SaskEnergy Incorporated First Quarter Report 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. The two objectives direct activities that naturally oppose each other. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while supporting competitive rates often means allowing purchase prices to follow market prices. As a result, the balance between the two objectives may change depending on current 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 contracts. The purchase price contained in these forward 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 may use financial derivatives and physical swaps to manage the future purchase price of natural gas.
March 31, 2011
The commodity margin on sales to customers, as reported in the consolidated financial statements, was as follows:
Three months ended September 30
Six months ended September 30
(millions)
2019
2018 Change
2019
2018 Change
Commodity sales
$
26 21
$
(16)
$
59 47 12 25 37
$
(29)
$
10
$
30 27
Commodity purchases
12
20
9 1 1 2
Realized margin on commodity sales Impact of fair value adjustments
5
(4) (9)
(9)
3
10 15
(25) (34)
-
Margin on commodity sales
$
$
(13)
$
$
$
$
3
The realized margin on commodity sales excludes the impact of unrealized fair value adjustments on derivative instruments, as these adjustments can fluctuate significantly from one period to the next and do not necessarily represent the amount that will be paid upon settlement of the related natural gas contract. The Corporation realized a $3 million margin on commodity sales for the six months ending September 30, 2019 compared to a $12 million margin for the same period in 2018-19. Average revenue was $2.56 per GJ and average cost of gas sold was $2.33 per GJ, resulting in a margin of $0.23 per GJ. This margin is lower than the average commodity margin of $0.50 per GJ through the same six month period in 2018-19. The effect of 11 PJs fewer of gas sold in 2019-20 and the effect of a decreased commodity rate also contributed to the lower margin in 2019-20. Commodity rates were reduced from $2.95 per GJ to $2.57 per GJ effective April 1, 2019. Meanwhile the GCVA balance has increased to $19 million owing to customers, up $2 million from the balance owing to customers at March 31, 2019. The realized margin on commodity sales of $1 million for the three months ended September 30, 2019 was $4 million lower than the same period in 2018-19. This is also due to a higher cost of gas sold combined with a lower commodity rate.
Commodity Fair Value Adjustments
Fair value adjustments at September 30, 2019 had a nil impact on the margin on commodity sales. The differential between the contract price and market prices increased during the six months ending September 30, 2019, from $0.03 per GJ to $0.05 per GJ, which was offset by a lower volume of contracts outstanding. SaskEnergy segregates a portion of its natural gas purchase contracts for gas that will ultimately be sold to commodity customers. Under IFRS, such contracts are not required to be reported at market value. The volume of contracts identified and segregated for the purpose of expected commodity sales was 275 PJs at September 30, 2019, compared to 154 PJs at March 31, 2019. The increase is a result of the Corporation’s ability to enter into more purchase contracts at lower natural gas prices and for a longer period of time. The Corporation received approval from the Ministry of Finance during 2018-19 to enter into sale and purchase transactions with commitments 10 years forward with counterparties whose credit rating is AA or higher. In the current low natural gas price environment, this will allow the Corporation to commit to long term contracts at low natural gas prices.
Asset Optimization Margin
SaskEnergy uses its access to natural gas markets to execute purchases and sales of natural gas to generate margins. By utilizing off peak transportation and storage capacity and to help mitigate third party transportation expenses, SaskEnergy is able to find opportunities in the market to take advantage of pricing differentials between 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.
6
2019-20 SECOND QUARTER REPORT
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