Management’s Discussion and Analysis
Commodity Fair Value Adjustments Fair value adjustments on commodity derivative instruments decreased the margin on commodity sales by $16 million as the $20 million favourable fair value position at March 31, 2023 decreased to $4 million favourable at June 30, 2023. The favourable price differential between contract prices and market prices on future commodity purchase contracts decreased to $0.06 per GJ at June 30, 2023, compared to $0.30 per GJ at March 31, 2023. 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 June 30,
(millions)
2023
2022 Change
$
37 36
Asset optimization sales
$
114 108
$
(77) (72)
Asset optimization cost of sales
1
Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage
6
(5) (1)
(1)
-
- -
(1)
1
$
Margin on asset optimization sales
$
5
$
(5)
The realized margin on asset optimization sales for the three months ended June 30, 2023, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $5 million lower than in 2022. Energy prices in Western Canada began to increase through the three months ending June 30, 2022 as major pipeline capacity projects in Alberta experienced continued construction delays. In combination with increased maintenance projects on natural gas systems in Alberta, 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 three months ending June 30, 2022 and executed 18.7 PJ of asset optimization contracts at an average margin of $0.31 per GJ. The delayed construction projects in Alberta were operationalized in early 2023 and increased transportation capacity in Alberta. Natural gas prices have declined and price volatility has decreased as transportation capacity seen in 2022 are not materializing in 2023. This is resulting in decreased opportunities for SaskEnergy to use its unutilized transportation capacity for asset optimization activities. The Corporation executed 13.7 PJ of asset optimization contracts at an average margin of $0.11 per GJ through the three months ended June 30, 2023. 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 unrealized fair value adjustments on asset optimization derivative instruments had a $1 million impact on outstanding asset optimization contracts in 2023. Revaluation of Natural Gas in Storage The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. At each reporting period, the Corporation measures net realizable value of natural gas in storage held for asset optimization transactions based on forward market prices and anticipated delivery dates. The Corporation sold its asset optimization natural gas in storage inventory in April 2023 when gas prices were still high compared to lower prices in the summer, resulting in no inventory held at June 30, 2023. The impact on 2023 net income was $nil.
8
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