Natural Resources Canada Quarterly Financial Report (Unaudited) for the Quarter Ended September 30, 2017

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 2017. 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) works to improve the quality of life of Canadians by ensuring that our natural resources are developed sustainably, providing a source of jobs, prosperity, and opportunity, while preserving our environment and respecting our communities and Indigenous peoples.

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 2017-18 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before money 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.

NRCan uses the full accrual method of accounting to prepare and present its annual unaudited departmental financial statements that are part of the departmental results reporting process. 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 September 30, 2017, 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 2017-18 with those of 2016-17.

Authorities

As per Table 1, presented at the end of this document, and on Graph 1 below, as at September 30, 2017, NRCan has authorities available for use of $1,385.4 million in 2017-18 compared to $1,715.0 million as of September 30, 2016, for a net decrease of $329.6 million or 19%.

The decrease of $329.6 million in authorities in 2017-18 compared to 2016-17 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 $19.5 million between the authorities available for use at the end of the second quarters of 2017-18 ($521.5 million) and 2016-17 ($541.0 million) is explained mainly by the following year-over-year changes:

Decreases:

• $23.8 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^{Footnote 1};
• $4.8 million for the professional services reduction announced in Budget 2016; and
• $2.5 million for the sunsetting of the ecoENERGY for Biofuels program in 2016-17.

Increases:

• $6.2 million for the transfers from Capital to Operating, as part of a planned decrease in capital spending;
• $2.9 million for Marine Conservation Targets, due to a planned adjustment to the program financial profile; and
• $2.5 million for the Clean Growth and Climate Change programs, due to a planned adjustment to the program financial profile.

For Vote 5 capital expenditures, a net decrease of $19.1 million between the authorities available for use at the end of the second quarters of 2017-18 ($68.4 million) and 2016-17 ($87.5 million) is explained mainly by the following year-over-year changes:

Decreases:

• $14.7 million for the Federal Infrastructure Initiative, due to a planned adjustment to the program financial profile;
• $6.2 million for the transfers from Capital to Operating, as part of a planned decrease in capital spending; and
• $6.1 million for the Enhancing National Earthquake Monitoring initiative, due to a planned adjustment to the program financial profile.

Increase:

• $7.7 million for the Capital Budget Carry Forward as there were more authorities available to carry forward in 2017-18.

For Vote 10 grants and contributions, a net increase of $49.2 million between the authorities available for use at the end of the second quarters of 2017-18 ($332.9 million) and 2016-17 ($283.7 million) is explained mainly by the following year-over-year changes:

Increases:

• $66.8 million for the Clean Growth and Climate Change programs, due to a planned adjustment to the program financial profile;
• $34.5 million for the Green Infrastructure envelope (i.e., Electric Vehicle Demonstrations and Deployment), due to a planned adjustment to the program financial profile; and
• $7.0 million for the Youth Employment Strategy, as this program received additional funding in Budget 2017.

Decreases:

• $25.1 million for the sunsetting of the ecoENERGY for Biofuels program in 2016-17;
• $18.4 million for the ecoENERGY for Renewable Power program, due to a planned adjustment to the program financial profile; and,
• $17.3 million for the Sustainable Development Technology Canada (SDTC) Sustainable Development Technology Fund, due to the transfer of responsibility for SDTC to the Department of Innovation, Science and Economic Development.

For statutory items, a net decrease of $340.2 million between the second quarters of 2017-18 ($462.6 million) and 2016-17 ($802.8 million) is explained mainly by:

Decreases:

• $325.9 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 2017-18 than in 2016-17, due to fluctuations in oil prices and variances in production^{Footnote 2};
• $8.2 million in the Nova Scotia Offshore Revenue Account, as forecasts at the time of Main Estimates were that less revenue would be collected in 2017-18 than in 2016-17 due to variances in production and fluctuations in natural gas prices¹; and
• $5.9 million in Employee Benefit Plan adjustment, as the rate decreased in 2017-18 compared to 2016-17.

