ar11-lr-final

Notes to and forming part of the Financial Statements – continued
For the 52 WEEK period ended 31 July 2011
Notes to and forming part of the Financial Statements – continued
For the 52 WEEK period ended 31 July 2011
4. Financial Risk Management (CONTINUED) 4. Financial Risk Management (CONTINUED)
(b) Market risk
(i) Interest rate risk
The Group’s exposure to market interest rates primarily relates to the Group’s core borrowings. The Group’s treasury policy is to
manage its finance costs using a mix of fixed and floating rate debt. The Group’s policy is to maintain between 50% to 90% of core
borrowings (repricing after twelve months) at fixed rates. At balance date 87% (2010: 86%) of the Group’s core borrowings were at
fixed interest rates. The Group uses fixed rate debt and interest rate swaps to manage the fixed interest rate pricing and profile.
The following sensitivity table, based on interest rate risk exposures in existence at balance date shows the effect of reasonably
possible interest rate movements on after tax profit and equity, with all other variables held constant.
GROUP
Asset/(Liability)
NotE
CARRYING
AMOUNT
+100 BASIS POINTS -100 BASIS POINTS
HIGHER/(LOWER)
PROFIT
EQUITY
HIGHER/(LOWER)
PROFIT
EQUITY
$000 $000 $000 $000 $000
At 31 July 2011
Cash and cash equivalents 18 23,016 166 166 (166) (166)
Bank borrowings 29 (50,000) (360) (360) 360 360
Fixed rate senior bond 29 (99,129) 571 571 (601) (601)
Derivative financial instruments
Interest rate swaps – cash flow hedges 22 (2,820) 360 (141) (360) (3,499)
Interest rate swaps – fair value hedges 22 354 (571) (571) 601 601
(128,579) 166 (335) (166) (3,305)
At 1 August 2010
Cash and cash equivalents 18 101,226 709 709 (709) (709)
Bank borrowings 29 (75,000) (525) (525) 525 525
Fixed rate senior bond 29 (98,642) 452 452 (490) (490)
Derivative financial instruments
Interest rate swaps – cash flow hedges 22 (3,210) 490 1,400 (490) (1,430)
Interest rate swaps – fair value hedges 22 179 (452) (452) 490 490
(75,447) 674 1,584 (674) (1,614)
The parent has no exposure to interest rate risk, with the exception of its cash on hand at balance date.
(ii) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from currency exposures, primarily with respect to the US dollar, through the
purchases of inventory directly from overseas suppliers. The Group uses forward foreign exchange contracts to reduce the currency
risks associated with these purchases.
Management work to a Board approved Treasury Policy to manage foreign exchange risk. The policy parameters for hedging
forecasted currency exposures are:
• to hedge 40% to 100% of forecast US dollar commitments expected in the next 0 to 6 months
• to hedge 0% to 85% of forecast US dollar commitments expected in the next 7 to 12 months
• where exposures to other currencies arise, the Group hedges these risks once a firm commitment is in place
• where foreign currency hedging extends beyond a 12 month time horizon, this requires the approval of the Group’s Chief Executive Officer.
At balance date the Group had the following foreign currency risk exposures:
GROUP CARRYING AMOUNT NOTIONAL AMOUNT
Asset/(Liability) NotE 2011 2010 2011 2010
$000 $000 $000 $000
Forward currency contracts – cash flow hedges
Buy US dollars/Sell New Zealand dollars 22 (30,867) (2,757) 252,382 175,812
The average exchange rate of US dollar forward contracts at balance date were $0.7558 (2010: $0.7066). The spot rate used to
determine the mark-to-market carrying value of the US dollar forward contracts at balance date was $0.8792 (2010: $0.7260).
Throughout the year the Group’s US dollar hedge cover levels typically range between 55% to 70% of the forecast annual direct
US dollar exposure. At balance date the Group has US dollar hedges in place to cover 73.0% (2010: 67.1%) of the forecast annual
direct US dollar exposure. As a result of the US dollar exchange rate trading at historically high levels during the current year the
Group has taken the unusual step of placing additional cover extending beyond 12 months. The additional cover represents 48.0%
of the forecast 13 to 18 month direct US dollar exposure.
The following sensitivity table, based on foreign currency risk exposures in existence at balance date, shows the effect of reasonably
possible exchange rate movements on after tax profit and equity, with all other variables held constant.
AFTER TAX PROFIT EQUITY
GROUP HIGHER/(LOWER) HIGHER/(LOWER)
Forward currency contracts – cash flow hedges 2011 2010 2011 2010
$000 $000 $000 $000
10% appreciation in the New Zealand dollar – – (14,162) (10,862)
10% depreciation in the New Zealand dollar – – 17,309 13,276
There is no profit and loss sensitivity, as the forward currency contracts have been designated as cash flow hedges and assumes
they will be 100% hedge effective. The parent company has no currency risk exposures.
(iii) Price risk
Management work to a Board approved Treasury Policy to manage electricity commodity price risk. The Group manages its exposure
to electricity price fluctuations by negotiating fixed price supply contracts with its electricity suppliers and using electricity pricing
contracts (contracts for difference) to provide an economic hedge. The policy parameters for hedging forecast electricity price
exposures are:
• to hedge 60% to 100% of forecast electricity usage in the next 0 to 12 months
• to hedge 0% to 75% of forecast electricity usage in the next 13 to 24 months
• to hedge 0% to 50% of forecast electricity usage in the next 25 to 60 months
At balance date the Group had the following electricity price risk exposures.
GROUP CARRYING AMOUNT AVERAGE PRICE PER MWH NOTIONAL AMOUNT (MWH)
ASSET/(LIABILITY) 2011 2010 2011 2010 2011 2010
$000 $000 $ $
Electricity pricing contracts – economic hedges – (194) – 82.64 – 14,688
These contracts were fair valued by comparing the contract rate to the market rate for contracts with matching maturity periods.
The Group’s “contracts for difference” did not qualify for hedge accounting and all movements in fair value have been recognised
as an expense/revenue on the face of the income statement in the period they occurred. To reduce fair value earnings volatility
the Group has not entered any new “contracts for difference” since 2008 and has now fully unwound all pre-existing “contracts for
difference” preferring to use fixed price supply contracts to hedge the Group’s electricity price exposure.
The parent has no direct exposure to commodity price risk.
FINANCIAL STATEMENTS 44
FINANCIAL STATEMENTS 45