Welcome to Trustpower. The browser that you are currently using is not supported by this site. For best results please upgrade your browser.
Retrieving Data

Note 37

For The Year Ended 31 March 2012

FINANCIAL RISK MANAGEMENT

Financial Risk Management Objectives

TrustPower’s activities expose it to a variety of financial risks: electricity price risk, interest rate risk, exchange rate risk, liquidity risk and credit risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out under policies approved by the Board.

(a) Electricity Price Risk

The Group typically sells more electricity at fixed prices than it generates. As a result the Group is required to purchase a percentage of its electricity sold off the electricity spot market. This leaves the Group exposed to fluctuations in the spot price of electricity where it sells electricity at a fixed price. The Group operates under an energy trading policy which limits the exposure the Group may have in any future period. Future exposure is estimated based on expected fixed price sales and generation output. The Group has entered into a number of electricity hedge contracts to reduce the commodity price risk from price fluctuations on the electricity spot market. These hedge contracts establish the price at which future specified quantities of electricity are purchased. Any resulting differential to be paid or received is recognised as a component of energy costs through the term of the contract. The Group has elected to apply cash flow hedge accounting to those instruments it deems material and which qualify as cash flow hedges while immaterial contracts are not hedge accounted.

The aggregate notional volume of the outstanding electricity derivatives at 31 March 2012 was 639 GWh (31 March 2011: 900 GWh).

The hedged anticipated electricity purchase transactions are expected to occur continuously throughout the next five years from the end of the reporting period consistent with the Group’s forecast electricity generation and retail electricity sales. Gains and losses recognised in the cash flow hedge reserve on electricity derivatives as of 31 March 2012 will be continuously released to the income statement in each period in which the underlying purchase transactions are recognised in the income statement.

Sensitivity analysis

The following tables summarise the impact of increases/decreases of the relevant forward electricity prices on the Group’s post-tax profit for the year and on other components of equity. The sensitivity analysis is based on the assumption that the relevant forward electricity prices had increased/decreased with all other variables held constant as a result of the fair value change in electricity price derivatives.

 

GROUP PARENT
2012 2011 2012 2011
    $000 $000 $000 $000
Increase/(decrease) to profit of a 10% increase in electricity forward price (3,706) (609) (3,706) (609)
Increase/(decrease) to profit of a 10% decrease in electricity forward price 3,706 609 3,706 609
Increase/(decrease) to equity of a 10% increase in electricity forward price 5,062 5,369 5,062 5,369
Increase/(decrease) to equity of a 10% decrease in electricity forward price (5,062) (5,369) (5,062) (5,369)
         

(b) Interest Rate Risk

The Group’s bank borrowings are all on floating interest rates exposing it to the risk that rising interest rates will increase the Group’s interest expense and, hence, reduce its profitability. The Group operates under a treasury policy which prescribes the proportion of fixed interest rate cover the Group must hold in relation to its future borrowings. This proportion is calculated based on the actual fixed rate cover held and the forecast debt levels of the Group. The Group has various interest rate financial instruments to manage exposure to fluctuations in interest rates. Any resulting differential to be paid or received on the instruments is recognised as a component of interest paid. The Group has elected to hedge account only a limited number of these instruments.

The aggregate notional principal amounts of the outstanding interest rate derivative instruments at 31 March 2012 was $489,459,000 (31 March 2011: $440,415,000).

Interest payment transactions are expected to occur at various dates between one month and nine years from the end of the reporting period consistent with the Group’s forecast total borrowings.

Effective interest rates for the Parent and the Group are disclosed in note 25.

Sensitivity analysis

At 31 March 2012, if interest rates at that date had been 100 basis points higher/lower with all other variables held constant, post-tax profit for the year and other components of equity would have been adjusted by the amounts in the table below, as a result of the fair value change in interest rate derivative instruments.

