PIPELINES / Westcoast Energy: Warm Weather and Non-Recurring Items
Reduce Westcoast's Six Months Earnings (Part 2 of 2)
TSE, ME, VSE SYMBOL: W
NYSE SYMBOL: WE
JULY 23, 1998
VANCOUVER, BRITISH COLUMBIA--
ENERGY MARKETING
The energy marketing business incurred a loss of $27 million for
the first six months of 1998 compared with a loss of $6 million in
1997.
The lower earnings are primarily due to the Company's 50 percent
interest in Engage Energy which realized higher losses reflecting
lower margins due to warm weather and continued intense
competition. In addition, the results include an after-tax
provision of approximately $14 million or 14 cents per common
share, reflecting the Company's share of a non-recurring loss due
to customer defaults.
In late June 1998, unusual and prolonged hot weather combined with
forced electrical outages led to electricity price spikes that
resulted in two of Engage Energy's customers defaulting on their
obligations to deliver electricity. To meet its own sales
commitments, Engage Energy was required to purchase replacement
electricity in the market at substantially higher prices,
resulting in the loss. Engage Energy intends to proceed with
legal action however the amount of recovery, if any, is uncertain
at this time.
Engage Energy has been operating in a challenging environment over
the past several quarters and has generated operating losses due
to reduced trading margins resulting from weather related weak gas
prices and intense competition. While an active energy marketing
operation is desirable to complement the Company's other
businesses, the magnitude of the losses incurred is not
acceptable. If operating results do not improve, the strategic
direction of this business will be reconsidered.
With respect to the recently incurred losses arising from customer
defaults, Engage Energy has completed a review of its policies and
procedures. This review, which considered advice from Engage's
external auditors, concluded that the policies and systems in
place are appropriate however, changes are required in the
execution of these policies. Changes required to tighten credit
and operating practices have now been initiated.
PIPELINE PROJECTS
The Company is continuing its development work on the Maritimes &
Northeast Pipeline, and the Alliance Pipeline, the TriState
Pipeline, and the Millennium Pipeline projects.
MARITIMES & NORTHEAST PIPELINE
The Company has a 37.5 percent interest in the Maritimes &
Northeast Pipeline (M&NP) which will transport in excess of 500
million cubic feet per day of natural gas sourced from offshore
fields being developed near Sable Island to markets in Nova
Scotia, New Brunswick, and the northeast United States. The
1,040-kilometre main pipeline and associated lateral pipelines are
expected to cost approximately $1.7 billion, and are expected to
be in service by November 1999.
In December 1997, the NEB issued a certificate of public
convenience and necessity for M&NP, which was the last major
regulatory approval required for construction of the Canadian
portion of the pipeline. Construction of the Canadian portion of
the mainline is scheduled to commence with the clearing of the
pipeline route in the fourth quarter of 1998.
With respect to the portion of the pipeline in the United States,
the Federal Energy Regulatory Commission (FERC) has awarded M&NP a
full certificate for Phase I of the pipeline, which is currently
under construction, from Dracut, Massachusetts, to Wells, Maine,
and has issued a preliminary determination and a final
Environmental Impact Statement with respect to Phase II of the
pipeline from Wells, Maine, to the Canada-United States border.
Final regulatory approval of the construction of Phase II of the
pipeline in the United States is expected in the third quarter of
1998.
ALLIANCE PIPELINE PROJECT
The Company has a 14.5 percent interest in the Alliance Pipeline
Project which is designed to deliver an incremental 1.3 billion
cubic feet per day of natural gas from western Canada to the
Chicago area. The 3,100-kilometre pipeline is expected to cost in
excess of $4 billion and is expected to be in service by October
2000.
The NEB hearing applicable to the Alliance Pipeline Project, which
commenced in January 1998, was completed in May 1998. A decision
is expected in the fourth quarter of 1998.
In July 1998, Alliance received the draft Comprehensive Study
Report (CSR) from the NEB. The CSR is a critical step in the
regulatory and environmental approval process. The NEB concluded
that the Alliance project is not likely to cause significant
adverse environmental effects.
GAS DISTRIBUTION
The contribution to net income applicable to common shares from
the gas distribution business was $71 million for the first six
months of 1998 compared with $112 million in 1997.
