Third quarter results show a decline in energy revenue

In the third quarter update, the total non-renewable resource revenue forecast is down $503 million from budget, mainly due to plummeting oil prices. Bitumen royalties have taken the biggest hit, and are expected to drop $644 million from budget to year end, with other revenue streams showing slight increases.

“We have taken steps to protect our financial position that will help keep us in the black this year. Contract settlements made by previous administrations and significantly lower resource revenues have created a very challenging fiscal outlook for Alberta. This requires a reset of our fiscal foundation to address a $7 billion revenue gap.”

World oil prices, which have fallen more than 50 per cent since June 2014, are drastically impacting government revenue and dampening the pace of Alberta’s economic growth.

“We are facing these challenges head on and laying the groundwork to provide long-term fiscal sustainability. Budget 2015 will include a 10-year plan that will help us minimize the effect of volatile energy prices and provide predictable and sustainable funding for programs and services. Albertans are increasingly engaged in the process and I want to thank everyone who shared their input over the past several weeks.”

Negotiated settlements made by previous administrations, including several compensation agreements reached after the release of Budget 2014, have increased projected spending by $2.6 billion over the next three years. This is causing added pressure at a time when the current government is dealing with a significant revenue shortfall.

Government has taken action to reduce spending including:

• The passing of the Accountability Act to restrict severance pay for political staff
• The reduction of Cabinet and MLA pay by five per cent
• Introducing a hiring restraint initiative
• Restricting advertising, promotions, printing, travel and sponsorship of conferences and events
• Closure of some international offices and the sale of government aircraft

Third Quarter Forecast

The 2014-15 surplus is now forecast at $465 million, down from $1.1 billion estimated at budget.

Total 2014-15 revenue has been revised to $44.8 billion, $397 million higher than the budget estimate, due primarily to better results in the first nine months for corporate income tax and investment income. However, the non-renewable resource revenue forecast has declined since second quarter, with bitumen royalties now expected to drop $644 million from budget by year end.

For the first nine months, the WTI oil price averaged about US$91 per barrel. The revised revenue forecast is based on a US$44 average for the remainder of the fiscal year. The oil price differential between WTI and WCS has remained narrower than the budget forecast, at approximately US$18 per barrel.

Investment income is expected to be up by $383 million with the Heritage Savings Trust Fund income forecast at $1.9 billion, $263 million higher than budget. The income forecast for other endowment funds is $352 million, $75 million more than expected.

Operational expense is now forecast at $41.2 billion, up $800 million from budget primarily for forest fires, agriculture and flood assistance, and to pay for negotiated public sector compensation settlements.

Overall, the 2014-15 Capital Plan is forecast to be $6.5 billion, $144 million lower than budget. While there were increases for school projects, these are offset by changes in project progress and re-profiling. No projects have been cancelled in 2014-15.

The Contingency Account is expected to end the year with a balance of $6.3 billion, $1.3 billion higher than estimated, mainly due to improved 2013-14 results and lower 2014-15 cash requirements. Direct borrowing for the Capital Plan, originally estimated at $4.9 billion, is now forecast at $3 billion, $1.9 billion lower than budget.

The Canadian dollar has fallen further, forecast now at about 88 US¢/Cdn$ compared to 91¢ at budget, which helps cushion the impact on revenue due to the drop in oil prices and bolsters exports. Non-energy industries will likely benefit from the weaker Canadian dollar and fewer cost pressures. However, real GDP is now forecast to slow to only 0.6 per cent growth in 2015 due to pullback in energy investment.

2014-15 Third Quarter forecast ($ millions)

Full year forecast	Budget 2014-15	Q3 Forecast	Change
Non-renewable resource revenue	$9,209	$8,706	-503
Total Revenue	$44,354	$44,751	397
Total Expense	$43,267	$44,286	1,019
Surplus	$1,087	$465	-622

Capital Plan	Budget 2014-15	Q3 Forecast	Change
Capital Plan spending	$6,599	$6,455	-144
Direct borrowing	$4,883	$3,000	-1,883

	Actual 2013-14	Q3 Forecast	Change from 2013-14
Surplus on Consolidated Financial Statements basis	($302)	$361	663

Balance sheet	2013-14 Year End	2014-15 Forecast	Change
Heritage Fund and endowments	$18,562	$19,000	438
Contingency Account	$4,658	$6,286	1,628

Energy and Economic Assumptions	Budget 2014-15	Q3 Forecast	Change
WTI (US$/bbl)	$95.22	$79.24	-15.98
WCS @ Hardisty (Cdn$/bbl)	$77.18	$68.88	-8.30
Differential (in US$)	$24.99	$17.49	-7.50
Exchange Rate (US¢/Cdn$)	91.0¢	88.3¢	-2.7