Risk tolerance approved by boards
Kerry Kaseman, Basin Electric manager of commodity risk, said pulling together the information to determine risk tolerance starts with the financial forecast in March each year.
“That’s when middle office, or commodity risk staff, develops pricing scenarios: a base price and price bandwidth for the various commodities that Basin Electric, Dakota Gasification Company, and Dakota Coal handle,” Kaseman said. “Those numbers are provided to Cooperative Planning, who enter the prices into a planning model to develop expectations for generation, purchased power, and surplus sales. … Following that, Dakota Coal prices coal based on various expectations. Then, everything is provided back to financial planning, who develops a model to show the variation to net income before tax.”
Once the numbers are available, Kaseman said a recommendation for risk tolerance is made by the middle office and provided to a working group of the Risk Management Steering Committee (RMSC).
“The working group then sends their recommendation to the RMSC, who reviews and signs off on the recommended risk tolerance. That then goes to the boards of directors,” he said. “For the next five years, we recommended less risk on the table in the near years, with risk being taken off the table bit by bit as the years go.”
For Basin Electric, the products included in risk tolerance are power purchase agreements, surplus sales, and natural gas to generate the peaking power plants. At Dakota Gas, the products considered are natural gas, tar oil, electricity, urea, naphtha, phenol, and cresylic acid. At Dakota Coal, the product considered is diesel fuel. For the 2018-2022 Risk Tolerance approved in 2017, commodity price variances are based on a 50 percent confidence level.
The next step, after risk tolerance is approved, is Marketing & Asset Management staff will develop a hedge plan, which will be brought to the board in April. Dakota Gasification Company’s Risk Tolerance was approved in December 2016.