4360 NEW ZEALAND GAZETTE, No. 155 25 NOVEMBER 2013

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

23. Contingencies

(i) Regulation and Capital Projects
Transpower is allowed to recover from Transmission customers the project costs set out in Grid Upgrade Plans (GUPs). Since 2010 the GUP’s have been approved by the Commerce Commission (CC). Prior to that date the Electricity Commission (EC) approved GUP’s. If project expenditure exceeds the amount initially approved, Transpower must apply to the CC for approval to recover the additional amount.

NIGU Project

The NIGU Project (NIGU) which involved the construction of a new 400kV capable transmission line between Whakamaru and Auckland was commissioned in October 2012.

The current maximum cost approved by the regulator for NIGU is $824 million. The final cost of the project will exceed this amount, by around $70 million. Transpower has made an application to the Commerce Commission with respect to the majority of the additional NIGU costs.

There is uncertainty over the extent to which the final costs of NIGU will be approved by the Commerce Commission. Under regulations introduced in January 2012, the Commerce Commission has discretion:

(a) to increase the maximum cost approved above $824 million;

(b) to review the original EC approved amount of $824 million and make adjustments, retrospectively, for movements in CPI and foreign exchange inputs.

If the latter adjustment were applied, the original approved amount could reduce by approximately $80 million. Transpower does not believe such an adjustment applies.

To the extent that the Commerce Commission determines that some of the additional project expenditure was not efficiently incurred and does not increase the final approved amount, Transpower would not be able to recover the full project cost and an asset impairment may result.

(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 placements, its bank facilities and its domestic multi-option facility.

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

Note 17 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.