SaskEnergy Third Quarter Report - December 31, 2019
SASKENERGY INCORPORATED
THIRD QUARTER REPORT December 31, 2019
VISION, MISSION AND VALUES
As a Crown corporation, SaskEnergy is committed to ensuring that all corporate activities align with the Government of Saskatchewan’s Crown Sector Strategic Priorities and the Saskatchewan Plan for Growth. Providing safe, reliable, high quality service to its customers is critically important to the Corporation – as is the provision of infrastructure necessary for the Province to grow and prosper.
MISSION Deliver natural gas in a safe, reliable, affordable way.
VISION Create customer value through safe, innovative energy solutions.
VALUES Safety
Accountability Collaboration
Spirit
TABLE OF CONTENTS
Financial and Operating Highlights
2
Management’s Discussion and Analysis
3
Introduction
3 3 5
Industry Overview
Consolidated Financial Results Liquidity and Capital Resources
11 12 13
Capital Expenditures
Outlook
Consolidated Financial Statements
15
Condensed Consolidated Statement of Financial Position Condensed Consolidated Statement of Comprehensive Income Condensed Consolidated Statement of Changes in Equity Condensed Consolidated Statement of Cash Flows Notes to the Condensed Consolidated Financial Statements
15 16 18 19 20
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended December 31
Nine months ended December 31
2019
2018
2019
2018
FINANCIAL HIGHLIGHTS ($ millions)
Total revenue
246
272
554
620
Total expenses
207
196
532
520
Consolidated net income
39
76
22
100
Market value adjustments
5
(10)
32
(27)
Income before unrealized market value adjustments
44
66
54
73
Dividends
22
17
22
17
Cash provided by operating activities
58
63
167
154
Capital expenditures
101
85
258
204
Total assets
3,139
2,878
Total net debt
1,508
1,350
Debt ratio
57.4%
56.3%
OPERATING HIGHLIGHTS
Distribution Volumes distributed (petajoules) Residential/Farm
14 11 41 66
13 11 46 70
21 19
21 19
Commercial
Industrial
110 150
122 162
Total
Weather (compared to last 30 years)
5% colder
1% colder
5% colder
6% colder
Transmission Volumes transported (petajoules) Domestic
104
101
253
242
Export
3
9
37
24
Total
107
110
290
266
Capital expenditures $ Millions
Cash from operations $ Millions
Income before MVA $ Millions
73
258
173
57
204
167
54
183
154
2019
2018
2017
2019
2018
2017
2019
2018
2017
2
2019-20 THIRD QUARTER REPORT
MANAGEMENT’S DISCUSSION & ANALYSIS
SaskEnergy Incorporated First Quarter Report
March 31, 2011
INTRODUCTION
The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the nine months ending December 31, 2019. Using financial and operating results as its basis, the MD&A describes the Corporation’s past performance and future prospects, enabling readers to view SaskEnergy from the perspective of management. The MD&A is presented as at February 12, 2020, and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS). For additional information related to the Corporation, refer to SaskEnergy’s 2018-19 Annual Report. The MD&A contains certain forward-looking statements that are subject to inherent uncertainties and risks. Many of these risks are described in the Risk Management and Disclosure section of SaskEnergy’s 2018-19 Annual Report. All forward-looking statements reflect the Corporation’s best estimates and assumptions based on information available at the time the statements were made. However, actual results and events may vary significantly from those included in, contemplated by, or implied by such statements. The volume of natural gas delivered to customers is sensitive to variations in weather, particularly through the prime heating season of November to March. Additionally, changes in market value adjustments may cause significant fluctuations in net income due to the volatility of natural gas prices. Therefore, the condensed consolidated financial results for the first nine months of 2019-20 should not be taken as indicative of the performance to be expected for the full year. In order to compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments, realized margin on commodity sales, and realized margin on asset optimization sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. Unrealized market value adjustments vary considerably with market prices of natural gas, drive significant changes in the Corporation’s consolidated net income and may obscure other business factors that are also important to understanding the Corporation’s financial results. The measures referred to above are non-IFRS measures, in that there is no standardized definition, and may not be comparable to similar measures presented by other entities.
INDUSTRY OVERVIEW
SaskEnergy monitors a number of important factors that could influence financial performance.
Natural Gas Prices
The price of natural gas is set in the open market and influenced by a number of factors including production, demand, storage levels, takeaway capacity, and general economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months, and the demand for natural gas to produce electricity for air conditioning during the summer months, weather typically has a large impact on price in the near term. Due to the high degree of uncertainty associated with weather and Alberta gas line maintenance/infrastructure issues, natural gas prices in both Alberta (AECO) and Saskatchewan (TEP) have been volatile in recent years.
