Transpower Annual Report 2011-2012

ANNUAL REPORT 2011/12
fORwARd ThiNkiNg + iNNOvATiON
// OUR yEAR A sNAPshOT
Thinking differently, working smarter.
A viRTUAL presence via robotics at our remote substation sites around New Zealand will shorten our response times to equipment failures = less time with the lights off.
This
is the current prototype used for communication and control assessment for substation robotics.
NEw zEALANd cONNEcTEd

safety efforts recognised. Lending a helping hand.
OUR drive to improve safety across the industry was recognised by four safety awards at the EEA Awards and the NZ Workplace Awards 2012. Our own STAR awards were held on 16 August, with over 105 nominations for safety excellence.
165
days this year were used by our staff in a volunteer capacity to give back to the communities they work and live in.
Transpower plans, builds, maintains and operates New zealands National grid. Our high voltage electricity transmission network connects generators with distribution companies (and their millions of customers) and with major industry. As a state-Owned Enterprise, were committed to being a powerful force for positive change over the next 20 years and beyond.
Using technology to reduce emissions.
Recycle and reuse.
if sUccEssfUL, a trial of new vacuum circuit breaker technology in the South Island may see a marked reduction in the use of SF6 going forward.
OUR
old computers are now being put to good use. Our partnership with Computers in Homes saw laptops given to families in need in the Wellington region this year.
cONTENTs
02.
improving our service.
chAiRMANs ANd chiEf ExEcUTivEs REviEw sTATEMENT Of cORPORATE iNTENT PERfORMANcE TARgETs BOARd Of diREcTORs cORPORATE gOvERNANcE diREcTORs REPORT TO shAREhOLdERs fiNANciAL sTATEMENTs 2011/12
12. 16. 18. 20. 27.
A NEw mobile website from our System Operator is now live and provides a selection of real-time data from the National Grid and market notices. Visit http://i.systemoperator.co.nz to keep up to date.
// CHAIRMANs AND CHIEF EXECUTIVEs REVIEW
sTRENgTh iN ThE fUTURE gRid

MARk vERBiEsT CHAIRMAN PATRick sTRANgE CHIEF EXECUTIVE
Transpower remains on track to deliver the key projects needed to further strengthen and secure the national transmission system.
Last year, we focused on the foundations of our business the safety, performance and reliability of the power system and the delivery of key projects to strengthen and secure the National grid. This will continue to be our focus this year.
financial performance Transpower performed well financially last year, largely in line with planned expenditure and revenue forecasts. Earnings after tax, prior to net changes in the fair value of financial instruments, were $167 million (2011: $126 million). Prior year earnings were reduced by one-off charges, including a $19.7 million impairment on the North Island Grid Upgrade land portfolio. Operating revenue was $794 million (2011: $737 million), an increase of $57 million, reflecting the commissioning of new investments in the grid. Operating expenses of $290 million increased $11 million compared with the previous year. This included instantaneous reserve charges of $18 million compared with $5 million the prior year. Under our regulatory framework, instantaneous reserve charges are largely passed through to customers, so we will recover the increased costs through revenue in upcoming years. Depreciation, amortisation, impairments and write-offs decreased to $180 million from $193 million. Capital expenditure was $915 million in 2012 (2011: $733 million) $553 million of this was on our three major projects. Net profit after tax for the year, after deducting for the impact of net fair value changes in financial instruments, was $85 million (2011: $79 million), an increase of $6 million. Fair value losses for the year were $115 million (2011: $65 million loss), an increase of $50 million over the prior year. These were predominantly the result of reductions in market interest rates, which reduce the fair value of financial instruments. We are not in the business of trading financial instruments and generally hold them to maturity. The fair value losses are non-cash in nature and therefore do not reflect or impact the underlying operating performance of the business. capital programme and funding We continue to access debt capital markets to fund the costs of our grid reinvestment programme and to refinance maturing debt. In 2012, we secured long-term bond funding through a US private placement of $466 million, a Canadian private placement of $307 million and domestic bond issues totalling $200 million. These debt issues have maturities ranging between 4 and 15 years, which maintains our prudent and diversified funding profile. Our net debt at 30 June 2012 was $2.3 billion. It will peak at around $3.6 billion by 2015/16. A key enabler for this borrowing programme is our strong investment grade long-term corporate credit rating (Standard & Poors AA- and Moodys A1). The rating reflects our Government ownership, the regulated nature of cash flows from our transmission activities and the high entry costs that would face any potential competitor. dividend payment Consistent with the conclusions of a capital structure review in 2010/2011, Transpower has recommenced paying dividends to the Crown. A $110 million interim dividend was paid in March 2012. A further dividend payment of $205 million was declared by the Board on 16 August 2012. This will be paid in September. It will bring the total dividend for the 2012 financial year to $315 million. The dividend is, in part, a result of the capital structure review. Accordingly, we expect next years dividend to be lower. Transmission revenue and pricing Through the 1990s and early 2000s, transmission prices decreased in real terms as there was little investment in the grid. As a result, transmission charges decreased from being over 15 per cent of a typical homeowners bill to about 8 per cent currently.
We are now in a period of reinvestment. This will improve the reliability of supply and ensure future requirements on the grid are met. This investment has been well signalled. It will result in annual transmission revenue (and therefore prices) increasing in the short term. However, even after the reinvestment programme is complete, transmission charges are forecast to remain below 10 per cent of the average household bill. Performance of the existing grid against the statement of corporate intent We met all of our network performance objectives for the year ended 30 June 2012. Despite the large construction programme under way, the underlying reliability was similar to last years figures, which were the third best in a decade. Longer term, we expect performance and reliability to improve further. System reliability and availability results against the targets in Transpowers 2011/12 Statement of Corporate Intent were as follows:
sysTEM AvAiLABiLiTy ANd RELiABiLiTy TARgETs HVAC AVAIlAbIlITy % HVDC AVAIlAbIlITy % PolE 2 oNly NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 0.05 SySTEM MINUTES1 NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 1.0 SySTEM MINUTE TO 30 JUNE 2012 2012 ANNUAL TARgET 98.5% 82.5% TARgET MET
98.7% 83.6% 19 2
3 3 3 3
21
1. oNE SySTEM MINUTE IS bASED oN A SySTEM PEAk oF 6,917 MW FoR THE PURPoSES oF THIS CAlCUlATIoN. oNE SySTEM MINUTE IS EqUIVAlENT To THE loSS oF ToTAl NATIoNAl ElECTRICITy SUPPly FoR 1 MINUTE AT PEAk loAD EqUIVAlENT To TURNING oFF A CITy THE SIzE oF HAMIlToN FoR AboUT 40 MINUTES.
We had 19 unplanned events that resulted in interruptions of more than 0.05 system minutes (versus 18 in 2011). The SCI target for the full year was less than or equal to 21. Two of these events the severe snow storm that caused transmission circuit outages throughout the lower North Island in mid-August 2011 and the Huntly incident in December 2011 had an impact greater than 1.0 system minute. The SCI target for the full year is no more than three events greater than 1.0 system minute. Excluding the Huntly incident, we had a total of 7.55 system minutes of non-supply (planned and unplanned). The Huntly incident lasted for 6.9 system minutes, which brought the total non-supply to 14.45 system minutes. The upgrade work we are undertaking will provide better reliability and resilience longer term. Improvements in field response, including automation, will also lift performance. However, construction and commissioning work increase our exposure to outages. This will require careful management of the grid until the upgrades are completed. Operating the future grid The importance of electricity to our economy will continue to increase. The National Grid is the cornerstone of the New Zealand electricity system. New Zealand has substantial low-cost and long-life existing renewable generation remote from our principal load centres. This means the fundamental role of the grid will endure. However, potential changes in electricity consumption, generation economics and customer response technologies bring with them greater uncertainty with respect to future grid loading.
Since the recessionary effects of the global financial crisis in 2007 were first felt, the rate of growth of peak demand on the grid has been almost flat. The small rise in end-user consumption has been largely offset by the introduction of smaller generation facilities embedded in the distribution network. Close coupling of electricity consumption and economic cycles has long been observed, with demand quickly rising again during economic recoveries. That said, fundamental changes are occurring. The use of local generation will increase. Greater use of demand-side response, whereby customers reduce non-essential load to reduce peak loadings on the electricity system, will slow peak load increases on the grid. Offsetting this, the development of larger-scale renewable generation facilities a long way from load centres can lead to increased loadings on the grid. The West Wind wind farm near Wellington and new geothermal plants in the central North Island are recent examples. These are displacing existing thermal generation closer to our major load centre in Auckland, leading to increased demands on the grid. This leads to higher levels of uncertainty, which must be factored in to grid planning. We must also consider the future impact of major load changes. These include the introduction of electric cars and significant changes in demand at major industrial facilities driven by global changes in commodity markets. We need to recognise that quite different scenarios may develop and create a number of options to deal with them. By doing this, we will be able to provide further capacity when it is required, while deferring investment in any large-scale new lines until it is certain that they are needed. Our long-term vision for the future of the National Grid Transmission Tomorrow outlines how we will develop and operate the National Grid over the next 20 to 30 years and beyond. Transmission Tomorrow, published in February 2011, was developed in consultation with the industry and is now embedded into our grid planning processes. It will enable us to respond to unexpected changes in generation or consumer demand more quickly. It also allows us to fully utilise our existing assets before we need to build more. investing in technology Technology will play a key role. Transmission Tomorrow focuses on delivering technology initiatives. Where possible, these initiatives will be used to limit the need to expand the grid footprint. For example, the introduction of variable line ratings on some of our transmission lines in November 2011 unlocked additional capacity from our existing transmission network. Instead of using a one size fits all approach, we have matched individual lines to local environmental conditions to enable us to get the maximum capacity out of each transmission line. These types of initiatives will help to defer the need to build more lines. Once proven, they also allow us to respond more quickly to unexpected changes in demand or generation. This allowed us to defer part of our committed grid upgrades in Central Otago despite them being fully approved by the regulator until prospective wind generation in the region is committed. In the interim, we are using variable line rating on the lines from Clyde to Roxburgh to provide additional grid capability. These developments are challenging technically, given the extremely high reliability required, and can take years to develop to the point where they are a viable alternative. However, where successful, the low cost of the additional capacity they provide can more than justify the development costs. A key technology is demand-side response the disconnection of non-essential load as a tool to maintain supply immediately after losses of key transmission lines or
equipment. After successful trials in the upper South Island, we are implementing a new United States-developed system that will make demand response an attractive commercial option for consumers. Our initial goal is to secure up to 60 MW of demand response, or the equivalent of three years demand growth, to defer investment otherwise required in the upper North Island. This expenditure of up to $12 million on demand-side response in Auckland is being funded as an alternative to transmission investment under the Commerce Commission grid investment arrangements. We are also commissioning a new state-of-the-art control system to manage both the new HVDC Pole 3 and existing HVDC Pole 2. This new bipole control system will enable more efficient use of generation resources, providing benefits to consumers potentially worth tens of millions of dollars. It will allow a single, national frequencykeeping market, with added operational flexibility from a feature known as round power. This will reduce the amount of generation required to be held in reserve to cover the unexpected loss of a generator. The bipole control system will also be linked electronically with our AC transmission grid north of Wellington. This will unlock vital additional capacity on these lines at times of both very low and very high generation in the South Island. Other initiatives include: the extension of the variable line ratings concept to provide real-time monitoring and rating of all our heavy-duty power equipment such as transformers; the extension of the STATCOM and Reactive Power Controller technology (recently successfully trialled and introduced in the South Island) to provide vital voltage support to Auckland; and, our first use of series compensation in the lower South Island. We believe series compensation will be key to achieving full use of the new 400 kV-capable line to Auckland over the longer term.
Underpinning all of this technology is the need for very high-speed fail-safe communication between all of our substations and operating centres. Our new $158 million broadband-based telecommunications network is well advanced. It will provide the platform to operate tomorrows grid, underpinning many of our planned technology enhancements. The core fibre network was successfully livened this year. Our substations are being linked progressively, and the network will be complete by June 2013. The network will also increasingly link us to our customers. We successfully trialled the Inter Control-Centre Communication Protocol with three of our major customers this year. This will enable exchange of large volumes of real-time data with our customers to support demand response and automatic generation dispatch and frequency-keeping. Over time, the benefits of these technologies will deliver reliability and security for our customers at a lower cost. However, while these initiatives will make the grid more efficient, they can only reduce, not eliminate, the need for future grid investment. Asset renewal and management We continue our systematic replacement and refurbishment of older equipment necessary after a long period of underinvestment. During 2012, we spent $223 million on replacement and refurbishment. Two major programmes under way are transmission tower painting and transformer replacement. We have around 24,000 transmission towers. Many are in high corrosion zones. Over the next three years, we plan to increase the number of towers we paint by 1015 per cent. Tower painting accounts for over 10 per cent of the capital spent on asset refurbishment. We are exploring ways to deliver the painting programme more efficiently. Our transformer fleet has an average age of 10 years beyond the international average. This results in higher maintenance costs and outage rates. A programme is under way to progressively replace our ageing fleet of single-phase transformer banks by 2030. We aim to replace five to seven transformer banks a year. This asset programme will be ongoing. As we focus on increasing the utilisation of the grid and thereby reducing expenditure on new assets, it is essential that the reliability and performance of its underlying components the individual assets are maintained at a high level. strengthening the grid Our four major projects the North Island Grid Upgrade (NIGU), HVDC Pole 3, North Auckland and Northland (NAaN) and Wairakei to Whakamaru Replacement Transmission Line are well under way. NIGU and HVDC Pole 3 are due for commissioning this coming year. North island grid Upgrade Major milestones this year include the commissioning of the new 220 kV Pakuranga substation, completion of the underground 220 kV cables linking Brownhill to Pakuranga and the removal of the old 110 kV Arapuni to Pakuranga transmission line. We expect to bring the full link into service by November 2012. The project has faced a number of cost pressures associated with increases in the cost of construction of the overhead transmission line and the acquisition of associated property rights along the line. The final cost of the project is now forecast at up to $894 million. The amount originally approved was $824 million. New transmission line projects are facing higher costs than those forecast when they were approved by the regulator some years ago. Common factors are the cost and availability of land access and the difficulties of building access roads and foundations in New Zealands highly variable geotechnical conditions.
hvdc Pole 3 project Last year, we announced that development and testing of the core control system by Siemens in Germany had been delayed. The forecast cost remains within budget. The 47-year-old Pole 1 equipment was decommissioned on 1 August 2012. Pole 3 is expected to be made commercially available to the market next year. In the following year, we will also replace the Pole 2 control system and commission the new bipole control system. The project will be completed within the $673 million budget. North Auckland and Northland project (NAaN) The project to increase diversity of supply to and around Auckland is expected to be commissioned in mid-2013. It is forecast to be below the maximum approved expenditure of $473 million. The first section of high voltage underground cable was installed in the Northern Busway in April 2012. wairakei to whakamaru Replacement Transmission Line project Construction work started this year on a new double-circuit 220 kV line between Wairakei and Whakamaru. This will replace an existing single circuit and ensure that despatch of the new geothermal generation being developed in the region is not constrained by the grid. The $141 million project is due to be commissioned in late 2013. west coast Upgrade project This year, we also completed the $20 million West Coast Upgrade project and the new Reefton to Dobson 110 kV transmission line. The project has increased the capacity and security of supply for West Coast consumers. workforce capability Our emphasis continues to be on enhancing our workforce capability to ensure we have the appropriate skills and expertise to meet the operational challenges of the future and to develop tomorrows leaders. We compete for talented staff locally and internationally and for transmission engineers in particular. As Generation Y start to fill key positions, we are changing the way we manage, recognise and reward employees to ensure that we attract the staff we need to manage and operate tomorrows grid. Our graduate training programme has been very successful in attracting tomorrows workforce. In recent years, we have substantially increased our intake numbers. Over 70 per cent (65 out of 88) of the graduates hired since the programme started in 2001 are still employed by Transpower. Ten graduates (including five women) joined the programme in February/March 2012. New staff have also been recruited for the development and commissioning phase of the HVDC Pole 3. This will help ensure we have a pool of skilled technicians and field engineers to maintain the new specialist HVDC and power electronics technology when it is commissioned. Our maintenance partners continue to be critical to Transpowers ability to maintain and operate the grid. We undertook a major review of our contractual relationships with them last year. We awarded new grid maintenance and project services contracts to six companies, covering a nine-year period from 1 July 2012. To increase efficiency in our operations, in December 2011, the staff of the three Regional Operating Centres located at Islington, Haywards and Otahuhu became direct employees of Transpower. The activities and functions that these 60 staff carry out are central to our grid operations.
Economic regulatory approvals In August 2011, the Commerce Commission approved in full our three year operating and capital expenditure plan for the 20122015 period. This was an important confirmation that the investments we are proposing for the grid are the right ones. In November 2011, the Commerce Commission approved our forecast revenues for the same period. We believe that the rate of return set was materially below Transpowers actual cost of capital, given the cost and extent of our business risk. We have therefore appealed the Commerce Commissions determination. The merits appeal will be heard in the High Court in September 2012. Until a final decision is made by the High Court, we will continue to apply the Commerce Commissions current determination of the allowed rate of return for setting prices. Managing the system in real time The System Operator, which manages the real-time co-ordination of electricity generation, transmission and demand, has performed well over the past year. We regularly review ourselves against 22 international Transmission System Operators (TSOs). The results are used by the System Operator to seek continuous improvement in its operational practices. The System Operator has a heavy development programme implementing changes for the Electricity Authority market development programme. As part of this, the systems and processes required to deliver the demand-side bidding and forecasting market initiative were implemented successfully. This will establish a consolidated set of schedules from which participants can view the forecast of load up to 36 hours in the future and make informed decisions on the basis of these schedules. The Electricity Authority and System Operator will need to work closely together to ensure the programme does not result in the System Operator becoming overcommitted or cause other essential development tasks to be deferred. The System Operator also completed the first stage of a review of under-frequency management involving reserves and automatic under-frequency load shedding (AUFLS) a well functioning AUFLS is critical in preventing a general collapse of electricity supply to a large part of New Zealand. This is a significant engineering review of reserves in the New Zealand power system. It involves a wide range of industry participants. The Huntly incident on 13 December 2011 served as a timely reminder of the importance of, and reliance on, reserves and AUFLS. We learned some important lessons from the event. Two of the most important lessons were identifying that there is a lack of specification of when our customers can switch disconnected feeders back on after an event, which could cause a longer loss of power to the end-consumer. The communication during the Huntly event was very good. However, we will continue to work with our customers to ensure there is a clear process in place if this type of event was ever to occur again. The second lesson was that only 4 per cent not the full block of 16 per cent of the AUFLS triggered due to some unique frequency harmonics that were peculiar to the Huntly configuration. How the frequency reacted reinforced the findings of intensive computer modelling and analysis that the System Operator did last year. We will continue to work with industry to make appropriate adjustments to the existing AUFLS scheme. The System Operator also monitored system security very closely during autumn and early winter as the southern-most hydro systems experienced one of the driest intake sequences ever recorded. Due to the high availability of North Island generation and the prudent response by the southern generators, the HVDC link ran south for an extended period, and this successfully averted any shortage.
communitycare fund Our community relations programme aims to ensure that we are giving back to those affected by our assets and works. In 2011, our CommunityCare Fund awarded grants totalling $930,000 to 61 community-based projects nationwide. Projects included assisting schools and sports clubs, refurbishing community halls and marae and nature conservation. greenline programme The CommunityCare Fund is now supplemented by Greenline, our new community environmental programme. The first project was completed in March 2012 with the restoration of a historic road near Ohariu Valley, north of Wellington. Longer-term partnerships with local councils are under way. The CommunityCare and Greenline programmes are key elements in maintaining constructive relationships where our lines run through communities. The continuing support of those communities is key to running an efficient and cost-effective grid. Reducing carbon emissions Transpower was responsible for 11,916 tonnes of CO2 equivalent emissions for 2010/11. This was 10 per cent higher than 2009/10 (10,708 tonnes). The increase was primarily due to more vehicle and air travel by our staff as a result of greater construction activity. Sulphur hexafluoride (SF6) emissions continue to be our single largest source of emissions (36 per cent). Reducing these emissions is a key focus area of our carbon management programme.
10
safety Safety is a core Transpower value. Ensuring a safe and healthy environment for our employees, contractors and the public is of paramount importance. Our ultimate goal is an injury-free workplace. Taking into account the significantly higher work load of 5.44 million hours (2011: 4.28 million hours), our injury frequency rate improved (i.e. the number of medical treatment injuries per million hours worked reduced). This is despite an increased proportion of civil work, which has a higher safety incident rate. However, the improvement was less than targeted, with 32 medical treatment and lost-time injuries recorded against an SCI target of 26 for the full year. In 2011, there were 26 medical treatment and lost-time injuries. While our performance is better than many if not most other New Zealand industries and markedly better than a decade ago, it still trails our best-performing peers internationally. We are determined to close that gap. Looking forward As we complete our major upgrade projects, we expect our capital expenditure will reduce to between $300 and $400 million per year in the near term. This is lower than we have previously forecast due to savings delivered by our applied technology advances. We will continue to seek these efficiencies. Our staffing levels will reduce slightly as the major projects are completed. However, our skilled people will be needed in other areas once the major projects are completed. The extensive renewal and refurbishment programme means that the number of projects ongoing will be similar to todays they just wont be the size and scale of the biggest current projects. We face at least two more years of increased reliability risk as the major projects are completed and commissioned. Not only are there a number of large Transpower projects to commission, but also an unprecedented number of new generation stations will come on line over the next year. This will require careful management of the system. We believe the reinvestments made and the enhanced operating procedures will result in a material improvement in reliability. We are confident that the company is well placed to manage current operations, to deliver major projects and to meet the challenges that will arise in the future. Our financial gearing will continue to increase until the major projects are completed, peaking at about 70 per cent in 2013/14. This level of gearing is consistent with that of similar international companies. Our directors believe it is prudent and believe the company is well positioned to continue to provide an appropriate dividend return to its shareholder. in appreciation On behalf of the directors and management team, we thank our customers and stakeholders for their input and support. We also express appreciation to our landowners nationwide for their continued co-operation and understanding when we need to access our transmission assets the National Grid for the current and future benefit of the nation.
MARk vERBiEsT CHAIRMAN
PATRick sTRANgE CHIEF EXECUTIVE
11
// sTATEMENT Of cORPORATE iNTENT PERfORMANcE TARgETs
2011
/12
THE TARGETS FOR OPERATIONAL, FINANCIAL AND NON-FINANCIAL PERFORMANCE INDICATORS, AS DETAILED IN THE 2011/12 STATEMENT OF CORPORATE INTENT, ARE COMPARED BELOW WITH ACTUAL RESULTS ACHIEVED FOR THE PERIOD 1 JULY 2011 TO 30 JUNE 2012.
OPERATiONAL PERfORMANcE iNdicATORs HIGH VolTAGE AlTERNATING CURRENT (HVAC) CIRCUIT AVAIlAbIlITy (%)
AcTUAL 30 JUNE 2012
TARgET 30 JUNE 2012 98.5
98.7 83.6 19 2
AcTUAL 30 JUNE 2012
HIGH VolTAGE DIRECT CURRENT (HVDC) (PolE 2 oNly) CIRCUIT AVAIlAbIlITy (%)
82.5
NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 0.05 SySTEM MINUTES
21
NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 1 SySTEM MINUTE
fiNANciAL PERfORMANcE iNdicATORs EbITDAIF* MARGIN (%)
TARgET 30 JUNE 2012 63.2
63.0 2.9 7.5 9.9 1.83 2
FREE FUNDS FRoM oPERATIoNS INTEREST CoVERAGE (TIMES)
2.8
RETURN oN CAPITAl EMPloyED (%)
7.3
RETURN oN EqUITy (%)
9.9
AVERAGE ToTAl TRANSMISSIoN CoSTS (c/kWh)
1.75
ESTIMATED ECoNoMIC VAlUE ADDED ($MIllIoN)

