NEW ZEALAND GAZETTE, No. 191

9 DECEMBER 2008

Notes to and Forming Part of the Financial Statements
For the year ended 30 June 2008

GAS DIVISION

5. Interest rate swap
   To swap back fixed New Zealand dollar debt converted to floating back to fixed debt. The swap is used to match the interest rate profile in accordance with the Board strategy and is on matched terms. Hedge accounting is not applied to these swaps.

6. Cross-currency swap
   To convert New Zealand dollar floating debt from numbers 2 above to New Zealand dollar fixed debt. The swap is used to modify the debt profile in accordance with the Board strategy and is on matched terms. Hedge accounting is not applied to these swaps.

7. Interest rate swaps
   To unwind floating to fixed swaps which existed when the hedging policy was changed. These are to offset previous interest rate swaps and match the terms of those including termination date and roll dates. Hedge accounting is not applied to these swaps.

8. Interest rate swaps
   Historical floating to fixed swaps which are offset by 7 above on matched term and nil basis. Hedge accounting is not applied to these swaps.

9. Interest Rate Swaps
   To unwind portions of cash flow hedges. Those hedges offset portions of swaps shown in 3, 4 and 6 above and are not hedge accounted.

All cash flow hedges above are to reallocate any fixed rate debt, thus giving a totally floating portfolio, then re-hedge as per the parameters in the Treasury policy. This had the effect that some fixed rate hedges not applied against floating rate hedges. In line with NZ IAS-39 these are not able to be designated as hedges for accounting purposes and thus movements in the mark to market value of these is passed through to the Income Statement although they are impinged on matched terms.

The Group’s New Zealand dollar and foreign currency fixed rate debt is converted to floating New Zealand dollar debt through the use of derivatives, with these exactly matching the term and nominal value of the debt. At the joint of issue the nominal value of the bonds was equivalent to the fair value and the fair value of the derivative was zero. The movements in market not the derivatives continues movements in interest rates of tertiary rates.

Powerco bonds are able to be traded on the NZDX and an active secondary market exists. This valuation method assumes a constant credit rating.

The fair value of financial instruments is disclosed in the financial statements as follows:

| Other non-current financial assets | | |
| Interest rate swap | | |
| | 3,895 | 3,534 |
| | (3,815) | (3,534) |

| Other non-current financial liabilities | | |
| US cross currency interest rate swap | 14,124 | 18,407 |
| Interest rate swap | 4,066 | 6,078 |
| | 18,190 | 24,485 |

| Net fair value of assets / (liabilities) | (13,687) | (15,851) |

b) Currency swaps
Under currency swap contracts, the division agrees to exchange specified principal and interest foreign currency amounts at an agreed future date at a specified exchange rate (fixed for floating). Such contracts enable the division to mitigate the risk of adverse movements in foreign exchange rates.

The following table details the currency swaps outstanding as at reporting date:

Outstanding contracts as at 30 June 2008

Outstanding contracts as at 30 June 2007