BC Hydro Annual Report 2001

CREDIT RISK
Credit risk arises when BC Hydro relies on other parties to honour or perform contractual obligations which have economic value to
BC Hydro. This includes non-payment of balances owed to BC Hydro, as well as non-performance on contractual obligations having prices
which are favourable to BC Hydro. Credit risk arises through most of BC Hydro’s activities; however, the greatest exposure arises through
its electricity trade activities.
BC Hydro manages credit risk through Board-approved policies, as well as individual credit limits which reflect the creditworthiness of its
counterparties. The policies and credit limits are intended to limit concentrations of credit risk which may arise with respect to specific
customer segments, as well as to geographic regions which may be similarly affected by changing economic, political or other considerations.
However, as the number of participants and potential markets are limited, concentrations of credit risk related to electricity trade activities
may arise. Where opportunities are available, these concentrations of risk are mitigated through various risk mitigation techniques
including collateral, netting arrangements and insurance.
INTEREST RATE RISK
Interest rate risk arises from potential changes in interest rates, and the associated impact on BC Hydro’s cost of borrowing. At March 31,
2001, approximately $1,175 million or 19 per cent of net debt was subject to interest rate risk during the next fiscal year. Interest rate risk is
managed through Board-approved policies which require the debt portfolio to be managed using an appropriate blend of fixed and floating
rate debt, as well as by managing the term to maturity of its debt portfolio to manage exposure to interest rate movements in the future.
BC Hydro utilizes financial instruments, including interest rate swaps and options, to adjust the balance of fixed and floating rate debt,
and to reduce its overall cost of borrowing.
FOREIGN CURRENCY RISK
Foreign currency risk relates to potential changes in foreign currency rates, and the impact that this may have on BC Hydro’s assets and
obligations. The majority of BC Hydro’s foreign currency risk results from exposure to changes in United States currency. In the normal
course of its business, BC Hydro is exposed to foreign currency movements through electricity trade activities which are mainly transacted
in the United States, as well as through its debt portfolio which includes a component of foreign currency denominated debt. Foreign
currency risk is managed through policies and limits which are approved by the Board of Directors.
Some of BC Hydro’s exposure to foreign currency movements is reduced through its normal business activities, as BC Hydro is required to
settle many of its transactions through payment or receipt of amounts in foreign currency. For example, a component of BC Hydro’s debt
portfolio is denominated in U.S. dollars; this allows matching of US-dollar interest payments with US-dollar receipts from electricity trade
activities. BC Hydro manages its remaining foreign exchange risk using a variety of financial instruments including foreign currency swaps,
options and futures contracts.
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