2014 SaskEnergy Annual Report
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Responsible energy for a sustainable Saskatchewan
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
SAFETY We are always committed to our personal safety, the safety of our team and the public. INTEGRITY We are accountable for our decisions, our actions, and the results. STEWARDSHIP We are responsible in our use of all resources.
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 Operating Environment Consolidated Financial Results Liquidity and Capital Resourc e s
1 2 3 4 9
Management’s Discussion and Analysis Introduction
Capital Additions
9
Outlook
10 11
Consolidated Financial Statements
Financial and Operating Highlights
CONSOLIDATED FINANCIAL INFORMATION ($ millions)
Three months ended June 30
2021
2020
54 49
58 47
Delivery
Transportation and storage
1 1 4
1
Commodity margin
(4)
Asset optimization margin Customer capital contributions Total revenue and margins
2
109
104
27 39 30
25 40 29
Employee benefits
Operating and maintenance Depreciation and amortization
3
3
Saskatchewan taxes Net finance expense
15
13
-
(2)
Other (gains)
Total expenses
114
108
(5)
(4)
Loss before unrealized market value adjustments
15 10
12
Market value adjustments CONSOLIDATED NET INCOME
8 3
4
Dividends declared
3,277 1,630 58.3%
3,161 1,516 57.9%
Total assets Total net debt
Debt ratio
64 33 30
56 42 13
Cash provided by operating activities Cash used in investing activities Cash used in financing activities OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm
4 6
6 6
Commercial
41 51
Industrial
34 46
Total
Normal
18% colder
Weather (compared to last 30 years) Transmission energy (petajoules) Domestic
79
72
2
1
Export
Total
81
73
Cash from Operations $ Millions
Cash used in investing activities $ Millions
(Loss) income before MVA $ Millions
56
70
30
60
12
64
42
33
61
30
0
60
56
(5)
(4)
0
(30)
50
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 three months ended June 30, 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 August 18, 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 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 three 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 three months ended June 30, 2021 to the results for the three months ended June 30, 2020, unless otherwise noted.
p.2
Management Discussion and Analysis
OPERATING ENVIRONMENT SaskEnergy monitors a number of important factors that could influence financial performance. Energy Infrastructure Uncertainty
Another quarter into the global pandemic and the energy complex continues to look towards higher energy demand post-pandemic. Oil prices have fully recovered their 2020 losses and have moved up to levels not seen since late 2018. Price increases have not been limited to energy with many commodities (primarily grains) at multi-year highs; most notably, perhaps, lumber futures have finally began to fall after nearly quadrupling off of their 2020 lows. Regulatory uncertainty remains a significant concern as the Keystone XL pipeline project was cancelled in June after its presidential permit was rescinded five months earlier. The cancellation limits future export capacity for Alberta’s oil sands, but incremental capacity is still expected from the Trans Mountain expansion to the West Coast, whose construction has continued after a brief delay to mitigate potential damage to migratory bird populations. South of the border, the U.S. Army Corps of Engineers is expected to complete an environmental impact assessment on the Dakota Access Pipeline by 2022; this is notable as these assessments typically occur prior to construction, but the line has been active since 2017. Current court rulings allow the line to remain in-service awaiting the results of the assessment, though that status remains at risk due to pending legal challenges. Regulatory uncertainty is not confined to high-profile oil pipelines, as local gas projects are also affected. In a near identical situation as the NGTL 2021 Expansion delay that directly impacted SaskEnergy contracts, NGTL’s Edson Mainline project was approved by the federal government after an extended delay. SaskEnergy has no contractual association with this project, but benefits from facilities that balance supply and demand in Alberta. Impacts from the NGTL 2021 Expansion delay will finish in the second quarter with a curtailment expected in August. Natural Gas Demand The prior fiscal year ended with lower expectations for gas demand driven by customer de-contracting and lower utilization of remaining contracts. With the economy continuing to recover and an improved outlook for agri-business