SaskEnergy Second Quarter Report - September 30, 2016


SaskEnergy Incorporated First Quarter Report The transition to the Corporation’s new fiscal year-end will report 12-month periods ending March 31 st , which changes the perspective of th Corporation’s financial reporting cycle. When reporting a December 31 st year-end, the Corporation incurred peak winter heating loads from January through March and these results typically remained prominent through the low heating load periods of April through September. With the Corporation’s new fiscal period beginning April 1, the financial results and peak winter heating loads are absent. The financial results for the two quarters ending September 30, 2016 highlight operating results and the Corporation’s focus on cost management while working to expand the natural gas system and perform important safety/integrity work in preparation for the approaching winter heating loads. Losses will be common during the first two quarters in the absence of the winter heating load and the financial results demonstrate the dependency the Corporation’s financial results have on weather and winter heating loads. March 31, 2011

Market Prices

With the warm weather through the 2015-16 winter, the amount of gas in storage throughout North America at the beginning of April 2016 was much higher than usual. Natural gas prices reached 20-year lows at the end of March 2016, but recovered through the end of September 2016. Storage injection levels were strong through the summer of 2016 resulting in Saskatchewan storage levels being 93 per cent full at the end of September 2016, while Western Canada storage and Canadian storage being 98 per cent and 97 per cent full. This compares to Canadian storage being 83 per cent full at the end of September 2015. As storage levels reach capacity, pricing levels may fluctuate until the winter heating season begins, potentially creating gas marketing opportunities for the Corporation based on the spreads between spot prices and forward prices.

Commodity Margin

A commodity rate reduction effective January 1, 2016, a result of low natural gas prices, is contributing to lower commodity revenue in comparison to the same two quarters in 2015-16. These first two summer quarters generally experience low commodity margins, until the winter heating season begins midway through the third quarter and continues through to the end of the fiscal period. The commodity margin is highly dependent on winter weather conditions and customer consumption during the winter heating season. With natural gas prices forecasted to remain relatively low in the near future, the Corporation submitted a second application to the Saskatchewan Rate Review Panel to lower the Commodity rate effective November 1, 2016. Natural gas prices have recovered through the year but remain relatively low in comparison to recent years. A result of reduced heating loads from the warmer winter in 2015-16, strong injections through the summer and high levels of natural gas in storage. The requested rate reduction was approved October 12, 2016 and the commodity rate decrease from $4.30 per GJ to $3.65 per GJ will be effective November 1, 2016.

Gas Marketing Margin

SaskEnergy purchased and injected low priced natural gas into storage as market prices declined earlier this year. These lower cost purchases reduced the average cost of natural gas, improving the margins on sales contracts through the end of September 2016. Natural gas spot prices increased, while the forward price curve remained relatively unchanged through the first six months of the fiscal period, reducing gas marketing opportunities through the summer. SaskEnergy will continue to monitor natural gas prices and capitalize on opportunities through the remainder of the year.

Delivery Revenue

In the low natural gas price environment, Saskatchewan natural gas production and exploration will remain slow until prices increase and investment into additional production by Saskatchewan producers becomes more economical. At the same time, customer growth within the Province continues to increase natural gas load growth. Without increasing Saskatchewan production to meet growing load growth, a stronger dependency on importing natural gas supply from Alberta is created. The growing dependency on Alberta supply is increasing operating costs for the Corporation, as gas is being transported further distances. In recent years, the pace of Saskatchewan’s provincial economy and residential customer growth contributed to growing delivery revenue, however customer connection levels are declining in 2016 while industrial and commercial demand for service continues to be strong. Overall, delivery revenue is higher for the first six months of 2016-17 due to delivery rates increasing 4.5 per cent effective January 1, 2016. The third and fourth quarters will see delivery revenues increase with the onset of winter weather conditions, which are expected to return to more seasonably colder temperatures compared to the unseasonably warm winter during 2015-16. During the first quarter, the Corporation submitted an application to the Saskatchewan Rate Review Panel for an average rate increase of 8.6 per cent effective November 1, 2016. Regular delivery service rate increases are required to offset cost pressures related to maintaining a reliable distribution system, increasing Alberta supply costs, and an industry standard rate of return. The requested rate increase was approved October 12, 2016. The Corporation continues to focus on internal



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