22 DECEMBER 2004
NEW ZEALAND GAZETTE, No. 171
4275

TRANSPower NEW ZEALAND LIMITED LINES BUSINESS
NOTES TO THE FINANCIAL STATEMENTS continued
FOR THE YEAR ENDED 30 JUNE 2004

18. CONTINGENT LIABILITIES

(i) Guarantees

Cross Border Lease

Transpower has entered into three cross border leases in respect of certain HVDC converter stations and the submarine cables, and the majority of the South Island AC transmission assets. 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, a limited guarantee dated 31 May 1996 in respect of the submarine cables and a limited guarantee dated 22 December 2003.

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 Kiwi Co-operative Dairies Limited has since withdrawn from the proceedings.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) Economic Gain (Loss) Account

In the current 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") has been, at Directors discretion, passed on to customers over time. Any such transfer to customers would occur after consideration by Directors of the balance of this account.

Under the proposed new regulatory regime the Electricity Commission will be required to determine transmission pricing. Also, the Commerce Commission will set revenue thresholds for Transpower. With the transition to this new regulatory environment in mind, Directors have recently reset prices with effect from 1 April 2004 to a level necessary to earn an appropriate rate of return in respect of an asset value from which have been deducted the asset revaluations giving rise to the EV customer account balance.

At 30 June 2004 there is $86,930,000 (30 June 2003: $68,185,000) to the credit of the customer account.

(iv) Debt Defeasance

The Transpower Group has 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 Statements of Financial Position. There were no gains or losses on defeasance. In respect of the $532,700,000 defeased Transpower has a secondary obligation of up to $100,000,000 if a financial institution does not honour its obligations on the loan note and has not provided adequate capital. Transpower considers that the likelihood of being required to satisfy this secondary obligation is remote.

(v) Provision for Industry Related Costs

Directors have provided for certain industry related costs. Directors believe that further disclosure of the details of these costs could adversely influence Transpower's position in its negotiations with third parties. As as result, disclosure is limited in accordance with section 11.13 of FRS-15.

There are no other material contingent liabilities for Transpower or the Transpower Group as at balance date.

19. SEGMENTAL INFORMATION

The Transpower Lines Business operates predominantly in one industry, the transmission of high voltage electricity. Transpower's operations are carried out in New Zealand and are therefore within one geographical segment for reporting purposes.