SaskEnergy Commodity Rate 2009 Review and Natural Gas Market Update

SaskEnergy Commodity Rate 2009 Review
and Natural Gas Market Update

The following is a discussion of how SaskEnergy sets its commodity rate, the status of
the natural gas marketplace and the Corporation’s 2009 performance.

A.
Residential Commodity Rates

SaskEnergy’s commodity rate that was approved for November 01, 2009 is the
lowest commodity rate that our customers have seen in almost nine years.




Historical Commodity Rates


$10.00

$9.00

$8.00

$7.00

J
G
$6.00

$/

$5.00
Current

$4.00
$5.21/GJ

$3.00

$2.00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010


In setting the commodity rate, SaskEnergy follows the standard natural gas utility
regulatory practice in Canada to pass through the cost of gas sold to customers
without markup. No profit or loss should be incurred by the utility on the sales of
natural gas.

The difference between SaskEnergy’s cost of gas and the revenue generated
from commodity rates is tracked in the Gas Cost Variance Account (GCVA).
Balances in the GCVA are refunded to or collected from customers in future
commodity rate applications. This process supports the principle that no profit or
loss is made by SaskEnergy on the sale of natural gas. The company’s auditors,
as well as the Saskatchewan Rate Review Panel, independently monitor the
GCVA to ensure this principle is followed.

Each natural gas utility across Canada has a different rate setting process within
their province. SaskEnergy’s process is to recommend a rate based on the
forward natural gas market and reduction of the GCVA balance to zero over that
same 12 month time period. The rate is established for November 01 of each
year and then reviewed for a potential change on April 01 if the GCVA continues
to be too large or if market conditions change. Rate applications are reviewed by
the Saskatchewan Rate Review Panel and they make a recommendation to
Cabinet for their approval.

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R e s id e n t i a l C o m m o d it y R a t e

W e i g h t e d A v e r a g e C o m m o d i t y R a te J a n - D e c 2 0 0 9

C u r r e n t R a te J a n u a r y 2 0 1 0





C e n tr a G as

$ 7. 3 4 / G J
$ 4. 4 1 / G J
$ 6 . 92 / G J
$ 6 . 85 / G J
(2 0 0 9)
(2 0 0 9)
( 20 0 9 )
( 20 0 9 )

$ 6. 6 8 / G J
$ 5. 7 9 / G J
$ 5 . 21 / G J
$ 5 . 79 / G J
( Ja n 2 0 10 )
( Ja n 2 0 10 )
(J a n 2 0 1 0)
(J an 2 0 1 0)


B rit is h
A lb e rt a
S a s k a t c h e w a n M a n i to b a

C o lu m b ia


W in t e r P r ic e P r o t e c t io n
< 6 0 %
0 %
9 0 %
< 8 0 %

•
7 0 % o f g as us e d in t h e w i n te r



The SaskEnergy rate was $8.51/GJ from January 1 to March 31, $5.96 from April
01 to October 31 and $5.21/GJ from November 1 to December 31. The current
rate is very comparable to other utilities with the added value that the majority of
the 2009/10 winter supply costs are fixed to protect against upside volatility that
is prevalent in the natural gas market. SaskEnergy had the lowest commodity
rates in 2008 and the lowest in 7 out of the last 11 years.

Currently, the rate is very comparable to Manitoba (Centra) and British Columbia
(Terasen) that provide price protection to their customers. Rates for these
utilities are $6.68/GJ for Terasen and $5.79/GJ for Centra. This compares to
SaskEnergy’s $5.21/GJ.




Comparison to Other Major
Canadian Utilities


150%


125%


100%


75%

SaskEnergy
High
Low
Average

50%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Lowest in Canada 7 of the last 11 years

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B.
SaskEnergy Gas Supply

i)
Buying Natural Gas

SaskEnergy buys most of its natural gas from producers and marketers in
Saskatchewan. Typically about the same amount of natural gas is
purchased every day of the year. In the summer, when natural gas
demand is low, the natural gas not used that day is injected into storage.
During the cold winter months natural gas is produced from storage to
supplement the daily purchases in order to meet the high heating load.
This supply strategy is very effective given the operational challenges of
serving Saskatchewan customers in such a large geographical area with
extreme weather conditions.




G a s S upply P o rt f o lio


550

500
450

T y pi c a l D a i l y U s a ge
400

350

300

250
D a i l y Ga s P ur c ha s e s

Ga s i s i nj e c t e d i nt o s t or a ge
200

150

100

Ga s i s pr oduc e d f r om s t or a ge
50
t o me e t wi nt e r he a t i ng l oa d

0



ii)
Natural Gas Prices

SaskEnergy purchases its customers’ gas
on the open market, where the price is
determined by the forces of supply and
demand. The primary pricing point of
AECO
natural gas in North America is Henry Hub
in Louisiana. Because of its pipeline
connections to the high consuming regions
in the eastern United States, a futures
NYMEX
(Henry Hub)
contract based on Henry Hub trades on the
New York Mercantile Exchange (NYMEX).
This provides a high degree of transparency to natural gas prices. The
U.S. NYMEX natural gas price is the most commonly quoted natural gas
price in the media.


