Natural Resources Canada Quarterly Financial Report (Unaudited) for the Quarter Ended September 30, 2016

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), as well as Canada’s Budget 2016. 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.^{Footnote 1}

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 2016-17 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. As the Federal Budget is typically tabled around the same time as Main Estimates, measures announced in the Budget are not included in Main Estimates for either 2015-16 or 2016-17.   

In fiscal year 2016-17, frozen allotments will be established by Treasury Board authority in departmental votes to prohibit the spending of funds identified as savings measures in Budget 2016. 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 2015-16 for savings measures in Budget 2015.

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 expenditure 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 September 30, 2016, including Main Estimates and Supplementary Estimates (A), for which full supply was released. The details presented in this report focus on and compare the second quarter results of 2016-17 with those of 2015-16.

Authorities

As per Table 1, presented at the end of this document, and on Graph 1 below, as at September 30, 2016 NRCan has authorities available for use of $1,715.0 million in 2016-17 compared to $2,523.2 million as of September 30, 2015, for a net decrease of $808.2 million or 32%.

The decrease of $808.2 million in authorities in 2016-17 compared to 2015-16 is explained by the net effect of both increases and decreases within Vote 1 operating expenditures, Vote 5 capital expenditures, Vote 10 grants and contributions, and statutory authorities, as per the following:

For Vote 1 operating expenditures, a net decrease of $382.7 million between the authorities available for use at the end of the second quarters of 2016-17 ($541.0 million) and 2015-16 ($923.7 million) is explained mainly by the following year-over-year changes:

Decreases:

• $395.2 million for the transfer of responsibility for the Nuclear Legacy Liabilities Program and Port Hope Area Initiative to Atomic Energy Canada Limited (AECL); and
• $7.3 million for the Operating Budget Carry Forward as there were less authorities available to carry forward in 2016-17.

Increases:

• $7.0 million for the transfers from Capital to Operating, as part of an alignment exercise; and
• $5.0 million for the United Nations Convention on the Law of the Sea (UNCLOS) - Mapping of the North Pole, due to a planned adjustment to the program financial profile.

For Vote 5 capital expenditures, a net increase of $33.2 million between the authorities available for use at the end of the second quarters of 2016-17 ($87.5 million) and 2015-16 ($54.3 million) is explained mainly by the following year-over-year changes:

Increases:

• $29.2 million for the Accelerated Infrastructure Program (AIP), as this program received additional funds via Budget 2016;
• $6.1 million for the Enhancing National Earthquake Monitoring initiative, due to a planned adjustment to the program financial profile; and
• $4.9 million for the Capital Budget Carry Forward as there were more authorities to carry forward in 2016-17.

Decreases:

• $7.0 million for the transfers from Capital to Operating, as part of an alignment exercise.

For Vote 10 grants and contributions, a net decrease of $22.9 million between the authorities available for use at the end of the second quarters of 2016-17 ($283.7 million) and 2015-16 ($306.6 million) is explained mainly by the following year-over-year changes:

Decreases:

• $25.7 million for the Climate Change Renewal, as the envelope - announced in Budget 2016- was at a lower level than that of 2015-16;
• $22.0 million for ecoENERGY for Biofuels, due to a planned adjustment to the program financial profile; and
• $13.6 million for the Wind Power Production Incentive Program, due to a planned adjustment in the program financial profile.

Increases:

• $13.8 million for the Investments in Forest Industry Transformation Program, due to a planned adjustment to the program financial profile;  
• $11.3 million for the Sustainable Development Technology Canada (SDTC) Sustainable Development Technology Fund, due to a planned adjustment to the program financial profile from $6.0 million in 2015-16 to $46.2 million in 2016-17, offset by a decrease of $28.9 million for the transfer of responsibility for SDTC to the Department of Innovation, Science and Economic Development via the 2016-17 Supplementary Estimates (A); and
• $12.9 million for the Green Infrastructure, a group of new initiatives announced in Budget 2016.

For statutory items, a net decrease of $435.9 million between the authorities available for use at the end of the second quarters of 2016-17 ($802.8 million) and 2015-16 ($1,238.7 million) is explained mainly by:

Decreases:

• $368.1 million in the Newfoundland Offshore Petroleum Resource Revenue Fund, as forecasts at the time of Main Estimates were that less revenue would be collected in 2016-17 than in 2015-16, due to lower oil prices^{Footnote 2};
• $59.9 million in the Nova Scotia Offshore Revenue Account, as forecasts at the time of Main Estimates were that less revenue would be collected in 2016-17 than in 2015-16 due to decreased production and lower natural gas prices²; and
• $10.6 million pertaining to the Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources, due to a planned adjustment to the financial profile.

Increases:

• $2.7 million in Employee Benefit Plan adjustment, as the rate increased in 2016-17 compared to 2015-16.

