2019-20 SaskEnergy Annual Report

Management’s Discussion and Analysis

through the basic monthly charge to customers but still retains a significant amount of this risk. Natural Gas Prices

customer bills. The Corporation is responsible for monthly remittances to Canada Revenue Agency, similar to collecting and remitting the Goods and Services Tax. Physical risks associated with climate change may include an increase in extreme weather events such as heavy rainfall, floods, wildfires, extreme winds and ice storms, or changing weather patterns that cause ongoing impacts to seasonal temperatures. Natural gas transmission and distribution assets above ground or on water crossings are exposed to extreme weather events. Managing physical risks involves preparing for these extreme weather events. Regular maintenance and insurance focus on mitigating extreme conditions. A structured capital expenditure program aimed at system integrity and safety ensure the long-term strength of the Corporation’s natural gas system. The majority of the Corporation’s natural gas infrastructure is underground, which also helps mitigate the effects of extreme weather conditions. Weather SaskEnergy has designed its transmission and distribution system, and operating plans, based on a severely cold winter that is expected to occur once every 20 years. Financial projections, as well as commodity and delivery rates, are based on a ‘normal’ or typical winter. To the extent that weather differs from normal, SaskEnergy will generate more revenue (colder than normal) or less revenue (warmer than normal). A severely cold winter can also result in significantly higher operating costs, as such a winter puts more stress on equipment and requires more labour and material to manage. SaskEnergy has mitigated some of the risk of weather by increasing the amount of delivery revenue recovered CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Corporation prepares its consolidated financial statements in accordance with IFRS, using the accounting policies described in Note 3 of the consolidated financial statements. The application of these accounting policies requires management to make a number of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. These judgments, estimates and assumptions, which are based on historical experience and other factors that are considered relevant, are

Natural gas prices can change significantly, and often do over a short period of time. As selling prices are set in advance of gas purchases, it is possible that commodity rates do not generate enough revenue to cover the cost of gas purchased or, alternatively, that the commodity rate recovers more than the cost of gas. Under the current regulatory model, SaskEnergy is not allowed to earn a margin on the sale of gas to customers, nor is it subject to realized losses. Differences between the cost of gas purchased and the revenue earned on the sale of gas to customers are collected in the GCVA and incorporated into the calculation of the commodity rate when rates are reset, usually in April or November each year. Gas prices also have a significant impact on market value adjustments. Market value adjustments include the impact of fair value adjustments as well as the revaluation of natural gas in storage. Fair value adjustments represent the change in value of gas purchased or gas sales contracts from one reporting period to the next. In addition, gas prices can affect the net realizable value of natural gas in storage, as it is valued at the lesser of cost or what could be realized in the market when it is sold. As discussed in the financial risk management section of the consolidated financial statements, SaskEnergy has risk management policies in place to limit the impact that market prices can have on the financial results.

reviewed on an ongoing basis. The Corporation’s critical accounting policies and estimates, which could materially impact the Corporation’s consolidated financial statements, have been summarized below. Estimated Unbilled Revenue Commodity sales and delivery revenues are recognized when natural gas is delivered to customers. SaskEnergy estimates the volume of natural gas delivered but not billed, as it is currently impracticable to read all

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