28 NOVEMBER

NEW ZEALAND GAZETTE

4519

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued

FOR THE YEAR ENDED 30 JUNE 2003

18. CONTINGENT LIABILITIES

(i) Guarantees

Cross Border Lease
Transpower has entered into two cross border leases in respect of certain HVDC converter stations and the submarine cables. The nature of these transactions is described in Note 10.
Transpower has given guarantees and certain undertakings in accordance with a limited guarantee dated 24 October 1996 in respect of certain HVDC converter stations and a limited guarantee dated 31 May 1996 in respect of the submarine cables.

The likelihood of losses in respect of these matters is considered to be remote.

Debt
Transpower has provided guarantees in respect of loan arrangements for the Bonds, Euro medium term notes and Australian medium term notes as described in Note 11.

The maximum exposure under each of these guarantees is as follows:

The likelihood of losses in respect of these matters is considered to be remote.

(ii) Todd Energy and Kiwi Co-operative Dairies Claim
Todd Energy Limited and Kiwi Co-operative Dairies Limited have commenced a claim against both Transpower and Powerco Limited alleging breaches of the Commerce Act. Transpower has filed a statement of defence and believes that it has not breached the Commerce Act in any respect. Kiwi Co-operative Dairies Limited has since withdrawn from the proceedings.

(iii) Network Tasman
Network Tasman Limited has commenced a claim against Transpower alleging misrepresentation, breach of good faith, breach of collateral contract, estoppel, breach of the Fair Trading Act and breach of implied term. The damages claimed total $7 million. Transpower has filed a statement of defence and believes that the claims against it are without merit.

(iv) Economic Gain (Loss) Account
In the current self-regulatory environment, Transpower operates its revenue setting methodology within an Economic Value ("EV") framework that analyses economic gains and losses between those attributable to shareholders and those attributable to customers. The balance of the accumulated gain (loss) from monopoly activities attributable to customers ("the EV balance") may be passed on to customers over time. Any such transfer to customers would occur after consideration by Directors of the balance of this account and its likely future movement in order to preserve stability and predictability of prices.

As Transpower is entering a new regulatory regime, the future treatment of the EV balance is uncertain. Under this new regulatory regime the statutory Electricity Commission will be required to endorse Transpower's pricing methodology and may make changes accordingly. Also, the Commerce Commission will set revenue thresholds for Transpower. In these circumstances, it is unclear that the realised gains included in the EV balance will be crystallised, in which case the Directors consider that it may be inappropriate to continue to return the EV balance to customers.

At 30 June 2003 there is $68,185,000 (30 June 2002: $126,376,000) to the credit of the customer account.

(v) Debt Defeasance
During the period the Transpower Group entered into a funding arrangement which resulted in the Group raising $200,000,000 in debt. The funding arrangement raised gross funding of $732,700,000 of which $532,700,000 was on lent to financial institutions. The net effect of this transaction is that $532,700,000 of funding is defeased and is therefore not recognised in the Group Statement of Financial Position. There were no gains or losses on defeasance. In respect of the $532,700,000 defeased