October 19th, 2018

Power profits could be $33M

By Collin Gallant on June 13, 2018.

Medicine Hat City Hall is shown in this undated photo. City officials forecast electric profits to hit $33 million this year and council will soon decide the best course of action to take with that electrical dividend.

cgallant@medicinehatnews.com @CollinGallant

Medicine Hat’s golden goose in en route to laying a $33-million egg in the form of electricity profits this year, city officials forecasted in their first financial update of the year at Tuesday’s audit committee meeting.

That’s the biggest payday for the power plant since at least 2013, after which the city began drawing down its reserves to cover absent gas and power profits in the municipal budget.

A new strategy in 2017 sought to remove commodity revenue entirely from city budgets, but with added tax revenue offset by cost containment making up a $23-million shortfall, that has since shrunk to about $17 million.

Audit committee members debated for more than an hour on how a return to profitability should be folded into that process, known as Financially Fit for the Future, or whether rebuilding reserves or cutting debt might be preferred to tax abatement.

“It’s very easy to say ‘yep, let’s get back on the dividend train,’ but in the end that’s not prudent,” said committee chair Coun. Darren Hirsch, adding that some new consideration of profits needs to be inserted into the city’s financial plan.

“It’ll all be up to council to determine but it’s my opinion that (the profits) are not sustainable.”

Committee member Coun. Phil Turnbull, who had been elected last October stating that the Financially Fit plan shouldn’t be off limits for updates, said there is an expectation citizens will benefit from the publicly-owned utility.

It’s the result of “some very good work by the utility,” said Turnbull.

“I would think we build up the reserves as soon as possible and be very conservative,” he said. “It’s difficult for citizens who see taxes go up, utility rates go up and we’re showing a large profit.

“We need to be more balanced in our approach.”

Power plant managers had predicted a $10.3-million annual profit, but now believe higher prices, better export markets and lower costs for fuel gas will see the facility generate $25 million.

This winter, the city also signed two new huge power contracts with Hut 8 data processing, which went online this month, and also Aurora Cannabis, which could open in early 2019.

Commissioner Cal Lenz said they are confident in the new numbers for this year, but as the provincial system moves to a capacity market, price volatility, which drives up profits, should ease.

“There will be some ability to capture high prices in the next year or two, but not on a going-forward basis,” he told the committee. “(Low gas prices) too have changed our gross margins significantly. We’re quite confident in our numbers.”

City councillors had telegraphed such a boost in profits might be coming.

Earlier this month, Mayor Ted Clugston told reporters the prospect of higher dividends needed to be factored into initial budget discussions set to take place next week.

Coun. Kris Samraj wrote a lengthy blog piece about the history and benefit of the dividend system.

Under a new dividend policy, half the money would be destined for deposit in a heritage savings fund, set up two years ago to capture commodity income.

The rest would go to the tax stabilization reserve, meant to cover shortfalls during the Financially Fit period.

Since 2014, the city has spent more than $70 million in reserve money, filling the tax gap and avoiding a rate shock in any given year. That money was pulled from the gas depletion and electrical equipment reserves, the latter of which was to buy new generators that are now debt-financed.

Turnbull said rebuilding that balance could lead to two options: the new money could be accessed in another downturn, or be used to lower the city’s debt position, and thereby financing charges paid by utility customers.

Hirsch said mid- to long-term planning analysis is needed.

“I think we need to take another look at it,” he said. “Especially when there are potentially lower profits in years three and four.”

For the past two years, tax increases and cost containment have narrowed the annual deficit to about $16 million, and the stated goal is to get it to about $3 million by the end of the next four-year budget cycle in 2022.

But that will come with tax increases, scheduled in the four-per-cent range each year as budgeters also introduce spending cuts to reduce the gap as well.

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