5072

NEW ZEALAND GAZETTE, No. 200

30 NOVEMBER 2005

TRANSPower NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued

FOR THE YEAR ENDED 30 JUNE 2005

19. CONTINGENT LIABILITIES continued

(iv) 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 new regulatory regime the Electricity Commission will be required to determine transmission pricing. Also, the Commerce Commission sets revenue thresholds for Transpower. The balance of the EV account at 30 June 2005 was $98,740,000 to the credit of the customer.

(v) Industry Related Costs

There is a possibility that Transpower will incur future liabilities in relation to 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 a result, disclosure is limited in accordance with section 11.13 of FRS-15.

20. 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.

21. FINANCIAL INSTRUMENTS

(a) Financial risks

The Transpower Group is subject to a number of financial risks which arise as a result of having a debt portfolio of $1,551,336,000 as at 30 June 2005 (2004: $1,609,357,000) denominated in both New Zealand dollars and foreign currency, making purchases from foreign suppliers and having contractual agreements with customers. These financial risks comprise:

Interest rate risk

Interest rate risk is the risk of adverse impact on the present and future finance costs of the Group arising from the interaction of interest rate movements with the Transpower Group's debt portfolio.

Currency risk

Currency risk is the risk of adverse impact of exchange rate movements, which determine the New Zealand dollar cost of foreign denominated expenditures and the New Zealand dollar value of debt issued in foreign currencies.

Credit risk

Credit risk is the risk of adverse impact on the Transpower Group through the failure of a third party bank, financial institution or customer to meet its financial obligations. Financial instruments which subject the Transpower Group to credit risk include bank balances, receivables, investments, interest rate swaps, cross currency interest rate swaps, forward rate agreements, foreign exchange and forward contracts.

Liquidity risk

Liquidity risk is the risk of adverse impact on the Transpower Group arising from the Group's inability to meet its monetary obligations in an orderly manner. This might result from the Group not maintaining adequate funding facilities or being unable to renew or replace existing facilities when they mature.

To manage and limit the effect of these financial risks the Transpower Board of Directors has approved policy guidelines and authorised the use of various financial instruments. The policy adopted by the Board prohibits the use of financial instruments for speculative purposes. All off balance sheet financial instruments must be directly related to underlying physical debt or firm capital commitments on Board approved projects.