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Risk Management Forum: Desperately Seeking Liquidity
Troubled markets drive defensive tactics.
the government and had their ratings affirmed, and we’ve gotten more comfortable. A lot of the problems seemed to wash themselves out over time, so we’re taking more transaction exposure. It’s not just trading. We do have a small energy-trading business, but we acquire tremendous amounts of energy, and perform various types of hedging for fuels and purchased electricity.
For pure trading, it means very little to us except we are very conscious about the creditworthiness of the companies we do business with.
Fortnightly: How do you anticipate the economic downturn will affect demand for energy commodities? How is this affecting your hedging activity and supply plans?
Dybalski: That’s a tricky one. Year on year, we’re actually seeing net growth. But when I look at individual locations and customer sectors, year on year we can see there has been some conservation and pullback. We’ve seen conservation in the residential sector in certain locations—unprecedented levels of conservation. For years and years, with people buying new gadgets, such as big-screen TVs, use per customer has grown steadily. Now, for the first time consistently for six to eight months residential use per customer has been declining. It’s hard to tell whether this is because of declining income or the effect of acquiring efficient appliances and compact fluorescent light bulbs. It’s happened so suddenly, it’s hard to know what’s behind it.
Our income has been affected. We operate in regions where we service the energy exploration and production sector. With commodity prices in 2008 as high as they were, we saw tremendous growth, counter to the rest of the economy. Some of that growth has continued. Projects that were put in place through the end of last year still show growth in consumption of electricity. But I expect that with the decline in commodity prices, some of that will taper off.
From a hedging perspective, particularly on the natural gas side, we’ve had hedging programs ongoing for some time, approved by various regulatory bodies. We don’t expect that to change much. Consumers will benefit from locking in lower prices as we go through the year.
We’ve had some discretion in locking in prices for fleet fuel—gasoline and diesel. We didn’t hit the absolute low price, but what we’ve done will prove beneficial to our cost structure.
We have to be cognizant that demand will be lower. We can’t assume the same growth rates next year and acquire fuel for the same level of demand. As we acquire contracts for different things, we make sure we have enough cushion and optionality to accommodate changes in demand.
Longer term it becomes a significant issue for us, in terms of development and acquisition of new facilities.
The volatility in the economy makes projecting what will happen six to 12 years from now more difficult. Building a power plant has a multi-year lead time. What we do in the resource-planning group is look at different areas of the economy, try to understand the drivers as best we can and understand the scenarios. Our resource planning group takes that and