ScotPower’s £400m dollar hedging boon

International energy firm ScottishPower said last week it made £400 million ($728 million) from hedging its US dollar revenues.

The company reaped the cash as a result of re-pricing a £4.9 billion portfolio of cable forwards at a rate of $1.84 to the pound last week. The forwards were initially taken out in March 2002, when the US dollar was trading at $1.42 to the pound.

The firm’s dollar exposure arises from its US subsidiary PacifiCorp, the Oregon-based electric utility it bought in 1999.

Treasurer Adrian Coats in Glasgow said the board took the decision to reprice the forwards, transacted largely with JP Morgan and Citigroup, in mid-to late-March.

Bank derivatives sales dealers recently reported that some corporate treasurers face pressure from their boards of directors not to use derivatives to hedge currency exposure. But Coats said this was not the case at ScottishPower.

However, Coats conceded, ScottishPower may face more difficulties hedging its balance sheet in the future after the 2005 implementation of new accounting standard IAS 39, which requires firms to mark derivatives positions to market.

This is not the first time ScottishPower has reaped the rewards of shrewd risk management. In 2002, it enjoyed a £60 million mark-to-market gain on its hedges, as a result of interest rate fluctuations. It was also one of the few energy companies to emerge unscathed from the Enron crisis, as a result of stringent credit risk controls.

ScottishPower was named Risk's corporate risk manager of the year 2003.