Legislative Council Wednesday 25 March, 2020

Ms FORREST question to LEADER of the GOVERNMENT in the LEGISLATIVE COUNCIL, Mrs HISCUTT

I refer to the 2019 Annual Report for Hydro Tasmania;
1. When generation assets are valued, electricity prices used are either market prices (if available) or prices as forecast by an internal model.
a. How does Hydro Tasmania account for the long term contracts with major industrials which include discounted prices; and
b. Do they affect the value of generation assets or are they recorded elsewhere as a liability?

2. Referring to Note 17 on page 53 covering Other financial liabilities, please explain in lay terms the difference between an economic hedge and a cash flow hedges as they relate to energy price derivatives;
3. Referring to the cash flow statement on page 23 there were net proceeds from financial derivatives of $108.6 m received in 2018/19 whereas in 2017/18 there was an outflow of $202.5 million with the same description.
a. Please explain the transactions behind these two figures in lay terms.
4. When hedges are closed is there a cash settlement; and
a. If so, is this the case in all instances;
5. When hedges are entered into is there a cash payment; and
a. If so, does this apply in all cases?

ANSWERS:
Q1.
a For the period the contracts with major industries applies, they are valued using an observable market price curve where available and then using an internal price curve. They are designated as a hedge under AASB 9 Financial Instruments. The effective portion of changes in the fair value of the derivative contract is recognised in Other Comprehensive Income. Any ineffective portion of changes in the fair value is recognised in the Income Statement.

b The Major Industrial contracts are one of the inputs into the asset valuation model. The output of the model informs the asset values of the business.

Q2.
Cash flow hedge - A cash flow hedge is a hedge of the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction, that is attributable to a particular risk. In relation to electricity generation, generally the variability comes from the volatility in spot electricity price creating volatility in cash flows.
Economic hedge - Economic Hedge is not a cash flow hedge.

Q3.
a These figures are predominantly made up of the net cash payments/receipts of the futures margin account refer to the “Energy price derivatives movement reconciliation: Liability/(asset) at the beginning of the year”, Note 17 page 53 of the annual report.

Q4.
a There is not always a cash settlement when a hedge is closed. The instrument used will dictate whether a cash transaction occurs on closing.

Q5.
a When a hedge is entered into, a cash payment is not always required. The instrument used will dictate whether a cash transaction occurs.