4892

NEW ZEALAND GAZETTE, No. 186

28 NOVEMBER 2008

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

23. Financial instruments

(a) Financial Risks

The Lines Business is subject to a number of financial risks which arise as a result of its business activities, including having a debt portfolio of $1,173,611,000 as at 30 June 2008 (2007: $1,460,590,000) 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 Lines Business arising from the interaction of interest rate movements with the Lines Business’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 Lines Business through the failure of a third party bank, financial institution or customer to meet its financial obligations. Financial instruments which subject the Lines Business 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 Lines Business arising from the Lines Business’s inability to meet its monetary obligations in an orderly manner. This might result from the Lines Business 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 Board 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 derivatives must be directly related to underlying physical debt or firm capital commitments on Board approved projects.

(b) Financial Risk Management Policies

The key financial risk management policies are as follows:

Interest rate risk management policy
The Lines Business’s policy sets annual minimum and maximum hedging parameters expressed as a percentage of forecast debt. This policy ensures that the Lines Business’s costs of funds will be reasonably predictable from year to year.

Currency risk management policy
The Lines Business’s policy is to hedge all committed foreign currency denominated purchases greater than $1 million (New Zealand Dollar equivalent). Foreign currency borrowings are hedged into New Zealand dollars at the time of commitment to drawdown by the Lines Business. Currency risk on foreign currency denominated borrowings is eliminated using cross currency interest rate swaps.

Credit risk management policy
The Lines Business’s 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 Lines Business shareholders’ funds or 15 per cent of the shareholders’ funds of the counterparty as shown in the most current audited annual report. If the counterparty is a New Zealand Corporate, the credit limit is not to exceed $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 exposures versus these limits are monitored on a daily basis.