15. 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 strategy, derivative instruments are used to manage the price of the natural gas it buys. The objective is to reduce cost of gas variability 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 asset optimization 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 that may be used 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 period-end closing positions, an increase of $1.00 per Gigajoule (GJ) in natural gas prices would have increased net income, through an increase in the fair value of natural gas derivative instruments, by $41 million (March 31, 2019 - $44 million). Conversely, a decrease of $1.00 per GJ would have decreased net income, through a decrease in the fair value of natural gas derivative instruments, by $41 million (March 31, 2019 - $44 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 December 31, 2019 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
$
284 100
$
284 100
$
- -
$
- -
$
- - -
Trade and other payables
Lease liability Long-term debt
14
6
5
4
1,341
87
52 25
253
1,959
Derivative instruments
11
9
(8)
- -
Commitments
135
135
-
-
$
1,885
$
621
$
82
$
249
$
1,959
At period end, the Corporation’s borrowing capacity, together with relatively stable operating cash flows, provide sufficient liquidity to fund these contractual obligations. Interest rates used in calculating financial obligations are effective December 31, 2019. In addition to the above, the Corporation has posted a $15 million (March 31, 2019 - $15 million) letter of credit with ICE NGX as security for natural gas purchases and sales conducted by the Corporation on the ICE NGX natural gas exchange in Alberta. ICE 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.
c. Credit risk
Credit risk is the risk of financial loss if a customer or counterparty to a financial or derivative instrument fails to meet its contractual obligations. The Corporation is exposed to credit risk through cash, trade and other receivables, debt retirement funds and derivative instrument assets. Credit risk related to cash and debt retirement funds is minimized by dealing with institutions that have strong credit ratings and holding highly-rated financial securities.
29
2019-20 THIRD QUARTER REPORT
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