In close alignment with Saskatchewan Crown Sector Strategic Priorities and the Saskatchewan Plan for Growth, SaskEnergy’s 2016-17 efforts will continue to focus on the four strategic mandates: Service Excellence, Achieving Growth, Our Team and Creating Value. With the oil and gas sector accounting for nearly 15 per cent of Saskatchewan’s real Gross Domestic Product (GDP), declining oil and natural gas prices through 2015 and 2016 have adversely affected the provincial economy. However, provincial demand for natural gas is expected to continue growing, as major customers in potash production and natural gas power generation expand operations through 2016-17. The continued growth in natural gas demand, combined with declining conventional gas production and an aging pipeline system, continues to put pressure on SaskEnergy facilities to meet customer load requirements. Additional investment in pipeline facilities is required to allow more gas to be imported from Alberta, capture gas produced in association with provincial oil production, serve new customers, and maintain the integrity of the pipeline system. SaskEnergy is projecting an investment of more than $600 million over the next three years. This additional investment will be primarily funded out of cash from operations, with an additional $101 million to be financed with incremental long-term debt. 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 pursue collaboration opportunities and technology initiatives to create operational efficiencies in how it serves customers and maintains facilities. Since 2009, SaskEnergy has achieved $38 million of operating efficiency savings and another $4 million has been targeted for 2016-17. Operating Expenses As the number of customers increases, and the natural gas infrastructure to serve those customers grows, the cost of operating the pipeline system rises. Generally, the addition of new customers and load reduces the average cost to serve those customers, so costs do not rise at the same rate as the expansion of the system. However, as the pipeline and distribution system continues to age, and supply shifts from conventional Saskatchewan production to associated gas production and Alberta supply, additional costs are incurred that do not generate additional revenue. Consequently, the average cost of serving customers is expected to rise. Depreciation and amortization combined with net finance expenses are expected to rise by $6 million as a direct result, while operating expenses, (employee benefits and operating and maintenance) are expected to rise by $4 million even with projected efficiency savings of $4 million. Revenue The rate increases effective January 1, 2016 will provide additional delivery, transportation and storage 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 decline to 4,800 through 2016-17. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects revenue to increase by $22 million in 2016-17, driven by a six per cent increase in load. Commodity and Gas Marketing Margins Natural gas prices reached record lows during the first three months of 2016 and are not expected to make a significant recovery throughout 2016-17 given the record levels of North American natural gas in storage at the end of the winter heating season. Currently, the differential between forward prices and current prices — the driver for much of SaskEnergy’s gas marketing activity — is relatively high, allowing large percentage returns; although smaller on a dollar value basis than in previous years. Consequently, the potential gas marketing margins on gas marketing activities are expected to be lower than they have been in the past. The January 1, 2016 commodity rate reduction to $4.30 per GJ will reduce commodity revenue, but lower natural gas market prices are expected to reduce the average cost of gas by an equal or greater amount. Consequently, favourable margins are expected on commodity sales. By the end of March 31, 2017, the GCVA balance owing from customers is expected to be fully recovered. As part of the regular commodity rate review process, commodity rates will be reviewed and adjusted as required. Consolidated Net Income Consolidated net income, including the impact of fair value adjustments, is expected to be $117 million in 2016-17. Natural gas prices are a key risk to these financial results. A $0.10 per GJ increase in the price of natural gas will allow SaskEnergy to recover $3 million of the $34 million net realizable value adjustment reported at the end of March 31, 2016 on natural gas in storage and $6 million of the $98 million fair value adjustment reported on natural gas contracts. Conversely, a $0.10 per GJ decline in natural gas prices would adversely affect net income to a similar degree. During 2016-17, a number of derivative instruments are expected to expire resulting in a reversal of fair value adjustments reported in prior periods however, further declines in natural gas prices could negatively impact the expected benefit.
2015-16 ANNUAL REPORT SASKENERGY
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