2 DECEMBER

NEW ZEALAND GAZETTE

4593

ELECTRICITY CORPORATION OF NEW ZEALAND LIMITED

NOTES TO THE FINANCIAL STATEMENTS

17. FINANCIAL INSTRUMENTS

(i) Currency, Interest Rate and Revenue Risk

Nature of activities and management policies with respect to financial instruments:

(a) Currency

ECNZ has exposure to foreign exchange risk as a result of offshore funding activities and transactions denominated in foreign currencies arising from normal trading activities. Where exposures are certain, such as borrowing commitments, it is ECNZ's policy to hedge these risks as they arise. ECNZ uses cross currency interest rate swaps and forward foreign exchange contracts to manage these exposures.

The cash settlement requirements of the above instruments approximate the contract amounts shown above.

(b) Interest Rate

ECNZ has a mixture of medium to long term borrowings that are used to fund ongoing activities. It is ECNZ policy to manage exposure to interest rate risk via the use of interest rate swaps, forward rate agreements, interest rate options and interest rate futures. The notional principal or contract amounts of interest rate contracts outstanding at balance date are as follows:

The cash settlement requirement of interest rate swaps is the net interest payable of $663,143 (1995 $408,549). The best approximation for FRAs is the current market value at 30 June 1996 which is $165,771 (1995 $14,569). The cash settlement requirement of interest rate options is the net market value of the options, at strike date, if the option is exercised. Based on current market rates at 30 June 1996 this would be $107,636 (1995 $130,890).

Futures are cash settled each day to reflect the market value at close of the previous business day.

(c) Revenue - Electricity Hedge and Options Contracts

As part of its energy supply contracts, ECNZ entered into electricity price hedges with customers for the period to 30 September 1996. Under these contracts ECNZ sells electricity forward at a fixed price (hedge price) together with a limited volume of call options. Any difference on maturity between the hedge price and the spot price is settled between the parties, irrespective of how much electricity is supplied. If the spot price is greater than the hedge price, ECNZ must settle with the counterparty. Conversely, if the spot price is less than the hedge price the counterparty must settle with ECNZ. It is not practicable to estimate the fair value of electricity hedge and option contracts as the secondary market for electricity price hedge products, namely seasonal hedge, monthly hedge and call options, was not sufficiently active as at 30 June 1996. The contract amount of electricity price hedges at 30 June 1996 amounted to $174 million (1995 $356 million).

(ii) Concentration of Credit Risk

In the normal course of its business ECNZ incurs credit risk from trade debtors and from transactions with financial institutions.

ECNZ has a credit policy that is used to manage this exposure to credit risk. As part of this policy, limits on exposures with counterparties have been set and approved by the Board of Directors and are monitored on a regular basis.

ECNZ does not have any significant concentrations of credit risk. ECNZ does not require collateral or security to support financial instruments, due to the high credit rating of the financial institutions dealt with. ECNZ further minimizes its credit exposure by limiting the amount of funds placed with any one financial institution at any one time. ECNZ does not anticipate the non-performance of any obligations that existed at balance date.