## CAPITAL POWER CORPORATION 

Notes to the Consolidated Financial Statements 

(Tabular amounts in millions of Canadian dollars, except share and per share amounts) 

## 30. Risk management, continued: 

## Market risk, continued 

## Foreign exchange risk, continued 

The Company’s foreign exchange management policy is to limit economic and material transactional exposures arising from movements in the Canadian dollar relative to the U.S. dollar or other foreign currencies. The Company’s exposure to foreign exchange risk arises from future anticipated cash flows from its U.S. operations, debt service obligations on U.S. dollar borrowings, and from certain capital expenditure commitments denominated in U.S. dollars or other foreign currencies. The Company co-ordinates and manages foreign exchange risk centrally, by identifying opportunities for naturally-occurring opposite movements and then dealing with any material residual foreign exchange risks; these are hereinafter referred to as being economically hedged. 

As at December 31, 2012, holding all other variables constant, a $0.10 strengthening or weakening of the Canadian dollar against the U.S. dollar would not have a significant impact on net income attributable to common shareholders. There would be no impact to other comprehensive income. 

This sensitivity analysis excludes translation risk associated with the translation of subsidiaries that have a different functional currency to the functional currency of the Company, financial instruments that are non-monetary items, and financial instruments denominated in the functional currency in which they are transacted and measured. 

## Interest rate risk 

The Company is exposed to changes in interest rates on its cash and cash equivalents, and floating rate current and non-current loans and borrowings. The Company is exposed to interest rate risk from the possibility that changes in interest rates will affect future cash flows or the fair values of its financial instruments. In some circumstances, floating rate funding may be used for current borrowings and other liquidity requirements. As at December 31, 2012, the proportion of fixed rate loans and borrowings was approximately 92% of total loans and borrowings outstanding (December 31, 2011 - 89%). The Company may also use derivative instruments to manage interest rate risk. As at December 31, 2012, the Company did not hold any interest rate derivatives. 

Assuming that the amount and mix of fixed and floating rate loans and borrowings and net loans and borrowings remains unchanged from that held as at December 31, 2012, a 100 basis point decrease or increase to interest rates would not have a significant impact on full year net income attributable to common shareholders and would have no direct impact on other comprehensive income. 

The effect on net income does not consider the effect of an overall change in economic activity that would accompany such an increase or decrease in interest rates. There would be no impact on net income for loans and borrowings issued and held by the Company at fixed interest rates. 

## Credit risk 

Credit risk is the possible financial loss associated with the inability of counterparties to satisfy their contractual obligations to the Company. The Company’s counterparty credit risk management policy is established by the executive team and approved by the Board of Directors and the associated procedures and practices are designed to manage the credit risks associated with the various business activities throughout the Company. Credit risk management procedures and practices generally include assessment of individual counterparty creditworthiness and establishment of exposure limits prior to entering into any agreements or transactions with the counterparty. Credit exposures and concentrations are subsequently monitored and are regularly reported to management on an ongoing basis. Counterparty creditworthiness also continues to be evaluated on an ongoing basis after transactions have been initiated. 

Credit risk is managed and mitigated through a number of risk mitigation practices such as securing parent company guarantees to enhance counterparty credit quality, negotiating and obtaining security (such as cash, letters of credit or property) to offset potential losses, utilization of credit derivatives to reduce credit risk and margining to limit credit risk where applicable. 

