Management’s Discussion and Analysis
customer meters on March 31 of each year. The volume of unbilled revenue is determined by comparing the estimated total volume of natural gas delivered to the distribution system with the volume of natural gas billed to customers. Regular meter readings throughout the year are used to reconcile volumes purchased with volumes billed. At March 31, 2020, the unbilled revenue related to commodity sales and delivery revenue was $31 million. The unbilled revenue related to transportation and storage revenue was $16 million at March 31, 2020. Net Realizable Value of Natural Gas in Storage Held for Resale The Corporation’s natural gas in storage is valued at the lower of weighted average cost and net realizable value. When determining the net realizable value, the Corporation uses quoted future market prices based on anticipated delivery dates, taking into account the Corporation’s existing natural gas contracts, ability to withdraw natural gas from storage and management’s intention. At March 31, 2020, the revaluation increased the carrying amount of natural gas in storage by $7 million. A $1.51 per GJ improvement in the differential between the weighted average cost and net realizable value would completely eliminate the $7 million revaluation. Fair Value of Financial and Derivative Instruments The Corporation uses natural gas derivative instruments to secure its supply of natural gas and manage the impact of natural gas price variability. Prior to settlement, SaskEnergy records all natural gas derivative instruments at fair value. The fair value is determined based on quoted market prices and takes into account the credit quality of both counterparties and the Corporation. Given fluctuations in natural gas prices, fair value adjustments vary throughout the length of the contract. At March 31, 2020, a $1.00 per GJ increase in natural gas prices throughout the forward curve would have increased the fair value of outstanding natural gas contracts by $43 million. Conversely, a decrease of $1.00 per GJ would have decreased the fair value of natural gas derivative instruments by $43 million. Useful Lives and Depreciation and Amortization Rates for Property, Plant and Equipment, Intangible Assets and Right-of-Use Assets With a combined carrying amount of $2,874 million, property, plant and equipment and intangible assets constitute a significant component of the Corporation’s
assets. As a result, changes in assumptions related to the calculation of depreciation and amortization expense may have a significant impact on SaskEnergy’s net income. At March 31, 2020, a one-year decrease in the estimated service life of the Corporation’s capital asset base would have increased the Corporation’s depreciation and amortization expense by approximately $3 million. A one-year decrease in the estimated service life of ROU assets would have increased depreciation expense by approximately $2 million.
Estimated Unearned Customer Capital Contributions, Contract Liabilities and Refund Liabilities
Customer capital contributions, related to the construction of new, customer-specific service connections, are initially recognized as contract liabilities until the related property, plant and equipment are available for use. The Corporation’s customer capital contributions, particularly those related to the transmission system, are often subject to refunds over a certain period. Consequently, when the related property, plant and equipment are available for use, an estimate of the potential refund is recorded as a liability until the refund period has passed. At March 31, 2020, the Corporation estimated $19 million of contract liabilities, where the customer has paid a customer capital contribution in advance of construction and the related facilities are not yet available for use. The Corporation estimated $7 million in refund liabilities, where the customer’s facilities are in service and a refund may be available to the customer depending on the amount of natural gas the customer actually flows compared to what was estimated at contract inception. Estimated Future Costs of Decommissioning Liabilities The Corporation determines its obligations, legal and constructive, for the future costs of decommissioning certain natural gas facilities by estimating both the associated costs and timing of the necessary cash flows. The timing of future decommissioning is conditional upon the Corporation’s anticipated ongoing use for these facilities, while future decommissioning costs are estimated based on the Corporation’s experience and presented on a discounted basis. At March 31, 2020, the Corporation’s provisions were estimated at $292 million. A one per cent increase in the discount rate used to determine the provisions would have resulted in an $85 million decrease in provisions at the end of March 31, 2020. A one per cent decrease would have resulted in a $133 million increase.
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