3
2019-20 THIRD QUARTER REPORT
Natural gas fundamentals remain in a strong supply position relative to demand. AECO weighted average 5A index (daily settlement) price was $1.39 per gigajoule (GJ) through the nine months ending December 31, 2019 compared to $1.24 fo the same nine months in 2018.
SaskEnergy Incorporated First Quarter Report
March 31, 2011
Alberta natural gas prices saw high volatility in the summer season due to maintenance that limited supply and takeaway capacity. Reduced exports caused negative spot prices several times over the summer season. However, at the beginning of October 2019 TC Energy (formally TransCanada) changed curtailment policies which reduced volatility and contributed to stronger pricing. This policy has had a positive impact on storage injections in Alberta but storage levels are still at lower levels than any of the previous five years. Recent price volatility has reverted to seasonal norms and is primarily driven by weather. With low storage levels in Alberta, the expectation is for prices to remain elevated for at least the remainder of this winter season. Traditionally, most natural gas in Saskatchewan (TEP) is priced at a differential to the AECO price. This AECO to TEP differential for the nine months ended December 31, 2019 averaged $0.49 compared to $1.53 for the year prior. The decreased differential can be attributed to the TC Energy curtailment policy that has allowed for higher levels of gas to flow through its interruptible Eastgate service. With this policy in place and planned facility upgrades, expectations for a smaller TEP differential will continue going forward.
The following chart shows AECO natural gas prices:
Constraints of Existing Infrastructure
Despite the shift to horizontal drilling methods improving gas supply economics, getting western Canadian gas to market has remained a major concern. Gas well drilling west of Saskatchewan has tended to move farther into northwestern Alberta and northeastern British Columbia. This has resulted in delivery infrastructure that is constrained due to undersized facilities.
4
2019-20 THIRD QUARTER REPORT
NOVA Gas Transmission Ltd. (NGTL) currently has a project before the Canada Energy Regulator which is intended to relieve this constraint by adding additional gas line and compressor facilities. SaskEnergy will continue to monitor this situation and take an active role in the process to ensure access to a reliable source of natural gas.
SaskEnergy Incorporated First Quarter Report
March 31, 2011
CONSOLIDATED FINANCIAL RESULTS
Consolidated Net Income
Three months ended December 31
Nine months ended December 31
(millions)
2019
2018 Change
2019
2018 Change
Income before unrealized market value adjustments Impact of fair value adjustments Revaluation of natural gas in storage
$
44
$
66 12
$
(22) (20)
$
54
$
73 13 14
$
(19) (48) (11)
(8)
(35)
3
(2)
5
3
Consolidated net income
$
39
$
76
$
(37)
$
22
$
100
$
(78)
Excluding market value adjustments, financial results for the nine months ending December 31, 2019 are $19 million lower than the same period in 2018. The decrease in net income is due to a lower commodity margin, higher employee benefit expenses, and higher operating and maintenance expenses. This is partially offset by increased transportation revenue and higher customer contributions relating to both transmission and distribution customers.
The commodity margin is $15 million lower in 2019-20 compared to the same nine months in 2018-19, which is resulting from the commodity rate decreasing from $2.95 per GJ to $2.57 per GJ effective April 1, 2019.
An increase in customer load growth contributed to additional transportation revenue relative to 2018-19. Much of the load growth is the result of continued economic growth in the province, driven by expansion in the major industrial sectors of enhanced oil recovery and power generation. As natural gas production continues to decline, Saskatchewan increasingly relies on gas production in Alberta to meet its delivery requirements. This results in increased transportation utilization on the TC Energy Mainline system to import natural gas from Alberta. These increasing requirements have resulted in higher overall operating costs compared to prior year. While the increase in load requires higher spending in some areas, the continued focus on efficiency and cost management have helped to mitigate increases in both operating costs and employee benefits. Market value adjustments reduced SaskEnergy’s consolidated net income by $32 million. The differential between the contract price and market prices, decreasing from $0.46 per GJ at the end of 2018-19 to $0.22 per GJ in 2019-20, are resulting in an unfavourable market value adjustment of $36 million on outstanding asset optimization purchase contracts. This was partially offset by an increased price differential on asset optimization sales contracts resulting in a favourable market value adjustment of $3 million. The value of natural gas in storage is sensitive to natural gas prices. At December 31, 2019, the value of gas in storage was $42 million, or $11 million below cost. At the end of March 2019, the value of natural gas in storage was $26 million, or $14 million below cost. A decrease in near term natural gas market prices is the primary driver of the increase in the unfavourable revaluation of natural gas in storage. The difference between the $14 million unfavourable adjustment at the end of the previous fiscal year and the current $11 million unfavourable adjustment to the cost of gas in storage has been reported as a $3 million favourable market value adjustment during the nine months ending December 31, 2019.
