SaskEnergy Incorporated First Quarter Report 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 $15 million margin on commodity sales for the nine months ending December 31, 2016 compared to the $21 million margin for the same period in 2015. Average revenue was $3.71 per GJ and average cost of gas sold was $3.30 per GJ during April through December 2016, resulting in a margin of $0.41 per GJ. This compared to an average commodity margin of $0.54 per GJ through the same nine month period in 2015. Lower margins in 2016 were a result of commodity rate decreases from $4.84 per GJ to $4.30 effective January 1, 2016, and to $3.65/GJ effective November 1, 2016. March 31, 2011
The realized margin on commodity sales of $13 million for the three months ending December 31, 2016 was $4 million below the $17 million margin in 2015 due primarily to the lower commodity rates.
Commodity Fair Value Adjustments
The fair value adjustments for the nine month period ended December 31, 2016 increased the margin on commodity sales by $82 million as the $100 million unfavourable fair value position at March 31, 2016 improved to $18 million unfavourable at December 31, 2016. The settlement of higher priced natural gas purchase contracts during the nine months contributed to a lower volume of contracts outstanding. In addition, the prices of the remaining natural gas purchase contracts are closer to market prices due to the recovery of AECO market prices during the first three quarters. For example, at the end of March 2016 the forward price for delivery of natural gas at AECO in January 2017 was $2.68 / GJ. By the end of December 2016 that price had increased $0.77 / GJ to $3.45. This recovery in prices has contributed to the favourable market value adjustments.
Gas Marketing Margin
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 primary strategy involves the purchase and storage injection of natural gas accompanied by a forward sales contract that essentially locks in a future profit margin. Traditionally this strategy has produced significant margins; however, due to low natural gas market prices and lower differentials between current and forward market prices, the opportunities to generate significant margins have also diminished. The Corporation also leverages its storage facilities by purchasing low cost natural gas and injecting it into storage, to hold and sell when gas prices recover. Lastly, SaskEnergy provides natural gas supply options to larger end-use customers in Saskatchewan through non-regulated contract sales.
Three months ended
Nine months ended December 31
December 31
2016
2015 Change
2016
2015 Change
(millions)
$
41
$
113
Gas marketing sales
$
41
$
-
$
116
$
(3) (1) (4) (2)
Gas marketing purchases 1
(41)
(102)
(34)
(7) (7) (6)
(101)
-
11
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
7
15
(11)
(12)
(5) (1)
(10)
13
27
14
(1)
28
$
2
$
26
Margin on gas marketing sales 1 Net of change in inventory
$
1
$
1
$
4
$
22
The realized margin on gas marketing sales at December 31, 2016, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $11 million. This is $4 million lower compared to the same period of 2015, as market conditions limited the opportunities for the Corporation to transact significant volumes of purchases and sales at margins similar to the same period in 2015. The Corporation increased its gas marketing activity, although at smaller margins, with 49 PJs of natural gas sold in the nine months ended December 31, 2016 compared to 37 PJs in the same period of 2015.
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, 2016 on gas marketing derivative instruments reduced the gas marketing margin by $12 million for the nine month period and $11 million for the three month period compared to $10 million and $5 million unfavourable for the same periods in 2015. At the end of March, SaskEnergy had 26.4 PJ of purchase contracts with an unfavourable fair value of $7 million, and 38.7 PJ of Sales contracts with a favourable fair value of $9 million. At December 31, 2016 these purchase contracts had matured. The elimination of the market value adjustments on the purchase contracts has favourably affected financial results. Meanwhile, many of the sales contracts in place at the end of March 2016 remain, and with the rise in gas prices, the change in the value of these contracts adversely affected the margin on gas sales at the end of the third quarter. The impact of the higher gas prices on outstanding sales contracts exceeded the impact of expiring purchase contracts for a net impact on gas margin of $12 million.
6
2016-17 THIRD QUARTER REPORT
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