4 DECEMBER 2009 NEW ZEALAND GAZETTE, No. 179 4363

Note to and Following Part of the Financial Statements
For the year ended 30 June 2009

GAS DIVISION

5 Fixed to rate swaps
To swap fixed rated New Zealand dollar debt converted to floating back to fixed debt.
The swaps are used to match the interest rate profile in accordance with the Board strategy and is on mis-matched terms. Hedge accounting is not applied to these swaps.

6 Interest rate swaps
To convert New Zealand dollar floating debt from type 2 above to New Zealand dollar fixed debt. The swap is used to modify the debt profile in accordance with the Board strategy and is on matched terms. Hedge accounting is not applied to these swaps.

7 Historical interest rate swaps
Interest rate swaps entered into swaps which existed when the hedging policy was changed.
These are no effect previous interest rate swaps and match the terms of those including:
the termination date and rolls. Hedge accounting is not applied to these swaps.

8 Interest rate swaps
Historical floating to fixed swaps which are offset by 7 above on matched tenors and roll dates. Hedge accounting is not applied to these swaps.

9 Interest rate swaps
To unwind portions of cash flow hedges. These hedges offset portions of swaps shown in types 3, 4 and 5 above and are not hedge accounted.

10 Interest rate options
Options created in favour of a third party requiring Powerco to enter fixed pay swaps if exercised. These have been entered in conjunction with interest rate swaps in type 5 above.

11 Fixed-for-floating collars
Interest rate collars used to limit exposure to floating rates on New Zealand fixed debt swapped to floating from type 1 above.

All cash flow hedges above are on matched terms. The Dividend policy is to re-borrow any fixed rate debt, thus giving a (virtually) floating profile, then re-hedge as per the parameters in the Treasury policy. This has had the effect that some fixed rate hedges are applied against floating rate hedges. In line with NZ IAS 39 these are not able to be designated as hedges for accounting purposes and thus movements in the market to marked value of these is passed through to the Income Statement through the use of derivatives.

The Discount New Zealand dollar and foreign currency fixed rate debt is converted to floating through the use of derivatives, with these usually matching the terms and nominal value of fixed debt. At the point of issue the nominal value of the bonds was equivalent to the fair value, and the fair value of the derivative was zero. The working is marked to the changes in market value of the derivative. The valuation method takes into account the interest rate curve and foreign exchange rates by calculating the discounted future cash flows on derivatives as at the reporting date. The method assumes a constant credit rating of all parties to the contract.

This valuation method takes into account the interest rate curve and foreign exchange rates by calculating the discounted future cash flows on derivatives as at the reporting date. The method assumes a constant credit rating of all parties in the foreign exchange.

Powerco bonds are able to be traded on the NZDX and an active secondary market exists. This valuation method assumes a constant credit rating.

The fair value of financial instruments is disclosed in the financial statements as follows:

b) Currency swaps

Under currency swap contracts, the Dividend agrees to exchange specified principal and interest payments in currency amounts at an agreed future date at a specified exchange rate (fixed for floating). Such contracts enable the Group to mitigate the risk of adverse movements in foreign exchange rates.
The following table details the currency swaps outstanding as at reporting date.