SaskEnergy Quarterly Report 2023
202 3 -2 4 Financial Statements Second Quarter Report September 30, 2023
VISION Environmental sustainability and economic prosperity for future generations. CORPORATE VISION Providing critical energy for a greener Saskatchewan and reducing our emissions from operations by 35 per cent by 2030. MISSION SaskEnergy delivers natural gas and energy solutions responsibly to the residents, businesses and industries of Saskatchewan. VALUES
STEWARDSHIP We are responsible in our use of all resources. INTEGRITY We are accountable for our decisions, our actions, and the results. SAFETY We are always committed to our personal safety, the safety of our team and the public.
SPIRIT We support a respectful,
dynamic and a diverse work environment that encourages achievement.
RELATIONSHIPS We succeed through strong internal and external collaboration, trust and open communication.
TABLE OF CONTENTS Financial and Operating Highlights Management's Discussion and Analysis Introduction
3 4 4 6
Operating Environment
Consolidated Financial Results Liquidity and Capital Resources
11 12 1 3 1 4
Capital Additions
Outlook
Consolidated Financial Statements
2
Financial and Operating Highlights
Three months ended September 30,
Six months ended September 30,
CONSOLIDATED FINANCIAL INFORMATION ($ millions)
2023
2023
2022
2022
43 58
100 117
Delivery
43 61
100 118
Transportation and storage
5 5 7
20
Commodity margin
7
9
6
Asset optimization margin Customer capital contributions Total revenue and margins
15
21 10
11
5
118
254
131
258
26 47 35
54 95 70 11
Employee benefits
24 44 31
51 89 62 11
Operating and maintenance Depreciation and amortization
6 1
Saskatchewan taxes
7 1
1
Impairment loss on trade and other receivables
1
19
38
Net finance expense Other (gains) losses
18
35
(2)
(1)
(1)
(1)
Total expenses
132
268
124
248
(14)
(14) (14) (28)
Income before unrealized market value adjustments
7
10 15 25 96
3
Market value adjustments
17 24 23
CONSOLIDATED NET (LOSS) INCOME Cash provided by operating activities
(11)
58
142
(79)
(111)
Cash used in investing activities
(71)
(99)
-
(33)
Cash (used in) provided by financing activities
47 13
11 19
6
10
Dividends declared
3,498 1,829 60.0%
Total assets Total net debt
3,529 1,815 59.3%
Debt ratio
OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm
2 2
7 7
2 2
7 8
Commercial
45 49
90
Industrial
39 43
82 97
Total
104
33% warmer 36% warmer
18% warmer 3% warmer
Weather (compared to last 30 years) Transmission energy (petajoules) Domestic
82
167
75 25
157
5
9
Export
39
Total
87
176
100
196
Cash used in Investing Activities $ millions
Income before MVA $ millions
Cash from Operations $ millions
10
100 150
160
10
142
122
111
102
99
96
(10)
80
0 50
(14)
(25) 2021
(30)
0
2023
2022
2021
2023
2022
2023
2022
2021
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 six months ended September 30, 2023. 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 November 22, 2023 and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Accounting 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 2022-23 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 2022-23 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 six months of 2023-24 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; 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. 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 six months ended September 30, 2023, to the results for the six months ended September 30, 2022, unless otherwise noted. OPERATING ENVIRONMENT SaskEnergy monitors a number of crucial factors that could influence financial performance. More Global Variables As the global supply of liquified natural gas (LNG) continues to grow, the market for natural gas continues to be driven by an ever-wider diversity of variables. Through much of the second quarter, volatility in the LNG market was driven in part by strikes and the risk of strikes at LNG facilities along the coast of Australia. After a successful vote for industrial action was passed in early August, global benchmark prices increased by over 20 per cent in a single day. The market seems to have stabilized somewhat as the risk of long-term strike action was averted with an agreement being reached. Australia has been the second largest exporter of LNG over the last year and the facilities in question supply nearly 10per cent of global LNG. Prices in North America were also volatile through the first weeks of August. US and Canadian benchmarks rose by around 20 per cent during the first week of strike uncertainty. Volatility during the remainder of the quarter was relatively low even though July, August, and September all set monthly average demand records in the US – a function of record-breaking heat and a continuing shift from coal to gas for electricity generation. Growing receipts continue to keep the market in balance despite the growing demand. In western Canada, production has outstripped demand, and this leaves storage levels above seasonal norms going into winter. Well completion and licensing activity remains quite robust as incremental gas supplies will be expected on-line ahead of the initial startup of the LNG Canada facility at Kitimat.
