2840 NEW ZEALAND GAZETTE No. 113

12. Total Equity and Liabilities

Total Equity and Liabilities | 18,205,599 | 17,963,358 |

13. Financial Instruments

Company policy

It is company policy to request a retailer sign a ‘Use of System Agreement’ before that retailer is allowed to use the companies lines to sell energy. As part of the ‘Use of System Agreement’ it is company policy that a retailer maintain an acceptable credit rating of at least A3 (Moodys Investor Service Inc), A- (Standard & Poors rating group) or B+ (AM Best). If the retailer cannot supply an acceptable credit rating then the retailer must supply a cash bond or an irrevocable letter of credit equal to 3 months lines charges. It is company policy to review the level of bond every 6 months and where appropriate adjustments to levels are requested.

Interest Rate Risk

The Company is subject to normal fluctuations of interest rates.

Concentration of Credit Risk

The concentrations of credit risk in respect of energy retailers using the Network is limited because any retailer is required to maintain certain prudential requirements including an acceptable long term credit rating of at least A3 (Moody’s Investor Service Inc), A- (Standard and Poors Rating Group) or B+ (AM Best). If no such rating is provided by a retailer Otago Power Limited has the ability to charge a cash bond equal to an estimated 3 months charge payable by the retailer with a review of the level of Bond every six months.

Fair Values

All financial instruments shown in the Statement of Financial Position are recorded at fair value.

Currency Risk

The Company is not exposed to any direct currency risk.

Revenue - Electricity Price Hedging Contracts

Prior to the sale of the energy retail business on 31 March 1999 Otago Power Limited had entered into electricity price hedges with generators. Under these agreements Otago Power Limited agreed with electricity generators a fixed price (hedge price) for a percentage of its estimated electricity needs. On the sale of the energy retail business the hedge contracts were retained.

On maturity of the electricity price hedges any difference between the hedge and the spot market price is settled between the parties. Settlement occurs irrespective of the amount of electricity actually supplied. If this spot market price is greater than the hedge price, electricity generators must settle the difference with Otago Power Limited. Conversely if the spot market price is less than the hedge price, Otago Power Limited must settle the difference with the electricity generators. At balance date the hedge contracts have been marked to market and the unrealised loss recognised in the Statement of Financial Performance.

Credit Risk - Electricity Price Hedging Contracts

With respect to electricity price hedges, Otago Power Limited’s exposure is on any potential difference between the spot price and the hedge price, where on maturity of these agreements the spot price is greater than the hedge price. Otago Power Limited does not anticipate any non-performance of any obligations which may exist on maturity of these agreements.

Fair Value - Electricity Price Hedging Contracts

The fair value of electricity price hedging contracts can vary from day to day as the spot market price for electricity varies.

As at balance date the contract amount of electricity hedges amounted to $3,470,909 (1999 -$6,490,450) and the fair value $810,977. The fair value represents the mark to market value at 31 March 2000 and is based on an independent valuation derived from an assessment of the likely forward price curve for electricity. The secondary market for electricity price hedging contracts is not yet sufficiently active and the fair value (or mark to market) assessment is not necessarily the price the hedge contracts would be exchanged for is sold as a portfolio to a third party at the date of valuation. Until the sale of the energy retail business the electricity price hedging contracts represented hedges and until maturity of these agreements there was potentially an asset or liability which previously was not recognised in the financial statements.