* EARNINGS bEFoRE INTEREST, TAX, DEPRECIATIoN, AMoRTISATIoN, IMPAIRMENT AND NET FAIR VAlUE ADjUSTMENTS
(13)
NON-fiNANciAL PERfORMANcE TARgETs MATERIAl bREACHES oF SySTEM oPERAToR PERFoRMANCE oblIGATIoNS REPoRTED To THE ElECTRICITy AUTHoRITy ACC WoRkPlACE SAFETy AUDIT STATUS
AcTUAL 30 JUNE 2012
TARgET 30 JUNE 2012 <4
0
TERTiARy
TERTIARy
NUMbER oF FATAlITIES oR INjURIES CAUSING PERMANENT DISAbIlITy
0 32
NUMbER oF MEDICAl TREATMENT INjURIES
<26
12
2012
/13
THE PERFORMANCE TARGETS FOR THE 2012/13 PERIOD, WHICH ARE DETAILED IN THE 2012/13 STATEMENT OF CORPORATE INTENT, WILL BE REPORTED IN NExT YEARS ANNUAL REPORT, AND ARE AS FOLLOWS:
OPERATiONAL PERfORMANcE iNdicATORs HIGH VolTAGE AlTERNATING CURRENT (HVAC) CIRCUIT AVAIlAbIlITy (%)
TARgET 30 JUNE 2013
98.5 82.5 21 3
TARgET 30 JUNE 2013
HIGH VolTAGE DIRECT CURRENT (HVDC) (PolE 2 oNly) CIRCUIT AVAIlAbIlITy (%)
NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 0.05 SySTEM MINUTES
NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 1 SySTEM MINUTE
fiNANciAL PERfORMANcE iNdicATORs EbITDAIF* MARGIN (%)
66.3 2.8 7.6 11.3 2.10 31
FREE FUNDS FRoM oPERATIoNS INTEREST CoVERAGE (TIMES)
RETURN oN CAPITAl EMPloyED (%)
RETURN oN EqUITy (%)
AVERAGE ToTAl TRANSMISSIoN CoSTS (c/kWh)
ESTIMATED ECoNoMIC VAlUE ADDED ($MIllIoN)

* EARNINGS bEFoRE INTEREST, TAX, DEPRECIATIoN, AMoRTISATIoN, IMPAIRMENT AND NET FAIR VAlUE ADjUSTMENTS
NON-fiNANciAL PERfORMANcE TARgETs MATERIAl bREACHES oF SySTEM oPERAToR PERFoRMANCE oblIGATIoNS REPoRTED To THE ElECTRICITy AUTHoRITy ACC WoRkPlACE SAFETy AUDIT STATUS
TARgET 30 JUNE 2013
<
4 0
TERTiARy
NUMbER oF FATAlITIES oR INjURIES CAUSING PERMANENT DISAbIlITy
NUMbER oF MEDICAl TREATMENT INjURIES
(ADjUSTED FoR FoRECAST 2012/13 MAN HoURS)
5%, 2011/12 REsULT
13
// sENiOR MANAgEMENT TEAM
// 01
// 02
// 03
// 04
// 05
PATRick sTRANgE CHIEF ExECUTIVE
hOwARd cATTERMOLE CHIEF FINANCIAL OFFICER
cyNThiA BROPhy GENERAL MANAGER PEOPLE AND CORPORATE RELATIONS
MikE cARTER GENERAL MANAGER GRID PROJECTS
gARTh diBLEy GENERAL MANAGER GRID PERFORMANCE
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// 06
// 07
// 08
// 09
// 10
dAvid kNighT GENERAL COUNSEL AND COMPANY SECRETARY
JOhN cLARkE GENERAL MANAGER GRID DEVELOPMENT
kiERAN dEviNE GENERAL MANAGER SYSTEM OPERATIONS
JiM TOchER GENERAL MANAGER INFORMATION SERVICES AND TECHNOLOGY
BOB siMPsON CHIEF ENGINEER
15
// BOARd Of diREcTORs
01 ABBy has an extensive legal background and experience in the areas of finance and mergers and
acquisitions, both in New Zealand and in the United Kingdom. Abby has previously served as an independent director and chair of Mike Pero Mortgages and as chief executive of internet-based financial services company Fundit. She has also held senior positions at Telecom New Zealand, Cable and Wireless Plc and the Pharmaceutical Management Agency. She is also a director of the Local Government Funding Agency.
02 ALAsTAiR is Chairman of Henergy Cage-free and was Chairman of the Crown Health Financing
Agency until July 2012. Alastair is a current trustee of the Wairarapa Regional Irrigation Trust and the Scout Youth Foundation. He is also a council member at Massey University. Alastair was a Managing Director at Credit Suisse First Boston (based in London and Tokyo) and a member of the Credit Suisse Financial Products senior executive team. He was a member of the senior executive for Meridian Energy at its formation in 1999. Alastair has also been on the investment advisory committee of venture capital firm, No 8 Ventures and a member of two of the investment companies boards.
// 01
// 02
// 03
// 04
// 05
ABBy fOOTE
ALAsTAiR scOTT
dON hUsE
iAN fRAsER DEPUTY CHAIRMAN
kEiTh TEMPEsT
03 dON is a director of AMP New Zealand Office, OTPP New Zealand Forest Investments and
Sydney Airport Corporation. He was chief executive officer of Auckland International Airport from 2003 until he retired in 2008, chief financial officer of Sydney Airport Corporation from 1998 to 2003 and chief executive of Wellington International Airport from 1991 to 1998. From 1990 to 1999, he was a director of TransAlta New Zealand and of its predecessor entities. His earlier career included chief executive and senior financial management roles with the Cable Price Downer and Steel and Tube groups.
04 iAN was appointed to the Transpower Board in May 2007. After graduating in engineering at Canterbury University, Ian has worked as a consulting engineer and in the construction industry. He was a director of Beca Group from 1985 to 2007, Managing Director of Beca Carter Hollings and Ferner from 2004 to 2007 and has served on a number of industry boards including the New Zealand Society for Earthquake Engineering, the Association of Consulting Engineers (president 2000 to 2002) and was a director of Mighty River Power from 1999 to 2006 (deputy chair 2005 to 2007). He is currently a director of Stevenson Group and New Zealand Social Infrastructure Fund.
16
// diREcTORs REPORT TO shAREhOLdERs
05 kEiTh is now a professional company director having worked for 24 years in the electricity
industry, the last 8 years as chief executive of TrustPower. Keith was involved in most aspects of the electricity industry reforms of the 1990s including the establishment and governance of the wholesale electricity market, the corporatisation of the electric power boards and the establishment and design of the current market rules. Keith is a director of Crown Fibre Holdings, Port of Tauranga, NZ Bus and UltraFast Fibre.
06 MARk is a professional company director and strategic advisor. Mark has previously been a partner of law firm, Simpson Grierson, and was a senior executive at Telecom Corporation of New Zealand for over 7 years. He is currently the Chairman of Telecom Corporation of New Zealand, Willis Bond Capital Partners and Willis Bond General Partner, and is a director of Freightways and a board member of the Financial Markets Authority. Mark is also a consultant to Simpson Grierson.
cONTENTs
// 06
// 07
// 08
18. 20.
cORPORATE gOvERNANcE
MARk vERBiEsT CHAIRMAN
MAURy LEyLANd
MikE POhiO
diREcTORs REPORT TO ThE shAREhOLdERs
07 MAURy has been a senior executive at Fonterra since 2005 and is currently leading a large transformation across Fonterras commodity supply chain. Previous roles within Fonterra have included General Manager New Zealand Logistics and Associate Director Strategy and Growth. Prior to that, she spent 9 years with the Boston Consulting Group as a strategy consultant working with large companies in New Zealand and Australia, with a particular focus on operations. She was a member of the design team for Team New Zealand during the successful 1995 Americas Cup campaign in San Diego. Maury is also a member of the Advisory Board for the Department of Engineering Science at the University of Auckland. 08 MikE has been chief executive of Tainui Group Holdings since 2006. Prior to that, he was
container terminal manager at the Port of Tauranga. Mike has also worked for Fonterra and its Hamilton-based predecessor, the New Zealand Dairy Group. Mikes roles for Fonterra and its antecedents have included Group Financial Controller, General Manager of Glencoal Energy, Regional General Manager for Anchor Products and Manager of Merger Benefits. Mike is Chairman of BNZ Partners Waikato. He has tribal linkages to Te Arawa (Ngati Pikiao) and Ngai Tahu.
17
TRANSPOWER NEW ZEALAND LIMITED
Corporate governance
Transpower is a limited liability company and a State-owned Enterprise (SoE) with its shares held on behalf of the Crown by the Minister of Finance and the Minister for State-owned Enterprises. The following sets out the ways in which Transpowers board fulfils its corporate governance responsibilities.
BOARd cOMPOsiTiON ANd PERfORMANcE
The shareholding Ministers appoint Transpowers Directors. Directors are independent, non-executive and are generally appointed for terms of up to three years, although they may be reappointed for subsequent terms. There should be a balance of independence, skills, knowledge, experience and perspectives among the Directors. Transpower provides new Directors with a detailed induction, including site visits to key assets. New directors also receive an information pack containing key information about Transpowers business and meet with the Chief Executive and the Executive Team. At least annually, the Chairman holds strategic workshops to update the board on current issues. New Directors are also encouraged to attend new Director workshops organised by the Crown organisation Monitoring Unit (CoMU). The board is accountable to the shareholding Ministers for the performance of Transpower. CoMU monitors and advises the shareholding Ministers on the boards performance. Each Directors performance is evaluated by the Chairman, and the board also evaluates its overall performance. The board delegates responsibility for the day-to-day management of Transpower to the Chief Executive, who, in turn, may delegate his authority to the managers of internal business divisions. The Delegated Authority Policy describes the limits of delegated authority and prescribes those matters in respect of which the board reserves its decision-making authority. A Director may obtain independent professional advice at Transpowers cost relating to the affairs of Transpower or to his or her other responsibilities as a Director. before obtaining any advice, Directors must discuss the matter with the Chairman. Advice relating to the affairs of Transpower is then made available to the board.
gOvERNANcE REqUiREMENTs ANd BEsT PRAcTicE
The board has confirmed that its corporate governance policies, practices and procedures are in accordance with the Corporate Governance in New Zealand Principles & Guidelines, and the NzXs Corporate Governance Best Practice Code, in the material respects in which they are appropriate for a State-owned Enterprise. A summary of our compliance with these principles may be found on the Transpower website.
BOARd cOMMiTTEEs
Transpowers board has established three standing committees: an Audit and Finance Committee, a Network Risk Committee, and a People and Performance Committee, each of which operates in accordance with formal criteria adopted by the board. A minimum of three Directors sit on each committee. Each committee is chaired by a Director who is not the Chairman of the board. The agenda, papers and minutes of each committee are provided to all Directors.
Audit and finance committee

The board requires the Audit and Finance Committee to meet at least four times a year and to consider, review, monitor and approve: annual audit plans and individual internal and external audits and reviews reports compliance and statutory reporting/disclosure treasury activity financial reporting, risk assessments, plans and policies insurance programmes, including the governance and operational activities of Risk Reinsurance limited (RRl).
Network Risk committee

The board requires the Network Risk Committee to meet at least four times a year and to consider, assess and review asset and network risks and their controls.
People and Performance committee

The board requires the People and Performance Committee to meet at least four times a year to assist the board in overseeing HR and remuneration management within Transpower.
18
Corporate governance continued

EThicAL sTANdARds
Transpower has adopted a Code of Ethics and Conduct, which sets out the ethical and behavioural standards by which Directors and employees are expected to conduct themselves. All employees are required to sign an acknowledgement that they have read and understood and will comply with the requirements of the Code of Ethics and Conduct. In addition, Transpowers Directors Interests Policy governs the disclosure of Directors individual interests and how conflicts of interest are to be resolved and managed. The Directors Fees and Expenses Policy governs the payment of fees and the reimbursement of expenses to Directors. Transpowers Compliance Policy sets out the process for reporting breaches of Transpower policies and outlines how any known or suspected breaches will be dealt with. Transpower reviews all policies regularly and reports to the board on compliance.
ANNUAL MEETiNg
In line with shareholder expectations for more SoE disclosure, accountability and visibility, Transpower is holding its fourth Annual Meeting in Christchurch on 18 october this year. The objective is to give all Transpower stakeholders the opportunity to learn more about its business performance, future growth and how it is discharging its corporate social responsibility.
REPORTiNg ANd discLOsURE
The board submits to Transpowers shareholding Ministers its Statement of Corporate Intent, business plan, half yearly report, including unaudited accounts, and annual report, including audited annual accounts. Transpower sends financial information monthly to the Treasury and quarterly to CoMU and consults regularly with both parties on relevant issues. Transpower also consults with the shareholding Ministers on substantial business and operational matters and those outside the scope of Transpowers core business. Transpower makes announcements of various matters that have had a material effect on its commercial value on both CoMUs and its own website, pursuant to the SoE Continuous Disclosure regime. In addition to the shareholding Ministers, Transpowers stakeholders include other Ministers of the Crown and their ministries, the Treasury, CoMU, regulators, customers, industry and business groups, landowners and landowner groups, contractors and suppliers, and the wider public. Transpower invests considerable effort in maintaining productive relationships with its stakeholders. This includes the provision of timely and appropriate information and opportunities for feedback.
dEBT LisTiNgs ANd wAivERs
Transpower has debt listed on the New zealand debt security market (NzDX). As a listed issuer, Transpower is subject to certain requirements and obligations under the NzSX/NzDX listing Rules, including a continuous disclosure obligation. In order to list its debt on the NzDX, Transpower has obtained the following waivers: Waivers from rule 5.2.3 which requires at least 25 per cent of the tranche of bonds quoted on the NzDX to be held by at least 500 bondholders who are members of the public. The waiver in respect of the bonds quoted on the NzDX under the ticker code TRP010 is for a period of one year from 28 February 2012. Subsequent to balance date, there has also been a waiver in respect of the bonds quoted on the NzDX under the ticker code TRP020 is for a period of one year from 7 September 2012. A waiver from rule 11.1.1 to permit Transpower to restrict the transfer of the TRP010 bonds or the TRP020 bonds in anything other than parcels of $1,000 or if the transfer would result in any bondholder holding less than $5,000 (if not zero). In relation to bonds listed on the NzDX on 29 February 2012, waivers from rules 7.1.5(b), 7.1.8, 7.1.10 and 7.1.12 on the basis that they are not applicable where the offer period in respect of the bonds quoted on the NzDX closed and the bonds allotted, prior to Transpower becoming a listed issuer on the NzDX.
AUdiT
The Auditor-General appoints Transpowers external auditors and sets the parameters of any assignments that they may undertake.
Risk MANAgEMENT
Transpower recognises that managing risk is an essential and critical component of its business. The board actively considers the strategic risks faced by Transpower and ensures Transpower has in place a framework within which major business risks can be identified, assessed, managed and reported on. The Risk and Audit Group maintains a register of key risks and the risk management actions to be undertaken in respect of those risks. Transpowers Risk Management Policy is approved by the board and reviewed annually by the Audit and Finance Committee.
REMUNERATiON
The shareholding Ministers determine the remuneration for Directors, and this is paid in accordance with Transpowers Directors Fees and Expenses Policy. Employees salaries are determined in accordance with Transpowers Remuneration Policy, which is approved by the board.
19
Directors report to the shareholders

for the year ended 30 June 2012
The directors are pleased to present their report of Transpower New zealand limited (Transpower) and its subsidiaries (the Transpower Group) for the year ended 30 june 2012.
AcTiviTiEs
The principal activity of the Transpower Group is the provision of high voltage electricity transmission services and the management of the assets that comprise New zealands national electricity grid.
REsULTs fOR ThE yEAR
GRoUP 2012 $M 2011 $M PARENT 2012 $M 2011 $M
operating revenue operating expenses Finance expenses Earnings before tax and net changes in fair values of financial instruments Income tax expense (credit) excluding changes in the fair value of financial instruments Earnings before net changes in fair values of financial instruments (Gain) loss in the fair value of financial instruments Income tax expense (credit) on changes in the fair value of financial instruments Net profit (loss)
kEy BALANcEs
794.2 469.7 90.9 233.6 66.7 166.9 114.9 (32.8) 84.8
737.2 472.1 87.3 177.8 51.5 126.3 65.4 (17.6) 78.5
781.9 474.8 104.0 203.1 55.4 147.7 (24.1) 6.8 165.0
817.7 475.8 204.8 137.1 34.4 102.7 4.9 4.4 93.4
Non current assets, including held for sale assets (note 15) External debt balances at face value New zealand dollar debt Foreign debt after adjusting for related foreign exchange derivatives
4,388.6 750.0 1,568.5 2,318.5
3,675.6 666.2 1,079.3 1,745.5
4,388.5 400.0 783.5 1,183.5
3,675.6 42.3 42.3
dividENds
Transpower paid an interim dividend in March 2012 of $110 million. on 16 August 2012, the directors declared a final dividend of $205 million.
AUdiTORs
In accordance with Section 19 of the State-owned Enterprises Act 1986, the Auditor-General is required to express an audit opinion on these financial statements. Pursuant to Section 32 of the Public Audit Act 2001, the Auditor-General has appointed Marcus Henry of Ernst & young to undertake the audit on her behalf.
iNfORMATiON ON TRANsPOwER diREcTORs
Meetings of the board of directors

