When pain cancels out the gain
Power plant profits overshadowed by natural gas losses, prompting new plans for Medicine Hat’s energy division
A big gain in power plant profits, coupled with more pain in natural gas production, highlighted the proposed business plans for the City of Medicine Hat utility division unveiled Monday night.
Both items were highlighted in recent quarterly financial reports, and for years, administrators and council members have noted that while petroleum production lagged, power production has picked up.
Now however, actual cash losses are mounting for the gas business without an end in sight to low pricing.
On Monday, general manager Brad Maynes said he plans to bring new plans to trim costs before the middle of 2019, at which time a report on the winter drilling season — and the effort to boost revenue with oil exploration — should be available.
“The numbers just aren’t acceptable,” Maynes told reporters after outlining forecasts that could see the gas unit lose a total of $119.6 million in cash over the next four years.
That follows a $35.6 million projected loss this year, during which the department cut $6 million in costs hoping to drive down the difference.
That’s mainly due to extremely low natural gas prices experienced this year, despite a move to divest low production wells, shutting in others and a greater move toward oil.
“It’s been building for a while,” said Maynes. “We’ve put forth our four-year budget, but we’re going to bring forward a number of series of initiatives to address that number ... It’s unfortunate and there are headwinds with limited options, but we’re going to do our best.” Mayor Ted Clugston said the natural gas and petroleum division is struggling, but profits at the power plant, also called Genco, are essentially “a wash.”
Over the same budget cycle from 2019 to 2022, a burgeoning trade at the city’s power plant could see $101.3 million in profit.
“We’re bleeding red ink in NPGR, but it’s almost made up in (power generation),” said Clugston. “That’s the natural hedge that I’ve been talking about for 11 years. Imagine if we didn’t have it, how difficult it would be, or vice versa.”
Coun. Darren Hirsch told council he’s heard from constituents asking why the city can’t simply stop producing, or exit the business. Commissioner Cal Lenz said obligations to abandon wells can stretch into the future, and the city is guarding against overreaction.
“If we can turn that tide, there will be significant upside to the city,” said Lenz.
Over all divisions, the net profit including gas and power distribution, sewer and other utilities will be between $6.3 million and $12 million.
Lenz said the division’s goal is to spur “steady, reliable revenue growth” while maximizing existing assets.
“The power plant is a very good driver for the business, we’re confident in the numbers we’ve put forward,” said Lenz, citing aggressive export marketing and new large internal contracts to supply the Hut 8 data processing centre and, next year, Aurora Cannabis growing facility.
Within the business plan, the division plans to transfer $25 million from the electric equipment reserve to a tax stabilization fund, while NPGR operations will be paid for partly by the gas depletion reserve.
Currently dividends from business units are mandated to flow into two reserve funds. One is for long-term savings to fund capital construction, and another is the tax stabilization fund that provides bridge payments while commodity revenue is stripped out of the municipal budget via the Financially Fit budget plan.
In 2019, the power plant is forecast to post a $28.2 million profit, leading to a dividend of about $23 million.
Also in the capital plan, $1 million will be put toward evaluating and designing additional generation.
In petroleum production, the city business unit is budgeted to lose $27.2 million in 2019 due to low natural gas prices, then reduced amounts in 2020 when an $18.7 million loss is predicted.
That follows a huge loss in 2018, forecast to be $31.6 million as gas prices fell to historic lows during the year.
By 2020, the petroleum department expects to shed another 10 positions, leaving them with 87 after years of scaling back.