SaskEnergy Incorporated First Quarter Report 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 $2 million margin on commodity sales for the six months ending September 30, 2016 compared to the $4 million margin for the same period in 2015. Average revenue was $3.75 per GJ and average cost of gas sold was $3.63 per GJ during April through September 2016, resulting in a margin of $0.12 per GJ. This compared to an average commodity margin of $0.16 per GJ through the same six month period in 2015. Lower margins in 2016 were a result of a commodity rate decrease from $4.84 per GJ to $4.30 effective January 1, 2016. This was partially offset by there being 7 less petajoules (PJs) of excess gas sales during 2016 compared to 2015. Excess gas sales typically have lower margins and reduce the commodity margins. March 31, 2011 The realized commodity margin on commodity sales of $1 million for the three months ending September 30, 2016 was $2 million above the $1 million unfavourable margin in 2015. A lower commodity rate in 2016 reduced the commodity margin, however excess gas sales during 2016 were lower than 2015 and had a positive effect on the commodity margin. There were 5 PJs of excess gas sales in the three months ending September 30, 2015 in comparison to only 1 (PJs) sold in 2016.
Commodity Fair Value Adjustments
The fair value adjustments at the end of the September 30, 2016 increased the margin on commodity sales by $53 million as the $100 million unfavourable fair value position at March 31, 2016 improved to $47 million unfavourable at September 30, 2016. The settlement of higher priced natural gas purchase contracts during the six months contributed to a lower volume of contracts outstanding. In addition, the prices of the remaining natural gas purchase contracts outstanding are closer to market prices due to the recovery of AECO market prices during the first two quarters. 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 $1.54 per GJ from $1.02 per GJ at the end of March 2016 to $2.56 per GJ at the end of September 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.
Three months ended
Six months ended September 30
September 30
(millions)
2016
2015 Change
2016
2015 Change
Gas marketing sales
$
46
$
40
$
6
$
72
$
75
$
(3)
Gas marketing purchases 1
(40)
(36)
(4)
(61)
(67)
6 3 4
Realized margin on gas marketing sales Impact of fair value adjustments Revaluation of natural gas in storage
6 4 3
4
2 7 4
11
8
(3) (1)
(1)
(5)
14
-
14
Margin on gas marketing sales
$
13
$
-
$
13
$
24
$
3
$
21
1 Net of change in inventory
The realized margin on gas marketing sales at September 30, 2016, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $11 million. This is $3 million higher compared to the same period of 2015. 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, although at smaller margins, with 35 PJs of natural gas sold in the six months ended September 30, 2016 compared to 24 PJs in the same period of 2015.
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2016-17 SECOND QUARTER REPORT
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