4102 NEW ZEALAND GAZETTE, No. 140 23 NOVEMBER 2012

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

In addition to the above, the Group’s liquidity policy requires the Group to have access to committed funding facilities, to cover the sum of all debt which matures over the next six months plus peak cumulative anticipated operating cash flow requirements over the next six months. To meet this policy requirement Transpower has:

• a three year Standby Facility for NZD $250 million, effective 21 December 2010. This was undrawn at 30 June 2012 and 30 June 2011; and
• a three year Standby Facility for NZD $250 million, effective 26 May 2010. This was undrawn at 30 June 2012 and 30 June 2011.

ii. Interest rate risk
Interest rate risk is the risk of an adverse impact on the present and future finance costs of the Group arising from an increase in interest rates. Transpower uses various financial instruments to fix interest rates to mitigate interest rate risk.

The Group’s policy sets annual minimum and maximum hedging parameters expressed as a percentage of forecast debt. This policy ensures that the Group’s costs of funds will be reasonably predictable from year to year. Interest rate swaps and options are used to change the interest rate structure on existing and forecast debt and cross currency interest rate swaps entered into.

Under a new policy, the transition to which is being considered by the board, interest rate swaps would be placed so as to mirror, to the extent practicable, the interest rate used by the Commerce Commission in determining our regulated rate of return at the start of each regulatory period.

iii. Currency risk - debt
Currency risk on debt is the risk of adverse impact of exchange rate movements, which determine the NZD cost of debt (principal and interest) issued in foreign currencies.

Foreign currency borrowings are converted into a NZD denominated exposure at the time of commitment to drawdown. Currency risk on foreign currency denominated borrowings is managed using cross currency interest rate swaps and basis swaps.

Cross currency interest rate swaps are used to convert foreign currency denominated debt issued by the Group into NZD denominated debt. Cross currency interest rate swaps eliminate foreign currency risk on the underlying debt by determining the NZD equivalent of the interest payments and final principal exchange at the time of entering into the swap.

Basis swaps are used to eliminate currency risk when the Group issues bonds in a foreign currency. In a basis swap, the Group receives the offshore currency floating interest rate and pays the NZD floating interest rate.

iv. Credit risk
Credit risk is the risk of adverse impact on the Group through the failure of a counterparty 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 Poors or Moody’s/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 (2012 and 2011: none). Any collateral posted by Transpower would be included in Note 8 Trade and Other Receivables. (2012 and 2011: none)

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