CAPITAL EXPENDITURES
SaskEnergy Incorporated First Quarter Report
Three months ended
Six months ended September 30
September 30
March 31, 2011
(millions)
2017
2016 Change
2017
2016 Change
Customer growth and system expansion
$
35 25
$
28 22
$
7 3
$
49 44
$
42 35
$
7 9
Safety and system integrity
Information systems
3 2
3 2
- -
5 4
5 2
-
Vehicles & equipment, buildings, furniture
2
$
65
$
55
$
10
$
102
$
84
$
18
SaskEnergy continues to invest in its pipeline system to accommodate growth in the natural gas customer base and its increasing reliance on Alberta Gas to meet load requirements. Capital expenditures of $102 million for the six months ended September 30, 2017 are $18 million higher than the same period in 2016. Customer growth and system expansion is $7 million above the same period in 2016, a result of higher spending on transmission system growth, specifically, increased spending on two compression expansion projects in the current year. Safety and system integrity capital expenditures are $9 million higher than 2016, primarily due to faster progress on distribution system integrity programs.
OUTLOOK
With the Corporation’s fiscal period beginning April 1, peak winter heating loads are absent from the financial results until the third and fourth 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. 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 winter weather conditions over the next six months. Assuming normal weather conditions for the balance of 2017-18, net income before market value adjustments is expected to be approximately $105 million, an increase of $36 million over the 2016-17 actual result. This increase is primarily due to the assumed settlement of the litigation related to the SaskEnergy Place building purchase which would see approximately $12 million in prior lease payments returned to SaskEnergy. In addition, during the second quarter of 2017-18, a $15 million impairment reversal was recorded. This relates to a storage field asset, which due to a change in corporate strategy is moving from the non-core gas storage facility cash generating unit, into a larger pool of core storage assets, where it will be used to provide storage service and transmission avoidance to customers within a regulatory framework. 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. On October 4, 2017, the Saskatchewan Rate Review Panel recommended to Cabinet an average delivery rate increase of 2.95 per cent effective November 1, 2017. 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 obligation costs 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 over longer distances to meet growing load requirements. The Corporation is expecting staffing levels to remain relatively stable 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.
10
2017-18 SECOND QUARTER REPORT
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