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 December 31,
Nine months ended December 31,
(millions)
2023
2022 Change 2023
2022 Change
$
128 $
$
70 $
122
$
(52) (37) (15)
168 136
$
(40) (36)
Commodity sales
62
100
Commodity cost of sales
99 23
28
8
32
(4)
Realized margin on commodity sales Unrealized fair value adjustments
(35)
(24) (16)
(53) (30)
29 14
(37)
2
$
$
(7)
Margin on commodity sales
$
$
$
(5)
$
(2)
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 nine months ended December 31, 2023, was $4 million lower than in 2022. The commodity margin was $0.75 per GJ through the nine months ended December 31, 2023, slightly lower than the $0.76 per GJ for the same period ended December 31, 2022. To address AECO daily index prices trending upwards in 2022, SaskEnergy received approval to increase its commodity rate to $4.20 per GJ from $3.20 per GJ effective August 1, 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 last year. Subsequently, the AECO daily index has dropped significantly in 2023, averaging $2.32 per GJ through the nine months ended December 31, 2023, compared to $5.22 per GJ in the same period ended December 31, 2022. The substantial decrease in the market moved gas prices below the commodity rate and increased the amounts owing to customers in the GCVA. Consequently, the Corporation received approval to decrease its commodity rate to $3.20 per GJ effective October 1, 2023. Lower natural gas prices and reduced commodity rates have reduced both commodity sales and commodity cost of sales compared to the prior year. Furthermore, the significantly warmer weather in the fall of 2023 has led to lower gas consumption, further contributing to the unfavourable variance.
7
Made with FlippingBook Ebook Creator