2014 SaskEnergy Annual Report
Third Quarter Report Dec ember 3 1 , 20 24
Community Aspiration Environmental sustainability and economic prosperity for future generations of Saskatchewan. Vision Providing critical energy to support a prosperous Saskatchewan. Mission SaskEnergy delivers natural gas and energy solutions responsibly to the residents, businesses and industries of Saskatchewan.
Values
Safety We commit to our personal safety, the safety of our team and the public.
Integrity We are accountable for our decisions, our actions, and the results.
Stewardship We align resources towards the greatest and most responsible impact.
Teamwork We collaborate, respect, and trust
one another. We are diverse and inclusive.
TABLE OF CONTENTS Financial and Operating Highlights Management's Discussion and Analysis Introduction Operating Environment
3 4 4 6
Consolidated Financial Results Liquidity and Capital Resources Capital Additions Outlook Consolidated Financial Statements
1 2 12 1 4 1 5
Financial and Operating Highlights
Three months ended December 31,
Nine months ended December 31,
CONSOLIDATED FINANCIAL INFORMATION ($ millions)
2024
2023
2024
2023
96 64 12
205 187
Delivery
90 60
190 177
Transportation and storage Net commodity sales realized Realized asset optimization margin Customer capital contributions
21
8 4 7
28 10 18
6
9
12
27
Total revenue and margins
190
449
169
423
30 55 35
90
Employee benefits
28 53 35
82
157 104
Operating and maintenance Depreciation and amortization
148 105
4 2
15
Saskatchewan taxes
4
15
-
Loss (recovery) on trade and other receivables
(3)
(2)
19
57
Net finance expense
21
59
-
2
Other net losses Total expenses
3
2
145
425
141
409
45
24
Net income before unrealized market value adjustments
28
14
2
(3)
Market value adjustments CONSOLIDATED NET LOSS
(24)
(38) (24)
47 87
21
4
226
Cash provided by operating activities Cash used in investing activities
67
209
(106)
(215)
(85)
(196)
18
(30)
Cash (used in) provided by financing activities
14
(19)
7
15
Dividends declared
5
15
3,766 1,896 60.0%
Total assets Total net debt
3,616 1,867 60.5%
Debt/Equity ratio
OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm
13 11 52 76
20 18
11 10 49 70
18 17
Commercial
142 180
Industrial
139 174
Total
1% warmer 15% warmer
6% warmer 16% warmer
Weather (compared to last 30 years) Transmission energy (petajoules) Domestic
110
272
104
271
1
2
Export
2
11
Total
111
274
106
282
Cash used in Investing Activities $ millions
Income before MVA $ millions
Cash from Operations $ millions
180 270
0 30 60 90
180 270
226
72
215
209
196
162
161
24
0 90
0 90
14
2024
2023
2022
2024
2023
2022
2024
2023
2022
3
Management’s Discussion and Analysis
Introduction The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial performance for the nine months ended December 31, 2024. 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 13, 2025 and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with IAS 34, Interim Financial Reporting using accounting policies consistent with IFRS® Accounting Standards. For additional information related to the Corporation, refer to SaskEnergy’s 2023-24 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 2023-24 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 2024-25 should not be taken as indicative of the performance to be expected for the full year. The Corporation’s financial results are subject to variation, especially given the volatility of natural gas prices. To compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments; net commodity sales realized; 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 Accounting Standards measures, in that there is no standardized definition and may not be comparable to similar measures presented by other entities. The discussion of the Corporation’s results in the MD&A, set out on the following pages, is a comparison of the results for the nine months ended December 31, 2024, to the results for the nine months ended December 31, 2023, unless otherwise noted. Operating Environment SaskEnergy monitors a number of important external factors that could influence financial performance. Canadian real gross domestic product (GDP) growth has averaged nearly 2 per cent annualized in the first three quarters of 2024. Despite this positive growth, cost-related obstacles continue to cloud the outlook for many Canadian businesses, with inflation continuing to be an obstacle for some businesses in the near term, as elevated costs of goods and services linger after inflation peaked and is starting to decline. Other businesses anticipate challenges relating to high interest rates and debt costs to have a larger impact. Overall, Saskatchewan's economic performance in 2024 has been robust, driven by strong agricultural output, construction activity, and a healthy labor market. The province's real GDP growth forecast for 2024 stands at 1.9 per cent, which is higher than the national average of 1.3 per cent forecasted and tied at fourth highest among Canadian provinces. Saskatchewan economic growth is largely attributed to a nearly 10 per cent increase in crop production. In addition to agriculture, Saskatchewan's non-residential construction sector has also contributed to its economic performance. The ongoing work at the Jansen Mine project has been a significant driver of growth in this sector. Residential construction investment is advancing at a healthy pace, fueled by recent interest rate cuts that have ignited housing demand.
