SaskPower U.S. Debt: Hedging Currency Exposure

On December 19, 2002, the board of directors of the Saskatchewan Power Corporation (SaskPower) was contemplating the approval of the company’s 2003 foreign exchange strategy to manage long-term currency risk exposure in the utility’s U.S. dollar debt. SaskPower had borrowed extensively in the early 1990s, with maturities ranging from 10 to 30 years. The U.S. dollar exchange rate against the Canadian dollar had since increased, thereby increasing the effective burden of the debt and reducing the utility’s net income. A change in accounting practices implemented in 2001 required SaskPower to recognize as a gain or a loss in the current year any translation differences in the value of its outstanding U.S. dollar debt resulting from fluctuations in the exchange rate during the year. This policy change led to a significant reduction in net income in 2001, followed by a significant increase during the first eight months of 2002. The volatility in earnings had complicated the task of setting rates for electricity and had proved politically difficult to justify. In late 2002, SaskPower had to decide whether and how to hedge its currency exposure in outstanding U.S. dollar debt.

This case is suitable for various undergraduate or graduate courses including derivatives and risk management, international finance, corporate finance and intermediate and advanced financial accounting. The case covers topics related to foreign currency financing activities in general, and financing by utilities in particular. After completion of the case, students will be able to<ul><li>weigh potential advantages and risks associated with borrowing in a foreign market;</li><li>quantify the foreign currency exposure in foreign debt and consider hedging strategies;</li><li>analyze foreign currency swaps: how they are structured, valued, and used, and how counterparty risk is assessed; and</li><li>understand the accounting recognition of foreign currency translation losses and gains, and how such accounting practices influence the financial and operating decisions of organizations like Crown power utilities.</li><ul>

• Foriegn currency debt
• F/X risk, Foreign currency swap
• power utility