4318 NEW ZEALAND GAZETTE, No. 149 24 NOVEMBER 2006

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued

FOR THE YEAR ENDED 30 JUNE 2006

20. FINANCIAL INSTRUMENTS continued

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, interest rate options, 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.

(b) Risk management policies

The key risk management policies are as follows:

Interest rate risk management policy

The Group’s policy sets annual minimum and maximum hedging parameters expressed as a percentage of forecast debt out to 10 years. This policy ensures that the Group’s costs of funds will be reasonably predictable from year to year.

Currency risk management policy

The Transpower Group’s policy is to hedge all material foreign currency denominated purchases. Foreign currency borrowings are hedged into New Zealand dollars at the time of commitment to drawdown by the Transpower Group. Currency risk is eliminated using cross currency interest rate swaps.

Credit risk management policy

The Transpower Group’s credit policy is to establish credit limits with counterparties that are either a bank, a financial institution or special purpose derivative products company. These net credit limits are not to exceed 20 per cent of Transpower Group shareholders’ funds or 15 per cent of the shareholders’ funds of the counterparty as shown in the most current annual report. If the counterparty is a New Zealand Corporate, the credit limit is not to exceed NZ$40,000,000.

In addition, the counterparty must have a minimum long term credit rating of A or above by Standard & Poor’s, or Moody’s equivalent.

Credit limits are monitored on a daily basis.

The concentration of credit risk with respect to trade receivables is high due to the small number of customers comprising the Group’s customer base. It is the Group’s policy to perform credit evaluations on customers requiring credit and the Group may in some circumstances require collateral. No collateral is held at 30 June 2006 (30 June 2005, nil).

Liquidity risk policy

To ensure the Group has adequate funding facilities in place to support future operations, the Group’s liquidity policy requires the Group to have access to committed debt facilities (i.e. guaranteed funds) that exceed the peak cumulative anticipated financing and operating cash flow requirements excluding long term debt over the next six months by 20 per cent. To smooth the Group’s refinancing requirements in future periods, committed debt facilities maturing in any 12 month period are not to exceed NZ$350,000,000. No more than 50% of debt facilities can mature within the next three years and at least 20% of debt facilities must mature after five years.

(c) Financial instruments which manage currency, interest rate and liquidity risk

The Directors have authorised the use of the following financial instruments to manage currency risk, interest rate risk and liquidity risk:

On Balance Sheet financial assets and liabilities

Term debt

The Transpower Group has five active debt facilities: a European Commercial Paper programme, a Euro Medium Term Note programme, a Domestic Medium Term Note programme, an Australian Medium Term Note programme and a Domestic Multi-option Facility. The Group uses these facilities to issue debt securities into different global debt markets.

In the event the Transpower Group is unable to utilise these facilities the Group has established a committed credit facility. This is a Standby Facility for NZ$250,000,000 which was not in use at 30 June 2006 or 30 June 2005.