4
Management’s Discussion and Analysis
Saskatchewan Supply and Demand Like 2022, the maintenance season on pipelines upstream of Saskatchewan was very busy. There were numerous outages, and one major in-line inspection even presented the prospect of a firm curtailment on deliveries to Empress – something that hasn’t occurred in decades. However, unlike 2022, the market impact of this work was minimal. Alberta prices were relatively stable throughout the summer with no sharp drops down to $0 per GJ (or less). Price spreads between locations were relatively flat and often below the cost of incremental transport – minimizing the opportunity to profit from the value of storage and transportation assets. Saskatchewan Natural Gas Prices The AECO daily index averaged $2.46 per GJ through the three months ended September 30, 2023. The year-over-year decrease from $3.94 per GJ was largely a function of lower continental and global prices. Traditionally, most natural gas in Saskatchewan (TEP) is priced at a differential to the AECO price. This AECO to TEP differential for the quarter averaged $0.05 per GJ premium compared to $1.80 per GJ the year prior. As previously discussed, despite heavy maintenance, daily capacity from AECO to TEP has been readily available this year causing the spread to flatten out. The following chart shows AECO natural gas prices:
AECO Monthly Index Historical Prices
$8.00
$7.00
Limited Export Capacity from Alberta
Forward Price at September 30, 2023 Average Price: $3.41/GJ
$6.00
2015-Present Average Price $2.61/GJ
$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
5
Management’s Discussion and Analysis
CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income
Three months ended September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
(Loss) income before unrealized market value adjustments Impact of fair value adjustments Revaluation of natural gas in storage
$
(14)
$
(14) (14)
$
7
$
(21) (13)
$
10 15
$
(24) (29)
3
16
-
-
1
(1)
-
-
$
(11)
$
(28)
Consolidated net (loss) income
$
24
$
(35)
$
25
$
(53)
The loss before unrealized market value adjustments was $14 million in 2023, $24 million unfavourable compared to income of $10 million in 2022. This is resulting from lower asset optimization margins, combined with higher employee benefits expenses, operating and maintenance expenses, depreciation and amortization expense and finance costs. These were partially offset by a higher commodity margin. Through the prior year’s six months ended September 30, 2022, the Corporation was able to take advantage of unutilized transportation capacity as natural gas line projects continued to be delayed in Alberta. In combination with increased maintenance projects, which limited transportation capacity on Alberta systems, throughout the summer — higher-than normal asset optimization margins were realized in the prior year. The Alberta natural gas projects were operationalized in 2023, which has removed the transportation capacity constraints realized in 2022 and has contributed to lower natural gas market prices and decreased market price volatility, both limiting the Corporation’s asset optimization opportunities through 2023. Employee benefits expenses increased in 2023 as vacant positions from 2022 were filled. Operating and maintenance expenses increased in 2023 compared to 2022 as the Corporation implemented an updated online customer portal, resulting in higher hosting fees to support the additional functionality implemented. In addition, transportation and storage expenses increased as natural gas is sourced from farther distances and transportation service providers implemented rate increases. Depreciation and amortization expenses increased in 2023 compared to 2022 as the Corporation implemented both the results of a third-party depreciation study as well as a change in the management estimate on useful lives of intangible and compression assets. Finance costs continued to increase, a result of the upturn of short-term, market interest rates, combined with long-term debt issues through 2023 increasing long-term debt financing costs. These unfavourable impacts were partially offset by a higher commodity margin in 2023 compared to 2022, as the Corporation received approval to increase its commodity rate effective August 1, 2022 to address increasing natural gas market prices and to address the large gas cost variance account balance owing from customers to the Corporation. Natural gas market prices have significantly decreased since last winter, resulting in a lower cost of gas, which is also contributing to the higher commodity margin through 2023. Forward market prices declined below March 2023 levels, generating a $14 million unfavourable fair value adjustment, as the favourable price differential between average deal price and average market price on outstanding commodity purchase contracts declined $0.13 per GJ at September 30, 2023 compared to March 31, 2023. 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 normal 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. The majority of SaskEnergy natural gas contracts are normal usage and are not recorded at fair value.
