Natural Resources Canada Quarterly Financial Report (Unaudited) for the Quarter Ended September 30, 2012

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, Supplementary Estimates (A), and the Net Budgetary Authorities published on the Treasury Board Secretariat website, as well as Canada’s Economic Action Plan 2012 (Budget 2012). 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 Program Activities

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 sector to the economy and improve the quality of life of Canadians.^{Footnote 1}

Further details on NRCan’s authority, mandate and program activities 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), as well as transfers from Treasury Board for the 2012-2013 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 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 2012 could not be reflected in the 2012-2013 Main Estimates.

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

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 September 30, 2012, including Main Estimates, Supplementary Estimates (A), the Operating Budget Carry Forward and the Capital Budget Carry Forward for which full supply was released. The details presented in this report focus on and compare the second quarter results of 2012-2013 with those of 2011-2012.

Authorities

As per Table 1 presented at the end of this document, and Graph 1 below, as at September 30, 2012, NRCan has authorities available for use of $2,852.3 million in 2012-2013 compared to $3,695.4 million in 2011-2012, for a net decrease of $843.1 million or 22.8%.

Graph 1

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Graph 1 - Variances in Authorities as at September 30, 2012

(in thousands of dollars)	Fiscal year 2011-2012 Total available for use for the year ending 31-Mar-12	Fiscal year 2012-2013 Total available for use for the year ending 31-Mar-13
Vote 1 - Operating	735	827
Vote 5 - Capital	20	19
Vote 10 - Grants and contributions	1,268	752
Statutory	1,673	1,254
Total budgetary authorities	3,695	2,852

The decrease of $843.1 million in authorities in 2012-2013 compared to 2011-2012 is explained by the net effect of both decreases and increases within operating expenditures, capital expenditures, grants and contributions, and statutory authorities.

For operating expenditures, a net increase of $92.1 million in authorities is explained by the following year-over-year changes:

• an increase of $91.2 million for the Port Hope Area Initiative as part of a planned adjustment to the program financial profile;
• increases of $33 million for the ecoENERGY Efficiency program and $32.7 million for the ecoENERGY Innovation Initiative as these programs were announced in Budget 2011 and funding received in Supplementary Estimates (B) in 2011-2012;

These increases were offset by decreases of:

• $31.5 million as a result of the transfer to Shared Services Canada as part of the Administrative Services Review; and
• $13.1 million as part of a planned adjustment to the financial profile of the Clean Energy Fund.

For grants and contributions, a net decrease of $515.6 million in authorities is explained by the following year-over-year changes:

• a decrease of $538.6 million for the Pulp and Paper Green Transformation Program as the three-year, $1 billion program terminated on March 31, 2012;
• a decrease of $48.1 million for the ecoENERGY Technology Initiative and $21.8 million for the ecoENERGY for Biofuels Producer Incentive, the result of a planned adjustment to the programs financial profile;
• a decrease of $17.4 million for the Non-reactor Based Isotope Supply program, which sunset on March 31, 2012. Funds committed in Budget 2012 for the successor Isotope Technology Acceleration Program will be reflected in Supplementary Estimates (B); and
• a decrease of $80.4 million from resources available in Vote 10 – Grants and Contributions due to a reprofiling of funds and used to reduce the amount of new appropriations required and identified in Supplementary Estimates (A);

These were offset by increases of:

• $138 million for the Clean Energy Fund and $37.5 million for Sustainable Development Technology Canada (SDTC) for the Next Generation Biofuels Fund, reflecting adjustments to the financial profiles; and
• $27.9 million for the ecoENERGY Innovation Initiative as the program was announced in Budget 2011 and funding was received in Supplementary Estimates (B) in 2011-2012.

For statutory items, a net decrease of $418.6 million in authorities is explained largely by:

• decreases of $436.1 million in the Newfoundland Offshore Petroleum Resource Revenue Fund and $43.9 million in the Nova Scotia Offshore Revenue Account, caused by fluctuations in oil and gas prices and production levels;

Offset by:

• an increase of $59.3 million for the statutory grant to Sustainable Development Technology Canada for the Next Generation Biofuels Fund.

