Gap to city’s debt ceiling sure to shrink
Off-loading 1,500 low-return natural gas wells could put the city’s energy division in the black this year, but the loss of revenue will further shrink room under the city’s debt ceiling, though not by a critical amount, administrators say.
Municipal debt limits are calculated by a provincially mandated formula that in Medicine Hat’s case is twice annual revenue. But that is straight revenue divorced from expenses, and while the well sale lowers operating expenses and liabilities to create a net $30-million gain, it trims $20 million in sales income.
Those figures, presented this week in a mid-year financial report, would mean the city’s ability to borrow money would be reduced by $40 million (twice the revenue decline).
“That’s probably a fair estimate,” said corporate services commissioner Brian Mastel, specifically to the loss of gas sale income.
“It’s certainly going to drop due to the absence of that (gas) revenue.”
Mastel notes the city is well below the current cap of $612 million. The debt was $294 million at June 30, putting it at 48 per cent of the limit.
New forecasting, included for the first time this month, predicts it rise to 55 per cent next year.
Actual borrowings could reach $350 million during 2018, with the largest item being the final payments on the new north-end powerplant. About $25 million of the $55-million project is due this fall.
A departmental goal is to keep the actual debt less than 75 per cent of the limit in the long term.
Last winter council approved the divestiture of 1,500 wells in an effort to shut down low-economic production sites and jettison longterm liabilities to remediate the wells.
This week’s financial report states the move has led to operational savings, and after five years of negative net income, the city’s energy production business could gain equity this year.
The 2017 debt limit is based on about $306 million in revenue across all city operations in 2016 — lower because of poor electrical export sales, and as such the comparison of debt to limit narrowed.
The situation is similar to a revenue drop and debt ceiling adjustments in 2008 when the debt limit fell from $804 million to $582 million when natural gas prices tanked and brought down city revenue with them.
The following year, the city’s actual debt fell by 0.5 per cent, but room under the debt ceiling grew by four per cent because revenue increased.
Most municipalities in Alberta are only allowed to accumulate debt equal to 1.5 times annual revenue.
Medicine Hat is considered alongside Calgary, Edmonton and Fort McMurray as special cases where the limit is twice revenue.