6
Management’s Discussion and Analysis
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 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. SaskEnergy 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 IFRS 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. The commodity margin on sales to customers, as reported in the condensed consolidated financial statements, was as follows:
Three months ended September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
$
22 17
$
58 38 20
Commodity sales
$
16
$
6 8
$
46 37
$
12
Commodity cost of sales
9 7
1
5 5
Realized margin on commodity sales Unrealized fair value adjustments
(2)
9
11
(11)
17 24
(12) (14)
16 25
(27) (16)
$
10
$
9
Margin on commodity sales
$
$
$
$
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’s realized margin on commodity sales for the six months ended September 30, 2023, was $11 million higher than in 2022. The commodity margin was $1.26 per GJ through the six months ended September 30, 2023, compared to $0.66 per GJ for the same period ended September 30, 2022. SaskEnergy received approval to increase its commodity rate to $4.20 per GJ from $3.20 per GJ effective August 1, 2022 to address AECO daily index prices trending upwards in 2022. The Corporation was able to maintain the $4.20 per GJ commodity rate through 2022, largely due to its commodity price risk management strategy, while market prices climbed as high as $8.00 per GJ. Subsequently, the AECO daily index dropped significantly in 2023, averaging $2.39 per GJ through the six months ended September 30, 2023, compared to $5.40 per GJ in the same period ended September 30, 2022. The market price declines contributed to the favourable margins through 2023. The GCVA balance increased to $10 million owing to customers at September 30, 2023, compared to $2 million owing to customers at March 31, 2023 — a result of the average AECO daily index decreasing to $2.39 per GJ for the six months ended September 30, 2023 compared $4.68 per GJ for the twelve months ended March 31, 2023. With AECO daily index prices declining, the Corporation’s rate application to reduce commodity rates was approved. A Commodity rate decrease of 24.5 per cent, from $4.20 per GJ to $3.20 per GJ will be implemented effective October 1, 2023. When combined with the approved delivery rate increase of 5 per cent, residential customers will see an overall bill decrease of nearly 8 per cent.
