2014 SaskEnergy Annual Report
Third 4XDUWHU5HSRUW
Dec ember 1
Responsible energy for a sustainable Saskatchewan
VISION
' - -�� --
Environmental sustainabiltty and economic prosperity for future = _.. generations. -,,.�...__-,
CORPORATE VISION Providlng critical energy for a greener Saskatchewan and reducing our en1issions from operations by 35 per cent by 2030.
MISSION SaskEner-gy delivers natural gas and ener-gy solutions responsibly to the residents, businesses and industries of Saskatd1evvan.
VALUES
• ;,.'! f �
�� SPIRIT
We support a respectful dynamic and a diverse wo · rk environment that encou. rage.s achievement. RELATIONSHIPS We succeed through strong internal and external co.llaboration. trust and open .communicatio· n.
alw;ays c·ommitted ta our personal safety, the safety of our team , ond thepub · lic.
A'1l. INTEGRITY "iiiflWe are accountablefor our decisions.. our actions. and the resuln. 0 STEWARDSHIP' · We are responsible in our use of all resources.
TABLE OF CONTENTS
Financial and Operating Highlights
1 2 3 4 9
1\/lanagement's Discussion and .A.nalysis Introduction Operating Envirnnment
Consolidated Financial Results Liquidity and Capital Resour-ces Capital Additions Outlook Consolidat , ed Financial Stat , ements
1 0 11 1 2
Financial and Operating Highlights
CONSOLIDATED FINANCIAL INFORMATION ($ millions)
Three months ended December 31
Nine months ended December 31
2021
2021
2020
2020
88 53 10
182 153
Delivery
86 46
185 139
Transportation and storage
12
Commodity margin
4
5
2 9
7
Asset optimization margin Customer capital contributions Total revenue and margins
-
(4)
16
8
18
162
370
144
343
24 46 31
75
Employee benefits
24 43 29
71
131
Operating and maintenance Depreciation and amortization
120
92 14
86 12
4 2
Saskatchewan taxes
3 2
-
Impairment loss on trade and other receivables
4
14
43
Net finance expense Other losses (gains)
14
41
1
-
-
(2)
Total expenses
122
355
115
332
40
15 30 45
Income before unrealized market value adjustments
29
11 18 29
(22)
Market value adjustments CONSOLIDATED NET INCOME Cash provided by operating activities Cash used in investing activities Cash provided by financing activities
(12)
18 28
17 44
130
125
(70)
(192)
(83)
(186)
46
65 10
50
76 13
4
Dividends declared
8
3,483 1,759 59.6%
Total assets Total net debt
3,304 1,630 59.5%
Debt ratio
OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm
14 11 47 72
20 19
13 11 45 69
22 19
Commercial
129 168
Industrial
118 159
Total
2% colder
1% warmer
Weather (compared to last 30 years) Transmission energy (petajoules) Domestic
2% colder
5% colder
104
255
99
242
10
20
Export
1
5
Total
114
275
100
247
Cash from Operations $ millions
Cash used in investing activities $ millions
Income before MVA $ millions
166
54
180
60
300
258
130
125
192
186
150
30
90
15
11
0
0
0
2021 2020 2019
2021 2020 2019
2021 2020 2019
Management 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, 2021. 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 16, 2022, 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 2020-21 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 2020-21 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 2021-22 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. The discussion of the Corporations results that follow in the MD&A, set out on the following pages, is a comparison of the results for the nine months ended December 31, 2021 to the results for the nine months ended December 31, 2020, unless otherwise noted.
