Natural Resources Canada Quarterly Financial Report (Unaudited) for the Quarter Ended June 30, 2014

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), and the Net Budgetary Authorities published on the Treasury Board Secretariat website, as well as Canada’s Economic Action Plan 2014 (Budget 2014).   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 and Supplementary Estimates (A) for the 2014-15 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 2014 was tabled in Parliament on February 11, 2014, before the tabling of the Main Estimates on February 27, 2014, while Budget 2013 was tabled in Parliament on March 21, 2013, after the tabling of the Main Estimates on February 25, 2013. The measures in Budget 2014 were not reflected in the 2014-15 Main Estimates and the measures in Budget 2013 were not reflected in the 2013-14 Main Estimates.

In fiscal year 2014-15, frozen allotments will be established by Treasury Board authority in departmental votes to prohibit the spending of funds identified as savings measures in Budget 2014. The changes to departmental authorities for future years will be 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 2013-14 for savings measures in Budget 2013.

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 June 30, 2014, including Main Estimates and Supplementary Estimates (A) for which full supply was released. The details presented in this report focus on and compare the first quarter results of 2014-15 with those of 2013-14.

Authorities

As per Table 1, presented at the end of this document, and on Graph 1 below, as at June 30, 2014, NRCan has authorities available for use of $2,729.6 million in 2014-15 compared to $2,779 million in 2013-14, for a net decrease of $49.4 million or 1.8%.

Graph 1

The decrease of $49.4 million in authorities in 2014-15 compared to 2013-14 is explained by the net effect of both increases and decreases within operating expenditures, capital expenditures, grants and contributions, and statutory authorities, as per the following.

For operating expenditures, a net increase of $45.5 million between the first quarters of 2014-15 ($844.8 million) and 2013-14 ($799.3 million) in authorities available for use is explained mainly by the following year-over-year changes:

Increases:

• $30.5 million for the Port Hope Area Initiative as part of a planned adjustment to the program financial profile;
• $22.9 million for the Nuclear Legacy Liabilities Program as part of a planned adjustment to the program financial profile;
• $20.3 million for the Stakeholder Engagement and Outreach Campaign to Build Prosperity for Canada - International Advertising Component as this new program was approved in fiscal year 2013-14 through Supplementary Estimates (B);
• $11.7 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); and
• $10 million for Advisory Services for the restructuring of Atomic Energy of Canada Limited, as this funding was approved in fiscal year 2013-14 through Supplementary Estimates (B).

Decreases:

• $16.5 million for the Advertising Campaign Program as it sunsetted on March 31, 2014;
• $15.2 million for the Budget 2012 Savings Measures and Budget 2013 Travel Reduction as the amount of reduction increased from 2013-14 to 2014-15;
• $7.7 million for the Clean Energy Fund as part of a planned adjustment to the program financial profile;
• $3.4 million for the Targeted Geoscience Initiative Phase IV as part of a planned adjustment to the program financial profile;
• $3 million for the Program of Energy Research and Development as part of a planned adjustment to the program financial profile; and
• $1.8 million for transfers to the Capital Vote as part of an alignment exercise.

For capital expenditures, a net decrease of $12.8 million between the first quarters of 2014-15 ($12.8 million) and 2013-14 ($25.6 million) in authorities available for use is explained mainly by the following year-over-year changes:

Increases:

• $1.8 million for transfers from the Operating Vote as part of an alignment exercise; and
• $0.2 million for the Marine Geo-hazards program, which is new in fiscal year 2014-15.

Decreases:

• $10.8 million for the Revitalization of NRCan’s Satellite Station Facilities across Canada as part of a planned adjustment to the program financial profile as work was mostly completed by March 31, 2014;
• $3.3 million for the relocation of the CANMET Materials Technology Laboratory to Hamilton as work was mostly completed by March 31, 2014; and
• $0.6 million for the Canadian Armed Forces Arctic Training Centre (CAFATC) as the project was completed by March 31, 2014.

