SaskEnergy Incorporated First Quarter Report A major transmission project went into service in the first quarter of 2019-20, which increased transmission customer contributions compared to the same period in the prior year and accounts for the majority of the increase in customer contributions year-over-year. The incre se in customer load growth contributed to additional transportation revenue relative to 2018-19. Much of the load growth is the result of continued economic growth in the province, driven by expansion in the major industrial sectors of enhanced oil recovery and power generation. As natural gas production continues to decline, Saskatchewan increasingly relies on gas production in Alberta to meet its delivery requirements. This results in increased transportation utilization on the TC Energy Mainline system to import natural gas from Alberta. These increasing requirements have resulted in higher overall operating costs compared to prior year. While the increase in load requires higher spending in some areas, the continued focus on efficiency and cost management have helped to mitigate increases in both operating costs and employee benefits.
March 31, 2011
The commodity margin is lower in 2019-20 compared to the same period in 2018-19, which is resulting from the commodity rate decreasing from $2.95 per GJ to $2.57 per GJ effective April 1, 2019.
Market value adjustments reduced SaskEnergy’s consolidated net income by $27 million. The differential between the contract price and market prices decreasing from $0.46 per GJ at the end of 2018-19 to $0.24 per GJ in 2019-20 are resulting in an unfavourable market value adjustment of $30 million on outstanding asset optimization purchase contracts. This was partially offset by the price differential on asset optimization sales contracts increasing, resulting in a favourable market value adjustment of $3 million on outstanding asset optimization sales contracts. The value of natural gas in storage is sensitive to natural gas prices. At September 30, 2019, the value of gas in storage was $46 million, or $14 million below cost. At the end of March 2019, the value of natural gas in storage was $26 million, or $14 million below cost. A decrease in near term natural gas market prices is the primary driver of the increase in the unfavourable revaluation of natural gas in storage. This is equally offset by a decrease in the volume of natural gas in storage. The $14 million unfavourable adjustment at the end of the previous fiscal year is equal to the current $14 million unfavourable adjustment to the cost of gas in storage, resulting in a nil market value adjustment at September 30, 2019.
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 natural 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. Consequently, higher commodity margins in one year are often followed by lower commodity margins in the subsequent year. 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. The most notable differences are the elimination of intercompany transportation costs in the preparation of the consolidated financial statements and how derivative instrument settlements are recognized in the cost of gas. A gain or loss reported in the Corporation's consolidated financial statements may not be reflected in the GCVA.
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2019-20 SECOND QUARTER REPORT
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