Natural Gas Sales and Purchases
Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non-regulated asset optimization activities. IFRS requires these activities to be presented together within the consolidated financial statements; however, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately.
5
2019-20 THIRD QUARTER REPORT
SaskEnergy Incorporated First Quarter Report With the exception of those contracts entered into for an entity’s own usage, IFRS requires derivative instruments such as natural gas purchase and sales contracts to be recorded at fair value until their settlement date. Changes in the fair value of the deriv tive instruments, driven by changes in future natural gas prices, are recorded in net ncome through natural gas sales or natural gas purchases depending on the specific contract. Upon settlement of the natural gas contract, the amount paid or received by SaskEnergy becomes realized and is recorded in natural gas sales or purchases. March 31, 2011
Commodity Margin
SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel (SRRP). The commodity rate, which is reviewed April 1 and November 1 of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with the sale of natural gas to distribution customers. Regulatory principles require that utilities do not earn a profit or realize losses on the sale of natural gas to customers over the long term. Consequently, SaskEnergy accumulates differences between the commodity revenue earned and the cost of natural gas sold in a Gas Cost Variance Account (GCVA). The balance in the GCVA, which is not included in SaskEnergy’s financial statements, is either recovered from, or refunded to, customers as part of future commodity rates. Consequently, higher commodity margins in one year are often followed by lower commodity margins in the subsequent year. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. Consequently, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. The most notable differences are the elimination of intercompany transportation costs in the preparation of the consolidated financial statements and how derivative instrument settlements are recognized in the cost of gas. A gain or loss reported in the Corporation's consolidated financial statements may not be reflected in the GCVA. SaskEnergy’s natural gas price risk management program has two objectives: to reduce the impact of natural gas price volatility on the cost of gas and to support rates that are competitive with other utilities. The two objectives direct activities that naturally oppose each other. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while supporting competitive rates often means allowing purchase prices to follow market prices. As a result, the balance between the two objectives may change depending on current market conditions. In order to ensure a secure supply of natural gas, SaskEnergy contracts for the physical delivery of natural gas using non-financial derivatives, referred to as forward or physical natural gas contracts. The purchase price contained in these forward contracts may be fixed, or it may be based on a variable index price. While fixed price contracts reduce the impact of natural gas price volatility, variable or market prices can assist in offering competitive rates depending on the pricing environment. SaskEnergy may use financial derivatives and physical swaps to manage the future purchase price of natural gas.
The commodity margin on sales to customers, as reported in the consolidated financial statements, was as follows:
Three months ended
Nine months ended December 31
December 31
(millions)
2019
2018 Change
2019
2018 Change
Commodity sales
$
63
$
70
$
(7)
$
93
$
129
$
(36)
Commodity purchases 1
(52)
(53)
1
(79)
(100)
21
Realized margin on commodity sales Impact of fair value adjustments
11
17
(6)
14
29 20
(15) (22)
(2)
(5)
3
(2)
Margin on commodity sales
$
9
$
12
$
(3)
$
12
$
49
$
(37)
1 Net of change in inventory
6
2019-20 THIRD QUARTER REPORT
SaskEnergy Incorporated First Quarter Report The realized margin on commodity sales excludes the impact of unrealized fair value adjustments on derivative instruments, as these adjustments can fluctuate significantly from one period to the next and do not necessarily represent the amount that will be paid upon settlement of the related natural gas contract. The Corporation realized a $14 million margin on commodity sales for the nine months ending December 31, 2019 compared to a $29 million margin for the same period in 2018-19. Average revenue was $2.54 per GJ and average cost of gas sold was $2.17 per GJ, resulting in a margin of $0.37 per GJ. This margin is lower than the average commodity margin of $0.60 per GJ through the same nine month period in 2018-19. The effect of 10 PJs less gas sold in 2019-20 and the effect of a decreased commodity rate also contributed to the lower margin in 2019-20. Commodity rates were reduced from $2.95 per GJ to $2.57 per GJ effective April 1, 2019. Meanwhile the GCVA balance has decreased to $16 million owing to customers, down $1 million from the balance owing to customers at March 31, 2019. March 31, 2011 The realized margin on commodity sales of $11 million for the three months ended December 31, 2019 was $6 million lower than the same period in 2018-19. This is due to a higher cost of gas sold combined with the lower commodity rate.
