First Quarter Report June 3 0, 20 24
Community Aspiration Environmental sustainability and economic prosperity for future generations of Saskatchewan. Vision Providing critical energy to support a greener Saskatchewan. Mission SaskEnergy delivers natural gas and energy solutions responsibly to the residents, businesses and industries of Saskatchewan.
Values
Safety We commit 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 align resources towards the greatest and most responsible impact.
Teamwork We collaborate, respect, and trust
one another. We are diverse and inclusive.
TABLE OF CONTENTS Financial and Operating Highlights Management's Discussion and Analysis Introduction Operating Environment
3 4 4 6
Consolidated Financial Results Liquidity and Capital Resources Capital Additions Outlook Consolidated Financial Statements
11 12 13 14
Financial and Operating Highlights
Three months ended June 30,
2024
CONSOLIDATED FINANCIAL INFORMATION ($ millions)
2023
61 62
Delivery
57 59 15
Transportation and storage Realized commodity margin
6 1 3
Realized asset optimization margin Customer capital contributions Total revenue and margins
1 4
133
136
32 49 34
Employee benefits
28 48 35
Operating and maintenance Depreciation and amortization
5
Saskatchewan taxes Net finance expense
5
19
19
-
Other net losses Total expenses
1
139
136
(6) (4)
Net loss before unrealized market value adjustments
-
Market value adjustments CONSOLIDATED NET LOSS
(17) (17)
(10)
79 36 61
86 32 35
Cash provided by operating activities Cash used in investing activities Cash used in financing activities
4
Dividends declared
4
3,571 1,822 59.4%
Total assets Total net debt
3,513 1,781 59.0%
Debt/Equity ratio
OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm
5 5
5 5
Commercial
45 55
45 55
Industrial
Total
4% warmer 13% warmer
Weather (compared to last 30 years) Transmission energy (petajoules) Domestic
82
85
-
Export
4
Total
82
89
Cash used in Investing Activities $ millions
(Loss) Income before MVA $ millions
Cash from Operations $ millions
50
10
100
86
79
73
36
32
3
28
0
25
0
50
(6)
0
(10)
0
2024
2023
2022
2024
2023
2022
2024
2023
2022
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 three months ended June 30, 2024. 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 28, 2024 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 2023-24 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 2023-24 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 2024-25 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 three months ended June 30, 2024, to the results for the three months ended June 30, 2023, unless otherwise noted. Operating Environment SaskEnergy monitors a number of important external factors that could influence financial performance. Continued Global Integration Global Liquified Natural Gas (LNG) markets started the fiscal year relatively strong with the major Asian and European index both trading up around 25 per cent for the quarter – still a moderate move when compared to the hyper-volatility seen in 2022. Factors driving this move have been heat in Asia, facility maintenance in Norway, and the United States benchmark price increasing by 40 per cent, as much of the United States experienced a heat wave that put significant pressure on electricity generation. Should temperatures normalize through the summer, the strong prices would be at risk due to robust storage levels. One notable exception to price strength is in Texas’ Permian Basin, where high production, low local demand, pipeline maintenance, and LNG maintenance have resulted in low and even negative prices for much of the quarter. Global natural gas markets continue to see increasing correlation as the global LNG market share grows with respect to global imports and exports. North American liquefaction capacity did not grow through 2023, but the brief pause is ending as Canada’s LNG facility in Kitimat, British Columbia, is expected to begin operations in 2024-25. Further, in June the Haisla Nation and Pembina announced a positive final investment decision for the Cedar LNG facility off the coast of Kitimat. This facility is expected to add around 17 per cent to Canada’s liquefaction capability when it comes online in 2028. Despite the expectation for demand from the LNG sector, western Canadian gas prices remained low, as high production and high storage levels were met with modest demand and seasonal pipeline maintenance.
