SaskEnergy First Quarter Report - June 30, 2020

First Quarter Report June 30, 2020

2020-21 First Quarter Report

As a Crown corporation, SaskEnergy is committed to ensuring that all corporate activities align with the Government of Saskatchewan’s Crown Sector Strategic Priorities and the Saskatchewan Plan for Growth. Providing safe, reliable, high quality service to its customers is critically important to the Corporation – as is the provision of infrastructure necessary for the Province to grow and prosper.

Mission Deliver natural gas in a safe, reliable, affordable way.

Vision Create customer value through safe, innovative energy solutions.

Values

Safety We are always committed to our safety, the safety of our team and the public. Accountability We are accountable for our decisions, our actions and the results. Spirit We create a positive and dynamic work environment that recognizes achievement and balance while supporting business success.

Collaboration We succeed through strong internal and external relationships, trust and open communication.

2020-21 First Quarter Report

Table of Contents

Financial and Operating Highlights

Management’s Discussion and Analysis

Introduction

5 6 7

Industry Overview

Consolidated Financial Results Liquidity and Capital Resources

14 15 15

Capital Additions

Outlook

Consolidated Financial Statements

Condensed Consolidated Statement of Financial Position Condensed Consolidated Statement of Comprehensive Income Condensed Consolidated Statement of Changes in Equity Condensed Consolidated Statement of Cash Flows Notes to the Condensed Consolidated Financial Statements

16 17 18 19 20

2020-21 First Quarter Report

Financial and Operation Highlights

Three months ended June 30,

2020

2019

FINANCIAL HIGHLIGHTS ($ millions)

Total revenue

167

169

Total expenses

159

169

Consolidated net income

Market value adjustments

(12)

Income before unrealized market value adjustments

(4)

Dividends

Cash provided by operating activities

Capital additions

Total assets

3,161

2,935

Total net debt

1,516

1,381

Debt ratio

57.9%

56.2%

OPERATING HIGHLIGHTS

Distribution Volumes distributed (petajoules) Residential/Farm

6 6

5 5

Commercial

Industrial

34 46

38 48

Total

Weather (compared to last 30 years)

18% colder

3% colder

Transmission Volumes transported (petajoules) Domestic

74 14 88

Export

Total

Income before MVA $ Millions

Cash from operations $ Millions

Capital additions $ Millions

10 15

(5) 0 5

(4)

2020

2019

2018

2020

2019

2018

2020

2019

2018

Management’s Discussion and Analysis

INTRODUCTION

The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the three months ended June 30, 2020. Using financial and operating results as its basis, the MD&A describes the Corporation’s past performance and future prospects, enabling readers to view SaskEnergy from the perspective of management. The MD&A is presented as at August 19, 2020, and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS). For additional information related to the Corporation, refer to SaskEnergy’s 2019-20 Annual Report. The MD&A contains certain forward-looking statements that are subject to inherent uncertainties and risks. Many of these risks are described in the Risk Management and Disclosure section of SaskEnergy’s 2019-20 Annual Report. All forward-looking statements reflect the Corporation’s best estimates and assumptions based on information available at the time the statements were made. However, actual results and events may vary significantly from those included in, contemplated by, or implied by such statements. The volume of natural gas delivered to customers is sensitive to variations in weather, particularly through the prime heating season of November to March. Additionally, changes in market value adjustments may cause significant fluctuations in net income due to the volatility of natural gas prices. Therefore, the condensed consolidated financial results for the first three months of 2020-21 should not be taken as indicative of the performance to be expected for the full year. In order to compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments; realized margin on commodity sales; and realized margin on asset optimization sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. Unrealized market value adjustments vary considerably with market prices of natural gas, drive significant changes in the Corporation’s consolidated net income and may obscure other business factors that are also important to understanding the Corporation’s financial results. The measures referred to above are non-IFRS measures, in that there is no standardized definition, and may not be comparable to similar measures presented by other entities.

2020-21 First Quarter Report

INDUSTRY OVERVIEW

SaskEnergy monitors a number of important factors that could influence financial performance.

Energy Complex Volatility

The prior year ended with the entire global energy complex in a state of uncertainty. Pandemic-related demand destruction combined with a geo-political supply glut had resulted in crude oil prices falling by over 60 per cent. Since that time, oil prices continued to fall with WTI hitting unprecedented negative values; yet oil ultimately finished the quarter up over 40 per cent. With producers significantly reducing capital spending and consumers facing an unknown period of reduced demand, pipeline companies and processors continue to face uncertainty upstream and downstream. With global storage levels and US production at all-time highs, the fall in natural gas prices preceded the broader global slow down. The fall in oil prices may result in higher natural gas prices as the gas associated with oil production may come off the market if oil producers shut-in production. Conversely, reduced gas demand from oil producers could cause a decline in gas prices. Ironically, all of the large factors (production, demand, and storage) have balanced out to leave Alberta-based gas prices relatively stable over the first six months of 2020.

