SaskEnergy Incorporated First Quarter Report 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. Identifying own-use natural gas purchase contracts reduces the variability of fair value adjustments in the Corporations financial statements. SaskEnergy’s price risk management strategy will govern purchases not identified as own-use purchases to reduce the impact of price changes on realized gas purchase costs which add to the variability in fair value adjustments. March 31, 2011 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 $3 million margin on commodity sales for the three months ending June 30, 2017 compared to $1 million for the same period in 2016. Average revenue was $3.65 per GJ and average cost of gas sold was $3.29 per GJ during April through June 2017, resulting in a margin of $0.36 per GJ. This compared to an average commodity margin of $0.14 per GJ through the same period in 2016 Margins were lower in 2016 primarily due to the sale of excess gas, a result of a much warmer than normal winter, at prices below the average cost of gas.
Commodity Fair Value Adjustments
The fair value adjustments at the end of June 30, 2017 increased the margin on commodity sales by $1 million as the $35 million unfavourable fair value position at March 31, 2017 improved to $34 million unfavourable at June 2017. The settlement of higher priced natural gas purchase contracts during the three months contributed to a lower volume of contracts outstanding.
Gas Marketing Margin
SaskEnergy uses its access to natural gas markets to execute purchases and sales of natural gas to generate margins. By utilizing off peak transportation and storage capacity, SaskEnergy is able to take advantage of pricing differentials between transportation hubs and time periods while minimizing its exposure to price risk. Its primary strategy is to purchase and inject gas when prices are relatively low, and sell the gas in the future when prices are higher. In most cases the purchases and sales are executed at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions.
Three months ended June 30
(millions)
2017
2016 Change
Gas marketing sales
$
51
$
26
$
25
Gas marketing purchases 1
(46)
(21)
(25)
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
5 5
5
-
(5)
10
(4)
11
(15)
Margin on gas marketing sales
$
6
$
11
$
(5)
1 Net of change in inventory
The realized margin on gas marketing sales at June 30, 2017, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $5 million. This equaled the same period of 2016. The Corporation increased its gas marketing activity in response to the natural gas price volatility, generating slightly larger margins, combined with 18 PJs of natural gas sold in the three months ending June 30, 2017 compared to 17 PJs in the same period of 2016.
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 June 30, 2016 on gas marketing derivative instruments increased the gas marketing margin by $5 million for the three month period. At the end of June 30, 2017, the AECO near month price dropped to $2.19 per GJ, having a favourable impact on gas marketing natural gas sales contracts, partially offset by older purchase and sales contracts maturing. At the end of June 2017, the volume of outstanding contracts was 34 PJs less than at March 31, 2017.
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2017-18 FIRST QUARTER REPORT
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