2014 SaskEnergy Annual Report
Second Quarter Report September 30, 2022
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
1 1 12 1 3 1 5
Capital Additions
Outlook
Consolidated Financial Statements
2
Financial and Operating Highlights
CONSOLIDATED FINANCIAL INFORMATION ($ millions)
Three months ended September 30,
Six months ended September 30,
2022
2022
2021
2021
43 61
100 118
Delivery
40 51
94
Transportation and storage
100
7
9
Commodity margin
1 4 3
2 5 7
15
21 10
Asset optimization margin Customer capital contributions Total revenue and margins
5
131
258
99 24 44 31
208
24 44 31
51 89 62 11
Employee benefits
51 85 61 10
Operating and maintenance Depreciation and amortization
7 1
Saskatchewan taxes
7
1
Recovery on trade and other receivables
-
(2)
18
35
Net finance expense
14
29
(1)
(1)
Other gains
(1)
(1)
Total expenses
124
248
119
233
7
10 15 25 96
Income (loss) before unrealized market value adjustments
(20)
(25)
17 24 23
Market value adjustments CONSOLIDATED NET INCOME Cash provided by operating activities Cash used in investing activities Cash provided by financing activities
37 17 38
52 27
102
(71)
(99)
(89)
(122)
47 13
11 19
49
19
Dividends declared
2
6
3,529 1,815 59.3%
Total assets Total net debt
3,385 1,683 58.8%
Debt ratio
OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm
2 2
7 8
2 2
6 8
Commercial
39 43
82 97
Industrial
41 45
82 96
Total
36% warmer 25% warmer
3% warmer
Weather (compared to last 30 years) Transmission energy (petajoules) Domestic
7% warmer
75 25
157
72
151
39
Export
8
10
Total
100
196
80
161
Cash used in Investing Activities $ millions
Income before MVA $ millions
Cash from Operations $ millions
100 150
(40) (20) 0 20
0 40 80 120
10
102
122
96
81
99
103
0 50
(18)
(25) 2021
2022
2021
2020
2022
2020
2022
2021
2020
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, 2022. 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 16, 2022 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 2021-22 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 2021-22 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 2022-23 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, 2022, to the results for the six months ended September 30, 2021, unless otherwise noted.
OPERATING ENVIRONMENT SaskEnergy monitors a number of important factors that could influence financial performance. European Energy Crisis
Europe continues to face an energy shortfall and volatile natural gas prices. Prices for European benchmarks more than doubled through July and August and fortunately gave back nearly all those gains by the end of the quarter. Building storage levels remains a key priority for the continent; at the end of the quarter, storage levels were nearly 90 per cent full – well above the 80 per cent target set for November 1, 2022. The end of the quarter saw explosions causing serious damage to both the Nord Stream pipelines and the associated methane release. These lines were not active, so this did not represent a short-term change to import dynamics, but the incident does draw attention to the security of other existing facilities in the region and the long-term viability of the Nord Stream system. Global LNG suppliers continue to fuel Europe, though demand in Asia remains and shipping capacity is a bottleneck. This finite LNG export capacity has continued to isolate North America from high global gas prices, though volatility remains. The primary North American price index also doubled through the quarter on high demand and fell back to mid- June levels by the end of the quarter. Despite slower injections through a hot July, American storage continues to fill on pace, leaving the year-on-year deficit at its tightest since the end of withdrawal season.