The current members of the board of directors at 30 june 2012 are listed below, together with the number of board meetings held and attended during the period each director was eligible to attend such meetings.
20

continued
DIRECToR
DATE CoMMENCED IN oFFICE
MEETINGS HElD
MEETINGS ATTENDED
Mark Verbiest (chairman) Ian Fraser (deputy chairman) Abigail Foote Michael Pohio Maury leyland keith Tempest Don Huse Alastair Scott
1 August 2010 1 May 2007 1 May 2009 1 july 2009 1 November 2010 1 May 2011 1 May 2011 1 july 2011
13 13 13 13 13 13 13 13
13 13 13 12 13 12 13 12
Meetings of the audit and finance committee

MEMbERS MEETINGS HElD MEETINGS ATTENDED
Don Huse (chairman) Mark Verbiest Abigail Foote Michael Pohio Alastair Scott
5 5 5 5 5
5 5 5 4 5
The audit and finance committee considers any matters relating to the internal and external audits of the Transpower Group. It recommends appointment of internal auditors and considers policy and reporting on risk and compliance. It also monitors and recommends to the board to approve policies in relation to the treasury function for the Transpower Group.
Meetings of the network risk committee

Ian Fraser (chairman) Maury leyland keith Tempest
4 4 4
4 4 2
The network risk committee monitors and recommends to the board to approve policies in relation to maintaining the integrity of the national grid.
Meetings of the people and performance committee

Michael Pohio (chairman) Mark Verbiest Abigail Foote Maury leyland keith Tempest
5 5 5 5 5
5 5 5 5 4
The people and performance committee deals with and makes recommendations to the board in relation to human resource related matters.
21

continued
information on directors of subsidiary companies as at 30 June 2012

Transpower finance Limited Don Huse Patrick Strange Howard Cattermole d-cyphaTrade Limited Patrick Strange kieran Devine kevin Duckworth TB and T Limited Patrick Strange Howard Cattermole Christopher Sutherland Risk Reinsurance Limited Abigail Foote Howard Cattermole Mike Carter halfway Bush finance Limited Patrick Strange Howard Cattermole Christopher Sutherland
Appointments and resignations during the year

Risk Reinsurance Limited Mike Carter was appointed 30 May 2012 halfway Bush finance Limited Christopher Sutherland was appointed 22 May 2012 john bishop resigned 31 August 2011 TB and T Limited Christopher Sutherland was appointed 22 May 2012 john bishop resigned 31 August 2011
directors remuneration
Remuneration and benefits payable to directors for services as a director are determined in conjunction with the shareholding ministers as follows:
PAyMENTS To DIRECToRS oF TRANSPoWER NEW zEAlAND lIMITED DATE CoMMENCED IN oFFICE DATE CEASED IN oFFICE 2012 $000 2011 $000
Mark Verbiest (chairman) Ian Fraser (deputy chairman) Abigail Foote Michael Pohio Maury leyland * keith Tempest Don Huse Alastair Scott Ian Donald john Irving Dr Don brash Wayne brown Elena Trout
1 August 2010 1 May 2007 1 May 2009 1 july 2009 1 November 2010 1 May 2011 1 May 2011 1 july 2011 30 october 2003 22 November 2003 1 May 2009 1 September 2006 1 january 2005 30 April 2011 30 April 2011 30 April 2011 31 october 2010 31 october 2010 31 july 2012
110 73 56 56 54 54 59 51 513
88 58 56 55 36 9 9 60 45 46 38 13 513
* Maury Leyland resigned from the board effective 31 July 2012.
During the year, no director of Transpower or the Transpower Group has received or became entitled to receive any benefit other than that disclosed above. Transpower employees did not receive any specific remuneration for their services as directors.
22

continued
directors interests
The following directors have made general disclosures of interest with certain external organisations on the basis of their being a chairman, director, board member, trustee, council member, member, employee or consultant of those organisations; or holding bonds or shares of those organisations. The disclosures of interest cover the period up to the date the financial statements are signed.
DIRECToR PoSITIoN oRGANISATIoN
Mark Verbiest
Director ** Director Director ** Director ** Chairman Director Trustee ** Consultant Chairman * Consultant *
AMP Nz office limited Freightways limited Government Superannuation Fund Authority Southern Cross Medical Care Society Willis bond Capital Partners limited Financial Markets Authority Southern Cross Health Trust Simpson Grierson Telecom Corporation of New zealand limited New zealand Treasury beca Projects limited New zealand Social Infrastructure Fund limited Stevenson Group limited beca Group limited New zealand Gambling Commission New zealand local Government Funding Agency Tainui Group Holdings limited Nzl Group limited bNz Regional Partners Waikato Fonterra Co-operative Group limited Telecom Corporation of New zealand limited Port of Tauranga limited Crown Fibre Holdings limited Nz bus limited Ultrafast broadband limited Trustpower limited AMP Nz office limited Cavalier Corporation limited oTPP New zealand Forest Investments limited Sydney Airport Corporation limited karori Sanctuary Trust South Auckland Health Foundation Crown Health Financing Authority Massey University Council Matahiwi Vineyard limited Henergy Cage-Free limited
Ian Fraser
Director ** Director Director Consultant *
Abigail Foote Michael Pohio
Commissioner Director * CEo Director ** Chairman *
Maury leyland keith Tempest
Employee Director * Director Director Director Director Shareholder
Don Huse
Director Director ** Director Director Trustee ** Trustee **
Alastair Scott
Chairman Member Director Director
* Appointed a chairman, director, trustee, employee, consultant, or acquired bonds or shares during the year ** Ceased to be a chairman, director, trustee, employee, consultant, bondholder or shareholder during the year
23

continued
directors shares
No directors hold any interest in shares of Transpower.
directors loans
There were no loans by the Transpower Group to directors.
directors insurance
The Transpower Group has arranged policies of directors and officers liability insurance, which, together with the indemnity provided by Transpowers constitution and separate deeds of indemnity between Transpower and individual directors, ensure that generally, directors will incur no monetary loss as a result of actions undertaken by them as directors. Certain actions are specifically excluded, for example, the incurring of penalties and fines that may be imposed in respect of breaches of the law.
directors use of information

There were no notices from directors of the Transpower Group requesting to use company information received in their capacity as directors that would not otherwise have been available to them.
Remuneration of employees
The number of individuals employed by the Transpower Group who received total remuneration exceeding $100,000 were in the following bands:
REMUNERATIoN bAND ($000) CURRENT AND FoRMER EMPloyEES REMUNERATIoN bAND ($000) CURRENT AND FoRMER EMPloyEES
1,0501,059 660669 610619 530539 520529 500509 450459 440449 430439 420429 410419 400409 380389 340349 330339 310319 300309 290299 280289
1 1 1 1 1 1 1 2 1 1 1 1 1 2 1 2 1 2 4
270279 260269 250259 240249 230239 220229 210219 200209 190199 180189 170179 160169 150159 140149 130139 120129 110119 100109 Total
3 6 3 5 8 9 13 11 13 10 14 16 18 41 38 69 60 61 424
24

continued
study grants and donations

During the year, the Transpower Group made donations and study grants of $1,251,000 (2011: $2,053,000). Donations comprise principally sponsorship of university research projects, tertiary scholarships, the New zealand landcare Trust and the CommunityCare Fund. In 2011, the donations included $500,000 used to assist in the recovery from the Christchurch earthquakes. The board of directors of Transpower New zealand limited authorised the financial statements for issue on 16 August 2012.
For and on behalf of the board
MARk vERBiEsT CHAIRMAN 16 AUGUST 2012
dON hUsE DIRECToR 16 AUGUST 2012
25
26
// fiNANciAL sTATEMENTs 2011/12
fiNANciAL sTATEMENTs 2011/12

28. 30. 32. 33. 35. 82. 84.
cONTENTs
sTATEMENT Of cOMPREhENsivE iNcOME sTATEMENT Of fiNANciAL POsiTiON sTATEMENT Of chANgEs iN EqUiTy cAsh fLOw sTATEMENT NOTEs TO ThE fiNANciAL sTATEMENTs iNdEPENdENT AUdiTORs REPORT diREcTORy
27
Statement of comprehensive income

GRoUP 2012 NoTES $M 2011 $M
PARENT 2012 $M 2011 $M
Operating revenue Transmission revenue other revenue Finance revenue Operating expenses Transmission expenses Employee benefits other operating expenses Earnings before interest, tax, depreciation, amortisation, impairment, asset write-offs and changes in the fair value of financial instruments Depreciation Amortisation Impairment Asset write-offs Finance expenses Earnings before changes in the fair value of financial instruments and tax (Gain) loss in the fair value of financial instruments Earnings before tax Income tax expense (credit) Net profit (loss) Total net profit (loss) for the period is attributable to: Non controlling interest (NCI) owners of the parent 21 4.4 80.4 84.8 6.5 72.0 78.5 165.0 165.0 93.4 93.4 7 6 5 15 15 15 4 4 4 149.8 57.9 82.5 290.2 504.0 149.8 13.7 3.9 12.1 90.9 233.6 114.9 118.7 33.9 84.8 141.0 56.4 81.8 279.2 458.0 146.4 14.3 19.7 12.5 87.3 177.8 65.4 112.4 33.9 78.5 149.8 56.7 88.9 295.4 486.5 149.7 13.7 3.9 12.1 104.0 203.1 (24.1) 227.2 62.2 165.0 141.0 51.7 90.5 283.2 534.5 146.3 14.1 19.7 12.5 204.8 137.1 4.9 132.2 38.8 93.4 2 2 5 725.2 60.2 8.8 794.2 675.3 56.1 5.8 737.2 725.2 51.6 5.1 781.9 675.3 39.9 102.5 817.7
28
Statement of comprehensive income

continued
PARENT 2012 $M 2011 $M
Available for sale reserve transferred to profit or loss Other comprehensive income for the period net of tax Total comprehensive income for the period Total comprehensive income for the period is attributable to Non controlling interest (NCI) owners of the parent 21
0.9 0.9 85.7 4.4 81.3 85.7
78.5 6.5 72.0 78.5
0.9 0.9 165.9 165.9 165.9
93.4 93.4 93.4
Reconciliation of net profit (loss) specifying the net impact of fair value movements
Earnings before changes in the fair value of financial instruments and tax Income tax expense (credit) excluding changes in the fair value of financial instruments Earnings before net changes in fair values of financial instruments (Gain) loss in the fair value of financial instruments Income tax expense (credit) on changes in the fair value of financial instruments Net profit (loss) 29 233.6 66.7 166.9 114.9 (32.8) 84.8 177.8 51.5 126.3 65.4 (17.6) 78.5 203.1 55.4 147.7 (24.1) 6.8 165.0 137.1 34.4 102.7 4.9 4.4 93.4
These statements are to be read in conjunction with the accompanying notes.
29
Statement of financial position

as at 30 June 2012
PARENT 2012 $M 2011 $M
AssETs EMPLOyEd
current assets Cash and cash equivalents Trade and other receivables Current tax asset other investments Derivatives and hedge commitment in gain Non current assets held for sale Inventories Non current assets Trade and other receivables Investment in subsidiaries NzPCl investment Derivatives and hedge commitment in gain other financial assets Property, plant and equipment Capital work in progress Intangibles Total assets employed
fUNds EMPLOyEd
9.2 8 12 11 15 13 71.8 60.2 47.7 67.1 11.3 267.3 8 14 10 11 14 15 15 15 24.0 115.0 169.8 7.7 2,721.0 1,288.6 311.9 4,638.0 4,905.3
1.6 75.3 65.7 52.4 37.5 11.7 244.2 16.3 100.4 167.7 3.9 2,612.0 737.2 288.9 3,926.4 4,170.6
0.9 154.9 31.7 67.1 11.3 265.9 24.0 270.2 37.1 7.7 2,720.9 1,288.6 311.9 4,660.4 4,926.3
0.1 151.3 4.9 35.9 37.5 11.7 241.4 16.3 270.0 6.1 3.9 2,612.0 737.2 288.9 3,934.4 4,175.8
current liabilities Cash and cash equivalents Trade and other payables Current tax liability Current debt Derivatives and hedge commitment in loss Deferred income Provisions 19 11 3 17 16 6.4 186.3 9.5 10.1 100.2 50.6 8.5 371.6 158.0 5.8 493.5 130.9 34.8 13.7 836.7 182.6 5.9 1,615.2 31.6 50.6 8.5 1,894.4 153.6 2,190.7 35.7 34.8 13.7 2,428.5
30
Statement of financial position continued

as at 30 June 2012
PARENT 2012 $M 2011 $M
Non current liabilities Non current payables Finance lease liabilities Derivatives and hedge commitment in loss NzPCl debt Non current debt Deferred tax Provisions Total liabilities Equity Capital Available for sale financial assets reserve Accumulated surplus Non controlling interest Total equity Total funds employed 10 21 21 1,200.0 307.0 2.2 1,509.2 4,905.3 1,200.0 (0.9) 336.6 (2.2) 1,533.5 4,170.6 1,200.0 370.4 1,570.4 4,926.3 1,200.0 (0.9) 315.4 1,514.5 4,175.8 18 11 10 19 20 17 1.6 0.7 340.9 111.9 2,401.9 158.4 9.1 3,024.5 3,396.1 1.7 1.0 214.3 103.9 1,315.4 155.0 9.1 1,800.4 2,637.1 1.6 0.7 4.5 1,194.8 250.8 9.1 1,461.5 3,355.9 1.7 1.0 6.1 214.9 9.1 232.8 2,661.3
The board of directors of Transpower New zealand limited authorised these financial statements for issue on 16 August 2012. For, and on behalf of, the board
MARk vERBiEsT CHAIRMAN 16 AUGUST 2012
dON hUsE DIRECToR 16 AUGUST 2012
31
Statement of changes in equity

GRoUP oRDINARy SHARES AVAIlAblE FoR SAlE RESERVE $M RETAINED EARNINGS $M NoN oWNERS oF CoNTRollING THE PARENT INTEREST $M $M
ToTAl $M
2010/11
NoTES
$M
Equity at 1 July 2010 Profit for the period other comprehensive income Total comprehensive income Transactions with owners Recognition of NCI on subsidiary consolidation Total equity at 30 June 2011
2011/12
1,200.0 21 10 1,200.0
(0.9) (0.9)
264.6 72.0 72.0 336.6
1,463.7 72.0 72.0 1,535.7
(8.7) 6.5 6.5 (2.2)
1,455.0 78.5 78.5 1,533.5
Equity at 1 July 2011 Profit for the period other comprehensive income Total comprehensive income Transactions with owners Total equity at 30 June 2012 21
1,200.0 1,200.0
(0.9) 0.9 0.9
336.6 80.4 80.4 (110.0) 307.0

PARENT
1,535.7 80.4 0.9 81.3 (110.0) 1,507.0
(2.2) 4.4 4.4 2.2
1,533.5 84.8 0.9 85.7 (110.0) 1,509.2
oRDINARy SHARES
AVAIlAblE FoR SAlE RESERVE $M
RETAINED EARNINGS $M
NoN oWNERS oF CoNTRollING THE PARENT INTEREST $M $M
ToTAl $M
2010/11
NoTES
$M
Equity at 1 July 2010 Amalgamation of subsidiary during the year Profit for the period other comprehensive income Total comprehensive income Transactions with owners Total equity at 30 June 2011
2011/12
1,200.0 21 1,200.0
(0.9) (0.9)
219.8 2.2 93.4 93.4 315.4
1,418.9 2.2 93.4 93.4 1,514.5
1,418.9 2.2 93.4 93.4 1,514.5
Equity at 1 July 2011 Profit for the period other comprehensive income Total comprehensive income Transactions with owners Total equity at 30 June 2012 21
1,200.0 1,200.0
(0.9) 0.9 0.9
315.4 165.0 165.0 (110.0) 370.4
1,514.5 165.0 0.9 165.9 (110.0) 1,570.4
1,514.5 165.0 0.9 165.9 (110.0) 1,570.4
32
Cash flow statement

GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
cAsh fLOw fROM OPERATiONs
cash was provided from: Receipts from customers Dividends received from subsidiaries Interest received cash was applied to: Payments to suppliers and employees Tax payments Interest paid Net cash inflows (outflows) from operations
cAsh fLOw fROM iNvEsTMENTs
802.1 8.8 (291.1) (27.8) (163.4) 328.6
724.6 5.8 (292.7) (27.2) (125.1) 285.4
786.6 5.0 0.1 (295.8) (25.2) (176.5) 294.2
696.1 11.0 80.5 (278.3) (22.9) (231.6) 254.8
cash was provided from: Sale of property, plant and equipment Short term investments cash was applied to: Purchase of property, plant and equipment Short term investments other investments Net cash inflows (outflows) from investments
cAsh fLOw fROM fiNANciNg
34.3 65.6 (835.4) (61.2) (3.8) (800.5)
25.4 437.1 (663.7) (432.7) (633.9)
34.3 (835.4) (3.8) (804.9)
25.4 (653.9) (125.8) (754.3)
cash was provided from: Increase in loans cash was applied to: Increase in long term investments Dividends paid Repayment of loans Net cash inflows (outflows) from financing Net increase (decrease) in cash held opening balance brought forward closing net cash carried forward closing net cash carried forward comprises: Cash and cash equivalents asset Cash and cash equivalents liability 9.2 (6.4) 1.6 0.9 0.1 (110.0) (837.0) 473.1 1.2 1.6 2.8 (844.7) 327.2 (21.3) 22.9 1.6 (110.0) 511.5 0.8 0.1 0.9 499.9 0.4 (0.3) 0.1 1,420.1 1,171.9 621.5 499.9
33
Cash flow statement continued

REcONciLiATiON Of NET PROfiT (LOss) wiTh NET cAsh fLOw fROM OPERATiONs
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
Net profit (loss) Add (deduct) noncash items: Change in fair value of financial instruments Depreciation and amortisation Deferred tax Impairment Imputed interest Movements in working capital items: (Increase) decrease in trade and other receivables Decrease (increase) in prepayments (Increase) decrease in stocks of materials (Decrease) increase in trade and other payables, interest payable and deferred income (Decrease) increase in taxation payable (Decrease) increase in provisions Add (deduct) items classified as investing activities: Property, plant and equipment writeoffs and loss on sale Capitalised interest Net cash flow from operations
84.8 114.9 163.5 3.4 3.9 2.4 0.9 (5.1) 0.4 21.4 3.7 (5.2) 12.1 (72.5) 328.6
78.5 65.4 160.7 (0.9) 19.7 2.4 (14.1) (2.0) (1.0) (6.5) 7.2 1.3 12.5 (37.8) 285.4
165.0 (24.1) 163.4 35.9 3.9 2.4 (6.0) (5.3) 0.4 13.4 10.8 (5.2) 12.1 (72.5) 294.2
93.4 4.9 160.4 28.6 19.7 2.4 (26.6) (2.0) (1.0) 1.2 (2.7) 1.8 12.5 (37.8) 254.8
34
Notes to the financial statements

1 2 3 4 5 6 7 8 9
Statement of accounting policies operating revenue Deferred income operating expenses Net finance expenses Change in fair value of financial instruments Income tax expense Trade and other receivables Financial instrument categorisation
16 Trade and other payables 17 Provisions 18 Non current finance lease liability 19 Debt, financial instruments and risk management 20 Deferred tax 21 Equity 22 Segment reporting 23 operating lease commitments 24 Capital commitments 25 Contingencies 26 Group entities 27 Related parties 28 Significant judgements/estimates 29 Alternate profit measure 30 Subsequent events
10 NzPCl debt and investment 11 Derivatives and hedge commitment 12 other investments 13 Inventories 14 other non current financial assets 15 Non current assets
1. sTATEMENT Of AccOUNTiNg POLiciEs
Reporting entity and statutory base

Transpower New zealand limited (Transpower) is a State-owned Enterprise registered in New zealand under the Companies Act 1993. The financial statements are in New zealand dollars and are of Transpower (the Parent) and its subsidiaries (together, the Group).
Nature of operations
The Group is the owner and operator of New zealands national electricity grid. The Group is a for-profit entity in accordance with Nz IAS 1 Presentation of Financial Statements.
Basis of preparation
The financial statements have been presented in accordance with the State-owned Enterprises Act 1986 and are prepared in accordance with the Financial Reporting Act 1993. The financial statements have been prepared, and comply with, generally accepted accounting practice (GAAP) in New zealand. The financial statements comply with New zealand Equivalents to International Financial Reporting Standards (Nz IFRS) and other applicable Financial Reporting Standards. The financial statements comply with International Financial Reporting Standards (IFRS).
Measurement basis
The measurement basis adopted in the preparation of these financial statements is historical cost except as modified for certain investments, held for sale assets, investment property, financial assets and financial liabilities as identified in specific accounting policies below.
35
Notes to the financial statements continued

1. sTATEMENT Of AccOUNTiNg POLiciEs continued
specific accounting policies

a) Basis of consolidation
The Group financial statements consolidate the financial statements of subsidiaries as at and for the year ended 30 june 2012. Subsidiaries are those entities controlled, directly or indirectly, by the Parent. All significant intercompany accounts and transactions are eliminated on consolidation. In the Parents financial statements, investment in subsidiaries is carried at cost. The partial termination of the 2003 cross border lease transaction has resulted in Transpower disclosing a non controlling interest (NCI) relating to New zealand Power Cayman 2003-1 limited (NzPCl). For the purpose of the consolidation, NCI was measured at the NCIs share of net assets.
b) Goodwill
Goodwill, representing the excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired, is recognised as an asset and not amortised, but tested for impairment annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. The Group had no goodwill in the period.
c) Revenue
The Group recognises revenue as it provides services or delivers products to customers. Agreements between Transpower and customers regarding the construction of network assets is recognised over the contract period or asset life, with revenue shown on a yield to maturity basis grossed up for an imputed interest expense. Certain transactions relating to the operation of the electricity market, specifically wholesale market related ancillary services and losses and constraint payments, are passed through and are therefore not recorded in profit or loss. This pass-through occurs because Transpower is deemed to act only as a collection agent.
d) Goods and services tax (GST)

The statement of comprehensive income and the cash flow statement are prepared so that all components are stated exclusive of GST. All items in the statement of financial position are stated exclusive of GST with the exception of receivables and payables, which include GST.
e) Accounts receivable
Accounts receivable are recorded initially at fair value and subsequently measured at amortised cost using the effective interest rate method, less any impairment. Impairment of receivables is calculated on an individual customer basis and recognised in cases where, based on objective evidence, the debt will not be paid when due by the customer.
f) Inventories
Stocks of materials are recorded at the lower of cost and net realisable value after due consideration for excess and obsolete items. Cost is determined on a weighted average basis.
g) Investments
Regular way financial asset purchases All regular way financial asset purchases are accounted for on settlement date and not trade date. investment in subsidiaries Investment in subsidiaries is accounted for in accordance with a) above. fair value through profit or loss Risk Reinsurance limiteds (RRl) investments are classified as fair value through profit or loss. This classification is on the basis that RRl has an active investment programme (held for trading). All other investments (excluding Fonterra shares (section k), investment in subsidiaries (section a), property loans (section i) and derivatives (section h)) are designated as fair value through profit or loss on the basis of preventing an accounting mismatch.
36

Fair values of quoted investments are based on prices current at balance date. If the market for a financial asset is not active, fair value is established by using valuation techniques including recent arms length transactions, reference to similar instruments, discounted cash flow analysis and option pricing models.
h) Other financial assets at fair value through profit or loss

other assets at fair value through profit or loss are derivatives. Derivatives are classified as held for trading unless they are designated as hedging instruments in a hedging relationship. Realised and unrealised gains and losses arising from changes in the fair values are included in the profit or loss in the period in which they arise.
i) Loans and receivables

loans and receivables are non-derivative financial assets with fixed or determinable payments that are not traded in an active market. These assets are carried at amortised cost using the effective interest rate method.
j) Trade and other payables

Trade and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid. Provisions are liabilities of uncertain timing or amount. They are measured at the amounts expected to be paid when the liabilities are settled.
k) Available for sale financial assets

Available for sale financial assets are non-derivatives that are either designated as available for sale by management or not classified in any of the other categories. These investments are carried at fair value with any unrealised gains and losses arising from changes in fair value recognised directly in other comprehensive income. on sale or on impairment, the accumulated fair value adjustments are included in profit or loss. Transpower has classified Fonterra shares, which are held as part of a land portfolio, in this category.
l) Property, plant and equipment

Property, plant and equipment is recognised at cost less accumulated depreciation. Cost is determined by including all costs directly associated with bringing the assets to their location and condition for their intended use.
m) Capital work in progress and capitalised borrowing costs

Capital work in progress is recorded at cost. Cost is determined by including all costs directly associated with bringing the assets to their location and condition for use. Finance costs incurred during the period of time that is required to complete and prepare the asset for its intended use are capitalised as part of the total cost for capital work in progress. The finance costs capitalised are based on the Groups weighted average cost of borrowing. Assets are transferred from capital work in progress to property, plant and equipment, or intangible assets as they become operational and available for use.
n) Depreciation
Depreciation of property, plant and equipment is calculated using the straight line method to write down the cost of property, plant and equipment to its estimated residual value over its estimated useful life. The estimated useful lives are as follows: Transmission lines Freehold buildings Substation assets HVDC assets Communication assets Administration assets 4070 years 3055 years 855 years 30 years 825 years 310 years
37

o) Non current assets held for sale

Non current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non current assets (and disposal groups) are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition and is expected to be completed within one year from the date of classification.
p) Leased assets
The Group is a lessee of certain property, plant and equipment under both finance and operating leases. The Group is also a lessor of certain property, plant and equipment under operating leases. Finance leases effectively transfer all of the risks and benefits incidental to ownership to the lessee, being the Group. leased assets are depreciated over their useful lives. A corresponding liability is also established at the inception of each lease, and each lease payment is allocated between the liability and finance costs. Under operating leases, all the risks and benefits of ownership remain with the lessor. operating lease payments/receipts are recognised in profit or loss in accordance with the pattern of benefits derived/received.
q) Intangibles
The cost of acquiring an intangible asset is amortised from the date the underlying asset is held ready for use on a straight line basis over the period of its expected benefit, which is as follows: Software Easements Right to access asset 5-8 years Indefinite 90 years
Easements are deemed to have an indefinite useful life, as the contracts do not have a maturity date and the Group expects to use the easements indefinitely. Therefore, easements are not amortised. Their value is assessed annually for impairment, and their carrying value is written down if found impaired. The Group capitalises the direct costs associated with putting the easements in place. These costs include registration and associated valuation and legal costs and also any injurious affection payments. Where Transpower buys land and then establishes an easement, a valuation is obtained for the easement. This valuation is used as deemed easement cost and capitalised, with a corresponding reduction in the land valuation. Certain easements have been donated by the Crown. These are recognised at cost (nil) plus any direct cost associated with putting the easement in place. For intangibles with a finite life, where the periods of expected benefit or recoverable values have diminished due to technological change or market conditions, amortisation is accelerated or the carrying value is written down.
r) Impairment of assets
At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are largely independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the asset may be impaired.
38

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase.
s) Debt
Debt is designated as fair value through profit or loss on the basis of preventing an accounting mismatch. The Groups net debt and derivatives are managed as one integrated portfolio; therefore, measuring derivatives and net debt on different bases would create a recognition inconsistency or accounting mismatch. Fair values of quoted debt are based on prices current at balance date. If the market for a financial liability is not active, fair value is established by using valuation techniques including recent arms length transactions, reference to similar instruments and discounted cash flow analysis. The effect on fair values of credit risk (i.e. the premium over the basis interest rate risk for credit to reflect the credit rating of the relevant counterparty or Transpower) is based on quoted market prices.
t) Employee benefits
Provision is made for benefits accruing to employees when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within 12 months are measured at their nominal values using the rate expected to apply at the time of settlement. Provisions made in respect of employee benefits that are not expected to be settled within 12 months, are measured at the present value of the estimated cash flows to be made by the Group in respect of services provided by employees up to reporting date. defined contribution plans Contributions to defined contribution plans are expensed when incurred.
u) Taxation
Current and deferred tax for the period is recognised as an expense or income in profit or loss. There are two exceptions to this. Firstly, when items are credited or debited directly to other comprehensive income, the related deferred tax or current tax is also recognised directly in other comprehensive income. Secondly, where tax arises from the initial accounting for a business combination, it is taken into account in the determination of goodwill or discount on acquisition. current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).
39

deferred tax Deferred tax is accounted for using the liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax carrying amounts. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets and liabilities are not recognised if the temporary differences arise from the initial recognition of assets and liabilities (other than as a result of a business combination), which affects neither taxable income nor accounting profit.
v) Foreign currency transactions

Transactions denominated in a foreign currency that are not hedged are converted at the New zealand exchange rate at the date of the transaction. Foreign currency receivables and payables at balance date are translated at exchange rates current at balance date. Exchange differences arising on the translation or settlement of accounts payable and receivable in foreign currencies are recognised in profit or loss. Certain purchase commitments denominated in a foreign currency are hedged against foreign currency risk and designated as hedge items in fair value hedges under Nz IAS 39. The cumulative change in the fair value of the purchase commitments attributable to the hedged foreign currency risk is recorded as an asset or liability using forward rate based measurement with the corresponding gains or losses recognised in profit or loss. The gains or losses in the associated derivative are also recognised in profit or loss.
w) Translation of foreign Group entities

The financial statements of each of the Groups subsidiaries are prepared in the functional currency of that entity, being New zealand dollars, with the exception of d-cyphaTrade limited (d-cyphaTrade). d-cyphaTrade has a functional currency of Australian dollars with its presentational currency being New zealand dollars. Functional currency is determined for each entity based on the primary economic environment in which it operates. Revenue and expenses are translated at exchange rates at the dates of the transactions. Monetary assets and liabilities are translated at exchange rates current at balance date. Non monetary assets and liabilities are translated at their respective historical exchange rates.
x) Derivative financial instruments

The Group uses derivative financial instruments to reduce its exposures to fluctuations in foreign currency exchange rates and interest rates. The Group has designated certain derivatives as hedges, which are used to reduce foreign currency exposure on purchases. These hedges are designated as fair value hedges. For fair value hedging relationships, gains or losses on hedging instruments are included in profit or loss together with any change in the fair value of the hedged purchase commitment. For an instrument to qualify as a designated and effective hedging instrument, at the inception of the derivative transaction, the relationship between hedging instruments and hedged items must be documented, as must the Groups risk management objective and strategy for undertaking the hedge. Documentation is maintained upon the effectiveness of the hedge, i.e. whether the hedges are highly effective in offsetting foreign currency movement changes in the fair values of hedged items.
y) Cash flow statement

For the purposes of the cash flow statement, cash is considered to be cash held in bank accounts (net of bank overdrafts) plus highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of change in value. At Transpower, investments with an original maturity of less than three months are classified as cash.
40

New standards not yet adopted Transpower has elected not to early adopt the following standards (or revisions to standards), considered to be relevant to the financial statements, but not effective until 1 july 2013 or later.
Nz IFRS 9 Financial Instruments
For the areas of Nz IFRS 9 that have been released and can be early adopted, there is no material impact on the Groups financial statements. The main area that hasnt been released and cannot be early adopted relates to hedge accounting. Nz IFRS 9 hedge accounting may have a material impact upon the Group financial statements. It is too early to comment until the standard is finalised, in particular, the transitional arrangements.

Nz IFRS 10 Consolidated Financial Statements Nz IFRS 11 joint Arrangements Nz IFRS 12 Disclosure of Interests in other Entities Nz IFRS 13 Fair Value Measurement Statements
For the above four standards, Transpower anticipates that the changes will not have a material impact on the financial statements in the period of initial application other than increased disclosure. New standards adopted during the period There were no new or revised standards that had a material impact on the financial statements.
2. OPERATiNg REvENUE
Transmission revenue HVAC interconnection HVAC connection EV (rebate) charge HVAC HVDC EV (rebate) charge HVDC Customer investment contracts other transmission Other revenue System operator Rental income RRl investment income d-cyphaTrade income other 34.8 8.0 2.8 10.4 4.2 60.2 intercompany transactions (included above): 31.4 8.0 2.9 12.7 1.1 56.1 34.8 8.0 8.8 51.6 4.6 31.4 8.0 0.5 39.9 1.1 512.7 121.0 (40.8) 78.9 16.8 26.2 10.4 725.2 464.8 124.0 (42.8) 75.5 9.4 26.6 17.8 675.3 512.7 121.0 (40.8) 78.9 16.8 26.2 10.4 725.2 464.8 124.0 (42.8) 75.5 9.4 26.6 17.8 675.3
Intercompany revenue primarily relates to insurance claims activity of $3.5 million. There was a new claim during the year for $5 million. A 2008 claim for $1.5 million was withdrawn during the year.
41

2. OPERATiNg REvENUE continued
Transmission revenue
Transmission revenue consists of charges for the transmission of electricity from the point of generation to the point of supply, being high voltage alternating current (HVAC) interconnection, connection and high voltage direct current (HVDC). Transpower operates its revenue setting methodology within an Economic Value (EV) framework that analyses economic gains and losses between those attributable to shareholders and those attributable to customers. The balance of the accumulated gain (loss) from regulated transmission activities attributable to customers (the EV balance) is passed on to or claimed from customers over time as EV (rebates) or charges. Customer investment contracts are contracts entered into with customers to build grid connection assets. other transmission revenue was higher in 2011 due to the sale of copper from the dismantling of a decommissioned transmission line on the North Island Grid Upgrade (NIGU) route.
Other revenue
system operator System operator income relates to payments received for the provision of real time services to ensure the short term security of the New zealand electricity system. Rental income This includes rental income on various transmission land and buildings and also communications equipment. Assets are not held with the primary purpose of earning rental income. RRL investment income Transpower has a captive insurance company called Risk Reinsurance limited (RRl). RRl makes investments from premiums received from the parent company. RRl reinsures externally and maintains sufficient investments to meet expected claims. d-cyphaTrade income d-cyphaTrade income relates to income earned by Transpowers subsidiary d-cyphaTrade limited. d-cyphaTrade provides services to the Australian electricity derivatives market.
3. dEfERREd iNcOME
Customer investment contracts Transmission realignment other Total deferred income
16.8 32.3 1.5 50.6
12.1 21.5 1.2 34.8
16.8 32.3 1.5 50.6
12.1 21.5 1.2 34.8
customer investment contracts

Customer investment contracts are contracts entered into with customers to build grid connection assets. Where the customer pays upfront to construct the asset, the revenue is recognised over the contract period. Related imputed interest expense is based on the rate of return in the year the payment was received.
Transmission realignment
The Group has entered into contracts with customers to underground and realign some transmission line assets. The upfront revenue is recognised over the life of the related transmission assets. Related imputed interest expense is based on the rate of return in the year the payment was received.
42

