SaskEnergy Incorporated First Quarter Report A large portion of SaskEnergy’s revenue is dependent on customer’s use of natural gas to heat their premises. Normally, customers do not use large volumes of gas in the first and second quarter of the fiscal year and when weather is warmer than normal, 8 per cent warmer than normal year-to-date, generating net income during the first two quarters is challenging. Net income was favorably affected by the recognition of insurance proceeds in the first quarter that related to an incident at the Prud’homme storage caverns in 2014. March 31, 2011 During April through September 2017, higher priced natural gas purchase contracts related to the Corporation’s commodity business were delivered, which had a favourable impact on unrealized fair value adjustments. Also, during the same period, the AECO near-month natural gas spot price declined from $2.59 per GJ at the end of March 2017 to $0.90 per GJ. The net effect of expiring contracts that were out of the money, partially offset by the impact of lower market prices on outstanding contracts generated a $6 million favourable unrealized fair value adjustment. When natural gas market prices decreased through the six months ended September 30, 2017, the unfavourable net realizable value adjustment to gas in storage at the end of March 2017 increased by $7 million, resulting in an unfavourable impact on the Corporation’s consolidated net income.
Natural Gas Sales and Purchases
Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing 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. In the third quarter of 2016, the Corporation started to identify certain natural gas purchase contracts as own-use contracts. The Corporation enters into these contracts to acquire the natural gas it needs to meet expected sales to commodity customers. These non-financial derivative contracts are not recorded at fair value, rather, the contracts are accounted for as a purchase at the time of delivery. Natural gas contracts, not identified as own-use purchases, are classified as derivative instruments, which are 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.
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. The commodity rate, which is reviewed in April and November of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with natural gas sold to distribution customers without earning a profit. Regulatory principles require that utilities do not earn a profit or realize losses on the sale of natural 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. Consequently, lower commodity margins in one year are often followed by higher commodity margins in the subsequent year. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. As a result, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. The most notable differences are the elimination of intercompany costs in the preparation of the consolidated financial statements and how derivative instrument settlements are recognized in the cost of gas. A gain or loss reported in the Corporation’s consolidated financial statements may not indicate a similar adjustment in the GCVA.
Three months ended
Six months ended September 30
September 30
(millions)
2017
2016 Change
2017
2016 Change
Commodity sales
$
14
$
17
$
(3)
$
38
$
45
$
(7)
Commodity purchases 1
(15)
(16)
1
(36)
(43)
7
Realized margin on commodity sales Impact of fair value adjustments
(1)
1 5
(2) (4)
2 2
2
-
1
53
(51)
Margin on commodity sales
$
-
$
6
$
(6)
$
4
$
55
$
(51)
1 Net of change in inventory
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. The two objectives direct activities that naturally oppose each other. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while
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2017-18 SECOND QUARTER REPORT
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