transportation contracts to meet customer obligations. These transportation contracts had an unfavourable effect on the 2019-20 asset optimization margin.
SaskEnergy Incorporated First Quarter Report Asset Optimization Fair Value Adjustments
March 31, 2011
The Corporation enters into various natural gas contracts (swaps and forwards) in its asset optimization strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at June 30, 2019 on asset optimization derivative instruments decreased the asset optimization margin by $9 million compared to a decrease of $21 million for the same period in 2018-19. Between April 1, 2019 and June 30, 2019, near term natural gas market prices declined, allowing the Corporation to enter into lower priced natural gas purchase and sale transactions simultaneously. The purchase contracts outstanding at June 30, 2019 were $0.24 per GJ less than market price, while purchase contracts outstanding at the end of March 31, 2019 were $0.46 per GJ less than market price. This decrease in the favourable price differential in 2019-20 is primarily responsible for the unfavourable fair value adjustment. This was partially offset by the favourable variance related to the increase in price differentials on outstanding sale contracts.
Revaluation of Natural Gas in Storage
At each reporting period, the Corporation measures the net realizable value of natural gas in storage held for asset optimization transactions based on forward market prices and anticipated delivery dates. The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. Through the first three months 2019-20, the Corporation was able to purchase lower priced natural gas and inject it into storage, reducing the average cost of natural gas in storage; however, lower near term forward market prices adversely affected net realizable value. Consequently, the net realizable value of asset optimization natural gas in storage was $16 million below cost at June 30, 2019, which is a $2 million decrease from the $14 million unfavourable revaluation adjustment at March 31, 2019.
Revenue
Delivery revenue, transportation and storage revenue, customer capital contributions and other revenue, as reported in the consolidated financial statements, were as follows:
Three months ended June 30
(millions)
2019
2018
Change
Delivery revenue
$
54 46
$
52 37
$
2 9 6
Transportation and storage revenue Customer capital contributions
9
3 2
Other revenue
-
(2)
Revenue
$
109
$
94
$
15
Delivery Revenue
Delivery revenue is driven by the number of customers and the amount of natural gas they consume. As residential and commercial customers consume natural gas primarily as heating fuel, weather is the external factor that most affects delivery revenue. The weather in 2019-20 was 3 per cent colder than normal, the same as in 2018-19. Delivery revenue of $54 million for the three months ending June 30, 2019, was $2 million higher than the same period in the prior year. A 3.4 per cent rate increase effective April 1, 2019 contributed to the favourable variance. Delivery rate increases are implemented to address growing capital and operating costs incurred to continue providing high quality, safe and reliable service to customers. In alignment with the Crown Sector Strategic Priorities, the Corporation continues to focus on providing the province’s growing population with efficient and timely access to natural gas service while keeping rates competitive.
Transportation and Storage Revenue
The Corporation generates transportation revenue by receiving gas from customers at various receipt points in Saskatchewan and Alberta, and delivering natural gas to customers at various delivery points in the province. The transportation toll structure consists of a receipt service charge that customers pay when they put gas on to the natural gas transportation system, and a delivery service charge, which customers pay when they take delivery off the natural gas transportation system. Gas delivered to the system by customers is considered to be part of the TransGas Energy Pool (a notional point where producers, marketers and end users can match supplies to demand) until it is delivered to the end-use customer. For receipt and delivery services, the Corporation offers both firm and interruptible transportation. Under a firm service contract, the customer has a right to deliver or receive a specified quantity of gas on each day of the contract. With a firm contract, customers pay for the amount of capacity they
7
2019-20 FIRST QUARTER REPORT
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