15 NOVEMBER NEW ZEALAND GAZETTE 4051

Electricity Corporation of New Zealand Limited
Notes to the Financial Statements

(b) Interest rate
ECNZ has a mixture of current 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 receivable of $489,616 (1998 $4,034,539 receivable).

The best approximation for FRAs is the current market value at balance date which is $NIL (1998 $337,689).

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 balance date this would be $NIL (1998 $74,631).

Futures are cash settled each day to reflect the market value at the 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 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.

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.