on issued floating rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the yield curves at the reporting date and the credit risk inherent in the contract. The average interest rate is based on the outstanding balances at the end of the financial year.

The following table details the notional principal amounts and remaining terms for interest rate swap contracts outstanding as at the reporting date.

Receive floating I pay fixed

Group Later than two years but not later than five years

Average contracted fixed

interest rate 2017 2016

% %

Notional principal

2017 $'000

amount 2016 $'000

Fair value 2017 2016 $'000 $'000

4.280 4.280 __ 4 _5�0, _00_0 __ 4_ 5 _ 0 __ ,0_00 __ �(2_0�,3 _0�2)�___.(._20 ___ ,_05_2.._)

All interest rate swap contracts are designated as cash flow hedges.

The Group enters into interest rate swap contracts exchanging floating rate interest amounts for fixed rate amounts in order to reduce the floating cash flow exposure resulting from floating interest rates on borrowings.

The following table details the expected transfer of the cash flow hedge reserve to the profit and loss. This is expected to be to offset with a corresponding transfer to profit and loss of the related swaps included in Other financial liabilities.

Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years

24

Group 2017 2016 $'000 $'000

(8,819) (8,817) (2,436)

(20,072)

(5,455) (5,456) (6,343)

261 (16,993)



(h) Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss. The Group has adopted a policy of dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate as a means of mitigating the risk of financial loss from defaults. The Group's exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the risk management committee annually.

Trade receivables consist of a large number of customers with ongoing credit evaluation performed on their financial condition. Where appropriate, additional collateral credit support is obtained to mitigate the risk of loss.

The Group does not have significant credit risk exposure to any single counterparty. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies.

The carrying amount of financial assets recorded in the financial statements, net of any allowance for losses, represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained.

(i) Liquidity risk management

The Board of Directors is ultimately responsible for liquidity risk and has adopted an appropriate liquidity risk management framework to manage the consolidated entity's funding and liquidity requirements. The consolidated entity manages liquidity risk by (i) maintaining adequate banking and reserve borrowing facilities, (ii) continuously monitoring forecast and actual cash flows and (iii) refinancing maturing debt sufficiently in advance of the debt maturity.

Liquidity and interest rate tables

The following table details the Group's remaining contractual maturity for its financial assets and financial liabilities. The table is drawn up based upon the future undiscounted principal and interest cash flows.

Nominal cash flows

Group Weighted average

effective interest rate

W17 % Financial liabilities (derivative and non-derivative) Bank loans 3.42 US senior notes 3.96 Interest rate swaps 4.28 Loan from related party- International 8.75 Infrastructure Services Company Limited

Forward contracts

Trade and other payables

Total financial liabilities

Financial assets (derivative and non-derivative) Cross currency swaps 4.04 Finance lease receivable 10.50

Trade and other receivables

Cash and cash equivalents

Total financial assets

0 to 1 year

$'000

311,173 6,703

10,396 20,463

2

28,692

377,429

600 329

15,099

12,211

28,239

25

1 to 2 years $'000

6,703 8,854

20,519

36,076

82 329

411

2 to 5 years $'000

183,069 3,812

61,725

248,606

16,818 987

17,805

Over5 years $'000

239,616

239,616

15,749

15,749

Total $'000

311,173 196,475

23,062 342,323

2

28,692

901,727

17,500 17,394

15,099

12,211

62,204



(i) Liquidity risk management (continued)

Nominal cash flows Weighted average

Group effective interest rate

2016 %

Financial liabilities (derivative and non-derivative) Bank loans 3.66 US senior notes 3.96 Interest rate swaps 4.28 Loan from related party - International 8.75 Infrastructure Services Company Limited

Trade and other payables Total financial liabilities

Financial assets (derivative and non-derivative) Cross currency swaps 3.66 Finance lease receivable 10.50

