SaskEnergy Third Quarter Report
Third Quarter Report December 31, 2020
2020-21 Third Quarter Report
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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 We are always committed to our safety, the safety of our team and the public. Accountability We are accountable for our decisions, our actions and the results. Spirit We create a positive and dynamic work environment that recognizes achievement and balance while supporting business success.
Collaboration We succeed through strong internal and external relationships, trust and open communication.
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Table of Contents
Financial and Operating Highlights
4
Management’s Discussion and Analysis
5
Introduction
5 6 7
Industry Overview
Consolidated Financial Results Liquidity and Capital Resources
14 16 16
Capital Additions
Outlook
Consolidated Financial Statements
17
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
17 18 20 21 22
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Financial and Operation Highlights
Three months ended December 31,
Nine months ended December 31,
2020
2020
2019
2019
FINANCIAL HIGHLIGHTS ($ millions)
226 209
527 498
Total revenue Total expenses
246 207
554 532
17 12
29
Consolidated net income Market value adjustments
39
22 32
(18)
5
Income before unrealized market value adjustments
29
11 13
44 22 57 94
54 22
8
Dividends
44 79
125 178
Cash provided by operating activities
166 251
Capital additions
3,304 1,630
Total assets (As at December 31,) Total net debt (As at December 31,) Debt ratio (As at December 31,)
3,120 1,508 58.4%
59.5%
OPERATING HIGHLIGHTS
Distribution Volumes distributed (petajoules) Residential/Farm
13 11 45 69
22 19
14 11 44 69
21 19
Commercial
118 159
117 157
Industrial
Total
2%colder
5%colder
Weather (compared to last 30 years)
5% colder
5% colder
Transmission Volumes transported (petajoules) Domestic
99
242
104
253
1
5
3
37
Export
100
247
Total
107
290
Income before MVA $ Millions
Cash from Operations $ Millions
Capital Additions $ Millions
0 30 60 90
73
150 225
0 125 250 375
54
166
154
125
230
251
178
0 75
11
2020
2019
2018
2020
2019
2018
2020
2019
2018
Management’s Discussion and Analysis
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 ended December 31, 2020. 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 10, 2021, 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 2019-20 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 2019-20 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 2020-21 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.
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INDUSTRY OVERVIEW
SaskEnergy monitors a number of important factors that could influence financial performance.
Oil Market Volatility The prior fiscal year ended with the entire global energy complex in a state of uncertainty. Pandemic-related demand destruction combined with a geo-political supply glut had resulted in crude oil prices falling by over 60 per cent. The first two months of this fiscal year continued the trend of uncertainty and volatility. The end of April saw West Texas Intermediate (WTI) crude oil prices trade below negative $30 per barrel as traders were faced with the prospect of continued low demand and a lack of storage to balance the market.
Prices quickly recovered to around $40 per barrel, and remained range-bound for the entirety of fiscal Q2.
Market volatility returned during the third quarter with oil prices closing the quarter up over 30 per cent. Price strength is partially a result of slowly returning global demand, but there seems to be some other macroeconomic factors at play. The quarter saw strength throughout nearly all commodity markets – particularly grains, most of which are now trading well above pre-pandemic levels. A return to higher oil prices has seen oil production and associated gas production rebound from the pandemic- induced lows, but rig counts have been much slower to recover, and may yet require a further move up in price. Lower oil production in North Dakota has resulted in increased demand for Canadian gas to serve markets in the U.S. Midwest. Natural Gas Prices Globally, natural gas prices followed the trend of the other commodities. Cold weather in Western Europe and Asia have caused a Tesla-like rally in LNG prices. Asian LNG prices began the fiscal year nearly flat to North American gas prices despite the incremental variable and shipping costs; since then Asian prices have increased more than ten- fold. Despite the connection between global demand and North American supply, prices in North America have seen only a muted response due to constrained transportation (a shortage of ships and a bottleneck at the Panama Canal). Western Canadian gas prices have been responsive to local weather, meaning generally low prices with some volatility caused by changes to the weather forecasts. After a historically strong storage injection season, Western Canada has seen robust storage withdrawals, despite a mild winter, bringing storage levels back in-line with the five year average, yet still well above last year. Looking forward, some of the potential uncertainty is finally falling out of the market. The NGTL 2021 Expansion project, including additional capacity for SaskEnergy, has received all approvals. Due to regulatory delays the project’s construction is a year behind schedule, though existing system capacity should limit curtailments this summer. To address this concern, NGTL’s Temporary Service Protocol is currently before the Canada Energy Regulator for a potential extension through October 2021. A result is expected before the end of the fiscal year. The AECO daily index averaged $2.17 per GJ throughout the nine months ended December 31, 2020 compared to $1.39 per GJ the year prior. 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, 2020 averaged $nil compared to
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$0.50 per GJ for the year prior. The decreased differential can be attributed to upstream system improvements and the Temporary Service Protocol discussed above. As transportation is made more readily available from production areas in northeast BC to delivery points in southwest SK, the price differentials should remain near the marginal cost of transportation.
