## 9. Financial Instruments 

## Risk Management 

The Company is exposed to movements in the U.S./Canadian dollar exchange rate, interest rates and the price of natural gas. In order to minimize these exposures for both shareholders and ratepayers, the Company utilizes a variety of instruments to create an offsetting position to specific exposures. These instruments are employed in connection with an underlying asset, liability or anticipated transaction and are not entered into for speculative purposes. 

By entering into these instruments, the Company agrees to exchange with counterparties the difference between fixed and variable amounts, calculated by reference to specific foreign exchange rates, interest rates, or natural gas price indices based on a notional principal amount or notional quantity of natural gas. The notional amounts are not recorded in the financial statements as they do not represent amounts exchanged by the counterparties. 

Derivative financial instruments involve credit and market risk. Credit risk arises from the potential for a counterparty to default on its contractual obligations and is limited to those contracts where the Company would incur a loss in replacing the defaulted transaction. The Company minimizes credit risk by entering into off balance sheet risk management transactions only with creditworthy institutions that possess strong investment grade credit ratings or where such transactions are secured with approved forms of collateral. For transactions with terms of greater than five years, the Company may also retain the right to require a counterparty, who would otherwise meet the Company’s credit criteria, to provide collateral within a specified time frame. 

## Foreign Exchange 

The Company has an exposure to the U.S./Canadian dollar exchange rate primarily through its investments in U.S. dollar denominated operations. The Company has established a hedging program to manage a portion of that long-term exposure. At December 31, 2000, the Company had entered into par forward and cross currency swaps to hedge U.S. dollar denominated cash flows of approximately U.S. $60 million per annum (1999 — U.S. $39 million; 1998 — U.S. $39 million) as well as the redemption of the U.S. dollar denominated investment in OCENSA of U.S. $100 million (1999 — U.S. $100 million), thereby reducing currency exposures. In addition, forward foreign exchange contracts, including cross currency swaps, have been entered into to hedge the Company’s exposure on its U.S. dollar denominated debt and to match the effect of translating Canadian dollar denominated monetary financing held by an integrated U.S. subsidiary. 

## Interest Costs 

To hedge against the effect of future interest rate movements on its short to long-term borrowing requirements, the Company enters into forward interest rate agreements, swaps and collars. 

## Natural Gas Prices 

The Company uses natural gas price swaps, options and collars to manage exposure to natural gas prices. As allowed by the regulator of the Energy Distribution operations, a portion of the cost of future natural gas supply requirements is hedged. Amounts paid or received under the hedge agreements are recognized as part of the cost of the natural gas purchases which is recovered through the rate making process. At December 31, 2000, the Company had entered into natural gas price swaps to manage the price for approximately 4.9%, or 8.9 billion cubic feet, of its forecast fiscal 2001 system gas supply. During the year ended December 31, 2000, the Company hedged 35.2%, or 63.2 billion cubic feet, of its system gas supply (1999 — 37.7%, or 62.0 billion cubic feet; 1998 — 34%, or 53.4 billion cubic feet). 