development, forecasted demand has now stabilized for the next few years. Local supply continues to trend toward increased dependence on associated gas, 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 gas supply increases. Natural Gas Prices After a moderate winter, summer had a relatively extreme start. Excessively high temperatures and exceptional drought conditions through much of the Southwest United States (US) resulted in high natural gas use for electricity generation. Further east, exports into Mexico increased year-on-year, and LNG takeaways from the Gulf coast to Europe and Asia were maximized. This incremental demand resulted in high natural gas prices and reduced injections into storage – compounding high prices with growing concern about storage balances moving into winter. Price levels increased to the point where there was switching from natural gas back to coal for power generation in Eastern US – even as coal-to- natural gas switching in Europe was contributing to the high demand for LNG. Some relief may come to demand for LNG as Russia’s Nord Stream 2 pipeline begins service to Europe and as hurricane season potentially limits tanker traffic in the Gulf. In Alberta, the extreme heat resulted in impacts to receipts more characteristic of a cold winter day and also caused unplanned outages at compressor stations. The resulting curtailments generally resulted in prices increasing with periods of extreme volatility. Looking forward, some Alberta curtailments are still expected through the remainder of summer as delayed projects are finally placed into service. Barring complications with storage injections, these curtailments should have minimal impact to SaskEnergy and its customers. The AECO daily index averaged $2.93 per GJ throughout the first quarter compared to $1.89 per GJ the year prior — the largest portion of the difference coming from prices increasing through the latter part of the quarter. The end of the quarter also saw extreme volatility with a single day range on June 28 of $3.77 to $4.90 as the market processed production uncertainty through the heat. 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 $0.01 per GJ premium compared to flat the year prior. After years of volatility, the differential has found relative stability, but may see some volatility through the remaining summer as import curtailments take effect.
p.3
Management Discussion and Analysis
The following chart shows AECO natural gas prices:
AECO Monthly Index Historical Prices
$4.00
Limited Export Capicity from Alberta
Forward Price at June 30, 2021
$3.50
2015-Present Average Price $2.08/GJ
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income
Three months ended June 30,
(millions)
2021
2020
Change
Loss before unrealized market value adjustments
$
(5)
$
(4)
$
(1)
15
Impact of fair value adjustments Revaluation of natural gas in storage
8 4 8
7
-
(4)
$
10
Consolidated net income
$
$
2
The loss before unrealized market value adjustments in 2021 was consistent with 2020. This was a result of realized asset optimization margins improving in 2021, increasing transportation and storage revenue and additional distribution system customer capital contributions. This was fully offset by delivery revenue decreasing, employee benefit costs increasing and additional net finance expenses in 2021. Realized asset optimization margins improved in 2021 as a component of the Corporations transport capacity was secured through asset optimization contracts that expired in 2020 resulting in no impact in 2021. Transportation and Storage revenue increased in 2021 as domestic customers increased firm transportation contracting on receipt and delivery services. Higher distribution system customer connections and their related customer capital contributions were recognized in 2021 compared to the prior year. Employee benefit costs increased compared to the prior year as certain vacant positions were filled in key areas of the Corporation. Net finance expenses increased in 2021 as debt retirement fund earnings decreased and long term debt interest costs increased. Stronger natural gas market prices resulted in the price differential between contract prices and future market prices on commodity purchase contracts improving $0.20 per GJ in 2021 compared to 2020, resulting in a favourable fair value adjustment. In addition, as natural gas market prices continued to increase in 2021, natural gas in storage was recorded at weighted average cost, which was lower than net realizable value at June 30, 2021 and March 31, 2021. There was no revaluation of natural gas in storage and no impact on consolidated net income.