 
GROUP PARENT
2012 2011 2012 2011
    $000 $000 $000 $000
Increase/(decrease) to profit of a 100 basis point decrease in interest rates (10,752) (8,994) (6,587) (3,774)
Increase/(decrease) to profit of a 100 basis point increase in interest rates 10,336 8,713 6,195 3,647
Increase/(decrease) to equity of a 100 basis point decrease in interest rates (11,235) (9,601) (7,070) (4,381)
Increase/(decrease) to equity of a 100 basis point increase in interest rates 10,800 9,361 6,659 4,295
         

(c) Exchange Rate Risk

During the course of business the Group may enter into contracts for the construction of generation assets and the sale of carbon credits to be settled in a foreign currency in the future. This exposes the Group to movements in foreign exchange rates. The Group operates under a treasury policy which requires all foreign currency transactions over certain limits to be 100% hedged. Compliance with this policy is measured by forecasting future foreign currency transactions and ensuring that the exchange rate has been fixed. The Group enters into forward exchange contracts to reduce the risk from price fluctuations of foreign currency costs associated with the construction of property, plant and equipment or income associated with the sale of carbon credits. Any resulting differential to be paid or received is recognised as a component of the cost of the project for the construction of generation assets and as a part of revenue for the sale of carbon credits. The Group has elected to apply cash flow hedge accounting to these instruments.

The aggregate notional principal amounts of the outstanding forward foreign exchange contracts at 31 March 2012 was $11,076,000 (31 March 2011: $20,689,000).

The hedged anticipated transactions denominated in foreign currency are expected to occur at various dates between one month and 2 years from the end of the reporting period. Gains and losses recognised in the cash flow hedge reserve in equity on forward foreign exchange contracts as at 31 March 2012 will be recycled to revenue from the sale of carbon credits when the credits are sold.

Sensitivity analysis

At 31 March 2012, if the New Zealand dollar had weakened/strengthened by 10 per cent against the currencies with which the Group has foreign currency risk with all other variables held constant, post-tax profit for the year would not have been materially different.

Other components of equity would have been $(768,000)/$768,000 (lower)/higher (31 March 2011: $(1,387,000)/$1,458,000 (lower)/higher), arising from foreign exchange gains/losses on revaluation of foreign exchange contracts in a cash flow hedge relationship.

(d) Credit Risk

The Group has no significant concentrations of credit risk (2011: none). It has policies in place to ensure that sales are made to customers with an appropriate credit history. Where a potential customer does not have a suitable credit history a bond is required before the customer is accepted. Derivative counterparties and cash transactions are limited to high credit quality financial institutions with a minimum Standard & Poor’s long-term credit rating of A+ and other large electricity market participants (all have a Standard & Poor’s long-term credit rating of at least BBB). Where a potential counterparty does not meet these credit criteria the maximum level of credit exposure is set individually by the Board. The Group has policies that limit the amount of credit exposure to any counterparty.

The carrying amounts of financial assets recognised in the statement of financial position best represents the Group’s maximum exposure to credit risk at the reporting date without taking account of the value of any collateral obtained. As shown in note 19, the reported accounts receivable balance includes a provision for doubtful debts of $1,800,000 (2011: $1,800,000).

The Group has around 209,000 customers (2011: 221,000), only four (2011: four) of which make up more than one per cent of the Group’s total accounts receivable balance. The largest of these customers accounts for 4 per cent (2011: 4 per cent) of the Group’s total accounts receivable.

As of 31 March 2012, trade receivables relating to the Group and the Parent of $4,652,000 (2011: $3,859,000) were past due but not impaired.

The ageing analysis of these trade receivables is as follows:

 
GROUP PARENT
2012 2011 2012 2011
    $000 $000 $000 $000
Up to 3 months 4,652 3,589 4,652 3,589
  4,652 3,589 4,652 3,589
         
As of 31 March 2012, trade receivables relating to the Group and the Parent of $1,800,000 (2011: $1,800,000) were past due and impaired. The ageing analysis of these trade receivables is as follows:
         
GROUP PARENT
2012 2011 2012 2011
    $000 $000 $000 $000
Up to 3 months 493 96 493 96
3 to 6 months 455 873 455 873
6 to 12 months 756 453 756 453
Over 12 months 96 378 96 378
  1,800 1,800 1,800 1,800
         

For details of the receivables considered impaired refer to note 2.4.

Movements on the provision for impairment of trade receivables are as follows:

         
GROUP PARENT
2012 2011 2012 2011
  Note $000 $000 $000 $000
Opening balance 1,800 2,000 1,800 2,000
Provision for receivables impairment

7

1,515 1,708 1,515 1,708
Bad debts written off (1,515) (1,908) (1,515) (1,908)
Closing balance

19

1,800 1,800 1,800 1,800
         

(e) Liquidity Risk

The Group’s ability to readily attract cost effective funding is largely driven by its credit standing.

