Natural Resources Canada Quarterly Financial Report (Unaudited) for the Quarter Ended December 31, 2013

Statement outlining results, risks and significant changes in operations, personnel and programs

1. Introduction

This quarterly financial report should be read in conjunction with the Main Estimates and Supplementary Estimates (A), Supplementary Estimates (B), and the Net Budgetary Authorities published on the Treasury Board Secretariat website, as well as Canada’s Economic Action Plan 2013 (Budget 2013). It has been prepared by management as required by section 65.1 of the Financial Administration Act and in the form and manner prescribed by Treasury Board. This quarterly financial report has not been subject to an external audit or review.

1.1 Authority, Mandate and Programs

Natural Resources Canada (NRCan) seeks to enhance the responsible development and use of Canada’s natural resources and the competitiveness of Canada’s natural resource sectors. The department is an established leader in science and technology in the fields of energy, forests, and minerals and metals, and applies its expertise in earth sciences to build and maintain an up-to-date knowledge base of Canada’s landmass. NRCan develops policies and programs that enhance the contribution of the natural resource sectors to the economy and improve the quality of life of Canadians.^Footnote1

Further details on NRCan’s authority, mandate and programs can be found in Part II of the Main Estimates.

1.2 Basis of Presentation

This quarterly financial report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes NRCan’s spending authorities granted by Parliament, and those used by NRCan are consistent with the Main Estimates, Supplementary Estimates (A) and (B) as well as well as transfers from Treasury Boardfor the 2013-14 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework.

The authority of Parliament is required before monies can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2013 was tabled in Parliament on March 21, after the tabling of the Main Estimates on February 25, 2013, while Budget 2012 was tabled in Parliament on March 29, after the tabling of the Main Estimates on February 28, 2012. As a result, the measures in Budget 2013 could not be reflected in the 2013-14 Main Estimates and the measures in Budget 2012 were not reflected in the 2012-13 Main Estimates.

In fiscal year 2013-14, frozen allotments were established by Treasury Board authority in departmental votes to prohibit the spending of funds identified as savings measures in Budget 2013. The changes to departmental authorities for future years were implemented through the Annual Reference Level Update, as approved by Treasury Board, and reflected in the subsequent Main Estimates tabled in Parliament. The same approach was taken in 2012-13 for savings measures in Budget 2012.

NRCan uses the full accrual method of accounting to prepare and present its annual unaudited departmental financial statements, which are part of the Departmental Performance Report. However, the spending authorities voted by Parliament remain on an expenditure basis.

2. Highlights of Fiscal Quarter and Fiscal Year-to-Date Results

This Departmental Quarterly Financial Report reflects the results as at December 31, 2013, including Main Estimates, Supplementary Estimates (A) and (B), the Operating Budget Carry Forward, the Capital Budget Carry Forward and the TB Vote 15 for Collective Agreements for which full supply was released. The details presented in this report focus on and compare the third quarter results of 2013-14 with those of 2012-13.

Authorities

As per Table 1, presented at the end of this document, and Graph 1 below, as at December 31, 2013, NRCan has authorities available for use of $2,822.7 million in 2013-14 compared to $2,873.3 million in 2012-13, for a net decrease of $50.6 million or 1.8%.

Graph 1

The decrease of $50.6 million in authorities in 2013-14 compared to 2012-13 is explained by the net effect of both decreases and increases within operating expenditures, capital expenditures, grants and contributions, and statutory authorities, as per the following.

For operating expenditures, a net increase of $23.7 million in authorities is explained mainly by the following year-over-year changes:

Increases:

• $34.5 million for the Nuclear Legacy Liabilities Program as part of a planned adjustment to the program financial profile;
• $12.5 million for the Stakeholder Engagement and Outreach Campaign to Build Prosperity for Canada - International Advertising Component which is a new program for fiscal year 2013-14;
• $8.5 million for the Atomic Energy of Canada Limited Restructuring, which is reflected in Supplementary Estimates (B) in 2013-14;
• $8.1 million for Operating Budget Carry Forward (OBCF) as the OBCF amount was greater in 2013-14 than in 2012-13;
• $7.5 million for the Advertising Campaign Program; and
• $1.3 million for the transfer to Capital Budget of existing NRCan funding for the Revitalization of NRCan’s Satellite Station Facilities across Canada.