4
Management’s Discussion and Analysis
Continued delays to projects in Alberta and the associated maintenance curtailments to interruptible export service caused a complete disconnect of the Alberta market from other North American markets. Through August, Alberta prices fell from $6 per GJ to as low as negative $1 per GJ, while intraday volatility saw some days with price ranges of over $4 per GJ. Downward pressure on prices was alleviated somewhat due to record-setting heat and high oil sands demand. Because of firm contractual export capacity, SaskEnergy was well equipped to take advantage of low Alberta prices. Record Alberta storage injections through July and sustained injections (despite interruptible curtailments) in August closed the year-on-year storage deficit completely and moved end-of-quarter levels in line with the five-year average. Additional export capacity is expected online before the end of October and a significant tranche of additional capacity should be freed up by mid-winter when the 2021 Expansion Project is finally expected to be put fully in-service. Saskatchewan Natural Gas With the provincial economy continuing to recover and an improved outlook for the value-added agricultural sector, 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 downward, increasing dependence on associated gas with local oil production. Local demand continues to be increasingly met by imported supply. The completion of the above Alberta projects should improve the link between the provinces, but the availability of incremental transport will remain a high-priority variable. Natural Gas Prices The AECO daily index averaged $3.94 per GJ through the three months ended September 30, 2022, representing a moderate increase from $3.41 per GJ for the same period ended September 30, 2021; upstream system maintenance caused higher volatility, though the absolute price level began at a much higher level than previous years. High global prices were no longer enough to maintain high Western Canadian prices, as export lines were frequently completely full while the remainder of supply made its way into storage. 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 a $1.80 per GJ premium compared to $0.27 per GJ the year prior; the difference here can, again, be attributed to weeks of maintenance that depressed Alberta prices. The differential has tightened into the end of the quarter and is more reasonably priced going into winter as maintenance activities wrap up. The following chart shows AECO natural gas prices:
AECO Monthly Index Historical Prices
$8.00
Limited Export Capacity from Alberta
Forward Price at September 30, 2022 Average Price: $4.53/GJ
$7.00
2015-Present Average Price $2.52/GJ
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
5
Management’s Discussion and Analysis
CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income
Three months ended September 30,
Six months ended September 30,
(millions)
2021 Change
2021 Change 2022
2022
Income (loss) before unrealized market value adjustments Impact of fair value adjustments Revaluation of natural gas in storage
$
7
$
10 15
$
$
(20)
$
27
$
(25)
35
16
52
(37)
37
(21)
1
-
-
-
-
1 7
$
25
$
24
$
(2)
$
17
$
$
27
Consolidated net income
Income before unrealized market value adjustments was $10 million in 2022, $35 million favourable compared to the $25 million loss in 2021, resulting from higher commodity and asset optimization margins, higher delivery and transportation & storage revenues and higher customer capital contributions. This was partially offset by higher natural gas transportation costs, vehicle expenses and finance expense costs. The Corporation received approval to increase its commodity rate to address increasing natural gas market prices and the large gas cost variance account balance owing from customers to the Corporation. Conversely, the Corporation was able to take advantage of unutilized transportation capacity as natural gas line projects continued to be delayed in Alberta and increased maintenance projects limited transportation capacity on Alberta systems — the result being improved asset optimization margins. Delivery revenue improved in 2022 due to weather being three per cent colder than in 2021 and a delivery rate increase effective August 1, 2022, which will address increasing operating costs. Transportation and storage revenues are higher in 2022, primarily resulting from rate increases effective April 1, 2022 on receipt and delivery services, as the Corporation addresses increasing third-party transportation expenses, combined with customers increasing firm and interruptible transportation contracting across all services. These were partially offset by higher operating costs, due to increasing third-party transportation expenses and higher vehicle costs, which are resulting from fuel price increases. Finance expense costs are higher due to increasing average interest rates on short-term debt and higher long-term debt borrowing costs, as the Corporation borrowed additional long-term debt to support its capital investment requirements. Stronger natural gas market prices at September 30, 2022 generated a $15 million favourable fair value adjustment, resulting from a 15 PJ increase in natural gas contracts outstanding at September 30, 2022, which are recorded at a favourable price differential between average transaction price and average market price. In addition, natural gas in storage was recorded at weighted average cost, which was lower than net realizable value at September 30, 2022 and March 31, 2022. There was no impact on net income resulting from the revaluation of natural gas in storage. 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 but at the contract price.
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, 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. 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)
2022
2021 Change 2022
2021 Change
16
$
$
46 $
Commodity sales
$
9 8 1
7 1 6
$
29 $
17 10
9 7
37
Commodity cost of sales
27
9
Realized margin on commodity sales Unrealized fair value adjustments
2
7
17
16
38 39
(21) (15)
54 56
(38) (31)
$
24 $
$
25 $
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, 2022 was $7 million higher than in 2021, as SaskEnergy received approval to increase its commodity rate to $3.20 per GJ effective November 1, 2021. With a large GCVA balance owing from customers, combined with natural gas market prices projected to continue to increase, Cabinet also approved an interim commodity rate increase to $4.20 per GJ effective August 1, 2022, while the SRRP finalizes its review of the Corporation’s current rate application. The favourable rate adjustment impacts were partially offset by AECO daily index prices trending upwards and resulting in higher cost of sales. The AECO daily index averaged $5.40 per GJ through the six months ended September 30, 2022, compared to $3.17 per GJ in the same period ended September 30, 2021, resulting in cost of sales increasing to $2.84 per GJ compared to $2.43 per GJ in 2021. The GCVA balance increased to $26 million owing from customers at September 30, 2022, compared to $15 million owing from customers at March 31, 2022 — a result of the average AECO daily index increasing $1.59 per GJ for the six months ended September 30, 2022, compared to the 12 months ended March 31, 2022.