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the spreading of debt maturities. The Group operates under a treasury policy which dictates the level of available committed facility to be maintained to provide cover for reasonably conceivable adverse conditions. This is measured by forecasting debt levels under various adverse scenarios and comparing this to committed facility levels. The treasury policy also requires a spread of debt maturities which is measured by the proportion of debt maturing in various time bands.

The tables below analyse the Group’s and the Parent’s financial liabilities excluding gross settled derivative financial liabilities into relevant maturity Groupings based on the remaining period to the earliest possible contractual maturity date at the period end date. The amounts in the tables are contractual undiscounted cash flows.

         
GROUP Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2012 $000 $000 $000 $000
Net settled electricity price derivatives 463 3,675 2,878 4,319
Net settled interest rate derivatives 347 2,232 2,407 16,288
Accounts payable and accruals 106,160 87 104 4,273
Unsecured subordinated bonds - 119,824 6,472 182,492
Unsecured senior bonds - 8,170 8,170 270,575
Unsecured bank loans - 10,073 5,628 301,172
Financial guarantee contracts 756 - - -
Total 107,726 144,061 25,659 779,119
Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2011 $000 $000 $000 $000
Net settled electricity price derivatives 2,151 7,522 5,802 4,103
Net settled interest rate derivatives 30 979 1,008 6,628
Accounts payable and accruals 82,135 87 104 4,481
Unsecured subordinated bonds - 11,232 11,110 308,788
Unsecured senior bonds - 8,179 8,090 270,228
Unsecured bank loans 35 3,994 - 340,959
Financial guarantee contracts 756 - - -
Total 85,107 31,993 26,114 935,187
PARENT Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2012 $000 $000 $000 $000
Net settled electricity price derivatives 463 3,675 2,878 4,319
Net settled interest rate derivatives 217 975 1,192 10,967
Accounts payable and accruals 98,617 87 104 4,273
Unsecured subordinated bonds - 119,824 6,472 182,492
Unsecured senior bonds - 8,170 8,170 270,575
Unsecured bank loans - 7,786 5,628 125,432
Financial guarantee contracts 756 - - -
Total 100,053 140,517 24,444 598,058
Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2011 $000 $000 $000 $000
Net settled electricity price derivatives 2,151 7,522 5,802 4,103
Net settled interest rate derivatives 30 471 501 5,461
Accounts payable and accruals 81,355 87 104 4,481
Unsecured subordinated bonds - 11,232 11,110 308,788
Unsecured senior bonds - 8,179 8,090 270,228
Unsecured bank loans 35 1,707 - 137,332
Financial guarantee contracts 756 - - -
Total 84,327 29,198 25,607 730,393
 
The tables below analyse the Group’s and the Parent’s derivative financial instruments that will be settled on a gross basis into relevant maturity Groupings based on the remaining period to the contractual maturity date at the period end date. The amounts disclosed in the tables are the contractual undiscounted cash flows.
 
GROUP Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2012 $000 $000 $000 $000
Foreign currency forward contracts
Inflows 3,784 - 3,409 3,882
(Outflows) (2,685) - (2,316) (2,685)
Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2011 $000 $000 $000 $000
Foreign currency forward contracts
Inflows 3,720 2,553 3,340 11,076
(Outflows) (3,063) (2,599) (2,642) (8,768)
         
PARENT Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2012 $000 $000 $000 $000
Foreign currency forward contracts
Inflows 3,784 - 3,409 3,882
(Outflows) (2,685) - (2,316) (2,685)
Less than
1 month
1-6
months
6-12
months
Over
1 year
At 31 March 2011 $000 $000 $000 $000
Foreign currency forward contracts
Inflows 3,720 2,553 3,340 11,076
(Outflows) (3,063) (2,599) (2,642) (8,768)
 

Fair Values

Except for subordinated bonds and senior bonds (see notes 26 and 27), the carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair values.

Estimation of Fair Values

The fair values of financial assets and financial liabilities are determined as follows:

 

  • The fair value of financial assets and liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices.
  • The fair value of other financial assets and liabilities are calculated using discounted cash flow analysis based on market-quoted rates.
  • The fair value of derivative financial instruments are calculated using quoted prices. Where such prices are not available, use is made of discounted cash flow analysis using the applicable yield curve or available forward price data for the duration of the instruments.