Commodity Fair Value Adjustments
Fair value adjustments at December 31, 2019 had a $2 million unfavourable impact on the margin on commodity sales. The differential between the contract price and market prices increased during the nine months ending December 31, 2019, from $0.03 per GJ to $0.06 per GJ. SaskEnergy segregates a portion of its natural gas purchase contracts for gas that will ultimately be sold to commodity customers. Under IFRS, such contracts are not required to be reported at market value. The volume of contracts identified and segregated for the purpose of expected commodity sales was 272 PJs at December 31, 2019, compared to 154 PJs at March 31, 2019. The increase is a result of the Corporation’s ability to enter into more purchase contracts at lower natural gas prices and for a longer period of time. The Corporation received approval from the Ministry of Finance during 2018-19 to enter into sale and purchase transactions with commitments 10 years forward with counterparties whose credit rating is AA or higher. In the current low natural gas price environment, this will allow the Corporation to commit to long term contracts at low natural gas prices.
Asset Optimization Margin
SaskEnergy uses its access to natural gas markets to execute purchases and sales of natural gas to generate margins. By utilizing off peak transportation and storage capacity and to help mitigate third party transportation expenses, SaskEnergy is able to find opportunities in the market to take advantage of pricing differentials between transportation hubs, delivery points and time periods while minimizing its exposure to price risk. In most cases the purchases and sales are executed at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions.
The asset optimization margin, as reported in the consolidated financial statements, was as follows:
Three months ended
Nine months ended December 31
December 31
(millions)
2019
2018 Change 2019
2018 Change
Asset optimization sales
$
39 40
$
54 46
$
(15)
$
105
$
170 161
$
(65) (62)
Asset optimization purchases
(6)
99
Realized margin on asset optimization sales Impact of fair value adjustments Revaluation of natural gas in storage
(1) (6)
8
(9)
6
9
(3)
17
(23)
(33)
(7)
(26) (11)
3
(2)
5
3
14
Margin on asset optimization sales
$
(4)
$
23
$
(27)
$
(24)
$
16
$
(40)
7
2019-20 THIRD QUARTER REPORT
SaskEnergy Incorporated First Quarter Report The realized margin on asset optimization sales at December, 2019, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $6 million. This is $3 million lower than the $9 million margi f r the s m period in 2018-19. Due to market conditions, the Corporation’s opportunity to enter nto asset optimization activity has been limited and therefore sold lower volumes of natural gas at slightly higher margins compared to the same period in 2018-19. Some transportation capacity within Alberta was also secured through asset optimization transportation contracts to meet customer obligations. These transportation contracts had an unfavourable effect on the 2019-20 asset optimization margin. March 31, 2011
Asset Optimization Fair Value Adjustments
The Corporation enters into various natural gas contracts (swaps and forwards) in its asset optimization strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at December 31, 2019 on asset optimization derivative instruments decreased the asset optimization margin by $33 million compared to a decrease of $7 million for the same period in 2018-19. Between April 1, 2019 and December 31, 2019, near term natural gas market prices declined, allowing the Corporation to enter into lower priced natural gas purchase and sale transactions simultaneously. The purchase contracts outstanding at December 31, 2019 were $0.22 per GJ more than market price, while purchase contracts outstanding at the end of March 31, 2019 were $0.46 per GJ less than market price. This decrease in the favourable price differential in 2019-20 is responsible for an unfavourable fair value adjustment, which was slightly offset by the favourable variance related to the increase in price differentials on outstanding sale contracts.
Revaluation of Natural Gas in Storage
At each reporting period, the Corporation measures the net realizable value of natural gas in storage held for asset optimization transactions based on forward market prices and anticipated delivery dates. The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. Through the first nine months of 2019-20, the Corporation was able to purchase lower priced natural gas and inject it into storage, reducing the average cost of natural gas in storage; however, lower near term forward market prices adversely affected net realizable value. Consequently, the net realizable value of asset optimization natural gas in storage was $11 million below cost at December 31, 2019. The net realizable value adjustment was $14 million below cost at March 31, 2019, resulting in a $3 million favourable increase in the revaluation of natural gas in storage at December 31, 2019.
Revenue
Delivery revenue, transportation and storage revenue, customer capital contributions and other revenue, as reported in the consolidated financial statements, were as follows:
Three months ended December 31
Nine months ended December 31
(millions)
2019
2018 Change
2019
2018 Change
Delivery revenue
$
90 47
$
84 45 13
$
6 2
$
185 141
$
179 118
$
6
Transportation and storage revenue Customer capital contributions
23
8
(5)
28
20
8
Other revenue
-
-
-
-
4
(4)
$
145
$
142
$
3
$
354
$
321
$
33
Delivery Revenue
Delivery revenue is driven by the number of customers and the amount of natural gas they consume. As residential and commercial customers consume natural gas primarily as heating fuel, weather is the external factor that most affects delivery revenue.