7
Management’s Discussion and Analysis
Commodity Fair Value Adjustments Natural gas market prices trended higher through most of the first six months of 2022-23, with fair value adjustments on outstanding commodity purchase contracts at September 30, 2022 being $16 million favourable compared to contracts outstanding at March 31, 2022. This is resulting from a 15 PJ increase in contracts outstanding at September 30, 2022, which are recorded at a favourable price differential between average deal price and average market price. 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)
2021 Change
2022
2021 Change 2022
$
220 199
$
106
$
$
138 122
$
54 43 11
82 77
$
52 48
Asset optimization sales
91 15
Asset optimization cost of sales
21
Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage
4
5
16
(1)
(1)
(1)
-
(2)
1
1
-
-
-
-
1
$
20
$
15
$
3
$
17
$
12
$
3
Margin on asset optimization sales
The realized margin on asset optimization sales for the six months ended September 30, 2022, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $16 million higher than in 2021. 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. They were originally scheduled to be in-service in April 2021 but are now expected to be in-service in early 2023. In combination with increased maintenance projects on natural gas systems in Alberta through the summer and fall months of 2022, both components factored into creating transportation capacity constraints, resulting in increasing natural gas market prices and increasing market price volatility through 2022. The Corporation was able to capitalize on its unutilized transportation capacity through the summer and fall months of 2022 and executed 38 PJ of asset optimization contracts compared to 11 PJ the prior year and at margins of $0.56 per GJ compared to $0.23 per GJ in 2021. 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 impact of the unrealized fair value adjustment on asset optimization derivative instruments had an unfavourable impact of $1 million on the realized margin on asset optimization sales. This is due to the favourable price differential on outstanding asset optimization purchase contracts decreasing from $1.26 per GJ at March 31, 2022 to $1.20 per GJ at September 30, 2022. 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. With near-term forward natural gas market prices increasing through 2022, asset optimization natural gas in storage was recorded at weighted average cost at September 30, 2022 and March 31, 2022. With both equaling net realizable value, the impact on 2022 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)
2022
2021 Change 2022
2021 Change
$
43 61
$
100 118
Delivery revenue
$
40 51
$
3
$
94
$
6
Transportation and storage revenue Customer capital contributions
10
100
18
5
10
3
2
7
3
$
109
$
228 $
Revenue
$
94
$
15
201
$
27
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 was $6 million higher than in 2022, primarily due to weather being three per cent colder than normal through the six months ended September 30, 2022 compared the same period in 2021. The effect of increasing costs related to safety, system integrity and infrastructure maintenance are contributing to delivery rate increases needed for the Corporation to continue to deliver safe and reliable service to customers. 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 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 $18 million higher in 2022 than in 2021, consisting of a $17 million increase in transportation revenue and a $1 million increase in storage revenue. Receipt and delivery service revenues combined for $8 million of the $17 million increase in transportation revenue, primarily due to rate increases effective April 1, 2022 as the Corporation addresses increasing third-party transportation expenses. Transportation customers also increased firm and interruptible contracting in 2022 compared to 2021 across all services, which contributed to the remaining transportation revenue increases in 2022. Included in transportation and storage revenue for the six months ended September 30, 2022 is $6 million of storage revenue, which is $1 million higher than in 2021, primarily due to rate increases effective April 1, 2022. The abundance of natural gas limits the demand for natural gas storage to those customers with relatively low load factors who use the service to mitigate receipt transportation charges.
