SASKENERGY 2018-19 ANNUAL REPORT
Operating Expenses As the number of customers increases, the gas line infrastructure required to serve those customers grows, and the cost of operating the 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. 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 $16 million as a direct result of capital expenditures, while operating expenses (employee benefits and operating and maintenance) are expected to rise by $25 million even with projected efficiency savings of $4 million in 2019-20. The cost increases are primarily due to rising third- party transportation costs related to importing natural gas to meet growing load requirements. Revenue An approved delivery rate increase of 3.4 per cent effective April 1, 2019 will provide additional delivery revenue to 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 3,600 new customers through 2019-20. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects delivery and transportation and storage revenue to increase by $25 million in 2019-20. Transportation rates increased effective May 1, 2018 but will remain unchanged in 2019-20. Commodity Margins Natural gas prices reached record lows during 2018-19, although short-term gas prices have since slightly 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, a driver for much of SaskEnergy’s asset optimization activity, is relatively flat. Other asset optimization activities, which leverage off-peak transportation and storage capacity in the distribution utility, are expected to continue to generate margins;
however, the potential for asset optimization margins is expected to be lower than it has been in the past. Weather is always a factor affecting 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 influenced 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 an asset optimization perspective, but could create further opportunities to reduce commodity rates to customers. Delivery and transportation revenue will continue to grow along with increasing operating costs. The outcome will be moderate rate pressure assuming regular rate increases. SaskEnergy will continue to focus on providing safe and reliable service to its customers and invest in safety and growth initiatives while actively seeking operating and capital deployment efficiencies through collaboration and technology initiatives.
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