8
2019-20 THIRD QUARTER REPORT
SaskEnergy Incorporated First Quarter Report Delivery revenue of $185 million for the nine months ending December 31, 2019 was $6 million higher than 2018-19. A 3.4 per cent rate increase effective April 1, 2019 contributed to higher delivery revenue. Delivery rate increases are implemented to address growing capital and operating costs incurred to continue providing high quality, safe and reliable service to customers. In alignment with the Crown Sector Strategic Priorities, the Corporation continues to focus on providing the province’s growing population with efficient and timely access to natural gas service while keeping rates competitive. March 31, 2011 Delivery revenue of $90 million for the three months ending December 31, 2019 was $6 million higher than the same period in 2018-19. This is due to the weather being 4 per cent colder for the three months of 2019-20 compared to 2018-19.
Transportation and Storage Revenue
The Corporation generates transportation revenue by receiving gas from customers at various receipt points in Saskatchewan and Alberta, and delivering natural gas to customers at various delivery points in the province. The transportation toll structure consists of a receipt service charge that customers pay when they put gas on to the natural gas transportation system, and a delivery service charge, which customers pay when they take delivery off the natural gas transportation system. Gas delivered to the system by customers is considered to be part of the TransGas Energy Pool (a notional point where producers, marketers and end users can match supplies to demand) until it is delivered to the end-use customer. For receipt and delivery services, the Corporation offers both firm and interruptible transportation. Under a firm service contract, the customer has a right to deliver or receive a specified quantity of gas on each day of the contract. With a firm contract, customers pay for the amount of capacity they have contracted for whether they use it or not. Under an interruptible contract, customers may deliver or receive gas only when there is available capacity on the system and pay receipt and delivery tolls when they deliver or receive gas.
Integral to the Corporation’s transmission system are several strategically located natural gas storage sites, which have the capacity to provide operational flexibility along with a reliable and competitive natural gas storage service.
Transportation and storage revenue was $141 million for the nine months ending December 31, 2019, $23 million higher than in 2018-19. Industrial customer and power generation related load growth continues to increase demand for natural gas within the province and is driving higher transportation revenue. Storage revenue is comparable with the previous year as the decline in contracted demand for storage services has stabilized. The apparent abundance of natural gas, coupled with small or even negative differentials between current and forward gas prices, limits the demand for natural gas storage to those customers with relatively low load factors who use the service to mitigate receipt transportation charges.
Transportation revenue for the three months ending December 31, 2019 was $2 million higher than the same period in 2018-19. This is also due to load growth, resulting from increasing demand for natural gas within the province.
Customer Capital Contributions
The Corporation receives capital contributions from customers to partially offset the cost of constructing facilities to connect them to the transmission and distribution systems. Generally, contributions related to transmission system projects tend to be larger but less frequent than contributions related to the distribution system. The volume and magnitude of customer contribution revenue can vary significantly period-over-period as various factors influence their receipt and recognition as revenue. The contributions received, less potential refunds, are recognized as revenue once the related property, plant and equipment is available for use. The Corporation may refund a customer for some or all of the contributions they make depending on how much gas the customer consumes or transports through the system. Many of the customer contributions are received in advance of construction and are initially recorded as a contract liability in the statement of financial position. The amount of contributions expected to be refunded is estimated and recorded as a refund liability until the eligible refund period expires or a refund is earned by the customer. Customer capital contribution revenue for the nine months ending December 31, 2019 was $8 million above 2018-19 due to higher transmission customer connections. The three months ending December 31, 2019 were $5 million lower than 2018-19 due to the timing of projects.
9
2019-20 THIRD QUARTER REPORT
Other Revenue
SaskEnergy Incorporated First Quarter Report In the pr vious year, other revenue primarily consisted of gas processing fees and natural gas liquid sales from two natural g s liquid xtrac ion plants. Compression and gathering service revenue relating to these plants comprised the remaining balance of other revenue. The Corporation sold the two natural gas liquid extraction plants effective October 1, 2018. March 31, 2011
Other Expenses
SaskEnergy’s expenses are driven to a large degree by its investment in its transmission, distribution and storage systems. Depreciation expense, net finance expense and Saskatchewan taxes are directly tied to the investment in facilities. As the level of investment in these facilities increase, these expenses also increase. Employee benefit costs and operating and maintenance costs are also driven by the investment in assets, although less directly. As the number of customers increases, and infrastructure to serve those customers grows, the costs to operate and maintain the system increases. These expenses increase primarily because the amount of work to service and maintain the natural gas system increases as the kilometres of gas line, number of service connections, and amount of compression equipment increases. Increased regulatory requirements and changing public perceptions have resulted in accelerated prevention, detection and mitigation initiatives, adding pressure to transmission, distribution and storage rates.
