4112 NEW ZEALAND GAZETTE, No. 140 23 NOVEMBER 2012

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

23. Contingencies

(i) Regulation and Capital Projects

Transpower is allowed to recover the costs from projects set out in Grid Upgrade Plans (GUPs) approved previously by the Electricity Commission (EC) and since 2010 approved by the Commerce Commission (CC). If project expenditure exceeds the amount initially approved, Transpower must apply to the CC for approval to recover the additional amount from transmission customers.

At 30 June 2012, there are four completed grid reinforcement projects for which the final expenditure was in excess of their approved amounts by a cumulative total of $15 million. Consistent with the regulatory process, Transpower is seeking CC approval for the additional expenditure. To the extent that the CC did not approve the additional spend on any project, that additional expenditure could not be recovered from customers.

Expenditure on the NIGU project (NIGUP) is forecast to exceed, by up to $70 million, the amount of $824 million approved by the EC in July 2007. The project is due to be completed in late calendar 2012. Transpower will seek approval for the additional expenditure from the CC in due course. Under regulations introduced in January 2012, approval amounts may be adjusted for the CPI and foreign exchange movements. If applied retrospectively, this would reduce the approved amount for NIGUP. Transpower has received a number of claims from two contractors on the NIGUP. In the event that all of the claims received were accepted, the project cost would increase by approximately $50 million. Transpower’s view, supported by external legal advice, is that there is little merit to the majority of the claims received.

(ii) Guarantees

NZPCL

In November 2009, the Group partially terminated the 2003 cross border lease in respect of the majority of the HVAC transmission assets in the South Island. As a result of the partial termination, Transpower has consolidated a special purpose vehicle, NZPCL. NZPCL has a deposit with a financial institution and a loan from another financial institution. The cash flows from the deposit and loan offset. No consideration was transferred. The loan to NZPCL is guaranteed by Transpower.

The substance of the transaction is such that Transpower rather than the non controlling interest would be responsible for any shortfall between the value of the asset and the liability.

Debt

Transpower, and in some cases certain subsidiaries, have provided guarantees in respect of the Group’s bonds, euro medium term notes (EMTN), Australian medium term notes, the US private placement, its bank facilities and its domestic multi-option facility.

The likelihood of losses in respect of these matters is considered to be remote.

Note 19 Debt, financial instruments and risk management includes the outstanding amounts issued at balance date.

Bonds - issued by Transpower Finance Limited

Bonds are issued under a trust deed dated 6 April 1995 between Transpower, the Initial Guaranteeing Subsidiaries (including Transpower Finance) and The New Zealand Guardian Trust Company Limited. The Trust Deed has been amended on various occasions to incorporate (and remove) new subsidiaries into (and from) the Guaranteeing Group.

Pursuant to the Trust Deed, Transpower and its subsidiaries excluding RRL and d-cyphaTrade Limited (the "Guaranteeing Group") have given a negative pledge that, while any of the stock issued under the Trust Deed remains outstanding they will not, subject to certain exceptions, create or permit to exist any charge or lien over any of their respective assets. Each member of the Guaranteeing Group has guaranteed all amounts payable on redemption or repayment of the bonds and the payment of interest during the term of the bonds.

Bonds - issued by Transpower New Zealand Limited

Transpower has issued bonds which remain outstanding under a master trust deed dated 18 March 2011 between Transpower and The New Zealand Guardian Trust Company Limited, as amended from time to time (Master Trust Deed), and a supplemental trust deed (no. 1) dated 17 November 2011 between Transpower and The New Zealand Guardian Trust Limited.