also optimizes transmission and storage capacity during off-peak periods by purchasing and selling natural gas in the open market to generate additional margins. The margins earned on this activity benefit customers by reducing pressure on transmission and distribution rates. The Corporation also leverages its storage facilities by purchasing natural gas and injecting it into storage when gas prices are low and selling when gas prices recover. This activity is primarily responsible for the revaluation of natural gas in storage, as gas prices continue to fall to all time low prices while inventory balances grow. Lastly, SaskEnergy provides natural gas supply options to larger end-use customers in Saskatchewan through non-regulated contract sales.
The gas marketing margin, as reported in the consolidated financial statements, was as follows:
31, 2016 1
Gas marketing sales
Gas marketing purchases
Realized margin on gas marketing sales
Impact of fair value adjustments
Revaluation of natural gas in storage
Margin on gas marketing sales
1 See note under table of Consolidated net income (loss) on page 31.
The realized margin on gas marketing sales for the 12 months ended December 31, 2015 — which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage — was $19 million. By purchasing gas at low prices, SaskEnergy was able to reduce the average cost of gas sold and increase the margins earned compared to 2014. The lower market prices and smaller forward pricing differentials also constrained opportunities for the Corporation to transact significant volumes of purchases and sales. There were 47 PJ of natural gas sold in the 12 months of 2015 compared to 95 PJ sold in the same period of 2014. During the three months ended March 31, 2016, the Corporation realized a $5 million margin on gas marketing sales, which excludes the effect of fair value adjustments and revaluation of natural gas in storage. As market prices continued to decline through the period, higher sales volumes were offset by the effects of declining gas marketing margins.
Gas Marketing Fair Value Adjustments
Gas marketing margins are affected by fair value gains and losses on the various natural gas contracts (forward contracts, swaps and options) it uses in its gas marketing strategies. During 2015, fair value adjustments reduced gas marketing margins by $14 million compared to an $8 million increase in 2014. The fair value loss in 2015 is partially attributed to the fair value gain in 2014 — as contracts with a favourable fair value settle, they reduce the amount of the fair value adjustment. As market prices declined through the first three months of 2016, the Corporation replaced expiring natural gas contracts with new lower priced sales and purchase contracts. With higher volumes of sales and purchase contracts outstanding at the end of March 31, 2016 compared to December 31, 2015, and as market prices continued to decline, the unfavourable fair value impact declined by $1 million compared to December 31, 2015.
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. With the near-month AECO spot price falling from $2.70 per GJ at the end of December 31, 2014 to $2.35 per GJ at the end of December 31, 2015, the weighted average cost of gas in storage fell by $0.24 to $2.72 per GJ. Purchases made in the low market price environment have reduced the average cost of gas in storage; however, lower forward market prices continue to adversely affect net realizable value. Consequently, the net realizable value of gas marketing natural gas in storage was $24 million below cost as at December 31, 2015, which is $1 million lower than the revaluation adjustment at December 31, 2014. As the near-month AECO spot price fell to $1.02 per GJ at the end of March 31, 2016, the unfavourable net realizable value adjustment on gas marketing gas in storage increased to $34 million below cost compared to $24 million below cost at December 31, 2015. The Corporation took advantage of the declining market prices through the three month period by purchasing and injecting an additional three PJ of low priced natural gas into storage, which reduced the average cost of gas in storage and lessened the effect of lower gas prices.
Management’s Discussion & Analysis
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