Other expenses, net finance expenses and other gains (losses), as reported in the consolidated financial statements, were as follows:
Three months ended
Nine months ended December 31
December 31
(millions)
2019
2018 Change
2019
2018 Change
Employee benefits
$
25 41 28
$
22 42 21
$
(3)
$
68
$
64
$
(4) (6) (7) (1)
Operating and maintenance Depreciation and amortization
1
118
112
(7)
81 12
74 11
Saskatchewan taxes
3
3
-
$
97
$
88
$
(9)
$
279
$
261
$
(18)
Net finance expense
$
14
$
13
$
(1)
$
41
$
38
$
(3)
Other gains (losses)
$
-
$
-
$
-
$
-
$
13
$
(13)
Employee Benefits
Operational and business reviews have identified a requirement for moderate full time equivalent increases in key strategic areas as part of the Corporation’s success in meeting current and future business needs. Ongoing efficiency efforts and management of planned overtime and vacancies resulted in a reduction of full time equivalents in other areas, however employee benefit costs of $68 million were $4 million higher than 2018-19. This is due to contractor positions being transitioned into full-time equivalent positions in the later part of 2018-19.
Employee benefits costs of $25 million for the three months ending December 31, 2019 were $3 million above 2018- 19 due to higher full time equivalent positions.
Operating and Maintenance
Higher transportation costs incurred on the TC Energy mainline transportation system increased operating and maintenance expenses to $118 million in 2019-20, $6 million higher than in 2018-19. With the growing demand for natural gas, the Corporation’s increased reliance on gas receipts from Alberta is resulting in more natural gas being
10
2019-20 THIRD QUARTER REPORT
transported and over greater distances. Rate increases on these third party transportation systems are also increasing transportation expenditures. SaskEnergy continues to mitigate the impact of higher transportation and safety and integrity ex enditures through continued efficiency efforts and cost saving measures.
SaskEnergy Incorporated First Quarter Report
March 31, 2011
Operating and maintenance expenses of $41 million for the three months ending December 31, 2019 were $1 million higher than the same period in 2018-19. This is also due to increasing third party transportation expenditures.
Depreciation and Amortization
Balancing safety and system integrity with the growing demand for service continues through 2019-20. Strategic capital investments required to ensure the necessary infrastructure is in place to meet increasing load growth, has increased the capital asset base, resulting in increasing depreciation and amortization. The Corporation implemented an external depreciation study, decreasing depreciation rates and offsetting increased depreciation resulting from an increasing asset base. In 2019-20, depreciation and amortization was $81 million, $7 million higher than the same period in 2018-19.
Depreciation and amortization expenses of $28 million for the three months ending December 31, 2019 were $7 million higher than the same period in 2018-19, also due to an increasing capital asset base.
Net Finance Expense
Net finance expenses of $41 million and $14 million for the nine and three months ending December 31, 2019 were $3 million and $1 million higher than the same periods in 2018-19. The increase in finance expenses that resulted from increased investment was partly offset by lower interest rates. The low interest rate environment has allowed the Corporation to replace maturing long-term debt with lower cost debt.
LIQUIDITY AND CAPITAL RESOURCES
As a Crown corporation, SaskEnergy’s primary sources of capital are cash from operations, debt — which is borrowed through the province’s General Revenue Fund — and equity advances from CIC, the Province’s Crown corporation holding company. Equity advances are rarely used to finance Crown corporations as CIC prefers to use its Subsidiary Crown Dividend Policy to manage its equity interests in its commercial enterprises. Cash from operations is SaskEnergy’s most important source of capital. As a utility, cash from operations is relatively stable and the Corporation relies upon it to fund its investment in natural gas facilities, including new construction to support provincial growth and integrity spending on existing infrastructure. Long and short-term debt can be borrowed through the Province of Saskatchewan to meet any long or short-term incremental capital requirements, and to repay debt as it matures. Sources of liquidity include Order in Council authority to borrow up to $500 million in short-term loans, and a $35 million uncommitted line of credit with the Toronto-Dominion Bank. By borrowing through the Province, SaskEnergy has access to the Province’s borrowing capacity and North American capital markets. The SaskEnergy Act allows the Corporation to borrow up to $2,500 million.
