SENSITIVITY ANALYSIS
The Company’s earnings will fluctuate with changes in the market prices and certain volumetric parameters, such as weather. Enbridge manages its financial market risks through an Earnings at Risk (EaR) metric. Under the Company’s EaR policy, using a two standard deviation confidence interval, the maximum adverse change in 12 months forward earnings from movements in market prices over a 1 month period of time will not exceed 5% of earnings. On December 31, 2006, the Company’s EaR was 2.9%.
The following table shows the effect of changes in certain key financial market variables on earnings. These sensitivities are approximations based on business conditions as of December 31, 2006 and may not be applicable to other periods, under other economic conditions or for greater magnitude changes.
| Factor |
|
Decrease |
|
After-Tax Earnings Impact |
| Exchange rate (CAD Dollar to US Dollar) |
|
CAD$0.01 |
|
$1.1 million |
| Exchange rate (CAD Dollar to Euro) |
|
CAD$0.01 |
|
$0.3 million |
| Interest Rates |
|
0.5% |
|
$4.0 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 and as such, these fluctuations have been excluded from the Company’s EaR metric. The Company hedges the foreign currency risk of dividends it receives from foreign currency denominated subsidiaries. Any unhedged foreign currency dividends are captured in the EaR metric.
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 |
|
18 degree days |
|
1 billion cubic feet |
| Volume |
|
1 billion cubic feet |
|
$1.3 million (after-tax) |
In 2006, weather negatively impacted earnings by a larger magnitude than the above sensitivities would suggest. This resulted from the unusual pattern of distribution 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.
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