4 DECEMBER 2009

NEW ZEALAND GAZETTE, No. 179

4365

Notes to and Forming Part of the Financial Statements
For the year ended 30 June 2009

GAS DIVISION

(e) 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 specifies a long term target for total debt divided by total capital. This is managed both by reviewing debt levels, and altering distributions which influence the balance of equity. Total capital includes the non-current and current assets of the Division which is equivalent to the equity and liabilities of the Division (refer to the balance sheet). The Division also complies with financial covenants agreed with lenders as part of financing agreements. These include a capital structure covenant combining debt to debt plus equity, and also minimum net worth covenant as calculated by adding equity plus subordinated debt. As at 30 June 2009 all external covenants had been complied with.

Risk Management
The Division engages in business in Australia and New Zealand and has currency exchanges relating to the Australian dollar and US dollar. In the normal course of events the Group is exposed to loss through

(a) Market risk
(i) Credit risk
(ii) Liquidity risk

The Division’s risk programme recognises the unpredictability of financial markets and 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 this risk 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 operates in New Zealand and Australia and has foreign exchange exposures arising from US dollar denominated debt and investments in Australian operations.
These exposures the Division to potential gains and losses arising from currency movements.
The Division 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
The current debt will interest rates will change, increasing or decreasing the cost of borrowing or lending. The Division’s short-term borrowings are on a floating daily interest rate basis. Non-current debt is funded by the fixed coupon bonds and Powerco’s commercial paper program based on 90 day Bank Bills. On 30 June 2009, Powerco Limited had entered into interest rate swap agreements with registered banks. The weighted average of the interest rate swap agreements (excluding the reverse swap agreements) produce an interest rate of 6.83% 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
Financial instruments with the potential to subject the Division to credit risk principally consist of bank balances and accounts receivable. There are no significant concentrations of credit risk. These accounts are subject to a Board Prudential Supervision Policy, which is used to manage the exposure to credit risk. As part of this policy, limits on 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
The Division’s policy risk is 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 the Treasury Policy, set out by the Board of Directors, which specifies certain levels of liquidity which must be maintained for short term requirements and further stipulations regarding the timing of refinancing of upcoming debt maturities. Liquidity levels are forecast and monitored on a continuous basis.

(f) 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 or 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 Income Statement or the Statement of Changes in Equity in relation to these borrowings.

(g) 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. +100bp is Powerco’s and the industry accepted sensitivity rate used when analysing volatility through interest rate movements, and represents management’s assessment of the possible change in interest rates. This analysis includes cash flows on floating 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 wholesale capital advance facility with the Commonwealth Bank of Australia for up to $300 million. As at 30 June 2009 $29.7 million was drawn down on the facility (2008: funds drawn of $30.0 million). The facility’s base on a revolving credit arrangement and as such does not have set repayment dates. The facility is due to expire on 22 March 2011. The facility has the benefit of a Security Trust Deed, as set out in Serious Deed of Debt Facility. This facility had interest rates during the period ranging from 2.75% p.a to 8.15% p.a. The amount of working capital advances facility allocated to the gas division was $83.36 million (2008: $6.77 million).

At year end the amount of bank overdraft allocated to the gas division was $0–34.9 million (2006: $0–0.09 million). The overdraft interest rate on this facility at that date was 8.76% (2008: 6.5%).

There is no sight of set-off between any of the facilities.

6 PROVISIONS

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