4. OPERATiNg ExPENsEs
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
Transmission expenses Maintenance of HVAC substations Maintenance of HVDC substations and cables Maintenance of HVAC lines Maintenance of HVDC lines HVDC share of reserves other direct transmission expenses Employee benefits Short term benefits Defined contribution schemes other Other operating expenses Information technology costs Industry levies other business support costs operating lease and rental costs External auditor audit fee External auditor other assurance Insurance bad debt write-off Total operating expenses intercompany transactions (included above): Intercompany expenses relate primarily to insurance. Maintenance includes inspection, servicing and repair costs. HVDC share of reserves: The wholesale electricity market provides reserves to cover for the loss of the largest operating generation unit in each trading period. These reserves are charged to generators. At times, particularly when it is operating with only one pole, the HVDC link faces reserve charges. These are charged to the Group (as grid asset owner). Following regulatory changes, these costs are generally recoverable from customers. other direct transmission expenses include investigations work that the Group conducts (prior to commencement of a capital project) and the costs associated with running the Groups communications network. Information technology costs include such items as software licences, maintenance, application support and project investigations. other business support costs include such items as legal fees, office equipment, communications, vehicles, travel, consultants, donations and study grants. operating lease and rental costs comprises predominantly the leases of the Groups administrative buildings and various items of communication equipment. External audit audit fee was $349,000 for 2012 (2011: $342,000). External audit other assurance was $264,000 (2011: $287,000). other assurance includes reviews of financial statements, prospectuses and regulatory financial statements. 20.1 6.7 32.8 17.4 0.3 0.3 4.9 82.5 290.2 19.5 7.0 34.5 15.8 0.3 0.3 4.4 81.8 279.2 20.0 6.7 32.9 17.4 0.3 0.3 11.3 88.9 295.4 11.1 18.5 7.0 38.5 15.8 0.3 0.3 10.1 90.5 283.2 14.1 54.0 3.0 0.9 57.9 52.6 2.6 1.2 56.4 52.9 2.9 0.9 56.7 48.2 2.4 1.1 51.7 47.7 9.1 43.8 0.9 17.5 30.8 149.8 52.1 11.1 46.4 1.3 4.7 25.4 141.0 47.7 9.1 43.8 0.9 17.5 30.8 149.8 52.1 11.1 46.4 1.3 4.7 25.4 141.0
43

5. NET fiNANcE ExPENsEs
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
finance revenue Interest received Dividends received finance expenses Interest paid and associated fees Capitalised interest Imputed interest other finance expenses Total net finance expenses intercompany transactions (included above): Interest received Interest paid and associated fees Dividends received 139.0 5.0 91.4 237.1 11.0 160.8 (72.5) 2.4 0.2 90.9 82.1 122.0 (37.8) 2.4 0.7 87.3 81.5 173.9 (72.5) 2.4 0.2 104.0 98.9 239.5 (37.8) 2.4 0.7 204.8 102.3 8.8 8.8 5.8 5.8 0.1 5.0 5.1 91.5 11.0 102.5
Transpower has a 100% owned subsidiary, Transpower Finance limited (TPFl) which has previously borrowed funds on behalf of the Group and on-loaned it to other Group members, principally the Parent. Prior to june 2011, the Parent had both borrowings and investments with TPFl with a net position, being a borrowing from TPFl. In june 2011, the investment with TPFl was consolidated into the existing borrowing. Hence, in the 2012 year there has been a decrease in intercompany interest revenue and expense.
interest paid and associated fees

All interest paid is on debt designated as fair value through profit or loss.
imputed interest
Imputed interest is on customer investment contracts and transmission realignment and certain other prepaid transactions. Refer to Note 3 Deferred income for more information.
44

6. chANgE iN fAiR vALUE Of fiNANciAL iNsTRUMENTs
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
Accounting hedges Foreign exchange forward contracts hedge accounted Hedge commitment Other Foreign debt Cross currency interest rate swaps Foreign interest rate swaps basis swaps NzD interest rate swaps Foreign exchange forward contracts not hedge accounted Investments NzD debt Available for sale assets Total fair value (gain) loss intercompany transactions (included above): Fair value movement investments Fair value movement NzD debt (0.7) (6.8) (2.5) 8.7 10.1 (75.5) 2.3 2.6 169.0 0.2 (0.2) 5.8 0.6 114.9 114.9 (69.2) 77.3 1.8 (1.0) 42.8 (1.2) (0.3) 15.3 65.5 65.4 15.8 (32.4) 0.2 0.2 (0.7) (7.8) 0.6 (24.1) (24.1) (1.2) (2.5) 8.7 5.0 4.9 (5.8) 5.8 12.2 (12.3) (0.1) (5.8) 5.8 12.2 (12.3) (0.1)
The above fair value movements are as a result of the Group recognising the financial instruments at fair value through profit or loss or as fair value hedges. The Group experiences fair value movements principally through movements in underlying interest rates and exchange rates. The Group generally seeks to fix interest rates to provide certainty of interest rate costs. This means that, prima facie, a decrease in market interest rates will result in the Group sustaining fair value losses and conversely an increase in market interest rates will result in fair value gains.
credit spread impact

Corporate debt normally has a credit spread built into the pricing that is applied by the market, over and above the swap curve. This spread represents the additional risk of a corporate debt obligation compared with a liquid net settled swap transaction. Note 19 Debt, financial instruments and risk management (c) (iv) Credit risk has discussion of the credit spread impact on fair value.
foreign purchases
The Group hedges against foreign currency fluctuations on certain foreign purchases through the use of foreign exchange forward contracts (FECs). The hedge commitment represents the non derivative fair value movement, attributable to foreign exchange movements, on the commitment to buy the goods, i.e. before the goods or an invoice are received.
debt and investments

Refer to Note 19 Debt, financial instruments and risk management for information on the use of debt, investments and derivatives.
45

6. chANgE iN fAiR vALUE Of fiNANciAL iNsTRUMENTs continued
Available for sale assets

This relates to an impairment of Transpowers Fonterra shares. The shares are held as part of Transpowers land holdings. Transpower revalues the Fonterra shares based on the annual fair value share price released by Fonterra. For the last three years, the fair value share price of the shares has been $4.52. Transpower purchased the majority of Fonterra shares at a share price higher than $4.52. Accordingly, Transpower has held these revaluation losses in the available for sale reserve. Due to the duration of the revaluation losses, a fair value impairment is required.
7. iNcOME TAx ExPENsE
current tax expense Current period Adjustment for prior periods deferred tax expense origination and reversal of temporary differences Adjustment for prior periods Change in future tax rate Total income tax expense (credit) Amounts charged or credited to other comprehensive income Unrealised gain on available-for-sale investments income tax expense (credit) reported in other comprehensive income Reconciliation of effective tax operating surplus before tax Income tax at 28c (2012) or 30c (2011) Tax effect of: Change in future tax rate Non deductible expenses Tax exempt income Under/(over) provided in prior periods Total income tax expense (credit) 0.2 (0.3) 0.8 33.9 (0.4) 0.1 (0.2) 0.7 33.9 0.2 (1.6) 62.2 (1.5) 0.1 (3.5) 4.0 38.8 118.7 33.2 112.4 33.7 227.2 63.6 132.2 39.7 6.4 (3.0) 3.4 33.9 5.3 (5.8) (0.4) (0.9) 33.9 37.2 (1.3) 35.9 62.2 23.2 6.9 (1.5) 28.6 38.8 26.7 3.8 30.5 28.3 6.5 34.8 25.0 1.3 26.3 13.1 (2.9) 10.2
on 20 May 2010, the Government announced its budget tax changes. These changes included reducing the company tax rate from 30% to 28% which was effective 1 july 2011 for Transpower.
46

8. TRAdE ANd OThER REcEivABLEs
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
current Trade and other receivables Intercompany receivables Prepayments Non current Prepayments Total trade and other receivables intercompany balances (included above): Intercompany receivables Prepayments There was no impairment of receivables during the year (2011: none). The prepayments predominantly relate to the telecommunication lease connection fees. 78.5 1.8 71.8 1.5 24.0 95.8 16.3 91.6 24.0 178.9 16.3 167.6 67.9 3.9 71.8 68.8 6.5 75.3 71.4 78.5 5.0 154.9 72.1 71.8 7.4 151.3
47

9. fiNANciAL iNsTRUMENT cATEgORisATiON
DESIGNATED FAIR VAlUE THRoUGH FAIR VAlUE PRoFIT oR THRoUGH loSS PRoFIT oR (ACCoUNTING loSS (HElD MISMATCH) FoR TRADING)
HEDGE ACCoUNTING (FAIR VAlUE METHoD)
AVAIlAblE FoR SAlE
loANS AND RECEIVAblES
oTHER lIAbIlITIES
current assets Cash and cash equivalents Trade and other receivables Investments RRl Intercompany investment Investments other Hedge commitments Non current assets Investment in subsidiaries other financial assets (Fonterra shares) other financial assets (loans) current liabilities Trade and other payables Current debt Intercompany debt Current portion of non current debt Non current liabilities bonds Term borrowing Euro medium term notes US private placement other derivatives Interest rate swaps Interest rate options basis swaps Cross currency interest rate swaps Foreign exchange forward contracts not hedge accounted Foreign exchange forward contracts hedge accounted X X X X X X X X X X X X X X X n/a n/a n/a n/a X X n/a n/a X X X X X X
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10. NzPcL dEBT ANd iNvEsTMENT
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
investment Current Non current debt Current Non current 111.9 111.9 Net investment (debt) Non controlling interest (net of tax) 3.1 2.2 103.9 103.9 (3.5) (2.2) 115.0 115.0 100.4 100.4
NzPcL debt and investment

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, New zealand Power Cayman 2003-1 limited (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 loan and the deposit are recognised at fair value in the Group financial statements based on discounted cash flows. The difference between the asset and liability is due to the yield curves that have been applied to the cash flows.
Non controlling interest

As Transpower has no legal ownership interest in NzPCl, the net liabilities and any movements in net liabilities are recognised as a non controlling interest. 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.
49

11. dERivATivEs ANd hEdgE cOMMiTMENT
This note shows the short term (ST) and long term (lT) breakdown of the derivatives and hedge commitment.
GRoUP
2012
ST ASSET $M
lT ASSET $M
ST (lIAbIlITy) $M
lT (lIAbIlITy) $M
ToTAl ASSET (lIAbIlITy) $M
debt related derivatives Cross currency interest rate swaps Interest rate swaps basis swaps FX swaps Purchasing related derivatives and hedge commitment Foreign exchange forward contracts Commitment on fair value hedges Total derivatives and hedge commitment commitment on fair value hedges (above) Total derivatives
2011
16.0 0.1 16.1
105.9 59.6 165.5
(68.6) (68.6)
(3.7) (331.1) (1.8) (336.6)
102.2 (324.1) (1.8) 0.1 (223.6)
31.6 47.7 31.6 16.1
4.3 169.8 4.3 165.5
(31.6) (100.2) (100.2)
(4.3) (340.9) (340.9)
(35.9) 35.9 (223.6) 35.9 (259.5)
debt related derivatives Cross currency interest rate swaps Interest rate swaps basis swaps Purchasing related derivatives and hedge commitment Foreign exchange forward contracts Commitment on fair value hedges investment related derivatives Interest rate swaps Total derivatives and hedge commitment commitment on fair value hedges (above) Total derivatives 52.4 35.7 16.7 167.7 6.1 161.6 (0.2) (130.9) (130.9) (214.3) (214.3) (0.2) (125.1) 41.8 (166.9) 0.2 35.7 6.1 (35.7) (6.1) (41.6) 41.8 6.3 10.2 16.5 106.0 54.6 1.0 161.6 (22.8) (72.2) (95.0) (63.4) (144.8) (208.2) 26.1 (152.2) 1.0 (125.1)
Derivatives are used to manage financial risk. The gain or loss on derivatives represents the unrealised gain or loss at balance date. The Group anticipates that the derivatives will be held until maturity, and it is unlikely that settlement at the reported fair values will occur.
debt and purchasing related derivatives

The nature of the debt and purchasing related derivatives is discussed in Note 19 Debt, financial instruments and risk management.
50

PARENT ST ASSET $M lT ASSET $M ST (lIAbIlITy) $M lT (lIAbIlITy) $M ToTAl ASSET (lIAbIlITy) $M
0.1 0.1
32.8 32.8
(0.2) (0.2)
32.8 (0.2) 0.1 32.7
31.6 31.7 31.6 0.1
4.3 37.1 4.3 32.8
(31.6) (31.6) (31.6)
(4.3) (4.5) (4.5)
(35.9) 35.9 32.7 35.9 (3.2)
0.2 35.7 35.9 35.7 0.2
6.1 6.1 6.1
(35.7) (35.7) (35.7)
(6.1) (6.1) (6.1)
(41.6) 41.8 0.2 41.8 (41.6)
commitment on fair value hedges

The Group hedges against foreign currency fluctuations on certain foreign purchases through the use of foreign exchange forward contracts (FECs). The hedge commitment represents the non derivative fair value movement, attributable to foreign exchange movements, on the commitment to buy the goods, i.e. before the goods or an invoice are received. The fair value of the derivative (FEC) is shown separately (in the same note).
51

11. dERivATivEs ANd hEdgE cOMMiTMENT continued
investment related derivatives

In 2011, the investment related derivatives relate to interest rate swaps on RRls investments. RRl investment policy states that up to 40% of the total asset exposure may be hedged with interest rate swaps. For cash instruments, the interest rate swap duration can be no longer than 3 years. For bonds, the interest rate swap duration can be no longer than the underlying bond asset life. The notional value of RRl interest rate swaps outstanding at balance date, by maturity banding, are:
Within one year one to two years Two to five years Greater than five years
4.5 4.5

PARENT
12. OThER iNvEsTMENTs
GRoUP 2012 $M 2011 $M
2012 $M
2011 $M
Risk Reinsurance investments Deposits Floating rate notes Corporate bonds other investments 34.0 3.0 23.2 60.2 46.7 5.0 14.0 65.7
Risk Reinsurance investments

RRl is required to hold investments with counterparties of a certain credit rating. These limits are set out in Note 19 Debt, financial instruments and risk management (c) (i). In 2012, investments were made in financial instruments issued by organisations with credit levels of A or above with the exception of a $1 million investment in a financial instrument issued by PowerCo and also a $500,000 investment in a financial instrument issued by Contact Energy (both companies have a Standard and Poors rating of bbb). These investments were made in accordance with the policy as stated in Note 19 (c) (i). In 2011, investments were made in financial instruments issued by organisations with credit levels of A or above with the exception of a $1 million investment in a financial instrument issued by PowerCo (Standard and Poors rating of bbb). These investments were made in accordance with the policy as stated in Note 19 (c) (i).
52

13. iNvENTORiEs
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
Substations Transmission lines Communications other Total inventories Inventories expensed during the period All inventory is classified as finished goods i.e. no further processing is carried out.
14. OThER NON cURRENT fiNANciAL AssETs
9.5 1.0 0.5 0.3 11.3 3.8
7.5 3.6 0.6 11.7 0.3
9.5 1.0 0.5 0.3 11.3 3.8
7.5 3.6 0.6 11.7 0.3
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
investment in subsidiaries Other financial assets Property loan assets Fonterra shares Total non current financial assets
3.9 3.8 7.7 7.7
3.9 3.9 3.9
270.2 3.9 3.8 7.7 277.9
270.0 3.9 3.9 273.9
investment in subsidiaries
Transpower accounts for its subsidiaries at cost.
Property loan assets

Transpower has a property portfolio as a result of the North Island Grid Upgrade (NIGU) project. Properties were purchased between Whakamaru and South Auckland for the purposes of establishing easements and then on-selling. As part of the selling programme, Transpower has two vendor finance loan assets. These loan assets are carried at amortised cost. No impairment is expected.
fonterra shares
As a result of the NIGU property portfolio, the Group holds Fonterra shares. When dairy farms are purchased, Fonterra shares are often purchased to enable the continued operation of the dairy farm. These shares are classified as available for sale because they do not fall into the other three categories of financial instruments, i.e. they have no maturity date, they are not traded on an active market, there are no fixed payments associated with holding the shares and they are not held for short term profit making.
53

15. NON cURRENT AssETs
This note includes property, plant and equipment; intangible assets; and non current assets held for sale.
HVAC TRANSMISSIoN lINES $M HVDC TRANSMISSIoN lINES $M HVDC SUbSTATIoNS AND SUbMARINE CAblES $M
gROUP
HVAC SUbSTATIoNS $M
At 30 June 2011 Cost Accumulated depreciation/amortisation Net book value/carrying value 30 June 2011 reconciliation opening net book value/carrying value (1 july 2010) Additions/transfers Disposals/transfers Impairment Depreciation/amortisation Closing net book value/carrying value Non current assets held for sale balances NIGU property held for sale balance pre 2011 impairment less 2011 impairment on NIGU property held for sale low voltage assets balance Total non current assets held for sale Total non current assets, including held for sale assets At 30 June 2012 Cost Accumulated depreciation/amortisation Net book value/carrying value 30 June 2012 reconciliation opening net book value/carrying value (1 july 2011) Additions/transfers Disposals/transfers Impairment Depreciation/amortisation Closing net book value/carrying value Non current assets held for sale balances NIGU property held for sale balance pre 2012 impairment less 2012 Impairment on NIGU property held for sale low voltage assets balance Total non current assets held for sale Total non current assets, including held for sale assets 58.7 (1.4) 1.8 59.1 1,010.1 80.2 8.0 8.0 1,362.5 164.5 997.2 28.6 (29.8) (2.5) (42.5) 951.0 48.0 36.0 (1.2) (2.6) 80.2 1,248.9 174.1 (6.9) (61.6) 1,354.5 157.5 23.0 (16.0) 164.5 1,262.4 (311.4) 951.0 111.5 (31.3) 80.2 1,734.4 (379.9) 1,354.5 358.1 (193.6) 164.5 32.1 (5.4) 3.5 30.2 1,027.4 48.0 7.3 7.3 1,256.2 157.5 973.0 105.5 (18.5) (14.3) (48.5) 997.2 47.3 4.5 (3.8) 48.0 1,177.0 130.4 (5.4) (53.1) 1,248.9 164.1 10.2 (0.1) (16.7) 157.5 1,269.6 (272.4) 997.2 77.7 (29.7) 48.0 1,578.8 (329.9) 1,248.9 335.2 (177.7) 157.5
54

CoMMUNICATIoNS $M
ADMINISTRATIoN ASSETS $M
ToTAl PRoPERTy, PlANT AND EqUIPMENT $M
EASEMENTS AND RIGHT To ACCESS $M
SoFTWARE $M
ToTAl INTANGIblE ASSETS $M
CAPITAl WoRk IN PRoGRESS $M
191.1 (74.6) 116.5 81.0 50.4 (0.2) (14.7) 116.5
110.1 (66.2) 43.9 39.6 14.0 (0.1) (9.6) 43.9
3,562.5 (950.5) 2,612.0 2,482.0 315.0 (24.3) (14.3) (146.4) 2,612.0
240.1 (0.1) 240.0 107.1 133.0 (0.1) 240.0
110.9 (62.0) 48.9 45.7 17.4 (14.2) 48.9
351.0 (62.1) 288.9 152.8 150.4 (14.3) 288.9
737.2 737.2 475.3 739.0 (477.1) 737.2
116.5
43.9
32.1 (5.4) 10.8 37.5 2,649.5
240.0
48.9
288.9
737.2
218.5 (90.7) 127.8 116.5 30.0 (0.2) (18.5) 127.8
117.3 (74.3) 43.0 43.9 7.7 (8.6) 43.0
3,802.2 (1,081.2) 2,721.0 2,612.0 299.4 (38.1) (2.5) (149.8) 2,721.0
251.4 (0.7) 250.7 240.0 11.3 (0.6) 250.7
136.3 (75.1) 61.2 48.9 25.4 (13.1) 61.2
387.7 (75.8) 311.9 288.9 36.7 (13.7) 311.9
1,288.6 1,288.6 737.2 915.0 (363.6) 1,288.6
127.8
43.0
58.7 (1.4) 9.8 67.1 2,788.1
250.7
61.2
311.9
1,288.6
55

