there are fewer distribution customer connections due to the current decline in the provincial economy. The prior year also included a large transmission system customer contribution.
Market value adjustments improved SaskEnergy’s consolidated net income by $8 million. The differential between the contract price and market prices on commodity and asset optimization purchase contracts improved in the current year as near term natural gas market prices increased. The value of natural gas in storage is sensitive to gas prices. At June 30, 2020, the value of gas in storage was $26 million, or $3 million below cost. At the end of March 2020, the value of natural gas in storage was $13 million, or $7 million below cost. An increase in near term natural gas market prices is the primary driver of the decrease in the unfavourable revaluation of natural gas in storage. The difference between the $7 million unfavourable adjustment at the end of the previous fiscal year and the current $3 million unfavourable adjustment to the cost of gas in storage has been reported as a $4 million favourable market value adjustment during the three months ended June 30, 2020.
Natural Gas Sales and Purchases
Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non-regulated asset optimization activities. IFRS requires these activities to be presented together within the consolidated financial statements; however, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately. With the exception of those contracts entered into for an entity’s own usage, IFRS requires derivative instruments such as natural gas purchase and sales contracts to be recorded at fair value until their settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in net income through natural gas sales or natural gas purchases depending on the specific contract. Upon settlement of the natural gas contract, the amount paid or received by SaskEnergy becomes realized and is recorded in natural gas sales or purchases.
Commodity Margin
SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel (SRRP). The commodity rate, which is reviewed April 1 and November 1 of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with the sale of natural gas to distribution customers. Regulatory principles require that utilities do not earn a profit or realize losses on the sale of gas to customers over the long term. Consequently, SaskEnergy accumulates differences between the commodity revenue earned and the cost of natural gas sold in a Gas Cost Variance Account (GCVA). The balance in the GCVA, which is not included in SaskEnergy’s financial statements, is either recovered from, or refunded to, customers as part of future commodity rates. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. Consequently, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. A gain or loss reported in the Corporation's consolidated financial statements may not be reflected in the GCVA. SaskEnergy’s natural gas price risk management program has two objectives: to reduce the impact of natural gas price volatility on the cost of gas and to support rates that are competitive with other utilities. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while supporting competitive rates often means
2020-21 First Quarter Report
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