MANAGEMENT’S DISCUSSION AND ANALYSIS
OUTLOOK Factors that are expected to affect SaskEnergy in the near future include the growth of the provincial economy, a declining supply of natural gas in the province resulting in increased reliance on imported natural gas, and rising customer expectations for safe, reliable natural gas services. Assuming normal weather conditions through 2018-19, net income before market value adjustments is expected to be approximately $68 million, a decrease of $42 million over the 2017-18 actual result. The decrease is primarily due to the return to normal weather, as 2017-18 was five per cent colder than normal, and lower anticipated gas marketing margins. 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 an aging pipeline system, will require incremental investments in pipeline facilities. SaskEnergy is projecting to invest more than $755 million over the next three years. This additional investment will be primarily funded through cash from operations, with an additional $330 million to be financed with net 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 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 $48 million of operating efficiency savings and another $4 million has been targeted for 2018-19. Operating Expenses As the number of customers increase, the natural gas pipeline infrastructure required to serve those customers grows, and the cost of operating the pipeline system rises. Generally, the addition of new customers and load reduces the average cost to serve 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 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 $5 million as a direct result of capital expenditures, while operating expenses (employee benefits and operating and maintenance) are expected to rise by $23 million even with projected efficiency savings of $4 million in 2018-19. The cost increases are primarily due to rising third-party transportation costs related to importing natural gas to meet growing load requirements. Plus the capacity constraints on the TransCanada Mainline will increase the transportation related costs. Revenue The delivery rate increase effective November 1, 2017 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 to 4,000 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 $11 million in 2018-19. Transportation rates have remained unchanged since January 1, 2016 and increases are expected to help mitigate increasing third-party transportation rate increases. Commodity Margins Natural gas prices reached record lows during 2017- 18, although short-term gas prices have since slightly recovered. Prices further into the future have continued to fall throughout most of 2017-18 but are beginning to increase. This suggests that the market believes the likelihood of higher prices in the future is small. Currently, the differential between current and forward prices, a driver for much of SaskEnergy’s gas marketing activity, is relatively flat. 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. Lower natural gas market prices are expected to reduce the average cost of gas, which could result in a lower commodity rate for customers in 2018-19. As part of the normal course of business, commodity rates are reviewed regularly and adjusted as required.
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