SaskEnergy Incorporated First Quarter Report Assuming normal weather conditions through 2019-20, net income before market value adjustments is expected to be approximately $72 million, a decrease of $62 million over the 2018-19 actual result. The decrease is primarily due to the return to normal weather, as 2018-19 was ten per cent colder than normal, and a commodity rate decrease effective April 1, 2019. While SaskEnergy continues to effectively manage expenses, increased transportation costs to move natural gas into and throughout the province will continue to create cost pressure. While SaskEnergy’s customer base expands every year, the growth of the industrial sector is contributing the most to this increased usage, driven by higher demand for natural gas from the enhanced oil recovery and power generation sectors. SaskEnergy plans years in advance where natural gas infrastructure will be needed to secure supply and increase gas line capacity. SaskEnergy plans to invest more than $1.123 billion over the next three years. This investment will be primarily funded through long term debt, with an additional $633 million planned over the next three years. 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 implement technological and process solutions to more efficiently serve customers and maintain facilities. Since 2009, SaskEnergy has achieved $52 million of operating efficiency savings and another $4 million has been targeted for 2019-20.
March 31, 2011
Operating Expenses
As the number of customers increase, the gas line infrastructure required to serve those customers grows, and the cost of operating the system rises. Generally, the addition of new customers and load reduces the average cost to serve customers, so costs do not rise at the same rate as the expansion of the system. 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 $11 million as a direct result of capital expenditures, while operating expenses (employee benefits and operating and maintenance) are expected to rise by $23 million even with projected efficiency savings of $4 million in 2019-20. The cost increases are primarily due to rising third-party transportation costs related to importing natural gas to meet growing load requirements.
Revenue
An approved delivery rate increase of 3.4 per cent effective April 1, 2019 will provide additional delivery revenue to offset increasing cost pressures resulting from customer growth and integrity investments experienced in recent years. Customer connections, which are closely related to the strength of the provincial economy, are expected to increase modestly to 2,300 new customers through 2019-20. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects delivery and transportation and storage revenue to increase by $21 million in 2019-20. Transportation rates increased effective May 1, 2018 but will remain unchanged in 2019-20.
Commodity and Asset Optimization Margins
Short-term natural gas prices decreased during the six months ending September 30, 2019. Prices further into the future have remained relatively constant compared to prices at March 31, 2019. This suggests that the market believes the likelihood of higher prices in the future is small. Currently, the differential between current and forward prices, a driver for much of SaskEnergy’s asset optimization activity, is relatively flat. Other asset optimization activities, which leverage off-peak transportation and storage capacity in the distribution utility, are expected to continue to generate margins; however, the potential for asset optimization margins is expected to be lower than it has been in the past. 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. Transportation, storage, and other revenue items are typically not influenced by weather, as is the case with operating expenses. Commodity revenue and gas purchases are both affected by weather but typically offset each other.
Summary
SaskEnergy’s financial performance is expected to remain strong. 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. A low natural gas price environment will continue to create challenges from an asset optimization perspective.
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2019-20 SECOND QUARTER REPORT
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