SaskEnergy Incorporated First Quarter Report The capital expenditure increases in 2019-20 on these projects were partially offset by installing compression at the Rush Lake interconnect in the prior year at a cost of $5 million to help mitigate the requirement for additional Alberta supply. It was cost effective for the Corporation to receive additional supply on the Loomis to Herbert gas line, which is owned by the Many Islands Pipe Lines (Canada) Limited subsidiary, with the gas being sourced from TCPL Mainlin or Foothills Pipelines. This project was completed in 2018-19.
March 31, 2011
OUTLOOK
With the Corporation’s fiscal period beginning April 1, peak winter heating loads only begin to have a positive impact on the financial results in the third and fourth quarters. Without revenue from heating loads it is not uncommon for SaskEnergy to experience minimal net income and even losses through the first two quarters. Factors that are expected to affect SaskEnergy in the near future include the continued growth of the provincial economy, resulting in increased reliance on imported natural gas, and higher customer expectations for safe, reliable natural gas services. Assuming normal weather conditions through 2019-20, net income before market value adjustments is expected to be approximately $64 million, a decrease of $70 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, power generation and mining 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 $976 million over the next three years. This investment will be primarily funded through long term debt, with an additional $533 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.
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 $16 million as a direct result of capital expenditures, while operating expenses (employee benefits and operating and maintenance) are expected to rise by $25 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 $25 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 three months ending June 30, 2019. Prices further into the future have remained 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
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2019-20 FIRST QUARTER REPORT
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