Unusually warm temperatures in most of the Company's gas
distribution franchise areas reduced earnings by $33 million or 32
cents per common share for the first six months of 1998 compared
with the same period in 1997. In particular, the Ontario
operations experienced weather in 1998 which was approximately 19
percent warmer than normal.
The reduction in earnings also reflects lower allowed rates of
return on common equity, development costs related to the new
non-regulated retail energy services initiative, and Centra Gas
Manitoba's disallowed recovery of certain natural gas costs net of
expected recoveries, offset partially by continued growth in the
number of customers, higher service and rental revenues, and
higher rate bases.
UNION GAS
The customer base of Union Gas increased by more than 3 percent to
1,050,000 at June 30, 1998, from 1,015,000 at June 30, 1997.
Union Gas' natural gas volumes were 600 billion cubic feet for the
first six months of 1998 compared with 641 billion cubic feet in
1997.
In January 1998, Union Gas and Centra Gas Ontario were amalgamated
and continue to carry on their operations as Union Gas Limited.
In June 1998, the Ontario Energy Board (OEB) approved the transfer
of Union Gas' retail merchandise, rentals and servicing programs
to Union Energy, Westcoast's non-regulated retail energy services
business. The transfer, which is expected to take place at the
end of 1998, involves approximately $525 million of net assets in
exchange for cash and preferred shares. Associated with the
transfer, Union Gas will assume the one-time transition costs
which are estimated to be approximately $6 million after tax,
which will not be recovered through rates.
OTHER DISTRIBUTION OPERATIONS
The customer base of the other Centra Gas companies and Pacific
Northern Gas increased by more than 3 percent to 388,900 at June
30, 1998, from 377,000 at June 30, 1997. Natural gas volumes
applicable to these companies were 80 billion cubic feet for the
first six months of 1998 compared with 91 billion cubic feet in
1997.
CENTRA GAS MANITOBA
In June 1998, the Manitoba Public Utilities Board (MPUB) approved
Centra Gas Manitoba's 1998 return on common equity at 9.91 percent
and maintained the common equity component of rate base at 40
percent. The MPUB disallowed recovery of approximately $27
million of natural gas costs related to price management
activities. Net of recoveries, related items and income taxes,
the earnings contribution reflects a net reduction of
approximately $12 million or 12 cents per common share.
The dynamic hedging practices used by Centra Gas Manitoba in its
price management program have been discontinued and do not occur
at other Westcoast utilities. Before adopting any replacement
price management programs, discussions will be initiated with the
MPUB which may result in the MPUB pre-approving any price
management transactions undertaken by Centra Gas Manitoba. The
Company's objective in these discussions will be to properly align
the benefits and risks involved in any price management program.
Risk management policies in place at the Company's other gas
distribution businesses restrict gas price management activities
to limited hedging transactions designed to reduce volatility and
the resulting exposure of customers to increases in the cost of
gas.
The MPUB will conduct a hearing beginning at the end of July 1998
to approve new rates that include the disposition of increased gas
costs and other items which were approved by the MPUB in its June
1998 decision.
In July 1998, Centra Gas Manitoba filed an application for leave
to appeal the decision of the MPUB with the Manitoba Court of
Appeal. A decision from the court is expected later this year.
CENTRA GAS ALBERTA
In June 1998, the Company completed the sale of Centra Gas Alberta
to AltaGas Services Inc. for $61 million resulting in an after-tax
contribution to net income of $14 million or 14 cents per common
share.
PACIFIC NORTHERN GAS
In June 1998, the British Columbia Utilities Commission (BCUC)
decided PNG's common equity component of rate base to be its
actual common equity subject to a ceiling of 36 percent. The rate
of return on common equity for PNG, as determined by the formula
approved by the BCUC, was maintained at 10.75 percent for 1998.
UNION ENERGY
Union Energy completed the purchase of six additional heating,
ventilation and air conditioning (HVAC) businesses. To date a
total of 15 HVAC businesses have been acquired in Ontario and
Manitoba. The 15 HVAC businesses currently have annual revenues
in excess of $59 million.
As noted above, the OEB has approved the transfer of Union Gas'
retail merchandise and service programs to Union Energy. The
transfer involves approximately $525 million of net assets,
including operations pertaining to appliance sales and rentals,
appliance service work and merchandise financing.