4
Management’s Discussion and Analysis
Saskatchewan Prices In contrast to most of the world, Saskatchewan’s natural gas prices were characterized by lower volatility and prices through the first quarter of 2024-25. The AECO daily index averaged $1.11 per GJ through the quarter, compared to $2.34 per GJ the prior year, with the decline primarily a function of increased production, cooler temperatures, and relatively full storage levels. Traditionally, most natural gas in Saskatchewan is priced at a differential to the AECO price, with this differential for the quarter averaging a premium of $0.04 per GJ compared to $0.05 per GJ the year prior. Despite lower overall prices, the locational differential was nearly unchanged. The following chart shows AECO natural gas prices:
AECO Monthly Index Historical Prices
$8.00
$7.00
2015-Present Average Price $2.54/GJ
Forward Price at June 30, 2024 Average Price: $2.96/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 2028 2029
5
Management’s Discussion and Analysis
Consolidated Financial Results Consolidated Net Loss
Three months ended June 30,
(millions)
2024
2023 Change
$
(6) (3) (1)
Net Loss before unrealized market value adjustments
$
-
$
(6)
Impact of fair value adjustments Revaluation of natural gas in storage
(17)
14
-
(1)
$
(10)
Consolidated net loss
$
(17)
$
7
The Corporation is focused on balancing the challenges of maintaining affordability of natural gas services, while increasing environmental responsibility. These two priorities are strategic imperatives for the next three years as SaskEnergy works toward achieving the corporate vision of providing critical energy to support a greener Saskatchewan. The net loss before unrealized market value adjustments was $6 million in 2024, $6 million unfavourable compared to income of $nil in 2023, resulting from a lower commodity margin, combined with increased employee benefit costs. These were partially offset by the favourable impact of higher delivery and transportation and storage revenues. The Corporation’s realized margin on commodity sales for the three months ended June 30, 2024, was $9 million lower than in 2023, as the margin declined $0.97 per GJ compared to prior year. The Corporation received approval to decrease the commodity rate from $4.20 per GJ to $3.20 per GJ effective October 1, 2023. Furthermore, 20 per cent warmer than normal weather in April 2024 led to lower natural gas consumption compared to April 2023 when weather was 23 percent colder than normal. Employee benefit costs were higher than 2023, as a new Collective Bargaining Agreement took effect in February 2024 and full-time equivalents trended higher as the Corporation filled previously vacant positions. These unfavourable results were partially offset by higher delivery service revenues, driven by rate increases effective October 1, 2023, and higher transportation and storage revenues, resulting from customers executing higher contract demand services to meet their operating requirements. In addition, a 2 per cent average rate increase for transportation and storage services was implemented effective April 1, 2024, to address expansion of the transmission system and meet growing demand for natural gas services in Saskatchewan. Forward natural gas market prices at June 30, 2024, declined below March 2024 levels, generating a $3 million unfavourable fair value adjustment as the unfavourable price differential between average deal price and average market price on outstanding commodity purchase contracts declined a further $0.13 per GJ at June 30, 2024, compared to March 31, 2024. In addition, natural gas in storage at June 30, 2024, was recorded at net realizable value, which was lower than weighted average cost, resulting in a $1 million natural gas inventory revaluation and unfavourable impact on results, as natural gas market prices declined through 2024. 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’s natural gas contracts are normal usage and are not recorded at fair value but at the contract price upon settlement.