The following chart shows AECO natural gas prices:
AECO Monthly Index Historical Prices Forward Price at Dec 31, 2020 Low Demand for Western Canadian Gas
$3.50
$3.00
2015-Present Average Price $2.01/GJ
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income
Three months ended December 31,
Nine months ended December 31,
2020
2019 Change
2020
2019 Change
(millions)
Impact of fair value adjustments Revaluation of natural gas in storage Income before unrealized market value adjustments
$
$
11 12
29
$
44
$
(15)
$
54
$
(43)
(12)
(8)
(4) (3)
(35)
47
6
-
3
3
3
$
29
$
17
$
39
$
(22)
$
22
$
7
Consolidated net income
Excluding market value adjustments, financial results for the nine months ended December 31, 2020 are $43 million lower than the same period in 2019. The decrease in net income is due to a lower commodity margin, asset optimization margin and lower customer contribution revenues, in addition employee benefits, operating and maintenance costs and depreciation and amortization increased compared to 2019-20. Reduced natural gas market price volatility limited the Corporation’s asset optimization opportunities while increasing natural gas market prices reduced the profitability of commodity and asset optimization opportunities the Corporation did have. In addition, as natural gas production in Saskatchewan continues to decline, the Province
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increasingly relies on gas production in Alberta to meet its delivery requirements. This results in increased transportation utilization with TC Energy’s system to import natural gas from Alberta. These increasing requirements have resulted in higher overall operating and maintenance costs as well as lower asset optimization margins as some transport capacity was secured through asset optimization contracts. Customer contribution revenue is also lower than prior year as there are fewer transmission and distribution customer connections in 2020-21 due to the uncertainty facing residential and industrial customers in the current economic environment. The prior year also included a large transmission system customer contribution. Market value adjustments improved SaskEnergy’s consolidated net income by $12 million. The price differential between contract prices and market prices on forward commodity and asset optimization purchase contracts improved in the current year as near term natural gas market prices increased compared to prices at March 31, 2020. The value of natural gas in storage is sensitive to natural gas market prices, which in the near term have increased and resulted in a decrease in the unfavourable revaluation of natural gas in storage. At December 31, 2020, the value of natural gas in storage was $45 million, or $1 million below cost. At the end of March 2020, the value of natural gas in storage was $13 million, or $7 million below cost. The difference between the $7 million unfavourable adjustment at the end of the previous fiscal year and the current $1 million unfavourable adjustment to the cost of gas in storage has been reported as a $6 million favourable market value adjustment during the nine months ended December 31, 2020. 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. 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 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. 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 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.
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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. 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 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 condensed consolidated financial statements, was as follows:
Three months ended December 31,
December 31, Nine months ended
2020
2019 Change
2020
2019 Change
(millions)
Commodity sales
$
63 52 11
$
(4) (3) (7)
$
93 79 14
$
-
59 55
$
$
93 88
Commodity purchases
(9) (9)
4
5 4
Realized margin on commodity sales Impact of fair value adjustments
(15)
(2)
(13)
(2)
6
$
(11)
$
9
Margin on commodity sales
$
9
$
(20)
$
12
$
(3)
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 $5 million margin on commodity sales for the nine months ended December 31, 2020 compared to $14 million for the same period ended December 31, 2019. During 2020, average revenue was $2.51 per GJ and average cost of gas sold was $2.36 per GJ, resulting in a margin of $0.15 per GJ. The margin is $0.22 per GJ lower than the average commodity margin of $0.37 per GJ through the same nine month period in 2019-20. With the AECO daily index averaging $2.17 per GJ throughout the nine months ended December 31, 2020 compared to $1.39 per GJ the year prior, the effect was a higher cost of gas sold in 2020-21, which increased the Corporation’s average cost of commodity purchases while decreasing the realized margin on commodity sales. Meanwhile the GCVA balance has decreased to $1 million owing to customers, down $12 million from the $13 million owing to customers at March 31, 2020.
