NEW ZEALAND GAZETTE, No. 159

29 NOVEMBER 2010

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

24. Financial instruments

(a) Financial Risks

The Transpower Lines Business is subject to a number of financial risks which arise as a result of its business activities, including having a debt portfolio which is denominated in both New Zealand dollars and foreign currency, its investment portfolio and from hedging purchases from foreign suppliers.

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 Transpower Lines Business arising from the interaction of interest rate movements with The Transpower 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 Transpower Lines Business through the failure of a third party bank, financial institution or customer to meet its financial obligations. Financial instruments which subject The Transpower Lines Business to credit risk include bank balances, receivables, investments, interest rate swaps, cross currency interest rate swaps, forward rate agreements, foreign exchanges and forward contracts.

Liquidity risk
Liquidity risk is the risk of adverse impact on The Transpower Lines Business arising from The Transpower Lines Business’s inability to meet its monetary obligations in an orderly manner. This might result from The Transpower 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 or forecast 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
Transpower’s policy sets annual minimum and maximum economic hedging parameters expressed as a percentage of forecast debt. This policy ensures that Transpower’s cost of funds will be reasonably predictable from year to year. Transpower does not hedge account for interest rate risk.

Currency risk management policy
Transpower’s policy is to hedge all committed foreign currency denominated purchases greater than $1 million (New Zealand Dollar equivalent). Foreign currency borrowings are converted into New Zealand dollars at the time of commitment to drawdown by Transpower. Not all derivatives are hedge-accounted. Currency risk on foreign currency denominated borrowings is managed using cross currency interest rate swaps.

Credit risk management policy
Transpower’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 the greater of 20 per cent of Group 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.

Counterparties must have a minimum long term credit rating of A or above by Standard & Poor’s, Moody’s or Fitch equivalent.

Credit exposures versus these limits are monitored on a daily basis. For those counterparties with whom Transpower has a Collateral Support Agreement (CSA), the counterparty credit limit is defined as the maximum exposure threshold dictated by the CSA.

The concentration of credit risk with respect to trade receivables is high due to the small number of customers comprising Transpower’s customer base. It is Transpower’s policy to perform credit evaluations on customers requiring credit and Transpower may in some circumstances require collateral. No collateral is held at 30 June 2010 (2009: nil).