Notes to the financial statements (continued) Section 4: Debt and equity (continued) 20. Derivative financial instruments (continued) B. Amounts recognised in statement of financial position (continued) i. Nature of derivatives Derivative financial instruments are used to hedge economic exposures to movements in interest and foreign exchange rates. Western Power uses derivative financial instruments in accordance with Board approved policy. Under this policy the critical terms of the hedging instruments must align with the hedged items. Speculative trading where a derivative is entered into without an underlying economic exposure is strictly prohibited. All derivative activities are carried out by a specialist group within Western Power that has the appropriate skills, experience and supervision. As at the reporting dates presented, Western Power used the below derivative financial instruments. See table 49 below. All qualified for hedge accounting in accordance with the accounting policy in note 20(a). This is further explained in note 20(b)(ii). ii. Hedge ineffectiveness Hedge ineffectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure an economic relationship exists between the hedged item and hedging instrument.
Hedge ineffectiveness can occur due to: • changes in the forecast timing of the cash flow transaction • differences in the critical terms between the hedging instrument and the hedged item • changes in the credit risk of Australia or the derivative counterparty. Interest rate swaps and forward domestic borrowing commitments Western Power enters into interest rate swaps and fixed rate forward domestic borrowing commitments that have the same critical terms as the hedged item, including the notional amount, interest rates, payment dates and maturities. Where Western Power does not hedge all outstanding borrowings, the hedged item is identified as a proportion of the outstanding borrowings up to the notional amount of the hedging instrument. Forward exchange contracts Western Power enters into forward exchange contracts that have the same critical terms as the hedged item, including the transaction amount, foreign exchange rates and payment dates. During the reporting year ended 30 June 2025, Western Power assessed no hedge ineffectiveness – being all critical terms matched, ensuring the economic relationships existed between the hedged items and hedging instruments (30 June 2024: no hedge ineffectiveness).
Table 49: Nature of derivatives Instrument
Economic exposure hedged
Interest rate swaps
Western Power enters into interest rate swaps in order to hedge against floating interest rate exposures arising from borrowing obligations. Western Power enters into forward exchange contracts in order to hedge against foreign currency risk, principally arising from the future purchase of inventories and capital equipment in foreign currencies. Western Power enters into fixed rate forward domestic borrowing commitments in order to mitigate refinancing risk and to hedge against interest rate exposures arising from future borrowing obligations with floating rates.
Forward exchange contracts
Forward domestic borrowing commitments
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Western Power Annual Report 2025
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