p.2
Management Discussion and Analysis
OPERATING ENVIRONMENT SaskEnergy monitors a number of important factors that could influence financial performance. Global Energy Uncertainty
After consistent natural gas market price increases through the previous two quarters, the third quarter saw significant price volatility in both European and Asian benchmark gas prices. The quarter ended with over twenty vessels crossing the Atlantic to supply Europe with liquified natural gas (LNG). High energy prices were also responsible for over twenty energy suppliers in the UK discontinuing operations, leaving over 2 million customers with the need to change providers – highlighting the importance of a well-regulated market and a prudent commodity hedging strategy. Global energy demands are being met with increased production and shipping of LNG. Calendar 2021 saw Australia surpass Qatar to become the world’s leader in LNG exports, but limited expansions in these locations will likely relinquish that position to the United States sometime in 2022. Canada is still expected to enter the LNG export market when the LNG Canada Export Facility near Kitimat, BC opens in the mid-2020’s – though the feeder natural gas pipeline project, Coastal GasLink, remains a point of concern with blockades and construction delays throughout the year. LNG Canada’s position on the west coast to serve Asian markets was strengthened in December when Pembina terminated the Jordan Cove LNG project on the Oregon coast. This project would have been supplied by gas from the Western Canadian Sedimentary Basin but had been challenged for years by regulatory issues for both the interconnecting pipeline and the coastal liquefaction facility. High global energy prices on their own, and in concert with already existing supply chain constraints are a contributing factor in recent increases to inflation – in Canada and around the world. Limited LNG export capacity kept North America somewhat isolated from high global energy prices. Prices at Henry Hub, the benchmark for Gulf Coast natural gas, fell by 40 per cent through the quarter as continually rising natural gas demand required for power generation and consistent demand for LNG were not enough to offset strong production and expectations for above normal temperatures in early winter (US only). Energy prices in Western Canada were further isolated from high global levels (though not volatility) due to an active maintenance season on TC Energy’s NGTL system that unexpectedly extended into November. This maintenance activity resulted in limitations to export capacity out of Alberta – resulting in relatively low AECO prices upstream of the maintenance bottlenecks. The quarter ended with firm curtailments out of Alberta due to a compressor facility in that province being impacted by extreme cold weather on Boxing Day. SaskEnergy was able to utilize alternate transport, so customers did not experience curtailments in Saskatchewan. Saskatchewan Natural Gas The prior fiscal year ended with lower expectations for natural gas demand, driven by customer de-contracting and lower utilization of remaining contracts. With the provincial economy continuing to recover and an improved outlook for agri- business development, potash mining, enhanced oil recovery, and power generation, there is greater potential for increased demand over the next few years. Rising energy and carbon prices do present a risk for energy-intensive industries. Local supply continues to trend toward increased dependence on associated gas, with no new natural gas wells in 2021, leaving local supply highly dependent on the volatile global oil market. With higher prices, rig activity in the province has improved, but not enough to expect meaningful gas supply increases. Natural Gas Prices The AECO daily index averaged $4.41 per GJ throughout the quarter compared to $2.50 per GJ the year prior — as the downward pressure of gas line maintenance being overpowered by higher prices downstream and the market concern for cold winter weather. The end of the quarter saw price recovery (though still below October highs) as cold weather settled over the province during the last two weeks of the quarter. 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 $0.10 per GJ premium compared to $0.01 per GJ the year prior. The differential had found relative stability after gas line maintenance was complete and may remain more stable as delayed expansion projects in Alberta are finally completed in April 2022.
p.3
Management Discussion and Analysis
Winter prices appear to have stabilized looking forward, as expectations for cold weather are offset by warmer weather outside the prairie provinces and adequate storage levels across the continent. The following chart shows AECO natural gas prices:
CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income
Three months ended December 31,
Nine months ended
December 31,
(millions)
2021
2020 Change 2021
2020 Change
$
40
$
15 30
Income before unrealized market value adjustments
$
29
$
11
$
11 12
$
4
(22)
Impact of fair value adjustments Revaluation of natural gas in storage
(12)
(10)
18
-
-
-
-
6
(6)
$
18
$
45
Consolidated net income
$
17
$
1
$
29
$
16
The income before unrealized market value adjustments of $15 million in 2021 was $4 million favourable compared to the income of $11 million in 2020. This was a result of an increasing commodity margin, higher transportation & storage revenue and a reduction in the estimate for impairment loss on trade and other receivables in 2021 compared to 2020. This was partially offset by decreased delivery revenue and increased operating expenses in other categories. The increased commodity margin is primarily due to the Corporation implementing a commodity rate increase effective November 1, 2021, which will address increasing natural gas market prices. Increased transportation & storage revenue is due to rate increases effective April 1, 2021, combined with domestic customers increasing firm transportation contracting on receipt and delivery services. Also contributing to higher income was a reduction in the allowance for doubtful accounts estimate, a result of the improved provincial economic outlook continuing through the quarter. These were partially offset by decreasing delivery revenues resulting from declining residential customer volumes as weather was 6 per cent warmer than prior year, combined with small increases in other expense categories. Stronger natural gas market prices at December 31, 2021, lead to the favourable price differential increasing between average contract prices and average market prices on the Corporation’s forward purchase contracts, resulting in a favourable fair value adjustment. In addition, natural gas in storage was recorded at weighted average cost, which was lower than net realizable value at December 31, 2021 and March 31, 2021. There was no impact on net income resulting from revaluation of natural gas in storage.