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 various factors influence their receipt and recognition as revenue. Customer capital contributions were $3 million higher in 2022, resulting from developers in Saskatoon and Regina requiring more gas line installations in the distribution utility than in the six months ended September 30, 2021. 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)
2022
2021 Change 2022
2021 Change
$
24 44 31
$
51 89 62 11
Employee benefits
24 44 31
$
$
- - - -
$
51 85 61 10
$
-
(4) (1) (1) (3) (9)
Operating and maintenance Depreciation and amortization
7
Saskatchewan taxes
7
Impairment (Recovery) on trade and other receivables
1
1
-
(1) (1)
(2)
$
214 $
$
107 $
$
205
$
106
$
18
$
35
Net finance expenses
$
14
$
29
$
(6)
$
(4)
$
(1)
$
(1)
$
(1)
$
-
Other gains
$
(1)
$
-
Employee Benefits Demographics, coupled with post-covid employee expectations, are resulting in labour shortages and prolonged vacancies for many organizations. SaskEnergy is facing greater challenges with attraction and retention of personnel than historically experienced. The turnover rate, which is typically low, has increased to over 5%. In response, SaskEnergy is focusing on enhancing the employee experience by introducing hybrid remote work arrangements, improving versatility with benefits and strengthening the Corporation’s talent programs. Employee benefit costs in 2022 equal 2021, as the Corporation manages the impact of a tight labour market. Operating and Maintenance Operating and maintenance expenses were $4 million higher than in 2021, as growing demand and increasing natural gas imports from Alberta are resulting in more natural gas being transported and over greater distances. Vehicle and equipment operating costs are also higher in 2022, resulting from increasing fuel prices, but were partially mitigated by implementing additional scheduling efficiencies resulting in reduced vehicle and equipment costs.
10
Management’s Discussion and Analysis
Depreciation and Amortization Balancing safety and system integrity with demand for service continued through 2022. Strategic capital investments required the necessary infrastructure be put in-service to meet current customer demand, resulting in increased depreciation and amortization — which was $1 million higher than in the same period in 2021. Recovery on Trade and Other Receivables The estimate of the allowance for expected credit loss increased in 2022 and returned to normal levels after a $2 million recovery in 2021, which was a product of the provincial economic outlook beginning to improve in 2021. Net Finance Expenses Net finance expenses for 2022 were $6 million higher than in 2021, primarily due to higher long- and short-term debt interest costs. The Corporation borrowed additional long-term debt to support its capital investment requirements while short-term debt interest rate increases, along with declining debt retirement fund earnings, contributed to higher net finance expenses year over year. Debt retirement funds are monies set aside, typically one per cent of a debt issuance, to retire the long-term debt upon maturity. The Corporation makes regular contributions to the debt retirement funds, which are held and invested by the Saskatchewan Ministry of Finance and can be impacted inversely by interest rate movements. 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.
Three months ended September 30,
Six months ended September 30,
(millions)
2022
2021 Change 2022
2021 Change
$
23
$
96
Cash provided by operating activities Cash used in investing activities Cash provided by financing activities
$
38
$
(15)
$
102
$
(6)
(71)
(99)
(89)
18
(122)
23
47
11
49
(2)
19
(8)
$
(1)
$
8
Increase (decrease) in cash and cash equivalents
$
(2)
$
1
$
(1)
$
9
Operating Activities Cash provided by operating activities decreased $6 million through the six months ended September 30, 2022 compared to the same period in 2021. The Corporation’s working capital declined compared to 2021 as the Corporation purchased and injected natural gas into storage in anticipation of customer demands through the winter. The Corporation also paid down amounts owing to vendors, which was partially offset by receivables collected from customers. Investing Activities Cash used in investing activities decreased $23 million compared to 2021, primarily due to capital investment required for system expansion projects declining in 2022. Investment in 2021 included two significant projects, the 86-kilometre gas line from Rosetown to Vanscoy and the Pierceland expansion project, which were both placed into service in 2021-22.
11
Management’s Discussion and Analysis
Financing Activities Cash provided by financing activities decreased $8 million in 2022 compared to 2021, primarily due to higher dividends paid to the Corporation’s shareholder in 2022. The Corporation used $31 million for interest payments, $17 million for dividend payments and $17 million to repay short-term debt. In addition, the Corporation borrowed an additional $100 million of long-term debt in two increments to support its capital investment requirements. In the first quarter of the fiscal year, $50 million of long-term debt was borrowed at a discount of $12 million, with an interest rate of 2.8 per cent and maturity date of 2053. A second $50 million of long-term debt was borrowed in the second quarter, at par, with an interest rate of 4.3 per cent and maturity date of 2042.