Union Energy, as a non-regulated retail energy services business,
will have more flexibility than the regulated utilities to design
and package energy products and services to meet customer needs.
POWER GENERATION
The contribution to net income applicable to common shares from
Power Generation operations was $6 million for the first six
months of 1998 compared with $5 million in 1997.
The increase in the contribution primarily reflects benefits
associated with tax management.
ISLAND COGENERATION PROJECT
Westcoast Power and Fletcher Challenge Energy Inc. are developing
a cogeneration plant at Fletcher Challenge Canada Limited's pulp
and paper mill near Campbell River on Vancouver Island. Westcoast
Power has a 40 percent interest in the 240-megawatt Island
Cogeneration Project which is expected to cost in excess of $200
million. Construction of the facility is expected to commence
this summer.
WHITBY COGENERATION PROJECT
The turbine at the Whitby plant recently passed its performance
and reliability tests and the cogeneration plant is expected to be
placed into commercial operation in the near future.
FORT FRANCES COGENERATION
In June 1998, the operations at the Fort Frances Cogeneration
Plant were shut down as a result of a labour strike at the
adjacent operations of Abitibi Consolidated Inc., the steam host
for the cogeneration plant.
INTERNATIONAL
The contribution to net income applicable to common shares from
International activities was $2 million for the first six months
of 1998 compared with a loss of $1 million in 1997.
The increase in the contribution primarily reflects higher
earnings applicable to the Company's investment in Indonesia and
benefits associated with tax management, partially offset by
ongoing costs associated with developing new projects.
OTHER
OTHER ACTIVITIES
The net costs applicable to other activities, including
unallocated corporate financing expenses, were $18 million for the
first six months of 1998 compared with $16 million in 1997.
CAPITAL ISSUED
In April 1998, the Company issued $150 million of 5.70 percent MTN
Debentures, Series 5, maturing in 2008.
In July 1998, Union Gas issued $100 million of 5.70 percent MTN
Debentures, Series 1, maturing in 2008.
DIVIDEND
The underlying fundamentals of the Company continue to be solid
and the long-term outlook for natural gas and electricity related
businesses remains positive. Westcoast's ability to generate
earnings remains strong and is growing with the addition of
several significant new projects that are in the development
phase. The deterioration in the operating results during the
first half of this year is largely the result of one-time events.
Reflecting the positive outlook for the Company, the Board of
Directors has elected to increase the dividend effective September
30, 1998 by 1 cent per common share to 32 cents per quarter, to
shareholders of record at the close of business on September 4,
1998.
YEAR 2000 PROJECT
Year 2000 issues are a matter of high priority for the Company.
Westcoast has underway an extensive program of review and
remediation of computer systems and applications and key business
processes in use throughout the Company in its effort to avoid
year 2000 problems which could cause a material disruption to the
Company's business. The Company is in communication with its
vital customers, suppliers and other third parties to assess their
level of year 2000 readiness. However, it is not possible for the
Company to be certain that all aspects of the year 2000 issue
affecting the Company, including those related to efforts of
customers, suppliers or other third parties, will be fully
resolved. The Company, therefore, is developing business
contingency plans to allow it to carry on business in an orderly
manner into the year 2000. A Corporate Year 2000 Project Office
has been established at the Company's headquarters in Vancouver,
and project offices have been established at each of its operating
companies across the enterprise, to identify and address year 2000
issues. The Company now projects the cost of its year 2000
project to be approximately $50 million, including internal costs,
based on current estimates of remediation measures.
FORWARD LOOKING INFORMATION
The information in this news release contains forward-looking
statements with respect to Westcoast Energy Inc., its subsidiaries
or affiliated companies. By their nature, these forward-looking
statements involve risks and uncertainties that could cause actual
results to differ materially from those contemplated by the
forward-looking statements. Such risks and uncertainties include,
among others: general economic and business conditions, the
ability of the Company to successfully implement the initiatives
and projects referred to in this news release, natural gas prices,
changes in the regulatory environment in which the Company's
regulated entities operate (including changes in allowed rates of
return), and the changes in, or failure to comply with, the laws
and government regulations applicable to the Company.
