Financial statements
Section B: Notes to the Group financial statements for the year ended 30 June 2024
Section B: Notes to the Group financial statements for the year ended 30 June 2024
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Financial risk management and derivatives (continued)
Hedging accounting policy (continued) Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges.
Any gain or loss on the hedging instrument (for example, foreign currency denominated borrowings) relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in the foreign currency translation reserve in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit and loss, in net finance costs. Gains and losses accumulated in the foreign currency translation reserve in equity are included in the profit and loss when the foreign operation is disposed or sold. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting or are specifically not designated in an accounting hedge relationship as natural offset achieves substantially the same accounting results. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the profit and loss. The Financial PPAs, discussed below, include a contract for difference (CfD) which are derivative financial instruments that do not qualify for hedge accounting. They are recorded on the balance sheet at fair value with movements recorded in the profit and loss.
Hedging strategy and instruments used by the Group Fair value hedges
The Group enters into cross-currency interest rate swaps or interest rate swaps to mitigate exposure to changes in the fair value of borrowings which are issued at fixed interest rates or denominated in a foreign currency, by converting to floating interest rate Australian dollar borrowings. The objective of the Group’s fair value hedges is to hedge the fair value exposure to movements in exchange rates and movements in interest rates. Cash flow hedges The Group enters into cross-currency interest rate swaps and interest rate swaps to hedge exposure to changes in cash flows on borrowings that bear floating interest rates or are denominated in a foreign currency, by converting to fixed interest rate Australian dollar borrowings. The objective of the Group’s cash flow hedges is to hedge the cash flow exposure to movements in variable interest rates and movements in exchange rates. The Group's policy is to hedge the interest rate exposure on drawn borrowings to between 80% and 100% and to ensure compliance with any covenant requirements of its funding facilities by issuing fixed interest rate borrowings or by entering into interest rate swap contracts. Interest rate swap contracts currently in place swap floating interest rate commitments back to fixed interest rates. As at 30 June 2024, 88% (2023: 98%) of the Group’s interest rate exposure based on the carrying amount of drawn borrowings at reporting date (excluding letters of credit facilities) was hedged. The Group uses forward exchange contracts to protect against exchange rate movements between the AUD and foreign currencies on highly probable forecast transactions relating to operating expenditure. The fair value of forward exchange contracts held is not material to the Group in the current or prior financial year. Hedge of net investment in foreign entity A portion of the Group's USD denominated borrowings and CAD denominated borrowings act as a natural hedge against the exposure to foreign currency movements in Transurban's investment in its US and Canadian based assets (TC in the US and A25 in Canada). During FY23, the Group sold its controlling interest in A25 (refer to Note B21). As a result of this transaction, the Group’s net investment hedge of the CAD asset was discontinued, with $7 million in cumulative losses related to exchange rate movements on the borrowing hedging instrument, net of tax transferred to the profit and loss as part of the loss on sale from the divestment. From the date of the change in control of A25 and the recognition of the Group’s remaining 50% interest in A25 as an equity accounted investment, the Group designated a new net investment hedge of its equity accounted investment in the A25 asset. Derivative instruments not in an accounting hedge relationship The Group uses forward exchange contracts to protect against exchange rate movements on a portion of its USD and CAD principal and interest commitments. The fair value of these forward exchange contracts held is not material to the Group in the current or prior financial year. Power Purchase Agreements As at 30 June 2024, the Group has entered into four PPAs; three Financial PPAs and one Retail PPA, all of which are operational. The Financial PPAs with the Sapphire Wind Farm and Bango Wind Farm are both for 9 years and 9 months and support the NSW and WestConnex operations (excluding WestConnex M4-M8 link) and expire in December 2030. The Bango Wind Farm became operational on 8 June 2022 and on 2 June 2022, the Bango Wind Farm PPA was amended and expanded to include NCX and M5 West operations from July 2022 onwards. The Financial PPA with the Coopers Gap Wind Farm is for 4 years and 6 months, became operational on 1 January 2022 and supports Transurban Queensland's operations expiring in June 2026. The Financial PPAs include a CfD which is a derivative financial instrument and is recorded on the balance sheet at fair value with movements recorded in the profit and loss. The Retail PPA to supply renewable energy became operational on 1 January 2024 and supports the Victorian operations expiring in December 2030. The Retail PPA contract differs to the Financial PPA contract in that it does not contain a CfD derivative.
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