13. Financial risk management (continued)
a. Natural gas price risk
The Corporation purchases natural gas for resale to its customers. While natural gas is purchased at fluctuating market prices, the Corporation sells natural gas to customers at a fixed commodity rate that is reviewed semi- annually. As part of its natural gas price risk management, the Corporation uses derivative instruments to manage the price of the natural gas it buys. The Corporation’s objective is to reduce the volatility of natural gas prices and to have rates that are competitive to other utilities. The Corporation also purchases and sells natural gas in the open market to generate incremental income through its gas marketing activities. The purchase or sale price of natural gas may be fixed within the contract or referenced to a floating index price. When the price is referenced to a floating index price, natural gas derivative instruments may be used to fix the settlement amount. The types of natural gas derivative instruments the Corporation may use for price risk management include natural gas price swaps, options, swaptions, and forward contracts. The Corporation’s commodity price risk management strategy establishes specific hedging targets, which may differ depending on current market conditions, to guide risk management activities. Additionally, the Corporation uses mark-to-market value, value-at-risk, and net exposure to monitor natural gas price risk. These metrics are measured and reported daily to the Commodity Risk Management Committee, a subcommittee of the Corporation’s Executive Committee. Based on the Corporation’s period-end closing positions, an increase of $1.00 per Gigajoule in natural gas prices would have increased net income, through an increase in the fair value of natural gas derivative instruments, by $88 million (December 31, 2014 - $87 million). Conversely, a decrease of $1.00 per Gigajoule would have decreased net income, through a decrease in the fair value of natural gas derivative instruments, by $90 million (December 31, 2014 - $87 million).
b. Liquidity risk
Liquidity risk is the risk that the Corporation is unable to meet its financial obligations as they become due. The Corporation has credit facilities available to refinance maturities in excess of anticipated operating cash flows. The contractual maturities of the Corporation’s financial obligations, including interest payments and the impact of netting agreements, as at September 30, 2015 were as follows:
Contractual Maturities
Carrying Less Than
1 - 2
3 - 5
More Than
(millions)
Amount
1 Year
Years
Years
5 Years
Short-term debt
$
229 106
$
229 106
$
- - -
$
- - -
$
- - -
Trade and other payables
Dividends payable
10
10
Long-term debt
1,020
179 147
118
228
1,167
Derivative instruments
89
92
59
-
$
1,454
$
671
$
210
$
287
$
1,167
During the third quarter, the Corporation’s received approval to borrow up to $500 million in temporary loans, an increase of $100 million to the previously approved borrowing limit. At period end, the Corporation’s increased borrowing capacity, together with relatively stable operating cash flows, provide sufficient liquidity to fund these contractual obligations. In addition to the above, the Corporation has posted a $15 million letter of credit with NGX Financial Inc. (NGX) as security for natural gas purchases and sales conducted by the Corporation on the NGX natural gas exchange in Alberta. NGX may draw upon the letter of credit if the Corporation fails to make timely payment for, or delivery of, natural gas as per the related contract.
25
2015 THIRD QUARTER REPORT
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