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, 2017 amounts to $284.3 million or 21% of total funding available for the fiscal year, compared to $341.0 million or 20% for the same quarter last year. This decrease of $56.7 million in spending is mainly related to a decrease in expenditures for transfer payments in 2017-18 compared to the same type of expenditures in 2016-17. 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 increase of $18.2 million in personnel expenditures between the second quarters of 2017-18 ($119.7 million) and 2016-17 ($101.5 million) is mainly due to retroactive payments and wage increases arising from collective bargaining settlements ($16.7 million).

The net increase of $26.8 million in personnel expenditures between the year-to-date expenditures at the end of the second quarters of 2017-18 ($230.4 million) and 2016-17 ($203.6 million) is largely due to retroactive payments and wage increases arising from collective bargaining settlements ($22.0 million) as well as new hires ($1.7 million) supporting various programs.

The net decrease of $7.8 million in professional and special services between the second quarters of 2017-18 ($18.8 million) and 2016-17 ($26.6 million) is mainly explained by the following:

Decreases:

• $7.3 million for the Federal Infrastructure Initiative due to a change to accurately reflect the way these expenditures are being recorded. They were recorded under professional and special services in the second quarter of 2016-17 and under acquisition of land, buildings and works in the second quarter of 2017-18. The adjustment to record these expenditures against acquisition of land, buildings and works was done in 2016-17 as well, however it was at the end of the year; and
• $3.6 million due to the timing of expenditures to OGDs from one year to the next related to the Justice Canada Funding Model and the Energy Innovation Program.

Increase:

• $2.7 million due to the timing of expenditures from one year to the next for various projects.

The net decrease of $7.9 million in professional and special services between the year-to-date expenditures at the end of the second quarters of 2017-18 ($37.4 million) and 2016-17 ($45.3 million) is mainly due to the same reasons as above.

The net increase of $9.1 million in acquisition of land, buildings and works between the second quarters of 2017-18 ($9.1 million) and 2016-17 ($0 million) and the year-to-date expenditures at the end of the second quarters is due to a change to accurately reflect the way the expenditures for the Federal Infrastructure Initiative are being recorded. They were recorded under professional and special services in the second quarter of 2016-17, which was corrected at the end of 2016-17, and under acquisition of land, buildings and works in the second quarter of 2017-18. In addition, there was also an increase in spending in 2017-18 to complete projects that were delayed in 2016-17 for the Federal Infrastructure Initiative.

The net decrease of $60.1 million in expenditures for transfer payments between the second quarters of 2017-18 ($114.6 million) and 2016-17 ($174.7 million) primarily consists of:

Decreases:

• $66.0 million for a statutory Atlantic offshore one-time royalty payment related to the White Rose project which occurred in the second quarter of 2016-17; and
• $3.7 million for Investments in Forest Industry Transformation due to a reduced number of agreements in 2017-18.

Increases:

• $2.8 million for statutory Atlantic offshore transfers as a result of higher production and increased oil prices;
• $2.0 million for the Youth Employment Strategy, as this program received additional funding in Budget 2017;
• $2.0 million for Electric Vehicle Demonstrations due to agreements being finalized at the end of 2016-17 and/or early 2017-18;
• $1.4 million for Clean Growth and Climate Change programs (i.e., Oil & Gas and Energy Innovation Program) due to agreements being finalized at the end of 2016-17 and/or early 2017-18; and
• $1.3 million for the ecoENERGY for Renewable Power program due to increased energy production, which led to higher incentive payments in 2017-18.

The net decrease of $57.9 million in expenditures for transfer payments between the year-to-date expenditures at the end of the second quarters of 2017-18 ($182.6 million) and 2016-17 ($240.5 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.

The net decrease of $10.8 million in other subsidies and payments between the second quarters of 2017-18 ($7.5 million) and 2016-17 ($18.3 million) is mainly due to a payment to the Government of Manitoba for the Soldier Settlement Board, which occurred in the second quarter of 2016-17. This also explains the net decrease of $11 million in other subsidies and payments between the year-to-date expenditures at the end of the second quarters of 2017-18 ($7.7 million) and 2016-17 ($18.7 million).

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. The Department has identified its key risks and has developed mitigation strategies that are presented in the Departmental Plan and the Departmental Results Report.

Natural resources are at the nexus of Canada’s economic and environmental agendas. They bring large economic benefits, accounting for about 16% of Canada’s nominal gross domestic product and 1.7 million jobs in 2016. Furthermore, they inform 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 emissions.

