SaskEnergy Incorporated First Quarter Report price increased from $1.02 per GJ at the end of March 2016 to $3.45 per GJ at the end of December 2016, generating a $70 million favourable unrealized fair value adjustment on outstanding natural gas contracts. When natural gas market prices increased throughout the nine months ended December 31, 2016, the unfavourable net realizable value impact at the end of March 2016 improved by $27 million at December 31, 2016, resulting in a favourable impact on the Corporation’s consolidated net income. March 31, 2011
Natural Gas Sales and Purchases (normal use)
Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing 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. In the third quarter of 2016, the Corporation started to identify certain natural gas purchase contracts as own-use contracts. The Corporation enters into these contracts to acquire the natural gas it needs to meet expected sales to commodity customers. These non-financial derivative contracts are not recorded at fair value, rather, the contracts are accounted for as a purchase at the time of delivery. Other natural gas contracts are classified as derivative instruments and 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. The commodity rate, which is reviewed in April and November of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with natural gas sold to distribution customers without earning a profit or incurring a loss over the long term. For rate-setting purposes, 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 recorded for financial reporting purposes, is either recovered from or refunded to customers as part of future commodity rates. Consequently, higher commodity margins in one year are often followed by a commodity rate reduction and lower commodity margins in the subsequent year, as is the case in 2015-16 and 2016-17. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. As a result, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. The most notable differences are the elimination of intercompany costs in the preparation of the consolidated financial statements, including transportation costs paid to TransGas; as well as the recognition of financial derivative settlements. While a gain or loss is commonly reported in the Corporation’s consolidated financial statements, it should not be taken as indicative of the results recorded within the GCVA.
Three months ended
Nine months ended December 31
December 31
2016
2015 Change
2016
2015 Change
(millions)
$
80
$
125
Commodity sales
$
89
$
(9)
$
160
$
(35)
Commodity purchases 1
(67)
(110)
(72)
5
(139)
29
13 29
15 82
Realized margin on commodity sales Impact of fair value adjustments
17
(4)
21
(6)
(1)
30
6
76
$
42
$
97
Margin on commodity sales
$
16
$
26
$
27
$
70
1 Net of change in inventory
SaskEnergy manages the purchase price of natural gas it buys through its natural gas price risk management program with two objectives – to reduce the impact of natural gas price volatility, and to offer rates that are competitive to other utilities. The two objectives naturally oppose each other, and the balance between the two may change depending on existing market conditions. In order to ensure a secure supply of natural gas, SaskEnergy contracts for the physical delivery of natural gas using non-financial derivatives, referred to as forward or physical natural gas purchase contracts. In the third quarter of 2016, the Corporation started to identify natural gas purchase contracts as own-use contracts, which are not recorded at fair value. The purchase price contained in forward or physical natural gas contracts may be fixed, or it may be based on a variable index price. While fixed price contracts reduce the impact of natural gas price volatility, variable or market prices can assist in offering competitive rates depending on the pricing environment. SaskEnergy uses financial derivatives and physical swaps to manage the future purchase price of natural gas. Implementing the own-use natural gas purchase strategy, will reduce the variability in fair value adjustments in the Corporations financial statements. SaskEnergy’s price risk management strategy will govern non-own-use purchases to reduce the impact of price changes on realized gas purchase costs which add to the variability in fair value adjustments.
5
2016-17 THIRD QUARTER REPORT
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