SaskEnergy Second Quarter Report - September 30, 2016

SaskEnergy Incorporated First Quarter Report A commodity rate decrease effective January 1, 2016 reduced the realized commodity margin in 2016 compared to 2015. The gas marketing margin slightly increased in 2016 as natural gas market prices reached 20 year lows in 2016, allowing the Corporation to enter into favourable purchase and sale contracts with positive margins realized in July through September. March 31, 2011 During April through September 2016, higher priced natural gas purchase contracts related to the Corporation’s commodity business expired, which had a positive impact on unrealized fair value adjustments. In addition, natural gas market prices recovered significantly by the end of June 2016 and continued through to September. The AECO near-month natural gas spot price increased from $1.02 per GJ at the end of March 2016 to $2.56 per GJ at the end of September 30, 2016, generating a $56 million favourable unrealized fair value adjustment on outstanding natural gas contracts.

Natural Gas Sales and Purchases

Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing activities. IFRS requires these activities to be presented together within the consolidated financial statements; however, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately. As derivative instruments, natural gas contracts are recorded at fair value until their settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in net income through natural gas sales or natural gas purchases depending on the specific contract. Upon settlement of the natural gas contract, the amount paid or received by SaskEnergy becomes realized and is recorded in natural gas sales or purchases.

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. The commodity rate, which is reviewed in April and November of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with natural gas sold to distribution customers without earning a profit or incurring a loss over the long term. For rate-setting purposes, 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 recorded for financial reporting purposes, is either recovered from or refunded to customers as part of future commodity rates. Consequently, higher commodity margins in one year are often followed by a commodity rate reduction and lower commodity margins in the subsequent year, as is the case in 2015-16 and 2016-17. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. As a result, 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 costs in the preparation of the consolidated financial statements, including transportation costs paid to TransGas, as well as the timing related to recognit ion of financial derivative settlements. While a gain or loss is commonly reported in the Corporation’s consolidated financial statements, it should not be taken as indicative of the results recorded within the GCVA.

Three months ended

Six months ended September 30

September 30



2015 Change


2015 Change

Commodity sales













Commodity purchases 1







Realized margin on commodity sales Impact of fair value adjustments

1 5

(1) (2)

2 7


4 7




Margin on commodity sales













1 Net of change in inventory

SaskEnergy manages the purchase price of natural gas it buys through its natural gas price risk management program with two objectives – to reduce the impact of natural gas price volatility, and to offer rates that are competitive to other utilities. The two objectives naturally oppose each other, and the balance between the two may change depending on existing 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 uses financial derivatives and physical swaps to manage the future purchase price of natural gas. In the current low price environment SaskEnergy’s price risk management strategy leans more towards reducing volatility and as a result, SaskEnergy has more price risk management transactions which tend to drive more variability in fair value adjustments



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