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Sensitivity Analysis
The Company's earnings will fluctuate with changes in certain market prices, volumetric throughput and with weather.
Enbridge quantifies and manages its market price risks using an earnings at risk (EaR) metric. Under the Company's EaR policy, the maximum adverse change in the 12 month forward earnings forecast (due to movements in market prices over a one-month period of time) will not exceed 5% of earnings (based on a 95% confidence interval). On December 31, 2007, the Company's EaR was 2.8% (2006 - 2.9%) of 12 month forecasted earnings.
The following table shows the effect that changes in certain key financial market variables has on earnings. These sensitivities are approximations based on business conditions as of December 31, 2007 and may not be applicable to other periods.
Factor |
Change |
After-Tax Earnings Impact |
|---|---|---|
Exchange rate (CAD Dollar to U.S. Dollar) |
CAD$0.01 |
$1.5 million |
Exchange rate (CAD Dollar to euro) |
CAD$0.01 |
$0.4 million |
Interest rate |
0.5% |
$3.0 million |
Interest rate fluctuations are captured in the Company's EaR metric; however, under GAAP the impact of foreign currency fluctuations on earnings from foreign subsidiaries cannot be hedged. As such, these fluctuations have been excluded from the Company's EaR metric. The Company does hedge the foreign currency risk on cash distributions it receives from foreign currency denominated subsidiaries. Unhedged foreign currency cash flows are incorporated in the EaR metric.
Transportation volumetric risks are managed through tariff agreements. Most of the Company's tariff agreements provide for take-or-pay or throughput insensitivity.
Weather is a significant driver of delivery volumes at EGD, given that a significant portion of EGD's customers use natural gas for space heating. Weather, measured in terms of degree day deficiency, directly impacts EGD's earnings as noted below. Degree-day is a measure of coldness, calculated as the total number of degrees each day by which the daily mean temperature falls below 18 degrees Celsius.
Factor |
Incremental change |
Approximate incremental impact |
|---|---|---|
Weather |
17 degree days |
1 billion cubic feet |
Volume |
1 billion cubic feet |
$1.2 million (after-tax) |
In recent years weather has impacted earnings by a larger magnitude than the above sensitivities would suggest. This results from the unusual pattern of distribution of degree days during the year and their relative effectiveness. Degree days are fully effective, typically in the peak winter months, when their occurrence directly impacts the consumption pattern by a similar magnitude.