28 NOVEMBER 2011 NEW ZEALAND GAZETTE, No. 184 5333

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

17. Debt, financial instruments and risk management

The following items are discussed elsewhere in the financial statements

The Transpower group has the following policies that apply to debt, financial instruments and risk management. The lines business is an integral part of the Transpower group, and as such the following Group information applies to the lines business

(a) Summary

Debt is issued by the Group in both New Zealand dollars (NZD) and foreign currencies. Derivatives are used to manage currency risk and interest rate risk by converting foreign borrowings to NZD and by converting floating interest rates to fixed interest rates. The use of derivatives means that Transpower effectively has borrowings denominated in NZD, predominantly at fixed interest rates.

The Group also uses derivatives in its purchase of goods and services.

The Group 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 NZD and foreign currencies, and from purchases of goods and services denominated in a foreign currency.

The financial risks are those that are financing related; being liquidity, interest rate, currency, and credit risk; and those that are operating related, being currency, commodity and credit risk.

Financial risk management is carried out by a central Treasury function which operates under policies approved by the board of directors.

(b) Fair value and classifications

Transpower values the majority of financial instruments at fair value in the statement of financial position. For cash and cash equivalents, accounts payable and receivables, fair values are materially similar to their cost due to the short term nature of these items.

Fair value, represents the amount which would, in the course of the normal operation of the financial markets, extinguish all current and future contractual obligations arising in respect of a particular financial instrument. The Group uses discounted cash flow techniques to calculate the fair value of its investments, debt and derivative instruments. The interest rate used for discounting is based on the applicable market swap curve, for example, for USD debt the USD swap curve for similar rated entities would be used as the basis for discounting the expected cash flows. The swap curve is adjusted for estimated credit spreads above the swap curve that exist for debt issues. This is the tier 2 category as described by NZ IFRS 7.

(c) Financial risks - financing related

i. Liquidity risk

Liquidity risk is the risk of the Group being unable to access sufficient funds to meet its financial obligations in an orderly manner. This might result from the Group not maintaining adequate funding facilities or being unable to replace existing debt maturities.

To smooth the Group’s refinancing requirements in future periods, committed funding facilities maturing in any 12 month period are not to exceed NZD $500 million. No more than 50% of debt can mature within the next three years and at least 30% of debt must mature after five years. At 30 June 2011, committed funding facilities maturing exceeded this self-imposed limit with $869.6 million maturing. Extra short term funds were held at 30 June 2011 while Transpower completed a review of its capital structure and dividend policy.

Term debt

The Group has six debt facilities. The aggregate principal amount of the debt outstanding may not exceed the following:

The Group uses these facilities to issue debt securities into different markets. The Group can issue in various currencies up to the equivalent value shown in the table above.