/T/
CONSOLIDATED FINANCIAL RESULTS HIGHLIGHTS
For the Six Months Ended June 30, 1998 ($million)
Transmission Gas Power Int'l Other Total
and Services Distribution Generation
Operating
revenues 2,432 1,157 51 24 2 3,666
-----------------------------------------------------
Net income 44 71 6 2 (2) 121
-----------------------------------------------------
Net income applicable to common
shares 43 71 6 2 (18) 104
-----------------------------------------------------
Operating cash flow
(before working capital changes)
90 161 14 7 (22) 250
-----------------------------------------------------
Total
assets 3,912 5,304 238 494 74 10,022
-----------------------------------------------------
Per common share:
(dollar/share)
Earnings -
basic $0.41 $0.68 $0.06 $0.02 $(0.17) $1.00
Operating
cash flow $0.87 $1.55 $0.13 $0.06 $(0.21) $2.40
Dividends $0.62
-----------------------------------------------------
Common shares: (000)
Outstanding 104,252
Weighted average 103,971
-----------------------------------------------------
For the Six Months Ended June 30, 1997 ($million) (restated)
Transmission Gas Power Int'l Other Total
and Services Distribution Generation
Operating
revenues 2,338 1,397 56 5 2 3,798
-----------------------------------------------------
Net income 55 112 5 (1) (3) 168
-----------------------------------------------------
Net income applicable to common
shares 54 112 5 (1) (16) 154
-----------------------------------------------------
Operating cash flow
(before working capital changes)
86 229 15 - (23) 307
-----------------------------------------------------
Total
assets 3,710 5,085 254 98 42 9,189
-----------------------------------------------------
Per common share:
(dollar/share)
Earnings -
basic $0.53 $1.10 $0.05 $(0.01)$(0.16) $1.51
Operating
cash flow $0.85 $2.25 $0.15 - $(0.23) $3.02
Dividends $0.58
-----------------------------------------------------
Common shares: (000)
Outstanding 101,964
Weighted average 101,651
-----------------------------------------------------
Transmission and Services - natural gas gathering, processing,
transmission, energy marketing and related services;
Gas Distribution - natural gas distribution, transmission,
storage
and related services;
Power Generation - generation of electrical and thermal energy
from
natural gas;
International - international operations and development
projects;
Other Activities - other activities, including unallocated
corporate financing expenses.
/T/
/T/
QUARTERLY RESULTS
Q1 Q2 Q3 Q4 Annual
1998 (dollar/share)
Earnings per
common share $0.99 $0.01
Weather impact 0.19 0.07
--------------
Weather normalized
earnings(x) $1.18 $0.08
--------------
1997 (dollar/share)
Earnings per
common share $1.20 $0.31 $(0.17) $0.72 $2.06
Weather impact 0.01 (0.07) - 0.04 (0.02)
----------------------------------------
Weather normalized
earnings(x) $1.21 $0.24 $(0.17) $0.76 $2.04
----------------------------------------
(x) The earnings applicable to the gas distribution companies
have
been adjusted to remove positive and negative weather variances.
/T/
/T/
OPERATIONS REVIEW HIGHLIGHTS
For the Six Months Ended June 30
1998 1997
Throughput (bcf)
Westcoast Energy Pipeline Division 350 342
Foothills Pipe Lines 474 466
Empire State Pipeline 53 52
Union Gas 600 641
Other Centra Gas and PNG 80 91
--------------------
1,557 1,592
--------------------
Average Rate Base (million)
Westcoast Energy Pipeline and
Field Services Divisions 2,281 2,232
Foothills Pipe Lines (proportionate
share - Phase I - 27 percent) 185 189
Empire State Pipeline (proportionate
share - 50 percent) 128 128
Union Gas 3,126 2,932
Other Centra Gas and PNG 977 916
--------------------
6,697 6,397
--------------------
Degree Days (percent from normal xx)
Union Gas (19.3) 1.0
Centra Gas Ontario (amalgamated
with Union Gas in 1998) - 3.9
Centra Gas Manitoba (16.4) 22.9
Centra Gas BC (8.1) 0.7
xx A degree day is a measure of the coldness of the weather
experienced based on the extent to which the daily mean
temperature
falls below a reference temperature, usually 18 degrees Celsius.
( ) indicates warmer than normal weather.
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