Forward contracts

Trade and other receivables

Cash and cash equivalents Total financial assets

U) Financing facilities

Unsecured subordinated loan facility - amount used- amount unused

Unsecured working capital facility - amount used- amount unused

Unsecured bank loan facilities - amount used- amount unused

Unsecured US senior notes - amount used - amount unused

(k) Fair values

Oto 1 year

$'000

209,837 5,985

10,917 20,519

29,355

276,613

66 329

4

15,418

21,807

37,624

1 to 2 years $'000

4,379 5,985 8,795

20,519

39,678

285 329

614

2 to 5 years $'000

161,686 100,990

7,119 61,557

331,352

3,411 987

4,398

Overs years $'000

89,448

255,019

344,467

9,286 17,078

26,364

Group 2017

$'000

234,500

234,500

20,000 20,000

309,000 71,000

380,000

151,134

151,134

Total $'000

375,902 202,408

26,831 357,614

29,355

992,110

13,048 18,723

4

15,418

21,807

69,000

2016 $'000

234,500

234,500

20,000 20,000

317,000 33,000

350,000

151,134

151,134

The fair value and carrying value of borrowings is disclosed in note 13. The fair value of borrowings and derivative instruments are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market rates. This is a level 2 fair value measurement. The Board of Directors consider the carrying amount of other financial instruments such as short-term trade receivables and payables recognised in the consolidated financial statements approximate their fair values.

26


19 Contingent assets and liabilities

The Group does not have any contingent assets or liabilities at 31 December 2017.

20 Events occurring after the Statement of Financial Position date

There have been no events subsequent to the Statement of Financial Position date which necessitate any adjustment to the financial statements and notes thereto.

Subsequent to 31 December 2017 it became known that Wellington Electricity Lines Limited will exceed its SAIDI quality standard under the Electricity Distribution Services Default Price-Quality Path Determination 2012 for the regulatory year ending 31 March 2018 (following an exceedance for the year ended 31 March 2017). The exceedance is not due to a deterioration of the network performance but is caused by factors outside the group's control. Wellington Electricity Lines Limited is currently discussing this with the Commerce Commission.

27

Wellington Electricity Distribution Network Limited Directory for the financial year ended 31 December 2017

Wellington Electricity Distribution Network Limited is a limited company, incorporated in New Zealand.

Company Number

21 18567

Registered office

Bell Gully

Level21

171 Featherston Street

Wellington 6011

Principal place of business

Level 1

85 The E splanade

Lower Hutt 5012

Auditor

Deloitte

PO Box 1990

Wellington 6140

Solicitor

Bell Gully

PO Box 1291

Wellington 6140

28

Deloitte.

Independent Auditor's Report

To the Shareholder of Wellington Electricity Distribution Network Limited

Opinion

Basis for opinion

Directors' responsibilities for the consolidated financial statements

Auditor's responsibil ities for the audit of the consolidated financial statements

We have audited the financial statements of Wellington Electricity Distribution Network Limited (the 'Company') and its subsidiaries (the 'Group'), which comprise the consolidated statement of financial position as at 31 December 2017, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements, on pages 2 to 27, present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards ('NZ IFRS').

We conducted our audit in accordance with International Standards on Auditing ('ISAs') and International Standards on Auditing (New Zealand) ('ISAs (NZ)'). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

Other than in our capacity as auditor, the provision of other assurance services, taxation services and a temporary secondment to provide mechanical modelling services, we have no relationship with or interests in the Company or any of its subsidiaries. These services have not impaired our independence as auditor of the Company and Group.

The directors are responsible on behalf of the Group for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible on behalf of the Group for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and ISAs (NZ) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on at the External Reporting Board's website at:

https: //www .xrb. govt. nz/sta nda rds-for-assu ranee-practitioners/auditorsresponsibilities/a ud it-report-7

This description forms part of our auditor's report.

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Deloitte.

Restriction on use

Wellington, New Zealand Deloitte Limited 28 February 2018

This report is made solely to the Company's shareholders, as a body, in accordance with Section 207B of the Companies Act 1993. Our audit has been undertaken so that we might state to the Company's shareholders those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company's shareholders as a body, for our audit work, for this report, or for the opinions we have formed.

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