p.4
Management Discussion and Analysis
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 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. Commodity Sales 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. For financial reporting purposes, SaskEnergy prepares its financial statements on a consolidated basis while applying IFRS. Consequently, amounts determined for rate-setting purposes differ from 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. 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. Commodity margin on sales to customers
Three months ended December 31,
Nine months ended
December 31,
(millions)
2021
2020 Change 2021
2020 Change
$
82 72 10
$
111
Commodity sales
$
59 55
$
23 17
$
93 88
$
18 11
99 12 28 40
Commodity cost of sales
Realized margin on commodity sales Unrealized fair value adjustments
4
6
5 4 9
7
(26) (16)
(15) (11)
(11)
24 31
$
$
Margin on commodity sales
$
$
(5)
$
$
p.5
Management Discussion and Analysis
Realized Margin on Commodity Sales The Corporation’s realized margin on commodity sales for the nine months ending December 31, 2021 was $7 million higher than 2020 as SaskEnergy received approval to increase its commodity rate to $3.20 per GJ effective November 1, 2021. The last commodity rate adjustment was implemented April 1, 2019 when the commodity rate was decreased to reflect the lower price of natural gas at that point in time. Natural gas market prices have essentially doubled since SaskEnergy last adjusted its commodity rate, a result of recent extreme weather events across North America, higher liquefied natural gas exports and higher natural gas demand. The Corporation was able to benefit from the higher natural gas market prices by increasing returns on physical swap and other gas sales in 2021 compared to 2020. The realized margin per GJ for commodity sales increased to $0.33 per GJ in 2021 compared to $0.15 per GJ in 2020. This was partially offset by commodity sales revenue from residential customers being lower through 2021, as sales volumes are 1 PJ lower than the same period in 2020, a result of weather being 1 per cent warmer than normal in 2021 compared to 5 percent colder than normal in 2020. The GCVA balance increased to $19 million owing from customers at December 31, 2021 compared to $6 million owing from customers at March 31, 2021, a result of the AECO daily index averaging $3.59 per GJ through the nine months ending December 31, 2021 compared to an average of $2.37 per GJ throughout the 12 months ending March 31, 2021. Commodity Unrealized Fair Value Adjustments As natural gas market prices continue to trend higher, the unrealized fair value adjustment on the Corporations commodity derivative instruments increased the commodity margin by $28 million. The favourable price differential between average contract prices and average market prices on future commodity purchase contracts increased from $0.33 per GJ at March 31, 2021 to $0.67 per GJ at December 31, 2021, resulting in the $12 million favourable fair value position at March 31, 2021 increasing to $40 million favourable at December 31, 2021. 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 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. Asset Optimization margin
Three months ended December 31,
Nine months ended
December 31,
(millions)
2021
2020 Change 2021
2020 Change
$
59 57
141 134
$
Asset optimization sales
$
24 24
$
35 33
$
94 98
$
47 36 11
Asset optimization cost of sales
2 4
7 2
Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage
-
2 1
(4)
3
8 6
(6) (6) (1)
-
-
-
-
$
6
$
9
Margin on asset optimization sales
$
3
$
3
10
$
$
Realized Margin on Asset Optimization Sales The realized margin on asset optimization sales, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $11 million higher than 2020. Transportation capacity within Alberta was secured through asset optimization transportation contracts in 2020 to meet customer obligations while no capacity was contracted through asset optimization opportunities in 2021. The incremental transportation contracts in 2020 had an unfavourable effect on the unrealized margin on asset optimization sales.