7
Management’s Discussion and Analysis
Commodity Fair Value Adjustments Fair value adjustments on commodity derivative instruments decreased the margin on commodity sales by $11 million as the $20 million favourable fair value position at March 31, 2023 decreased to $9 million favourable at September 30, 2023. The favourable price differential between contract prices and market prices on future commodity purchase contracts decreased to $0.17 per GJ at September 30, 2023, compared to $0.30 per GJ at March 31, 2023. 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, 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. The asset optimization margin, as reported in the condensed consolidated financial statements, was as follows:
Three months ended September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
$
38 33
$
75 69
Asset optimization sales
$
106
$
(68) (58) (10)
$
220 199
$
(145) (130)
Asset optimization cost of sales
91 15
5
6
Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage
21
(15)
(2)
(3)
(1)
(1) (1)
(1)
(2)
-
-
1
-
-
$
3
$
3
Margin on asset optimization sales
$
15
$
(12)
$
20
$
(17)
The realized margin on asset optimization sales for the six months ended September 30, 2023, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $15 million lower than in 2022. In the prior year, energy prices in Western Canada increased through the six months ending September 30, 2022, as major pipeline capacity projects in Alberta experienced continued construction delays. In combination with increased maintenance projects on natural gas systems in Alberta, both components factored into creating transportation capacity constraints, resulting in increasing natural gas market prices, increasing market price volatility through 2022 and increasing AECO to TEP price differentials. The Corporation was able to capitalize on its unutilized transportation capacity through the six months ending September 30, 2022, and executed 38.4 PJ of asset optimization contracts at an average margin of $0.56 per GJ. The delayed construction projects in Alberta were operationalized in early 2023 and increased transportation capacity in Alberta. Natural gas prices, location price differentials and market price volatility have declined, as transportation capacity constraints seen in 2022 are not materializing in 2023. This is resulting in decreased opportunities for SaskEnergy to use its unutilized transportation capacity for asset optimization activities. The Corporation executed 27.5 PJ of asset optimization contracts at an average margin of $0.23 per GJ through the six months ended September 30, 2023. 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 until the natural gas contracts are realized. The unrealized fair value adjustments on asset optimization derivative instruments had a $3 million unfavourable impact on outstanding asset optimization contracts in 2023. Revaluation of Natural Gas in Storage The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. At each reporting period, the Corporation measures net realizable value of natural gas in storage held for asset optimization transactions based on forward market prices and anticipated delivery dates. The Corporation sold its asset optimization natural gas in storage inventory and has no inventory held at September 30, 2023. The impact on 2023 net income was $nil.
8
Management’s Discussion and Analysis
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 September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
$
43 58
$
100 $
Delivery revenue
$
43 61
$
-
100 118
$
-
117
Transportation and storage revenue Customer capital contributions
(3)
(1)
7
11
5
2
10
1
$
108 $
$
228 $
Revenue
109
$
(1)
228
$
-
Delivery Revenue 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. 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 these impacts 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. 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 delivery revenue, as residential and commercial customers consume natural gas primarily as heating fuel. Delivery revenue of $100 million through the six months ended September 30, 2023, equaled prior year results. Rate increases effective August 1, 2022, for all delivery services increased delivery revenue year-over-year, which was equally offset by the impact of residential customers natural gas consumption decreasing 1 PJ in 2023 compared to the prior year, as weather was 15 per cent warmer than the prior year. To address increasing operating costs related to safety, system integrity and growing distribution infrastructure, the Corporation received approval to increase delivery rates by 5 per cent effective October 1, 2023. 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, 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 off 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 either 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. Transportation and Storage revenue was $1 million lower for the six months ended September 30, 2023 compared to the same period in 2022, as higher delivery service revenues are resulting from industrial customers executing higher contract demand and interruptible transportation services to meet their operating requirements. This was partially offset by customers decreasing export transportation service contracts in 2023 compared to 2022. High natural gas market prices in Canada through 2022 created incentives for customer to increase export services and supply Eastern Canada with natural gas as the region was experiencing higher natural gas market prices than Western Canada. This opportunity did not present itself in 2023 and export services are returning to normal levels. Storage revenue of $6 million for the six months ended September 30, 2023 equaled the prior year results. Customers leverage storage services for balancing their transportation account and inject natural gas into storage in the summer to meet higher loads and demands in the winter.