For grants and contributions, a net decrease of $194.9 million between the first quarters of 2014-15 ($444 million) and 2013-14 ($638.9 million) in authorities available for use is explained mainly by the following year-over-year changes:

Increases:

• $12.5 million for the grant to Sustainable Development Technology Canada-Tech Fund due to a planned adjustment to the program financial profile; and
• $4 million for Gunnar Mine Remediation Program as part of a planned adjustment to the program financial profile.

Decreases:

• $107.5 million for Clean Energy Fund due to a planned adjustment to the program financial profile resulting from a number of projects not proceeding and also the program sunsets on March 31, 2015;
• $35.7 million for the Investments in Forest Industry Transformation Program as it sunsetted on March 31, 2014;
• $31.1 million for the ecoENERGY for Biofuels Producer Incentive due to a planned adjustment to the program financial profile;
• $25 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;
• $4.6 million for the Isotope Technology Acceleration Program as part of a planned adjustment to the program financial profile;
• $3.3 million for the Forest Innovation Program and Expanding Market Opportunities Program as part of a planned adjustment to the program financial profile;
• $2.6 million for the Wind Power Production Incentive Program as part of a planned adjustment to the program financial profile; and
• $1.9 million for the African Model Forest Initiative as it sunsetted on March 31, 2014.

For statutory items, a net increase of $112.8 million between the first quarters of 2014-15 ($1,428 million) and 2013-14 ($1,315.2 million) in authorities available for use is explained mainly by:

Increases:

• $79.3 million for the Canada Foundation for Sustainable Development Technology - Next Generation Biofuels Fund – Statutory; and
• $57.4 million in the Newfoundland Offshore Petroleum Resource Revenue Fund as expectations are that more revenue will be collected in 2014-15 than in 2013-14.

Decreases:

• $11.1 million in the Nova Scotia Offshore Revenue Account caused by fluctuations in oil and gas prices and production levels;
• $8.1 million pertaining to the Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources due to a planned adjustment to the program financial profile; and
• $4.8 million for the Contribution to the Employee Benefit Plan as a result of a change in rate and a reduction in salary funding.

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

The spending for the quarter ending June 30, 2014 amounts to $251.9 million or 9.2% of total funding available for the fiscal year, compared to $249.1 million or 9% for the same quarter last year. Therefore, spending for the first quarter for both fiscal years has been relatively stable. Further analysis has been done on standard objects with significant expenses, which is represented on Graph 2 below, and Table 2 at the end of this document presents the spending for all standard objects.

Graph 2

The net decrease of $4.8 million in personnel expenditures between the first quarters of 2014-15 ($103 million) and 2013-14 ($107.7 million) is mainly explained by a decrease in FTEs due to the implementation of Budget 2012 Savings Measures and the restructuring of some of the sectors. These reductions also decrease NRCan’s expenditures for the Contribution to the Employee Benefit Plan.

The decrease of $8.9 million in expenditures for professional and special services between the first quarters of 2014-15 ($41.2 million) and 2013-14 ($50.1 million) is mainly explained by the following:

Decreases:

• $7.3 million related to the timing of expenditures from one year to the next for various programs; and
• $1.6 million for the Cold Stream Well relief drilling that occurred in the first quarter of 2013-14 but did not occur in the first quarter of 2014-15.

