17. Debt, financial instruments and risk management

The following items are described in the financial statements in the following notes:

(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 at balance date, 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 risks, being liquidity, interest rate, currency, and credit, and those that are operating related risks, being currency, commodity, customer credit, insurance and regulatory.

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 observable market prices, and 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.

Transpower has certain debt issues listed on the New Zealand debt exchange (NZDX). The volume of trades is considered insufficient to use quoted market prices for valuation purposes.

(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 750 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.

Term debt

The Group has five 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.