CAPITAL EXPENDITURES
SaskEnergy Incorporated First Quarter Report
Three months ended June 30
March 31, 2011
(millions)
2016
2015 Change
Customer growth and system expansion
$
14 13
$
22 15
$
(8) (2) (1) (2)
Safety and system integrity
Information systems
2
3 2
Vehicles & equipment, buildings, furniture
-
$
29
$
42
$
(13)
SaskEnergy continues to invest in its pipeline system to accommodate growth in the natural gas customer base and its transition to becoming a net importer of natural gas. Capital expenditures of $29 million for the three months ended June 30, 2016 are $13 million below the same period in 2015. Customer growth and system expansion capital expenditures of $14 million are $8 million lower than 2015, primarily due to slower distribution customer growth, combined with lower spending on the Advanced Metering Infrastructure (AMI) and the meter exchange programs.
OUTLOOK
In late November, the Government of Saskatchewan announced that, as a next step in the transition to summary budgeting, the fiscal year end of Crown Investments Corporation entities, including SaskEnergy, changed from December 31 to March 31. SaskEnergy reported a 15-month period ending March 31, 2016 to transition to the new fiscal year-end and will report on the 12-month periods ending March 31st with the first being March 31, 2017. In close alignment with Saskatchewan Crown Sector 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. The Corporation is financially well-positioned to achieve its business objectives in 2016-17 and its five-year planning horizon.
Market Prices
Natural gas market prices returned to more characteristic levels of volatility between January 2016 and June 2016 in comparison to the relatively stable market price environment experienced throughout 2015. Natural gas prices reached 20- year lows at the end of March 2016 and then recovered by the end of June 30, 2016. It is not expected that natural gas prices will continue to achieve gains similar to what was witnessed during the first quarter of this fiscal year. With the warm weather through the 2015-16 winter, the amount of gas in storage in Alberta at the beginning of this quarter was much higher than usual. The April to June period has seen additional injections such that storage levels in Western Canada, as of June 30, were 92 per cent full while Canadian storage inventory levels were 83 per cent full compared to 60 per cent full June 30, 2015. It is expected that Alberta storage will reach capacity during August based on current injection rates. Once Alberta storage is full, gas prices are likely to fall. However, there may be continuing strength in NYMEX pricing which will support longer term AECO pricing. This should create gas marketing opportunities for the Corporation as the spreads between spot prices and forward prices create opportunities for those who have storage capacity.
Commodity Margin
The commodity rate reduction effective January 1, 2016, a reflection of low natural gas prices resulting from growing U.S natural gas supply during 2014 and 2015, will contribute to lower commodity revenue through 2016-17 in comparison to 2015. The commodity margin will be low through the second quarter until the winter heating season begins midway through the third quarter and continues through to the end of the fiscal period. The commodity margin will be highly dependent on winter weather conditions. During the first quarter, the Corporation submitted an application to the Saskatchewan Rate Review Panel to lower the Commodity rate by 14 per cent effective November 1, 2016. If approved, the commodity rate will decrease from $4.30 per GJ to $3.65 per GJ as natural gas prices are expected to decline following reduced heating loads from the warm winter and high levels of natural gas in storage.
Gas Marketing Margin
SaskEnergy purchased and injected low priced natural gas into storage as market prices declined earl ier this year. With Alberta storage expected to fill in August, the Corporation expects to find opportunities to purchase additional lower priced natural gas and inject it into storage for sale at some future date when natural gas prices are higher. These lower cost purchases will reduce the average cost of natural gas and create higher margins on existing sales contracts over the remainder of the year.
12
2016-17 FIRST QUARTER REPORT
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