28 NOVEMBER 2011 NEW ZEALAND GAZETTE, No. 184 5337

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

iv

Credit risk
Credit risk is the risk of adverse impact on the Group through the failure of a third party bank, financial institution or customer to meet its financial obligations. Financial instruments which subject the Group to credit risk include bank balances, receivables, investments, interest rate swaps, cross currency interest rate swaps, basis swaps, interest rate options, forward rate agreements and foreign exchange forward contracts.

The Group’s policy is to establish credit limits with counterparties that are either a bank, a financial institution, special purpose derivative products company or a New Zealand corporate. 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. In addition, if the counterparty is a New Zealand corporate, the credit limit for investments is not to exceed $40 million.

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

Credit exposures versus these limits are monitored on a daily basis.

For those counterparties with whom the Group has a Collateral Support Agreement (CSA), the counterparty credit limit for derivatives is defined as the maximum exposure threshold dictated by the CSA. Any collateral that is posted is included in Note 14 Trade and Other Payables (2011: none; 2010: $20.6 million). Any collateral posted by Transpower would be included in Note 8 Trade and Other Receivables. (2011 and 2010: none).

The maximum credit exposure in respect of non-derivative assets is best represented by their carrying value.

The credit risk arising from the use of derivative products is minimised by the netting and set-off provisions contained in the Group’s International Swap Dealer Agreements (ISDAs). Under these agreements, transactions are net settled therefore the maximum credit exposure is best represented by the net mark to market valuation by counterparty where the valuation is positive, as follows:

Credit spreads
Credit Spreads are an estimate of the additional premium over the relevant yield curve that would be required by market participants to compensate them for the perceived risk inherent in the counterparty and transaction. For derivative transactions, the impact of credit spreads is substantially lower than for debt and investment transactions due to the offsetting nature of the cash flows.

The following table shows the impact of credit spread movements on debt, derivatives and investments on fair value:

v

Sensitivity analysis

Currency risk - debt
All foreign currency debt is converted back to NZD denominated exposure, therefore no sensitivity analysis has been performed for foreign currency debt.

Fair value risk
The Group’s net debt is designated as “fair value through profit or loss”. As such, the Group is subject to fair value gains or losses. The extent of the gains or losses is based on the Group’s cash flow profile compared to the corresponding movement in the yield curve. For debt, derivatives and investments the relevant yield curve is effectively adjusted for the credit margin.

A parallel shift in the yield curve by 1% (100 basis points) would create the following fair value movements based on Group net debt held at 30 June 2011: