SaskEnergy Incorporated First Quarter Report expenditures are $24 million lower than 2015, primarily due to slower distribution customer growth, combined with reduced spending on the Advanced Metering Infrastructure (AMI), meter exchange programs and vehicle and equipment purchases. OUTLOOK March 31, 2011 The transition to the Corporation’s new fiscal year-end will report 12-month periods ending March 31 st , which changes the perspective of the Corporation’s financial reporting cycle. When reporting a December 31 st year-end, the Corporation incurred peak winter heating loads from January through March and these results typically remained prominent through the summer months, which have low heating loads. With the Corporation’s new fiscal period beginning April 1, the financial results and peak winter heating loads are absent until the third and fourth quarter. Losses will be common during the first two quarters in the absence of the winter heating load and the financial results for the third and fourth quarter demonstrate the impact weather and heating loads have on the Corporation’s financial results. Due to the low natural gas price environment, Saskatchewan natural gas production and exploration will remain slow. Until prices increase and improve the economics of natural gas exploration and development in Saskatchewan, producers are unlikely to increase their investment in Saskatchewan production. At the same time, customer growth within the Province continues to increase natural gas load growth, increasing the dependency on importing natural gas from Alberta. The growing dependency on Alberta supply is increasing operating costs for the Corporation, as gas is being transported further distances. Market Prices With the warm weather through the 2015-16 winter, the amount of gas in storage throughout North America at the beginning of April 2016 was much higher than usual. Natural gas prices reached 20-year lows and the AECO near month spot price closed at $1.02 per GJ at the end of March 2016. Through the summer and into the third quarter, near month gas prices recovered to $3.45 per GJ, while prices farther into the future actually declined from their levels in March. Storage injection levels were strong through the summer of 2016, reaching normal Saskatchewan storage levels going into the winter heating season. Natural gas prices are currently very sensitive to winter weather forecasts, with warmer forecasts creating downward pressure on prices and colder forecasts putting upward pressure on rates. The gas price volatility could create gas marketing opportunities for the Corporation based on the spreads between spot prices and forward prices. Commodity Margin In accordance with standard utilty regulatory practice, the Corporation does not earn a margin on commodity sales to customers. With the natural gas price declines in recent years, the Corporation has implemented commodity rate reductions effective January 1, 2016, and November 1, 2016, reducing the commodity rate to $3.65 per GJ, the lowest rate in 16 years. This is contributing to lower commodity revenue in comparison to the same three quarters in 2015-16. Commodity margins are expected to improve in the fourth quarter, a result of peak winter heating loads, but are expected to remain lower than prior years. The commodity margin is highly dependent on winter weather conditions and customer consumption during the heating season, placing uncertainty on the fourth quarter results. The commodity rate decrease that was approved in combination with the delivery rate increase will more than offset the delivery service rate increase, such that customers will see an overall reduction on their bills. Gas Marketing Margin SaskEnergy purchased and injected low priced natural gas into storage as market prices declined earlier in 2016. These lower cost purchases reduced the average cost of natural gas, improving the margins on sales contracts through the end of December 2016. At the end of the third quarter, natural gas spot prices increased, while the forward price curve remained relatively unchanged through the first nine months of the fiscal period. This reduced gas marketing opportunities. SaskEnergy has been successful in taking advantage of opportunities as they arose and will continue to monitor natural gas prices for additional opportunities through the remainder of the year. As a result, while current market conditions are not supportive of large projected gains, it is expected that opportunities will arise throughout the fourth quarter that will allow some additional gas marketing margins to be created. Delivery Revenue In recent years, the pace of Saskatchewan’s provincial economy and residential customer growth contributed to growing delivery revenue. However, in 2016, the number of customer connections has declined, while industrial and commercial demand for service continues to be strong. Overall, delivery revenue is higher for the first nine months of 2016-17 due to delivery rate increases effective January 1, 2016 and November 1, 2016. Regular delivery service rate increases are required to offset cost pressures related to maintaining a reliable distribution system, and increasing Alberta supply costs. The Corporation continues to focus on internal efficiencies to help offset cost pressures and ensure delivery service rates remain competitive. The fourth quarter will see delivery revenues increase due to winter weather conditions, which are expected to return to more seasonably colder temperatures compared to the unseasonably warm winter during 2015-16.
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2016-17 THIRD QUARTER REPORT
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