CAPITAL EXPENDITURES
SaskEnergy Incorporated First Quarter Report
Three months ended
Nine months ended December 31
March 31, 2011
December 31
(millions)
2018
2017 Change
2018
2017 Change
Customer growth and system expansion
$
52 33
$
41 28
$
11
$
117
$
90 72
$
27
Safety and system integrity
5 2
77 12 24
5 3
Information systems
6
4 4
9 8
Vehicles & equipment, buildings, furniture
16
12 30
16 51
$
107
$
77
$
$
230
$
179
$
SaskEnergy continues to invest in its pipeline system to accommodate increasing demand from new and existing customers and its increasing reliance on Alberta gas to meet load requirements. Capital expenditures of $230 million for the nine months ended December 31, 2018 are $51 million higher than the same period in 2017. Customer growth and system expansion is $27 million above the same period in 2017, a result of higher spending to accommodate load growth primarily relating to industrial customers. Increasing compression is required to meet natural gas demand in the Province resulting from importing additional Alberta supply onto the transmission system.
OUTLOOK
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 Saskatchewan weather conditions through the winter months. Assuming normal weather conditions for 2018-19, net income before market value adjustments is expected to be approximately $95 million, a decrease of $16 million over the 2017-18 actual result. This decrease is primarily due to lower commodity margins as the commodity rate decreased to $2.95 from $3.65 effective November 1, 2018. While SaskEnergy continues to effectively manage expenses, increased transportation costs to move natural gas into and throughout the province will create cost pressure. 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 on track to invest nearly $268 million in capital investment, net of customer contributions, during 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 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.
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 $11 million as a direct result of capital expenditures, while operating expenses (employee obligation costs and operating and maintenance) are expected to rise by $34 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, are expected to increase modestly to approximately 3,000 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 $30 million in 2018-19, driven by colder than normal weather to date, increased revenue for gas transported from Alberta, and a transportation and storage rate increase effective May 1, 2018.
10
2018-19 THIRD QUARTER REPORT
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