p.6
Management Discussion and Analysis
Asset Optimization Unrealized 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. Unrealized fair value adjustments on the Corporation’s asset optimization derivative instruments increased the margin on asset optimization sales by $2 million. Stronger natural gas market prices at December 31, 2021 compared to March 31, 2021 increased the favourable price differential between average contract prices and average market prices on future asset optimization purchase contracts by $0.42 per GJ, resulting in an $8 million favourable fair value adjustment. This was fully offset by the $10 million unfavourable fair value adjustment resulting from the unfavourable price differential on outstanding asset optimization sale contracts increasing from $0.18 per GJ at March 31, 2021 to $0.59 per GJ at December 31, 2021. 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. Asset optimization natural gas in storage was recorded at weighted average cost at December 31, 2021 and March 31, 2021, as forward natural gas market prices continue to increase and exceed weighted average cost. There was no impact on net income resulting from revaluation of natural gas in storage. Revenue
Three months ended December 31,
Nine months ended
December 31,
(millions)
2021
2020 Change 2021
2020 Change
$
88 53
$
182 153
Delivery revenue
$
86 46
$
2 7 1
$
185 139
$
(3)
Transportation and storage revenue Customer capital contributions
14
9
16
8
18
(2)
$
150
$
351
Revenue
$
140
$
10
$
342
$
9
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 also 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 ratepayers, the Corporation strives to make the most effective use of materials, technology, resources and collaborate with other Crown corporations. 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 was $3 million lower than 2020 due to residential customer volumes decreasing 2 PJ as weather was 1 per cent warmer than normal in 2021 compared to 5 per cent colder than normal in 2020. In alignment with Saskatchewan Crown Sector Strategic Priorities, the Corporation continues its customer focus through continuous improvements in service delivery and identifying ways to advance quality of service to the province’s The Corporation generates transportation revenue by receiving natural 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 receipt service charges, which customers pay when they contract to deposit gas on the natural gas transportation system, and delivery service charges that customers pay when they contract to 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 population while keeping rates competitive. Transportation and Storage Revenue
p.7
Management Discussion and Analysis
specified quantity of gas on each day of the contract. With a firm contract, customers pay for 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. Receipt and delivery service revenues combined for a $14 million increase in 2021 compared to 2020, due to rate increases effective April 1, 2021 on receipt and delivery services as the Corporation addresses increasing third party transportation expenses. Domestic customers also increased firm transportation contracting in 2021 compared to 2020, which contributed to increasing transportation revenue in 2021. Storage revenue in 2021 of $7 million equaled 2020 as the abundant supply of natural gas, coupled with small or even negative differentials between current and forward natural gas market prices, limits the demand for natural gas storage to 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 capital contributions can vary significantly across reporting periods as various factors influence their receipt and recognition as revenue. Customer capital contributions in 2021 were $2 million lower than 2020. Transmission system customer capital contributions recognized in 2021 are $nil while contributions of $5 million recognized in 2020 relate to a third-party customer growth capital project that was finalized in 2020. This decline was partially offset by distribution system customer capital contributions increasing $3 million in 2021 compared to 2020, resulting from increased customer activity. Expenses SaskEnergy’s expenses are driven to a large degree by its investment in the Corporation’s transmission, distribution and storage systems. Depreciation and amortization, 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 benefits and operating and maintenance expenses are also driven by the Corporation’s investment in facilities, although less directly. Work to service and maintain the natural gas system grows as infrastructure, specifically the kilometres of gas lines, number of service connections, and amount of compression equipment, to serve an increasing number of customers grows. Additional regulatory requirements and changing public perceptions are accelerating prevention, detection, and mitigation initiatives, adding pressure to transmission, distribution and storage rates.