4
Management’s Discussion and Analysis
Inflation Canada’s Consumer Price Index (CPI) inflation through 2024 has significantly declined from a high of 2.9 per cent in May, to a low of 1.6 per cent in September, before rising slightly to 1.8 per cent in December of 2024. The Bank of Canada remains committed to maintaining price stability for Canadians by keeping inflation close to the 2.0 per cent target. Consequently, inflation has remained within or below the Bank of Canada’s midpoint target of 2.0 per cent for the fifth consecutive month, reinforcing current expectations of further interest rate cuts through 2025. The Bank of Canada increased its policy rate from 0.25 per cent in the first quarter of 2022 to a peak of 5.25 per cent in July 2023, before implementing a series of reductions in 2024, bringing the rate down to 3.25 per cent by December 2024. Private sector economists anticipate further reductions to 2.75 per cent by mid-2025, which is the mid-point of the nominal neutral interest rate range estimated by the Bank of Canada. Labour market Saskatchewan’s unemployment rate is slightly lower than the national rate, with an average rate of 5.9 per cent in December 2024. Saskatchewan's labor market has shown impressive performance, boasting one of the lowest unemployment rates across Canada. This is largely due to healthy labor demand, particularly within the public services sphere. Saskatchewan Natural Gas Prices Despite the expectation for increased demand from the anticipated start-up of operations at LNG Canada’s facility in Kitimat, British Columbia, Western Canadian natural gas prices remained low through 2024, as high production and high storage levels were met with both modest demand and modest seasonal pipeline maintenance. The result being Western Canadian natural gas prices have diverged significantly from the rest of North America. Despite the low prices at AECO, gas prices in other parts of North America have surged due to colder-than-average temperatures. This discrepancy is attributed to seasonally low internal demand in Western Canada resulting in seasonally high natural gas storage levels while export capacity remains maximized. In total, Western Canada’s natural gas output was 19.05 Bcf/d in November, while December production reached a new record of 19.33 Bcf/d. LNG Canada partners contributed a record 2.26 Bcf/d in November, however, gas intake developments for LNG Canada remain uncertain, with irregular gas flow and recent announcements indicating delays in commissioning activities at the liquefaction site. December, for parts of Canada, did turn out to be cold and contributed to reasonable natural gas storage withdrawals, specifically in Alberta and Saskatchewan. Western Canada storage levels at December 2024 were approximately 84 per cent full, which is 35 per cent higher than the three-year average of 62 per cent full and approximately 7 per cent higher than December 2023 storage levels of 79 per cent full. Again, production levels remained constant while seasonal demand has been lower than normal. Saskatchewan storage levels of 68 per cent full at December 31, 2024 are lower than December 2023 storage levels of 72 per cent full and higher than the three-year average of 65 percent full. The extremely low AECO prices were expected to rise through the three months ended December 31, 2024, as increasing near term demand for natural gas from heating, power and liquified natural gas exports was anticipated. However, AECO natural gas prices were characterized by lower volatility and largely remained below $1.00 per gigajoule (GJ) between mid- June through to October. Prices averaged $0.55 per GJ through the month of October before increasing to an average of $1.88 per GJ through the month of December, as the impact of the winter heating season began to take effect. High natural gas storage levels have also been a factor in Saskatchewan. The AECO daily index averaged $1.40 per GJ through the quarter, compared to $2.18 per GJ the prior year as warmer temperatures and relatively full storage levels contributed to the low-price environment. Traditionally, most natural gas in Saskatchewan is priced at a differential to the AECO price, with this differential for the quarter averaging a premium of $0.14 per GJ compared to $0.07 per GJ the year prior.
