SaskEnergy Incorporated First Quarter Report margin of $0.14 per GJ. This compared to a favourable realized margin of $5 million for the same period in 2015 based on an average commodity margin of $0.36 per GJ. The lower realized commodity margin in 2016 is a result of a commodity rate decrease from $4.84 per GJ to $4.30 effective January 1, 2016. Lower volumes delivered to residential and commercial customers also contributed to the lower margin, a result of weather being 17 per cent warmer than normal in 2016 compared to 5 per cent warmer in 2015. March 31, 2011
Commodity Fair Value Adjustments
The fair value adjustments at the end of the quarter increased the margin on commodity sales by $48 million as the $100 million unfavourable fair value position at March 31, 2016 improved to $52 million unfavourable at June 30, 2016. The settlement of higher priced natural gas purchase contracts during the three months contributed to a lower volume of contracts outstanding and the prices of the remaining natural gas purchase contracts outstanding are closer to market prices due to the recovery of market prices during the quarter. Market prices dropped at the end of March 2016, as warmer weather through the winter resulted in higher than expected levels of natural gas in storage. The AECO near-month natural gas spot price increased $1.17 per GJ from $1.02 per GJ at the end of March 2016 to $2.19 per GJ at the end of June 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 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 have fallen to all time low prices while inventory balances have grown. 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 condensed consolidated financial statements, was as follows:
Three months ended June 30
(millions)
2016
2015 Change
Gas marketing sales
$
26
$
35
$
(9)
Gas marketing purchases 1
(21)
(31)
10
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
5
4
1
(5)
(2)
(3)
11
1
10
Margin on gas marketing sales
$
11
$
3
$
8
1 Net of change in inventory
The realized margin on gas marketing sales for 2016, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $5 million, which is consistent with prior year. A low market price environment generally constrains opportunities for the Corporation to transact significant volumes of purchases and sales at favourable margins; however, the rapid decline in short-term market prices at the end of March 2016 generated favourable forward pricing differentials as forward pricing did not decline to the same extent. This allowed the Corporation to increase gas marketing activity with 17 PJs of natural gas sold in the three months ended June 30, 2016 compared to 12 PJs in the same period of 2015.
Gas Marketing Fair Value Adjustments
The Corporation enters into various natural gas contracts (swaps, options and forwards) in its gas marketing strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at June 30, 2016 on gas marketing derivative instruments reduced the gas marketing margin by $5 million compared to the unfavourable fair value impact of $2 million at the end of the same period in 2015. The market price increase at the end of June 2016 resulted in the $5 million unfavourable effect on net income. The AECO near month spot price increased $1.17 per GJ from March 2016 to the end of June 2016. At June 30, 2016 the Corporation’s outstanding gas marketing contracts consisted primarily of sales contracts. The average deal price at June 30, 2016 on the outstanding sales contracts was $0.14 below the market price in comparison to the favourable position at the end of March 2016 when the average deal price on the outstanding sales contracts was $0.23 higher than the market price.
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2016-17 FIRST QUARTER REPORT
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