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 September 30, 2016 amounts to $341.0 million or 20% of total funding available for the current fiscal year, compared to $378.4 million or 15% for the same quarter of the previous fiscal year. This decrease of $37.4 million is mainly related to decreased expenditures for professional and special services and transfer payments in 2016-17 compared to 2015-16 for the same type of expenditures. 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.

The net decrease of $1.0 million in personnel expenditures between the second quarters of 2016-17 ($101.5 million) and 2015-16 ($102.5 million) is mainly explained by the following:  

Decreases:

• $2.2 million related to the reduced staffing levels through attrition and departures, as well as the lower rates of pay for new staff; and
• $0.3 million due to the transfer of employees associated with the AECL restructuring.

Increases:

• $1.3 million related to new funding received in the second quarter for the Energy Innovation Program (EIP) announced in Budget 2016. In 2015-16, expenditures to other government departments were made in the first quarter under the previous program, whereas in 2016-17, these payments were made in the second quarter under the new EIP.

The net decrease of $3.8 million in personnel expenditures between the year-to-date expenditures at the end of the second quarters of 2016-17 ($203.6 million) and 2015-16 ($207.4 million) is related to a combination of factors including reduced staffing levels through attrition and departures, and the transfer of employees associated with AECL restructuring.

The net decrease of $54.2 million in expenditures for professional and special services between the second quarters of 2016-17 ($26.6 million) and 2015-16 ($80.8 million) is mainly explained by the following:

Decreases:

• $58.3 million for the transfer of responsibility for the Nuclear Legacy Liabilities Program and Port Hope Area Initiative to AECL in 2015-16; and
• $2.8 million due to completion of the operational phase of the Cold Stream Well Remediation initiative in 2015-16.

Increases:

• $5.5 million related to the AIP due to the launch of AIP3, the new phase of the project, and the increase in expenditures due to the timing of payments related to AIP2, the existing phase, in comparison to the second quarter of 2015-16; and
• $1.6 million due to the timing of expenditures to other government departments from one year to the next related to realty management services.

The net decrease of $67.5 million in expenditures for professional and special services between the year-to-date expenditures at the end of the second quarters of 2016-17 ($45.3 million) and 2015-16 ($112.8 million) is mainly due to the same reasons as above.

The net increase of $10.5 million in expenditures for transfer payments between the second quarters of 2016-17 ($174.7 million) and 2015-16 ($164.2 million) primarily consists of:

Increases:

• $21.1 million for statutory Atlantic offshore transfers due to more payments being made in comparison to the second quarter of 2015-16; and
• $4.0 million for the payment on a multi-year agreement for the Investment in Forest Industry Transformation program that was not in effect during the second quarter of 2015-16.

Decreases:

• $4.7 million related to the ecoENERGY for Biofuels Program largely due to a reduction in active agreements as the program nears its closure, as well as proponents claiming less incentives due to challenging market conditions;
• $4.1 million due to the timing of the receipt and processing of invoices;
• $2.1 million for the Expanding Market Opportunities program, as there were lower claim requests in comparison to the second quarter of 2015-16;
• $2.1 million related to the completion of the ecoENERGY Innovation Initiative; and
• $1.3 million to the sun-setting of the Isotope Technology Acceleration Program in 2015-16.

The net increase of $12.7 million in expenditures for transfer payments between the year-to-date expenditures at the end of the second quarter of 2016-17 ($240.6 million) and 2015-16 ($227.9 million) is mainly related to the same reasons as above as well as the payments to SDTC made in the first quarter of 2016-17.

In addition to the above details, other minor increases and decreases were observed within different standards objects.

3. Risks and Uncertainties

NRCan recognizes that a solid understanding of its risk environment is fundamental to achieving its strategic outcomes and maintaining operational efficiency and effectiveness.  NRCan sees risk management as an essential element in developing and implementing efficient, effective and relevant policies, programs, science and technology and internal services. NRCan’s approach to risk management is codified in the Integrated Risk Management Policy Framework, which is aligned with the Treasury Board Framework for the Management of Risk.

Natural resources are at the nexus of Canada’s economic and environmental agendas. They bring large economic benefits, accounting for about 17% of Canada’s nominal gross domestic product and 1.75 million jobs. Furthermore, they are a contributing factor in Canada’s environmental performance.

Our collective challenge, which is also an opportunity, is to set and implement a plan that will ensure the growth of the resource sectors and the achievement of our goals in terms of the reduction of our greenhouse gas (GHG) emissions. At the Paris Climate Change Convention, Canada agreed that by 2030, it will reduce GHG emissions by 30 percent from 2005 levels. This challenge is significant and will be influenced by a variety of factors including market forces.

NRCan is closely monitoring the impacts of these and other developments and taking actions to ensure that our resource sectors remain a source of jobs, prosperity and opportunity in a world that values sustainable practices. In particular, NRCan is supporting the Minister in delivering on his mandate letter commitments. To this end, it has introduced new structures such as a stakeholder engagement unit and a Delivery and Results unit to help execute the Department’s policy agenda.