5
Management’s Discussion and Analysis
The following chart shows AECO natural gas prices:
AECO Monthly Index Historical Prices
$8.00
$7.00
Forward Price at December 31, 2024 Average Price: $2.82/GJ
Limited Export Capacity from Alberta 2015-Present Average Price: $2.48/GJ
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Consolidated Financial Results Consolidated Net Income (Loss)
Three months ended December 31,
Nine months ended December 31,
(millions)
2024
2023 Change 2024
2023 Change
Net income before unrealized market value adjustments Impact of fair value adjustments
$
45
$
24
$
28
$
17 26 43
$
14
$
10 35 45
2
(3)
(24)
(38) (24)
$
47
$
21
Consolidated net income (loss)
$
4
$
$
$
The Corporation is focused on balancing the challenges of maintaining affordability of natural gas services, while increasing environmental responsibility. These two priorities are strategic imperatives for the next three years as SaskEnergy works toward achieving the corporate vision of providing critical energy to support Saskatchewan. The net income before unrealized market value adjustments for the nine months ended, December 31, 2024 was $24 million, reflecting a $10 million increase compared to the net income of $14 million in December 2023. This improvement is primarily attributed to higher revenue from delivery, transportation, and storage services, as well as increased customer capital contributions in 2024. These favourable results were partially offset by lower net commodity sales realized, increased employee benefit costs, and higher operating and maintenance expenses. Higher delivery service revenues were driven by rate increases effective October 1, 2023, combined with the impact of colder weather than the prior year increasing customer demand for natural gas as heating energy. Higher transportation and storage revenues are resulting from higher demand to meet customers’ operating requirements, combined with a 2 per cent average rate increase for transportation and storage services being implemented effective April 1, 2024, to address expansion of the transmission system and meet growing demand for natural gas services in Saskatchewan. The Corporation’s net commodity sales realized for the period ended December 31, 2024, were lower than in 2023, as the net commodity sales realized declined $0.18 per GJ compared to prior year. The Corporation received approval to decrease the commodity rate from $4.20 per GJ to $3.20 per GJ effective October 1, 2023, therefore reducing sales revenue realized. This was partially offset by natural gas prices declining $1.26 per GJ in 2024 compared to 2023, which favourably reduced commodity cost of sales compared to 2023. In addition, weather through the nine months ended December 31, 2024, was 10 per cent colder than the same period in 2023 and favorably increased customer demand.
6
Management’s Discussion and Analysis
Employee benefit costs were higher than 2023, as a new Collective Bargaining Agreement took effect in February 2024 and full-time equivalents trended higher as the Corporation filled previously vacant positions. Operating and maintenance expenses were higher than in 2023, primarily due to inflationary impacts and third-party transportation costs increasing. Forward natural gas market prices at December 31, 2024, declined below March 2024 levels, generating a $3 million unfavourable fair value adjustment as the unfavourable price differential between average deal price and average market price on outstanding commodity purchase contracts declined a further $0.12 per GJ at December 31, 2024, compared to March 31, 2024. 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 Accounting Standards require 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. With the exception of those contracts entered into for an entity’s normal usage, IFRS Accounting Standards require 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 derivative instruments, driven by changes in future natural gas prices, are recorded in net income 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. The majority of SaskEnergy’s natural gas contracts are normal usage and are not recorded at fair value but at the contract price upon settlement. Commodity Sales Subject to Section 16 of The SaskEnergy Act, SaskEnergy’s charges, rates, terms and conditions are described in a Terms & Conditions of Service Schedule. This schedule sets natural gas commodity rates, as approved by Provincial cabinet, based on the recommendations of the Saskatchewan Rate Review Panel (SRRP). The commodity rate 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 neither earn a profit nor realize losses on the sale of 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. SaskEnergy prepares its financial statements on a consolidated basis while applying IFRS Accounting Standards . Consequently, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. 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. 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 opposing 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 also use financial derivatives and physical swaps to manage the future purchase price of natural gas.
