Extreme cold weather blanketed North America through the first few months of 2014 resulting in one of the coldest winters the continent has experienced. In highly populated natural gas consuming regions the severe winter was even more pronounced, leading to record consumption for heating homes and businesses. The cold weather resulted in the largest winter season storage drawdown in North America. By spring, natural gas in storage in the U.S. was 55 per cent below the five-year average and at its lowest level in 11 years. Much to the surprise of market participants, a mild summer and prolific natural gas production led to the largest storage refill season on record. By the end of 2014, natural gas in storage was back to the five-year average, and U.S. natural gas production was setting new daily records. In Saskatchewan, natural gas produced from conventional wells continued to decline but large gains in natural gas supply associated with oil production kept total provincial production near 2013 levels. Incremental demand for natural gas from the cold weather, as well as increased power generation and industrial growth, was met with increased imports of natural gas from Alberta. In 2014, 51 per cent of total Saskatchewan supply was imported from Alberta.
The natural gas price volatility that was experienced in 2014 resulted in significant fluctuations in unrealized market value adjustments as evidenced by the $80 million adjustment at December 31, 2014. The significant adjustment is due to greater price differentials on a larger number of forward gas contracts outstanding at the end of 2014 compared to 2013. The decline in market prices at the end of the year also generated a $23 million net realizable value adjustment to natural gas in storage compared to $11 million at the end of 2013. The $87 million unrealized market value adjustment on natural gas contracts and inventory revaluation was a major contributor to the consolidated net loss of $33 million, which was $112 million below the 2013 result. While these purchase contracts were negatively impacted by lower prices in December 2014, SaskEnergy’s approved commodity rate is designed to recover these purchase costs. The Corporation expects to recover approximately $55 million in 2015. In October, a situation involving the release of gas and subsequent fire at a storage cavern wellhead occurred at the Corporation’s Prud’homme storage facility. In December, a ground movement-related natural gas leak in the community of Regina Beach resulted in a natural gas incident that damaged several buildings. Only minor injuries were reported at the incidents and the Corporation’s employees and contractors responded in a professional and dedicated manner to ensure the safety of everyone impacted by the incidents. The Prud’homme incident was caused by a wellhead failure and is estimated to cost approximately $11 million in emergency response, loss of gas, and damage to facilities. The Corporation is insured for such incidents and has received insurance proceeds of $5 million to offset the emergency response costs. The Corporation expects to claim for the remaining costs during 2015 once the ongoing investigation is finalized. Early indications suggest the Regina Beach incident was the result of extreme soil movement experienced in the area. The company initiated a number of measures to address impacts to its gas system, including additional surveying and monitoring, upgrades of the pipeline systems in the areas of ground movement in December, and collaboration with Regina Beach and surrounding communities on additional safety vigilance efforts. Both events resulted in additional operating costs and have contributed to the decline in the 2014 operating income. Natural Gas Prices Natural gas prices are set in an open market and are influenced by a number of variables including production, demand, natural gas storage levels and economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months and the demand for natural gas to generate incremental electricity for air conditioning in the summer, weather has the greatest impact on natural gas prices in the near term. Due to the high degree of uncertainty associated with weather, natural gas prices can be very volatile.
Natural Gas Prices
$12
$10
$8
AECO Monthly Price
Forward Price at December 31, 2014
$6
$4
$2
$0
Throughout the extremely cold weather early in the year, natural gas prices increased and experienced high volatility. The AECO monthly index, the benchmark price for natural gas in Western Canada, reached a five-year high in March of $5.64 per gigajoule (GJ). As storage supplies were replenished, and U.S. natural gas production set new records late in the year, natural gas prices stabilized. The AECO monthly index remained in the $3.50 per GJ to $3.90 per GJ range during the last few months of 2014.
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Management’s Discussion & Analysis
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