✨ Financial Risk Management
4104 NEW ZEALAND GAZETTE, No. 140 23 NOVEMBER 2012
TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS
(d) Financial risks - operating related
I. Currency risk - foreign purchases
Currency risk is the risk of the adverse impact of exchange rate movements, which determine the NZD cost of foreign denominated purchases. It is the Group’s policy to hedge all committed foreign currency denominated payments greater than NZD 1 million (NZD equivalent) by using forward foreign exchange forward contracts to fix or offset the NZD cost.
The majority of foreign currency payments greater than NZD 1 million (NZD equivalent) are hedge accounted.
The notional gross contract amounts of foreign exchange forward contracts outstanding at balance date, by maturity banding, are:
| 2012 | 2011 | |
|---|---|---|
| $M | $M | |
| Within one year | 171.8 | 266.2 |
| One to two years | 18.7 | 38.3 |
| Two to five years | – | 18.6 |
| Greater than five years | – | – |
| Total foreign exchange forward contracts | 190.5 | 321.1 |
ii. Commodity risk
Commodity risk is the risk of an adverse impact in commodity prices such as prices for aluminium and copper. These are some of the raw materials used in the construction of the electricity transmission network. Generally, Transpower has used contracts in which commodity risk is borne by the supplier.
iii. Customer credit risk
Transpower’s customers comprise predominantly electricity generators, electricity distribution companies and some large industrial users. There is a high concentration of credit risk with respect to trade receivables due to the small number of significant customers which the majority of revenue is received from. It is the Group’s policy to perform credit evaluations on customers requiring credit and the Group may in some circumstances require collateral. No collateral is held at 30 June 2012 (2011: none).
Significant receivables balances at balance date were:
| LINES BUSINESS | |
|---|---|
| 2011 | |
| $M | |
| Vector Limited | 12.1 |
| Meridian Energy Limited | 5.8 |
iv. Insurance risk
Transpower insures its grid assets up to a cap of $350 million under a material damage policy. Transmission lines are not insured because the premium cost exceeds the probability of significant loss. Submarine cables are separately insured to a cap of $30 million.
Transpower operates a captive insurance company through its subsidiary Risk Re-Insurance Ltd (RRL). Under the material damage policy RRL is liable for the first $9 million of insurance cost for grid assets and up to $23.75 million for cables. A $1 million excess applies under the material damage policy, no excess applies to the submarine cables.
RRL maintains an investment portfolio to meet any insurance claims.
v. Regulatory risk
Transpower is a natural monopoly and is regulated by the Commerce Commission (the CC). The CC determines what rate of return applies to Transpower’s assets. It also determines the level of operating expenditure and capital expenditure that can be recovered from customers.
There is a risk that Transpower’s rate of return may be set at too low a level to compensate Transpower for undertaking investments in grid assets. There is also the risk that Transpower overspends against its operating expenditure and capital expenditure thresholds and thus cannot recover these costs.
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NZ Gazette 2012, No 140
✨ LLM interpretation of page content
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Transpower New Zealand Limited Financial Statements
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🏭 Trade, Customs & IndustryFinancial risks, Currency risk, Commodity risk, Customer credit risk, Insurance risk, Regulatory risk, Foreign exchange contracts, Credit evaluations, Insurance policies, Regulatory compliance