SaskEnergy Incorporated First Quarter Report In order to ensure a secure supply of natural gas, SaskEnergy contracts for the physical delivery of natural gas using non- financial derivatives, referred to as forward or physical natural gas contracts. The purchase price contained in these forward contracts may be fixed, or it may be based on a variable index price. While fixed price contracts reduce the impact of natural gas price volatility, variable or market prices can assist in offering competitive rates depending on the pricing environment. SaskEnergy uses financial derivatives and physical swaps to manage the future purchase price of natural gas. Identifying own-use natural gas purchase contracts reduces the variability of fair value adjustments in the Corporation’s financial statements. SaskEnergy’s price risk management strategy will govern purchases not identified as own-use purchases to reduce the impact of price changes on realized gas purchase costs which add to the variability in fair value adjustments. March 31, 2011 The realized margin on commodity sales excludes the impact of unrealized fair value adjustments on derivative instruments, as these adjustments can fluctuate significantly from one period to the next and do not necessarily represent the amount that will be paid upon settlement of the related natural gas contract. On a consolidated basis, the Corporation realized a $19 million margin on commodity sales for the nine months ending December 31, 2017, $4 million above the same period in 2016. Average revenue was $3.41 per GJ and average cost of gas sold was $2.89 per GJ during April through December 31, 2017, resulting in a margin of $0.52 per GJ. This compared to an average commodity margin of $0.41 per GJ through the same period in 2016. Margins were lower in 2016 primarily due to the sale of excess gas, a result of a much warmer than normal 2015-16 winter, at prices below the average cost of gas. Slightly higher volumes sold in 2017 (35 PJs) also contributed to the higher margin in 2017 as there was 34 PJs sold in the same period of 2016.
A $16 million favourable margin for the three months ending December 31, 2017 was $3 million higher than the $13 million favourable margin in 2016, due to declining market prices resulting in a lower average cost of gas than in 2016.
Commodity Fair Value Adjustments
The fair value adjustments at the end of December 31, 2017 reduced the margin on commodity sales by $5 million as the $35 million unfavourable fair value position at March 31, 2017 declined to $40 million unfavourable. A higher volume of natural gas contracts outstanding at December 31, 2017 was the primary driver contributing to the unfavourable effect.
Gas Marketing Margin
SaskEnergy uses its access to natural gas markets to execute purchases and sales of natural gas to generate margins. By utilizing off peak transportation and storage capacity, SaskEnergy is able to take advantage of pricing differentials between transportation hubs and time periods while minimizing its exposure to price risk. Its primary strategy is to purchase and inject gas when prices are relatively low, and sell the gas in the future when prices are higher. In most cases the purchases and sales are executed at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions.
Three months ended
Nine months ended December 31
December 31
(millions)
2017
2016 Change
2017
2016 Change
Gas marketing sales
$
66
$
41
$
25
$
169
$
113
$
56
Gas marketing purchases 1
(60)
(41)
(19)
(151)
(102)
(49)
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
6
-
6
18 19
11
7
17
(11)
28
(12)
31
-
13
(13)
(7)
27
(34)
Margin on gas marketing sales
$
23
$
2
$
21
$
30
$
26
$
4
1 Net of change in inventory
The realized margin on gas marketing sales at December 31, 2017, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $18 million and $6 million for the nine and three month periods respectively. This was $7 million and $6 million higher than the same periods in 2016. The Corporation increased its gas marketing activity in response to the natural gas price volatility created by disruptions on the NGTL transmission system. This resulted in the Corporation selling higher volumes of natural gas at higher margins compared to the same period in 2016. The Corporation sold 72 PJs in 2017 compared to 49 PJs in the same period of 2016.
Gas Marketing Fair Value Adjustments
The Corporation enters into various natural gas contracts (swaps, options and forwards) in its gas marketing strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at December 31, 2017 on gas marketing derivative instruments increased the gas marketing margin by $19 million for the nine month period. The December 31, 2017, AECO near month price dropped $1.03 per GJ to $2.04 per GJ compared to March 31, 2017, resulting in a favourable impact on gas marketing natural gas sales contracts. Also contributing to the favourable impact on the gas marketing margin was the Corporation’s ability to take advantage of a brief decline in market prices by purchasing lower priced natural gas purchase
6
2017-18 THIRD QUARTER REPORT
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