Full Version - Essential Energy

Notes to the Financial Statements
for the year ended 30 June 2005
(b) Credit Risk Credit risk represents the loss that would be recognised if counterparties failed to meet their
financial obligations.
The credit risk of financial assets, excluding investments, of the Corporation which have been recognised on the Statement
of Financial Position is reflected in the carrying amount net of any provision for doubtful debts.
The Corporation minimises concentrations of credit risk by undertaking transactions with a large number of customers and
counterparties in Australia. The Corporation is not materially exposed to any individual customer or counterparty.
Credit risk related to derivative contracts is minimised by ensuring counterparties are approved under the Masters Agreements
of the International Swaps and Derivatives Association Inc (ISDA).
Foreign exchange contracts are subject to credit risk in relation to the relevant counterparties, which are principally large banks.
The maximum credit risk exposure on foreign exchange contracts is the full amount of foreign currency the Corporation pays.
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(c) Net Fair Value of Financial Assets and Liabilities
Financial instruments are carried at net fair value unless stated otherwise. These are disclosed in note 22(a) above.
Other than loan debt which is actively managed under a risk management agreement with NSW Treasury Corporation (TCorp),
financial assets and liabilities are not readily traded on organised markets in standardised form.
All financial instruments are disclosed on the Statement of Financial Position.
(d) Derivative Financial Instruments
The Corporation is exposed to changes in interest rates, foreign exchange rates and commodity prices from its activities. The following
derivative instruments are used to hedge these risks: interest rate futures contracts, forward foreign exchange contracts and futures
commodity price contracts. Derivative financial instruments are not held for speculative purposes.
(i) Electricity Purchases
The Corporation enters into wholesale market contracts to minimise exposure to fluctuations in wholesale market electricity prices.
The Corporation’s policy is to manage its exposure in line with the forecast volumes of committed retail customers.
For its franchise load, the Corporation operates under the Electricity Tariff Equalisation Fund (ETEF), administered by NSW Treasury.
Under the ETEF, the Corporation pays a set price for its electricity purchases and is not exposed to pool price variation.
For its contestable load, the Corporation’s policy is to actively manage the exposure arising from its forecast contestable load. In doing
so, the Corporation has entered various hedging contracts (bought and sold swaps and options) with individual market participants.
Any unhedged position exposes the Corporation to pool price variation. The Corporation’s policy is that the exposure and the consequent
contract price risk are managed within Board approved limits.
As these contracts can be settled other than by physical delivery of the underlying commodity, they are classified as financial
instruments in accordance with Australian Accounting Standard AAS33 “Presentation and Disclosure of Financial Instruments”.
In entering into these contracts for the purposes of managing the risks associated with retail sales, the gains and costs of entering
these contracts and any realised or unrealised gains and losses are deferred until the underlying sales occur. On settlement, the
contracted price is compared to the spot price on that date and the price differential is applied to the contracted quantity. A net amount
is paid or received by the entity.
The following table details the terms and values of the Corporation’s outstanding electricity hedging contracts at the reporting date.
Contracts
Net Fair
Value
Net Fair
Value
Face
Value
Face
Value
2005 2004 2005 2004
$’000 $’000 $’000 $’000
1 year or less 213,673 273,015 198,058 259,552
1 to 5 years 178,653 269,805 159,633 251,744
More than 5 years 289 13,169 181 10,993
392,615 555,989 357,872 522,289
At balance date, the Corporation’s electricity hedging contracts generated a net unrecognised gain of $34.74 million (gain of $33.70
million in 2004). As these contracts are held for the purpose of hedging contracted mass-market customer sales and contracted
commercial and industrial customer load, no ultimate net gain is expected upon realisation. The net unrecognised gain is calculated
in accordance with prices sourced from the Australian Financial Markets Association (AFMA). The AFMA market price estimates are
based on prices usually quoted for small volume contracts and are therefore not necessarily representative of independent market
price valuations for the larger volume contracts entered into by the Corporation, for which there are no readily available market price
valuations.
COUNTRY ENERGY ANNUAL REPORT 2004–2005