9
Management’s Discussion and Analysis
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 several factors influence their receipt and recognition as revenue. Customer capital contributions were $1 million higher in 2023, resulting from more gas line installations in the distribution utility compared to the six months ended September 30, 2022. 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 expense 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 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 grows as the kilometres of gas lines, 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) losses, as reported in the condensed consolidated financial statements are as follows:
Three months ended September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
$
26 47 35
$
54 95 70 11
Employee benefits
$
24 44 31
$
(2) (3) (4)
$
51 89 62 11
$
(3) (6) (8)
Operating and maintenance Depreciation and amortization
6 1
Saskatchewan taxes
7 1
1
-
1
-
1
-
Impairment loss on trade and other receivables
$
115 $
$
231 $
107
$
(8)
214
$
(17)
$
19
$
38
Net finance expenses
$
18
$
(1)
$
35
$
(3)
$
(2)
$
(1)
Other gains
$
(1)
1
$
$
$
(1)
-
Employee Benefits Full-time equivalents are trending higher in 2023 than 2022 levels, resulting in employee benefit costs increasing $3 million compared to 2022 as the Corporation was able to fill previously vacant positions. Operating and Maintenance With SaskEnergy’s continued focus on core operations, while striving for efficiencies to support its continued financial strength, the Corporation’s Operational Effectiveness team has completed 27 continuous improvement initiatives and has 76 underway. SaskEnergy continues its focus on operational excellence to achieve cost savings through business process improvements.
10
Management’s Discussion and Analysis
Operating and maintenance expenses were $6 million higher than in 2022, as the Corporation continues to leverage technology and enhance customer services. Modernizing and adding additional functionality to the Corporation’s online customer-portal is resulting in additional hosting fees in 2023 compared to 2022. SaskEnergy’s digital presence continues to grow with the launch of a mobile application for Apple and Android devices. In addition, favourable summer weather conditions in 2023 permitted work on leak survey programs to be completed ahead of the same period in 2022, increasing costs in 2023. Lastly, growing demand and increasing natural gas imports from Alberta are resulting in more natural gas being transported and over greater distances, thus increasing transportation expenses. Third party rate increases on transportation services are also contributing to the higher transportation expenses in 2023. Depreciation and Amortization Balancing safety and system integrity with demand for service continued through 2023. Strategic capital investments required the necessary distribution and transmission infrastructure be put in-service to meet current customer demand, resulting in increased depreciation and amortization — which was $8 million higher than the same period in 2022. Changes made to depreciation rates, based on an external depreciation study, as well as a change in management assumptions for amortization of intangible and compression assets also contributed to higher depreciation in 2023. Net Finance Expenses Net finance expenses for 2023 were $3 million higher than in 2022, a result of increasing short-term market interest rates, as the Corporation’s average short-term debt interest costs climbed to 4.9 per cent through the six months ending September 31, 2023 compared to 1.9 per cent through the same period in 2022. Additional long-term debt issuances of $125 million in 2023, also contributed to the higher financing costs in 2023. LIQUIDITY AND CAPITAL RESOURCES As a Crown corporation, 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 its 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. Cash provided by and used in activities, as reported in the condensed consolidated financial statements are as follows:
Three months ended September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
$
58
$
142
Cash provided by operating activities Cash used in investing activities
$
23
$
35
$
96
$
46
(79)
( 111)
(71)
(8)
(99)
(12) (44) (10)
-
(33)
Cash (used in) provided by financing activities (Decrease) increase in cash and cash equivalents
47
(47) (20)
11
$
(21)
$
(2)
$
(1)
$
$
8
$
11
Management’s Discussion and Analysis
Operating Activities Cash provided by operating activities increased $46 million through the six months ended September 30, 2023 compared to the same period in 2022, due to favourable changes in working capital. High accounts receivable balances at March 31, 2023 were collected through the six months ending September 30, 2023 as the Corporation was emerging from the winter heating season. In addition, decreasing natural gas market prices through 2023 resulted in reduced natural gas in storage purchase prices in the current period compared to the prior year, as the Corporation prepares for the upcoming winter by injecting natural gas inventory into storage facilities for withdrawal through the upcoming cold winter weather. Investing Activities Cash used in investing activities increased $12 million compared to 2022, primarily due to capital investment required for system expansion, risk management and reliability of natural gas service projects increasing in 2023. Financing Activities Cash used in financing activities of $33 million in 2023 was $44 million more than the $11 million provided by financing activities in 2022, primarily due to higher cash from operating activities decreasing the Corporation’s reliance on short-term debt, a positive result taking into account short-term market interest rates are continuing to trend higher through 2023. The Corporation used $34 million for interest payments, $10 million for dividend payments and $11 million to pay debt retirement fund installments. In addition, the Corporation borrowed an additional $125 million of long-term debt in three increments in the first quarter to support its capital investment requirements.