Natural Gas Prices

The price of natural gas is set in the open market and influenced by a number of factors including production, demand, natural gas storage levels, take-away capacity, and economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months, and the demand for natural gas to produce electricity for air conditioning during the summer months, weather typically has a large impact on prices in the near term. Alberta (AECO) and Saskatchewan (TEP) have seen less volatility in the last three quarters compared to years prior. Alberta pipeline maintenance and infrastructure issues have reduced in frequency and severity since October 2019 when NGTL enacted their Temporary Service Protocol (TSP) policy change. The price volatility that occurred this quarter can mainly be attributed to a decrease of natural gas supply caused by a rapid downturn in oil prices which caused the shut-in of some oil wells and their associated natural gas. These two factors were also the leading cause of a higher AECO price than previous years. The AECO daily index averaged $1.89 per gigajoule (GJ) throughout the 3 months ended June 30, 2020 compared to $0.99 per GJ the year prior. Traditionally, most natural gas in Saskatchewan (TEP) is priced at a differential to the Alberta (AECO) price. This AECO to TEP differential for the three months ended June 30, 2020 averaged $nil compared to $0.67 for the year prior. The decreased differential can be attributed to the NGTL curtailment policy that has allowed for higher levels of natural gas to flow through its interruptible Eastgate service, along with elevated price levels at AECO.

2020-21 First Quarter Report

The following chart shows AECO natural gas prices:

AECO Monthly Index Historical Prices

$14.00

Conventional Natural Gas

2003-2008 Average Price $6.90/GJ

$12.00

$10.00

Shale Gas Revolution 2009-2014 Average Price $3.45/GJ

$8.00

Low Demand for Western Canadian Gas

$6.00

2015-Present Average Price $1.97/GJ

$4.00

Forward Price at June 30, 2020

$2.00

$0.00

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income

Three months ended June 30,

(millions)

2020

2019

Change

(Loss) income before unrealized market value adjustments

(4)

(16)

Impact of fair value adjustments Revaluation of natural gas in storage

8 4

(10)

(2)

Consolidated net income

Excluding market value adjustments, financial results for three months ended June 30, 2020 are $16 million lower than the same period in 2019. The decrease in net income is due to a lower asset optimization margin and lower customer contribution revenues while operating and maintenance costs increased compared to 2019-20. Reduced natural gas market price volatility has limited the Corporation’s opportunities and profitability of asset optimization contracts. In addition, as natural gas production continues to decline, Saskatchewan increasingly relies on gas production in Alberta to meet its delivery requirements. This results in increased transportation utilization with TC Energy’s system to import natural gas from Alberta. These increasing requirements have resulted in higher overall operating and maintenance costs as well as lower asset optimization margins as some transport capacity was secured through asset optimization contracts. Customer contribution revenue is also lower than prior year as

2020-21 First Quarter Report

there are fewer distribution customer connections due to the current decline in the provincial economy. The prior year also included a large transmission system customer contribution.

Market value adjustments improved SaskEnergy’s consolidated net income by $8 million. The differential between the contract price and market prices on commodity and asset optimization purchase contracts improved in the current year as near term natural gas market prices increased. The value of natural gas in storage is sensitive to gas prices. At June 30, 2020, the value of gas in storage was $26 million, or $3 million below cost. At the end of March 2020, the value of natural gas in storage was $13 million, or $7 million below cost. An increase in near term natural gas market prices is the primary driver of the decrease in the unfavourable revaluation of natural gas in storage. The difference between the $7 million unfavourable adjustment at the end of the previous fiscal year and the current $3 million unfavourable adjustment to the cost of gas in storage has been reported as a $4 million favourable market value adjustment during the three months ended June 30, 2020.

Natural Gas Sales and Purchases

Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non-regulated asset optimization activities. IFRS requires these activities to be presented together within the consolidated financial statements; however, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately. With the exception of those contracts entered into for an entity’s own usage, IFRS requires derivative instruments such as natural gas purchase and sales contracts to be recorded at fair value until their settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in net income through natural gas sales or natural gas purchases depending on the specific contract. Upon settlement of the natural gas contract, the amount paid or received by SaskEnergy becomes realized and is recorded in natural gas sales or purchases.

