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 Corporation’s 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 $29 million and $17 million margin on commodity sales for the nine months and three months ending December 31, 2018, $10 million and $1 million above the same periods in 2017. Average revenue was $2.73 per GJ and average cost of gas sold was $2.13 per GJ during April through December 31, 2018, resulting in a margin of $0.60 per GJ. This compared to an average commodity margin of $0.52 per GJ through the same period in 2017. Margins were higher in 2018 primarily due to a lower average cost of gas sold, as natural gas market prices reached significant lows during the nine month period. Higher volumes sold in 2018 (33 PJs excluding excess gas sales) compared to 31 PJs sold in the same period of 2017 also contributed to higher margins in 2018.
Commodity Fair Value Adjustments
The fair value adjustments at the end of December 31, 2018 improved the margin on commodity sales by $20 million as the $37 million unfavourable fair value position at March 31, 2018 improved to $17 million unfavourable. This was a result of increasing natural gas market prices, particularly on purchase contracts. A higher volume of natural gas contracts outstanding at December 31, 2018 also contributed to the favourable variance.
Asset Optimization 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 into storage 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
Nine months ended December 31
December 31
(millions)
2018
2017 Change
2018
2017 Change
Asset Optimization sales
$
54
$
66
$
(12)
$
170
$
169
$
1
Asset Optimization purchases 1
(46)
(60)
14
(161)
(151)
(10)
Realized margin on asset optimization sales Impact of fair value adjustments Revaluation of natural gas in storage
8
6
2
9
18 19
(9)
17
17
-
(7)
(26)
(2)
-
(2)
14
(7)
21
Margin on asset optimization sales
$
23
$
23
$
-
$
16
$
30
$
(14)
1 Net of change in inventory
The realized margin on asset optimization sales at December 31, 2018, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was a gain of $9 million for the nine month period. This was $9 million lower than the same period in 2017. The Corporation increased its asset optimization activity in response to natural gas price volatility resulting in the Corporation selling higher volumes of natural gas at lower margins compared to the same period in 2017.
Asset Optimization Fair Value Adjustments
The Corporation enters into various natural gas contracts (swaps and forwards) in its asset optimization strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at December 31, 2018 on asset optimization derivative instruments decreased the asset optimization margin by $7 million for the nine month period. The December 31, 2018, AECO near month price increased $0.47 per GJ to $1.54 per GJ compared to March 31, 2018, resulting in an unfavourable impact on asset optimization natural gas sales contracts. At the end of December 31, 2018, the volume of outstanding purchase and sale contracts was 118 PJs lower than at March 31, 2018.
6
2018-19 THIRD QUARTER REPORT
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