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

(f) Financial Instruments

Capital Risk Management

The Division manages its levels of debt and equity to ensure an efficient capital structure while maintaining certain internal financial ratios. Powerco’s Treasury Policy requires that the gearing ratio (net debt divided by total capital) is managed both by reviewing debt levels and altering distributions which influences the balance of equity. Total capital includes non-current and current classes of the division which are equivalent to the equity plus liabilities of the division refer to its balance sheet.

The Division also complies with financial covenants agreed with lenders as part of their financing agreements. These include a capital structure covenant comparing debt to debt equity, and also minimum net worth covenant as calculated by adding equity, plus subordinated debt. As at 30 June 2008 all covenants had been complied with.

Risk Management

The Division engages in business in Australia and New Zealand and has currency exposures relating to the Australian dollar and US dollar. In the normal course of events the Divisions exposed to loss through:

1. Market risk
2. Credit risk
3. Liquidity risk

The Company’s risk management seeks to minimise the potential adverse effects of market movements. The Division uses derivative financial instruments for this purpose but does not engage in holding instruments for trading or speculation.

Management of these risks is performed in accordance with the policies approved by the Board of Directors. These cover both detailed policies and specific areas such as foreign exchange risk, interest rate risk, credit risk and liquidity risk as well as the use of derivatives and appropriateness of counter parties.

(1) Market risk

(i) Foreign exchange exposures

The Division has foreign exchange exposures arising from US dollar denominated debt. This exposes the Division to volatility gains and losses arising from currency movements. The Division’s policy relating to US dollar denominated debt is to minimise the exchange rate exposure by use of matching hedges taken out at the time the loans were drawn down.

(ii) Interest rate exposures

Interest rate risk is the risk that interest rates will change increasing or decreasing the cost of borrowing or lending. The Division’s short-term borrowings are on a floating rate/interest rate. Non-current debt is funded by fixed coupon bonds and Powerco’s commercial paper program based on 90 day Bank Bills.

Powerco has entered into interest rate swap agreements to reduce the impact of the changes in interest rates on its borrowings. As at 30 June 2008, Powerco Limited had interest rate swap arrangements with registered banks. The weighted average of the interest rate swap agreements (excluding the reverse swap agreements) produce an interest rate of 6.77% p.a. Powerco’s Treasury Policy specifies parameters regarding the levels of interest rate hedging which are monitored by the Board on a monthly basis.

(2) Credit risk

Credit risk is the risk that a counterparty will be unable to meet its obligations. The Division’s credit risk primarily consists of bank balances and accounts receivable. There are no significant concentrations of credit risk. These amounts are subject to a Board Presidential Supervision Policy which is used to manage exposure to credit risk. As part of this policy, the Division’s exposures have been set and are monitored on a regular basis. Cash deposits are only made with registered banks. The maximum credit risk is the carrying value.

(3) Liquidity risk

Liquidity risk is the risk that the Division may be unable to meet its financial obligations as they fall due. This risk is managed by maintaining sufficient cash and deposits together with access to committed credit facilities. The division adheres to a Treasury Policy, approved by the Board of Directors, which specifies certain levels of liquidity that must be maintained for short term requirements and longer term obligations regarding the timing of refinancing of upcoming debt maturities. Liquidity levels are forecast and monitored on a continuous basis.

(g) Foreign currency sensitivity analysis

Powerco’s foreign currency borrowings are 100% hedged against movements in the NZD/USD exchange rate. Any movements in the value of borrowings or the interest payable due to a movement in the exchange rate is offset by an equal and opposite movement in the value and cash flows applicable to the hedge. As such the sensitivity calculation shows no movement in either the P&L or equity in relation to these borrowings.

(h) Interest rate sensitivity analysis

The following table details the Division’s sensitivity to a 100BP increase and decrease in the New Zealand interest rates, with all other variables held constant as at the reporting date. Tobago’s Policy is to actively accepted sensitivities that arise when applying volatility through interest rate movements, and represents the sensitivity of the interest rate change on interest rates. This analysis includes cash flows in fixing rate debt and interest rate derivatives as well as movements in the interest rate swap curve.

5 CASH & WORKING CAPITAL ADVANCES FACILITY

Powerco Limited operates a revolving capital advance facility with the Commonwealth Bank of Australia for up to $30 million. As at 30 June 2008, the full $39 million was drawn down on the facility (2007: funds drawn of $3.0 million). The facility is based on a revolving credit arrangement and as such does not have set repayment dates. The facility expires on 22 March 2011. This facility has been entered into the Security Trust Deed as a Senior Secured Debt Facility. This facility had interest rates ranging from 8.15% to 8.50%. The amount allocated to the gas division of year end was $5.877 million (2007: $4.718 million). The overdraft interest rate on this facility at that date was 10.5% (2007: 10.0%).

There is right of set-off between any of the facilities.

6 PROVISIONS

These provisions relate to employee entitlements such as accrued wages, bonuses, holiday pay and long service leave. The entitlements affected by a number of estimates including the expected termination period of employees and the timing of employees utilising the benefits. The majority of the provision is expected to be realised within their next two years.