Management’s Discussion and Analysis
Commodity Fair Value Adjustments Natural gas market prices trended higher through most of the first six months of 2022-23, with fair value adjustments on outstanding commodity purchase contracts at September 30, 2022 being $16 million favourable compared to contracts outstanding at March 31, 2022. This is resulting from a 15 PJ increase in contracts outstanding at September 30, 2022, which are recorded at a favourable price differential between average deal price and average market price. 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 September 30,
Six months ended September 30,
(millions)
2021 Change
2022
2021 Change 2022
$
220 199
$
106
$
$
138 122
$
54 43 11
82 77
$
52 48
Asset optimization sales
91 15
Asset optimization cost of sales
21
Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage
4
5
16
(1)
(1)
(1)
-
(2)
1
1
-
-
-
-
1
$
20
$
15
$
3
$
17
$
12
$
3
Margin on asset optimization sales
The realized margin on asset optimization sales for the six months ended September 30, 2022, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $16 million higher than in 2021. Energy prices in Western Canada increased through the six months ending September 30, 2022 as major pipeline capacity projects in Alberta experienced continued construction delays. They were originally scheduled to be in-service in April 2021 but are now expected to be in-service in early 2023. In combination with increased maintenance projects on natural gas systems in Alberta through the summer and fall months of 2022, 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 summer and fall months of 2022 and executed 38 PJ of asset optimization contracts compared to 11 PJ the prior year and at margins of $0.56 per GJ compared to $0.23 per GJ in 2021. 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 impact of the unrealized fair value adjustment on asset optimization derivative instruments had an unfavourable impact of $1 million on the realized margin on asset optimization sales. This is due to the favourable price differential on outstanding asset optimization purchase contracts decreasing from $1.26 per GJ at March 31, 2022 to $1.20 per GJ at September 30, 2022. 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. With near-term forward natural gas market prices increasing through 2022, asset optimization natural gas in storage was recorded at weighted average cost at September 30, 2022 and March 31, 2022. With both equaling net realizable value, the impact on 2022 net income was $nil.
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