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Commodity Fair Value Adjustments
For the nine months ended December 31, 2020, the fair value adjustment commodity derivative instruments increased the margin on commodity sales by $4 million as the $4 million favourable fair value position at March 31, 2020 increased to $8 million favourable at December 31, 2020. The favourable price differential between contract prices and market prices on future commodity purchase contracts increased to $0.19 per GJ at December 2020 compared to a favourable price differential of $0.08 per GJ at March 31, 2020.
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.
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 transportation constraints, 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. SaskEnergy also uses purchases and sales of natural gas to mitigate transportation constraints, which are executed at a cost.
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,
2020
2019 Change
2020
2019 Change
(millions)
$
24 24
$
94 98
Asset optimization sales
$
39 40
$
(15)
$
105
$
(11)
Asset optimization purchases
16
99
1
-
(4)
Realized margin on asset optimization sales Impact of fair value adjustments Revaluation of natural gas in storage
(1) (6)
1 9
6
(10)
3
8 6
(33)
41
-
3
(3)
3
3
$
3
$
10
Margin on asset optimization sales
$
(4)
$
7
$
(24)
$
34
The realized margin on asset optimization sales for the nine months ended December 31, 2020, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was a $4 million loss, $10 million lower than the $6 million favourable margin for the same period in 2019. At the beginning of October 2019, TC Energy enacted a Temporary Service Protocol, which reduced natural gas price volatility while contributing to stronger natural gas pricing. During 2020, average revenue was $2.10 per GJ and average cost of gas sold was $2.20 per GJ, resulting in an unfavourable margin of $0.10 per GJ. The margin is $0.21 per GJ lower than the favourable average commodity margin of $0.11 per GJ through the same nine month period in 2019-20. Reducing natural gas price volatility also limited SaskEnergy’s asset optimization opportunities, as asset optimization sales volumes decreased 10 PJs in 2020 compared to 2019, resulting in a $1 million unfavourable volume variance.
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Asset Optimization Fair Value Adjustments
The Corporation enters into various natural gas contracts in its asset optimization strategies, which are subject to volatility of natural gas market prices. For the nine months ended December 31, 2020, the fair value adjustment on asset optimization derivative instruments increased the margin on asset optimization sales by $8 million compared to a decrease of $33 million for the same period in 2019-20. Stronger natural gas market prices resulted in the price differential between contract prices and market prices on future asset optimization purchase contracts improving to $0.10 per GJ favourable at December 2020 compared to an unfavourable price differential of $0.20 per GJ at March 31, 2020. This $0.30 per GJ favourable change in the price differential on asset optimization purchase contracts in 2020-21 resulted in a $9 million favourable fair value adjustment, which was partially offset by the $1 million unfavourable variance related to a $0.17 per GJ increase in the unfavourable price differentials on outstanding asset optimization 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. Near term forward natural gas market prices increased since March 2020, consequently, the net realizable value of asset optimization natural gas in storage was $1 million below cost at December 31, 2020, which is a $6 million favourable adjustment to net income from the $7 million unfavourable revaluation adjustment recorded as at March 31, 2020.
Revenue
Delivery revenue, transportation and storage revenue and customer capital contributions, as reported in the consolidated financial statements, were as follows:
December 31, Three months ended
Nine months ended December 31,
2020
2019 Change
2020
2019 Change
(millions)
$
185 139
$
86 46
$
$
185 141
$
-
Delivery revenue
$
90 47
(4) (1)
(2)
Transportation and storage revenue Customer capital contributions
18
8
28
(10)
8
-
$
342
$
140
$
$
354
$
(12)
Revenue
$
145
(5)
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.
Delivery revenue of $185 million for the nine months ended December 31, 2020 equaled the same period in 2019 as weather for both nine month periods were 5 per cent colder than normal.
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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 $139 million for the nine months ended December 31, 2020, $2 million lower than the same period in 2019. Contracted demand and interruptible volumes relating to export sales decreased by $4 million as demand for natural gas in eastern Canada declined. This is partially offset by increased delivery service revenue of $2 million, as Industrial customer and power generation related load growth increased demand for natural gas within the province and is driving higher contract demand transportation revenue. Included in transportation and storage revenue is storage revenue of $7 million for the nine months ended December 31, 2020, which equals the previous year. The apparent abundance of natural gas, coupled with small or even negative differentials between current and forward natural 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.