Decreases:

• $15.4 million for the reimbursement of Paylist expenditures which was included in fiscal year 2012-13 third quarter authorities, while in fiscal year 2013-14, is not yet included in NRCan’s authorities;
• $14.7 million for the Geo-mapping for Energy and Minerals Program as it sunsetted on March 31, 2013 and was renewed in fiscal year 2013-14 through Supplementary Estimates (B) with a lower amount of funding;
• $14.5 million for the Port Hope Area Initiative as part of a planned adjustment to the program financial profile; and
• $7.1 million for the Budget 2012 Savings Measures that are not included in any specific programs mentioned in these operating expenditures as the savings measures are higher in 2013-14 than 2012-13.

For capital expenditures, a net decrease of $2.6 million in authorities is explained mainly by the following year-over-year changes:

Increases:

• $7.7 million for the Revitalization of NRCan’s Satellite Station Facilities across Canada;
• $0.5 million for Capital Budget Carry Forward (CBCF) as the CBCF amount was greater in 2013-14 than in 2012-13;
• $0.4 million for the relocation of the CANMET Materials Technology Laboratory to Hamilton; and
• $0.2 million for transfer from Department of National Defence for the Canadian Safety and Security Program.

Decreases:

• $10.1 million for the construction of the Canadian Armed Forces Arctic Training Centre (CAFATC) in Resolute Bay, Nunavut, as the project was almost completed in 2012-13; and
• $1.3 million for the transfer from Operating Budget of existing NRCan funding for the Revitalization of NRCan’s Satellite Station Facilities across Canada.

For grants and contributions, a net decrease of $133.2 million in authorities is explained mainly by the following year-over-year changes:

Increases:

• $10 million for the Investments in Forest Industry Transformation Program as part of a planned adjustment to the program financial profile ;
• $3.1 million for Gunnar Mine Remediation Program as part of a planned adjustment to the program financial profile; and
• $2.8 million for the Isotope Technology Acceleration Program as part of a planned adjustment to the program financial profile.

Decreases:

• $73.7 million for Clean Energy Fund due to a planned adjustment to the program financial profile;
• $51.0 million for the ecoENERGY for Biofuels Producer Incentive due to a planned adjustment to the program financial profile;
• $12.5 million for the grant to Sustainable Development Technology Canada for the Next Generation Biofuels Fund due to a planned adjustment to the program financial profile;
• $5.9 million for the Forest Innovation Program and Expanding Market Opportunities Program as part of a planned adjustment to the program financial profile;
• $3.5 million for the Budget 2012 Savings Measures that are not included in any specific programs mentioned in these grants and contributions as the savings measures are higher in 2013-14 than 2012-13; and
• $2.8 million for the Wind Power Production Incentive Program as part of a planned adjustment to the program financial profile.

For statutory items, a net increase of $61.3 million in authorities is explained mainly by:

Increases:

• $154.2 million in the Newfoundland Offshore Petroleum Resource Revenue Fund as expectations are that more revenue will be collected in 2013-14 than in 2012-13; and
• $22.5 million pertaining to the Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources as the authority was provided in the Supplementary Estimates (C) in the fourth quarter of 2012-13.

Decreases:

• $59.3 million for the statutory grant to Sustainable Development Technology Canada (SDTC) for the Next Generation Biofuels Fund as SDTC’s cash flow does not require funding for 2013-14; and
• $56.5 million in the Nova Scotia Offshore Revenue Account caused by fluctuations in oil and gas prices and production levels.

In addition to the above detail, other minor increases and decreases occurred within the appropriated funding and in other statutory departmental programs.

Budgetary Expenditures by Standard Object

As at December 31, 2013, year-to-date spending amounts to $1,198 million or 42.4% of total funding available, compared to $1,154.8 million or 40.2% at the same time last year. The year-to-date increase of $43.2 million in expenditures between 2013-14 and 2012-13 is represented in Table 2 at the end of this document for all standard objects.