Three months ended December 31,
Nine months ended
December 31,
(millions)
2021
2020 Change 2021
2020 Change
$
24 46 31
$
75
Employee benefits
$
24 43 29
$
-
$
71
$
(4)
131
Operating and maintenance Depreciation and amortization
(3) (2) (1)
120
(11)
92 14
86 12
(6) (2)
4 2
Saskatchewan taxes
3 2
-
Impairment loss on trade and other receivables
-
4
4
$
107
$
312
$
101
$
(6)
$
293
$
(19)
$
14
$
43
Net finance expenses
14
-
$
41
$
(2)
$
1
$
-
Other loss (gains)
$
-
$
(1)
$
(2)
$
(2)
p.8
Management Discussion and Analysis
Employee Benefits Employee benefit costs were $4 million higher in 2021 compared to 2020 due to filling certain vacant positions in strategic areas of the business as the Corporation continues to focus on meeting current and future business needs. Operating and Maintenance Operating and maintenance expenses were $11 million higher than 2020, resulting from higher transportation expenses as the Corporation increased transportation contracting on TC Energy’s transportation system. This is compounded by the Corporation utilizing asset optimization transactions in 2020 to meet a portion of customer transportation requirements. The result being higher transportation costs through operating and maintenance expenses in 2021 compared to 2020 as growing demand and increasing natural gas imports from Alberta continue to result in more natural gas being transported, and over greater distances. Depreciation and Amortization Balancing safety and system integrity with the demand for service continued through 2021. Strategic capital investments required to ensure the necessary infrastructure is in place to meet current customer demand were put into service and is resulting in increased depreciation and amortization. Depreciation and amortization was $6 million higher than the same period in 2020. Net Finance Expenses Net finance expenses for 2021 were $2 million higher than 2020, with lower debt retirement fund earnings contributing to the year over year variance. Debt retirement funds are monies set aside, typically 1 per cent of a debt issuance, to retire the long-term debt upon maturity. The Corporation makes regular contributions to the funds, which are held and invested by the Saskatchewan Ministry of Finance and can be impacted inversely by interest rate movements. In addition, the Corporation borrowed additional long-term debt to support its capital investment requirements, resulting in higher long-term debt interest costs. Impairment Loss on Trade and Other Receivables The impairment loss was $4 million lower in 2021 compared to 2020 as the allowance for doubtful accounts estimate was reduced, a result of the improved provincial economic outlook continuing through the quarter. In 2020, the Crown Utility Deferral Payment Program was offered to help alleviate the impacts of COVID-19 on customers. The result being increased trade receivables and the related allowance for doubtful accounts estimate growing through to the end of September 30, 2020. Customers could then elect to pay outstanding balances over a 12-month period starting from September 2020, which extended the timeframe trade receivables from customers remained outstanding. 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 uncommitted 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)
2021
2020 Change 2021
2020 Change
$
28
$
130
Cash provided by operating activities Cash used in investing activities Cash provided by financing activities Increase in cash and cash equivalents
$
44
$
(16)
$
125
$
5
(70)
(192)
(83)
13
(186)
(6)
46
65
50 11
(4) (7)
76 15
(11) (12)
$
4
$
3
$
$
$
$
p.9
Management Discussion and Analysis
Operating Activities Cash provided by operating activities increased $5 million in 2021 compared to 2020, driven by a higher commodity margin and higher transportation and storage revenue as the province returns to a more normal business environment in 2021. These increased cash flows were partially offset by lower delivery revenue and small increases in other expense categories. Investing Activities Cash used in investing activities increased $6 million compared to 2020, primarily due to capital investment required for system expansion, as the Corporation completes projects to meet natural gas demand. This was partially offset by decreasing investment in customer growth initiatives and business and technology optimization. Financing Activities Cash provided by financing activities decreased $11 million in 2021 compared to 2020, primarily due to higher dividends paid to the Corporation’s shareholder and lower net borrowing in 2021. The Corporation used $51 million for interest payments and $13 million for dividend payments. This was offset by the Corporation increasing short-term debt by $96 million to fund operations through the warmer summer months. In addition, during the first quarter of the fiscal year, the Corporation borrowed an additional $50 million of long-term debt to support its capital investment requirements. The debt has an interest rate of 2.8 per cent and matures in 2052. SaskEnergy’s debt-to-equity ratio at the end of December 31, 2021 of 60 per cent debt and 40 per cent equity is within the Corporation’s long-term target range of 58 to 63 per cent debt. CAPITAL ADDITIONS SaskEnergy ensures that responsive customer service and safe and reliable natural gas delivery are priorities of its capital management governance.