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. Customer capital contribution revenue of $18 million for the nine months ended December 31, 2020 was $10 million lower than 2019-20 due to distribution customer connections decreasing by $5 million and transmission system customer connections also decreasing by $5 million in the current period. 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.
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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. Additional 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, as reported in the condensed consolidated financial statements, were as follows:
Three months ended December 31,
Nine months ended December 31,
2020
2019 Change
2020
2019 Change
(millions)
$
24 43 29
$
71
Employee benefits
$
25 40 28
$
1
$
68
$
(3) (4) (5)
120
Operating and maintenance Depreciation and amortization
(3) (1)
116
86 12
81 12
3 2
Saskatchewan taxes
3 1
-
-
4
Impairment loss
(1) (4)
2
(2)
$
101
$
293
$
97
$
$
279
$
(14)
$
14
$
41
Net finance expenses
$
14
$
-
$
41
$
-
$
(2)
$
-
$
$
2
-
$
$
-
Other gains
-
Employee Benefits
Employee benefit costs of $71 million were $3 million higher for nine months ended December 31, 2020 compared to the same period in the prior year, as vacant positions in strategic areas of the business have been filled to continue to meet the Corporation’s current and future business needs. Ongoing efficiency efforts and management of overtime and planned vacancies resulted in a reduction of full time equivalents in other areas partially offsetting these increases.
Operating and Maintenance
Operating and maintenance costs of $120 million for the nine months ended December 31, 2020 are $4 million higher than the same period in 2019-20. Higher transportation contracted by the Corporation on TC Energy’s transportation system increased operating and maintenance expenses by $4 million in 2020-21 compared to 2019- 20. Growing demand for imported natural gas from Alberta is resulting in more natural gas being transported and over greater distances. In addition, the provision for bad debts increased $2 million and carbon tax payments are $1 million higher in 2020 compared to 2019. The provision for bad debt increased in 2020 as Saskatchewan’s unemployment rate increased, a result of the impact of COVID-19 and a subsequent economic downturn causing higher expected credit losses. SaskEnergy was able to partially mitigate the impact of these increased costs through reductions of $3 million in contracts and consulting, sustenance and training costs in 2020 compared to 2019.
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Depreciation and Amortization
Balancing safety and system integrity with the demand for service continues through 2020-21. Strategic capital investments required to ensure the necessary infrastructure is in place to meet customer demand, has increased the capital asset base from the previous year, resulting in increased depreciation and amortization. For the nine months ended December 31, 2020, depreciation and amortization was $86 million, which was $5 million higher than the same period in 2019-20.
Net Finance Expense
Net finance expenses were $41 million for the nine months ended December 31, 2020, which equaled the same period in the prior year as higher debt retirement fund earnings and lower short-term debt interest expense was fully offset by higher long-term debt interest expense. 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. Throughout 2020-21, The SaskEnergy Act allows the Corporation to borrow up to $2,500 million.
Three months ended December 31,
Nine months ended December 31,
2020
2019 Change
2020
2019 Change
(millions)
$
44
$
125
Cash provided by operating activities Cash used in investing activities Cash provided by financing activities Increase/(decrease) in cash and cash equivalents
$
57
$
(13)
$
166
$
(41)
(83)
(186)
(97)
14 12
(258)
72
76
50
85
(9)
38
$
11
$
15
$
(2)
$ 13
$
(7)
$ 22
Operating Activities Cash provided by operating activities was $125 million for the nine months ended December 31, 2020, a decrease of $41 million from 2019-20. Cash flows from operations decreased due to lower commodity margins, asset optimization margins, lower customer contribution revenue combined with higher employee benefit, operating and maintenance and depreciation and amortization costs.
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Investing Activities Cash used in investing activities totaled $186 million for the nine months ended December 31, 2020, $72 million less than the nine months ended December 31, 2019. Capital investment levels declined in 2020-21 due to the deferral of some system expansion projects resulting from changing customer requirements. In addition, the prior year included substantial system expansion spending around the city of Saskatoon. Lower capital maintenance work is also contributing to the reduced investing activity however the risk profile of the Corporation has not been negatively impacted as a result. Financing Activities Cash provided by financing activities of $76 million through the nine months ended December 31, 2020 declined $9 million compared to the $85 million provided in 2019-20. The Corporation used $50 million for interest payments and $34 million to pay long-term debt. The Corporation borrowed an additional $150 million in long-term debt at a premium of $10 million to support its capital investment requirements and increased short-term debt by $10 million. SaskEnergy’s debt ratio at the end of December 31, 2020 of 59 per cent debt and 41 per cent equity is within the Corporation’s long-term target range of 58 to 63 per cent debt.