Commodity Margin

SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel (SRRP). The commodity rate, which is reviewed April 1 and November 1 of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with the sale of natural gas to distribution customers. Regulatory principles require that utilities do not earn a profit or realize losses on the sale of gas to customers over the long term. Consequently, SaskEnergy accumulates differences between the commodity revenue earned and the cost of natural gas sold in a Gas Cost Variance Account (GCVA). The balance in the GCVA, which is not included in SaskEnergy’s financial statements, is either recovered from, or refunded to, customers as part of future commodity rates. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. Consequently, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. A gain or loss reported in the Corporation's consolidated financial statements may not be reflected in the GCVA. SaskEnergy’s natural gas price risk management program has two objectives: to reduce the impact of natural gas price volatility on the cost of gas and to support rates that are competitive with other utilities. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while supporting competitive rates often means

2020-21 First Quarter Report

allowing purchase prices to follow market prices. As a result, the balance between the two objectives may change depending on current market conditions.

In order to ensure a secure supply of natural gas, SaskEnergy contracts for the physical delivery of natural gas using non-financial derivatives, referred to as forward or physical natural gas contracts. The purchase price contained in these forward contracts may be fixed, or it may be based on a variable index price. While fixed price contracts reduce the impact of natural gas price volatility, variable or market prices can assist in offering competitive rates depending on the pricing environment. SaskEnergy may use financial derivatives and physical swaps to manage the future purchase price of natural gas.

The commodity margin on sales to customers, as reported in the condensed consolidated financial statements, was as follows:

Three months ended June 30,

(millions)

2020

2019

Change

Commodity sales

20 18

25 24

Commodity purchases

(6) (1)

Realized margin on commodity sales

1 5

Impact of fair value adjustments

(1)

Margin on commodity sales

The realized margin on commodity sales excludes the impact of unrealized fair value adjustments on derivative instruments, as these adjustments can fluctuate significantly from one period to the next and do not necessarily represent the amount that will be paid upon settlement of the related natural gas contract. The Corporation realized a $1 million margin on commodity sales for the three months ended June 30, 2020 compared to the $2 million margin for the same period ended June 30, 2019. Average revenue was $2.51 per GJ and average cost of gas sold was $2.39 per GJ, resulting in a margin of $0.12 per GJ. The margin is lower than the average commodity margin of $0.30 per GJ through the same three month period in 2019-20. The effect of higher cost of gas sold in 2020-21 was partially offset by higher volumes sold compared to prior year. Meanwhile the GCVA balance has decreased to $9 million owing to customers, down $4 million from the balance owing to customers at March 31, 2020.

Commodity Fair Value Adjustments

The fair value adjustments at June 30, 2020 increased the margin on commodity sales by $5 million as the $4 million favourable fair value position at March 31, 2020 increased to $9 million favourable at June 30, 2020. The favourable differential between the contract price and market prices on commodity purchase contracts increased during the three months ending June 30, 2020 from $0.08 per GJ to $0.18 per GJ.

SaskEnergy segregates a portion of its natural gas purchase contracts for gas that will ultimately be sold to commodity customers. Under IFRS, such contracts are not required to be reported at market value.

Asset Optimization Margin

SaskEnergy uses its access to natural gas markets to execute purchases and sales of natural gas to generate margins. By utilizing off peak transportation and storage capacity and to help mitigate transportation constraints, SaskEnergy is able to find opportunities in the market to take advantage of pricing differentials between

2020-21 First Quarter Report

transportation hubs, delivery points and time periods while minimizing its exposure to price risk. In most cases the purchases and sales are executed at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions. SaskEnergy also uses purchases and sales of natural gas to mitigate transportation constraints, which are executed at a cost.

The asset optimization margin, as reported in the condensed consolidated financial statements, was as follows:

Three months ended June 30,

(millions)

2020

2019

Change

Asset optimization sales

37 41

35 31

Asset optimization purchases

(10)

Realized margin on asset optimization sales Impact of fair value adjustments Revaluation of natural gas in storage

(4)

(8)

3 4

(9) (2)

Margin on asset optimization sales

(7)

The realized margin on asset optimization sales at June 30, 2020, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was a $4 million loss. This is $8 million lower than the $4 million favourable margin for the same period ended June 30, 2019. At the beginning of October 2019, TC Energy enacted a temporary policy which reduced volatility and contributed to stronger pricing. SaskEnergy was left with limited asset optimization opportunities due to the reduced volatility, which resulted in the Corporation selling 8 PJs less natural gas at lower margins, resulting in a $6 million reduction in margin compared to the same period in 2019-20. Some transportation capacity within Alberta was also secured through asset optimization transportation contracts to meet customer obligations. These incremental transportation contracts had an unfavourable $2 million effect compared to the 2019-20 asset optimization margin.

