The commodity margin on sales to customers, as reported in the consolidated financial statements, was as follows:
15 Months
3 Months
12 Months
12 Months
Ended March
Ended March
Ended
Ended
December
December
31, 2016 1
31, 2016
31, 2015
31, 2014
Change
(millions)
Commodity sales
$ 310
$ (20)
$ 385
$ 95
$ 290
Commodity purchases
301
51
338
88
250
Realized margin on commodity sales
9
31
47
7
40
Impact of fair value adjustments
(83)
98
4
(11)
15
Margin on commodity sales
$ (74)
$ 129
$ 51
$ (4)
$ 55
1 See note under table of Consolidated net income (loss) on page 31.
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 for the 12 months ended December 31, 2015 — $31 million higher than 2014. The margin earned in 2015 is significantly higher than 2014 as the cold weather conditions in 2014 increased commodity costs, which reduced the 2014 commodity margin and created a $34 million deficit in the GCVA. The deficit in the GCVA was addressed by increasing the commodity rate to $4.84 per GJ on July 1, 2014, a rate that was designed to recover the projected cost of gas plus the deficit in the GCVA over a two-year period. Subsequent to the commodity rate increase, natural gas prices fell below expectations, reducing the cost of gas sold and increasing commodity margins throughout 2015. In contrast to 2014, weather was warmer than normal through 2015, resulting in the industry experiencing higher than expected levels of natural gas in storage at the end of December 31, 2015. When combined with record natural gas production, market prices reached new 20-year lows near the end of 2015 and the Corporation reduced the commodity rate from $4.84 to $4.30 per GJ effective January 1, 2016. The Corporation realized a $7 million margin on commodity sales for the three months ended March 31, 2016, which is lower than normal due to the commodity rate decrease and 14 per cent warmer than normal weather reducing volumes delivered. This was partially offset by the favourable effects of declining market prices lowering the average cost of gas sold in the three month period.
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 31, 2015. The settlement of natural gas contracts during 2015 contributed to a lower volume of contracts outstanding at the end of 2015 which improved the fair value position. In addition, the values of the remaining natural gas contracts were closer to market prices, which also improved the fair value adjustment at the end of December 31, 2015. Between January 1 and March 31, 2016, natural gas prices fell significantly (the AECO near-month natural gas spot price fell from $2.35 per GJ to $1.02 per GJ), reducing the $15 million fair value adjustment at December 31, 2015 by $11 million to $4 million at the end of March 31, 2016. Gas Marketing Margin 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. Traditionally this strategy has produced significant margins; however, while natural gas market prices have declined and differentials between current and forward market prices have narrowed, the opportunities to generate significant margins have also diminished. The Corporation
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2015-16 ANNUAL REPORT SASKENERGY
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