KUWAIT ENERGY plc GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011
F-152
53.
DERIVATIVE FINANCIAL INSTRUMENTS
2011
2010
USD 000’s
USD 000’s
Financial liabilities carried at fair value through
profit or loss
Held for trading derivatives not designated in hedge accounting
relationships (See a below)
750
675
Derivatives that are designated and effective as hedging instruments
carried at fair value
Oil put options (See b below)
-
3,662
-
4,337
The Group’s derivative financial instruments are all classified as Level 2 in both years. Level 2 fair value
measurements are those derived from inputs other than quoted prices that are observable for the asset or liability
either directly (ie. as prices) or indirectly (ie. derived from prices).
a) Held for trading derivatives
Derivatives used for hedging purposes but which do not meet the qualifying criteria for hedge accounting are
classified as ‘Held for trading derivatives’.
Interest rate cap is an agreement to cap the interest rate on IFC facilities at 2 % when the LIBOR is more than 2
% and equal to or less than 5 %. The interest rate cap matures on 30 June 2014.
The notional amounts of interest rate cap together with the fair value as at 31 December is summarised as
follows:
Held for trading Derivatives
Notional principal value
Fair value
(Negative) /Positive
2011
2010
2011
2010
USD 000’s
USD 000’s
USD 000’s
USD 000’s
- Interest rate cap
50,000
50,000
(750)
(675)
b) Cash flow hedges
This instrument enables the Group to mitigate the risk of fluctuations in oil prices for 60,000 barrels of oil per
month by locking the price at USD 81.85 up to the strike price of USD 95. The fair value of oil put option at
the end of the reporting period is determined by discounting the future cash flows using the curves at the end of
the reporting period and the credit risk inherent in the contract, and is disclosed below.
The following table details the notional principal amount and the fair value of the oil put option outstanding at
the end of the reporting period.
Cash flow hedge
Notional principal value
Fair value
(Negative) /Positive
2011
2010
2011
2010
USD 000’s
USD 000’s
- Oil put option
60,000 barrels
of oil per
month up to 1
October 2011
60,000 barrels
of oil per
month up to 1
October 2011
-
(3,662)
The oil put option settles on a monthly basis and no amounts were open at 31 December 2011.
The oil put option is designated as a cash flow hedge in order to reduce the Group’s exposure to fluctuations in
oil prices and is deemed to be highly effective.
