SaskEnergy Incorporated First Quarter Report 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 $119 million for the six months ended September 30, 2018 are $17 million higher than the same period in 2017. Customer growth and system expansion is $16 million above the same period in 2017, a result of higher spending on distribution system growth relating to industrial customers and transmissi n system growth relating to increasing compression requirements to meet natural gas demand in the Province resulting in bringing additional Alberta supply onto the transmission system. 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 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 $87 million, a decrease of $35 million over the 2017-18 actual result. This decrease is primarily due to lower commodity margins as the commodity rate is expected to decrease 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 projecting 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 $4 million as a direct result of capital expenditures, while operating expenses (employee obligation costs and operating and maintenance) are expected to rise by $33 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 3,600 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 $26 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.
Gas Marketing and Commodity Margins
While long term natural gas prices have slightly decreased from the end of March 2018, near term natural gas prices have increased. Over a longer period, forward gas prices have displayed a flat to slightly increasing trend suggesting that the likelihood of significantly higher prices in the future is low. Current market prices are fairly representative of long term prices, resulting in the differential between current and forward prices being fairly small. This differential is the driver for much of SaskEnergy’s gas marketing activity in the past, with the exception of summer to winter spreads. These market conditions adversely affect the prospect for generating the high margins required to support SaskEnergy’s non-core storage business. The Corporation may be able to take advantage of TCPL mainline through diversions to other locations when capacity is underutilized which would result in favourable gas marketing results.
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2018-19 SECOND QUARTER REPORT
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