OUTLOOK
SaskEnergy Incorporated First Quarter Report With the Corporation’s fiscal period beginning April 1, peak winter heating loads are absent from the financial results until the third and fo rth quarter. Without revenue from heating loads it is not uncommon for SaskEnergy to experience minimal net income and even losses through the first two quarters. March 31, 2011 Factors that are expected to affect SaskEnergy through the remainder of the year include the growth of the provincial economy, reliance on imported natural gas and interconnected pipeline systems, and customer expectations for safe, reliable natural gas services. Assuming normal weather conditions through 2017-18, net income before market value adjustments is expected to be approximately $85 million, an increase of $16 million over the 2016-17 actual result. The increase is primarily due to the return to normal weather in 2017-18 as the prior period was seven per cent warmer than normal. Efficiency and productivity gains as well as aggressive cost management are expected to limit cost increases in 2017-18. 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 an aging pipeline system and increasing regulatory requirements, will require incremental investments in pipeline facilities. SaskEnergy is projecting to invest more than $280 million over the remainder of the year. This additional investment will be funded through cash from operations and an additional $160 million of 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 $42 million of operating efficiency savings and another $4 million has been targeted for 2017- 18.
Operating Expenses
As the pipeline and distribution system continues to age, and supply shifts 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 $10 million as a direct result of capital expenditures, while operating expenses (employee benefits and operating and maintenance) are expected to rise by $7 million even with projected efficiency savings of $4 million in 2017-18. The cost increases are primarily due to rising third-party transportation costs related to importing more natural gas and over longer distances to meet growing load requirements. The Corporation is expecting staffing levels to decline somewhat through 2017 as efficiencies and productivity gains are realized. SaskEnergy will continue to meet the Province’s growing natural gas requirements while keeping cost increases to a minimum and staffing at efficient levels.
Revenue
The delivery rate increase effective November 1, 2016 will provide additional delivery revenue to help 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 4,500 new customers through 2017-18. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects revenue to increase by $60 million in 2017-18, driven by a six per cent increase in load and a delivery rate increase effective November 1, 2017, which is currently before the Saskatchewan Rate Review Panel.
Commodity Margins
While long term natural gas prices have remained relatively unchanged from the end of March 2017, near term natural gas prices have declined. Over a longer period, forward gas prices have displayed a downward trend suggesting that the likelihood of higher prices in the future is small. Currently, the differential between current and forward prices, the driver for much of SaskEnergy’s gas marketing activity in the past, is negative with the exception of summer to winter spreads. These market conditions adversely affect the prospect for generating the margins required to support SaskEnergy’s non-core storage business. Other gas marketing activities, which leverage off-peak transportation and storage capacity in the distribution utility, are expected to continue to generate margins; however, the potential for gas marketing margins is expected to be lower than i t has been in the past. The November 1, 2016 commodity rate reduction to $3.65 per GJ will reduce commodity revenue during 2017-18; however, lower natural gas market prices are expected to reduce the average cost of gas by an equal amount. Consequently, favourable margins are expected on commodity sales. As part of the normal course of business, commodity rates are reviewed regularly and adjusted as required.
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2017-18 FIRST QUARTER REPORT
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