market prices. Natural gas liquid prices have also declined from the levels experienced in 2014, resulting in an additional impairment of natural gas liquid extraction assets being recognized in 2015. The fourth quarter of 2015 reported $57 million of income before unrealized market value adjustments, which was $30 million higher than the $27 million reported in 2014. This is primarily due to higher customer contribution revenue relating to transmission projects, and lower operating and maintenance expenses. A higher realized margin on commodity sales resulting from a rate increase and higher transportation revenue, resulting from higher contracted volumes plus a rate increase also contributed to the favourable variance. These results were partially offset by a decline in delivery revenue, a result of warmer than normal weather in the fourth quarter reducing the volume of natural gas delivered.
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. Prices remained low throughout 2015, with forward natural gas prices reaching their lowest levels since 1998 in early December. Demand for heating load was muted with an unseasonably warm fourth quarter, while production remained near record levels. Natural gas in storage in North America ended the injection season at the highest level on record, remaining at record levels through December. The AECO monthly index, the benchmark price for natural gas in western Canada, averaged $2.62/GJ in 2015, down from an average of $4.19/GJ during the same time period in 2014. Of particular note in 2015 was the low volatility in AECO natural gas prices, which was approximately 50% less volatile than historical levels. The following chart presents AECO natural gas prices. Most natural gas in Saskatchewan is priced at a differential to the AECO price and is typically between $0.05 per gigajoule (GJ) and $0.20 per GJ higher than AECO.
$12.00
$10.00
$8.00
AECO Monthly
$6.00
Forward Price
$4.00
$2.00
$0.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Natural Gas Sales and Purchases
Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing activities. These activities are presented together, as required by IFRS. However, the Corporation manages these activities as distinct and separate businesses, and as such, the MD&A addresses these natural gas sales and purchases separately.
Commodity Sales to Customers
SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel. The commodity rate, which is reviewed April 1 and November 1 of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with natural gas sold to distribution customers without earning a profit or incurring a loss over the long term. For rate-setting purposes, SaskEnergy accumulates differences between the commodity revenue earned and the cost of natural gas sold in a Gas Cost Variance Account (GCVA). The balance in the GCVA, which is not recorded for financial reporting purposes, is either recovered from or refunded to customers as part of future commodity rates.
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2015/2016 FOURTH QUARTER REPORT
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