CAPITAL ADDITIONS Capital additions, as reported in the condensed consolidated financial statements, were as follows:
Three months ended September 30,
Six months ended September 30,
(millions)
2023
2022 Change 2023
2022 Change
$
12 28 28
$
21 31 41 13
Customer growth System expansion Risk management
$
34
$
(22)
$
43
$
(22)
3
25
5
26
23
5 2 1
34 10
7 3 1
9 2
Reliability of natural gas service
7 1
3
Business and technology optimization
2
$
79
$
109
Capital additions
$
68
$
11
$
94
$
15
Capital additions through the six months ended September 30, 2023, were $15 million higher than the investment made in 2022. Investment in customer growth projects was $22 million lower than 2022 investment levels, as the Corporation focuses on investing in urban and rural mains and services in 2023 to support existing and future customer connections to the distribution system. In 2022, the Corporation’s focus was on expanding the transmission system to accommodate growing natural gas demand within the province’s value-added agriculture sector and gas-fired power generation industry. 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. Higher investment of $26 million in system expansion projects through 2023 are resulting from spending on Regina reinforcement projects, which will increase available delivery capacity in west Regina, and position the Corporation to meet new customer demand. In addition, transmission system work in 2023 is focused on the Melfort East Expansion project. The project began in 2022-23 and involves gas line expansion to meet demand growth. Over 80 per cent of the project costs are expected to take place in 2023-24. 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 $41 million is approximately one-third of the Corporation’s 2023 year-to-date capital investment and increased $7 million over 2022 expenditures.
12
Management’s Discussion and Analysis
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 increased $3 million in 2023 compared to the same period in 2022. The Corporation purchased additional construction equipment in the current year, supply chain issues pushed planned delivery of fleet vehicles and equipment from 2022 to 2023 and additional focus is being placed on investing in system improvement work on town border stations and district regulator stations in 2023. 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 2023 investment in business and technology optimization is comparable to 2022. OUTLOOK With the outlook for provincial natural gas demand continuing to grow in the short to intermediate term, SaskEnergy will continue to focus on core operations and strive for efficiencies to support its continued financial strength. Recognizing the importance of reducing emissions, SaskEnergy has several initiatives targeted to support emissions reductions from both internal operations and customer-focused initiatives. Offsetting the cost pressures created by these efforts, SaskEnergy continues its focus on operational excellence to achieve cost savings through business process improvements, leveraging technology, and collaboration with other Crown corporations and executive government. Modest incremental growth is expected primarily from SaskEnergy’s industrial customers in 2023-24, with additions from the value-added agricultural sector and from gas-fired power generation leading the way. While the number of residential customers connecting 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. Despite the expected customer growth, SaskEnergy is forecasting lower earnings in 2023-24 due to lower asset optimization margins and lower customer capital contributions. Increasing employee benefits expenses and operating costs combined with higher interest expense are also having negative impact on earnings. After a period of high natural gas prices in 2022, prices began to fall, allowing SaskEnergy to request a decrease to its commodity rate. In September 2023, SaskEnergy obtained approval from the Government of Saskatchewan for a 24.5 per cent decrease to the commodity rate, dropping it from $4.20 to $3.20 per gigajoule and a five per cent delivery service rate increase. SaskEnergy sets its rates at a level that ensures the maintenance of safe, reliable and affordable natural gas service across Saskatchewan. The combined commodity and delivery service rate adjustments will result in an overall bill decrease for the average residential customer. Affordability remains a top priority for SaskEnergy and its focus on operational excellence will mitigate cost pressures to keep the delivery of natural gas affordable for its customers. 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 2023-24, 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 supporting the emissions reduction strategy.
