SaskEnergy Third Quarter Report - September 30, 2015

Due to the seasonality of the weather in the Province, the volume of commodity sales to customers declines significantly in the second and third quarters. However, some of the costs associated with the Corporation’s price risk management strategy do not decline with the decreasing sales volumes. As such, declining margins on commodity sales are not unusual during the second and third quarters. For the third quarter of 2015, the Corporation realized a $1 million unfavourable margin on commodity sales which was comparable to the margin in the same period of 2014. An unfavourable fair value adjustment of $2 million for the third quarter of 2015 was the result of the natural gas market prices declining in September 2015.

Gas Marketing Sales

Three months ended September 30

Nine months ended September 30

2015

2014 Change

2015

2014 Change

(millions)

$

40

$

109

Gas marketing sales

$

97

$

(57)

$

348

$

(239)

Gas marketing purchases 1

(36)

(97)

(97)

61

(338)

241

4

12

Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage

-

4

10

2

(3) (1)

(9)

4

(7) (1)

(8)

(1)

-

-

11

(11)

$

-

$

3

Margin on gas marketing sales 1 Net of change in inventory

$

4

$

(4)

$

13

$

(10)

SaskEnergy’s gas marketing activity employs several different strategies, all of which attempt to optimize storage and transportation capacity available to the Corporation to earn a positive margin. The most significant gas marketing activity is focused on utilizing the storage capabilities of a depleted gas field in west-central Saskatchewan. The primary strategy involves the purchase of natural gas accompanied by a forward sales contract that essentially locks in a future profit margin. Low natural gas market prices in the past few years created opportunities for the Corporation to purchase relatively low-priced natural gas which has been injected into storage facilities to be sold in the future when prices are higher. The Corporation also optimizes transmission and storage capacity during off peak periods, by purchasing and selling natural gas in the open market to generate additional margins. The margins earned on this activity benefit customers by reducing pressure on transmission and distribution rates. Lastly, SaskEnergy provides natural gas supply options to larger end-use customers in Saskatchewan through non-regulated contract sales. The realized margin on gas marketing sales, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $12 million. This was an increase of $2 million from the same period last year as higher margins were partially offset by low market prices for natural gas and forward market pricing limited the opportunities for the Corporation to transact significant volumes of purchases and sales. There were 34 PJ of natural gas sold in the first nine months of 2015 compared to 80 PJ in the same period of 2014. On a third quarter basis, the Corporation realized a $4 million margin in 2015 which was a result of a higher realized margin, partially offset by lower volumes. Transactions undertaken through the Corporation’s gas marketing strategies create risk, especially given the volatility of natural gas market prices. The Corporation enters into various natural gas contracts in its gas marketing activities. These contracts are derivative instruments and, as such, are recorded at fair value until the date of settlement. Changes in fair value positions are recorded in either gas marketing sales or gas marketing purchases, depending on the specific natural gas contract. Once settled, the amount paid or received for the contract is recorded in gas marketing sales or gas marketing purchases, as appropriate. During the first nine months of 2015, fair value adjustments on derivative instruments reduced the margin on gas marketing sales by $9 million. The fair value position slightly declined from $8 million unfavourable at the end of September 2014 to $9 million unfavourable at the end of September 2015. The results are comparable and reflect the Corporation’s lower volume of outstanding contracts at the end of the period due to contracts settling in the first nine months of 2015, which has been offset by the impact of declining natural gas market prices in September 2015. At each reporting period, the Corporation measures the net realizable value of gas marketing natural gas in storage based on forward market prices and anticipated delivery dates. The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. In recent years, low natural gas prices have translated to reduced prices on the forward price curve. AECO’s price decreased to $2.60/GJ at the end of September, down $0.10/GJ from the end of 2014 and down $0.17/GJ from the end of August. As forward contracts settle, their market value adjustments become realized in net income leaving a lower volume of natural gas contracts outstanding compared to the end of 2014. The result is improved market value adjustments despite declining market prices. Consequently, the net realizable value of gas marketing natural gas in storage was $23 million below cost as at September 30, 2015, which is unchanged from the revaluation adjustment required at December 31, 2014.

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2015 THIRD QUARTER REPORT

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