15. NON cURRENT AssETs continued PARENT
The Parent owns the vast majority of the Groups assets. The Parent balances are:
PARENT 2012 $M 2011 $M
Net book value Property, plant and equipment Capital work in progress Intangible assets Non current assets held for sale Profit or loss Depreciation expense Amortisation expense Impairment expense capital work in progress can be split into the following classes:
GRoUP AND PARENT 2012 $M 2011 $M
2,720.9 1,288.6 311.9 67.1 149.7 13.7 3.9
2,612.0 737.2 288.9 37.5 146.3 14.1 19.7
HVAC transmission lines HVDC transmission lines HVAC substations HVDC substations and submarine cables Communications Administration assets Software intangible assets other intangible assets
705.5 1.9 172.8 371.4 19.7 3.8 10.3 3.2 1,288.6
328.8 13.1 162.6 193.9 18.2 10.1 6.3 4.2 737.2
during the year the following borrowing costs were capitalised: HVAC transmission lines HVDC transmission lines HVAC substations HVDC substations and submarine cables Communications Administration assets Software intangible assets other intangible assets 38.0 0.6 11.9 19.9 1.5 0.5 0.1 72.5 These costs were capitalised at the weighted average cost of debt of 7.62% (2011: 7.57%). 15.1 0.4 8.5 9.1 1.7 0.7 0.2 2.1 37.8
56

15. NON cURRENT AssETs continued
Property, plant and equipment

Administration assets include computer hardware, plant, equipment, furniture and motor vehicles. land and buildings are contained within the above classes and have a net book value of $213.9 million (2011: $236.3 million).
impairment
The impairment expense is made up of:
held for sale NIGU project property Total Property, plant and equipment NIGU project property other property Total Total impairment 2.5 2.5 3.9 14.3 14.3 19.7 1.4 1.4 5.4 5.4
The North Island Grid Upgrade (NIGU) project property relates to land and buildings purchased for the NIGU project. The outstanding impairment held at balance date is $35.3 million (2011: $42.3 million). As at 30 june 2012, Transpower holds 52 properties along the route of the line being constructed between Whakamaru and South Auckland relating to NIGU (2011: 72 properties). The line was approved by the Electricity Commission on 5 july 2007, with designation and resource consenting being granted by the board of Inquiry on 18 September 2009. 20 properties were sold in the period (2011: 20 properties) and no properties were purchased (2011: 6 properties). For the NIGU properties sold to 30 june:
Net book value of properties sold Sales amount Gain (loss) on property sales Previously recognised impairment Gain (loss) on property sales
22.9 24.2 1.3 8.4 (7.1)
16.6 17.5 0.9 6.7 (5.8)
For regulatory purposes, Transpower does not charge customers for losses (or rebate any gains) from movements in property values, where the property was purchased for the purposes of obtaining an easement and then reselling. only easements and related costs from these properties are charged to customers. Transpower has determined that each property is an individual cash-generating unit and is classified as other for segmental reporting.
57

15. NON cURRENT AssETs continued
held for sale assets

The held for sale is split into NIGU and low voltage assets. NIGU assets: These relate to properties on the North Island Grid Upgrade (NIGU) route between Whakamaru and South Auckland purchased for the purposes of establishing easements and then on-selling. Some of these properties are classified as held for sale. Where Transpower classifies these properties as held for sale, they are expected to be sold within 12 months. The above section on impairment has information on past sales and gains/losses on sale. low voltage assets: These relate to substations and lines that are 110 kV or less. Where these substations and lines are not integral to Transpowers transmission network, these assets are sold to the local lines company. Where Transpower classifies these properties as held for sale, they are expected to be sold within 12 months. The below section has information on past sales and gains/losses on sale. For the low voltage assets sold to 30 june:
Net book value of low voltage sold Sales amount Gain (loss) on low voltage asset sales including impairment Gain (loss) on low voltage asset sales excluding impairment
9.7 9.7
0.7 0.7
intangible assets
Easements
Easements are deemed to have an indefinite useful life because: there is no expiry date to the easement agreements; and Transpower is expected to use the easements indefinitely, based on past experience. Easements also include injurious affection payments and related costs such as resource consents. There was no impairment on easements during the year (2011: none). The cost of easements are expected to be fully recovered from transmission customers.
Right to access assets

The most significant right to access asset relates to the 2011 purchase of access rights to the Vector Tunnel in Auckland for $50 million. The Vector Tunnel right to access asset is being amortised over the contract life, 90 years.
Software
The amortisation of software occurs over 5-8 years.
16. TRAdE ANd OThER PAyABLEs
Trade creditors Employee entitlements Current portion finance leases Total trade and other payables
174.6 11.6 0.1 186.3
147.6 10.2 0.2 158.0
171.1 11.4 0.1 182.6
143.3 10.1 0.2 153.6
58

17. PROvisiONs
GRoUP EMPloyEE bENEFITS RESTRUCTURING $M $M DISMANTlING $M ToTAl $M
Balance at 1 July 2011 Provisions made during the period Provisions used during the period Provisions reversed during the period Balance at 30 June 2012 Current portion of provisions Non current portion of provisions Balance at 30 June 2012
8.0 6.8 (8.1) 6.7 6.7 6.7
1.2 0.2 (1.2) 0.2 0.2 0.2

PARENT
13.6 (2.9) 10.7 1.6 9.1 10.7
22.8 7.0 (12.2) 17.6 8.5 9.1 17.6
EMPloyEE bENEFITS RESTRUCTURING $M $M
DISMANTlING $M
ToTAl $M
Balance at 1 July 2011 Provisions made during the period Provisions used during the period Provisions reversed during the period Balance at 30 June 2012 Current portion of provisions Non current portion of provisions Balance at 30 June 2012
8.0 6.8 (8.1) 6.7 6.7 6.7
1.2 0.2 (1.2) 0.2 0.2 0.2
13.6 (2.9) 10.7 1.6 9.1 10.7
22.8 7.0 (12.2) 17.6 8.5 9.1 17.6
Employee benefits
The Group, for accounting purposes, has a constructive obligation with regard to certain employee benefits. This provision is expected to be used within one year.
Restructuring
Staff redundancy provision: This provision is expected to be used within one year.
dismantling
In September 2007, Transpower removed from service the HVDC Pole 1 (Pole 1) due to the low probability, high consequence risks posed by continuing operation of the ageing technology. Following additional risk mitigation measures including decommissioning one half of Pole 1, the remaining half was made available for limited operation from September 2009. Transpower recognises site restoration and rehabilitation liabilities where Transpower believes an obligation exists. Pole 1 contains mercury and Transpower has estimated the decommissioning cost based on engineering advice. Decommissioning of the remaining half of Pole 1 is planned to be completed by june 2015. Actual decommissioning costs may vary from the figures indicated.
59

18. NON cURRENT fiNANcE LEAsE LiABiLiTy
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
one to five years Greater than five years Reconciliation to lease payments: Total future minimum lease payments Interest expense Total lease liability recognised This is represented by: Current lease liability Non current lease liability
0.4 0.3 0.7 1.8 (1.0) 0.8 0.1 0.7 0.8
0.5 0.5 1.0 2.3 (1.1) 1.2 0.2 1.0 1.2
0.4 0.3 0.7 1.8 (1.0) 0.8 0.1 0.7 0.8
0.5 0.5 1.0 2.3 (1.1) 1.2 0.2 1.0 1.2
The lease liability outstanding at 30 june 2012 relates to a lease over a transmission line.
19. dEBT, fiNANciAL iNsTRUMENTs ANd Risk MANAgEMENT
The following items are described in the financial statements in the following notes:
ITEM NoTE
NzPCl debt and investment Derivative balances split between short term and long term assets and liabilities RRl interest rate swaps Debt security and guarantees
10 11 11 25
(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 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 that arise as a result of its business activities, including having a debt portfolio that is denominated in both NzD and foreign currencies, an investment portfolio held by a captive insurance company and from purchases of goods and services denominated in a foreign currency. The financial risks are those that are financing related, being liquidity, interest rate, currency and credit risk, and those that are operating related, being currency, commodity, customer credit, insurance and regulatory risks. Financial risk management is carried out by a central treasury function, which operates under policies approved by the board of directors.
60

19. dEBT, fiNANciAL iNsTRUMENTs ANd Risk MANAgEMENT continued
(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 that 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 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 Groups 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 six debt facilities. The aggregate principal amount of the debt outstanding may not exceed the following:
FoREIGN CURRENCy EqUIVAlENT $M
CURRENCy
NzD $M
Domestic medium term note programme European commercial paper programme European medium term note programme Australian medium term note programme Domestic multi-option facility Revolving cash advance facility
NzD USD USD AUD NzD NzD
500 1,000 750
1,500 629 1,259 954 500 200
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. In addition to the above, the Groups liquidity policy requires the Group to have access to committed funding facilities to cover the sum of all debt that 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 three year Standby Facility for NzD $250 million, effective 21 December 2010. This was undrawn at 30 june 2012 and 30 june 2011; and a three year Standby Facility for NzD $250 million, effective 26 May 2010. This was undrawn at 30 june 2012 and 30 june 2011.
61

investments and RRL 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. In addition to these investments, Transpower has a captive insurance company called Risk Reinsurance ltd (RRl). RRl makes investments from premiums received from the parent company. RRl re-insures externally and maintains sufficient investments to meet expected claims. RRl does not offer insurance to any external parties. For RRl cash and bond holdings, the counterparties have maximum limits depending on their ratings. The limits by Standard and Poors (or Moodys/Fitch equivalent) are as follows:

NzD 5 million (face value), if the counterparty is rated AA- or higher NzD 3 million (face value), if the counterparty is rated A- or higher NzD 1 million (face value), if the counterparty is rated bbb or higher, or, if there is no long term rating but a short term rating of A1 or better.
The above limits exclude RRls cash holdings with banks that are Transpower approved counterparties.
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. The Groups policy sets minimum and maximum hedging parameters expressed as a percentage of forecast debt. This policy ensures that the Groups 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. Under a new policy, the transition to which is being considered by the board, interest rate swaps would be placed so as to mirror, to the extent practicable, the interest rate used by the Commerce Commission in determining our regulated rate of return at the start of each regulatory period.
62

iii. Currency risk debt

Currency risk on debt 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 dominated borrowings is managed using cross currency interest rate swaps and basis swaps. Cross currency interest rate swaps are used to convert foreign currency denominated debt issued by the Group into NzD denominated debt. 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.
63
debt and related derivatives interest rate, currency and liquidity risk
The following table details Transpowers debt and associated derivatives. The result after derivatives is that Transpower effectively has a debt portfolio in New zealand dollars at predominantly fixed interest rates across multiple repayment dates. The effective net cash flows on floating rate payments are determined by applying the applicable swap curve to determine the expected future cash flows. At 30 june 2012, bkbM was 2.68% (2011: 2.67%).
gROUP 2012
DEbT AND ISSUING DERIVATIVE CoMPANy MATURITy DATE DEbT RECEIVE DERIVATIVE PAy NoTIoNAl DERIVATIVE DERIVATIVE NoTIoNAl RECEIVE RECEIVE DERIVATIVE PAy CURRENCy INTEREST RATE VAlUE NzD
FACE VAlUE
NoTIoNAl EFFECTIVE DERIVATIVE CURRENCy INTEREST RATE RECEIVE VAlUE
M EcP AUD issue TPNz Bonds bonds 2015 TPNz bonds 2017 TPFl bonds 2018 TPNz bonds 2019 TPFl bonds 2020 TPFl CPI issue TPFl Term borrowing boTM facility TPNz boTM facility TPNz EMTN CHF EMTN TPFl CAD EMTN TPNz HkD EMTN TPFl UsPP USPP 2016 TPFl USPP 2019 TPFl USPP 2021 TPNz USPP 2022 TPFl USPP 2023 TPNz USPP 2026 TPNz cash outflow on debt, cciRs and foreign iRs 10-Sep-12 3-Dec-15 15-Feb-17 30-Nov-18 12-Nov-19 10-jun-20 15-May-20 5-Sep-14 17-May-16 6-Aug-14 20-Mar-17 24-Mar-20 27-Sep-16 27-Sep-19 13-oct-21 15-Dec-22 13-oct-23 13-oct-26 7.9 75.0 50.0 125.0 50.0 150.0 100.0 100.0 100.0 300.0 250.0 400.0 25.0 75.0 232.0 150.0 78.0 70.0 AUD 3.31%
$M (7.9) AUD 3.31%
$M 10.1
NzD bkbM + 110 bp NzD 6.60% NzD 5.14% NzD 7.19% NzD 6.95% NzD 4.37% NzD bkbM + 33 bp NzD bkbM + 42.5 bp CHF CAD HkD USD USD USD USD USD USD 3.49% 3.00% 4.00% 5.59% 5.74% 3.43% 3.60% 3.58% 3.83%
(50.0) (50.0) (150.0) (100.0)
NzD NzD NzD NzD
6.60% 7.19% 6.95% 4.37%
50.0 50.0 150.0 100.0
(300.0) (250.0) (400.0) (25.0) (75.0) (232.0) (150.0) (78.0) (70.0)
CHF CAD HkD USD USD USD USD USD USD
3.49% 3.00% 4.00% 5.59% 5.74% 3.43% 3.60% 3.58% 3.83%
343.9 307.6 73.1 41.1 123.4 284.4 203.5 95.6 85.8
Debt short term Current portion of long term debt debt short term as per statement of financial position debt long term as per statement of financial position Total debt face value (as per above) New zealand dollar debt Foreign debt after adjusting for related foreign exchange derivatives
GRoUP 750.0 1,568.5 2,318.5
PARENT 400.0 783.5 1,183.5
A portion of the above floating rate bkbM exposure is converted to fixed rate exposure by the use of interest rate swaps (IRS) as per the Groups treasury policy. The table below shows the notional IRS maturing by time period and the weighted average interest rate for that period. The table includes forward starting IRS. The IRS are net-settled. The table below reflects the net cash outflows comprising both IRS assets and liabilities i.e. IRS in the money are assets and out of the money are liabilities. Notional value of resetting basis swaps (net settled) liabilities Greater than five years Notional value of interest rate swaps maturing by time banding (net settled) liabilities Within one year one to two years Two to three years Three to four years Four to five years Greater than five years Net cash outflows on iRs liabilities Notional value of interest rate swaps maturing by time banding (net settled) assets Within one year one to two years Two to three years Three to four years Four to five years Greater than five years Net cash outflows on iRs assets Total effective net cash flows Total debt derivatives fair value (also, refer to note 11 for further derivatives breakdown) Other financial liabilities Trade and other payables Finance lease liabilities Cash and cash equivalents 55.0 195.0 860.5 539.0 1,138.0 1,555.0 bkbM + 40 bp 55.0 195.0 860.5 539.0 1,138.0 1,555.0
bkbM bkbM bkbM bkbM bkbM
64
DERIVATIVE EFFECTIVE NzD INTEREST RATE AFTER APPlyING FINANCIAl DERIVATIVES
FAIR VAlUE DEbT FAIR VAlUE DERIVATIVE FAIR VAlUE ToTAl FAIR VAlUE WITHIN oNE yEAR
EFFECTIVE NET NzD CASH FloWS (INFloWS)/oUTFloWS oNE To TWo yEARS TWo To THREE yEARS THREE To FoUR To FIVE FoUR yEARS yEARS GREATER THAN FIVE yEARS
ToTAl
$M 2.62% 10.1 74.8 55.4 125.6 56.2 165.3 90.8 100.2 100.4 bkbM + 38 bp bkbM + 174.1 bp bkbM + 120 bp bkbM + 22.3 bp bkbM + 20.5 bp bkbM + 197 bp bkbM + 128.6 bp bkbM + 193.25 bp bkbM + 205 bp 428.7 314.8 70.2 36.5 114.5 298.6 189.5 97.0 83.4 2,412.0 10.1 10.1 2,401.9 2,412.0
$M (0.1)
$M 10.0 74.8 49.1 125.6 46.6 132.2 98.4 100.2 100.4
$M 10.0 2.7 1.8 6.4 1.7 4.2 3.7 3.0 3.2 10.5 13.3 2.8 1.2 3.4 13.2 9.6 4.4 4.0 99.1
$M 2.9 1.9 6.4 1.8 4.5 3.8 3.0 3.2 11.1 13.9 2.9 1.2 3.7 13.3 8.8 4.4 4.1 90.9
$M 3.2 2.1 6.4 1.9 5.0 4.2 100.7 3.2 346.0 15.2 3.2 1.4 4.2 14.4 9.5 4.8 4.4 529.8
$M 76.7 2.3 6.5 2.1 5.6 4.6 103.2 16.1 3.5 1.5 4.6 15.5 10.3 5.2 4.7 262.4
$M 51.8 6.4 2.3 6.1 4.9 320.4 3.7 41.5 5.0 16.4 11.0 5.5 5.0 480.0
$M 134.7 56.4 170.7 116.4 84.5 136.1 366.4 270.2 134.6 136.6 1,606.6
$M 10.0 85.5 59.9 166.8 66.2 196.1 137.6 106.7 112.8 367.6 378.9 100.6 46.8 157.0 439.2 319.4 158.9 158.8 3,068.8
bkbM + 100 bp bkbM + 77.3 bp bkbM + 21 bp bkbM + 107 bp
(6.3) (9.6) (33.1) 7.6
(95.6) (2.3) (0.5) 2.6 (2.9) (17.7) 2.1 (6.5) (6.0) (168.3)
333.1 312.5 69.7 39.1 111.6 280.9 191.6 90.5 77.4 2,243.7
(168.3)
2,243.7
bkbM + 12 bp
5.64% 6.25% 6.34% 6.23% 5.95%
0.6
(0.2) 5.9 30.6 18.7 22.2 8.9 86.3 185.2
(0.2) 5.6 29.9 19.3 20.9 16.5 92.2 182.9
(0.1) 19.9 17.3 18.8 16.1 72.1 601.8
(0.1) 5.8 30.8 26.8 63.4 325.7
(0.2) 15.5 28.2 43.7 523.5
1.8 85.9 85.9 1,694.3
1.0 11.5 80.4 61.1 108.2 182.4 443.6 3,513.4
391.3
223.6
186.3 0.1 6.4
0.2 0.1
0.7 0.1
0.1
0.1 0.1
0.6 0.3
187.9 0.8 6.4
65

