SaskEnergy Incorporated First Quarter Report The continued growth in natural gas demand combined with declining conventional gas production means that more gas will be imported or acquired from gas production associated with oil production. This shift in source of supply, together with maintaining a safe and reliable pipeline system and increasing regulatory requirements, will require incremental investments in pipeline facilities. SaskEnergy is projecting to invest nearly $300 million in 2018-19. This additional investment will be funded primarily through cash from operations with the remaining from incremental borrowing. The additional load growth will generate more revenue for the Corporation; however, the investment in infrastructure will also increase operating costs and put pressure on delivery and transportation rates. The Corporation continues to work with other Crown corporations, and other business enterprises, to investigate technological solutions to more efficiently serve customers and maintain facilities. Since 2009, SaskEnergy has achieved $48 million of operating efficiency savings and another $4 million has been targeted for 2018- 19. March 31, 2011
Operating Expenses
In order to maintain the integrity of the transmission and distribution systems, address growing regulatory requirements and manage the shift from conventional Saskatchewan production to associated gas production and Alberta supply, additional investments are required that do not generate additional revenue. Expenditures to address safety and system integrity do not increase revenues and therefore add pressure to utility rates. Consequently, the average cost of serving customers is expected to rise. Depreciation expense and finance expense are expected to rise by $5 million as a direct result of capital expenditures, while operating expenses (employee obligation costs and operating and maintenance) are expected to rise by $23 million even with projected efficiency savings of $4 million in 2018-19 and continued focus on cost management efforts. The cost increases are due to rising third-party transportation costs related to importing more natural gas over longer distances to meet growing load requirements.
Revenue
Regular and moderate delivery rate increases provide additional delivery revenue to help offset increasing cost pressures resulting from customer growth, integrity investments and the growing regulatory compliance efforts. Customer connections, which are closely related to the strength of the provincial economy, were expected to increase modestly to 4,000 new customers through 2018-19. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects delivery and transportation and storage revenue to increase by $11 million in 2018-19, driven by a delivery rate increase effective November 1, 2017 and transportation and storage rate increase effective April 1, 2018.
Gas Marketing and Commodity Margins
While long term natural gas prices have slightly decreased from the end of March 2018, near term natural gas prices have increased. Over a longer period, forward gas prices have displayed a flat to slightly increasing trend suggesting that the likelihood of significantly higher prices in the future is low. Current market prices are fairly representative of long term prices, resulting in the differential between current and forward prices being fairly small. This differential is the driver for much of SaskEnergy’s gas marketing activity in the past, with the exception of summer to winter spreads. These market conditions adversely affect the prospect for generating the high margins required to support SaskEnergy’s non-core storage business. The Corporation may be able to take advantage of TCPL mainline through diversions to other locations when capacity is underutilized which would result in favourable gas marketing results. Lower natural gas market prices are expected to reduce the average cost of gas, which is expected to result in a lower commodity rate for customers in 2018-19. As part of the normal course of business, commodity rates are reviewed regularly and adjusted as required.
Summary
Although, SaskEnergy’s financial performance is expected to remain strong, there are risks to the outlook. Capital expenditure requirements and rising costs will remain a challenge throughout the forecast period as SaskEnergy adjusts to continued customer load growth, infrastructure renewal requirements, shifting natural gas supply dynamics and regulatory compliance. Delivery and transportation revenue will continue to grow, partially offset by increased operating costs. SaskEnergy will continue to focus on providing safe and reliable service to its customers and investing in safety and growth initiatives while actively seeking operating and capital deployment efficiencies through collaboration and technology initiatives. Weather wil l be a key factor affecting 2018-19 financial results. Forecasted results are based on normal weather as defined by the 30-year average. To the extent that weather is colder than normal, delivery revenue will increase, and to the extent that weather is warmer than normal, delivery revenue will be lower. Assuming weather is not extremely cold, transportation, storage, and other revenue items are typically not impacted by weather, as is the case with operating expenses. Commodity revenue and gas purchases are both affected by weather but typically offset each other.
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2018-19 FIRST QUARTER REPORT
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