SaskEnergy Incorporated First Quarter Report 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 $7 million margin on commodity sales for the three months ending June 30, 2018, $4 million above the same period in 2017. Average revenue was $2.65 per GJ and average cost of gas sold was $2.12 per GJ during April through June 30, 2018, resulting in a margin of $0.52 per GJ. This compared to an average commodity margin of $0.36 per GJ through the same period in 2017. Margins were higher in 2018 primarily due to a lower average cost of gas. Higher volumes sold in 2018 (12 PJs) also contributed to the higher margin in 2018 as there was 6 PJs sold in the same period of 2017.
Commodity Fair Value Adjustments
The fair value adjustments at the end of June 30, 2018 improved the margin on commodity sales by $15 million as the $37 million unfavourable fair value position at March 31, 2018 improved to $22 million unfavourable. This was a result of increasing natural gas market prices, particularly on purchase contracts. A higher volume of natural gas contracts outstanding at June 30, 2018 was also a contributing driver to the favourable 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 into storage 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 June 30
(millions)
2018
2017 Change
Gas marketing sales
$
55
$
51
$
4
Gas marketing purchases 1
(56)
(46)
(10)
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
(1)
5 5
(6)
(21)
(26)
12
(4)
16
Margin on gas marketing sales
$
(10)
$
6
$
(16)
1 Net of change in inventory
The realized margin on gas marketing sales at June 30, 2018, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was a loss of $1 million for the three months respectively. This was $6 million lower than the same period in 2017. The Corporation increased its gas marketing activity in response to natural gas price volatility resulting in the Corporation selling higher volumes of natural gas at lower margins compared to the same period in 2017. The Corporation sold 38 PJs in 2018 compared to 18 PJs in the same period of 2017.
Gas Marketing Fair Value Adjustments
The Corporation enters into various natural gas contracts (swaps and forwards) in its gas marketing strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at June 30, 2018 on gas marketing derivative instruments decreased the gas marketing margin by $21 million for the three month period. The June 30, 2018, AECO near month price increased $0.32 per GJ to $1.39 per GJ compared to March 31, 2018, resulting in an unfavourable impact on gas marketing natural gas sales contracts. At the end of June 2018, the volume of outstanding contracts was 41 PJs lower than at March 31, 2018.
Revaluation of Natural Gas in Storage
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. As much of the natural gas in storage is held to meet future sales contracts, it is not unusual
6
2018-19 FIRST QUARTER REPORT
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