6
Management’s Discussion and Analysis
Commodity Margin Subject to Section 16 of The SaskEnergy Act, SaskEnergy’s charges, rates, terms and conditions are described in a Terms & Conditions of Service Schedule. This schedule sets natural gas commodity rates, as approved by Provincial cabinet, based on the recommendations of the Saskatchewan Rate Review Panel (SRRP). The commodity rate is determined based on rate-setting principles and is designed to recover the realized costs associated with the sale of natural gas to distribution customers. Regulatory principles require that utilities neither earn a profit nor 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 June 30,
(millions)
2024
2023 Change
$
26 20
$
36 21 15
$
(10)
Commodity sales
Commodity purchases
(1) (9)
6
Realized margin on commodity sales Unrealized fair value adjustments
(5)
(16)
11
$
1
$
(1)
$
2
Margin on commodity sales
The realized margin on commodity sales excludes the impact of unrealized fair value adjustments on derivative instruments. 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 three months ended June 30, 2024, was $9 million lower than in 2023, primarily resulting from the commodity margin declining to $0.69 per GJ through 2024 compared to $1.66 per GJ margin for the same three months ending June 30, 2023. The declining market price of natural gas, as well as the Corporation’s continued focus on natural gas price risk management, resulted in the Corporation receiving approval to decrease its commodity rate to $3.20 per GJ effective October 1, 2023, which reduced commodity rates and commodity sales, along with lower natural gas prices decreasing commodity cost of sales compared to 2023. Furthermore, 20 per cent warmer than normal weather in April 2024 led to lower natural gas consumption compared to April 2023 when weather was 23 percent colder than normal. The GCVA balance was $7 million owing to customers at June 30, 2024, compared to $8 million owing to customers at March 31, 2024 — as the rate decrease implemented effective October 1, 2023 continues to reduce the balance owed to customers.
7
Management’s Discussion and Analysis
Commodity Fair Value Adjustments For the three months ending June 30, 2024, the fair value adjustment on commodity derivative instruments decreased the margin on commodity sales by $5 million. The unfavourable price differential of $0.29 per GJ between contract prices and market prices on future commodity purchase contracts at March 31, 2024, further declined $0.13 per GJ, to an unfavourable price differential of $0.42 per GJ at June 30, 2024. SaskEnergy segregates a portion of its natural gas purchase contracts for gas that will ultimately be sold to commodity customers. Under IFRS, such own-use 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 June 30,
(millions)
2024
2023 Change
$
13 12
Asset optimization sales
$
37 36
(24) (24)
$
Asset optimization purchases
1 2
Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage
1
-
(1)
3
(1)
- -
(1)
$
2
Margin on asset optimization sales
$
2
$
The realized margin on asset optimization sales for the three months ended June 30, 2024, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, equaled the same period ending June 30, 2023. During 2024, the average margin on realized asset optimization sales was $0.11 per GJ, which equaled the same three- month period in 2023. Declining natural gas market prices and less volatility through 2024 compared to 2023, allowed for 4.4 PJ fewer asset optimization opportunities for the Corporation, resulting in $24 million lower sales and purchases in 2024 compared to 2023. Asset Optimization Fair Value Adjustments Through asset optimization strategies, the Corporation enters into various natural gas contracts which are subject to volatility of natural gas market prices until the natural gas contracts are realized. The unrealized fair value adjustment on outstanding asset optimization derivative instruments had a favourable impact of $2 million on the asset optimization margin. Declining natural gas market prices through 2024 resulted in the differential between contract prices and market prices on future asset optimization sales contracts improving $0.05 per GJ, resulting in a $2 million favourable fair value adjustment. 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. Declining natural gas market prices through 2024 resulted in a $1 million unfavourable net realizable value adjustment on natural gas in storage inventory.
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 June 30,
(millions)
2024
2023 Change
61 62
$
Delivery revenue
$
57 59
4 3
$
Transportation and storage revenue Customer capital contributions
3
4
(1)
126 $
$
Revenue
120
6
$
Delivery Revenue SaskEnergy provides reliable energy and competitive rates to customers, as they value low delivery charges. 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 and earn a return for its shareholders. 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 the financial impacts of these 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. SaskEnergy continues to focus on items within the Corporation’s control to embed efficiency into processes, such as identifying opportunities for standardization, simplification, and the elimination of waste from processes. SaskEnergy will continue to strive to provide customers with access to low-cost energy sources compared to alternatives and delivery charges that are among the lowest in Canada. 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 $4 million higher than 2023, primarily due to rate increases implemented effective October 1, 2023. Rate increases continue to address inflation, while the rate at which inflation is increasing is below the highs seen in 2022, prices continue to rise at a rate far above target. While economic forecasts anticipate a return to target in 2024, the ability to reach it remains to be seen. 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 from 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 revenues of $62 million, for the three months ending June 30, 2024, are $3 million higher than the same period in 2023. Higher delivery service revenues resulted from increased contracted demand volumes, as customers are executing higher contract demand services to meet their operating requirements. In addition, a 2 per cent average rate increase for transportation and storage services was implemented effective April 1, 2024, to address expansion of the transmission system and meet growing demand for natural gas services in Saskatchewan. Lower contracted demand volumes on export services in 2024 partially offset the favourable results as low natural gas prices and lower price differentials between Eastern and Western Canada reduced incentives for customers to utilize export services and supply Eastern Canada with natural gas.