The increase of $9.7 million in expenditures for transfer payments between the first quarters of 2014-15 ($87.7 million) and 2013-14 ($78 million) primarily consists of:

Increases:

• $14.4 million of which $9.6 million is for the payment to the Newfoundland Offshore Petroleum Resource Revenue Fund and $4.8 million is for the payment to the Nova Scotia Offshore Revenue Account. These statutory payments mirror, for the most part, royalty revenues collected in relation to offshore oil and gas activity and fluctuate based on oil and gas prices and production levels;
• $2.8 million for the ecoENERGY Renewable Power program due to the increased production levels of renewable resources in fiscal year 2014-15;
• $0.8 million for the Isotope Technology Acceleration Program due to the advances given in the contribution program according to the proponent agreements in the first quarter of fiscal year 2014-15;
• $0.3 million for the Contribution to the Canada-Newfoundland and Labrador Offshore Petroleum Board;
• $0.3 million for the ecoENERNGY Innovation Initiative program due to timing of expenditures from one year to the next year; and
• $0.2 million for the Science and Technology Internship Program, since in fiscal year 2013-14, the program was in the process of establishing contribution agreements and therefore expenditures were low, as opposed to the first quarter of 2014-15 with contribution agreements already in place.

Decreases:

• $7.7 million for ecoENERGY for Biofuels Producer Initiatives mainly due to delays in payment processing as a result of new review requirements;
• $0.4 million for the Expanding Market Opportunities Program;
• $0.3 million for the Forest Innovation Program;
• $0.3 million for the Wind Power Production Incentive program due to the decreased production levels of renewable resources in fiscal year 2014-15; and
• $0.3 million for the Forest Communities Program due to the termination of the program in fiscal year 2013-14.

In addition, the increase of $7.6 million in the first quarter of 2014-15 ($13.7 million) compared to the first quarter of 2013-14 ($6.1 million) for “Other subsidies and payments” is mainly due to a one-time transition payment of $12.3 million for implementing salary payment in arrears by the Government of Canada in 2014-15, offset by a reduction of $4.5 million related to the Interdepartmental Settlement Suspense Account in 2013-14.

 

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 growth is expected to remain sluggish driven by a number of factors including the severe winter weather disruptions in the US economy, deceleration in developing economies, and financial market turbulence resulting from geopolitical conflict within and between countries. This may impact the demand for natural resources. While the medium-term outlook for global demand for Energy is growing, Canada faces challenges to maintain an attractive climate for resource development, driven in part by existing infrastructure limitations and social licence issues. 

These macro challenges impact all levels of Canada’s resource industry and create uncertainties that may constrain their ability to execute on their business plans. This may 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. NRCan also faces challenges in addressing the need to absorb costs related to collective bargaining as well as addressing mounting financial pressures resulting from its aging real property assets. 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. NRCan has also implemented several specific initiatives to address these challenges including the development of sector-specific plans to meet existing and anticipated sector financial pressures.

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

Over the last few months, the Department has welcomed the arrival of the Honourable Greg Rickford P.C., M.P. as the new Minister of Natural Resources effective March 19, 2014, and Bob Hamilton, the Department’s new Deputy Minister effective July 2, 2014. In addition, the creation of the Major Projects Management Office-West branch was announced on May 27, 2014, with a mandate to support the implementation of recommendations from the Eyford Report.

No other significant changes in relation to operations, personnel or programs occurred during the first quarter of 2014-15.

5. Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that have been 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, with additional annual savings of $5 million associated with the horizontal review of the International Assistance Envelope. In achieving these savings, NRCan has streamlined corporate support to ensure sustainability and achieve internal efficiencies; focused on core roles and alignment with Government priorities; focused on work that provides clear economic benefits and adapts to changing industry circumstances; and scaled 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 to $107 million in 2014-15 and for 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 mostly complete and the Department is supporting a very small number of employees still engaged in the workforce adjustment process. A planning, monitoring and reporting framework for tracking implementation of Budget 2012 savings measures was developed, and progress on financial, HR and operational adjustments for specific savings initiatives was tracked on a quarterly basis since June 2013. During the last quarter, Assistant Deputy Ministers accountable for monitoring and reporting on Budget 2012 savings measures were asked to complete attestation forms confirming the completion of their implementation plans and providing an overall attestation for the implementation of all Budget 2012 savings measures and indicating any exceptions, impacts and corrective actions. All plans were reported as having been fully implemented.