7
Management’s Discussion and Analysis
The net commodity sales to customers, as reported in the condensed consolidated financial statements, was as follows:
Three months ended December 31,
Nine months ended December 31,
(millions)
2024
2023 Change 2024
2023 Change
$
69 57 12
$
114 $
Commodity sales
$
70 62
$
(1) (5)
128 100
$
(14)
93 21
Commodity cost of sales
(7) (7)
Net commodity sales realized Unrealized fair value adjustments
8
4
28
3
(2)
(24) (16)
27 31
(35)
33 26
$
15
$
19
Net commodity sales
$
$
$
(7)
$
The net commodity sales realized exclude the impact of unrealized fair value adjustments on derivative instruments. 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’s net commodity sales realized for the nine months ended December 31, 2024, was $7 million lower than in 2023, primarily resulting from the recovery per GJ declining to $0.53 per GJ through 2024 compared to $0.71 per GJ for the same nine months ended December 31, 2023. The declining market prices for natural gas, as well as the Corporation’s continued focus on natural gas price risk management, resulted in the Corporation receiving approval to decrease its commodity rate to $3.20 per GJ effective October 1, 2023, which further reduced commodity sales revenues in 2024 compared to 2023. Decreasing natural gas prices, from an average of $2.32 per GJ through the nine months ended December 31, 2023, to $1.06 per GJ for the same nine months in 2024, favourably decreased commodity cost of sales compared to 2023. In addition, 6 per cent warmer than normal weather through the nine months ended December 31, 2024, was 10 per cent colder than the same period in 2023, with both partially offsetting the impact of the lower commodity rate. The GCVA balance was $9 million owing to customers at December 31, 2024, compared to $8 million owing to customers at March 31, 2024 — as additional lower priced natural gas was purchased in 2024, which reduced the average cost of gas, increasing the GCVA balance owing to SaskEnergy’s customers. Commodity Fair Value Adjustments For the nine months ending December 31, 2024, the unrealized fair value adjustment on commodity derivative instruments decreased the net commodity sales realized by $2 million. The unfavourable price differential of $0.29 per GJ between contract prices and market prices on future commodity purchase contracts at March 31, 2024, further declined $0.12 per GJ, to an unfavourable price differential of $0.41 per GJ at December 31, 2024. SaskEnergy segregates a portion of its natural gas purchase contracts for gas that will ultimately be sold to commodity customers. Under IFRS Accounting Standards , such own-use contracts are not required to be reported at market value. 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, SaskEnergy is able to find opportunities in the market to take advantage of pricing differentials between transportation hubs, delivery points and time periods. In most cases, the Corporation executes purchase and sales contracts at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions. SaskEnergy also uses purchases and sales of natural gas to mitigate transportation constraints, which are executed at a cost.
8
Management’s Discussion and Analysis
The asset optimization margin, as reported in the condensed consolidated financial statements, was as follows:
Three months ended December 31,
Nine months ended December 31,
(millions)
2024
2023 Change 2024
2023 Change
$
27 21
$
54 45
Asset optimization sales
$
26 22
$
1
$
101
$
(47) (46)
Asset optimization purchases
(1)
91 10
9
6
(1)
Realized margin on asset optimization sales
4
2
(1)
(1)
Unrealized fair value adjustments Margin on asset optimization sales
-
(1)
(3)
2 1
$
5
$
8
$
4
$
1
$
7
$
The realized margin on asset optimization sales for the nine months ended December 31, 2024, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $1 million lower than in 2023. During 2024, the average margin on realized asset optimization sales was $0.23 per GJ, which was $0.03 per GJ lower than the $0.25 per GJ margin in 2023. Declining natural gas market prices from $2.32 per GJ in 2023 to $1.06 per GJ in 2024 and less volatility through 2024 compared to 2023, resulted in $47 million lower sales and $46 million lower purchases in 2024 compared to 2023. This was partially offset by the impact of an additional volume of 2.6 petajoules (PJ) of asset optimization opportunities realized by the Corporation. Asset Optimization Fair Value Adjustments Through asset optimization strategies, the Corporation enters into various natural gas contracts which are subject to volatility of natural gas market prices until the natural gas contracts are realized. The unrealized fair value adjustment on outstanding asset optimization derivative instruments had an unfavourable impact of $1 million on the asset optimization margin. The declining natural gas market prices through 2024 resulted in the differential between contract prices and market prices on future asset optimization sales contracts declining $0.03 per GJ, resulting in a $1 million unfavourable fair value adjustment. Revenue Delivery revenue, transportation and storage revenue, and customer capital contributions, as reported in the condensed consolidated financial statements, were as follows:
Three months ended December 31,
Nine months ended December 31,
(millions)
2024
2023 Change 2024
2023 Change
$
96 64 12
$
205 $
Delivery revenue
$
90 60
$
6 4 5
190 177
$
15 10
187
Transportation and storage revenue Customer capital contributions
27
7
18
9
$
172 $
$
419 $
Revenue
157
$
15
385
$
34
Delivery Revenue SaskEnergy provides reliable energy and competitive rates to customers, as they value low delivery charges. Natural gas delivery rates are designed to recoup all distribution facility and operating costs necessary for delivery of natural gas to customers throughout the year and earn a return for its shareholders. Natural gas storage and transportation costs — as well as ongoing investments related to safety, system integrity and growing infrastructure — are factored into delivery rates. Other considerations impacting natural gas delivery services include regulatory code compliance and industry best practices regarding safety. To minimize the financial impacts of these on delivery service customers, the Corporation strives to make the most effective use of resources and technology, and to collaborate with other Crown corporations and executive government. SaskEnergy continues to focus on items within the Corporation’s control to embed efficiency into processes, such as identifying opportunities for standardization, simplification, and the elimination of waste from processes. SaskEnergy remains committed to providing customers with access to cost-effective energy sources and maintaining delivery charges that are among the lowest in Canada.