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 June 30
(millions)
2021
2020
Change
$
20 19
$
25 24
$
(5)
Commodity sales
Commodity purchases
5
1
Realized margin on commodity sales Unrealized fair value adjustments
1 5 6
-
16 17
11 11
$
Margin on commodity sales
$
$
p.5
Management Discussion and Analysis
Unrealized Margin on Commodity Sales The Corporation’s $1 million realized margin on commodity sales for 2021 equaled 2020. During the first quarter of 2021-22, average revenue was $2.51 per GJ and average cost of gas sold was $2.43 per GJ, resulting in a margin of $0.08 per GJ. The GCVA balance increased to $11 million owing from customers at June 30, 2021 compared to $6 million owing from customers at March 31, 2021, a result of the AECO daily index increasing to $2.93 per GJ compared to $1.89 per GJ in 2020. Commodity Fair Value Adjustments The fair value adjustment through the first quarter on commodity derivative instruments increased the margin on commodity sales by $16 million as the $12 million favourable fair value position at March 31, 2021 increased to $28 million favourable at June 30, 2021. The favourable price differential between contract prices and market prices on future commodity purchase contracts increased during the first quarter from $0.33 per GJ to $0.53 per GJ. SaskEnergy segregates a portion of its natural gas purchase contracts for gas that will ultimately be sold to commodity customers. Under IFRS, such contracts are not required to be reported at market value. 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 June 30
(millions)
2021
2020
Change
$
30 29
Asset optimization sales
$
$
(7)
37 41
12
Asset optimization purchases
1
Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage
(4)
5
(1)
(4) (4) (3)
3 4 3
- -
$
$
$
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 $5 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. These incremental transportation contracts in 2020 had an unfavourable $6 million effect on the asset optimization margin. This was partially offset by the impact of the AECO daily index increasing $1.04 per GJ in 2021 compared to 2020, resulting in a higher average asset optimization purchase price and a reduced margin. 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. Unrealized fair value adjustments on asset optimization derivative instruments decreased the margin on asset optimization sales by $1 million. Stronger natural gas market prices at June 30, 2021 increased the favourable price differential between contract prices and market prices on future asset optimization purchase contracts by $0.41 per GJ, resulting in an $8 million favourable fair value adjustment. This was fully offset by the $9 million unfavourable fair value adjustment resulting from the unfavourable price differential on outstanding asset optimization sale contracts increasing from $0.18 per GJ to $0.62 per GJ.
p.6
Management Discussion and Analysis
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 June 30, 2021 and March 31, 2021, as near term forward natural gas market prices continue to increase and exceed weighted average cost. There was no revaluation impact on the first quarter net income. Revenue
Three months ended June 30
(millions)
2021
2020
Change
$
54 49
$
(4)
$
58 47
Delivery revenue
2 2
Transportation and storage revenue Customer capital contributions
4
2
$
107
$
-
$
107
Revenue
Delivery Revenue Delivery revenue is driven by the number of customers and the amount of natural gas they consume. Weather is the external factor that most affects delivery revenue, as residential and commercial customers consume natural gas primarily as heating fuel. Delivery revenue decreased $4 million in 2021 as weather was normal in 2021 compared to 18 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 specified quantity of gas on each day of the contract. With a firm contract, customers pay for the amount of capacity they have contracted for whether they use it or not. Under an interruptible contract, customers may deliver or receive gas only when there is available capacity on the system and only pay receipt and delivery tolls when they deliver or receive gas. Integral to the Corporation’s transmission system are several strategically located natural gas storage sites, which have the capacity to provide operational flexibility along with a reliable and competitive natural gas storage service. Receipt and delivery service revenues combined for a $2 million increase in 2021 compared to 2020 as domestic customer’s increased firm transportation contracting in 2021. Rate increases effective April 1, 2021 on receipt and delivery services are also contributing to higher transportation revenue compared to 2020 as the Corporation addresses increasing third party transportation expenses. population while keeping rates competitive. Transportation and Storage Revenue Storage revenue in 2021 of $2 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 higher than 2020 as more distribution system customer connections were completed in 2021 and the related customer capital contribution was recognized as revenue.
p.7
Management Discussion and Analysis
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 June 30
(millions)
2021
2020
Change
$
27 37 30
Employee benefits
$
25 38 29
$
(2)
Operating and maintenance Depreciation and amortization
1
(1)
3 2
Saskatchewan taxes
3 2
- -
Impairment loss on trade and other receivables
$
99
$
97
$
(2)
15
$
Net finance expenses
$
13
$
(2)
$
-
$
$
(2)
Other gains
(2)
Employee Benefits Employee benefit costs were $2 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 $1 million lower than 2020, a result of reducing the allowance for doubtful accounts estimate in 2021 as relaxed COVID-19 restrictions in 2021 improved the provincial economic outlook. This was partially offset by higher transportation expenses as the Corporation increased transportation contracting on TC Energy’s transportation system, resulting in increased operating and maintenance expenses in 2021 compared to 2020. 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 continues and is resulting in increased depreciation and amortization. Depreciation and amortization was $1 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. In addition, long-term debt interest expenses increased in 2021 as additional long-term debt is used to fund a portion of the current year’s capital investment in the Corporation’s natural gas line infrastructure.
