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 $25 million margin on commodity sales for the 12 months ending March 31, 2017 compared to the $28 million margin for the same period ending March 31, 2016. Average revenue was $3.61 per GJ and average cost of gas sold was $3.20 per GJ, resulting in a margin of $0.41 per GJ. This compared to an average commodity margin of $0.43 per GJ through the same 12-month period in 2016. Lower margins in 2016-17 were a result of commodity rate decreases from $4.84 per GJ to $4.30 effective January 1, 2016, and to $3.65 per GJ effective November 1, 2016, offset in part by the impact of lower prices on natural gas purchases. Meanwhile the GCVA balance has increased to $12.8 million owing from customers. Using the current commodity rate and natural gas prices, the GCVA balance is expected to be fully recovered by October 2018. Commodity Fair Value Adjustments The fair value adjustments at March 31, 2017 increased the margin on commodity sales by $65 million as the $100 million unfavourable fair value position at March 31, 2016 improved to $35 million unfavourable at March 31, 2017. The settlement of higher priced natural gas purchase contracts during the year reduced the volume of contracts outstanding from 86 PJ to 49 PJ and the differential between the contract price and market prices diminished from $1.16 per GJ to $0.72 per GJ during 2016-17. In addition, during 2016-17, SaskEnergy began to segregate a portion of its natural gas purchase contracts where the gas will ultimately be sold to commodity customers. Under IFRS, such contracts are not required to be reported at market value. The volume of contracts identified and segregated for the purpose of expected commodity sales was 36 PJ. Had these contracts been reported at market value, the fair value adjustment on commodity sales would have been $56 million. 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 find opportunities in the market 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. During 2016-17, SaskEnergy’s gas marketing activities included the purchase of 62 PJ of natural gas at an average price of $2.09 per GJ, the sale of 60 PJ at an average price of $2.42 per GJ and an increase to gas in storage of 2 PJ. In addition, SaskEnergy increased the volume of sales in future periods by 22 PJ.
The gas marketing margin, as reported in the consolidated financial statements, was as follows:
12 Months
12 Months
3 Months
15 Months
Ended March
Ended March
Ended March
Ended March
31, 2017 1
31, 2016 1
Change
31, 2015
31, 2016
(millions)
Gas marketing sales
$ 34
$ 181
$ 147
$ 147
$ –
Gas marketing purchases
30
157
133
127
6
Realized margin on gas marketing sales
4
24
14
20
(6)
Impact of fair value adjustments
(4)
(15)
(2)
(11)
9
Revaluation of natural gas in storage
–
(11)
13
(11)
24
Margin on gas marketing sales
$ –
$ (2)
$ 25
$ (2)
$ 27
1 See note under table of Consolidated Net Income (loss) on page 27.
The realized margin on gas marketing sales at March 31, 2017, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $14 million. This is $6 million lower than the $20 million margin for the period ending March 31, 2016, as market conditions limited the opportunities for the Corporation to transact significant volumes of purchases and sales at required margins.
29
2016-17 ANNUAL REPORT SASKENERGY
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