24 NOVEMBER 2006

NEW ZEALAND GAZETTE, No. 149

4317

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued

FOR THE YEAR ENDED 30 JUNE 2006

18. CONTINGENT LIABILITIES continued

(iii) Economic Gain (Loss) Account

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 passed on or claimed from customers over time.

The EV balance at 30 June 2006 was yet to be calculated. The balance of the EV account at 30 June 2005 was $98,740,000 to the credit of the customer.

(iv) Administrative settlement and Customer Rebates

On 23 December 2005 the Commerce Commission (the Commission) published notice of its intention to make a declaration of control of Transpower under Part 4A of the Commerce Act.

On 27 January 2006 the Commission published a paper setting out its draft reasons for forming an intention to declare control.

Transpower disagreed with the Commission’s preliminary conclusions and the reasons, and provided the Commission with detailed written submissions setting out Transpower’s views on the matter. Transpower also provided the Commission with a number of reports prepared by independent experts, which supported Transpower’s views.

On 31 March 2006, the Commission and Transpower reached agreement whereby: (a) the Commission agreed to delay its decision on whether to impose control and to provide Transpower with an opportunity to cut forward an administrative settlement proposal and (b) Transpower agreed to invoice customers in accordance with notified 2005/07 prices, but provide a credit note that effectively restored customer charges to the level applicable in March 2006.

Transpower has issued credit notes for $22.4m for the period April to June 2006.

Depending upon the outcome of the administrative settlement Transpower’s Transmission revenue for the period April to June 2006 may vary from that invoiced and disclosed in Note 2.

(v) 400kV project

On 30 September 2005 Transpower submitted its Grid Upgrade Plan. This included the North Island 400kV project, being the line proposed between Whakamaru and South Auckland. On 27 April 2006 the Electricity Commission (EC) issued a draft “no” to Transpower’s 400kV proposal, on the basis that there were more economic alternatives. Transpower disputed the EC findings and intends to submit a revised project to the EC in the near future. To date, including property purchases, Transpower has capitalised some $46.8 million of costs relating to the 400kV project. The vast majority of these costs are expected to be recycled into a revised project that is acceptable to the EC. In the event that there is no line constructed between Whakamaru and South Auckland then Transpower would face a write-down in the value of the Capitalised Costs. No such provision for any write-down has been made for the June 2006 financial statements.

(vi) Various other lawsuits, claims and investigations

Various other lawsuits, claims and investigations have been brought or are pending against Transpower. The Directors of Transpower cannot reasonably estimate the adverse effect (if any) on Transpower if any of the foregoing claims are ultimately resolved against Transpower’s interests.

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.

20. FINANCIAL INSTRUMENTS

(a) Financial risks

The Transpower Group is subject to a number of financial risks which arise as a result of its business activities, including having a debt portfolio of $1,541,509,000 as at 30 June 2006 ($1,513,474,000 as at 30 June 2005) 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.