Meridian Annual Report - Meridian Energy

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Meridian Energy Limited — Notes to the Financial Statements (continued)
21. Deferred Tax Liability (continued)
Certain deferred tax assets and liabilities have been offset in accordance with the Group’s accounting policy. The following is the analysis of the deferred
tax balances (after offset) for balance sheet purposes:
Group
Parent
2008
$’000
2007
$’000
2008
$’000
2007
$’000
Deferred Tax Liability 1,329,478 1,331,772 1,312,807 1,325,131
Deferred Tax Asset (1,122) (37) - -
1,328,356 1,331,735 1,312,807 1,325,131
22. Financial Risk Management
Meridian’s activities expose it to a variety of financial risks: market risk (including electricity and other price risk, currency risk, interest rate risk, cash
flow risk) credit risk, and liquidity risk. Meridian’s overall risk management programme focuses on the unpredictability of financial markets and the
electricity spot price and seeks to minimise potential adverse effects on the financial performance and economic value of the Group. Meridian uses
derivative financial instruments such as foreign exchange contracts and options ‘FEC’, cross currency interest rate swaps ‘CCIRS’, interest rate swaps
‘IRS’ including forward rate agreements and interest rate options, and electricity contracts for differences ‘CfD’s’ to hedge certain risk exposures.
Meridian uses sensitivity analysis to measure the amount of risk it is exposed to for price risk, foreign exchange risk and interest rate risk and aging
analysis for credit risk.
Risk management for interest rate risk and currency risk is carried out by the Group Treasury department under policies approved by the Board.
Electricity price risk management is carried out by a centralised electricity risk management group. These groups identify, evaluate and economically
hedge financial risks in close co-operation with the Group’s operating units. Hedges are undertaken on an economic basis based on net exposures and
cash flows. The Board provides written principles for overall risk management, as well as policies covering specific areas such as electricity price risk,
interest rate risk, foreign exchange risk, and credit risk.
a) Market Risk
i) Foreign Exchange Risk
Meridian borrows in foreign currencies and is exposed to foreign exchange risks, primarily in respect of the U.S. and Australian dollar. In addition,
the Group incurs capital and operating expenditure denominated in foreign currencies which exposes the Group to foreign exchange risk primarily in
respect of U.S. dollars, Japanese yen, Australian dollars and the Euro. Meridian does not enter into foreign exchange contracts for speculative purposes.
In respect of overseas borrowings, the Group’s policy is to hedge 100% of the foreign currency exposure of both interest and principal repayments.
This is achieved through CCIRS which swap all foreign currency denominated interest and principal repayments with New Zealand denominated
payments over the life of the borrowings. The combination of the foreign denominated debt and the CCIRS result in a Group exposure to New Zealand
floating interest rates and a fixed New Zealand denominated principal repayment. The New Zealand floating interest rate risk is managed as part of the
New Zealand interest rate risk as described in the following section.
Meridian establishes a combination of both cash flow and fair value hedges for the CCIRS and the foreign denominated borrowings (refer to
Note 23 – Derivative Financial Instruments). The aggregate notional principal amounts of the outstanding CCIRS at 30 June 2008 was $704.649 million
(30 June 2007: $704.649 million).
In respect of foreign exchange exposures on capital and operating expenditures denominated in foreign currencies, Meridian hedges the foreign
exchange risk through a combination of foreign exchange forward contracts and options “FEC”. Capital projects which are approved by the Board
are hedged 100% whilst capital projects which are anticipated but not approved are hedged up to 50 % based on treasury limits. All committed
foreign currency exposures of greater than $100,000NZD equivalent are hedged. The aggregate notional principal amounts of the outstanding FEC
at 30 June 2008 was $269.757 million (30 June 2007: $579.247 million).
In cases where the capital expenditure qualifies as a highly probable transaction, Meridian establishes a combination of both cash flow and fair value
hedges. To the extent these hedges are effective, gains and losses on the derivatives are included as a component of the cost of the capital expenditure.
In instances where the forecast capital expenditure does not meet the highly probable requirements, hedge accounting is not sought and the
derivatives are classified as held for trading (refer to Note 23 – Derivative Financial Instruments).
The value of foreign currency derivatives is sensitive to changes in the forward prices for currencies. The table below summarises the impact of a
10% increase/decrease in the New Zealand dollar against the forward price of the U.S. dollar, Australian dollar, Japanese yen and Euro, as at
30 June, on the Group’s profit and equity on the assumption that all other variables are held constant.