In addition to being responsive to its external context, NRCan also manages uncertainties regarding its future funding level and spending. The Department continues to manage the costs related to unfunded collective bargaining. In response, it tracks its financial risks through scenario planning, monthly analysis of trends and forecasting in both salary and non-salary expenditures, and comprehensive quarterly reviews.

NRCan will continue to integrate risk information into strategic and operational decision making.

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

The appointment of the Chief Financial Officer and Assistant Deputy Minister for the Corporate Management and Services Sector occurred in the second quarter of 2016-17.

No other significant changes in relation to operations, personnel or programs occurred during the second quarter of 2016-17.

Original signed by:

Table 1: Statement of Authorities (unaudited)

(in thousands of dollars)	Fiscal year 2016-17			Fiscal year 2015-16
	Total available for use for the year ending March 31, 2017*	Used during the quarter ended September 30, 2016	Used year-to-date at quarter-end	Total available for use for the year ending March 31, 2016**	Used during the quarter ended September 30, 2015	Used year- to-date at quarter-end
Vote 1 - Net Operating Expenditures	540,995	141,094	252,827	923,658	194,288	324,712
Vote 5 - Capital Expenditures	87,508	11,733	16,265	54,302	5,828	6,823
Vote 10 - Grants and Contributions	283,665	40,506	80,169	306,609	50,920	75,236
Statutory Payments
Minister of Natural Resources – Salary and motor car allowance	84	12	19	82	20	41
Contributions to employee benefit plans	59,384	13,324	26,648	56,645	14,084	28,167
Spending of amounts equivalent to proceeds from disposal of surplus crown assets	-	1	1	-	-	-
Canada Foundation for Sustainable Development Technology Grant	-	-	2,290	-	-	-
Contribution to the Canada/ Newfoundland Offshore Petroleum Board	8,835	4,418	4,418	8,835	2,209	4,418
Contribution to the Canada/Nova Scotia Offshore Petroleum Board	4,013	-	2,178	3,965	1,118	2,121
Payments to the Nova Scotia Offshore Revenue Account	14,828	2,322	2,944	74,752	7,630	9,279
Payments to the Newfoundland Offshore Petroleum Resource Revenue Fund	713,253	125,972	147,056	1,081,331	89,984	124,481
Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources	2,408	1,607	1,607	13,055	12,322	12,322
Total Statutory Payments	802,805	147,656	187,161	1,238,666	127,367	180,829
Total Budgetary Authorities	1,714,973	340,989	536,422	2,523,235	378,402	587,600

* Total available for use includes only authorities available for use and granted by Parliament at quarter-end through the Main Estimates, Supplementary Estimates (A), and carry forward from 2015-16, and  reflects some measures announced in Budget 2016.
** Total available for use includes only authorities available for use and granted by Parliament at quarter-end through the Main Estimates, Supplementary Estimates (A), and  carry forward from 2014-15, and reflects some measures announced in Budget 2015.

Table 2: Budgetary Expenditures by Standard Object (unaudited)

(in thousands of dollars)	Fiscal year 2016-17			Fiscal year 2015-16
	Planned expenditures for the year ending March 31, 2017*	Expended during the quarter ended September 30, 2016	Year-to-date used at Quarter-end	Planned expenditures for the year ending March 31, 2016**	Expended during the quarter ended September 30, 2015	Year-to-date used at Quarter-end
Budgetary Expenditures:
Personnel	401,370	101,451	203,571	394,827	102,485	207,421
Transportation and communication	13,660	4,356	6,783	15,926	3,753	6,439
Information	9,126	1,252	1,806	12,915	765	1,259
Professional and special services	137,076	26,641	45,306	523,576	80,782	112,784
Rentals	32,969	9,545	13,660	15,276	9,561	13,613
Repair and maintenance	4,059	2,539	4,532	9,832	2,213	2,635
Utilities, materials and supplies	33,374	4,544	7,004	33,329	4,299	6,405
Acquisition of land, buildings and works	38,058	-	-	7,071	465	465
Acquisition of machinery and equipment	51,451	4,322	5,453	51,483	2,377	3,262
Transfer payments	1,027,002	174,724	240,561	1,488,547	164,183	227,857
Other subsidies and payments	5,698	18,336	18,748	5,532	11,660	14,315
Total Budgetary Expenditures	1,753,843	347,710	547,424	2,558,313	382,542	596,454
Less:
Total  Revenues Netted Against Expenditures	38,870	6,721	11,002	35,079	4,140	8,854
Total Net Budgetary Expenditures	1,714,973	340,989	536,422	2,523,235	378,402	587,600

* Planned expenditures reflect some measures announced in Budget 2016.
** Planned expenditures reflect some measures announced in Budget 2015.