Coronavirus (COVID - 19) impact assessment
The COVID-19 pandemic has caused material disruption to businesses and has resulted in an economic slowdown. The Corporation has assessed and continues to monitor the impact of COVID-19 on its operations. The magnitude and duration of COVID-19 is uncertain and, if it causes significant disruption for an extended period of time, the impacts to the Corporation will increase. Potential impacts include loss of revenue, supply chain disruption, challenges associated with a remote or unavailable workforce and potential asset impairment. The Corporation’s business continuity plans are currently in place while continuing to effectively operate assets, conduct commercial activities and execute on projects with a focus on health, safety and reliability. SaskEnergy is considered essential for the Province given the important role the Corporation’s infrastructure plays in providing energy to customers. While it is too early to determine long-term impacts that COVID-19 may have on capital programs, a slowdown of construction activities and capital expenditures, relating to customers deferring their expansion plans in 2020 have been observed.
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CAPITAL ADDITIONS
Capital additions, as reported in the consolidated financial statements, were as follows:
Three months ended December 31,
Nine months ended December 31,
2020
2019 Change
2020
2019 Change
(millions) Strategic
$
29 20 49
$
50 54
Customer growth System expansion
$
16 47 63
$
13
$
44
$
6
(27) (14)
114 158
(60) (54)
104
Operational
18
47 19
Risk management
23
(5)
66 19
(19)
8 4
Reliability of natural gas service
6 2
2 2
- -
8
Business and technology optimization
8
30
74
31
(1)
93
(19)
$
79
$
178
Capital additions
$
94
$
(15)
$
251
$
(73)
Capital additions during the nine months ended December 31, 2020 of $178 million were $73 million lower than prior year as spending declined, primarily during the second quarter of 2020-21, compared to 2019-20.
Many system expansion projects planned for 2020 have been reduced or deferred by the Corporation and its customers, a result of the economic downturn resulting from the effects of a suppressed oil and gas market and COVID-19. Higher system expansion spending of $36 million on transmission urban infrastructure projects in 2019 resulted from growth in and around the City of Saskatoon. This consisted of a multi-year initiative that addressed increased natural gas capacity and moving high pressure transmission lines further away from populated areas. Preliminary capital expenditures on an 85 km NPS 20 gas line from Rosetown to Vanscoy, which were incurred in 2019 prior to the project being deferred, is expected to resume in spring 2021 with a completion date of fall 2021. It will connect Rosetown supply to the Saskatoon South Bypass NPS 20 gas line. These two projects are the primary drivers for system expansion project spending through the nine months ended December 31, 2019 being $60 million higher than the same period in the current year. Risk management spending on the distribution system declined $19 million year-over-year as the timing of some service upgrade projects have been adjusted as requirements changed. OUTLOOK SaskEnergy continues to focus on the impacts of the COVID-19 pandemic, promoting and maintaining the health and safety of the Corporation’s personnel and the public while maintaining its ability to deliver core services. In addition to the pandemic, the volatility of global oil prices continues to create uncertainty for producers and consumers of natural gas. Over 70 per cent of the production of natural gas in Saskatchewan is associated with oil production; hence, as oil producers were forced to shut-in wells due to record low oil prices, associated natural gas production was also shut-in. The reduction in Saskatchewan gas supply will require more natural gas to be imported from Alberta. Changing customer demand, global supply chain disruptions, and social distancing requirements have caused challenges and delays to system improvement projects, but have not impacted the Corporation’s ability to transport or market natural gas. SaskEnergy will continue to monitor and manage the impact of both COVID-19 and the volatility of oil prices on its business strategies as both situations evolve.
