Management’s Discussion and Analysis
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 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 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. SaskEnergy 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 IFRS consolidated financial statements. A gain or loss reported in the Corporation’s consolidated financial statements may not be reflected in the GCVA. 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. 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 opposing 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 also use financial derivatives and physical swaps to manage the future purchase price of natural gas. The commodity margin on sales to customers, as reported in the condensed consolidated financial statements, was as follows:
Three months ended September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
$
22 17
$
58 38 20
Commodity sales
$
16
$
6 8
$
46 37
$
12
Commodity cost of sales
9 7
1
5 5
Realized margin on commodity sales Unrealized fair value adjustments
(2)
9
11
(11)
17 24
(12) (14)
16 25
(27) (16)
$
10
$
9
Margin on commodity sales
$
$
$
$
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’s realized margin on commodity sales for the six months ended September 30, 2023, was $11 million higher than in 2022. The commodity margin was $1.26 per GJ through the six months ended September 30, 2023, compared to $0.66 per GJ for the same period ended September 30, 2022. SaskEnergy received approval to increase its commodity rate to $4.20 per GJ from $3.20 per GJ effective August 1, 2022 to address AECO daily index prices trending upwards in 2022. The Corporation was able to maintain the $4.20 per GJ commodity rate through 2022, largely due to its commodity price risk management strategy, while market prices climbed as high as $8.00 per GJ. Subsequently, the AECO daily index dropped significantly in 2023, averaging $2.39 per GJ through the six months ended September 30, 2023, compared to $5.40 per GJ in the same period ended September 30, 2022. The market price declines contributed to the favourable margins through 2023. The GCVA balance increased to $10 million owing to customers at September 30, 2023, compared to $2 million owing to customers at March 31, 2023 — a result of the average AECO daily index decreasing to $2.39 per GJ for the six months ended September 30, 2023 compared $4.68 per GJ for the twelve months ended March 31, 2023. With AECO daily index prices declining, the Corporation’s rate application to reduce commodity rates was approved. A Commodity rate decrease of 24.5 per cent, from $4.20 per GJ to $3.20 per GJ will be implemented effective October 1, 2023. When combined with the approved delivery rate increase of 5 per cent, residential customers will see an overall bill decrease of nearly 8 per cent.
7
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