For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. Consequently, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. The most notable differences are the elimination of intercompany costs in the preparation of the consolidated financial statements, including transportation costs paid to TransGas (a wholly owned subsidiary), as well as the timing related to recognition of financial derivative settlements. While a gain or loss is commonly reported in the Corporation’s consolidated financial statements, it should not be taken as indicative of the results recorded within the GCVA.
Commodity Margin
The commodity margin on sales to customers, as reported in the consolidated financial statements, was as follows:
Three months ended December 31
Twelve months ended December 31
2015
2014 Change
2015
2014 Change
(millions)
$
89
$
290
Commodity sales
$
113
$
(24)
$
310
$
(20)
Commodity purchases 1
(72)
(250)
(101)
29
(301)
51 31 98
17
40 15
Realized margin on commodity sales Impact of fair value adjustments
12
5
9
(1)
(94)
93
(83)
$
16
$
55
Margin on commodity sales
$
(82)
$
98
$
(74)
$
129
1 Net of change in inventory
SaskEnergy manages the purchase price of natural gas it buys through its natural gas price risk management program with two objectives: to reduce the volatility of natural gas prices and to offer rates that are competitive to other utilities. The two objectives naturally oppose each other, and the balance between the two may change depending on existing market conditions. In order to ensure a secure supply of natural gas, SaskEnergy contracts for the physical delivery of natural gas using non-financial derivatives, referred to as forward or physical natural gas contracts. The purchase price contained in these forward contracts may be fixed, or it may be based on a variable index price. While fixed price contracts reduce the impact of natural gas price volatility, variable or market prices can assist in offering competitive rates depending on the pricing environment. SaskEnergy uses financial derivatives and physical swaps to manage the future purchase price of natural gas. 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 $40 million margin on commodity sales, with average revenue of $4.29 per GJ and average cost of gas sold of $3.71 per GJ. This compared to a favourable realized margin of $9 million for the same period in 2014. The higher realized commodity margin in 2015 is a result of low natural gas market prices allowing the Corporation to reduce the average cost of commodity purchases, combined with the Corporation’s first commodity rate increase in six years to $4.84 per GJ effective July 1, 2014. This was slightly offset by lower volumes delivered to residential and commercial customers, a result of warmer weather. During the fourth quarter of 2015, the Corporation realized a $17 million favourable margin on commodity sales which was $5 million higher than the same period of 2014, a result of the low natural gas market prices allowing for the Corporation to realize a lower average cost of commodity purchases.
Gas Marketing Activity
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. Low natural gas market prices in the past few years created opportunities for the Corporation to purchase relatively low-priced natural gas which has been injected into storage facilities to be sold in the future when prices are higher. The Corporation also optimizes transmission and storage capacity during off peak periods, by 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.
7
2015/2016 FOURTH QUARTER REPORT
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