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)
2022
2021 Change 2022
2021 Change
Strategic Customer growth System expansion
$
34
28 $
43 $
$
6
$
12 $
31
3
5
59 65
(56) (28)
68 80
(63) (32)
37
48
Operational Risk management
23
34 10
20
3 3
34
-
7 1
Reliability of natural gas service
4 1
6 2
4
2
Business and technology optimization
-
-
31
46
25 90
6
42
4
$
68 $
$
94 $
Capital additions
$
(22)
122
$
(28)
Capital additions through the six months ended September 30, 2022 were $28 million lower than the investment made in 2021, primarily due to decreasing expenditures in system expansion projects, which were partially offset by higher investment in customer growth projects. Investment in customer growth projects increased $31 million in 2022 as the Corporation began work on the transmission and distribution system’s sections of the Moose Jaw supply project. There are three components to this 2022 project, consisting of the construction of a 30.5-kilometre NPS 16 gas line, Belle Plaine meter station modifications and new distribution meter/regulating station facilities. 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. Lower investment in system expansion projects through 2022 are a result of higher spending in 2021 on the Pierceland supply project and the 86-kilometre gas line from Rosetown to Vanscoy — which increases the Corporation’s gas line capacity from Rosetown to the Saskatoon Bypass gas line and east of the city. Both these projects were in-service in 2021-22. Risk is the likelihood of a negative consequence, such as damage or loss of gas containment, occurring on the SaskEnergy system. These consequences typically include damage to infrastructure, environment and potential harm to or loss of human life. Risk management spending of $34 million is approximately one-third of the Corporation’s 2022 capital additions and equals 2021 spending. Risk management efforts ensure safe and reliable service and rely on the Corporation’s inline inspection programs, which determine where the Corporation conducts system integrity digs the following year. Over many years of conducting inline inspection and integrity digs, the Corporation is realizing cost savings from balancing cost and re-inspection intervals while still actively managing and monitoring risk. The Corporation is able to focus integrity program investments on appropriate components of the system and still maintain a high level of natural gas deliverability to its customers.
12
Management’s Discussion and Analysis
SaskEnergy maintains over a 99 per cent reliability rating for delivering uninterrupted natural gas service to its customers. This is a great accomplishment considering the Corporation maintains almost 87,000 km of natural gas lines, which is slightly more than double the circumference of the planet Earth and is one of the largest gas line systems per number of customers in the world. SaskEnergy’s Leak Detection and Repair (LDAR) program seeks to minimize natural gas leaks, which results in more environmentally friendly and efficient operations, as well as increased safety of the system. Advanced technology used for this program, identifies more leaks at lower concentrations, typically before they are detectable by the public and well in advance of becoming hazardous. Currently, over 90 per cent of underground leaks are typically found by the Corporation. Based on integrity analysis and previous leak survey findings, SaskEnergy knows where to look and is able to focus on those areas proactively. This allows integrity work to be scheduled rather than conducted under emergency conditions, which are performed at a cost premium. The success of early detection of leaks and more efficient surveys allows SaskEnergy to take a risk-based approach to prioritize repairs, maximize operational resources and minimize safety risks. The Corporation has recently adopted a practice to install a small meter bypass fitting on residential customers’ natural gas services. SaskEnergy is required to exchange natural gas meters in compliance with Measurement Canada regulations. To perform work on a meter set with the new bypass fitting, a temporary flexible hose with an inline regulator is installed and allows meter exchange work to be performed without interrupting gas service to the customer. The initiative will result in a more efficient meter upgrade process and a significantly improved customer experience. The improved customer experience is achieved by the elimination of a customer appointment to perform typical meter exchanges: Technicians are no longer required to relight customer appliances because the natural gas service is not interrupted during the meter exchange; technicians are no longer required to enter the customer premise; the technician’s time on site is reduced with the use of a bypass fitting and the volume of gas released to the atmosphere is reduced when an exchange is completed with a bypass meter installed. The bypass fittings are currently being installed during new natural gas service installations, existing customer upgrades and riser alterations. Reliability of natural gas in service includes property purchases for corporate business and the enhancement and/or extension of the life of property through renovations, modifications and/or upgrades. These projects give customers a degree of confidence that natural gas demand will be met without failure or loss of service. Reliability of natural gas service spending increased in 2022 by $4 million as the Corporation’s investment returned to normal levels, after having to reallocate resources to customer-focused service upgrade and alteration projects in 2021. With the restoration of reliability investment programs in 2022, the Corporation is focusing on district regulator station, town border station and odorant facility upgrades. 