Three months ended December 31,
Nine months ended
December 31,
(millions)
2021
2020 Change 2021
2020 Change
Strategic Customer growth System expansion
$
14 24 38
$
26 92
$
29 20 49
$
(15)
$
50 54
$
(24)
4
38 14
118
(11)
104
Operational Risk management
18
52 14
18
- -
47 19
5
8 5
Reliability of natural gas service
8 4
(5) (1) (1)
7
Business and technology optimization
1 1
8
31 69
73
30 79
74
$
$
191
Capital additions
$
$
(10)
$
178
$
13
Capital additions of $191 million through 2021 were $13 million higher than the Corporation’s 2020 investment. This is primarily due to higher system expansion spending in the current year on the 85-kilometre gas line from Rosetown to Vanscoy. The project was initiated in 2019-20 but was deferred through 2020-21 due to the COVID-19 pandemic changing priorities of the Corporation’s capital investment requirements. The project resumed in 2021 and will increase gas line capacity from Rosetown to the Saskatoon Bypass gas line. Investment in customer growth projects declined $24 million in 2021 as transportation service customers continue to defer projects requiring transmission system investment. Risk management spending on the distribution system increased $5 million in 2021 as the Corporation’s service upgrade program returned to normal levels year over year as the prior year’s approach limited public interactions with customers, while still addressing key risk areas. Reliability of natural gas service spending decreased in 2021 by $5 million as the Corporation reduced spending on building and leasehold improvements compared to 2020.
p.10
Management Discussion and Analysis
OUTLOOK SaskEnergy began its return to a “new normal” operating environment through the first three quarters of 2021-22 as the Province continued to monitor and remove COVID-19 pandemic restrictions. The Corporation continues to promote and maintain the health and safety of 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 natural gas production. More than 70 per cent of the production of natural gas in Saskatchewan is associated with oil production; hence, as oil producers face price instability and uncertain capital markets, variable oil production contributes to variable natural gas production. The reduction in Saskatchewan gas supply will need to be met by increased imports from Alberta. With an improved outlook for oil prices, along with value–added agricultural facilities planned in the Regina area, potential growth in natural gas demand is expected as these opportunities materialize over time. In 2021-22, income from operations is forecasted to be $50 million, which is a decrease of $9 million from the 2020-21 result. The decrease is primarily due to large transmission customer connections that were completed in the prior year resulting in higher customer contribution revenue in 2020-21. The Corporation anticipates 3,000 new residential customer connections to its distribution system through 2021-22, which is higher than planned and consistent with 2020-21 levels. Energy efficiency programs offered by the Corporation and implemented by SaskEnergy customers continue to influence the amount of natural gas they use. Initiatives targeted to support a greener energy strategy, increasing Government policy and regulations, and increasing needs for business and technology support create cost pressure for SaskEnergy. To offset the decline in revenue and increased costs, SaskEnergy will continue to focus on operational excellence, achieving cost savings through business process improvements, leveraging technology and collaboration with other Crown corporations and Executive government. 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 2021-22, SaskEnergy will make $2 1 5 million in net capital investments in the province, including maintaining the safety and reliability of the natural gas transmission and distribution systems, meeting regulatory compliance, and optimizing the Corporation’s business systems.
p.11
Condensed Consolidated Financial Statements 1 3 CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 1 4 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1 6 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 1 7 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Notes to the Consolidated Financial Statements
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1 8 1 8 20 20 20 2 2 2 4 2 5
