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

(f) Financial instruments

Capital Risk Management

The Division manages its levels of debt and equity to ensure an efficient capital structure while maintaining certain internal financial ratios. Powerco’s Treasury Policy specifies a long-term target for ‘net debt’ divided by total capital, this is managed both by reviewing debt levels and altering dividends which influence the balance of equity. Total capital includes the non-current and current assets of line Division which is equivalent to the equity and liabilities of the Division, amounting to NZ$2,393 million (note to the Balance Sheet for ‘further detail’). The Division also complies with financial covenants agreed with lenders as part of financing agreements. These include a capital structure covenant comparing total debt plus equity, and also minimum net worth covenant as calculated by adding equity plus subordinated debt. For the year ended, and at 30 June 2010, all external covenants had been complied with.

Risk Management

The Division engages in business in New Zealand and has currency expenses relating to the US dollars. In the normal course of events the Division is exposed to loss through:

1. Market risk
   • (1) Foreign exchange risk
   • (2) Interest rate risk
   • (3) Liquidity risk

The Division’s risk programme reviews the unpredictability of financial markets and seeks to minimise the potential adverse effects of market movements. The Division uses derivative financial instruments for this purpose, but does not engage in holding instruments for trading or speculation.

Management of this risk is performed in accordance with the policies approved by Powerco’s Board of Directors. These cover both detailed policies and specific areas such as foreign exchange risk, interest rate risk, credit risk, and liquidity risk as well as the use of derivatives and appropriateness of counter parties.

(1) Market risk

(i) Foreign exchange exposures
The Division operates in New Zealand and has foreign exchange exposures arising from US dollar denominated debt. This exposes the Division to potential gains and losses arising from currency movements. The Division policy relating to US dollar denominated debt is to minimise the exchange rate exposure by use of matching hedges taken out at the time the loans were drawn down.

(ii) Interest rate exposures
Interest rate exposures include the interest rates charged on borrowing or lending. The Division short-term borrowings are on a floating daily interest rate basis with registered banks. The Division’s debt is funded by the “head group borrowings” and Powerco’s commercial paper programme is based on 90-day Bank Bills, although no commercial paper is currently on issue.

Powerco has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its borrowings. As at 30 June 2020, Powerco had interest rate swap agreements with the weighted average of the interest rate swap agreements (excluding the reverse swap agreements) produce an interest rate of 6.83% at a Powerco’s Treasury Policy specifies parameters regarding two levels of interest rate hedging which are monitored by the Board on a monthly basis.

(2) Credit risk
Financial instruments with the potential to subject the Division to credit risk principally consist of bank balances and accounts receivable. There are no significant concentrations of credit risk. Those receivables are subject to policies which are used to manage the exposure to credit risk. As part of this policy, limits on exposures have been set and are monitored on a regular basis. Cash deposits are only made with registered banks. The maximum credit risk is the carrying value.

(3) Liquidity risk
Liquidity risk is the risk that the Division may be unable to meet its financial obligations as they fall due. The risk is managed by maintaining sufficient cash and deposit balances with access to committed credit facilities. The Division adheres to a Treasury Policy, approved by the Board of Directors, which specifies certain levels of liquidity which must be maintained to meet short-term requirements and further stipulations regarding the timing of refinancing of upcoming debt obligations. Liquidity levels are forecasted and monitored on a continuous basis.

(g) Foreign currency sensitivity analysis

Powerco’s foreign currency borrowings are 100% hedged against movements in the NZD/USD exchange rate. Any movements in the value of borrowing or the interest payable due to a movement in the exchange rate is offset by an equal and opposite movement in the value and cash flows applicable to the hedge. As such the sensitivity calculation shows no movement in either the profit or loss or the equity in relation to these borrowings.

(h) Interest rate sensitivity analysis

The following table details the Division’s sensitivity to a 100 basis points (BP) increase and decrease in the New Zealand interest rates, with all other variables held constant as at the reporting date. 130 basis points (BP) is Powerco’s and the auditors accepted sensitivity rate used when analysing volatility through interest rate movements and represents management’s assessment of the possible change in interest rates. This analysis excludes cash flows on floating rate debt and interest rate derivatives as well as movements in the interest rate swap curve.

5 Bank Overdraft Facility

Powerco operates a $2 million overall facility with Westpac Banking Corporation. At 30 June 2010, Powerco’s operating bank account was overdrawn to the extent of $0.87 million (2009: $0.49 million). The overdraft interest rate on this facility at that date was 8.75% (2009: 6.75%).

At year end the amount of bank overdraft allocated to the gas division was $0.187 million (2009: $0.319 million). The overdraft interest rate on this facility at that date was 8.75%.

6 EMPLOYEE ENTITLEMENTS

The provision for employee entitlements relates to employee benefits such as accrued wages, bonuses, annual holiday pay, accrued sick leave and long service leave. The provisions are affected by a number of estimates including the expected entitlement portion of employees and the timing of employees utilising the benefits. The majority of this provision is expected to be realised within the next two years.