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 $1 million lower in 2024, resulting from timing differences of distribution utility customer capital contributions in 2024 compared to 2023. 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 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 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, infrastructure to serve those customers grows, and the costs to operate and maintain the system rise in correlation with the increasing kilometres of gas lines, number of service connections and amount of compression equipment. Additional regulatory requirements and changing public perceptions have resulted in accelerated prevention, detection and mitigation initiatives - adding pressure to transmission and storage, and delivery service rates. Other expenses, net finance expenses and other net (gains) losses, as reported in the condensed consolidated financial statements are as follows:
Three months ended June 30,
(millions)
2024
2023 Change
$
32 49 34
$
$
(4) (1)
28 48 35
Employee benefits
Operating and maintenance Depreciation and amortization
1
5
-
5
Saskatchewan taxes
$ $ $
120 $
$ $ $
(4)
116
19
-
$ $
19
Net finance expenses
-
1
1
Other net losses
Employee Benefits Employee benefit costs were $4 million higher in 2024 than in 2023 as the new Collective Bargaining Agreement was effective February 2024 resulting in increased employee compensation in 2024, while full-time equivalents are trending higher due to the Corporation filling previously vacant positions. Operating and Maintenance Operating and maintenance expenses were $1 million higher than in 2023, primarily due to inflationary impacts and third- party transportation costs increasing. The Corporation utilizes third-party transportation to serve customer needs when it is more cost effective than developing new assets. With growing system requirements — resulting from customers continuing to choose, and other customers transitioning to, natural gas as their energy source — transportation costs are increasing as additional demand service contracts have been placed with third-party transportation providers. Depreciation and Amortization Depreciation and amortization were $1 million lower than the same period in 2023, as a major information system asset was fully depreciated in 2023-24, resulting in reduced depreciation. This was partially offset by increased depreciation on asset additions geared toward balancing safety and system integrity with the growing demand for natural gas services. Strategic capital investments required the necessary infrastructure be put in-service to meet this growing customer demand.
10
Management’s Discussion and Analysis
Net Finance Expenses Consumers and businesses are continuing to adapt to an interest rate environment elevated to levels not seen for well over a decade, challenging the Corporation and customers. Net finance expenses for 2024 were equal to 2023, primarily resulting from additional interest on net long-term debt issuances of $145 million during the first quarter. These debt issues will fund a portion of the current year’s capital investment in the Corporation’s natural gas line infrastructure — which benefits Saskatchewan customers in the short and long term. The additional long-term debt interest was offset by the impact of interest income earned, as cash from operations was held in the bank through most of the first quarter in 2024, until short-term debt maturities were reached and were paid. The debt-to-equity ratio at June 30, 2024, is 59 per cent, which falls within the long-term target range of 58 to 63 per cent debt. 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 June 30,
(millions)
2024
2023 Change
$
79
Cash provided by operating activities Cash used in investing activities Cash used in financing activities Increase in cash and cash equivalents
$
86
(7) (4)
$
(36) (61) (18)
(32) (35)
(26) (37)
$
19
$
$
Operating Activities Cash provided by operating activities decreased $7 million through the three months ended June 30, 2024, compared to the same period in 2023. A lower commodity margin and higher employee benefit costs are contributing to the decrease, a result of a commodity rate decrease from $4.20 per GJ to $3.20 per GJ effective October 1, 2023. Employee benefit costs grew in 2024, due to the implementation of the new Collective Bargaining Agreement, salary increases and full-time equivalents trending higher due to the Corporation filling previously vacant positions. Investing Activities Cash used in investing activities increased $4 million compared to 2023, primarily due to earlier capital investment in customer growth and risk management projects. Financing Activities Cash used in financing activities grew $26 million in 2024 compared to 2023, primarily due to higher net debt repayments in 2024 compared to 2023. During the first quarter of 2024-25, the Corporation borrowed an additional $150 million of long-term debt at a discount of $5 million and paid a long-term debt maturity of $100 million and $70 million of short- term debt. In addition, the Corporation used $29 million for interest payments and $6 million for dividend payments.