gROUP 2011
DEbT AND ISSUING DERIVATIVE CoMPANy MATURITy DATE DEbT RECEIVE DERIVATIVE PAy
FACE VAlUE
NoTIoNAl EFFECTIVE DERIVATIVE CURRENCy INTEREST RATE RECEIVE VAlUE
NoTIoNAl DERIVATIVE DERIVATIVE NoTIoNAl RECEIVE RECEIVE DERIVATIVE PAy CURRENCy INTEREST RATE VAlUE NzD
M call borrowing Promissory notes TPFl TPFl TPFl 1.2 170.0 45.0 4.0 30.0 50.0 50.0 150.0 100.0 100.0 5,000.0 125.0 300.0 400.0 25.0 75.0 150.0 NzD NzD NzD AUD USD NzD NzD NzD NzD 2.75% 2.82% 2.78% 4.81% 0.27% 6.60% 7.19% 6.95% 4.29%
$M
$M
15-Aug-11 15-Sep-11 15-Sep-11 15-Sep-11 15-Feb-17 12-Nov-19 10-jun-20 15-May-20 17-May-16 28-Nov-11 15-May-12 6-Aug-14 24-Mar-20 27-Sep-16 27-Sep-19 15-Dec-22
EcP AUD issue TPNz USD issue TPNz Bonds bonds 2017 TPFl bonds 2019 TPFl bonds 2020 TPFl CPI issue TPFl Term borrowing boTM facility TPFl EMTN jPy EMTN TPFl CAD EMTN TPFl CHF EMTN TPFl HkD EMTN TPFl UsPP USPP 2016 TPFl USPP 2019 TPFl USPP 2022 TPFl cash outflow on debt, cciRs and foreign iRs
(4.0) (30.0) (50.0) (50.0) (150.0) (100.0)
AUD USD NzD NzD NzD NzD
4.81% 0.27% 6.60% 7.19% 6.95% 4.29%
5.2 37.1 50.0 50.0 150.0 100.0
NzD bkbM + 52.5 bp jPy CAD CHF HkD USD USD USD 1.37% 4.61% 3.49% 4.00% 5.59% 5.74% 3.60% (5,000.0) (125.0) (300.0) (400.0) (25.0) (75.0) (150.0) jPy CAD CHF HkD USD USD USD 1.37% 4.61% 3.49% 4.00% 5.59% 5.74% 3.60% 98.4 153.6 343.9 73.1 41.1 123.4 203.5
Debt short term Current portion of long term debt debt short term as per statement of financial position debt long term as per statement of financial position Total debt face value (as per above) New zealand dollar debt Foreign debt after adjusting for related foreign exchange derivatives
666.2 1,079.3 1,745.5
A portion of the above floating rate bkbM exposure is converted to fixed rate exposure by the use of interest rate swaps (IRS) as per the Groups treasury policy. The table below shows the notional IRS maturing by time period and the weighted average interest rate for that period. The table includes forward starting IRS. The IRS are net-settled. The table below reflects the net cash outflows comprising both IRS assets and liabilities i.e. IRS in the money are assets and out of the money are liabilities. Notional value of resetting basis swaps (net settled) liabilities Greater than five years Notional value of interest rate swaps maturing by time banding (net settled) liabilities Within one year one to two years Two to three years Three to four years Four to five years Greater than five years Net cash outflows on iRs liabilities Notional value of interest rate swaps maturing by time banding (net settled) assets Within one year one to two years Two to three years Three to four years Four to five years Greater than five years Net cash outflows on iRs assets Total effective net cash flows Total debt derivatives fair value (also, refer to note 11 for further derivatives breakdown) Other financial liabilities Trade and other payables Finance lease liabilities
55.0
bkbM + 40 bp
55.0
160.0 195.0 860.5 539.0 2,228.0
bkbM bkbM bkbM bkbM bkbM
160.0 195.0 860.5 539.0 2,228.0
365.0
bkbM
365.0
66
DERIVATIVE EFFECTIVE NzD INTEREST RATE AFTER APPlyING FINANCIAl DERIVATIVES
FAIR VAlUE
EFFECTIVE NET NzD CASH FloWS (INFloWS) / oUTFloWS GREATER THAN FIVE yEARS
DEbT FAIR VAlUE
DERIVATIVE FAIR VAlUE
ToTAl FAIR VAlUE
WITHIN oNE yEAR
oNE To TWo yEARS
TWo To THREE yEARS
THREE To FoUR To FIVE FoUR yEARS yEARS
ToTAl
$M 1.2 169.5 44.7 bkbM + 11 bp bkbM + 12.7 bp bkbM + 100 bkbM + 77.3 bkbM + 21 bkbM + 107 bp bp bp bp 5.1 36.3 53.2 53.9 159.9 93.8 100.4 bkbM + 29 bkbM + 26.5 bkbM + 38 bkbM + 120 bp bp bp bp 75.9 160.8 478.7 65.4 34.8 105.8 169.5 1,808.9 256.8 236.7 493.5 1,315.4 1,808.9
$M
$M 1.2 169.5 44.7
$M 1.2 170.0 45.0 5.1 36.3 1.9 1.8 4.6 3.9 3.2 99.9 158.2 10.6 2.9 1.2 3.6 8.1 557.5
$M 2.4 2.2 6.0 4.8 3.7 12.1 3.2 1.4 4.1 9.0 48.9
$M 2.7 2.6 7.0 5.5 4.1 13.5 3.5 1.6 4.6 9.8 54.9
$M 3.1 2.9 8.1 6.2 4.4 347.6 3.7 1.7 5.1 10.6 393.4
$M 3.3 3.2 8.8 6.7 104.8 4.0 1.8 5.5 11.2 149.3
$M 52.6 62.0 188.0 128.7 89.5 41.6 143.3 285.8 991.5
$M 1.2 170.0 45.0 5.1 36.3 66.0 74.7 222.5 155.8 120.2 99.9 158.2 383.8 106.8 49.3 166.2 334.5 2,195.5
(3.7) (5.2) (18.7) 7.9
5.1 36.3 49.5 48.7 141.2 101.7 100.4
22.8 (6.3) (137.3) 3.6 5.2 12.3 40.9 (78.5)
98.7 154.5 341.4 69.0 40.0 118.1 210.4 1,730.4
bkbM + 22.3 bp bkbM + 20.5 bp bkbM + 128.6 bp
(78.5)
1,730.4
bkbM + 12 bp
0.4
(0.2)
(0.2)
(0.2)
(0.1)
(0.1)
2.0
1.2
6.40% 5.64% 6.25% 6.34% 6.26%
205.0
1.7 4.5 25.4 16.2 17.0 64.8 0.6 0.6 622.7
3.7 20.7 12.9 20.3 57.6 0.4 0.4 106.7
2.4 15.4 10.3 18.7 46.8 0.1 0.1 101.6
7.2 6.5 12.4 26.1 (0.3) (0.3) 419.1
1.6 12.9 14.5 (0.6) (0.6) 163.1
9.5 9.5 (3.5) (3.5) 999.5
1.7 10.6 68.7 47.5 90.8 219.3 (3.3) (3.3) 2,412.7
5.57%
(1.8)
125.1
158.0 0.2
0.2 0.1
0.8 0.1
0.1 0.1
0.1
0.6 0.6
159.7 1.2
67

19. dEBT, fiNANciAL iNsTRUMENTs ANd Risk MANAgEMENT continued PARENT
The Parent has $1,204.9 million of external debt (2011: $41.3 million). This debt is included in the Group table above, with the issuer of TPNz. The related derivatives are also issued by TPNz. All other debt and derivatives have been issued by Transpower Finance limited (TPFl), a 100% owned subsidiary of the Parent. The breakdown of Parent debt is:
2012 $M 2011 $M
current debt Intercompany External debt Non current debt External debt 1,194.8 1,194.8 Intercompany debt is repayable on demand and has an interest rate of 7.67% (2011: 7.62%) 1,605.1 10.1 1,615.2 2,149.4 41.3 2,190.7
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 that 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 Groups 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 credit rating of A or above by Standard and Poors (or Moodys/Fitch 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 16 Trade and other payables (2012: none; 2011: none). Any collateral posted by Transpower would be included in Note 8 Trade and other receivables (2012: none; 2011: 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 Groups international swap dealer agreements (ISDAs). 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 valuation is positive, as follows:
68

GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
Cross currency interest rate swaps Interest rate swaps basis swaps Interest rate options Foreign exchange forward contracts Total credit spreads
103.0 103.0
85.9 1.4 87.3
32.8 32.8
Credit spreads are an estimate of the additional premium over the relevant yield curve that would be required by market participants to compensate them for the perceived risk inherent in the counterparty and transaction. For derivative transactions, the impact of credit spreads is substantially lower than for debt and investment transactions due to the offsetting nature of the cash flows. The following table shows the impact of credit spread movements on debt, derivatives and investments on fair value:
Fair value profit/(loss) impact Statement of financial position impact (increase)/decrease in liabilities Statement of financial position impact (increase)/decrease in assets
159.4 215.5 0.9
(8.8) 55.6 0.4
116.5 116.5
v. Sensitivity analysis
currency risk debt All foreign currency debt is converted back to NzD denominated exposure, therefore no sensitivity analysis has been performed for foreign currency debt. fair value risk The Groups net debt is designated as fair value through profit or loss. As such, the Group is subject to fair value gains or losses. The extent of the gains or losses is based on the Groups cash flow profile compared to the corresponding movement in the yield curve and market perceptions on credit risk. For debt, derivatives and investments, the relevant yield curve is effectively adjusted for the credit risk (or spread). A parallel shift in the yield curve by 1% (100 basis points) would create the following fair value movements based on net debt held at 30 june 2012. In 2011, the Parent had short term debt only, so no sensitivity analysis was done.
69

GRoUP 2012 2012 2011 2011
yield curve interest rate change yield curve impact on pre-tax profit/(loss)/equity
+100 bp
$M
-100 bp
$M
+100 bp
$M
-100 bp
$M
155.9
PARENT 2012
(168.5)
131.4
(142.1)
2012
yield curve interest rate change yield curve impact on pre-tax profit/(loss)/equity
+100 bp
$M
-100 bp
$M
7.4
(7.9)
(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 Groups policy to hedge all committed foreign currency denominated payments greater than NzD 1 million (NzD equivalent) by using 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:
Within one year one to two years Two to five years Greater than five years Total foreign exchange forward contracts
171.8 18.7 190.5
266.2 38.3 16.6 321.1
171.8 18.7 190.5
266.2 38.3 16.6 321.1
70

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 with commodity risk borne by the supplier.
iii. Customer credit risk

Transpowers 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 from which the majority of revenue is received. It is the Groups 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:
Vector limited Meridian Energy limited
12.1 5.8
12.0 5.9
12.1 5.8
12.0 5.9
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 $90 million. Transpower operates a captive insurance company through its subsidiary Risk Reinsurance limited (RRl). Under the material damage policy RRl is liable for the first $9 million of insurance costs 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 Commerce Commission determines what rate of return applies to Transpowers assets. It also determines the level of operating expenditure and capital expenditure that can be recovered from customers. There is a risk that Transpowers 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.
71

20. dEfERREd TAx

GRoUP
bAlANCE 1 jUly 2010 $M
RECoGNISED IN PRoFIT oR loSS $M
Property, plant and equipment temporary differences Fair value of net debt and derivatives Revenue deferral Dismantling provision Impairment other Total deferred tax
215.5 (35.4) (3.9) (4.6) (11.6) (4.1) 155.9
22.9 (20.5) (0.1) 0.8 (2.5) (1.5) (0.9)
bAlANCE 1 jUly 2010 PARENT $M
Property, plant and equipment temporary differences Fair value of net debt and derivatives Revenue deferral Dismantling provision Impairment other Total deferred tax There are no unrecognised deferred tax balances (2011: none).
215.6 (6.7) (3.9) (4.6) (11.6) (1.6) 187.2
22.8 10.1 (0.1) 0.8 (2.5) (2.5) 28.6
Deferred tax is shown net as the balance relates to companies included in the Transpower Consolidated Tax Group and relate to the same jurisdiction, being the New zealand Inland Revenue Department. Property, plant and equipment temporary differences relate to the difference between tax and accounting book values. Fair value of net debt and derivatives relates to deferred tax on the differences between tax and accounting values. Revenue deferral relates to deferred tax on customer investment contracts and transmission line realignment. Note 3 Deferred income contains information on these transactions. Dismantling provision relates to the HVDC Pole 1, refer to Note 17 Provisions for background. Impairment relates to the NIGUP property, refer to Note 15 Non current assets for background. Amalgamation of EMS During the year to 30 june 2011 EMS limited was amalgamated into the Parent.
dividend withholding payments

There were no dividend withholding payments during the year (2011: none).
72

RECoGNISED IN oTHER CoMPREHENSIVE INCoME $M
bAlANCE 30 jUNE 2011 $M
238.4 (55.9) (4.0) (3.8) (14.1) (5.6) 155.0
29.0 (32.6) 0.5 0.7 4.2 1.6 3.4
267.4 (88.5) (3.5) (3.1) (9.9) (4.0) 158.4
AMAlGAMATIoN oF EMS $M
(0.7) (0.2) (0.9)
237.7 3.4 (4.0) (3.8) (14.1) (4.3) 214.9
29.7 (2.0) 0.5 0.7 4.2 2.8 35.9
267.4 1.4 (3.5) (3.1) (9.9) (1.5) 250.8
73

21. EqUiTy
capital
Transpower has 1,200,000,000 issued and fully paid $1 ordinary shares. Transpowers authorised capital is $1,200,000,000 (2011: $1,200,000,000). The shares confer on the holders the right to vote at any annual general meeting of Transpower. The shares have no par value and rank equally. Transpower does not have any externally imposed capital requirements.
Net tangible assets per share
GRoUP 2012 $M 2011 $M
PARENT 2012 $M 2011 $M
Net assets (equity) less intangibles (note 15) Total net tangible assets Net tangible assets per share ($)
1,509.2 (311.9) 1,197.3 1.00
1,533.5 (288.9) 1,244.6 1.04
1,570.4 (311.9) 1,258.5 1.05
1,514.5 (288.9) 1,225.6 1.02
dividends
The following dividends were declared and/or paid relating to the 2012 financial year.
DEClARED PAID AMoUNT $M CENTS PER SHARE
28/02/12 16/08/12 There were no dividends paid or declared relating to the 2011 financial year.
9/03/12
110 205
9 17
imputation credits
GRoUP 2012 $M
PARENT 2012 $M
balance at 1 july 2011 Net tax payments/transfers made/refunds received Imputation credits attached to dividends paid to shareholders balance at 30 june 2012 Terminal tax accrued at 30 june 2012 (to pay july 2012)
349.3 25.2 (42.8) 331.7 9.5 341.2
348.9 25.2 (42.8) 331.3 5.9 337.2
Management of capital
Transpowers capital structure and dividend policy was reviewed during 2011. As a result of this review, Transpower resumed dividend payments during the 2011/12 financial year and now funds a greater proportion of its capital programme with debt.
Available for sale reserve

This reserve comprises the cumulative net change in the fair value of available for sale financial assets until the investment is derecognised. The available for sale assets are the Fonterra shares that Transpower holds. During 2012, the assets were fully impaired meaning the reserve balance was recycled to profit or loss. Refer to Note 6 Change in fair value of financial instruments for details.
Non controlling interest

The Group recognises a non controlling interest in NzPCl. Refer to Note 10 NzPCl debt and investment for more information.
74

22. sEgMENT REPORTiNg
In 2012, the Group has one reportable segment, transmission. The transmission segment activities include the transmission of electricity from the point of generation to the point of connection. This segment has external revenue derived from New zealand customers and its assets are based in New zealand. The Group has no other reportable segments. The balance of the financial information (that is not the transmission segment) is reported as other in the table below. The material portion of the other balance is made up of the following discrete activities:

system operator the provision of real time services to ensure the short term security of the New zealand electricity system. d-cyphaTrade Limited established as a separate company on 1 August 2007. The company, operating in Australia, provides services to the Australian electricity derivatives market. It does not take positions in the market. RRL established in 2001 to provide insurance services to the Group.
Segment results are allocated using the ACAM method (avoidable cost allocation methodology). This methodology is used to prepare the financial statements of the Transpower lines (transmission) business. These financial statements are required by the Commerce Commissions Electricity Information Disclosure Requirements 2004. The ACAM methodology is required by, and explained in, the Commerce Commissions Electricity Information Disclosure Handbook.
Major customers
External customers that contribute 10% or more of total Group revenue are:
CUSToMER % oF GRoUP REVENUE 2012 SEGMENT
Vector limited Meridian Energy limited

TRANSMISSIoN 2012 $M 2011 $M oTHER 2012 $M
15.58 (2011: 15.86) 13.02 (2011: 13.22)

ADjUSTMENTS 2011 $M 2012 $M 2011 $M
Transmission Transmission
ToTAl 2012 $M 2011 $M
External revenue Operating expenses Grid maintenance IST maintenance Total operating expenses Capex
723.0 106.6 35.7 269.6 909.3
673.1 115.2 33.5 261.6 728.0
60.2 5.3 30.9 6.0
56.1 4.9 26.8 5.0
2.2 (5.1) (20.9) (10.3)
2.2 (4.3) (18.9) (9.2)
785.4 101.5 20.1 290.2 915.3
731.4 110.9 19.5 279.2 733.0
The adjustments are primarily made up of:

2012 $M 2011 $M GRoUP FINANCIAl STATEMENT ClASSIFICATIoN
External revenue Grid maintenance IST maintenance IST maintenance Total operating expenses
2.4 (2.5) (12.5) (7.9) (10.3)
2.4 (2.5) (10.4) (8.0) (9.2)
Imputed interest is included in net finance expenses (Note 5) Communication system maintenance is included in other direct transmission expenses (Note 4). IST leases are included in operating lease and rental costs (Note 4). Maintenance on the new communications network is included in other direct transmission expenses (Note 4). Relates to intercompany insurance premiums paid by the transmission segment to RRl.
75

23. OPERATiNg LEAsE cOMMiTMENTs
GRoUP 2012 2011 $M
PARENT 2012 $M 2011 $M
commitments in respect of non-cancellable operating leases payable: Within one year one to two years Two to five years later than five years Total operating lease commitments
$M
15.7 15.2 37.5 126.0 194.4
11.6 12.0 30.7 111.0 165.3
15.7 15.2 37.5 126.0 194.4
11.6 12.0 30.7 111.0 165.3
The lease commitments primarily relate to the leasing of fibre optic cables for Transpowers communications network.
24. cAPiTAL cOMMiTMENTs
capital commitments in respect of contracts for property, plant and equipment: Within one year one to two years Two to three years Three to four years Four to five years Greater than five years capital commitments in respect of contracts for intangible assets: Easements and right to access assets Software
444.9 31.0 5.5 2.1 483.5 0.1 0.1
724.5 48.8 27.7 7.5 808.5 25.1 0.1 25.2 833.7
444.9 31.0 5.5 2.1 483.5 0.1 0.1 483.6
724.5 48.8 27.7 7.5 808.5 25.1 0.1 25.2 833.7
Total capital commitments

25. cONTiNgENciEs
483.6
(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 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 year 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 the NIGU project. Transpower has received a number of claims from two contractors on the NIGU project. In the event that all of the claims received were accepted, the project cost would increase by approximately $50 million. Transpowers view, supported by external legal advice, is that there is little merit to the majority of the claims received.
76

25. cONTiNgENciEs continued
(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. Note 10 NzPCl debt and investment contains the amounts of the loan and loan asset. The substance of the transaction is such that Transpower rather that 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 Groups 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 that 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. Pursuant to the Master Trust Deed, Transpower has given a negative pledge that, while any unsubordinated notes are outstanding, it will not (and its subsidiaries will not), subject to certain exceptions, create or permit to subsist any charge or lien over any of their respective assets to secure payment of debt securities.
Euro medium term notes

Under the euro medium term note (EMTN) programme, Transpower Finance has previously issued notes guaranteed by Transpower. Transpower New zealand rather than Transpower Finance now issues notes under this programme. Transpower New zealand limited has given a negative pledge covenant that, while any of the notes issued under the EMTN programme remain outstanding, it will not (and its subsidiaries will not), subject to certain exceptions, create or permit to exist any charge or lien over any of its respective assets to secure payment of certain indebtedness.
Australian medium term notes