Three months ended
Nine months ended December 31
December 31
(millions)
2019
2018 Change
2019
2018 Change
Cash provided by operating activities Cash used in investing activities Cash provided by financing activities (Decrease)/increase in cash and cash equivalents
$
58
$
63
$
(5)
$
167
$
154
$
13
(97)
(85)
(12)
(258)
(204)
(54)
37
23
14
84
55
29
$
(2)
$
1
$
(3)
$
(7)
$
5
$
(12)
11
2019-20 THIRD QUARTER REPORT
Operating Activities
SaskEnergy Incorporated First Quarter Report Cash provided by operating activities was $167 million for the nine months ending December 31, 2019, an increase of $13 million from 2018-19. Cash flows from operations are up, primarily due to the imp ct of a higher transportation revenue. March 31, 2011
Investing Activities
Cash used in investing activities totaled $258 million for the nine months ending December 31, 2019, $54 million more than the same period in 2018-19. Capital investment levels increased in 2019-20 due to higher system growth combined with higher system integrity spending compared to 2018-19. The majority of capital investment to the end of December 2019 focused on $153 million of customer growth and system expansion projects, which were a result of Saskatchewan residential and industrial growth, as well as safety and system integrity programming of $85 million - a sign of the Corporation’s ongoing commitment to a safe, reliable system.
Financing Activities
Debt Ratio - December
Cash provided by financing activities was $84 million through the nine months ending December 31, 2019, compared to $55 million provided by financing activities in 2018-19. The Corporation used $47 million for interest payments and $43 million for dividends. The Corporation borrowed an additional $194 million in long-term debt to support its capital investment requirements and repay short-term debt. SaskEnergy’s debt ratio at the end of December 31, 2019 of 57 per cent debt and 43 per cent equity is slightly higher than the debt ratio of 56 per cent debt and 44 per cent equity at the end of 2018-19 and is slightly better than the Corporation’s long-term target range of 58 to 63 per cent debt.
61.9%
59.3% 58.4%
56.3% 57.4%
2015 2016 2017 2018 2019
CAPITAL EXPENDITURES
Capital expenditures, as reported in the consolidated financial statements, were as follows:
Three months ended
Nine months ended December 31
December 31
(millions)
2019
2018 Change
2019
2018 Change
Customer growth and system expansion
$
60 30
$
52 33
$
8
$
153
$
117
$
36
Safety and system integrity
(3) (4)
85
77 12 24
8
Information systems
2 2
6
8 5
(4)
Vehicles & equipment, buildings, furniture
16
(14) (13)
(19)
$
94
$
107
$
$
251
$
230
$
21
Capital expenditures during 2019-20 of $251 million were higher than in the prior year to meet the increasing load growth in the province and to move natural gas lines away from highly populated areas. Capital expenditures of $153 million for customer growth and system expansion are $36 million higher than the prior year. Safety and system integrity spending of $85 million are $8 million higher than the prior year primarily driven by increasing regulatory requirements. The increasing demand and lower Saskatchewan production requires additional Alberta supply to be brought onto SaskEnergy’s transmission system. TransGas is currently increasing the supply from NGTL with its Pierceland supply expansion project. It is a cost effective capacity investment that increases the Corporation’s ability to meet customer’s firm contracted Alberta supply requirements. The expansion also provides supply directly into a delivery growth area and helps leverage existing mainline transmission and compression infrastructure to other key areas of the system with potential future capacity improvements. This project incurred $12 million in costs through the nine months ending December 31, 2019.
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2019-20 THIRD QUARTER REPORT
SaskEnergy Incorporated First Quarter Report The Corporation is also increasing capacity in the Saskatoon - Prince Albert area. This will allow for increased capacity to manage planned or unplanned outages during a cold winter. Additionally, storage capacity at Prud'Homme is critical for winter operation. A new 85 km NPS 20 gas line from Rosetown to Vanscoy will connect Rosetown supply to the Sa katoon South By ass NPS 20 gas line. These two gas lines will provide additional capacity for both the Lanigan and Prince Albert areas. March 31, 2011 Growth in and around the City of Saskatoon has resulted in a multi-year initiative that will address increased natural gas capacity and move high pressure transmission lines further away from populated areas. This accounted for the majority of the increased spending in 2019-20 compared to the same period in the prior year. The capital expenditure increases in 2019-20 on these projects were partially offset by installing compression at the Rush Lake interconnect in the prior year at a cost of $13 million to access additional Alberta supply on the Mainline. It was cost effective for the Corporation to receive additional supply on the Loomis to Herbert gas line, which is owned through the Many Islands Pipe Lines (Canada) Limited subsidiary, with the gas being sourced from the TC Energy Mainline or Foothills Pipelines. This project was completed in 2018-19.
OUTLOOK
With the Corporation’s fiscal period beginning April 1, peak winter heating loads begin to have a positive impact on the financial results in the third and fourth quarters.
