SASKENERGY 2018-19 ANNUAL REPORT
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 include the impact of fair value adjustments as well as the revaluation of natural gas in storage. Fair 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 consolidated financial statements, SaskEnergy has risk management policies in place to limit the impact that market prices can have on the financial results. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Corporation prepares its consolidated financial statements in accordance with IFRS, using the accounting policies described in Note 3 of the consolidated financial statements. The application of these accounting policies requires management to make a number of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. These judgments, estimates and assumptions, which are based on historical experience and other factors that are considered relevant, are reviewed on an ongoing basis. The Corporation’s critical accounting policies and estimates, which could materially impact the Corporation’s consolidated financial statements, have been summarized below.
Estimated Unbilled Revenue Commodity sales and delivery revenues are recognized when natural gas is delivered to customers. SaskEnergy estimates the volume of natural gas delivered but not billed, as it is currently impracticable to read all 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, 2019, the unbilled revenue related to commodity sales and delivery revenue was $29 million. The unbilled revenue related to transportation and storage revenue was $16 million at March 31, 2019. 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, 2019, the revaluation increased the carrying amount of natural gas in storage by $19 million. A $1.15 per GJ improvement in the differential between the weighted average cost and net realizable value would completely eliminate the $14 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, 2019, 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 $44 million. Conversely, a decrease of $1.00 per GJ would have decreased the fair value of natural gas derivative instruments by $44 million.
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