June 26th, 2019

Extra power cash saves the day

By Collin Gallant on October 11, 2018.

The city's Unit 16 power plant on Box Springs Road is seen in May. Better than expected profits from electricity sales have offset significant city losses in natural gas.--NEWS FILE PHOTO


Summer power sales for the City of Medicine Hat beat already beefed-up profit forecasts according to a new report to the council’s audit committee this week.

That is also pushing up a projected dividend from the entire utility operations to $42.9 million — about $10 million more than was projected in early June and about four times the amount stated in the original budget.

That money is earmarked to flow into reserves, including one to buffer tax increases, but the entire report also shows mounting losses in a natural gas production unit that will now need separate reserve cash to operate.

“It’s terrible to have gas prices so low, but we’re burning that into electricity,” said Mayor Ted Clugston, who said prolonged low gas prices are now straining cash, not just equity.

“Before the EBITDA (earnings before non-cash adjustments) was positive, and now we’re spending cash. We have done divestitures and the growth strategy hasn’t happened as fast as we’d hoped, but there are interesting prospects.”

The city’s oil interests are increasingly profitable, but those are dwarfed by the size of the gas portfolio.

In gas production, states the update for the period ending Aug. 31, revenues are now expected to be $10 million lower than expected due to poor pricing and sales.

That’s about 15 per cent lower than budgeted. Even with an in-year cost-cutting program totalling $5 million by year-end, the division could post a net loss of $33.2 million.

Audit committee chair Darren Hirsch says in the broad view of the division’s financials, the net gain is $17 million.

“That net is important,” he said, adjusting in projected net earnings of $50 million for gas distribution, power, sewer and water.

“It’s obviously very encouraging for a business unit to return such strong results,” said Hirsch, whose committee received the update Tuesday. “It’s a little out of our control in that there was an uptick in prices.

Leading the way was power.

Power prices rose to four-year highs this summer across Alberta, with the city’s generation business profiting both on internal sales, where the price is set against the provincial average, and on export sales to the gird.

As temperatures rose all summer, the city set new production records in the first full year of operation of the 44-megawatt Unit 16 station, that mainly services a new major contract with the Hut 8 data processing centre.

The hot dry weather also pushed water sales upwards, by about $1.3 million, or six per cent, while costs were lower.

All told, the utility division’s dividend to the municipal coffers is expected to be $42.9 million.

That money is set to be split evenly, according to the city’s dividend policy, into a tax stabilization reserve and a Heritage Savings Fund.

If the projections hold, each would receive about $21.5 million.

Money required to fund Natural Gas and Petroleum Resources work would come from the City’s Gas Depletion Fund, which had a balance of $59.6 million in January, but could be drawn down to $19.6 million by year end.

The city reports updated financial numbers three times each year. The next update, including complete year results, is expected next spring when the annual report is presented.

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