NEW ZEALAND GAZETTE, No. 165

3 DECEMBER 2010

Notes to and Forming Part of the Financial statements
For the year ended 30 June 2010

GAS DIVISION

6. Interest rate swaps
   To swap back fixed 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 matched terms. Hedge accounting is not applied to these swaps.

7. 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 #70/16 on matched terms. Hedge accounting is not applied to these swaps.

8. General rate swaps
   To interest fixings in fixed swaps which existed when the hedging policy was changed. These are to offset crevassing interest rate swaps and match the terms of those including termination costs and roll. Hedge accounting is not applied to these swaps.

9. Interest rate swaps
   Historical floating to fixed swaps which are of a term by 7 above on matched term and roll basis. Hedge accounting is not applied to these swaps.

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

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

At each review, hedges above are on matched terms. The Division's policy is to re-finance by fixed rate debt more often, this is giving a fairly floating portfolio; 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 mark-to-market value of these are passed through to the profit & loss although they are represented on matched terms.

The Division’s new Zealand dollar and foreign currency hedging ratio goal is converted to floating New Zealand dollar debt through the use of derivatives, with these exactly matching the term and nominal value of the 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 marking to market of the derivatives inflows for the change, due to movements in interest rates or currency rates. 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.

Powerco bonds are able to be traded on line NZDX and are active secondary market maints.

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

b) Currency swaps

Under currency swap contracts, the Division agrees to exchange specified principal and interest in foreign currency amounts at an agreed future date at a specified exchange rate fixed for that date. Such contracts enable the Division to mitigate the risk of adverse movements in foreign exchange rates.

The following table details the currency swaps outstanding as at reporting date:

Outstanding contracts as at 30 June 2010

Outstanding contracts as at 30 June 2009