2 OCTOBER NEW ZEALAND GAZETTE 3965

TRANSALTA NEW ZEALAND LIMITED Notes to and forming part of the Financial
Statements (Continued)
For the Year Ended 31 March 1998

Note: 11 Financial Instruments

1. Electricity Price Hedging Contracts

Wholesale Electricity Market Risk

The basis upon which electricity is purchased and on-sold to customers results in the Company having exposure to electricity market price risk. The Company enters into hedge contracts to manage its exposure to market price risk. The Company has a Risk Management Policy to manage these risks that is reviewed by a committee of the Board of Directors.

On maturity of the electricity hedge contracts any difference between the contract price and the spot market price is settled between the Company and the counterparty. If the spot market price is greater than the contract price, the counterparty must settle the difference with the Company. Conversely, if the spot market price is less than the contract price the Company must settle the difference with the counterparty.

Credit Risk

The Company has credit risk on any difference between the spot price and the contract price, where on maturity of these contracts the spot price is greater than the contract price. The Company does not anticipate any non- performance of any obligations that may exist on maturity of these contracts.

Fair Value

The fair value of electricity price hedge contracts varies in accordance with the market price for electricity. As at balance date the secondary market for electricity price hedge contracts was not sufficiently active to provide a reliable measure of the fair value of the Company’s hedge contracts.

Face Value

The face value of electricity hedging contracts amounted to $419,715,000.

Carrying Value

As at 31 March 1998, the carrying value of electricity contracts is included in receivables, $2,166,000 (31 March 1997, $616,000) and in energy contracts $26,000,000 (31 March 1997 $nil).

2. Other Financial Instruments

The Company has a Treasury Policy to manage the risk associated with other financial instruments that is reviewed by a committee of the Board of Directors.

Credit Risk

Other financial instruments that potentially subject the Company to credit risk principally consist of accounts receivable, bank balances, short-term investments and interest rate swaps. The Company completes credit evaluations on customers where possible and requires a bond to be paid when customers cannot demonstrate an adequate credit history.

The Company monitors the credit quality of the counterparties to its off-balance sheet financial instruments and does not anticipate non-performance by the counterparties.

Short term investments are made with financial institutions and other organisations with a minimum credit rating of A long term and A-1 short term from Standards & Poors (or equivalent rating). The Company also has a limit on concentration of investments with any one institution or organisation.

The information disclosed in the 1998 Information Disclosure package issued by TransAlta New Zealand Limited has been prepared solely for the purposes of the Electricity (Information Disclosure) Regulations 1994.

The information should not be used for any other purpose than that intended under the regulations.