Management’s Discussion and Analysis
CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income
Three months ended June 30,
(millions)
2023
2022 Change
$
-
Income before unrealized market value adjustments
$
3
$
(3)
(17)
Impact of fair value adjustments Revaluation of natural gas in storage Consolidated net (loss) income
(1) (1)
(16)
-
1
$
(17)
$
1
$
(18)
Income before unrealized market value adjustments was $nil in 2023, $3 million unfavourable compared to income of $3 million in 2022, resulting from lower asset optimization margins, combined with higher operating and maintenance expenses, depreciation and amortization expense and finance costs. This was partially offset by a higher commodity margin and transportation and storage revenue. Through the three months ended June 30, 2022, the Corporation was able to take advantage of unutilized transportation capacity as natural gas line projects continued to be delayed in Alberta and increased maintenance projects limited transportation capacity on Alberta systems — the result being improved asset optimization margins. The Alberta natural gas projects were operationalized in 2023 and have contributed to lower natural gas market prices and decreased market price volatility, both limiting the Corporation’s asset optimization opportunities. Operating and maintenance expenses increased in 2023 compared to 2022 as the Corporation implemented an updated online customer portal, resulting in higher hosting fees to support the additional functionality implemented. In addition, transportation and storage expenses increased as natural gas is sourced from farther distances and transportation service providers implemented rate increases. Depreciation and amortization expenses increased in 2023 compared to 2022 as the Corporation implemented the results of a third-party depreciation study and a change in management estimate on useful lives of intangible assets in the fourth quarter of 2022-23. Finance costs continued to increase as short-term debt financing costs increase, primarily resulting from increasing short-term interest rates. These unfavourable impacts were partially offset by a higher commodity margin in 2023 compared to 2022, as the Corporation received approval to increase its commodity rate effective August 1, 2022 to address increasing natural gas market prices, which have significantly decreased since last winter, and to address the large gas cost variance account balance owing from customers to the Corporation. Transportation and storage revenue also increased in 2023 compared to 2022 as customers increased transportation services to meet their natural gas operating requirements. Forward market prices declined below March 2023 levels as the first quarter closed generating a $17 million unfavourable fair value adjustment as the favourable price differential between average deal price and average market price on outstanding commodity purchase contracts declined $0.24 per GJ at June 30, 2023 compared to March 31, 2023. In addition, natural gas in storage was recorded at weighted average cost, which was equal to net realizable value at June 30, 2023. There was no impact on 2023 net income resulting from the revaluation of natural gas in storage. Natural Gas Sales and Purchases Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated asset optimization activities. IFRS requires these activities to be presented together within the consolidated financial statements; however, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately. With the exception of those contracts entered into for an entity’s normal usage, IFRS requires derivative instruments such as natural gas purchase and sales contracts to be recorded at fair value until their settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in net income through natural gas sales or natural gas purchases depending on the specific contract. Upon settlement of the natural gas contract, the amount paid or received by SaskEnergy becomes realized and is recorded in natural gas sales or purchases. The majority of SaskEnergy natural gas contracts are normal usage and are not recorded at fair value.
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