During the first two quarters of 2017-18, the Department focused on managing its risks to advance priorities in the areas of softwood lumber; regulatory review, including modernization of the National Energy Board; Canada-U.S. relations; clean technology; Indigenous reconciliation; and Budget 2017 implementation, including funding for actions to support the Pan-Canadian Framework on Clean Growth and Climate Change. The Department is also aware of the emerging competitive issues faced by the natural resources sector.

NRCan 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 a new Assistant Deputy Minister (ADM) for the Major Projects Management Office and a new ADM for the Communications and Portfolio Sector occurred in the second quarter of 2017-18.

No other significant changes in relation to operations, personnel or programs occurred during the second quarter of 2017-18.

Original signed by:

Table 1: Statement of Authorities (unaudited)

(in thousands of dollars)	Fiscal year 2017-18			Fiscal year 2016-17
	Total available for use for the year ending March 31, 2018*	Used during the quarter ended September 30, 2017	Used year-to-date at quarter-end	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
Vote 1 - Net Operating Expenditures	521,497	147,739	265,297	540,995	141,094	252,827
Vote 5 - Capital Expenditures	68,445	8,665	12,130	87,508	11,733	16,265
Vote 10 - Grants and Contributions	332,870	43,393	66,687	283,665	40,506	80,169
Statutory Payments
Minister of Natural Resources – Salary and motor car allowance	84	21	42	84	12	19
Contributions to employee benefit plans	53,524	13,350	26,701	59,384	13,324	26,648
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	4,418	4,418
Contribution to the Canada/Nova Scotia  Offshore Petroleum Board	4,355	-	1,089	4,013	-	2,178
Payments to the Nova Scotia Offshore  Revenue Account	6,624	2,821	3,561	14,828	2,322	2,944
Payments to the Newfoundland Offshore  Petroleum Resource Revenue Fund	387,367	63,880	106,805	713,253	125,972	147,056
Crown Share Adjustment Payments for Nova  Scotia Offshore Petroleum Resources	1,818	53	53	2,408	1,607	1,607
Total Statutory Payments	462,607	84,543	142,669	802,805	147,656	187,161
Total Budgetary Authorities	1,385,419	284,340	486,783	1,714,973	340,989	536,422

* 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) which reflects some measures announced in Budget 2017.
** 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) which reflects some measures announced in Budget 2016.

Table 2:  Budgetary Expenditures by Standard Object (unaudited)

(in thousands of dollars)	Fiscal year 2017-18			Fiscal year 2016-17
	Planned expenditures for the year ending March 31, 2018*	Expended during the quarter ended September 30, 2017	Year-to-date used at Quarter-end	Planned expenditures for the year ending March 31, 2017**	Expended during the quarter ended September 30, 2016	Year-to-date used at Quarter-end
Budgetary Expenditures:
Personnel	395,879	119,696	230,417	401,370	101,451	203,571
Transportation and communication	13,028	4,287	7,092	13,660	4,356	6,783
Information	4,980	1,270	1,971	9,126	1,252	1,806
Professional and special services	123,224	18,877	37,440	137,076	26,641	45,306
Rentals	33,166	9,201	11,285	32,969	9,545	13,660
Repair and maintenance	5,333	711	1,961	4,059	2,539	4,532
Utilities, materials and supplies	36,987	4,277	6,232	33,374	4,544	7,004
Acquisition of land, buildings and works	2,121	9,104	9,106	38,058	-	-
Acquisition of machinery and equipment	66,333	1,780	2,726	51,451	4,322	5,453
Transfer payments	741,868	114,565	182,613	1,027,002	174,724	240,561
Other subsidies and payments	965	7,468	7,651	5,698	18,336	18,748
Total Budgetary Expenditures	1,423,884	291,236	498,494	1,753,843	347,710	547,424
Less:
Total Revenues Netted Against Expenditures	38,465	6,896	11,711	38,870	6,721	11,002
Total Net Budgetary Expenditures	1,385,419	284,340	486,783	1,714,973	340,989	536,422

* Planned expenditures reflect some measures announced in Budget 2017.
** Planned expenditures reflect some measures announced in Budget 2016.