Management’s Discussion and Analysis
Commodity Margin Subject to Section 16 of The SaskEnergy Act, SaskEnergy’s charges, rates, terms and conditions are described in a Terms & Conditions of Service Schedule. This schedule sets natural gas commodity rates, as approved by Provincial cabinet, based on the recommendations of the Saskatchewan Rate Review Panel (SRRP). The commodity rate is determined based on rate-setting principles and is designed to recover the realized costs associated with the sale of natural gas to distribution customers. Regulatory principles require that utilities neither earn a profit nor realize losses on the sale of 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. SaskEnergy prepares its financial statements on a consolidated basis while applying IFRS. Consequently, the amounts determined for rate-setting purposes are different than those reported within its IFRS consolidated financial statements. A gain or loss reported in the Corporation’s consolidated financial statements may not be reflected in the GCVA. 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. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while supporting competitive rates often means allowing purchase prices to follow market prices. As a result, the balance between the two opposing objectives may change depending on current market conditions. In order to ensure a secure supply of natural gas, SaskEnergy contracts for the physical delivery of natural gas using non-financial derivatives, referred to as forward or physical natural gas contracts. The purchase price contained in these forward contracts may be fixed, or it may be based on a variable index price. While fixed price contracts reduce the impact of natural gas price volatility, variable or market prices can assist in offering competitive rates depending on the pricing environment. SaskEnergy may also use financial derivatives and physical swaps to manage the future purchase price of natural gas. The commodity margin on sales to customers, as reported in the condensed consolidated financial statements, was as follows:
Three months ended June 30,
(millions)
2024
2023 Change
$
26 20
$
36 21 15
$
(10)
Commodity sales
Commodity purchases
(1) (9)
6
Realized margin on commodity sales Unrealized fair value adjustments
(5)
(16)
11
$
1
$
(1)
$
2
Margin on commodity sales
The realized margin on commodity sales excludes the impact of unrealized fair value adjustments on derivative instruments. These adjustments can fluctuate significantly from one period to the next and do not necessarily represent the amount that will be paid upon settlement of the related natural gas contract. The Corporation’s realized margin on commodity sales for the three months ended June 30, 2024, was $9 million lower than in 2023, primarily resulting from the commodity margin declining to $0.69 per GJ through 2024 compared to $1.66 per GJ margin for the same three months ending June 30, 2023. The declining market price of natural gas, as well as the Corporation’s continued focus on natural gas price risk management, resulted in the Corporation receiving approval to decrease its commodity rate to $3.20 per GJ effective October 1, 2023, which reduced commodity rates and commodity sales, along with lower natural gas prices decreasing commodity cost of sales compared to 2023. Furthermore, 20 per cent warmer than normal weather in April 2024 led to lower natural gas consumption compared to April 2023 when weather was 23 percent colder than normal. The GCVA balance was $7 million owing to customers at June 30, 2024, compared to $8 million owing to customers at March 31, 2024 — as the rate decrease implemented effective October 1, 2023 continues to reduce the balance owed to customers.
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