Factors that are expected to affect SaskEnergy in the near future include the continued growth of the provincial economy, resulting in increased reliance on imported natural gas, and higher customer expectations for safe, reliable natural gas services. Assuming normal weather conditions in the fourth quarter of 2019-20, net income before market value adjustments is expected to be approximately $82 million, a decrease of $52 million over the 2018-19 actual result. The decrease is primarily due to 5% colder than normal weather to date and with the return to normal weather expected in the fourth quarter, weather will be significantly warmer than 2018-19 when it was ten per cent colder than normal. In addition, the commodity rate decrease effective April 1, 2019 will see less commodity revenues from customers in the current fiscal year. While SaskEnergy’s customer base expands every year, the growth of the industrial sector is contributing the most to this increased usage, driven by higher demand for natural gas from the enhanced oil recovery and power generation sectors. SaskEnergy plans years in advance where natural gas infrastructure will be needed to secure supply and increase gas line capacity. SaskEnergy plans to invest more than $1.065 billion net of customer contributions over the next three years. This investment will be primarily funded through long term debt, with an additional $591 million planned over the next three years. The additional load growth will generate more revenue for the Corporation; however, the investment in infrastructure will also increase operating costs and put pressure on delivery and transportation rates. The Corporation continues to work with other Crown corporations, and other business enterprises, to implement technological and process solutions to more efficiently serve customers and maintain facilities. Since 2009, SaskEnergy has achieved $52 million of operating efficiency savings and another $4 million has been targeted for 2019-20.
Operating Expenses
As the number of customers increase, the gas line infrastructure required to serve those customers grows, and the cost of operating the system rises. Generally, the addition of new customers and load reduces the average cost to serve customers, so costs do not rise at the same rate as the expansion of the system. Expenditures to address safety and system integrity do not increase revenues and therefore add pressure to utility rates. Consequently, the average cost of serving customers is expected to rise. Depreciation expense and finance expense are expected to rise by $15 million as a direct result of capital expenditures, while operating expenses (employee benefits and operating and maintenance) are expected to rise by $12 million even with projected efficiency savings of $4 million in 2019-20. The cost increases are
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2019-20 THIRD QUARTER REPORT
primarily due to rising third-party transportation costs related to importing natural gas to meet growing load requirements.
SaskEnergy Incorporated First Quarter Report Revenue
March 31, 2011
An approved delivery rate increase of 3.4 per cent effective April 1, 2019 is providing additional delivery revenue to offset increasing cost pressures resulting from customer growth and integrity investments experienced in recent years. Customer connections, which are closely related to the strength of the provincial economy, are expected to increase modestly to 2,300 new customers through 2019-20. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects delivery and transportation and storage revenue to increase by $23 million in 2019-20. Transportation rates increased effective May 1, 2018 but will remain unchanged in 2019-20.
Commodity and Asset Optimization Margins
Short-term natural gas prices decreased during the nine months ending December 31, 2019. Prices further into the future have remained relatively constant compared to prices at March 31, 2019. This suggests that the market believes the likelihood of higher prices in the future is small. Currently, the differential between current and forward prices, a driver for much of SaskEnergy’s asset optimization activity, is relatively flat. Other asset optimization activities, which leverage off-peak transportation and storage capacity in the distribution utility, are expected to generate margins; however, the potential for asset optimization margins is expected to be lower than it has been in the past. Forecasted results are based on normal weather as defined by the 30-year average. To the extent that weather is colder than normal, delivery revenue will increase, and to the extent that weather is warmer than normal, delivery revenue will be lower. Transportation, storage, and other revenue items are typically not influenced by weather, as is the case with operating expenses. Commodity revenue and gas purchases are both affected by weather but typically offset each other.
Summary
SaskEnergy’s financial performance is expected to remain strong. Weather will be a key factor affecting 2019-20 financial results. Capital expenditure requirements and rising costs will remain a challenge throughout the forecast period as SaskEnergy adjusts to continued customer load growth, infrastructure renewal requirements, shifting natural gas supply dynamics and regulatory compliance. A low natural gas price environment will continue to create challenges from an asset optimization perspective. Delivery and transportation revenue will continue to grow along with increasing operating costs. SaskEnergy will continue to focus on providing safe and reliable service to its customers and investing in safety and growth initiatives while actively seeking operating and capital deployment efficiencies through collaboration, business process changes and technology initiatives.
Accounting Changes
In 2018-19, the Company adopted IFRS 15 Revenue from Contracts with Customers . Refer to the consolidated financial statements for the year ended March 31, 2019 for more information. (IFRS 9, Financial Instruments was early adopted in 2017-18).
In 2019-20, the Company adopted IFRS 16 Leases (Refer to the unaudited condensed interim financial statements for the three-months ended December 31, 2019 for more information).
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