11
Management’s Discussion and Analysis
Capital Additions Capital additions, as reported in the condensed consolidated financial statements, were as follows:
Three months ended June 30,
(millions)
2024
2023 Change
$
11
$
2
$
9 3
Customer growth System expansion Risk management
2
(1)
16
3
13
3 2
4 1
(1)
Reliability of natural gas service
1 4
Business and technology optimization
$
34
$
$
30
Capital additions
SaskEnergy is committed to providing solutions and services that benefit customers and Saskatchewan, leveraging the Corporation’s expertise and Saskatchewan’s private sector. The Corporation deploys its strategic capital to fund customer growth and create new business capabilities. Fulfilling customer demand for additional natural gas capacity is a core responsibility for the Corporation and demand is forecasted to increase as a result of the growing industrial and power generation sectors. Key focus areas include maintaining the safety and reliability of the natural gas transmission and distribution systems, enhancing customer experience, and supporting the emissions reduction strategy. Capital additions through the three months ended June 30, 2024, were $4 million higher than the investment made in 2023, primarily due to increasing expenditures in customer growth and risk management projects. Customer Growth Investment in customer growth projects of $11 million was $2 million higher than 2023 investment levels, as the Corporation continues to focus on investments that connect customers to the transmission system. System Expansion 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 of $1 million in system expansion projects through 2024 compared to 2023, is resulting from spending on distribution system infrastructure reinforcement projects in the Regina area being initiated later than in the prior year. These projects will increase available delivery capacity in west Regina and position the Corporation to meet new Capital investment in safety and system integrity continues to be SaskEnergy’s top priority. SaskEnergy takes a long-term view and uses a risk-based approach, to determine project priorities and the appropriate level of total integrity spending. Industry comparable data also provides reference, as the industry as a whole has progressively elevated safety and system integrity capital investment over the last number of years. Risk management capital projects concentrate on mitigating the likelihood of a negative consequence occurring on the SaskEnergy system, such as damage or loss of gas containment. These consequences typically include damage to infrastructure, environment and potential harm to or loss of human life. Risk management spending of $16 million is approximately half of the Corporation’s 2024 year-to-date capital additions, and is $3 million higher than 2023 expenditures, as the Corporation increases focus on cathodic protection, measurement and service replacement projects. Reliability of Natural Gas Service SaskEnergy’s network of transmission and distribution infrastructure requires regular monitoring and inspection, maintenance, upgrading and replacement to maintain service reliability for customers, avoid public safety incidents, and meet growing regulatory requirements. Recent years have also seen an increase in the cyber threat landscape and as a critical infrastructure operator, the Corporation has developed a robust Enterprise Security program that addresses both cyber and physical risks. This program requires continual improvement to mitigate risks and ensure secure systems for reliable operations. customer demand. Risk Management
12
Management’s Discussion and Analysis