The spending for the quarter ending December 31, 2013, amounts to $461.9 million or 16.4% of total funding available for the fiscal year, compared to $313 million or 10.9% for the same quarter last year. The increase in expenditures for the quarter ending December 31, 2013, of $148.9 million between 2013-14 and 2012-13, is represented in Graph 2 below only for standard objects with significant expenses and in Table 2 at the end of this document for all standard objects.

Graph 2

The decrease of $5.4 million in personnel expenditures between the third quarters of 2013-14 ($105.1 million) and 2012-13 ($110.5 million) is mainly explained by the following:

Decreases:

• $4.1 million mainly attributed to timing differences in expenditures funded by Treasury Board (e.g. maternity/paternity leave, severance pay and vacation pay when leaving the public service);
• $1 million for personnel resulting from the decrease in FTEs due to Strategic and Operating Review (SOR) and restructuring of some of the sectors; and
• $0.3 million mainly attributed to a lower salary budget following the renewal of the Geo-mapping for Energy and Minerals Program.

The year-to-date expenditures for personnel expenditures decreased by $7.9 million mainly related to the decrease in FTEs due to SOR and restructuring of some of the sectors.

The increase of $18.7 million in expenditures for professional and special services between the third quarters of 2013-14 ($75.7 million) and 2012-13 ($57 million) is mainly explained by the following:
Increases:

• $16.7 million related to the Nuclear Legacy Liabilities Program (NLLP) mainly attributed to the increase funding for NLLP in 2013-14 compared to 2012-13;
• $1.7 million related to the timing of expenditures from one year to the next for various programs;
• $1.7 million related to the advisory services for the restructuring of Atomic Energy of Canada Limited’s Nuclear Laboratories, which started in fiscal year 2013-14; and
• $0.6 million related to increased spending in 2013-14 for web developers and implementation of a departmental information management system (GCDocs).

Decreases:

• $0.9 million for the review of the Port Hope Area Initiative (PHAI) procurement strategy and procurement which has reduced the anticipated spending this fiscal year;
• $0.5 million for contracts that ended in 2012-13 and are not recurring in 2013-14;
• $0.4 million as a result of higher expenditures in 2012-13 related to the release of Energy Star Portfolio Manager and the absence of compliance surveys in 2013-14 as they are conducted every two years; and
• $0.4 million as a result of a lower budget for the Geo-mapping for Energy and Minerals Program.

The year-to-date expenditures on professional and special services increased by $46.3 million and is mainly attributable to the NLLP, which accounts for $43 million of the year-to-date increase.

The increase of $141.7 million in expenditures for transfer payments between the third quarters of 2013-14 ($263.2 million) and 2012-13 ($121.5 million), primarily consists of:

Increases:

• $137.4 million for the payment to the Newfoundland Offshore Petroleum Resource Revenue Fund. These statutory payments mirror in most part royalty revenues collected in relation to offshore oil and gas activity and fluctuate based on oil and gas prices and production levels;
• $15 million for Investments in the Forest Industry Transformation Program whereas in the previous fiscal year payments were made in the fourth quarter;
• $4.9 million for the ecoEII program for which there were minimal expenditures until the fourth quarter of 2012-13; and
• $3.6 million for the Isotope Technology Acceleration Program as the 2012-13 spending only occurred in the fourth quarter.

Decreases:

• $7 million for the payment to the Nova Scotia Offshore Revenue Account. This statutory payment mirrors royalty revenues collected in relation to offshore oil and gas activity and fluctuates based on oil and gas prices and production levels;
• $5.4 million for ecoENERGY for Biofuels Producer Initiatives mainly due to lower biofuel incentives rate per litre of ethanol and biodiesel; and
• $5 million for the ecoENERGY Renewable Power and Wind Power Production Incentive programs for which there were less payments in the third quarter of 2013-14 due to the variability of renewable resources.

Year-to-date transfer payments decreased by a net $8.4 million between the fiscal years of 2013-14 and 2012-13, primarily consist of:

• $66.3 million increase for the payment to the Newfoundland Offshore Petroleum Resource Revenue Fund;
• $44.9 million decrease for the payment to the Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources; and
• $28.4 million decrease for the payment to the Nova Scotia Offshore Revenue Account.

