2014 SaskEnergy Annual Report

11. Financial risk management (continued)

a. Natural gas price risk (continued) Based on the Corporation’s year 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 $87 million (2013 – $35 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 $87 million (2013 – $35 million). b. Interest rate risk The Corporation’s significant interest-bearing financial instruments are short-term variable rate debt and long-term fixed rate debt. Consequently, the Corporation is subject to interest rate risk on outstanding short-term debt balances as well as on future short-term and long-term borrowings. Interest rate risk is managed by adjusting the relative levels of short- and long-term debt depending on current market conditions. The Corporation monitors long-term debt levels by maintaining an industry-comparable long-term debt to long-term capital requirements ratio. The Corporation also prepares an annual corporate debt management plan which includes forecasts of borrowing requirements, financing strategies and target rates for interest rate risk management activities. At year end, the Corporation had $299 million of short-term debt outstanding, and $50 million of long-term debt that will mature within the next year and may be refinanced. Based on these amounts, a 0.5% change in interest rates would increase or decrease the annual finance expense by approximately $2 million (2013 – $2 million). The Corporation is also subject to interest rate risk related to debt retirement funds as the recorded fair value is driven by market prices which are largely determined by interest rates. Fluctuations in fair value of debt retirement funds can have an impact on the Corporation. During 2014, the fair value of debt retirement funds increased $7 million (2013 – $7 million decrease). c. Foreign currency risk The Corporation is exposed to foreign currency risk primarily through the purchase of goods and services that are payable in foreign currency. The Corporation monitors foreign currency requirements and utilizes financial instruments to manage risk when a foreign currency obligation exceeds a predetermined amount. At year end, the Corporation had $7 million in a United States dollar (USD) bank account to meet expected future USD expenditures. A five cent change in the exchange rate between the USD and the Canadian dollar at year end would have had an insignificant affect on net income. In 2013, a five cent change in the exchange rate on $13 million of forward contracts would have increased or decreased net income by approximately $1 million. d. 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, 2014 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 $ 299 $ 299 $ – $ – $ – Trade and other payables 117 117 – – – Dividends payable 3 3 – – – Long-term debt 958 95 126 268 1,125 Derivative instruments 107 148 82 46 – $ 1,484 $ 662 $ 208 $ 314 $ 1,125 At year end, the Corporation’s 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 $20 million (2013 – $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. Subsequent to December 31, 2014, the letter of credit was reduced to $15 million.

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2014 Annual Report SaskEnergy

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