carrying amount of natural gas in storage inventory is then 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 curve, and consequently, the net realizable value of gas marketing natural gas in storage was $23 million below cost, compared to $11 million below cost in 2013. The increased differential between the average cost and the average market price at the end of 2014, compared to 2013, resulted in a $12 million reduction in net income for the year. If forward natural gas prices improve in relation to the cost of the Corporation’s inventory, SaskEnergy will record an additional upward revaluation to recognize the increase in net realizable value, up to a maximum of the original cost. Otherwise, the revaluation will result in improved margins in the future, as contracts are settled by virtue of the lower carrying value of natural gas in storage. The realized margin on gas marketing sales, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $14 million. This was a decrease of $18 million from last year as low market prices for natural gas and forward market pricing limited the opportunity for the Corporation to realize significant margins. The lower realized margins are driven by the higher cost of gas. Delivery Revenue Cold weather, customer growth and delivery rate increases resulted in a $15 million increase in delivery revenue — from $217 million in 2013 to $232 million in 2014. The Corporation earns delivery revenue based on the volume of natural gas delivered to distribution customers plus a basic monthly charge. Customer growth directly impacts the basic monthly charge revenue and leads to additional delivery volumes. The Corporation experienced its third straight year of connecting more than 7,300 new residential, business and industrial customers to its distribution system. This is well above the 10- year average of approximately 5,300. Although customer growth is a significant driver in increased delivery volumes, advances in technology and energy conservation initiatives have partially offset the impact of incremental growth. The Corporation supports energy efficiency and emission reduction initiatives in order to limit the environmental impact of our customers.
transacted at market rates. With the commodity rate increase, SaskEnergy will, over the next two years, recover the amount by which the cost of gas sold exceeded the commodity rate during the first half of 2014. Gas Marketing 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 prices over the past few years also created an opportunity for the Corporation to purchase relatively low-priced natural gas to inject into this storage facility with the intent to sell it at a profit when prices rise. During off-peak periods, the Corporation also optimizes transmission and storage capacity by simultaneously 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. Transactions undertaken through the Corporation’s gas marketing strategies create risk, especially given the volatility of natural gas market prices. Similar to the discussion regarding commodity sales, the Corporation may enter into various natural gas contracts to manage natural gas price risk for 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 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.
Gas Marketing Margin (millions)
2014
2013
Change
Gas marketing sales
$ 370
$ 38
$ 408
Net New Customers
Gas marketing purchases
338
56
394
Realized margin on gas marketing sales
8,000
32
(18)
14
7,000
Impact of fair value adjustments
(33)
41
8
Revaluation of natural gas in storage
6,000
13
(25)
(12)
5,000
Margin on gas marketing sales
$ 12
$ (2)
$ 10
4,000
The Corporation remained in an overall favourable position, as the fair value adjustments on derivative instruments increased the margin on gas marketing sales by $8 million to $17 million at the end of 2014, compared to $9 million at the end of 2013. 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
3,000
2,000
1,000
0
2010
2011
2012
2013
2014
28
Management’s Discussion & Analysis
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