Reliability of natural gas in service includes enhancements, modifications or upgrades to facilities, ensuring that natural gas demand will be met without failure or loss of service. Reliability of natural gas service spending decreased by $1 million in 2024, as the Corporation focuses investment on purchasing construction equipment, system improvement work on town border stations and network improvements. Business and Technology Optimization 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 2024 year-to-date investment in business and technology optimization, is $1 million higher than 2023 and focused on the work management system upgrade project, which centers on work management business processes, foundational core systems integrations, and execution of ongoing enhancements. Outlook In 2024-25, SaskEnergy’s strategic imperatives include balancing affordability with environmental responsibility. The need for safe, reliable and affordable energy remains paramount for the people, businesses and industries of Saskatchewan to thrive. Responding to the current inflationary environment and continuing to find ways to efficiently serve customers with affordable energy is a growing challenge. Maintaining the integrity and reliability of the natural gas system, expanding to meet the growing needs of customers, and improving customers’ service experience are integral to the Corporation’s present and future. SaskEnergy anticipates modest growth from industrial customers to continue in 2024-25, with additions from gas-fired power generation leading the way. While the number of residential customers connected to SaskEnergy’s distribution system is expected to continue increasing, total demand and revenue growth from this customer segment is expected to remain stable due to energy efficiency improvements. Even with expected customer growth, SaskEnergy is forecasting lower earnings in 2024-25 due to higher operating costs, as well as lower asset optimization margins. Also contributing to anticipated earnings decline is the lack of delivery rate adjustment in 2024-25 as the organization continues to face pressure from inflationary cost increases. Affordability remains a top priority for SaskEnergy and its focus on operational excellence will look to limit the extent of possible delivery rate increases in the future. 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 2024-25, SaskEnergy will increase its capital investment in the province, with key areas of focus including: maintaining the safety and reliability of the natural gas transmission and distribution systems; enhancing customer experience; and continuing to support the emissions reduction strategy.
13
Consolidated Financial Statements
Contents Condensed C onsolidated Statement of Financial Position Condensed Consolidated Statement of Income and Comprehensive Income Condensed Consolidated Statement of Changes in Equity Condensed Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements
Long-Term Debt Commitments and Contingencies Unrealized Market Value Adjustments Natural Gas Sales and Purchases
General Information Basis of Preparation Material Accounting Policy Information
27
Natural Gas in Storage Held for Resale Financial and Derivative Instruments Financial Risk Management
Delivery Revenue
Transportation and Storage Revenue Net Finance Expenses Subsequent Event
Property, Plant and Equipment
Lease Liability
Consolidated Financial Statements (unaudited)
Condensed Consolidated Statement of Financial Position
June 30, 2024
March 31, 2024
(millions)
Notes
ASSETS Current assets Cash and cash equivalents
$
2
$
20
114
Trade and other receivables
185
26 21 43
Natural gas in storage held for resale
4
8
Inventory of supplies
20 11 11
Current portion of debt retirement funds Fair value of derivative instruments
9
5
215
255
18 45
Right-of-use assets Intangible assets
15 45
3,157
Property, plant and equipment
7
3,150
136
Debt retirement funds
168
3,571
$
3,633
$
LIABILITIES AND PROVINCE'S EQUITY Current liabilities Short-term debt
$
175 101
$
245 143
Trade and other payables
4
Dividends payable Contract liability
6
35
22
6
Current portion of lease liability Current portion of long-term debt Current portion of provisions Fair value of derivative instruments
8 9
5
75
100
7
8
27
5
26
430
555
3 4
Employee future benefits
3 4 8
Deferred revenue
10
Lease liability
8
155
Provisions
150
1,737 2,339
Long-term debt
9
1,667 2,387
Province's equity Equity advances
22
22
(11)
Other components of equity
(11)
1,221 1,232 3,571
Retained earnings
1,235 1,246
$
$
3,633
15
Consolidated Financial Statements (unaudited)
Condensed Consolidated Statement of Comprehensive Loss