3. Risks and Uncertainties

NRCan manages a number of risks, the most prominent of which are identified in its Corporate Risk Profile. Many of these risks relate to uncertainties in the global context and their potential impacts on Canada’s natural resource sectors which, given their significant contribution to the economy, might impact the country’s prosperity. As the lead on natural resource issues at the federal level, NRCan plays a key role in managing these risks. NRCan also handles a range of operational risks.

In the short run, global economic growth is expected to remain weak. The improved performance of developed countries is being counterbalanced by the slowing growth of developing countries. This may impact the demand for natural resources, which is largely driven by that of developing countries. Further, although the medium-term outlook for global demand for energy is soaring, Canada must confront structural shifts in natural resource demand and supply in both mature and emerging markets. It also faces challenges to maintaining an attractive climate for resource development, which is driven in part by infrastructure limitations.

These issues continue to create uncertainties, which affect the pace at which the department’s projects conducted in partnership with external stakeholders and industry – including joint research, development and demonstration projects – can be implemented. NRCan has mitigated financial risks by closely tracking program uptake, following best practices in accordance with the Financial Administration Act and requesting the reprofiling of funds, as required, to ensure program objectives continue to be met.

NRCan continues to manage financial uncertainty associated with the sunsetting of specific time-limited programs as well as the need to absorb costs related to collective bargaining increases following the announcement in the Speech from the Throne of an operating budget freeze. NRCan mitigates its financial risks through scenario planning, the conduct of a monthly analysis of trends and forecasting in salary expenditures and non-salary expenditures, and comprehensive quarterly reviews. The Department continues to provide support to the few employees still in workforce adjustment as a result of Budget 2012 Savings Measures and other cost reduction exercises.

4. Significant Changes in Relation to Operations, Personnel, Programs

The third quarter of 2013-14 saw one change at the Assistant Deputy Minister level as well in the position of the Chief Scientist.

No other significant changes in relation to operations, personnel or programs occurred during the third quarter of 2013-14.

5. Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that are being implemented to refocus government and programs, make it easier for Canadians and businesses to deal with their government, and modernize and reduce the back office.

NRCan’s budget was adjusted in 2012 to implement ongoing annual savings of $107 million by 2014-15, together with annual savings of $5 million associated with the horizontal review of the International Assistance Envelope. In achieving these savings, NRCan is streamlining corporate support to ensure sustainability and achieve internal efficiencies; focusing on core roles and alignment with Government priorities; focusing on work that provides clear economic benefits and adapts to changing industry circumstances; and scaling back programs to maintain affordability. In the first year of implementation, NRCan achieved savings of $67.8 million. Savings increased to $84.7 million in 2013-14 and will rise to $107 million in 2014-15 and future years. In addition, annual savings of $5 million, which began in 2012-13, were achieved through the horizontal review of the International Assistance Envelope. In implementing these changes, NRCan has made it a priority to treat its employees in an equitable, transparent and respectful manner. The transition to a smaller workforce is largely complete and the department is supporting its employees still engaged in the workforce adjustment process. A planning, monitoring and reporting framework for tracking implementation of Budget 2012 savings measures is in place. Progress on financial, HR and operational adjustments for specific savings initiatives is being tracked on a quarterly basis.

Other measures referenced in Budget 2012, which provided NRCan with renewed or new funding for a total of $162 million over two years, included:

• Supporting the Major Projects Management Office Initiative ($9 million to NRCan);
• Continuing the ongoing transformation of the forest sector through market development and innovation support ($105 million);
• Supporting the development of alternatives to existing medical isotope production technologies through the Isotope Technology Acceleration Program ($17 million);
• Revitalizing NRCan’s satellite station facilities across Canada ($23 million); and
• Supporting the Port Hope Area Initiative ($8 million).

