NEWS PHOTO COLLIN GALLANT City utility officials say power exports during last week’s cold snap were substantial when the prices paid on the provincial grid were 12 to 15 times higher than rates for local customers.
cgallant@medicinehatnews.com@CollinGallant
A second year of supersized power plant profits will give the City of Medicine Hat wiggle room to pay for a plan to wean the city budget off utility revenue, according to new mid-year financial statements.
Three years ago city budgeters launched “Financially Fit for the Future” – an effort to fill a $23-million budget gap caused when natural gas profits dried by cutting costs and raising tax revenue to make up the difference over 10 years.
That phased approach however, also required that millions of dollars in reserve funds be spent each year to provide bridging and avoid so-called “rate shock.” Initial deposits to a Tax Rate Stabilization fund drew huge sums out of utility reserves.
Some observers worried the effort might stabilize revenue but completely drain the city’s sizable bank balance.
On Monday, council’s audit committee committee heard that revised forecasts in electrical generation profits show a near doubling of the expected dividend to $42 million this year. That cash fully stocks the stabilization fund through 2023, as well as puts cash in a new savings fund.
Higher power prices, greater exports and lower costs will as well see equity in the operation grow before cash is paid to municipal coffers.
“Oh, it’s a wonderful report,” said Coun. Phil Turnbull, a member of the audit committee and chair of the utility committee.
“You have to remember though that three years ago, the power plant lost $5 million. There are so many unknowns, and we have to take care of the ‘knowns.'”
Other members as well said the bonanza of generating profits ($80 million over two years) should help shore up general financing of the plan.
Coun. Jamie McIntosh, another member of both committees, had expressed concern about the rate at which reserves were being depleted, but only cautiously welcomed this week’s forecasts.
“You can’t let this make it easier to avoid difficult decisions,” said McIntosh, citing the potential of separate reserve cash being required to accomplish a gas well abandonment program, or that a large portion of that $140 million is partially invested in equities, which like power markets, could see a reversal of business conditions.
“We’re in an incredibly fortunate position compared to some other municipalities,” said McIntosh. “But we have to keep our pedal to the metal.”
Another challenge is changes in the provincial budget this week, the effects of which will be presented in an interim budget update scheduled for December.
Corporate services commissioner Dennis Egert said the city’s financial report to end of August, as was presented Monday, is that the city is making progress on growing revenue and containing costs.
Measures in municipal services operations could lead to a $400,000 cost savings, while the expected loss in the city’s petroleum exploration division could be $1 million less than expected.
He also said discipline is required to improve the city’s financial picture.
“The whole emphasis is to make sure we’re not relying on volatile revenue for day to day (operations),” he said. “It could easily go the other way. That’s one thing we’re aware of.”
The 2019 budget year is the third under the Financially Fit plan and the initial gap of $23 million has been reduced to about $16 million this year since 2017.
Further phases would see it reduced by about $3 million per year until it is eliminated in 2024, but until then $48 million in total will be needed to balance the budget.
The forecasted year-end balance of the stabilization fund would be $43.2 million, after the power plant dividend is split evenly between it and the recently formed Heritage Savings account. Each is forecast to receive about $21.3 million, about $5 million more than forecast last January.
Aside from the dividend, new cost accounting policy will mean that higher operating profit will see the division’s deposit in its own equipment reserve fund double to about $10.5 million before the dividend is paid.
Council also approved about $15 million of construction earlier this year, paid for completely out of the higher operating income, meaning substation work.