9
Management’s Discussion and Analysis
Delivery revenue is primarily driven by the number of customers and the amount of natural gas they consume. Weather is the most significant external factor affecting the amount of natural gas customers consume, as residential and commercial customers consume natural gas primarily as heating fuel. In recent years, rate increases were implementedto address rapidly rising inflation and while the rates of inflation have levelled off to within the Bank of Canada target range, the Corporation continues to seek out operational efficiencies to slow the pace of rate increases for its customers. Delivery revenue was $15 million higher than 2023, primarily due to higher residential and commercial consumption of three PJs, as weather was 10 per cent colder than prior year. November and December 2024 were 16 per cent and 33 per cent colder, respectively, than the prior year. In addition, industrial customer’s consumption increased by three PJs to meet growing industrial demand for natural gas service. Rate increases implemented October 1, 2023, to address increasing natural gas transportation costs — as well as ongoing investments related to safety, system integrity and growing infrastructure, also 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, which customers pay when they put gas onto the natural gas transportation system, and a delivery service charge that customers pay when they take delivery from the natural gas transportation system. For receipt and delivery services, the Corporation offers both firm and interruptible transportation contracts. 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 only 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. contributed to the favourable results. Transportation and Storage Revenue Transportation and storage revenues of $187 million, for the nine months ending December 31, 2024, are $10 million higher than the same period in 2023. Higher intra-provincial delivery service revenues resulted from higher volumes transported in the third quarter of 2024 than the same three-month period in 2023. In addition, a 2 per cent average rate increase for transportation and storage services was implemented effective April 1, 2024, to address expansion of the transmission system and meet growing demand for natural gas services in Saskatchewan. 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 contribution revenue can significantly vary period-over-period, as various factors influence their receipt and recognition as revenue. Customer capital contributions were $9 million higher in 2024, resulting from increased activity of distribution utility customers in 2024 compared to 2023. Other Expenses SaskEnergy’s expenses are driven to a large degree by its investment in its transmission, distribution and storage systems. Depreciation and amortization expense, net finance expenses and Saskatchewan taxes are directly tied to the investment in facilities. As the level of investment in facilities increases, these expenses also increase. Employee benefit expenses, and operating and maintenance expenses, are also driven by the Corporation’s investment in facilities, although less directly. As the number of customers increases, infrastructure to serve those customers grows, and the costs to operate and maintain the system rise in correlation with the increasing kilometres of gas lines, number of service connections and amount of compression equipment. Additional regulatory requirements and changing public expectations have resulted in accelerated prevention, detection and mitigation initiatives - adding pressure to transmission and storage, and delivery service rates.