p.8
Management Discussion and Analysis
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 June 30
(millions)
2021
2020
Change
$
64
Cash provided by operating activities Cash used in investing activities Cash used in financing activities Increase in cash and cash equivalents
$
56
$
8 9
(33) (30)
(42) (13)
(17)
$
1
$
1
$
-
Operating Activities Cash provided by operating activities increased $8 million in 2021 compared to 2020 as cash flows from operations continued to trend higher with higher asset optimization margins and increased customer capital contributions related to distribution system customer connections. Investing Activities Cash used in investing activities declined $9 million compared to 2020 as capital investment levels declined in the current year due to the deferral of some system expansion projects resulting from changing customer requirements. In addition, the Corporation’s spending on buildings and leasehold improvements decreased in 2021. Financing Activities Cash used in financing activities increased $17 million in 2021 compared to 2020. The Corporation used $21 million for interest payments, $7 million for dividend payments and decreased short-term debt by $39 million. This was partially offset by the Corporation entering into an agreement with the Province to borrow an additional $50 million of long-term debt with an interest rate of 2.8 per cent, maturing in 2052 to support its capital investment requirements. SaskEnergy’s debt-to-equity ratio at the end of June 30, 2021 of 58 per cent debt and 42 per cent equity is within the Corporation’s long- term target range of 58 to 63 per cent debt. CAPITAL ADDITIONS SaskEnergy continues to advance the maturity of its capital management governance, ensuring a best practice approach that ensures responsive customer service and safe and reliable natural gas delivery are priorities.
Three months ended June 30
2021
2020
Change
(millions)
Strategic Customer growth System expansion
$
6 9
$
8
$
(2) (7) (9)
16 24
15
Operational Risk management
14
12
2
2 1
Reliability of natural gas service
4 2
(2) (1) (1)
Business and technology optimization
17 32
18 42
$
Capital additions
$
$
(10)
p.9
Management Discussion and Analysis
Capital additions of $32 million through 2021 were $10 million lower than the Corporation’s 2020 investment. Many system expansion projects planned for 2021 were either reduced or deferred by the Corporation and its customers through 2020 due to the uncertainty of the impact of a suppressed oil and gas market and COVID-19. System expansion spending in the current year is consistent with levels anticipated after the reductions or deferrals incurred in 2020. Risk management spending on the distribution system increased in 2021 as the Corporations service upgrade program returned to normal levels year over year as the prior year focused on a risk based approach while limiting public interactions with customers in 2020. Reliability of natural gas service spending decreased in 2021 by $2 million as the Corporation reduced spending on building and leasehold improvements compared to 2020. OUTLOOK SaskEnergy began its return to a “new normal” operating environment in the first quarter 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 results in variable natural gas production. The reduction in Saskatchewan gas supply will need to be met by increased imports from Alberta. As SaskEnergy adapts to flat or declining customer demand, there will be an increased focus on core operations and operational excellence to safeguard its financial strength into the future. In 2021-22, income from operations is forecasted to be $35 million, which is a decrease of $24 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. The number of residential customers connecting to SaskEnergy’s distribution system is expected to remain level compared to 2020-21, with 3,000 new customers forecasted in 2021-22. Energy efficiency programs offered by the Corporation and implemented by SaskEnergy customers reduce 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 $263 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.10
Condensed Consolidated Financial Statements 12 CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 13 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 14 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 15 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Notes to the Consolidated Financial Statements
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
16 16 18 18 18 20 22 23
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
24 25 25 2 6 2 6 2 7 2 7
LEASE LIABILITY COMMITMENTS AND CONTINGENCIES UNREALIZED MARKET VALUE ADJUSTMENTS NATURAL GAS SALES AND PURCHASES DELIVERY REVENUE TRANSPORTATION AND STORAGE REVENUE NET FINANCE EXPENSES
Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
p.43
June 30, 2021
March 31, 2021 (audited)
Notes
(millions)
(unaudited)
ASSETS Current assets Cash and cash equivalents
$
1
$
-
119
Trade and other receivables
165
24 14
Natural gas in storage held for resale
4
15 14
Inventory of supplies Assets held for sale
4
7 5
4
39
Fair value of derivative instruments
17
201
215
14 75
Right-of-use assets Intangible assets
15 77
2,838
Property, plant and equipment
8
2,851
149
Debt retirement funds
136
$
3,277
$
3,294
LIABILITIES AND PROVINCE'S EQUITY Current liabilities Short-term debt
$
225
$
264 116
87
Trade and other payables
4
Dividends payable Contract liability
7 5 6 5 8
14
6 4
Refund liability
Current portion of lease liability Fair value of derivative instruments
9 5
15
355
411
4 5 6
Employee future benefits
4 5 7
Deferred revenue
Lease liability
209
Provisions
227
1,535 2,114
Long-term debt
10
1,485 2,139
Province's equity Equity advances
72
72
1
Other components of equity
(1)
1,090 1,163
Retained earnings
1,084 1,155
$
3,277
$
3,294
p.12
Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
For the Three Months Ended June 30, 2021
For the Three Months Ended June 30, 2020
Income before Unrealized Market Value Adjust- ments
Income before Unrealized Market Value Adjust- ments
Unrealized Market Value Adjust- ments (Note 13)
Unrealized Market Value Adjust- ments (Note 9)
Total
Total
(millions)
Notes
REVENUE Natural gas sales
$
50 54 49
$
(9)
$
41 54 49
13 14 15
$
62 58 47
$
(2)
$
60 58 47
- - -
Delivery
- - -
Transportation and storage Customer capital contributions
4
4
2
2
157
(9)
148
169
(2)
167
EXPENSES Natural gas purchases (net of change in inventory)
48 27 41 30
(24)
24 27 41 30
13
65 25 38 29
(14)
51 25 38 29
- - - -
Employee benefits
- - - -
Operating and maintenance Depreciation and amortization
3
3
Saskatchewan taxes
3
3
Impairment (gain) loss on trade and other receivables
(2)
-
(2)
2
-
2
147
(24)
123
162
(14)
148
NET INCOME BEFORE THE FOLLOWING
10
15
25
7
12
19
(15)
- -
(15)
Net finance expenses
16
(13)
- -
(13)
-
-
Other gains
2
2 8
TOTAL NET (LOSS) INCOME ITEMS THAT MAY BE RECLASSIFIED BACK TO NET (LOSS) INCOME Change in fair value of debt retirement funds designated as FVOCI (1)
$
(5)
$
15
$
10
$
(4)
$
12
$
-
2
2
-
5
5
COMPREHENSIVE (LOSS) INCOME
$
(5)
$
17
$
12
$
(4)
$
17
$
13
The accompanying notes are an integral part of the condensed consolidated financial statements (1) Fair value through other comprehensive income (FVOCI)
p.13
Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Other Components of Equity
Retained Earnings
Equity Advances
Total
(millions)
BALANCE, AT APRIL 1, 2020 Comprehensive income (loss)
1,100
$
1,024
$
72
$
4
76
81
- -
(5)
(21)
Dividends
(21)
-
BALANCE, AT MARCH 31, 2021 (audited)
1,155
1,084
72
(1)
12
Comprehensive income
10
- -
2
(4)
Dividends
(4)
-
BALANCE, AT JUNE 30, 2021 (unaudited)
$
1,163
$
1,090
$
72
$
1
The accompanying notes are an integral part of the condensed consolidated financial statements
p.14
Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
For the Three Months Ended June 30,
(millions)
Notes
2021
2020
OPERATING ACTIVITIES Net income
$
10
$
8
Add (deduct) items not requiring an outlay of cash Net change in fair value of derivative instrument assets and liabilities Change in revaluation of natural gas in storage to net realizable value
(15)
12 12
(8) (4)
-
30 15
Depreciation and amortization
29 13
Net finance expenses
16
- -
Net gain on disposal of assets
(2) (1)
Other non-cash items
40 24 64
35 21 56
Net change in non-cash working capital related to operations
Cash provided by operating activities
INVESTING ACTIVITIES Additions to intangible assets
(1)
(2)
(31)
Additions to property, plant and equipment
(40)
-
Net proceeds on disposal of assets
1
(1)
Decommissioning costs
(1)
(33)
Cash used in investing activities
(42)
FINANCING ACTIVITIES Debt retirement funds redemptions Debt retirement funds installments
-
12
(10) (39)
(8)
Repayment of short-term debt Proceeds from long-term debt Repayment of long-term debt
(129)
50
161
-
(25)
(2)
Repayment of principal on lease liability
9
(1)
(22)
Interest paid Dividends paid
(21)
(7)
(2)
(30)
Cash used in financing activities
(13)
INCREASE IN CASH AND CASH EQUIVALENTS
$
1
$
1
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
-
1
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1
$
2
The accompanying notes are an integral part of the condensed consolidated financial statements
p.15
Notes to the Condensed Consolidated Financial Statements (unaudited)
