MANAGEMENT’S DISCUSSION & ANALYSIS
INTRODUCTION The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the twelve month period ended December 31, 2015. In late November, the Government of Saskatchewan announced that, as a next step in the transition to summary budgeting, the fiscal year end of Crown Investments Corporation entities, including SaskEnergy, will change from December 31 to March 31. For the current year, SaskEnergy will report on a 15-month period beginning January 1, 2015 and ending March 31, 2016. Thereafter, SaskEnergy will report on the 12-month periods ending March 31st of each year. Using financial and operating results as its basis, the MD&A describes the Corporation’s past performance and future prospects, enabling readers to view SaskEnergy from the perspective of management. This MD&A is presented as at February 26, 2016 and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS). For additional information related to the Corporation, refer to SaskEnergy’s 2014 Annual Report. The following discussion contains certain forward-looking statements that are subject to inherent uncertainties and risks, which are described in the Risk Management and Disclosure section of SaskEnergy’s 2014 Annual Report. All forward-looking statements reflect the Corporation’s best estimates and assumptions based on information available at the time the statements were made. However, actual results and events may vary significantly from those included in, contemplated by, or implied by such statements. The volume of natural gas delivered to customers is sensitive to variations in the weather, particularly through the prime heating season of November to March. Additionally, changes in market value adjustments may cause significant fluctuations in net income due to the volatility of natural gas prices. In order to compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments, realized margin on commodity sales, and realized margin on gas marketing sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. These unrealized market value adjustments vary considerably with the market prices of natural gas, drive significant changes in the Corporation’s consolidated net income, and may obscure other business factors that are also important to understanding the Corporation’s financial results. The measures referred to above are non-IFRS measures, in that there is no standardized definition, and may not be comparable to similar measures presented by other entities. CONSOLIDATED FINANCIAL RESULTS
Consolidated Net Income
Three months ended December 31
Twelve months ended December 31
2015
2014 Change
2015
2014 Change
(millions)
Income before unrealized market value adjustments Impact of fair value adjustments Revaluation of natural gas in storage
$
57
$
88
$
27
$
30 71 22
$
47
$
41 66 11
(5) (1)
(2) (1)
(76) (23)
(68) (12)
$
51
$
85
Consolidated net income (loss)
$
(72)
$
123
$
(33)
$
118
Income before unrealized market value adjustments of $88 million for the twelve months of 2015 was $41 million higher than 2014. Low natural gas prices and a commodity rate increase effective July 1, 2014 have contributed to higher realized commodity margins in 2015 compared to 2014. Transportation revenue also increased as a result of higher contracted demand volumes and a rate increase effective January 1, 2015. Delivery revenue declined due to lower volumes delivered to residential and commercial customers, a result of 2015 being significantly warmer on a consistent basis than 2014. Operating and maintenance expenses have decreased from 2014, as the Corporation implemented a number of both short and long term cost reduction initiatives during the year. Gas Marketing activities improved in 2015 compared to 2014, generating higher margins. This was achievable despite selling 50% less gas in a lower natural gas market price environment with smaller pricing differentials between current and forward prices. A small favourable unrealized market value adjustment was recognized on natural gas contracts outstanding at the end of 2015, as the improvement in market value from the expiration of contracts more than offset the unfavourable impact of lower
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2015/2016 FOURTH QUARTER REPORT
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