Good for wallet, bad for borrowing
Selling 1,500 gas wells meant $53M coming in, but also lowered the city’s ceiling for potential provincial debt
Selling about 1,500 of the city’s least profitable, highest liability natural gas wells last year will improve the financial bottom line, but also cut into the amount of money the City of Medicine Hat is allowed to borrow, the News has found.
Energy division officials brokered a deal last year to off load one quarter of its gas production.
The accounting resulted in a $53-million positive, mainly related to lowering long-term abandonment liability, with a side benefit of lower operating expense.
However, the resulting loss in revenue from the gas sales — regardless of profit, liability or expense — will mean a provincial debt limit will again fall for the third straight year.
“It will impact it, and that’s a trend that we’ve seen for the last few years,” said city finance general manager Dennis Egert.
“We do monitor the debt levels on an ongoing basis ... We’ve done the high level look at the impact and it’s not significant when it’s all together.”
Buffering the drop on petroleum revenue is an expected increase power revenue in 2017, which Mayor Ted Clugston said should continue to grow in 2018 and rebalance to credit limit.
“The sale of the gas fields will show up in the 2018 debt limit,” said Clugston after the gas division’s budget was presented earlier this month. “The revenue was dropping by so many millions, but so were expenses.
“It’s a good question, and also a concern.”
The recent power generation budget update for 2018 predicts revenue to grow by $27 million this year, which would add $54 million under the ceiling, which is calculated as twice total annual revenue.
However, petroleum sales fell to $66 million for the 2017 year (about $45 million less than projected) due partly to the sales of the fields, according to recent quarterly statements.
Related costs came down in tandem — and actually improved operating results — but the revenue effect is multiplied by two when debt is considered.
City revenue has generally declined in recent years as commodity prices for gas first, then more recently electricity, have remained low.
For example, the debt limit has dropped from $847 million in 2014 (based on 2013 revenue) to $612 million last year (based on 2016 revenue).
While actual borrowings rose by 40 per cent over that time, as a percentage of the limit, it doubled.
The city’s total debt today stands at $323.9 million — about half the current limit — but the ceiling will be recalculated once the city’s 2017 financial statements are audited, likely in March.
City council has also passed borrowing bylaws totalling $124 million that have not yet been enacted, which would bring the level to 73 per cent of the ceiling.
Financing can be arranged years ahead of time for projects however, and administrators typically space out spending as old debt is retired, said Egert.
The amount of new borrowing this year will be about $43 million — about $7 million less than in 2017 — said Egert. About $22 million in debt will be retired in 2018.