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AECO is the largest natural gas hub in Canada and is located in Alberta.
AECO is priced as a basis (differential) to NYMEX which typically
represents regional differences in supply and demand and usually
considers the cost to transport gas from western Canada to the high
consuming regions in the east. When a large volume of transactions
occur at a hub, such as AECO, it becomes a pricing reference point for
smaller hubs such as in Saskatchewan. SaskEnergy purchases almost all
of its natural gas supply from producers in Saskatchewan. This gas is
exchanged at the TransGas Energy Pool (TEP) and the price is quoted as
a basis (differential) to AECO prices in Alberta. Therefore factors affecting
the price of gas in North America, reflected in the NYMEX natural gas
price, affect the price of gas in Saskatchewan.

NYMEX natural gas is quoted in U.S. dollars and is bought and sold in
millions of British Thermal Units (MMBtu). Therefore once the AECO price
is expressed in US/MMBtu, it must be converted to Canadian dollars and
to gigajoules, the standard energy unit used in Canada. Changes in the
Canada-U.S. exchange rate affect the price of natural gas in Canada. An
appreciating Canadian dollar results in lower Canadian natural gas prices
and a depreciating Canadian dollar results in higher natural gas prices, all
things being equal. Following is an example of NYMEX natural gas prices
converted to the price of gas in Saskatchewan.






E x am pl e of Pr ic in g R e la t io ns h ip



A lb e rta

S a s k a tc h ew a n
NY ME X
US $5. 93/M M Btu
AE CO Basi s
US $-0. 40/M M Btu

AE CO Pr ice
US $5. 53/M M Btu
AE CO P ri ce
$ 5. 50/G J
E xchan ge Rate 1.0 5 US / C$
C$5. 81/ M MBtu
T E P Basi s 0. 00 - 0.1 0 0

M MBtu / 1.055 GJ
C$5. 50/ GJ
T E P P rice $ 5.50 - $5 .60/ GJ
AE CO Pr ice
C$5. 50/ GJ


T EP

A EC O



Tr a nsC a na da Pipe line



N
N Y
Y M
M E
E X
X






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iii)
SaskEnergy’s Natural Gas Price Risk Management Program

SaskEnergy has a natural gas price risk management program where it
uses financial instruments to manage the price of the natural gas it buys
on behalf of its customers. The goal of the price management program is
to reduce the volatility of natural gas prices and to have rates that are
competitive to other utilities. Over the last several years natural gas prices
have illustrated considerable volatility (+/- $4.00/GJ) making stability highly
valued by our customers.

In order to reduce volatility, SaskEnergy may use fixed price swaps or
futures contracts to lock in the price of gas for a period in the future. As
natural gas is largely used for heating, winter prices have been historically
higher than summer and more volatile. Therefore, in the summer,
SaskEnergy may lock in the price of gas for the upcoming winter. If
natural gas prices have changed by the time the gas is delivered,
SaskEnergy’s contracted price remains the same. At times SaskEnergy’s
contracted price will be lower than the market price when the gas is
delivered and sometimes it will be higher. The benefit of this type of
strategy is that the price for natural gas that SaskEnergy will be paying is
known in advance – regardless of what the market price of gas does.

To contribute to its goal of having rates that are comparable to other
utilities, SaskEnergy will sometimes accept the market price of natural gas
and/or use options strategies to keep the price it pays for natural gas
within certain ranges. The benefit of these strategies is that if market
prices fall, SaskEnergy’s commodity costs will also fall. On the other
hand, if prices rise, SaskEnergy’s cost of gas may also rise.

The two objectives naturally oppose each other and the balance between
the two will change depending on existing market conditions. In the longer
term, this price management strategy has proven effective for
Saskatchewan consumers. SaskEnergy’s price management strategy has
achieved the lowest commodity rate for residential customers in 7 out of
11 years.


C.
Natural Gas Market Update – December 2009

Natural gas prices are set in an open market and are influenced by a number of
variables including production, demand, natural gas storage levels and economic
conditions. Because of the high demand for natural gas to heat homes and
businesses during the cold winter months and the demand for natural gas to
generate incremental electricity for air conditioning in the summer, weather has
the greatest impact on natural gas prices in the near term. Natural gas prices are
extremely volatile due to the high degree of uncertainty associated with weather.


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Lower demand and increased production resulted in an over abundance of
natural gas throughout 2009. After a sharp drop in natural gas demand in North
America as a result of the 2008 recession, demand for natural gas finally began
to show signs of recovery during the fourth quarter of 2009. November statistics
show U.S. industrial activity stabilized in October and grew 0.8% in November.
On the supply side, technological advances in horizontal drilling and fracturing
techniques made production of natural gas from shale rock economically viable.
This materially increased natural gas supply on the continent in 2009 and is
expected to result in a lower long-term price of natural gas than in recent years.
However, with demand still primarily weather driven, volatility in prices is
expected to continue.

The Energy Information Administration (EIA), the U.S. government agency which
reports the volumes of natural gas in underground storage each week, showed
natural gas in storage peaked at 3.84 trillion cubic feet in November 2009. This
was a new record for total gas in storage in the U.S. Despite cold weather in the
high consuming regions of the continent in December, working gas in storage
was still at 3.57 trillion cubic feet in the United States at December 11, 2009 – a
record high for that time of year.

Its ease of use and its relative environmental benefits compared to fossil fuels,
will ensure natural gas continues to be a smart energy choice into the future.


For more information with regards to the natural gas market place, refer to the
following links for the National Energy Board (NEB) and the United States Energy
Information Administration (EIA).


NEB: http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/prcng/prcng-eng.html

EIA: http://tonto.eia.doe.gov/oog/info/ngw/ngupdate.asp


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