1. GENERAL INFORMATION SaskEnergy Incorporated (SaskEnergy or the Corporation) is a Saskatchewan provincially owned Crown corporation operating under authority of The SaskEnergy Act . The address of SaskEnergy’s registered office and principal place of business is 1777 Victoria Avenue, Regina, Saskatchewan, Canada S4P 4K5. The Corporation owns and operates natural gas-related businesses located both within and outside Saskatchewan. The condensed consolidated financial statements should not be taken as indicative of the performance to be expected for the full year due to the seasonal nature of the natural gas utility business. By virtue of The Crown Corporations Act, 1993 , SaskEnergy has been designated as a subsidiary of Crown Investments Corporation of Saskatchewan (CIC), a Saskatchewan provincially owned Crown corporation. Accordingly, the financial results of SaskEnergy are included in the consolidated financial statements of CIC. As a provincial Crown corporation, SaskEnergy and its wholly owned subsidiaries are not subject to Federal or Provincial income taxes in Canada.
2. BASIS OF PREPARATION a. Statement of compliance
The Corporation’s unaudited condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). The condensed consolidated financial statements do not include all the information required for the Corporation’s annual consolidated financial statements. Accordingly, these statements should be read with reference to the annual report for the year ended March 31, 2021. The accounting policies used in the preparation of these condensed consolidated financial statements conform with those used in the Corporation's most recent annual consolidated financial statements. The condensed consolidated financial statements were authorized for issue by the Audit and Finance Committee of the Board of Directors on August 18, 2021. b. Basis of measurement The condensed consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries with all significant transactions and balances being eliminated. The condensed consolidated financial statements have been prepared on the historical cost basis except for the following items, which are described in Note 3: Financial instruments classified as at fair value through profit or loss Financial instruments classified as at fair value through other comprehensive income Employee future benefits Provisions Natural gas in storage held for resale Property, plant and equipment c. Functional and presentation currency The condensed consolidated financial statements are presented in Canadian dollars, the Corporation’s functional currency, unless otherwise stated. All financial information presented in Canadian dollars has been rounded to the nearest million.
p.16
Notes to the Condensed Consolidated Financial Statements (unaudited)
d. Use of estimates and judgments In the application of the Corporation’s accounting policies, which are described in Note 3, management is required to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue and expenses. Actual results may differ from these estimates. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised as well as any future periods affected. Information about critical judgments in applying accounting policies that have a significant effect on the amounts recognized in the condensed consolidated financial statements include: Revenue recognition related to unbilled revenue Existence of decommissioning liabilities Designation of own-use derivative contracts (Note 11) Significant areas requiring the use of management estimates are: Estimated unbilled revenue Expected credit losses (Note 5) Net realizable value of natural gas in storage held for resale (Note 4) Fair value of financial and derivative instruments (Note 5) Useful lives and depreciation rates for right-of-use (ROU) assets Useful lives and amortization rates for intangible assets Useful lives and depreciation rates for property, plant and equipment
Recoverable amount of non-financial assets (Note 8) Estimated unearned customer capital contributions Estimated future cost of decommissioning liabilities COVID-19 (Coronavirus) impact assessment
The COVID-19 pandemic caused material disruption to businesses and resulted in an economic slowdown. The Corporation assessed and continues to monitor the impact of COVID-19 on its operations. The degree to which COVID- 19 has a more pronounced longer-term impact on the Corporation’s operations and growth projects will depend on future developments, policies and actions, all of which remain highly uncertain. The Corporation’s expected credit losses and allowance for doubtful accounts appear to be the most significantly affected estimates. The Corporation’s business continuity plans remain 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 of Saskatchewan given the important role the Corporation’s infrastructure plays in providing energy to customers.
p.17
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