MANAGEMENT’S DISCUSSION AND ANALYSIS
Commodity and Delivery Rate Pressure The rates SaskEnergy charges to customers for the sale and delivery of natural gas is subject to review by the SRRP and the Provincial Cabinet of the Government of Saskatchewan. Delivery and commodity rates are designed to recover the actual costs SaskEnergy incurs for these services to customers. In evaluating SaskEnergy’s commodity and delivery rates, the SRRP considers not only the cost of providing service to customers but also the impact that the proposed rates have on customers. Significant increases to rates create more hardship for customers and increase the risk of the SRRP not supporting the proposed rate increases. Consequently, it is incumbent upon SaskEnergy to effectively manage costs and manage gas purchase costs to emphasize price stability and minimize the potential for significant increases. To mitigate the risk of having rate requests rejected or rolled back, SaskEnergy takes a long-term perspective when buying natural gas to mitigate short-term market price movements and promotes natural gas as a reliable and relatively low cost source of energy. In addition, SaskEnergy works cooperatively with the SRRP and closely follows regulatory principles through the commodity rate application process. To assist customers in managing their energy costs, SaskEnergy offers a number of energy efficiency programs. Transportation Rate Adjustment Transportation rates cover the operating costs SaskEnergy incurs to provide transportation service to its natural gas customers. Operating costs have and will continue to rise as the province is now a net importer of natural gas. In addition, public safety requirements, capital expenditures required to maintain the safety and reliability of the system, and accommodating customer load growth increase interest and depreciation expenses. These higher operating costs may trigger rate increases that are seen as unacceptable or unmanageable from a customer’s perspective. While SaskEnergy cannot control or manage some third- party costs, through efficiency and productivity it can minimize the impact of rate changes on customers and pass the benefits on to customers. Transportation and delivery rate adjustments are managed through multi-year rate strategies, the annual business planning process, participation in regulatory forums, a strong relationship with the SRRP, shareholders and a strong Customer Dialogue process. In addition to the top strategic risks identified above, the Corporation’s financial results are subject to the following risks:
Weather SaskEnergy has designed its pipeline 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 through the basic monthly charge to customers but still retains a significant amount of this risk. Natural Gas Prices 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 represent the change in value of gas purchase 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 financial statements, SaskEnergy has risk management policies in place to limit the impact that market prices can have on the financial results.
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