For the Three Months Ended June 30, 2024
For the Three Months Ended June 30, 2023
Income (Loss) before Unrealized Market Value Adjust- ments
Income before Unrealized Market Value Adjust- ments
Unrealized Market Value Adjust- ments (Note 11)
Unrealized Market Value Adjust- ments (Note 11)
Total
Total
(millions)
Notes
REVENUE Natural gas sales
12 13 14
$
39 61 62
$
3
$
42 61 62
$
73 57 59
$
(4)
$
69 57 59
Delivery
- - -
- - -
Transportation and storage Customer capital contributions
3
3
4
4
165
3
168
193
(4)
189
EXPENSES Natural gas purchases (net of change in inventory)
12
32 32 49 34
7
39 32 49 34
57 28 48 35
13
70 28 48 35
Employee benefits
- - - -
- - - -
Operating and maintenance Depreciation and amortization
Saskatchewan taxes
5
5
5
5
152
7
159
173
13
186
NET INCOME BEFORE THE FOLLOWING Net finance expenses
13
(4)
9
20
(17)
3
15
(19)
- -
(19)
(19)
- -
(19)
Other net losses TOTAL NET LOSS
-
-
(1)
(1)
$
(6)
$
(4)
$
(10)
$
-
$
(17)
$
(17)
ITEMS THAT MAY BE RECLASSIFIED TO NET LOSS Change in fair value of debt retirement funds designated as FVOCI (1)
-
-
-
-
(1)
(1)
COMPREHENSIVE LOSS
$
(6)
$
(4)
$
(10)
$
-
$
(18)
$
(18)
The accompanying notes are an integral part of the condensed consolidated financial statements (1) Fair value through other comprehensive income (FVOCI)
16
Consolidated Financial Statements (unaudited)
Condensed Consolidated Statement of Changes in Equity
Other Components of Equity
Retained Earnings
Equity Advances
Total
(millions)
BALANCE, AT APRIL 1, 2023
$
1,247
$
1,235
$
22
$
(10)
20
Comprehensive income
21
- -
(1)
(21)
Dividends
(21)
-
BALANCE, AT MARCH 31, 2024
1,246
1,235
22
(11)
(10)
Comprehensive loss
(10)
- -
- -
(4)
Dividends
(4)
BALANCE, AT JUNE 30, 2024
$
1,232
$
1,221
$
22
$
(11)
The accompanying notes are an integral part of the condensed consolidated financial statements
17
Consolidated Financial Statements (unaudited)
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended June 30,
(millions)
Notes
2024
2023
OPERATING ACTIVITIES Net loss
$
(10)
$
(17)
Add 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
3 1
11 11
17
-
34 19
Depreciation and amortization
35 19
Net finance expenses Other non-cash items
15
-
1
47 32 79
55 31 86
Net change in non-cash working capital related to operations
Cash provided by operating activities
INVESTING ACTIVITIES Additions to intangible assets
(2)
(1)
(32)
Additions to property, plant and equipment
(29)
(2)
Decommissioning costs
(2)
(36)
Cash used in investing activities
(32)
FINANCING ACTIVITIES Debt retirement funds redemptions Debt retirement funds installments Net repayment of short-term debt Proceeds from long-term debt
10
-
(10) (70)
(10)
(115)
145
9 9 8
120
(100)
Repayment of long-term debt
-
(1)
Repayment of principal on lease liability
(1)
(29)
Interest paid Dividends paid
(23)
(6)
(6)
(61)
Cash used in financing activities
(35)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
$
(18)
$
19
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
20
$
6
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
2
$
25
The accompanying notes are an integral part of the condensed consolidated financial statements
18
Notes to the 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 of 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. The SaskEnergy Act was amended in December 2023. The amendment provided that, as of January 1, 2024, and for the purposes of Part 1 of the Greenhouse Gas Pollution Pricing Act ( GGPPA ), the Provincial Crown is the sole registered distributor of natural gas in Saskatchewan, in place of the Corporation. Pursuant to the amendment, the Corporation shall not have the power, right, authority, responsibility or obligation to pay or withhold payment of any charge, tax, levy, remittance or other payment arising from the delivery of natural gas required by Part 1 of the GGPPA .
2.
Basis of Preparation
a.
Statement of compliance
The Corporation’s 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 of 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, 2024.
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 28, 2024.
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
19
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