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

Budgetary Expenditures by Standard Object

As at September 30, 2012, year-to-date spending amounts to $841.8 million or 29.5% of total funding available, compared to $1,084.2 million or 29.3% at the same time last year. The year-to-date decrease of $242.5 million in expenditures between 2012-2013 and 2011-2012 is represented in Graph 2 below and in Table 2 at the end of this document across significant standard objects.

The spending for the quarter ending September 30, 2012, amounts to $582.4 million or 20.4% of total funding available for the fiscal year, compared to $806.2 million or 21.8% for the same quarter last year. The decrease in expenditures for the quarter ending September 30, 2012, of $223.8 million between 2012-2013 and 2011-2012, is represented in Graph 2 below and in Table 2 at the end of this document across significant standard objects.

Graph 2

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Graph 2 - Variance in Expenditures for Significant Standard Objects at at September 30, 2012

(in thousands of dollars)	Fiscal year 2011-2012 Expended during the quarter ending 30-Sep-11	Fiscal year 2012-2013 Expended during the quarter ending 30-Sep-12
Personnel	127,114	110,481
Professional and special services	54,862	57,531
Transfer payments	597,752	392,640
Total gross budgetary expenditures	806,184	582,422

Personnel expenditures are not readily comparable in the second quarter of 2011-2012 ($127.1 million) and 2012-2013 ($110.5 million). The net decrease of $16.6 million is mainly related to the transfer of 76 positions to Shared Services Canada and the reduction of positions in the NRCan restructuring and Budget 2012 Savings Measures.

The year-to-date personnel expenditures similarly are not comparable given a net decrease of $13.7 million, mainly related to the factors cited above.

The increase of $2.7 million in expenditures for professional and special services between the second quarter of 2012-2013 and 2011-2012 is explained by the following:

• $1.9 million increase associated with the timing of operating funding advances to other government departments under the Program of Energy Research and Development;
• $1.6 million increase in the Clean Energy suite of programs as it is the first full year of implementation for these programs; and
• $1.5 million increase related to the advancement of the implementation phase of Port Hope Area Clean-up, which was approved in December 2011;
• Offset by the decrease of activities for the transfer to Shared Services Canada.

The year-to-date expenditures on professional and special services increased by $21.4 million and relate mainly to the same reasons as above in addition to the following:

• $6.5 million for contract work and payments under programs (e.g., the Nuclear Legacy Liabilities Program) approved by Parliament at the end of June 2011 that are more advanced in the second quarter of 2012-2013 than in the second quarter last year; and
• increases resulting from achievement of more contract milestones requiring payment in 2012-2013 as compared to 2011-2012 in such programs as Geo-mapping for Energy and Minerals, Targeted Geoscience Initiative 4 and the Polar Continental Shelf Program in Resolute Bay.

Transfer payments decreased by a net $205.1 million between the second quarters of 2012-2013 and 2011-2012, generally reflecting the changes in annual funding authorities previously explained such as:

• A decrease of $129.7 million related to the Pulp and Paper Green Transformation Program, as the program expired on March 31, 2012;
• A decrease of $17.4 million in Clean Energy Fund transfers resulting from delays in payment processing;
• A decrease of $105.6 million for the payment to the Newfoundland Offshore Petroleum Resource Revenue Fund. This statutory payment mirrors royalty revenues collected in relation to offshore oil and gas activity and fluctuate based on oil and gas prices and production levels; and
• A decrease of $13.5 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 fluctuate based on oil and gas prices and production levels.

Offset by:

• An increase of $57.8 million pertaining to Nova Scotia Crown Share Adjustment Payments. This amount represents NRCan's initial payments to Nova Scotia under the Crown Share Adjustment statutory provision of the Canada Nova Scotia Offshore Petroleum Resources Accord Implementation Act and covers accrued adjustment payment entitlements related to previous years.