Where the fair value of a derivative is calculated as the present value of the estimated future cash flows of the instrument, the two key types of variables used by the valuation techniques are:

 

  • forward price curve (as described below); and
  • discount rates.
 
Valuation Input   Source    
Interest rate forward price curve Published market swap rates
 
Foreign exchange forward prices Published spot foreign exchange rates and interest rate differentials
 
Electricity forward price curve Market quoted prices where available and management’s best estimate based on its view of the long run marginal cost of new generation where no market quoted prices are available.
     
Discount rate for valuing interest rate derivatives   Published market interest rates as applicable to the remaining life of the instrument.
   
Discount rate for valuing forward foreign exchange contracts Published market interest rates as applicable to the remaining life of the instrument.
     
Discount rate for valuing electricity price derivatives   Assumed counterparty cost of funds ranging from 4.0% to 4.3%
 

The selection of variables requires significant judgement and therefore there is a range of reasonably possible assumptions in respect of these variables that could be used in estimating the fair value of these derivatives. Maximum use is made of observable market data when selecting variables and developing assumptions for the valuation techniques. See earlier in this note for sensitivity analysis.

NZ IFRS 7 requires that financial instruments are measured in the statement of financial position at fair value, this requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

 

  • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
  • Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2)
  • Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following tables present the Group’s and Parent’s financial assets and liabilities that are measured at fair value.

 
GROUP
Level 1 Level 2 Level 3 Total
31 March 2012 $000 $000 $000 $000
Assets per the statement of financial position
Interest rate derivative assets - 4,721 - 4,721
Electricity price derivative assets - - 8,357 8,357
Exchange rate derivative assets - 3,190 - 3,190
- 7,911 8,357 16,268
Liabilities per the statement of financial position
Interest rate derivative liabilities - 17,199 - 17,199
Electricity price derivative liabilities - - 4,207 4,207
Exchange rate derivative liabilities - - - -
- 17,199 4,207 21,406
       
Level 1 Level 2 Level 3 Total
31 March 2011 $000 $000 $000 $000
Assets per the statement of financial position
Interest rate derivative assets - 3,635 - 3,635
Electricity price derivative assets - - 1,763 1,763
Exchange rate derivative assets - 3,307 - 3,307
- 6,942 1,763 8,705
Liabilities per the statement of financial position
Interest rate derivative liabilities - 6,297 - 6,297
Electricity price derivative liabilities - - 18,503 18,503
Exchange rate derivative liabilities - - - -
- 6,297 18,503 24,800
PARENT
Level 1 Level 2 Level 3 Total
31 March 2012 $000 $000 $000 $000
Assets per the statement of financial position
Interest rate derivative assets - 4,689 - 4,689
Electricity price derivative assets - - 8,357 8,357
Exchange rate derivative assets - 3,190 - 3,190
- 7,879 8,357 16,236
Liabilities per the statement of financial position
Interest rate derivative liabilities - 10,378 - 10,378
Electricity price derivative liabilities - - 4,207 4,207
Exchange rate derivative liabilities - - - -
- 10,378 4,207 14,585
Level 1 Level 2 Level 3 Total
31 March 2011 $000 $000 $000 $000
Assets per the statement of financial position
Interest rate derivative assets - 3,344 - 3,344
Electricity price derivative assets - - 1,763 1,763
Exchange rate derivative assets - 3,307 - 3,307
- 6,651 1,763 8,414
Liabilities per the statement of financial position
Interest rate derivative liabilities - 4,805 - 4,805
Electricity price derivative liabilities - - 18,503 18,503
Exchange rate derivative liabilities - - - -
- 4,805 18,503 23,308
       
The following tables present the changes during the year of the level 3 instruments.
       
