4350 NEW ZEALAND GAZETTE, No. 155 25 NOVEMBER 2013

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 two year Standby Facility for NZD $250 million, maturing 7 December 2014, undrawn since inception.
• a three year Standby Facility for NZD $250 million, maturing 7 December 2015, undrawn since inception.

Investments
The Group from time to time invests surplus cash arising from its core operations and from active liquidity management in wholesale bank deposits and securities for periods of up to one year.

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.

Movements in interest rates will also impact on the fair values of the debt and derivatives portfolio. Prima facie, a market increase in interest rates will cause a decline in the net debt and derivative portfolio. Conversely a market decrease in interest rates will cause an increase in the net debt and derivative portfolio.

The Group’s policy sets 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.

iii.
Currency risk - debt
Currency risk 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 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 lesser 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 Standard and Poor’s credit rating of A or above or Fitch, Moody’s equivalent. The exception to these minimum credit ratings is for RRL investments, which are discussed in c) i. above. Credit exposures against these limits are monitored on a daily basis.

For those counterparties with which 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 (2013: none; 2012: none). Any collateral posted by Transpower would be included in Note 8 Trade and Other Receivables. (2013 none and 2012: 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 Swaps and Derivatives Association (ISDA). 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 net valuation is positive, as follows: