Annual report financial statements - Meridian Energy

Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2011
24. Financial Risk Management (continued)
GROUP 2011
$’000
GROUP 2010
$’000
Borrowings - NZD Equivalent Net of Foreign Exchange Hedging 1,613,947 1,543,962
Less: Cash and Cash Equivalents 368,191 54,394
Net Debt 1,245,756 1,489,568
Equity Attributable to Shareholders of the Parent 4,930,404 5,068,979
Adjust for Net Change in Fair Value of Certain Financial Instruments 277,383 85,942
Adjusted Shareholders’ Equity 5,207,787 5,154,921
Total Capital 6,453,543 6,644,489
Meridian’s debt facilities have financial covenants that relate to the Group. The two key financial covenants are as follows:
GROUP 2011 GROUP 2010
Debt to Debt Plus Equity (Gearing) 2.5 times 5.90 6.71
Meridian debt facilities have externally imposed capital requirements that relate to the Guaranteeing Group.
Refer to Note 15 for members of the Guaranteeing Group.
The Guaranteeing Group is in compliance with all debt facility covenants.
During the year all capital requirements relating to Meridian’s debt facilities have been complied with and a BBB+ (stable)
credit rating retained.
1 The Debt to Debt Plus Equity ratio is calculated using Total Capital and Net Debt as shown in the table above
b) Financial Risk Management
Meridian’s activities expose it to a variety
of financial risks: liquidity risk, market risk
(including electricity and other price risk,
currency risk, interest rate risk, cash flow
risk) and credit 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 to hedge certain
risk exposures such as: foreign exchange
contracts and options (‘FECs’); cross
currency interest rate swaps (‘CCIRSs’);
interest rate swaps (‘IRSs’) including
forward rate agreements; and electricity
and aluminium contracts for differences
(‘CFDs’) 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;
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 function under policies
approved by the Board. Electricity price
risk management is carried out by a
centralised electricity risk management
group, also under Board approved polices.
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.
c) Liquidity Risk
Meridian maintains sufficient cash and
marketable securities, the availability
of funding through an adequate amount
of committed credit facilities and the
ability to close out market positions as
part of its management of liquidity risk.
Due to the dynamic nature of the
underlying businesses, Group Treasury
maintains flexibility in funding by keeping
committed surplus credit lines available
of at least $250 million to ensure it has
sufficient headroom under normal and
abnormal conditions.
42 MERIDIAN ENERGY LIMITED