CUL: Times to stay tough for Alberta energy market

Nancy Southern, head of Canadian Utilities Ltd., said recently that things are likely to remain challenging for electricity producers and consumers for at least a couple years.

"2004 will be a difficult year for Canadian Utilities, primarily because of the low power pool prices and high gas prices which have put pressure on our margins in the gas-fired generating plants," Southern told the company's annual meeting.

Canadian Utilities is the largest business in the Atco Group and creates most of Atco's revenues and profits. Among Canadian Utilities' subsidiaries are Atco Power, Atco Gas, Atco Electric, Atco Midstream and Atco I-Tek.

First-quarter earnings, which Canadian Utilities announced last week, fell to $75 million from $86 million in the first three months of 2003.

The decline was attributed to decisions by the Alberta Energy and Utilities Board, which lowered the rates of return for the electric and pipeline subsidiaries.

Southern also pointed to oversupply in the recently deregulated Alberta electricity market. That has forced down prices at the same time that rising gas prices have increased the cost of generation, she said.

"The oversupply is pushing prices down and for companies such as ours that have new generation in the province, we're paying a higher cost for our fuel," she said.

"Nobody promised us that we were going to have years and years of smooth sailing when you invest in unregulated projects. You have to assume some risk."

Southern estimated it will take between two and four years for gas prices to stabilize - and they'll never return to 1990s levels.

"I think that we will see that levelling-out of the base price, but it's going to be significantly higher than it was in the '90s. The consensus I believe is around $4 (US)."

Variables that could affect that estimate include the health of the North American economy, the pace of energy demand growth in China, the construction of liquefied natural gas plants and the development of Arctic natural gas - not to mention the weather.

Last year, Canadian Utilities sold off gas and electricity retail operations serving more than one million Alberta customers. Direct Energy Marketing Ltd. will pay Atco about $90 million in the deal.

Further sales are possible, said Southern.

"As you look at the evolution of deregulation, you find that within utilities there are a number of assets that are no longer required for utility operations. We'll identify those as we go along."

The City of Calgary has appealed the regulatory approval of the Direct Energy sale. But Southern noted the city - home to both many of the company's operations as well as the Southern family - is a main shareholder of one of Canadian's competitors.

"One could speculate that the City of Calgary, which is the principal shareholder of Enmax, is concerned about new competition coming into the market," she said.

Despite future challenges, Canadian Utilities chief financial officer Jim Campbell pointed to good results in 2003. Revenue increased by $767 million to $3.7 billion, due in part to higher prices for gas and electricity sold to consumers. Earnings per share from operations rose from $3.75 to $4.09 - the 14th consecutive annual increase.