Under the Australian medium term note programme, Transpower Finance may issue notes guaranteed by Transpower. There were no notes issued at balance date (2011: none).
US private placement issued by Transpower Finance Limited

bonds are issued by Transpower Finance under a note and guarantee agreement dated 27 September 2004. The bonds are
77

guaranteed by Transpower (the Guarantor), Halfway bush Finance limited and Tb and T limited (the Subsidiary Guarantors). The Guarantor and Subsidiary Guarantors have unconditionally guaranteed payment of the principal, interest and other amounts owing under the agreement.
US private placement issued by Transpower New Zealand Limited

Notes (Transpower USPP Notes) have been issued by Transpower under a note purchase agreement dated 13 october 2011. The Transpower USPP Notes are guaranteed by Transpower Finance, Halfway bush and Tb and T (together, Subsidiary Guarantors). Each Subsidiary Guarantor has unconditionally guaranteed payment of the principal, interest and other amounts owing under the note purchase agreement for the Transpower USPP Notes.
(iii) Economic gain (loss) account

Transpower operates its revenue setting methodology within an economic value (EV) framework that analyses economic gains and losses between those attributable to shareholders and those attributable to customers. The balance of the accumulated gain (loss) from monopoly activities attributable to customers (the EV balance) has been passed on to or claimed from customers over time. The net balance of the EV account at 30 june 2011 was $24.3 million to the credit of Transpower (2011: $18.7 million to the credit of customers). This balance is comprised of an AC customer credit balance of $82.4 million and an HVDC customer debit balance of $106.7 million. The EV balances are to be passed on or claimed from customers over two regulatory periods, ending in june 2020. The 30 june 2012 EV account figures are expected to be finalised by 17 october 2012.
(iv) Regulated rate of return

on 23 December 2010, the Commerce Commission (CC) announced the new regulatory framework that applies to Transpower and that has been brought into effect by the Commerce Act (Transpower Individual Price-quality Path) Determination 2010 and the Commerce Act (Transpower Input Methodologies) Determination 2010. Under this framework, the CC has determined a regulated rate of return for Transpower of 7.19%, which is materially below a level that the directors and their specialist advisors consider appropriate. The process leading to this decision has been subject to judicial review. The High Court released its judgment on this review on 21 December 2011. The Court found that the CC had erred in that part of the process that related to the leverage rate used to calculate Transpowers regulated rate of return. The Court ordered that the CC reconsult on its leverage assumptions. Transpower has also appealed the merits of the rate of return decision itself. The appeal is likely to be heard in late 2012. As a result of these actions, it is possible (but by no means certain) that the regulated rate of return may be changed retrospectively. An increase in the regulated rate of return of 10 basis points approximates to revenue of $4 million per annum.
(v) kapiti high voltage coalition

The kapiti High Voltage Coalition (kHVC), a group of kapiti landowners, sued Transpower in the High Court in relation to reconductoring works carried out on the Mangahoa Paekakariki A and b lines before and during 2003. kHVC sought:
judicial review and quashing of the kapiti Coast District Councils decisions to grant various Resource Management Act 1991 (RMA) approvals for the works; and declarations that Transpower trespassed onto kHVC members properties when the works were carried out, on the basis that the works were not authorised by s23(3) of the Electricity Act 1992.
The case was heard in February 2012. A judgment has not yet been delivered. Transpower has agreed to surrender some of the challenged RMA approvals and, after the judgment, will take steps to secure whatever new RMA approvals are necessary. If the trespass claims are successful, Transpower may not be able to access the works (or at least part of them) without obtaining easements, and damages claims might be brought, including by non-kHVC members. It is considered unlikely that any material liability will result from this action.
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(vi) various other lawsuits, claims and investigations

Various other lawsuits, claims and investigations have been brought or are pending against the Group. The directors of Transpower cannot reasonably estimate the adverse effect (if any) on the Group if any of the foregoing claims are ultimately resolved against the Groups interests.
26. gROUP ENTiTiEs
All subsidiaries are wholly owned, are incorporated in New zealand (except where mentioned otherwise) and have a balance date of 30 june 2012. Transpower has no ownership interest in NzPCl. NzPCl is a special purpose vehicle registered in the Cayman Islands and is consolidated for financial reporting, indicated by the dotted line in the diagram below. Refer to Note 10 NzPCl debt and investment for more detail. Risk Reinsurance limited is registered and incorporated in the Cayman Islands. As at balance date the group entities are as follows:
TRANsPOwER NEw zEALANd LiMiTEd
d-cyphaTrade limited
Halfway bush Finance limited
Tb and T limited
Transpower Finance limited
Risk Reinsurance limited
New zealand Power Cayman 2003-1 limited
Provides services to the Australian market for electricity derivatives. Party to a cross border lease over the majority of the South Island HVAC assets. Transpower Finance limited used for financing. Risk Reinsurance limited captive insurance company registered in the Cayman Islands, established to provide insurance for the Transpower Group.
27. RELATEd PARTiEs
Transactions with key personnel

The Group did not conduct any business with key personnel.
key management personnel compensation

key personnel received the following compensation for their services to the Group:
Directors fees key management personnel Defined contribution schemes
0.5 5.2 0.2
0.5 4.7 0.2
0.5 5.2 0.2
0.5 4.7 0.2
There were termination payments to key management personnel in 2012 of $0.4 million (2011: none).
79

27. RELATEd PARTiEs continued
intercompany transactions
The subsidiaries identified in Note 26 are related parties of Transpower. Transactions with these parties are disclosed in the relevant notes. All of these transactions are conducted on a commercial basis. No related party debts have been written off or forgiven during the year. The balances are unsecured. Intercompany loans are repayable on demand.
government-related transactions
Transpower, being a State-owned Enterprise, transacts with other government-related entities. The most significant transactions and balances are as follows:
GRoUP 2012 $M 2011 $M
Meridian Energy limited revenue Electricity Authority revenue
101.3 34.2
95.5 30.2
Meridian Energy limited (Meridian) is a State-owned Enterprise that is an electricity generator and retailer. Meridian pays Transpower primarily for the transportation of electricity along the national electricity grid. The Electricity Authority (EA) is an independent Crown entity responsible for regulating the New zealand electricity market. The EA pays Transpower for its role as system operator of the national electricity grid. Transpower also settles its income and indirect tax obligations with the Inland Revenue Department. Some directors of the company may be directors or officers of other companies or organisations with which Transpower may transact. Such transactions are carried out on an arms length and independent commercial basis.
insurance
RRl insures certain grid assets of the Group. RRl is a wholly owned subsidiary of the Parent and is incorporated in the Cayman Islands. RRl reinsures to parties external to the Group to reduce some of its risk. Refer to Note 19 (d) (iv) for more discussion on insurance.
Premiums
In 2011, the Parent paid $10.3 million to RRl in insurance premiums (2011: $9.2 million). In 2012, RRl reinsured some of the risk, paying premiums of $3.8 million, of which $0.6 million is prepaid at june 2012.
Current claims
At june 2012 there is an unpaid claims liability of $8.3 million (2011: $4.8 million) relating to events during 2010 and 2012. The payment of these claims, if successful, will be made by RRl and is not claimable from the reinsurers external to the Group. There are sufficient liquid assets in RRl to pay these claims. These claims are expected to be paid within the next year. The change in the claims liability from 2011 to 2012 relates to a reduction of $1.5 million for a 2008 claim that was withdrawn during the year, and a new claim arose during the year for $5.0 million.
28. sigNificANT JUdgEMENTs/EsTiMATEs
Regulation and the NigU project

The NIGU project is forecast to exceed its initial approved amount by approximately $70 million. The board have made the judgement that no impairment is required in the 2012 financial statements. Note 25 Contingencies contains further details on this item.
80

28. sigNificANT JUdgEMENTs/EsTiMATEs continued
valuation of property
A valuation and subsequent impairment of $3.9 million was made on Transpowers property assets. The impairment was based on a desktop valuation by Crighton Anderson, registered valuers. Some of these properties relate to those on the North Island Grid Upgrade (NIGU) route between Whakamaru and South Auckland purchased for the purposes of establishing easements and then on-selling. Some of these properties are classified as held for sale based on Transpowers judgement that they expect a sale within 12 months. Refer to Note 15 Non current assets for more information.
dismantling provision
An estimate and assumption made regarding future events was in relation to a dismantling provision. This provision has a balance at 30 june 2012 of $10.8 million (30 june 2011: $13.6 million). The nature and uncertainty of this provision is discussed in Note 17 Provisions.
fair values of debt, derivatives and deposits

A key estimate is in relation to the fair values of debt, derivatives and deposits. Fair values are determined upon discounting cash flows based upon the relevant yield curve. The yield curve is adjusted to reflect the credit spread of the counterparty to the transaction. These valuations are considered level two in the Nz IFRS three level valuation hierarchy.
Non current assets

Transpower has exercised judgement, with assistance from independent engineers, in determining the useful life of property, plant and equipment and finite life intangible assets.
29. ALTERNATE PROfiT MEAsURE
Transpower discloses an alternate measure of profit which is earnings before net changes in fair values of financial instruments. Transpower discloses this information as it provides a different measure of underlying performance to the IFRS mandated profit measures, which are also disclosed. The directors consider that this additional profit measure is useful additional information for users of the financial statements. Changes in financial instruments values are driven by external interest rate movements and changes in Transpowers creditworthiness. Transpower is not in the business of trading financial instruments and generally holds the financial instruments until maturity. The fair value movements are non-cash in nature. Transpower has consistently reported an alternate profit on this basis since the adoption of IFRS.
30. sUBsEqUENT EvENTs
The directors approved the payment of a year end dividend on 16 August 2012 of $205 million. The dividend will be fully imputed. The directors are not aware of any other matter or circumstance since the end of the financial year that has significantly or may significantly affect the operations of Transpower or the Group.
81
Independent Auditors Report
To the Readers of Transpower New Zealand Limited and Groups Financial Statements for the year ended 30 June 2012 The Auditor-General is the auditor of Transpower New zealand limited (the company) and group. The Auditor-General has appointed me, Marcus Henry, using the staff and resources of Ernst & young, to carry out the audit of the financial statements of the company and group, on her behalf. We have audited the financial statements of the company and group on pages 28 to 81, that comprise the balance sheet as at 30 june 2012, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date and the notes to the financial statements that include accounting policies and other explanatory information.
Opinion financial statements

In our opinion the financial statements of the company and group on pages 28 to 81:

comply with generally accepted accounting practice in New zealand; comply with International Financial Reporting Standards; and give a true and fair view of the company and groups:

financial position as at 30 june 2012; and financial performance and cash flows for the year ended on that date.
Other legal requirements

In accordance with the Financial Reporting Act 1993 we report that, in our opinion, proper accounting records have been kept by the company and group as far as appears from an examination of those records. our audit was completed on 16 August 2012. This is the date at which our opinion is expressed. The basis of our opinion is explained below. In addition, we outline the responsibilities of the board of Directors and our responsibilities, and explain our independence.
Basis of opinion
We carried out our audit in accordance with the Auditor-Generals Auditing Standards which incorporate the International Standards on Auditing (New zealand). Those standards require that we comply with ethical requirements and plan and carry out our audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. Material misstatements are differences or omissions of amounts and disclosures that would affect a readers overall understanding of the financial statements. If we had found material misstatements that were not corrected, we would have referred to them in our opinion. An audit involves carrying out procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgement, including our assessment of risks of material misstatement of the financial statements whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the preparation of the company and groups financial statements that give a true and fair view of the matters to which they relate. We consider internal control in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the company and groups internal control.
82
Independent Auditors Report continued
An audit also involves evaluating:

the appropriateness of accounting policies used and whether they have been consistently applied; the reasonableness of the significant accounting estimates and judgements made by the board of Directors; the adequacy of all disclosures in the financial statements; and the overall presentation of the financial statements.
We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements. In accordance with the Financial Reporting Act 1993, we report that we have obtained all the information and explanations we have required. We believe we have obtained sufficient and appropriate audit evidence to provide a basis for our audit opinion.
Responsibilities of the Board of directors

The board of Directors is responsible for preparing financial statements that:

comply with generally accepted accounting practice in New zealand; and give a true and fair view of the company and groups financial position, financial performance and cash flows.
The board of Directors is also responsible for such internal control as it determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The board of Directors responsibilities arise from the State-owned Enterprises Act 1986 and the Financial Reporting Act 1993.
Responsibilities of the Auditor

We are responsible for expressing an independent opinion on the financial statements and reporting that opinion to you based on our audit. our responsibility arises from section 15 of the Public Audit Act 2001 and section 19(1) of the State-owned Enterprises Act 1986.
independence
When carrying out the audit we followed the independence requirements of the Auditor-General, which incorporate the independence requirements of the New zealand Institute of Chartered Accountants. In addition to the audit we have carried out assignments in the area of other assurance services, which are compatible with those independence requirements. other than the audit and these assignments, we have no relationship with or interests in the company or any of its subsidiaries.
Marcus henry Ernst & young on behalf of the Auditor-General Wellington, New zealand
83
// diREcTORy TRANSPoWER NEW zEAlAND lIMITED
BOARd Of diREcTORs
chAiRMAN MARk VERbIEST dEPUTy chAiRMAN IAN FRASER diREcTORs Abby FooTE DoN HUSE MAURy lEylAND MIkE PoHIo AlASTAIR SCoTT (APPoINTED jUly 2011) kEITH TEMPEST
gENERAL MANAgEMENT TEAM
AddREss Of OfficEs
chiEf ExEcUTivE PATRICk STRANGE gENERAL MANAgER PEOPLE ANd cORPORATE RELATiONs CyNTHIA bRoPHy gENERAL MANAgER gRid PROJEcTs MIkE CARTER chiEf fiNANciAL OfficER HoWARD CATTERMolE gENERAL MANAgER gRid dEvELOPMENT joHN ClARkE gENERAL MANAgER sysTEM OPERATiONs kIERAN DEVINE gENERAL MANAgER gRid PERfORMANcE GARTH DIblEy gENERAL cOUNsEL ANd cOMPANy sEcRETARy DAVID kNIGHT chiEf ENgiNEER bob SIMPSoN gENERAL MANAgER iNfORMATiON sERvicEs ANd TEchNOLOgy jIM ToCHER
wELLiNgTON TRANSPoWER HoUSE, 96 THE TERRACE Po boX 1021, WEllINGToN 6140 TElEPHoNE 64 4 495 7000 FACSIMIlE 64 4 495 7100 AUckLANd lEVEl 5, bUIlDING 2 CENTRAl PARk CoRPoRATE CENTRE 666 GREAT SoUTH RoAD Po boX 17-215, GREENlANE, AUCklAND 1546 TElEPHoNE 64 9 589 2300 FACSIMIlE 64 9 589 2310 PALMERsTON NORTh lEVEl 5, IRD bUIlDING CoRNER ASHlEy STREET AND FERGUSoN STREET Po boX 640, PAlMERSToN NoRTH 4440 TElEPHoNE 64 6 357 0919 FACSIMIlE 64 6 357 0917 chRisTchURch lEVEl 3, 6 SHoW PlACE ADDINGToN Po boX 21-154, EDGEWARE, CHRISTCHURCH 8143 TElEPHoNE 64 3 339 9800 FACSIMIlE 64 3 338 1290
84
www.transpower.co.nz
ThE NATiONAL gRid

Transpower Annual Report 2011-2012

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Transpower Annual Report 2011-2012

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ANNUAL REPORT 2011/12

fORwARd ThiNkiNg + iNNOvATiON

// OUR yEAR A sNAPshOT

Thinking differently, working smarter.

NEw zEALANd cONNEcTEd

Using technology to reduce emissions.

Recycle and reuse.

12. 16. 18. 20. 27.

// CHAIRMANs AND CHIEF EXECUTIVEs REVIEW

sTRENgTh iN ThE fUTURE gRid

// CHAIRMANs AND CHIEF EXECUTIVEs REVIEW

// CHAIRMANs AND CHIEF EXECUTIVEs REVIEW

// CHAIRMANs AND CHIEF EXECUTIVEs REVIEW

// CHAIRMANs AND CHIEF EXECUTIVEs REVIEW

MARk vERBiEsT CHAIRMAN

PATRick sTRANgE CHIEF EXECUTIVE

// sTATEMENT Of cORPORATE iNTENT PERfORMANcE TARgETs

AcTUAL 30 JUNE 2012

TARgET 30 JUNE 2012 98.5

NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 0.05 SySTEM MINUTES

NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 1 SySTEM MINUTE

fiNANciAL PERfORMANcE iNdicATORs EbITDAIF* MARGIN (%)

TARgET 30 JUNE 2012 63.2

63.0 2.9 7.5 9.9 1.83 2

FREE FUNDS FRoM oPERATIoNS INTEREST CoVERAGE (TIMES)

RETURN oN CAPITAl EMPloyED (%)

RETURN oN EqUITy (%)

AVERAGE ToTAl TRANSMISSIoN CoSTS (c/kWh)

ESTIMATED ECoNoMIC VAlUE ADDED ($MIllIoN)

AcTUAL 30 JUNE 2012

TARgET 30 JUNE 2012 <4

NUMbER oF FATAlITIES oR INjURIES CAUSING PERMANENT DISAbIlITy

NUMbER oF MEDICAl TREATMENT INjURIES

TARgET 30 JUNE 2013

NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 0.05 SySTEM MINUTES

NUMbER oF loSS oF SUPPly EVENTS GREATER THAN 1 SySTEM MINUTE

fiNANciAL PERfORMANcE iNdicATORs EbITDAIF* MARGIN (%)

66.3 2.8 7.6 11.3 2.10 31

FREE FUNDS FRoM oPERATIoNS INTEREST CoVERAGE (TIMES)

RETURN oN CAPITAl EMPloyED (%)

RETURN oN EqUITy (%)

AVERAGE ToTAl TRANSMISSIoN CoSTS (c/kWh)

ESTIMATED ECoNoMIC VAlUE ADDED ($MIllIoN)

TARgET 30 JUNE 2013

NUMbER oF FATAlITIES oR INjURIES CAUSING PERMANENT DISAbIlITy

NUMbER oF MEDICAl TREATMENT INjURIES

(ADjUSTED FoR FoRECAST 2012/13 MAN HoURS)

5%, 2011/12 REsULT

// sENiOR MANAgEMENT TEAM

PATRick sTRANgE CHIEF ExECUTIVE

hOwARd cATTERMOLE CHIEF FINANCIAL OFFICER

cyNThiA BROPhy GENERAL MANAGER PEOPLE AND CORPORATE RELATIONS

MikE cARTER GENERAL MANAGER GRID PROJECTS

gARTh diBLEy GENERAL MANAGER GRID PERFORMANCE

dAvid kNighT GENERAL COUNSEL AND COMPANY SECRETARY

JOhN cLARkE GENERAL MANAGER GRID DEVELOPMENT

kiERAN dEviNE GENERAL MANAGER SYSTEM OPERATIONS

JiM TOchER GENERAL MANAGER INFORMATION SERVICES AND TECHNOLOGY

BOB siMPsON CHIEF ENGINEER

iAN fRAsER DEPUTY CHAIRMAN

// diREcTORs REPORT TO shAREhOLdERs

MARk vERBiEsT CHAIRMAN

diREcTORs REPORT TO ThE shAREhOLdERs

TRANSPOWER NEW ZEALAND LIMITED

Director Director Director Director Trustee Trustee **