NEW ZEALAND GAZETTE, No. 132

2 NOVEMBER 2012

Notes to and Forming Part of the Financial Statements
For the year ended 31 March 2012

GAS DIVISION

4 OTHER FINANCIAL ASSETS AND LIABILITIES

The Company enters into New Zealand dollar floating to fixed interest rate swap agreements to reduce the impact of changes in floating interest rates on its borrowings and thus reduce variability in cash flow. Fixed to floating instruments are entered into in order to hedge the changes in fair value of fixed rate New Zealand dollar debt. The Company’s risk diligence crisis cover derivative instruments are hedges against the variations in interest costs and fair value of or to US dollar private placement debt.

Derivative instruments are initially recognised at fair value on the contract date and subsequently measured at their fair value on each balance date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either (i) hedges of highly probable forecast cash flow hedges, or (ii) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges).

The Company documents, at the inception of the hedge transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

(i) Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit or loss component of the Statement of Comprehensive Income. Amounts accumulated in equity are transferred to the profit or loss component of the Statement of Comprehensive Income in the same period in which the hedged item affects the profit or loss.

(ii) Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

(iii) Derivatives that do not qualify for hedge accounting
Certain derivative instruments are undertaken as economic hedges of exposures but the Company chooses not to apply hedge accounting. Changes in the fair value of any derivative instrument that is not hedge accounted is recognised immediately in the profit or loss component of the Statement of Comprehensive Income.

The fair value of financial derivatives and fixed rate debt is determined by independent valuation sources.

The Division holds the following financial instruments:

Interest rate swaps

The Division receives a New Zealand fixed interest rate and pays New Zealand dollar floating interest rates. These qualify for hedge accounting as fair value hedges and are entered into in terms matched to the underlying obligation.

Cross currency interest rate swaps

The Division receives New Zealand fixed interest rate and pays New Zealand dollar floating interest rates. The hedge is a fair value hedge and hedges the movements in currency and interest costs that would affect interest payments and final repayment at maturity. These were entered into at terms to match the underlying obligation.

US cross currency interest rate swaps

The Division receives a US dollar fixed interest rate and pays New Zealand dollar floating interest rates. For hedge accounting purposes this is split into a fair value and a cash flow hedge relationship. The fair value hedge hedges the changes in the fair value of the debt due to movements in US interest rates. The cash flow hedge hedges the changes in the fair value of the debt due to movements in the cross currency swap and credit margins. The cross currency swap hedges interest payments and the final repayment at maturity. These were entered into to conform to match the underlying obligations.

Interest rate swaps

The convert New Zealand dollar floating interest rate exposures to New Zealand dollar fixed debt. The swaps are used to modify the interest rate profile in accordance with the Treasury Policy and are on matched terms. Hedge accounting is not applied to these swaps.