10
Management’s Discussion and Analysis
Other expenses, loss (recovery) on trade and other receivables, net finance expenses and other net losses, as reported in the condensed consolidated financial statements are as follows:
Three months ended December 31,
Nine months ended December 31,
(millions)
2024
2023 Change 2024
2023 Change
$
30 55 35
$
90
Employee benefits
$
28 53 35
$
(2) (2)
$
82
$
(8) (9)
157 104
Operating and maintenance Depreciation and amortization
148 105
- -
1
4 2
15
Saskatchewan taxes
4
15
-
-
(3)
(5) (9)
(2)
(2)
Loss (recovery) on trade and other receivables
$ $ $
126 $
$ $ $
366 $
117
$ $ $
348
$ $ $
(18)
19
57
Net finance expenses
$ $
21
2 3
$ $
59
2
-
2
Other net losses
3
2
-
Employee Benefits Employee benefit costs were $8 million higher in 2024 than in 2023 as the new Collective Bargaining Agreement was effective February 2024, resulting in increased employee compensation in 2024. In addition, full-time equivalents are trending higher, as the Corporation strategically filled previously vacant construction and engineering positions to support growing customer demand for natural gas service and digital, technology and security positions to facilitate the Corporations commitment to innovation and digital transformation enabled by technology. These were partially offset by higher labour costs allocated to capital projects than the same nine months ended December 31, 2023, which decreased employee benefit costs. Operating and Maintenance Operating and maintenance expenses were $9 million higher than in 2023, primarily due to inflationary impacts and third-party transportation costs increasing. The Corporation utilizes third-party transportation to serve customer needs when it is more cost effective than developing new assets. With growing system requirements — resulting from customers continuing to choose natural gas as their energy source — transportation costs are increasing as additional demand service contracts have been placed with third-party transportation providers. In addition, the Corporation’s energy efficiency programs saw increased customer activity compared to prior year, a result partially attributable to the Corporation’s three new programs, which are the First Nations Furnace Replacement Rebate, Home Efficiency Retrofit Rebate and Homes Beyond Code programs. Additionally, the Residential Equipment Replacement Rebate is experiencing a surge of activity in recent months, with December seeing the second highest monthly customer participation since the program was introduced in 2019. Depreciation and Amortization Depreciation and amortization were $1 million lower than the same period in 2023, as a major information system asset was fully depreciated in 2023-24, resulting in reduced depreciation. This was partially offset by increased depreciation on asset additions geared toward balancing safety and system integrity with the growing demand for natural gas services. Strategic capital investments required the necessary infrastructure be placed into service to meet this growing customer demand. Net Finance Expenses The Corporation continues to adapt to an interest rate environment that has receded in recent months but is still elevated to levels that provide economic challenges. Net finance expenses were $2 million lower for 2024 compared to the same nine months ended December 31, 2023, which is primarily resulting from the impact of higher debt retirement earnings, as interest rates declined through 2024. In addition, interest income earned is higher than the prior year as cash from operations was held in the bank through most of the first quarter in 2024, until short-term debt maturities were reached. Higher interest allocations to capital projects also created a favourable impact as investment in capital projects increased $11 million in 2024 compared to 2023. These favourable results were partially offset by additional interest on the $195 million of net long-term debt issuances made during the first two quarters. These debt issues will fund a portion of the current year’s capital investment in the Corporation’s natural gas line infrastructure — which benefits Saskatchewan customers in the short and long term.
11
Management’s Discussion and Analysis
The debt-to-equity ratio at December 31, 2024, is 60 per cent, which falls within the long-term target range of 58 to 63 per cent debt. Liquidity and Capital Resources SaskEnergy’s primary sources of capital are cash from operations and debt — which is borrowed through the Province’s General Revenue Fund. Cash from operations is SaskEnergy’s most important source of capital. As a utility, cash from operations is relatively stable and the Corporation relies on it to fund a significant proportion of its investment in natural gas facilities, and the debt servicing costs on those investments. 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 line of credit with the Toronto-Dominion Bank. Under The SaskEnergy Act, the Corporation may borrow up to $2,500 million of debt upon approval of the Lieutenant Governor in Council.