Year-to-date transfer payments decreased by a net $224.8 million between the fiscal years of 2012-2013 and 2011-2012, generally reflecting the changes in annual funding authorities previously explained such as:

• A decrease of $159.8 million related to the Pulp and Paper Green Transformation Program;
• A decrease of $81.9 million for the payment to the Newfoundland Offshore Petroleum Resource Revenue Fund;
• A decrease of $18.3 million for the payment to the Nova Scotia Offshore Revenue Account;
• A decrease of $17.4 million in the Clean Energy Fund transfers; and
• A decrease of $8.7 million related to the Isotopes Supply Initiative, as the program expired on March 31, 2012.

Offset by:

• An increase of $57.8 million pertaining to Nova Scotia Crown Share Adjustment Payments.

3. Risks and Uncertainties

NRCan manages a number of risks, the most prominent of which are identified in its Corporate Risk Profile. A certain number of these risks are financial, such as those arising from the delivery of large projects based on partnerships or grants and contributions programs; others are driven by operating budget management. Risks associated with the implementation of Budget 2012 savings measures are discussed in the section ‘Budget 2012 Implementation’. These risks are being monitored and managed on an ongoing basis.

Some of NRCan’s risks stem from lower-than-anticipated economic growth, which has, in some cases, affected the pace at which projects based on partnerships with external stakeholders and industry – for example joint research, development and demonstration projects – can be implemented. NRCan is mitigating the financial impacts by closely tracking program uptake as well as requesting the reprofiling of funds, as required, to ensure program objectives are met over the life of programs.

NRCan also faces uncertainties related to salary forecasts. First, the anticipated renewal of some collective agreements will increase salary expenditures. Second, as part of the implementation of Budget 2012 savings measures, NRCan faces some uncertainties related to employee departures and the provision of the transition support measures. The Department continues to provide support to all of its employees affected by the Budget 2012 savings measures and other cost-containment initiatives, and mitigates related financial risks through scenario planning, by closely tracking workforce adjustment progress and by adjusting its salary forecast regularly.

Finally, NRCan is closely monitoring its operating budget by conducting a comprehensive monthly analysis of trends and forecasting in salary expenditures and non-salary expenditures to ensure affordability and sustainability. To further reduce risks associated with budgeting and forecasting, the Department continues to provide employees with financial system-related training, as needed.

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

Information on the impact of Budget 2012 can be found in the section ‘Budget 2012 Implementation’ below. As in the first Quarterly Financial Report, Budget 2012 announcements are situated within a broader context of diminishing departmental resources, arising from a number of factors, including the anticipated sunsetting or reduction over time of a number of large programs, including grants and contributions.

As previously reported, an Order-In-Council (P.C. 2011-1297) was signed on November 15, 2011, to transfer to Shared Services Canada the responsibility for providing email, data centre and network services from a number of organizations across the Government of Canada, including NRCan. During the second quarter, NRCan continued to work in partnership with Shared Services Canada to implement these changes.

While a small number of employees affected by Budget 2012 savings measures and the NRCan restructuring decided to leave the federal work force during the quarter ending September 30, 2012, the majority of affected employees are making their decision in the third quarter of 2012-2013.

5. Budget 2012 Implementation

This section provides an overview of the measures announced in Budget 2012, which aims to refocus government and programs, make it easier for Canadians and business to deal with their government, and modernize and reduce the back office.

NRCan’s budget will be adjusted to implement ongoing annual savings of $107 million by 2014-2015, together with an annual savings of $5 million associated with the International Assistance Envelope (IAE) horizontal review. In achieving this, NRCan will be focussing on its core roles and responsibilities. Internal corporate services will be reduced and NRCan’s organizational structure and operations will be streamlined.

In the first year of implementation, NRCan will achieve savings of $67.8 million. Savings will increase to $84.7 million in 2013-2014 and $107 million in 2014-2015 and future years. In addition, annual savings of $5 million beginning in 2012-2013 will be achieved through the IAE horizontal review.

In implementing these changes, NRCan has made it a priority to treat its employees with transparency and fairness.

