29 FEBRUARY 2012

NEW ZEALAND GAZETTE, No. 25

715

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

GAS DIVISION

(f) Financial Instruments

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

1. Market risk;
2. Credit risk; and
3. Liquidity risk.

The Division’s risk programme recognises 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 the 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 and the purchase of capital equipment in foreign currencies. This exposes the Division to potential gains and losses arising from currency movements. The Division policy relating to US dollar denominated debt is to eliminate 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 risk is the risk that interest rates will change, increasing or decreasing the cost of borrowing or lending. The Division’s short-term borrowings are on a floating interest rate basis.

Powerco has entered into interest rate swap agreements to reduce the impact of the changes in interest rates on its borrowings. As at 30 June 2011, Powerco had interest rate swap agreements with registered banks. The weighted average of the interest rate swap agreements (excluding the reverse swap agreements) produce an interest rate of 6.83% p.a. Powerco’s Treasury Policy specifies parameters regarding the 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. These accounts 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 only monitored on a regular basis. Cash deposits are 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. This risk is managed by maintaining sufficient cash and cash equivalents together 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 for short term requirements and further stipulations regarding the timing of refinancing of upcoming debt maturities. Liquidity levels are forecast 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 borrowings on 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 analyses

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. 100 basis points (BP) is Powerco’s and the industry 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 includes 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 overdraft facility with Westpac Banking Corporation. At 30 June 2011 Powerco had not drawn down on the facility. The overdraft interest rate of this facility at then date was 8.45% (2010: 8.75%).

8 EMPLOYEE ENTITLEMENTS

The provision for employee entitlements relates to employee benefits such as accrued wages, bonuses, accrued holiday pay and long service leave. The provision is attached by a number of estimates, including the expected employment period of employees and the timing of employees utilising the benefits. The majority of the provision is expected to be realised within the next two years.