Natural gas market prices are expected to remain low throughout 2015, which may limit gas marketing opportunities compared to prior years. The decline in natural gas prices will continue to generate unfavourable unrealized market value adjustments on natural gas contracts and natural gas in storage, however in the first quarter the settlement of existing contracts has resulted in a favourable market value adjustment. Natural gas liquid prices have also declined, resulting in an impairment of gas processing assets being recognized for the period ending March 31, 2015.
Natural Gas Prices
Natural gas prices are set in an open market and are influenced by a number of variables including production, demand, natural gas storage levels and economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months and the demand for natural gas to generate incremental electricity for air conditioning in the summer, weather has the greatest impact on natural gas prices in the near term. Due to the high degree of uncertainty associated with weather, natural gas prices can be very volatile. Prices remained low in the first quarter of 2015 as a result of continued record levels of production and unseasonable warm weather in western North America. Prices had declined sharply at the end of 2014 after hitting a five year high in March 2014 following one of the coldest winters in Canada and the U.S. in over 20 years. The AECO monthly index, the benchmark price for natural gas in western Canada, averaged $2.80/GJ in the first three months of 2015, down from an average of $4.51/GJ from the same time period in 2014. The following chart presents AECO natural gas prices. Most natural gas in Saskatchewan is priced at a differential to the AECO price and is usually between $0.05 per gigajoule (GJ) and $0.20 per GJ higher than AECO, which is consistent with the differential in the first quarter.
Natural Gas Sales and Purchases
Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing activities. Although presented together within the consolidated financial statements in accordance with IFRS, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately.
Commodity Sales to Customers
SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel. The commodity rate, which is reviewed April 1 and November 1 of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with natural gas sold to distribution customers without earning a profit or incurring a loss over the long term. For rate-setting purposes, SaskEnergy accumulates differences between the commodity revenue earned and the cost of natural gas sold in a Gas Cost Variance Account (GCVA). The balance in the GCVA, which is not recorded for financial reporting purposes, is either recovered from or refunded to customers as part of future commodity rates.
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2015 FIRST QUARTER REPORT
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