Management’s Discussion and Analysis
Commodity Fair Value Adjustments Natural gas market prices trended higher through most of the first nine months of fiscal year 2022-23, with fair value adjustments on outstanding commodity purchase contracts at December 31, 2022 being $37 million unfavourable compared to contracts outstanding at March 31, 2022. This is resulting from the favourable price differential between average deal price and average market price declining by $0.82 per GJ at December 2022 as near-term forward market prices declined from March 2022 levels. 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. 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, SaskEnergy is able to find opportunities in the market to take advantage of pricing differentials between transportation hubs, delivery points and time periods. In most cases, the Corporation executes purchase and sales contracts at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions. SaskEnergy also uses purchases and sales of natural gas to mitigate transportation constraints, which are executed at a cost. The asset optimization margin, as reported in the condensed consolidated financial statements, was as follows:
Three months ended December 31,
Nine months ended December 31,
(millions)
2022
2021 Change 2022
2021 Change
$
75 $
16 $
295 $
Asset optimization sales
59 $
141 $
154 133
68
267
Asset optimization cost of sales
57
11
134
7
28
Realized margin on asset optimization sales
2 4 6
5
7 2 9
21
-
(1)
Unrealized fair value adjustments Margin on asset optimization sales
(4)
(3)
$
7
$
27
$
$
1
$
$
18
The realized margin on asset optimization sales for the nine months ended December 31, 2022, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $21 million higher than in 2021. Energy prices in Western Canada increased through the nine months ending December 31, 2022 as major pipeline capacity projects in Alberta experienced continued construction delays. They were originally scheduled to be in-service in April 2021 but are now expected to be in-service in early 2023. In combination with increased maintenance projects on natural gas systems in Alberta through the summer and fall months of 2022, both components factored into creating transportation capacity constraints, resulting in increasing natural gas market prices and increasing market price volatility through 2022. The Corporation was able to capitalize on its unutilized transportation capacity through the summer and fall months of 2022 and executed 53 PJ of asset optimization contracts compared to 39 PJ the prior year and at margins of $0.55 per GJ compared to $0.19 per GJ in 2021. With weather being significantly colder than normal in November and December, transportation capacity was utilized to meet customer heating demand, limiting asset optimization opportunities as the quarter closed. Asset Optimization Fair Value Adjustments The Corporation enters into various natural gas contracts in its asset optimization strategies, which are subject to volatility of natural gas market prices until the natural gas contracts are realized. The impact of unrealized fair value adjustments on asset optimization derivative instruments had a net unfavourable impact of $1 million on outstanding asset optimization contracts as near term forward natural gas market prices declined at the end of the third quarter. A $30 million unfavourable fair value adjustment on outstanding asset optimization purchase contracts is resulting from the favourable price differential between average deal price and average market price on outstanding asset optimization purchase contracts decreasing from $1.26 per GJ at March 31, 2022 to $0.20 per GJ at December 31, 2022. This was almost fully offset by a $29 million favourable fair value adjustment on outstanding asset optimization sales contracts, as the unfavourable price differential between average deal price and average market price improved $0.86 per GJ from March 2022 to December 2022.
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