transportation hubs, delivery points and time periods while minimizing its exposure to price risk. In most cases the purchases and sales are executed at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions. SaskEnergy also uses purchases and sales of natural gas to mitigate transportation constraints, which are executed at a cost.
The asset optimization margin, as reported in the condensed consolidated financial statements, was as follows:
Three months ended June 30,
(millions)
2020
2019
Change
Asset optimization sales
$
37 41
$
35 31
$
2
Asset optimization purchases
(10)
Realized margin on asset optimization sales Impact of fair value adjustments Revaluation of natural gas in storage
(4)
4
(8)
3 4
(9) (2)
12
6
Margin on asset optimization sales
$
3
$
(7)
$
10
The realized margin on asset optimization sales at June 30, 2020, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was a $4 million loss. This is $8 million lower than the $4 million favourable margin for the same period ended June 30, 2019. At the beginning of October 2019, TC Energy enacted a temporary policy which reduced volatility and contributed to stronger pricing. SaskEnergy was left with limited asset optimization opportunities due to the reduced volatility, which resulted in the Corporation selling 8 PJs less natural gas at lower margins, resulting in a $6 million reduction in margin compared to the same period in 2019-20. Some transportation capacity within Alberta was also secured through asset optimization transportation contracts to meet customer obligations. These incremental transportation contracts had an unfavourable $2 million effect compared to the 2019-20 asset optimization margin.
Asset Optimization Fair Value Adjustments
The Corporation enters into various natural gas contracts in its asset optimization strategies, which are subject to volatility of natural gas market prices. At June 30, 2020, the fair value adjustment on asset optimization derivative instruments increased the asset optimization margin by $3 million compared to a decrease of $9 million for the same period in 2019-20. Between April 1, 2020 and June 30, 2020, near term natural gas market prices increased and purchase contracts outstanding at June 30, 2020 were $0.13 per GJ higher than market price, while purchase contracts outstanding at the end of March 31, 2020 were $0.20 per GJ higher than market price. This favourable decrease in the price differential on purchase contracts in 2020-21 was partially offset by the unfavourable variance related to the increase in price differentials on outstanding sale contracts.
Revaluation of Natural Gas in Storage
At each reporting period, the Corporation measures the net realizable value of natural gas in storage held for asset optimization transactions 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. Near term forward natural gas market prices increased since March 2020, consequently, the net realizable value of asset optimization natural gas in storage was $3 million below cost at June 30, 2020, which is a $4 million favourable adjustment to net income from the $7 million unfavourable revaluation adjustment recorded as at March 31, 2020.
2020-21 First Quarter Report
10
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