Three months ended December 31,
Nine months ended December 31,
(millions)
2024
2023 Change 2024
2023 Change
$
87
$
226 $
Cash provided by operating activities Cash used in investing activities
$
67
$
20
209
$
17
(106)
(215)
(85)
(21)
( 196)
(19) (11) (13)
18
(30) (19)
Cash (used in) provided by financing activities Decrease in cash and cash equivalents
14
4 3
(19)
$
$
(1)
$
(6)
$
$
(4)
$
Operating Activities Cash provided by operating activities increased by $17 million for the nine months ended December 31, 2024, compared to the same period in 2023. This increase was driven by higher customer demand combined with the impact of rate increases for both distribution and transmission natural gas services, which were implemented to address rising costs and expansion of the Corporation’s natural gas system. Increasing customer capital contributions through 2024 compared to 2023 in the distribution utility also contributed to the favourable cash flows. These favourable results were partially offset by higher employee benefit costs and higher operating and maintenance expenses. Employee benefit costs grew in 2024, due to the implementation of the new Collective Bargaining Agreement, salary increases and full-time equivalents trending higher due to the Corporation filling previously vacant positions. Operating and maintenance expenses increased as third-party transportation expenses increased to serve customers, combined with additional energy efficiency rebates paid to customers. Investing Activities Cash used in investing activities increased $19 million compared to 2023, primarily due to the Corporation continuing to expand investment related to safety, system integrity and growing infrastructure. Financing Activities Cash used in financing activities grew $11 million in 2024 compared to 2023, primarily due to the Corporation paying a long-term debt maturity of $100 million in 2024, as well as paying $34 million to reduce short-term debt, $69 million for interest payments and $14 million for dividend payments. During the first half of fiscal 2024-25, the Corporation borrowed an additional $200 million of long-term debt at a discount of $5 million. Capital Additions Capital additions, as reported in the condensed consolidated financial statements, were as follows:
Three months ended December 31,
Nine months ended December 31,
(millions)
2024
2023 Change 2024
2023 Change
$
25 26 33 10
$
52 49 73 19
Customer growth System expansion Risk management
$
20 18 23 16
$
5 8
$
41 49 64 29
$
11
-
10
9
Reliability of natural gas service
(6)
(10)
2
6
Business and technology optimization
2
-
5
1
$
96
$
199 $
Capital additions
$
79
$
17
188
$
11
12
Management’s Discussion and Analysis
SaskEnergy is committed to providing solutions and services that benefit customers and Saskatchewan, leveraging the Corporation’s expertise and Saskatchewan’s private sector. The Corporation deploys its strategic capital to fund customer growth and create new business capabilities. Fulfilling customer demand for additional natural gas capacity is a core responsibility for the Corporation and demand is forecasted to increase as a result of the growing industrial and power generation sectors. Key focus areas include maintaining the safety and reliability of the natural gas transmission and distribution systems, enhancing customer experience, and supporting the emissions reduction strategy. Capital additions through the nine months ended December 31, 2024, were $11 million higher than the investment made in 2023, primarily due to customers increasing demand for natural gas services and the Corporation focusing investment on the purchase of equipment, system improvements and technological advancements. Customer Growth Investment in customer growth projects of $52 million was $11 million higher than 2023 investment levels, as the Corporation continues to focus on investments that connect customers to the transmission and distribution systems. System Expansion System expansion capital projects provide incremental capacity for the transmission and distribution systems, through the installation of new or expanded gas line or facility assets, thus enabling demand growth and the addition of new customers. Investment in system expansion projects equals 2023 and focuses on distribution system infrastructure reinforcement projects in the Regina area, which will increase available delivery capacity in east Regina and position the Corporation to meet new customer demand. Risk Management Capital investment in safety and system integrity continues to be SaskEnergy’s top priority. SaskEnergy takes a long-term view and uses a risk-based approach, to determine project priorities and the appropriate level of total integrity spending. Industry comparable data also provides reference, as the industry as a whole has progressively elevated safety and system integrity capital investment over the last number of years. Risk management capital projects concentrate on mitigating the likelihood of a negative consequence occurring on the SaskEnergy system, such as damage or loss of gas containment. These consequences typically include damage to infrastructure, environment and potential harm to or loss of human life. Risk management spending of $73 million is the Corporation’s highest category of capital investment year-to-date, and intensified in 2024 compared to 2023, as the Corporation focuses on system improvement projects and cathodic protection, measurement and service replacement projects. Reliability of Natural Gas Service SaskEnergy’s network of transmission and distribution infrastructure requires regular monitoring and inspection, maintenance, upgrading and replacement to maintain service reliability for customers, avoid public safety incidents, and meet growing regulatory requirements. Recent years have also seen an increase in the cyber threat landscape and as a critical infrastructure operator, the Corporation has developed a robust Enterprise Security program that addresses both cyber and physical risks. This program requires continual improvement to mitigate risks and ensure secure systems for reliable operations. Reliability of natural gas in service includes enhancements, modifications or upgrades to facilities, ensuring that natural gas demand will be met without failure or loss of service. Reliability of natural gas service spending decreased by $10 million in 2024, as the Corporation focuses investment on purchasing construction equipment, system improvement work on town border stations and network improvements. Business and Technology Optimization Business and technology optimization ensures that every investment in information technology, every resource allocated and every application in development or in production, meets the Corporation’s business goals. The 2024 year-to-date investment in business and technology optimization is comparable to 2023 expenditures and focused on a work management system upgrade project, which centers on work management business processes, foundational core systems integrations, and execution of ongoing enhancements.
