Gas Marketing Margin
The gas marketing margin, 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)
$
41
$
150
Gas marketing sales
$
60
$
(19)
$
408
$
(258)
Gas marketing purchases 1
(34)
(131)
(56)
22
(394)
263
7
19
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
4
3
14
5
(5) (1)
(14)
16
(21)
8
(22)
(1)
(23)
22
(12)
11
$
1
$
4
Margin on gas marketing sales 1 Net of change in inventory
$
(3)
$
4
$
10
$
(6)
The year to date realized margin on gas marketing sales for 2015, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $19 million. This was an increase of $5 million from the same period last year as higher margins were realized as purchases executed at lower market prices reduced the average cost of natural gas per GJ. This was achievable despite lower market prices and smaller forward pricing differentials constraining opportunities for the Corporation to transact significant volumes of purchases and sales. There were 47 PJs of natural gas sold in the twelve months of 2015 compared to 95 PJs in the same period of 2014. During the fourth quarter, the Corporation realized a $7 million margin in 2015 compared to a $4 million margin in 2014, which is also a result of declines in the natural gas price environment from 2014.
Derivative Instruments
As derivative instruments, natural gas contracts are recorded at fair value using a market approach until their settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in net income through natural gas sales or natural gas purchases depending on the specific contract. Upon settlement of the natural gas contract, the amount paid or received by SaskEnergy becomes realized and is recorded in natural gas sales or purchases.
Commodity Fair Value Adjustments
The fair value adjustments at the end of the fourth quarter increased the margin on commodity sales by $15 million as the $104 million unfavourable fair value position at the end of 2014 improved to an $89 million unfavourable position at the end of December 2015. The settlement of natural gas contracts during 2015 contributed to a lower volume of contracts outstanding at the end of 2015. Additionally, the values of the remaining natural gas contracts that are outstanding are closer to market prices, which also improve the fair value adjustment.
Gas Marketing Fair Value Adjustments
The Corporation enters into various natural gas contracts (swaps, options and forwards) in its gas marketing strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at December 2015 on gas marketing derivative instruments reduced the gas marketing margin by $14 million compared to the favourable fair value impact of $8 million at the end of December 2014. In 2014, natural gas market prices declined heavily in December, creating a favourable market price differential of $0.76/GJ on gas marketing sales contracts outstanding at the end of 2014. The resulting favourable fair value impact on these natural gas contracts were realized in 2015 as the contracts were settled and replaced with new gas marketing sales contracts with an average market price differential of only $0.16/GJ. This decreased the favourable fair value impact in 2015 compared to 2014.
Revaluation of Natural Gas in Storage
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 carrying amount of natural gas in storage is 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 price curve. AECO’s price decreased from $2.70/GJ at the end of 2014 to $2.35/GJ at the end of 2015, a decrease of $0.35/GJ. The declining market price environment and the relative market stability throughout 2015 provide an opportunity to purchase lower priced natural gas inventory but the declining market prices also create an unfavourable net realizable value impact on longer term higher priced inventory contracts that remain in storage. The result is an unfavourable
8
2015/2016 FOURTH QUARTER REPORT
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