GROUP Electricity
price
derivatives
Total
31 March 2012 $000 $000
Assets per the statement of financial position
Opening balance 1,763 1,763
Gains and (losses) recognised in profit or loss (1,986) (1,986)
Gains and (losses) recognised in other comprehensive income 8,580 8,580
Closing balance 8,357 8,357
Total gains or (losses) for the period included in profit or loss for assets held at the end of the reporting period 4,316 4,316
Liabilities per the statement of financial position
Opening balance 18,503 18,503
(Gains) and losses recognised in profit or loss (22,876) (22,876)
(Gains) and losses recognised in other comprehensive income 8,580 8,580
Closing balance 4,207 4,207
Total (gains) or losses for the period included in profit or loss for liabilities held at the end of the reporting period 6,036 6,036
Settlements during the year 10,110 10,110
       
Electricity
price
derivatives
Total
31 March 2011 $000 $000
Assets per the statement of financial position
Opening balance 18,466 18,466
Gains and (losses) recognised in profit or loss (255) (255)
Gains and (losses) recognised in other comprehensive income (16,448) (16,448)
Closing balance 1,763 1,763
Total gains or (losses) for the period included in profit or loss for assets held at the end of the reporting period 1,483 1,483
Liabilities per the statement of financial position
Opening balance 2,066 2,066
(Gains) and losses recognised in profit or loss 877 877
(Gains) and losses recognised in other comprehensive income 15,560 15,560
Closing balance 18,503 18,503
Total (gains) or losses for the period included in profit or loss for liabilities held at the end of the reporting period 1,938 1,938
Settlements during the year 26,426 26,426
       
PARENT Electricity
price
derivatives
Total
31 March 2012 $000 $000
Assets per the statement of financial position
Opening balance 1,763 1,763
Gains and (losses) recognised in profit or loss (1,986) (1,986)
Gains and (losses) recognised in other comprehensive income 8,580 8,580
Closing balance 8,357 8,357
Total gains or (losses) for the period included in profit or loss for assets held at the end of the reporting period 4,316 4,316
Liabilities per the statement of financial position
Opening balance 18,503 18,503
(Gains) and losses recognised in profit or loss (22,876) (22,876)
(Gains) and losses recognised in other comprehensive income 8,580 8,580
Closing balance 4,207 4,207
Total (gains) or losses for the period included in profit or loss for liabilities held at the end of the reporting period 6,036 6,036
Settlements during the year 10,110 10,110
Electricity
price
derivatives
Total
31 March 2011 $000 $000
Assets per the statement of financial position
Opening balance 18,466 18,466
Gains and (losses) recognised in profit or loss (255) (255)
Gains and (losses) recognised in other comprehensive income (16,448) (16,448)
Closing balance 1,763 1,763
Total gains or (losses) for the period included in profit or loss for assets held at the end of the reporting period 1,483 1,483
Liabilities per the statement of financial position
Opening balance 2,066 2,066
(Gains) and losses recognised in profit or loss 877 877
(Gains) and losses recognised in other comprehensive income 15,560 15,560
Closing balance 18,503 18,503
Total (gains) or losses for the period included in profit or loss for liabilities held at the end of the reporting period 1,938 1,938
Settlements during the year 26,426 26,426
       

Electricity price derivatives are classified as Level 3 because the assumed location factors which are used to adjust the forward price path are unobservable.

A sensitivity analysis showing the effect on the value of the electricity price derivatives of reasonably possible alternative price path assumptions is shown in section (a) of this note.

Capital Risk Management Objectives

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital.

 

  • Net debt is calculated as total borrowings less short term deposits. Total borrowings are calculated using a value of unsecured bank loans plus unsecured subordinated and senior bonds.
  • Total capital funding is calculated as total equity as shown in the statement of financial position, adjusted for the fair value of financial instruments, plus net debt.

The gearing ratio is calculated below:

       
GROUP PARENT
2012 2011 2012 2011
  Note $000 $000 $000 $000
Net debt
Unsecured bank debt 25 308,440 336,327 119,605 132,700
Unsecured subordinated bonds 26 262,277 261,742 262,277 261,742
Unsecured senior bonds 27 212,178 211,518 212,178 211,518
Cash at bank / bank overdraft 18 (20,488) (12,568) (9,695) (1,429)
762,407 797,019 584,365 604,531
Equity
Total equity 1,571,331 1,418,491 1,390,234 1,172,978
Remove net effect of fair value of financial instruments after tax 16 (5,198) 7,872 (5,198) 7,872
1,566,133 1,426,363 1,385,036 1,180,850
Total capital funding 2,328,540 2,223,382 1,969,401 1,785,381
Gearing ratio 33% 36% 30% 34%