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. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. Consequently, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. The most notable differences are the elimination of intercompany costs in the preparation of the consolidated financial statements, including transportation costs paid to TransGas, as well as the timing related to recognition of financial derivative settlements. While a gain or loss is commonly reported in the Corporation’s consolidated financial statements, it should not be taken as indicative of the results recorded within the GCVA. The commodity margins on sales to customers, as reported in the consolidated financial statements, were as follows:
Commodity Margin
Three months ended June 30
Six months ended June 30
(millions)
2015
2014 Change
2015
2014 Change
Commodity sales
$
41
$
37
$
4
$
171
$
158
$
13
Commodity purchases 1
(36)
(42)
6
(147)
(162)
15 28
Realized margin on commodity sales Impact of fair value adjustments
5 9
(5)
10 26
24 18
(4)
(17)
10
8
Margin on commodity sales
$
14
$
(22)
$
36
$
42
$
6
$
36
1 Net of change in inventory
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. As derivative instruments, natural gas contracts are recorded at fair value until the settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in either commodity sales or commodity purchases depending on the specific contract. Upon settlement of the contract, the amount paid or received by SaskEnergy becomes realized and is recorded in commodity sales or purchases. For the first six months of 2015, fair value adjustments increased the margin on commodity sales by $18 million as the $104 million unfavourable fair value position at the end of 2014 improved to an $86 million unfavourable position at the end of June 2015. The settlement of contracts during the first six months of 2015 contributed to a lower volume of contracts outstanding at June 30, 2015. Additionally, the remaining contracts have a lower average contract price, which improves the fair value. 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 $24 million margin on commodity sales, with average revenue of $4.40 per GJ and average cost of gas sold of $3.82 per GJ. This compared to an unfavourable realized margin of $4 million for the same period in 2014. The higher commodity margin in 2015 is a result of the Corporation’s first commodity rate increase in six years to $4.84 per GJ effective July 1, 2014, combined with low natural gas market prices that have allowed the Corporation to reduce the average cost of commodity purchases. Due to the seasonality of the weather in the Province, the volume of commodity sales to customers declines significantly in the second quarter. However, some of the costs associated with the Corporation’s price risk management strategy do not decline with the lower sales volume. As such, declining margins on commodity sales are not unusual during the second quarter.
7
2015 SECOND QUARTER REPORT
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