SaskEnergy First Quarter Report - June 30, 2018

MANAGEMENT’S DISCUSSION & ANALYSIS

INTRODUCTION

The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the three months ended June 30, 2018. Using financial and operating results as its basis, the MD&A describes the Corporation’s past performance and future prospects, enabling readers to view SaskEnergy from the perspective of management. This MD&A is presented as at August 22, 2018 and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS). For additional information related to the Corporation, refer to SaskEnergy’s 2017-18 Annual Report. The following discussion contains certain forward-looking statements that are subject to inherent uncertainties and risks, which are described in the Risk Management and Disclosure section of SaskEnergy’s 2017-18 Annual Report. All forward-looking statements reflect the Corporation’s best estimates and assumptions based on information available at the time the statements were made. However, actual results and events may vary significantly from those included in, contemplated by, or implied by such statements. The volume of natural gas delivered to customers is sensitive to variations in the weather, particularly through the prime heating season of November to March. Additionally, changes in market value adjustments may cause significant fluctuations in net income due to the volatility of natural gas prices. Therefore, the condensed consolidated financial results for the first three months of 2018-19 should not be taken as indicative of the performance to be expected for the full year. In order to compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments, realized margin on commodity sales, and realized margin on gas marketing sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. These unrealized market value adjustments vary considerably with the market prices of natural gas, drive significant changes in the Corporation’s consolidated net income, and may obscure other business factors that are also important to understanding the Corporation’s financial results. The measures referred to above are non-IFRS measures, in that there is no standardized definition, and may not be comparable to similar measures presented by other entities.

INDUSTRY OVERVIEW

Natural gas prices are set in an open market and are influenced by a number of factors including production, demand, natural gas storage levels, take-away capacity and economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months, and the demand for natural gas to produce electricity for air conditioning during the summer months, weather typically has the greatest impact on natural gas prices in the near term. Due to the high degree of uncertainty associated with weather and recent Alberta pipeline maintenance issues, natural gas prices in western Canada have been very volatile. Natural gas market fundamentals remain in a strong supply position relative to demand over the last number of years due to the advancements in shale gas production. The AECO 7A monthly index, the benchmark price for natural gas in Western Canada, settled at $0.74 per gigajoule (GJ) for the month of June 2018. Throughout the past quarter ended June 30, 2018, market prices fluctuated greatly because of pipeline maintenance occurring in Alberta. Daily and weekly changes in pipeline maintenance caused extreme volatility in the AECO daily price, with the price actually settling below zero on two days during the quarter. A transformational change occurred regarding natural gas transportation in the fall of 2018, when the National Energy Board approved a long-term fixed price contract from Empress (Alberta/Saskatchewan border) to Dawn (Ontario) on TransCanada's mainline. This event resulted in transportation capacity from Alberta to the Saskatchewan border becoming fully contracted. TransCanada Pipelines’ NGTL system in Alberta appears to need expansion of its export capacity in order to meet customer/industry requirements. Until more NGTL capacity is made available, some natural gas is effectively trapped in Alberta resulting in low AECO prices relative to the rest of the continent. Natural gas in Saskatchewan is priced at a differential to the AECO price and has historically traded between $0.05 per GJ and $0.20 per GJ higher than AECO. However, with the NGTL system constrained, the Saskatchewan price differential to AECO has been higher and much more volatile, resulting in natural gas prices in Saskatchewan trading between $0.09/GJ and $2.00/GJ higher than the AECO price.

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2018-19 FIRST QUARTER REPORT

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