MANAGEMENT’S DISCUSSION AND ANALYSIS
Commodity Margin SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel (SRRP). The commodity rate, which is reviewed April 1 and November 1 of each year, 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 do not earn a profit or 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. Consequently, lower commodity margins in one year are often followed by higher commodity margins in the subsequent year. For financial reporting purposes, the Corporation 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 consolidated financial statements. The most notable differences are the elimination of intercompany transportation costs in the preparation of the consolidated
financial statements and how derivative instrument settlements are recognized in the cost of gas. 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. The two objectives direct activities that naturally oppose each other. 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 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 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 consolidated financial statements, was as follows:
(millions)
March 31, 2019
March 31, 2018
Change
$
228 $
Commodity sales
225 $
3 1 4
183
Commodity purchases
184
45 35
Realized margin on commodity sales Impact of fair value adjustments
41
(2)
37 41
$
80 $
Margin on commodity sales
39 $
There were no effects of IFRS 15 on Commodity sales.
The realized margin on commodity sales excludes the impact of unrealized fair value adjustments on derivative instruments, as 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 realized a $45 million margin on commodity sales for the 12 months ending March 31, 2019 compared to a $41 million margin for the same period ending March 31, 2018. Average revenue was $2.76 per GJ and average cost of gas sold was $2.23 per GJ, resulting in a margin
of $0.53 per GJ. The margin is slightly lower than the average commodity margin of $0.61 per GJ through the same 12-month period in 2018. The effect of an additional 15 PJs of gas sold in 2018-19 was partially offset by the effect of a decreased commodity rate. Commodity rates were reduced from $3.65 per GJ to $2.95 per GJ effective November 1, 2018 to allow customers to take advantage of lower rates during the winter heating season. Meanwhile the GCVA balance has increased to $17 million owing to customers, up $14 million from the balance owing to customers at March 31, 2018.
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