Approved by:

Original Signed by

Serge P. Dupont
Deputy Minister
February 21, 2014
Ottawa, Canada

Original Signed by

Kami Ramcharan, CMA
Chief Financial Officer
February 17, 2014
Ottawa, Canada

Table 1: Statement of Authorities (unaudited)

(in thousands of dollars)	Fiscal year 2013-14			Fiscal year 2012-13
	Total available for use for the year ending March 31, 2014*	Used during the quarter ended December 31, 2013	Used year-to-date at quarter-end	Total available for use for the year ending March 31, 2013**	Used during the quarter ended December 31, 2012	Used year-to-date at quarter-end
Vote 1 - Net Operating Expenditures	869,623	179,162	538,069	845,878	169,692	485,811
Vote 5 - Capital Expenditures	28,795	4,579	10,858	31,357	6,871	11,406
Vote 10 - Grants and Contributions	608,828	93,131	196,771	742,019	79,673	196,026
Statutory Payments
Minister of Natural Resources – Salary and motor car allowance	79	19	59	78	18	58
Contributions to employee benefit plans	60,181	14,926	44,780	59,716	14,929	44,787
Collection agency fees under sec 17.1 of the Financial Administration Act	-	4	5	-	-	19
Spending of amounts equivalent to proceeds from disposal of surplus crown assets	-	-	28	-	6	8
Canada Foundation for Sustainable Development Technology Grant	-	-	-	59,338	-	-
Contribution to the Canada/ Newfoundland Offshore Petroleum Board	7,756	-1,030	2,796	7,756	441	4,259
Contribution to the Canada/Nova Scotia Offshore Petroleum Board	3,550	111	1,987	3,450	889	2,663
Payments to the Nova Scotia Offshore Revenue Account	79,339	3,392	14,227	135,846	10,327	42,665
Payments to the Newfoundland Offshore Petroleum Resource Revenue Fund	1,142,062	167,592	375,601	987,902	30,150	309,288
Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources	22,460	-	12,856	-	-	57,775
Total Statutory Payments	1,315,427	185,014	452,339	1,254,086	56,761	461,522
Total Budgetary Authorities	2,822,673	461,886	1,198,036	2,873,339	312,997	1,154,765

* Total available for use includes only authorities available for use and granted by Parliament at quarter-end: Main Estimates, Supplementary Estimates (A) and Supplementary Estimates (B) and does not reflect measures announced in Budget 2013.
** Total available for use does not reflect measures announced in Budget 2012. Includes only authorities available for use and granted by Parliament at quarter-end: Main Estimates, Supplementary Estimates (A) and Supplementary Estimates (B).

Table 2: Budgetary Expenditures by Standard Object (unaudited)

(in thousands of dollars)	Fiscal year 2013-14			Fiscal year 2012-13
	Planned expenditures for the year ending March 31, 2014*	Expended during the quarter ended December 31, 2013***	Year-to-date used at Quarter- end	Planned expenditures for the year ending March 31, 2013**	Expended during the quarter ended December 31, 2012	Year-to-date used at Quarter-end
Budgetary Expenditures:
Personnel	408,374	105,112	329,527	422,390	110,548	337,447
Transportation and communication	40,007	3,668	10,012	41,516	4,717	11,838
Information	10,844	-2,791	9,476	8,379	3,240	6,264
Professional and special services	400,079	75,711	193,809	377,438	57,029	147,494
Rentals	20,856	2,289	12,192	16,827	3,019	13,788
Repair and maintenance	7,781	648	1,556	6,863	867	1,692
Utilities, materials and supplies	32,685	4,192	10,045	23,403	3,693	9,759
Acquisition of land, buildings and works	25,717	222	274	31,357	3,296	6,815
Acquisition of machinery and equipment	36,542	5,219	13,240	34,127	4,098	6,470
Transfer payments	1,863,994	263,196	604,238	1,936,311	121,479	612,675
Other subsidies and payments	11,562	11,678	32,274	8,062	5,464	15,499
Total Budgetary Expenditures	2,858,441	469,144	1,216,643	2,906,673	317,450	1,169,741
Less:
Total Revenues Netted Against Expenditures	35,768	7,258	18,607	33,333	4,452	14,976
Total Net Budgetary Expenditures	2,822,673	461,886	1,198,036	2,873,339	312,998	1,154,765

* Planned expenditures do not reflect measures announced in Budget 2013.

**Planned expenditures do not reflect measures announced in Budget 2012. Includes only authorities available for use and granted by Parliament at quarter-end: Main Estimates, Supplementary Estimates (A) and Supplementary Estimates (B).

*** Negative expenses of $2,791K under Information is the result of a refund from a supplier for an expense charged to a previous quarter combined with an expense reallocated to the previous year.