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 over 2016-17 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. Commodity Margins Natural gas prices reached record lows during the first three months of 2016 and, although short-term gas prices have since recovered, prices further into the future have continued to fall. This suggests that the market believes 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, 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 it 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. Consolidated net income, including the impact of fair value adjustments, is expected to be $91 million in 2017-18. Natural gas prices are a key risk to this forecast. A $1.00 per GJ increase in the price of natural gas will allow SaskEnergy to fully recover the $21 million net realizable value adjustment reported at the end of March 31, 2017 on natural gas in storage and $18 million of the $35 million market value adjustment reported on natural gas contracts. Conversely, a $1.00 per GJ decline in natural gas prices would adversely affect net income to a similar degree. During 2017-18, a number of derivative instruments are expected to expire resulting in a reversal of fair market value adjustments reported in prior periods. However, further declines in natural gas prices could negatively impact that expected benefit. Weather will be a key factor affecting 2017-18 financial results. Forecasted results are based on normal weather as defined by the 30-year average. To the extent that weather is colder than normal, delivery revenue will increase, and to the extent that weather is warmer than normal, delivery revenue will be lower. Transportation, storage, and other revenue items are typically not impacted by weather, as is the case with operating expenses. Commodity revenue and gas purchases are both affected by weather but typically offset each other. SaskEnergy’s financial performance is expected to remain strong. Capital expenditure requirements and rising costs will remain a challenge throughout the forecast period as SaskEnergy adjusts to continued customer load growth, infrastructure renewal requirements and shifting natural gas supply dynamics. A low natural gas price environment will continue to create challenges from a gas marketing perspective, but could create opportunities to reduce commodity rates to customers. Delivery and transportation revenue will continue to grow along with growth in operating costs. The outcome will be moderate rate pressure assuming rate increases are regular. Over the forecast period, SaskEnergy will continue to focus on providing safe and reliable service to its customers and investing in safety and growth initiatives while actively seeking operating and capital deployment efficiencies through collaboration and technology initiatives. RISK MANAGEMENT AND DISCLOSURE SaskEnergy is subject to a number of risks in transmission, storage, distribution and sale of natural gas as well as its business development activities. The Corporation’s effectiveness at managing risk directly affects its performance. The nature of natural gas, and the operation of high pressure pipelines, means that risk management is a critical operational focus for all employees at SaskEnergy. SaskEnergy’s approach to risk management is to thoroughly examine its operating activities to identify existing and emerging risks, effectively communicate those risks throughout the organization and actively manage them through its Enterprise Risk Management (ERM) process. SaskEnergy undertakes annual risk assessments that are used as inputs to the strategic and business planning process. The ERM process establishes roles and responsibilities as well as a general strategy for the Corporation to manage its risks
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Management’s Discussion & Analysis
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