3510 NEW ZEALAND GAZETTE, No. 134 30 NOVEMBER 2007

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

NOTES TO THE FINANCIAL STATEMENTS continued

FOR THE YEAR ENDED 30 JUNE 2007

20. FINANCIAL INSTRUMENTS continued

(d) Maximum credit risk exposure

The maximum credit exposure in respect of on balance sheet assets is best represented by their carrying value. For other financial instruments the maximum credit exposure is best represented by the net marked to market valuation by counterparty where the valuation is positive, as follows:

The credit risk arising from the use of derivative products is minimised by the netting and set-off provisions of the documentation and the application of applicable law. The Group further manages this risk by only entering into transactions with counterparties that fall within the Group’s credit risk management policy as outlined in section (b) Risk management policies, of this note.

(e) Carrying value and fair value

Carrying value
For off balance sheet financial instruments the carrying value in the Carrying/Fair Value table below is taken from the other receivables and other liabilities categories in the Statement of Financial Position as appropriate. The carrying values represent the results of accounting for these instruments, as described in the Statement of Accounting Policies. The unrealised foreign currency gains and losses on cross currency interest rate swaps are included in the carrying value of debt.

Fair value
Fair value represents the amount which would, in the course of the normal operation of the financial markets, extinguish all current and future contractual obligations using in respect of a particular financial instrument.

The fair value for short term investments, debt, cross currency interest rate swaps, foreign exchange forward contracts, interest rate swaps, forward rate agreements, interest rate options and foreign currency options is determined using the current market rates at balance date. For those debt instruments where there is no quoted market rate at balance date the fair value is based on the current market rate of a financial instrument with a similar maturity.

For cash and bank, trade receivables/creditors, other receivables, other liabilities, investments and investments in shares the fair value is equivalent to their carrying value and has been excluded from the Carrying/Fair Value table.

The difference between the carrying value and the fair value represents an unrealised cost or benefit to the Company. This arises as a result of variations between the historical contract rate and the current market rate at balance date.

The unrealised gain arising from movements in interest rates since the acquisition date of debt carried at 30 June 2007 and the derivative products used to manage interest rate risk in respect of that debt was NZ$100,674,000 (unrealised loss NZ$1,988,000 as at 30 June 2006). This comprises the difference between the carrying values and fair values of debt, cross currency interest rate swaps, interest rate swaps, forward rate agreements and interest rate options.

Transpower anticipates that the financial instruments will be held to maturity and it is unlikely that settlement at the reported fair values will occur and the resulting gain realised.