13
Management’s Discussion and Analysis
Outlook In 2024-25, SaskEnergy’s strategic imperatives include balancing affordability with environmental responsibility. The need for safe, reliable and affordable energy remains paramount for the people, businesses and industries of Saskatchewan to thrive. Responding to the current economic environment and continuing to find ways to efficiently serve customers with affordable energy is a growing challenge. Maintaining the integrity and reliability of the natural gas system, expanding to meet the growing needs of customers, and improving customers’ service experience are integral to the Corporation’s present and future. SaskEnergy anticipates modest growth from industrial customers to continue in 2024-25, with additions from gas-fired power generation leading the way. While the number of residential customers connected to SaskEnergy’s distribution system is expected to continue increasing, total demand and revenue growth from this customer segment is expected to remain stable due to energy efficiency improvements. SaskEnergy is forecasting slightly higher earnings in 2024-25 due to higher delivery revenue partially offset by higher operating costs. Affordability remains a top priority for SaskEnergy and its focus on operational excellence will look to limit the extent of possible delivery rate increases in the future. SaskEnergy is committed to providing solutions and service that benefit customers and Saskatchewan by leveraging the Corporation’s expertise and the province’s private sector. Throughout 2024-25, SaskEnergy will increase its capital investment in the province, with key areas of focus including: maintaining the safety and reliability of the natural gas transmission and distribution systems; enhancing customer experience; and continuing to support the emissions reduction strategy.
14
Consolidated Financial Statements
Contents Condensed C onsolidated Statement of Financial Position Condensed Consolidated Statement of Income and Comprehensive Income Condensed Consolidated Statement of Changes in Equity Condensed Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements
Long-Term Debt Commitments and Contingencies Unrealized Market Value Adjustments Natural Gas Sales and Purchases Delivery Revenue Transportation and Storage Revenue Net Finance Expenses
General Information Basis of Preparation Material Accounting Policy Information
2 9
Natural Gas in Storage Held for Resale Financial and Derivative Instruments Financial Risk Management
Property, Plant and Equipment
Lease Liability
Consolidated Financial Statements (unaudited)
Condensed Consolidated Statement of Financial Position
December 31, 2024
March 31, 2024
(millions)
Notes
ASSETS Current assets Cash and cash equivalents
$
1
$
20
Trade and other receivables
174
185
Natural gas in storage held for resale
4
35 21 44
8
Inventory of supplies
20 11 11
Current portion of debt retirement funds Fair value of derivative instruments
5
2
277
255
Right-of-use assets Intangible assets
17 43
15 45
Property, plant and equipment
7
3,282
3,150
Debt retirement funds
147
168
$
3,766
$
3,633
LIABILITIES AND PROVINCE'S EQUITY Current liabilities Short-term debt
$
211 169
$
245 143
Trade and other payables
Dividends payable Contract liability
7
6
42
22
Current portion of lease liability Current portion of provisions Current portion of long-term debt Fair value of derivative instruments
8
6 8
5 8
9 5
75 20
100
26
538
555
Employee future benefits
2 5 9
3 4 8
Deferred revenue
Lease liability
8
Provisions
169
150
Long-term debt
9
1,787 2,510
1,667 2,387
Province's equity Equity advances
22
22
Other components of equity
(7)
(11)
Retained earnings
1,241 1,256 3,766
1,235 1,246 3,633
$
$
The accompanying notes are an integral part of the condensed consolidated financial statements
16
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32Made with FlippingBook Ebook Creator