Approved by:

Table 1: Statement of Authorities (unaudited)

(in thousands of dollars)	Fiscal year 2012-2013			Fiscal year 2011-2012
	Total available for use for the year ending* March 31, 2013	Used during the quarter ended September 30, 2012	Used year-to-date at Quarter-end	Total available for use for the year ending* March 31, 2012	Used during the quarter ended September 30, 2011	Used year-to-date at Quarter-end
Vote 1 - Net Operating Expenditures	827,310	170,515	316,119	735,253	177,054	336,075
Vote 5 - Capital Expenditures	18,941	4,297	4,535	19,892	2,008	2,764
Vote 10 - Grants and Contributions	751,919	109,708	116,353	1,267,523	250,575	298,628
Statutory Payments
Minister of Natural Resources – Salary and motor car allowance	78	20	39	78	-	-
Contributions to employee benefit plans	59,716	14,929	29,858	58,743	29,372	29,372
Collection agency fees under sec 17.1 of the Financial Administration Act	-	19	19	-	-	-
Spending of amounts equivalent to proceeds from disposal of surplus crown assets	-	2	2	-	-	-
Grant to the Canada Foundation for Sustainable Development Technology	59,338	-	-	-	-	-
Contribution to the Canada/Newfoundland Offshore Petroleum Board	7,756	1,909	3,818	6,825	4,078	4,078
Contribution to the Canada/Nova Scotia Offshore Petroleum Board	3,450	887	1,775	3,400	1,675	1,675
Payments to the Nova Scotia Offshore Revenue Account	135,846	23,911	32,338	179,663	37,402	50,625
Payments to the Newfoundland Offshore Petroleum Resource Revenue Fund	987,902	198,450	279,137	1,423,982	304,020	361,032
Crown Share Adjustment Payments for Nova Scotia Offshore Petroleum Resources	-	57,775	57,775	-	-	-
Total Statutory Payments	1,254,086	297,901	404,761	1,672,691	376,547	446,782
Total Budgetary Authorities	2,852,256	582,422	841,768	3,695,359	806,184	1,084,249

* Includes only authorities available for use and granted by Parliament at quarter-end: Main and Supplementary Estimates (A).
** Total available for use does not reflect measures announced in Budget 2012, except for the renewal of the Major Projects Management Office, which was included in Supplementary Estimates (A) and is included in the total available.

Table 2: Budgetary Expenditures by Standard Object (unaudited)

(in thousands of dollars)	Fiscal year 2012-2013			Fiscal year 2011-2012
	Planned expenditures for the year ending March 31, 2013	Expended during the quarter ended September 30, 2012	Year-to-date used at Quarter end	Planned expenditures for the year ending March 31, 2012	Expended during the quarter ended September 30, 2011	Year-to-date used at Quarter-end
Budgetary Expenditures:
Personnel	402,004	110,481	226,899	389,349	127,114	240,578
Transportation and communication	39,241	4,501	7,121	29,774	7,320	10,671
Information	7,861	2,486	3,024	7,197	687	861
Professional and special services	387,644	57,531	90,465	331,518	54,862	69,086
Rentals	15,771	6,851	10,769	11,204	4,981	6,990
Repair and maintenance	6,434	545	825	5,756	729	930
Utilities, materials and supplies	21,935	3,949	6,066	18,762	4,611	6,634
Acquisition of land, buildings and works	18,941	3,519	3,519	19,892	4,158	4,914
Acquisition of machinery and equipment	31,987	1,714	2,372	28,078	3,344	4,156
Transfer payments	1,946,211	392,640	491,196	2,881,393	597,752	716,038
Other subsidies and payments	7,560	4,145	10,035	6,348	7,804	33,126
Total Budgetary Expenditures	2,885,589	588,362	852,291	3,729,271	813,361	1,093,984
Less:
Total Revenues Netted Against Expenditures	33,333	5,940	10,523	33,912	7,177	9,735
Total Net Budgetary Expenditures	2,852,256	582,422	841,768	3,695,359	806,184	1,084,249

* Planned expenditures do not reflect measures announced in Budget 2012, except for the renewal of the Major Projects Management Office, which was included in Supplementary Estimates (A) and for which spending had begun before June 30, 2012.