28 NOVEMBER

NEW ZEALAND GAZETTE

4007

Electricity Corporation of New Zealand Limited

Notes to the Financial Statements

17. Financial instruments continued

(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 2001. 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 contracts as the secondary market for electricity price hedge products, namely seasonal hedge, monthly hedge and call options, is not sufficiently active at balance date.

(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 minimises 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.

The maximum credit exposure to which ECNZ is subject is best measured by the cash settlement amount receivable from the counterparty. This is represented by the contract amount receivable for cross currency interest rate swaps and forward foreign exchange contracts, the net interest payable for interest rate swaps and the market value for forward rate agreements and interest rate options.

(iii) Fair values

The estimated fair values of ECNZ’s other financial instruments are as follows:

Cash and short term deposits, accounts receivable, accounts payable, other current assets and current liabilities are excluded from the table above because, due to their short term nature, the carrying value of these items is equal to their fair value.

The following methods were used to estimate the fair values of the following classes of financial instrument:

(a) Term liabilities and short term loans

The fair value of ECNZ’s term liabilities and short-term loans is estimated based on current market interest rates available to ECNZ for debt of a similar maturity. ECNZ anticipates that these liabilities will be held to maturity and that settlement at fair value is unlikely.

(b) Currency and interest rate swaps, foreign exchange contracts, interest rate swaps, forward rate agreements, interest rate options and interest rate futures

The fair value of these instruments is estimated based on their quoted market prices. ECNZ anticipates that these liabilities will be held to maturity and that settlement at fair value is unlikely.