As power and gas prices continue to fall, the City of Medicine Hat could face a non-existent dividend by as early as 2026.--NEWS FILE PHOTO
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Medicine Hat’s combined power and gas production units may struggle to stay in the black by 2026, as already hurting revenue could be dragged down further by higher carbon taxes and increasing cost to manage shrinking gas production, division officials told city council on Wednesday.
They expect the power plant and much smaller gas business to remain cash positive, but with lower prices, sales and revenue alongside higher carbon costs and accounting measures for remaining well abandonment work.
That could provide just a $600,000 dividend to municipal coffers in two years, compared to more than $200 million over 2022 and 2023.
“As this town knows, and what most towns know, commodity prices follow boom and bust cycles,” said energy division managing director Rochelle Pancoast to begin the committee of the whole meeting. “There are periods of high prices followed by periods of low prices … We’re familiar with it, but it’s an area of high risk in our financials.
“We’re on a down cycle and need to survive through it.”
Discussion of the two-year budget for the energy production unit lasted two hours, including an overview of commodity price estimates, carbon compliance charges, sustaining capital requirements and expected profit forecasts.
This year, financial officials estimate a $19-million profit on power will be set against a $6-million loss on gas, making the net dividend to city coffers about $12 million, or about $50 million less than expected.
Next year, the proposed budget predicts a $25.9-million profit on power and $19.9-million loss on gas, for a dividend of $6 million.
Then an $18.4-million power dividend in 2026 would be eaten up almost entirely by an expected $17.8-million loss in gas once net income is adjusted for well-liabilities.
“Those are forecasted at his point, and it’s certainly not as rosy a picture as it has been in the previous couple of years,” said Mayor Linnsie Clark. “Forecasts can change and we’ve heard about some of the uncertainties tonight, and in previous presentations.
“Energy is always a bit of a wave, and it’s incumbent upon us as the owner of an energy company to prepare and mitigate those risks as best we can.”
Division senior officials told council the budget plan assumes a status quo for the business model in order to have approved budget in place, as required, by Jan. 1.
Two more meetings are planned on the 2025-26 budget in early November, including the municipal operating budget as well as land and economic development, before the final draft is discussed in December.
Before then however, a third-party review of the energy business model will be presented to council.
The results and any change to local pricing would be folded in later, likely in early 2025, staffers have said.
As well potential new major spending for solar power field construction would arrive separate from the new budget, though a stripped-down capital ask calls for no new spending on carbon capture conversion at the gas-fired power plant. About $36 million for generator maintenance is needed, and no new gas spending is expected.
Funding is already approved for initial carbon-capture hub development.
Medicine Hat sells power onto the grid from its excess generating capacity when certain prices hurdles are met, including profit on top of cost of production.
Since prices are expected to remain generally low, volume of exports will likely fall, and within the local area, sales are also expected to decrease slightly.
“We’ll still realize (profit) on what we are selling, but the largest determinant is lower volume,” said Joel Higgins, a power market analyst with the city.
On the gas side, the city now imports most of its gas from third-party sales, and will likely produce about 10,000 MCF per day from 650 active wells. Another 2,250 wells are either shut in already or awaiting reclamation certificates.
“A big driver is now or abandoned and reclamation wells,” said gas business analyst Josh Barclay. “Remove them and gas is a profitable business unit, and that is the hope over time.”