13
Condensed Consolidated Financial Statements (unaudited)
1 5 CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 1 6 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1 8 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 1 9 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 GENERAL INFORMATION 20 BASIS OF PREPARATION 2 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2 1 NATURAL GAS IN STORAGE HELD FOR RESALE 2 1 FINANCIAL AND DERIVATIVE INSTRUMENTS 2 3 FINANCIAL RISK MANAGEMENT 2 5 ASSETS HELD FOR SALE 2 5 PROPERTY, PLANT AND EQUIPMENT
2 6 LEASE LIABILITY 2 6 LONG-TERM DEBT 2 7 COMMITMENTS AND CONTINGENCIES 2 6 UNREALIZED MARKET VALUE ADJUSTMENTS 2 8 NATURAL GAS SALES AND PURCHASES 2 9 DELIVERY REVENUE 2 9 TRANSPORTATION AND STORAGE REVENUE 2 9 N ET FINANCE EXPENSES
14
Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
September 30, 2023
March 31, 2023
(millions)
Notes
ASSETS Current assets Cash and cash equivalents
$
4
$
6
Trade and other receivables
121
248
Natural gas in storage held for resale
4
58 22 11
8
Inventory of supplies
19
Current portion of debt retirement funds
-
Assets held for sale
7 5
-
1
Fair value of derivative instruments
26
55
242
337
Right-of-use assets Intangible assets
14 43
12 51
Property, plant and equipment
8
3,048
3,020
Debt retirement funds
151
160
$
3,498
$
3,580
LIABILITIES AND PROVINCE'S EQUITY Current liabilities Short-term debt
$
215 113
$
311 145
Trade and other payables
Dividends payable Contract liability
7
6
23
12
Current portion of lease liability Current portion of long-term debt Fair value of derivative instruments
9
5
4
10
100
-
5
21
36
484
514
Employee future benefits
3 4 7
3 5 6
Deferred revenue
Lease liability
9
Provisions
134
158
Long-term debt
10
1,667 2,299
1,647 2,333
Province's equity Equity advances
22
22
Other components of equity
(20)
(10)
Retained earnings
1,197 1,199 3,498
1,235 1,247 3,580
$
$
The accompanying notes are an integral part of the condensed consolidated financial statements
15
Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2023
For the Three Months Ended September 30, 2022
Income before Unrealized Market Value Adjust- ments
Income before Unrealized Market Value Adjust- ments
Unrealized Market
Unrealized Market
Value Adjust- ments (Note 12)
Value Adjust- ments (Note 12)
Total
Total
(millions)
Notes
REVENUE Natural gas sales
13 14 15
$
60 43 58
$
(3)
$
57 43 58
$
122
$
(1)
$
121
Delivery
- - -
43 61
- - -
43 61
Transportation and storage Customer capital contributions
7
7
5
5
168
(3)
165
231
(1)
230
EXPENSES Natural gas purchases (net of change in inventory)
13
50 26 47 35
(6)
44 26 47 35
100
(18)
82 24 44 31
Employee benefits
- - - - -
24 44 31
- - - - -
Operating and maintenance Depreciation and amortization
Saskatchewan taxes
6 1
6 1
7 1
7 1
Loss on trade and other receivables
165
(6)
159
207
(18)
189
NET INCOME BEFORE THE FOLLOWING Net finance expenses
3
3
6
24
17
41
16
(19)
- -
(19)
(18)
- -
(18)
Other gains
2
2
1 7
1
TOTAL NET (LOSS) INCOME ITEMS THAT MAY BE RECLASSIFIED TO NET (LOSS) INCOME Change in fair value of debt retirement funds designated as FVOCI (1)
$
(14)
$
3
$
(11)
$
$
17
$
24
-
(9)
(9)
-
-
-
COMPREHENSIVE (LOSS) INCOME
$
(14)
$
(6)
$
(20)
$
7
$
17
$
24
The accompanying notes are an integral part of the condensed consolidated financial statements (1) Fair value through other comprehensive income (FVOCI)
16
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