2020-21 Third Quarter Report
16
Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at December 31, 2020 (unaudited)
As at March 31, 2020 (audited)
(millions)
Notes
Assets Current assets Cash and cash equivalents Trade and other receivables
$
16
$
1
132
155
45 14
13 13 11 15 15 73
Natural gas in storage held for resale
4
Inventory of supplies Debt retirement funds
-
13
Fair value of derivative instruments
5
220
208
16 75
Right-of-use assets Intangible assets
2,852
2,801
Property, plant and equipment
141
125
Debt retirement funds
$
3,304
$
3,222
Liabilities and Province's equity Current liabilities Short-term debt
$
289
$
279 120
96
Trade and other payables
8
2
Dividends payable
-
34 19
6
Current portion of long-term debt
31
Contract liability Refund liability
6 7 6 7 5
7
21
Fair value of derivative instruments Current portion of lease liability
5 7
6
443
488
7 5
Lease liability
7
Employee future benefits
240
292
Provisions
5
5
Deferred revenue Long-term debt
1,485 2,185
1,325 2,122
6
Province's equity
72
72
Equity advances
8
4
Other components of equity
1,039 1,119
1,024 1,100
Retained earnings
$
3,304
$
3,222
(See accompanying notes)
2020-21 Third Quarter Report
17
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
For the Three Months Ended December 31, 2020
For the Three Months Ended December 31, 2019
Income before Unrealized Market Value Adjustments
Income before Unrealized Market Value Adjustments
Unrealized Market Value Adjustments (Note 9)
Unrealized Market Value Adjustments (Note 9)
Total
Total
Notes
(millions)
Revenue Natural gas sales
$
86 86 46
$
3
$
83 86 46
$
102
$
(1)
$
101
10 11 12
- - -
90 47
- - -
90 47
Delivery
Transportation and storage Customer capital contributions
8
8
8
8
226
3
223
247
(1)
246
Expenses Natural gas purchases (net of change in inventory)
94 24 43 29
15
79 24 43 29
92 25 40 28
4
96 25 40 28
10
- - - - -
- - - - -
Employee benefits
Operating and maintenance Depreciation and amortization
3 2
3 2
3 1
3 1
Saskatchewan taxes
Impairment loss on trade and other receivables
15
195
180
189
4
193
31
(12)
Net income before the following
43
58
(5)
53
1
- - -
1
1
- - -
1
Finance income Finance expenses Net finance expenses
13 13 13
(15) (14)
(15) (14)
(15) (14)
(15) (14)
$
$
(12)
17
Total net income (loss)
$
29
$
44
$
(5)
$
39
Items that may be reclassified back to profit or loss Change in fair value of debt retirement funds designated as FVOCI
-
-
-
-
(1)
(1)
$
Comprehensive income (loss)
$
29
$
(12)
17
$
44
$
(6)
$
38
(See accompanying notes)
2020-21 Third Quarter Report
18
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
For the Nine Months Ended December 31, 2020
For the Nine Months Ended December 31, 2019
Income before Unrealized Market Value Adjustments
Unrealized Market Value Adjustments (Note 9)
Income before Unrealized Market Value Adjustments
Unrealized Market Value Adjustments (Note 9)
Total
Total
(millions)
Notes
Revenue Natural gas sales
187 185 139
$
(2)
$
$
185 185 139
10 11 12
198 185 141
$
$
2
$
200 185 141
- - -
Delivery
- - -
Transportation and storage Customer capital contributions
18
18
28
28
529
(2)
527
552
2
554
Expenses Natural gas purchases (net of change in inventory)
186
(20)
166
10
178
34
212
71
- - - - -
71
Employee benefits
68
- - - - -
68
120
120
Operating and maintenance Depreciation and amortization
116
116
86 12
86 12
81 12
81 12
Saskatchewan taxes
4
4
Impairment loss on trade and other receivables
2
2
479
(20)
459
457
34
491
Net income before the following
50
18
68
95
(32)
63
4
- - -
4
Finance income Finance expenses Net finance expenses
13 13 13
3
- - -
3
(45) (41)
(45) (41)
(44) (41)
(44) (41)
2
-
2
Other gains
-
-
-
Total net income (loss)
$
11
$
18
$
29
$
$
22
$
54
(32)
Items that may be reclassified back to profit or loss Change in fair value of debt retirement funds designated as FVOCI
-
4
4
-
2
2
Comprehensive income (loss)
$
11
$
22
$
33
$
54
$
(30)
$
24
(See accompanying notes)
2020-21 Third Quarter Report
19
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
Other Components of Equity
Retained Earnings
Equity Advances
Total
(millions)
Balance as at April 1, 2019 as previously stated
$
1,098
$
1,024
$
72
$
2
(19)
Prior period adjustment
15
(19)
-
-
Restated balance as at April 1, 2019
1,079
1,005
72
2 2
24
Comprehensive income
22
- -
(22)
Dividends
(22)
-
Balance as at December 31, 2019
1,081
1,005
72
4
Balance as at April 1, 2020 Comprehensive income
1,100
1,024
72
4 4
33
29
- -
(14)
Dividends
(14)
-
Balance as at December 31, 2020
$
1,119
$
1,039
$
72
$
8
(See accompanying notes)
2020-21 Third Quarter Report
20
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