By COLLIN GALLANT on November 30, 2021.
Wild power prices in Alberta this year could bring $50 million more than expected into the City of Medicine Hat’s coffers, council’s audit committee heard Monday as mid-year financial statements were presented.
Record high prices in the Alberta power market will likely continue to year end, it predicts, and would push unadjusted earnings from the combined natural gas production business (which is losing money) and power plant operations to about $127 million.
That’s about $90 million more than initially forecast last December, and even after half the cash is used to accelerate gas well abandonment, offset new debt in the division and add money to working capital, it could produce $50 million for other capital priorities and a clear $10-million dividend.
“It’s a lot of money,” said Dennis Egert, head of the city’s corporate services division, who presented figures representing financial performance to the end of September.
“There is major volatility in the businesses that we’re in,” said Egert. “Stable revenue is required to fund our municipal programs.”
Still, he cautioned, the city faces budget “headwinds,” including the retirement of its oil and gas assets. Others are outlined as reduced transfers from the Alberta government, the effect of COVID on business activity and the potential of high commodity prices reversing in volatile markets.
“These headwinds will last until 2022 and beyond,” he concluded, and as for power profits, “We don’t think this level (of revenue) is sustainable.”
Some of the improved results come from a faster than expected shutdown of natural gas assets, and therefore lower operating costs.
Committee chair, Coun. Darren Hirsch, reiterated that the volatile nature of commodity prices leaves Medicine Hat exposed to low prices.
Further insulating the municipal budget from price swings “should happen sooner than later,” he said.
“We don’t make a lot of money off our (Medicine Hat customers), quite frankly.”
Members of the committee, which met for the first time since the October election, spent about 75 minutes in the open portion of the meeting.
“So basically we got lucky – a hot summer and a cold winter,” asked Coun. Andy McGrogan.
“We were able to take advantage of what looks like a seven- or eight-year cycle in pricing,” said Egert.
They heard that power prices spiked in Alberta during a cold snap last February and then again throughout a hotter than normal summer, but prices have remained high even during periods when demand traditionally lulls.
This month, utility officials described record average prices since the Alberta market was deregulated, and predicted that to continue next year as they forecast profits in 2022.
That could materialize as coal power plant conversions to natural gas continue to hamper supply capacity in the short term, thereby propping up prices.
New cash is earmarked to first cover losses in the natural gas production division, then be allocated to other capital projects in the division. Then leftover amounts to the city’s Heritage Savings reserve.
The dividend formula was changed in late 2019, at the same time divisions were reorganized and financial reporting changed. That makes direct comparisons difficult, but the result for the power plant is likely an all-time record.
In 2019, the power generating unit revenue cleared its expenses by $71 million, two years after it recorded a net loss of $5 million.
Profits of $60 million in 2011 was considered a lifeboat for the city as gas prices plunged.
Overall, the city’s municipal operating surplus will likely be close to zero by year end, said Egert, adding that efforts to reduce expenses by $14.8 million had been executed. The city will spend a planned $7.8 million in reserve cash this year to balance the budget.
The report states the city’s long-term debt will be $362.5 million by year end, against treasury holdings valued at $550.8 million.