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 2022 investment in business and technology optimization equals the prior year. A Customer Portal project, to replace the Corporation’s online My Account portal, is on track to be implemented in the fourth quarter of fiscal 2022-23. The leading-edge portal will provide customers with updated functionality, more self-serve options in the future and will include full mobile capabilities. OUTLOOK SaskEnergy is entrusted with a key provincial asset in the natural gas transmission and distribution system and must ensure standards for safety and reliability are maintained. Safe and reliable service has always been a core priority for SaskEnergy and it will continue to be going forward. This is especially important now as the transition to cleaner energy may cause instability in other areas of the energy sector. The Corporation will continue to mature in the progress of addressing its emissions from operations and assisting customers in meeting their own sustainability goals. SaskEnergy recognizes customers are at the centre of its existence and it is important to proactively anticipate customer needs and expectations. The Corporation is committed to making it easy for customers to interact, transact and receive service when and how they want it. Modest incremental growth is expected from SaskEnergy’s industrial customers in 2022-23, primarily in the value-added agricultural sector and from gas-fired power generation. System expansion investments are expected to increase in and around the cities of Regina and Moose Jaw in 2023-24 as industrial customers require system expansion investment to meet their growing natural gas requirements.
13
Management’s Discussion and Analysis
The number of residential customers connecting to SaskEnergy’s distribution system is expected to be 3,000 new customers in 2022-23. However, customers continue to reduce their natural gas consumption by becoming more energy efficient, which results in limited revenue growth from distribution utility customers. Continued focus on core operations and operational excellence will safeguard SaskEnergy’s financial strength into the future. In 2022-23, income from operations is projected to be $110 million, which is an increase of $28 million from the 2021-22 result. The increase is primarily due to higher asset optimization margins, which are driven by unforeseen market volatility, and continued focus on efficient operations. Cost savings are partially offset by increased inflationary pressures impacting fuel prices, vehicle maintenance and materials and supplies. Initiatives targeted to support emissions reductions from both internal operations and customer-focused initiatives also create cost pressure for SaskEnergy. The Corporation will achieve 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 2022-23, SaskEnergy will make $182 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.
14
Condensed Consolidated Financial Statements (unaudited)
16 CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 17 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 19 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 20 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21 GENERAL INFORMATION 21 BASIS OF PREPARATION 22 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 22 NATURAL GAS IN STORAGE HELD FOR RESALE 23 FINANCIAL AND DERIVATIVE INSTRUMENTS 24 FINANCIAL RISK MANAGEMENT 26 ASSETS HELD FOR SALE 27 PROPERTY, PLANT AND EQUIPMENT
28 LEASE LIABILITY 28 LONG-TERM DEBT 29 COMMITMENTS AND CONTINGENCIES 29 UNREALIZED MARKET VALUE ADJUSTMENTS 30 NATURAL GAS SALES AND PURCHASES 31 DELIVERY REVENUE 31 TRANSPORTATION AND STORAGE REVENUE 31 NET FINANCE EXPENSES
15
Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (unaudited)
September 30, 2022
March 31, 2022
(millions)
Notes
ASSETS Current assets Cash and cash equivalents
$
10
$
2
110
Trade and other receivables
199
89 19
Natural gas in storage held for resale
4
6
Inventory of supplies Assets held for sale
16
2
7 5
1
125 355
Fair value of derivative instruments
121 345
11 64
Right-of-use assets Intangible assets
13 69
2,948
Property, plant and equipment
8
2,944
151
Debt retirement funds
146
$
3,529
$
3,517
LIABILITIES AND PROVINCE'S EQUITY Current liabilities Short-term debt
320
$
337 124
$
98 13 31
Trade and other payables
Dividends payable Contract liability
11 15
4 3
Refund liability
4 4
Current portion of lease liability Fair value of derivative instruments
9 5
25
36
494
531
3 5 5
Employee future benefits
4 5 6
Deferred revenue
Lease liability
9
140
Provisions
178
1,648 2,295
Long-term debt
10
1,559 2,283
Province's equity Equity advances
22
22
(14)
Other components of equity
(8)
1,226 1,234
Retained earnings
1,220 1,234
$
3,529
$
3,517
The accompanying notes are an integral part of the condensed consolidated financial statements
16
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