For the second quarter of 2015, the Corporation realized a $5 million favourable margin on commodity sales compared to a $5 million unfavourable margin in 2014, a result of a higher commodity rate. A favourable fair value adjustment of $9 million for the second quarter of 2015 was the result of higher priced purchase contracts settling during the second quarter, which lowered the average contract price on the remaining contracts. This differed significantly from the $17 million unfavourable adjustment for the same period in 2014 as future market price volatility driven by market supply constraints negatively impacted the average purchase price of the corporation’s commodity contracts compared to market.
Gas Marketing Sales
Three months ended June 30
Six months ended June 30
(millions)
2015
2014 Change
2015
2014 Change
Gas marketing sales
$
35
$
106
$
(71)
$
69
$
251
$
(182)
Gas marketing purchases 1
(31)
(101)
70
(61)
(241)
180
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
4
5 4
(1) (6)
8
10
(2)
(2)
(6)
(12)
6
1
-
1
1
11
(10)
Margin on gas marketing sales
$
3
$
9
$
(6)
$
3
$
9
$
(6)
1 Net of change in inventory
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 most significant gas marketing activity is focused on utilizing the storage capabilities of a depleted gas field in west-central Saskatchewan. The primary strategy involves the purchase of natural gas accompanied by a forward sales contract that essentially locks in a future profit margin. Low natural gas market prices in the past few years created opportunities for the Corporation to purchase relatively low-priced natural gas which has been injected into storage facilities to be sold in the future when prices are higher. The Corporation also optimizes transmission and storage capacity during off peak periods, by purchasing and sel ling 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. Lastly, SaskEnergy provides natural gas supply options to larger end-use customers in Saskatchewan through non-regulated contract sales. Transactions undertaken through the Corporation’s gas marketing strategies create risk, especially given the volatility of natural gas market prices. In its gas marketing activities, the Corporation enters into various natural gas contracts. These contracts are derivative instruments and, as such, are recorded at fair value until the date of settlement. Changes in fair value positions are recorded in either gas marketing sales or gas marketing purchases, depending on the specific natural gas contract. Once settled, the amount paid or received for the contract is recorded in gas marketing sales or gas marketing purchases, as appropriate. During the first six months of 2015, fair value adjustments on derivative instruments reduced the margin on gas marketing sales by $6 million as the fair value position declined from $17 million favourable at the end of 2014 to $11 million favourable at the end of June 2015. The change reflects the Corporation’s lower volume of outstanding contracts at the end of the period due to contracts settling in the first half of 2015. 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. In recent years, low natural gas prices have translated to reduced prices on the forward price curve, and consequently, the net realizable value of gas marketing natural gas in storage was $22 million below cost as at June 30, 2015. This is a $1 million improvement to the revaluation adjustment required at December 31, 2014, which is a result of lower volumes of natural gas in inventory and a lower average cost of gas. The realized margin on gas marketing sales, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $8 million. This was a decrease of $2 million from the same period last year as low market prices for natural gas and forward market pricing limited the opportunities for the Corporation to transact significant volumes of purchases and sales. On a quarterly basis, the Corporation realized a $4 million margin in 2015 which was comparable to the second quarter of 2014.
8
2015 SECOND QUARTER REPORT
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