GENERAL INFORMATION BASIS OF PREPARATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURAL GAS IN STORAGE HELD FOR RESALE FINANCIAL AND DERIVATIVE INSTRUMENTS FINANCIAL RISK MANAGEMENT ASSETS HELD FOR SALE PROPERTY, PLANT AND EQUIPMENT
2 6 2 6 2 7 2 7 2 8 2 9 2 9 29 30
LEASE LIABILITY LONG-TERM DEBT COMMITMENTS AND CONTINGENCIES UNREALIZED MARKET VALUE ADJUSTMENTS NATURAL GAS SALES AND PURCHASES DELIVERY REVENUE TRANSPORTATION AND STORAGE REVENUE NET FINANCE EXPENSES SUBSEQUENT EVENT
Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
p.43
December 31, 2021
March 31, 2021 (audited)
(millions)
Notes
(unaudited)
ASSETS Current assets Cash and cash equivalents
$
3
$
-
161
Trade and other receivables
165
51 16
Natural gas in storage held for resale
4
15 14
Inventory of supplies Assets held for sale
1
7 5
4
52
Fair value of derivative instruments
17
284
215
22 72
Right-of-use assets Intangible assets
15 77
2,953
Property, plant and equipment
8
2,851
152
Debt retirement funds
136
$
3,483
$
3,294
LIABILITIES AND PROVINCE'S EQUITY Current liabilities Short-term debt
$
360 113
$
264 116
Trade and other payables
4
Dividends payable Contract liability
7 5 6 5 8
14
6 6
Refund liability
Current portion of lease liability Fair value of derivative instruments
9 5
13
516
411
4 5
Employee future benefits
4 5 7
Deferred revenue
13
Lease liability
9
218
Provisions
227
1,535 2,291
Long-term debt
10
1,485 2,139
Province's equity Equity advances
72
72
1
Other components of equity
(1)
1,119 1,192
Retained earnings
1,084 1,155
$
3,483
$
3,294
The accompanying notes are an integral part of the condensed consolidated financial statements
p.13
Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
For the Three Months Ended December 31, 2021
For the Three Months Ended December 31, 2020
Income before Unrealized Market Value
Income before Unrealized Market Value
Unrealized Market Value Adjust- ments (Note 12)
Unrealized Market Value Adjust- ments (Note 12)
Adjust- ments
Adjust- ments
Total
Total
(millions)
Notes
REVENUE Natural gas sales
$
141
$
11
$
152
13 14 15
$
83 86 46
$
3
$
86 86 46
88 53
- - -
88 53
Delivery
- - -
Transportation and storage Customer capital contributions
9
9
8
8
291
11
302
223
3
226
EXPENSES Natural gas purchases (net of change in inventory)
129
33
162
13
79 24 43 29
15
94 24 43 29
24 46 31
- - - -
24 46 31
Employee benefits
- - - -
Operating and maintenance Depreciation and amortization
4
4
Saskatchewan taxes
3
3
Impairment loss on trade and other receivables
2
-
2
2
-
2
236
33
269
180
15
195
NET INCOME (LOSS) BEFORE THE FOLLOWING
55
(22)
33
43
(12)
31
(14)
- -
(14)
Net finance expenses
16
(14)
- -
(14)
(1)
(1)
Other losses
-
-
TOTAL NET INCOME (LOSS)
$
40
$
(22)
$
18
$
29
$
(12)
$
17
ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO NET INCOME (LOSS) Change in fair value of debt retirement funds designated as FVOCI (1)
-
1
1
-
-
-
COMPREHENSIVE INCOME (LOSS)
$
40
$
(21)
$
19
$
29
$
(12)
$
17
The accompanying notes are an integral part of the condensed consolidated financial statements (1) Fair value through other comprehensive income (FVOCI)
p.14
Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
For the Nine Months Ended December 31, 2021
For the Nine Months Ended December 31, 2020
Income before Unrealized Market Value Adjust- ments
Income before Unrealized Market Value Adjust- ments
Unrealized Market Value Adjust- ments (Note 12)
Unrealized Market Value Adjust- ments (Note 12)
Total
Total
(millions)
Notes
REVENUE Natural gas sales
$
252 182 153
$
(5)
$
247 182 153
13 14 15
$
187 185 139
$
(2)
$
185 185 139
- - -
Delivery
- - -
Transportation and storage Customer capital contributions
16
16
18
18
603
(5)
598
529
(2)
527
EXPENSES Natural gas purchases (net of change in inventory)
233
(35)
198
13
186
(20)
166
75
- - - -
75
Employee benefits
71
- - - -
71
131
131
Operating and maintenance Depreciation and amortization
120
120
92 14
92 14
86 12
86 12
Saskatchewan taxes
Impairment loss on trade and other receivables
-
-
-
4
-
4
545
(35)
510
479
(20)
459
NET INCOME BEFORE THE FOLLOWING Net finance expenses
58
30
88
50
18
68
(43)
- -
(43)
16
(41)
- -
(41)
-
-
Other gains
2
2
TOTAL NET INCOME
$
15
$
30
$
45
$
11
$
18
$
29
ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO NET INCOME Change in fair value of debt retirement funds designated as FVOCI (1)
-
2
2
-
4
4
COMPREHENSIVE INCOME
$
15
$
32
$
47
$
11
$
22
$
33
p.15
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 32 Page 33Made with FlippingBook Ebook Creator