Market Price Risk
Enbridge's earnings are subject to movements in interest rates, foreign exchange rates and commodity prices (collectively Market Price Risk). Given the Company's desire to maintain a stable and consistent earnings profile, it has implemented a Board of Directors approved Market Price Risk Policy to minimize the likelihood that adverse earnings fluctuations arising from movements in market prices across all of its businesses will exceed a defined tolerance. The primary Market Price Risk metric used to monitor risk and establish limits within that policy is EaR, as described above under Sensitivity Analysis.
The Company uses derivative financial instruments for market price risk management purposes. The following summarizes the types of market price risks to which the Company is exposed and the financial derivative hedging programs implemented.
Foreign Exchange Risk
The Company has exposure to foreign currency exchange rates, primarily arising from its U.S. dollar denominated investments, where carrying values, cashflows and earnings are subject to foreign exchange rate variability. The Company has implemented a policy whereby it must hedge a minimum level of foreign currency denominated earnings exposures identified over the next five year period. Under this policy, the Company has substantially hedged this exposure. The Company may also hedge shorter term anticipated foreign currency denominated capital expenditures. The earnings exposure from the foreign exchange positions is managed within the overall consolidated EaR limits of the Company.
Interest Rate Risk
The Company's cashflows and earnings are exposed to interest rate fluctuations due to the regular repricing of its variable rate debt. Floating to fixed interest rate swaps, collars and forward rate agreements are used to hedge against the effect of future interest rate movements. The Company monitors its debt portfolio mix of fixed and variable rate debt instruments to ensure that the consolidated portfolio of debt stays within its Board of Directors approved policy limit band of a maximum of 25% floating rate debt as a percentage of total debt outstanding. The Company is also exposed to fluctuations in longer term interest rates ahead of anticipated fixed rate debt issuances. Many of the Company's existing commercial arrangements and certain construction projects provide for the full recovery of financing costs through tolls. The Company may enter into interest rate derivatives to hedge a portion of the interest cost of these future debt issues. The earnings exposure from the interest rate portfolio is managed within the overall consolidated EaR limits of the Company. As well, for certain construction projects, financing costs are eligible for reimbursement through tolls.
Information about the debt portfolio is included in Notes 15 and 16 of the 2008 Annual Consolidated Financial Statements.
Commodity Price Risk
The Company's cashflows and earnings are exposed to changes in commodity prices as a result of ownership interest in certain assets, as well as through the activities of its Energy Services affiliates. The Company uses natural gas, power, crude oil and NGL derivative instruments to fix a portion of the variable price exposures that may arise from commodity usage, storage, transportation and supply agreements. The earnings exposure from the commodity positions is managed within business unit EaR sub-limits, as well as within the overall consolidated EaR limits of the Company.
Fair Values of Derivative Instruments
Information about the financial instruments (including derivatives) outstanding at year end is included in Note 22 of the 2008 Annual Consolidated Financial Statements.