 

Approved by:

Original Signed by

Bob Hamilton
Deputy Minister
August 27, 2014
Ottawa, Canada

Original Signed by

Kami Ramcharan, CMA
Chief Financial Officer
August 19, 2014
Ottawa, Canada

Table 1:  Statement of Authorities (unaudited)

(in thousands of dollars)

	Fiscal year 2014-15			Fiscal year 2013-14
	Total available for use for the year ending March 31, 2015*	Used during the quarter ended June 30, 2014	Used year-to-date at quarter-end	Total available for use for the year ending March 31, 2014**	Used during the quarter ended June 30, 2013	Used year-to-date at quarter-end
Vote 1 - Net Operating Expenditures	844,823	148,286	148,286	799,352	155,301	155,301
Vote 5 - Capital Expenditures	12,777	2,192	2,192	25,535	822	822
Vote 10 - Grants and Contributions	444,039	21,942	21,942	638,924	26,977	26,977
Statutory Payments
Minister of Natural Resources – Salary and motor car allowance	80	20	20	79	20	20
Contributions to employee benefit plans	55,168	13,792	13,792	59,957	14,927	14,927
Canada Foundation for Sustainable Development Technology Grant	79,338	-	-	-	-	-
Contribution to the Canada/Newfoundland Offshore Petroleum Board	7,756	2,209	2,209	7,756	1,913	1,913
Contribution to the Canada/Nova Scotia Offshore Petroleum Board	3,550	938	938	3,550	938	938
Payments to the Nova Scotia Offshore Revenue Account	68,216	6,721	6,721	79,339	1,969	1,969
Payments to the Newfoundland Offshore Petroleum Resource Revenue Fund	1,199,509	55,850	55,850	1,142,062	46,239	46,239
Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources	14,394	-	-	22,460	-	-
Total Statutory Payments	1,428,011	79,530	79,530	1,315,203	66,006	66,006
Total Budgetary Authorities	2,729,651	251,950	251,950	2,779,014	249,106	249,106

* Total available for use includes only authorities available for use and granted by Parliament at quarter-end through the Main Estimates and Supplementary Estimates (A) and does not reflect measures announced in Budget 2014.

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

Table 2: Budgetary Expenditures by Standard Object (unaudited)

(in thousands of dollars)

	Fiscal year 2014-15			Fiscal year 2013-14
	Planned expenditures for the year ending March 31, 2015*	Expended during the quarter ended June 30, 2014	Year-to-date used at Quarter- end	Planned expenditures for the year ending March 31, 2014**	Expended during the quarter ended June 30, 2013	Year-to-date used at Quarter-end
Budgetary Expenditures:
Personnel	390,814	102,957	102,957	404,149	107,740	107,740
Transportation and communication	25,856	1,247	1,247	39,679	2,539	2,539
Information	9,871	714	714	10,792	3,448	3,448
Professional and special services	430,295	41,203	41,203	336,497	50,061	50,061
Rentals	17,123	3,376	3,376	20,352	3,220	3,220
Repair and maintenance	5,705	319	319	8,110	190	190
Utilities, materials and supplies	28,537	1,823	1,823	32,288	2,207	2,207
Acquisition of land, buildings and works	6,713	152	152	24,982	-	-
Acquisition of machinery and equipment	24,897	3,033	3,033	33,682	2,380	2,380
Transfer payments	1,816,802	87,660	87,660	1,894,091	78,037	78,037
Other subsidies and payments	8,089	13,714	13,714	10,160	6,092	6,092
Total Budgetary Expenditures	2,764,701	256,198	256,198	2,814,782	255,914	255,914
Less:
Total Revenues Netted Against Expenditures	35,051	4,248	4,248	35,768	6,808	6,808
Total Net Budgetary Expenditures	2,729,651	251,950	251,950	2,779,014	249,106	249,106

* Planned expenditures do not reflect measures announced in Budget 2014.

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