Asset Optimization Fair Value Adjustments

The Corporation enters into various natural gas contracts in its asset optimization strategies, which are subject to volatility of natural gas market prices. At June 30, 2020, the fair value adjustment on asset optimization derivative instruments increased the asset optimization margin by $3 million compared to a decrease of $9 million for the same period in 2019-20. Between April 1, 2020 and June 30, 2020, near term natural gas market prices increased and purchase contracts outstanding at June 30, 2020 were $0.13 per GJ higher than market price, while purchase contracts outstanding at the end of March 31, 2020 were $0.20 per GJ higher than market price. This favourable decrease in the price differential on purchase contracts in 2020-21 was partially offset by the unfavourable variance related to the increase in price differentials on outstanding sale contracts.

Revaluation of Natural Gas in Storage

At each reporting period, the Corporation measures the net realizable value of natural gas in storage held for asset optimization transactions based on forward market prices and anticipated delivery dates. The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. Near term forward natural gas market prices increased since March 2020, consequently, the net realizable value of asset optimization natural gas in storage was $3 million below cost at June 30, 2020, which is a $4 million favourable adjustment to net income from the $7 million unfavourable revaluation adjustment recorded as at March 31, 2020.

2020-21 First Quarter Report

Revenue

Delivery revenue, transportation and storage revenue and customer capital contributions, as reported in the consolidated financial statements, were as follows:

Three months ended June 30,

(millions)

2020

2019

Change

Delivery revenue

58 47

54 46

4 1

Transportation and storage revenue Customer capital contributions

(7)

Revenue

107

109

(2)

Delivery Revenue

Delivery revenue is driven by the number of customers and the amount of natural gas they consume. As residential and commercial customers consume natural gas primarily as heating fuel, weather is the external factor that most affects delivery revenue. Delivery revenue of $58 million for the three months ended June 30, 2020 was $4 million higher than the same period in the prior year. The weather in 2020-21 was 18 per cent colder than normal and 15 per cent colder than the same three months in 2019-20. In alignment with the Crown Sector Strategic Priorities, the Corporation continues to focus on providing the province’s growing population with efficient and timely access to natural gas service while keeping rates competitive.

Transportation and Storage Revenue

The Corporation generates transportation revenue by receiving gas from customers at various receipt points in Saskatchewan and Alberta, and delivering natural gas to customers at various delivery points in the province. The transportation toll structure consists of a receipt service charge that customers pay when they put gas on to the natural gas transportation system, and a delivery service charge, which customers pay when they take delivery off the natural gas transportation system. Gas delivered to the system by customers is considered to be part of the TransGas Energy Pool (a notional point where producers, marketers and end users can match supplies to demand) until it is delivered to the end-use customer. For receipt and delivery services, the Corporation offers both firm and interruptible transportation. Under a firm service contract, the customer has a right to deliver or receive a specified quantity of gas on each day of the contract. With a firm contract, customers pay for the amount of capacity they have contracted for whether they use it or not. Under an interruptible contract, customers may deliver or receive gas only when there is available capacity on the system and pay receipt and delivery tolls when they deliver or receive gas.

Integral to the Corporation’s transmission system are several strategically located natural gas storage sites, which have the capacity to provide operational flexibility along with a reliable and competitive natural gas storage service.

Transportation and storage revenue was $47 million for the three months ended June 30, 2020, $1 million higher than the same period in 2019-20. Industrial customer and power generation related load growth increased the demand for natural gas within the province and is driving higher transportation revenue.

2020-21 First Quarter Report

Storage revenue is comparable with the previous year as the decline in contracted demand for storage services has stabilized. The apparent abundance of natural gas, coupled with small or even negative differentials between current and forward gas prices, limits the demand for natural gas storage to those customers with relatively low load factors who use the service to mitigate receipt transportation charges.

Customer Capital Contributions

The Corporation receives capital contributions from customers to partially offset the cost of constructing facilities to connect them to the transmission and distribution systems. Generally, contributions related to transmission system projects tend to be larger but less frequent than contributions related to the distribution system. The volume and magnitude of customer contribution revenue can vary significantly period-over-period as various factors influence their receipt and recognition as revenue. Customer capital contribution revenue for the three months ended June 30, 2020 was $7 million lower than 2019-20 due to less distribution system customer connections in the current period and the prior period including a large transmission customer contribution.

Other Expenses

SaskEnergy’s expenses are driven to a large degree by its investment in its transmission, distribution and storage systems. Depreciation expense, net finance expense and Saskatchewan taxes are directly tied to the investment in facilities. As the level of investment in these facilities increase, these expenses also increase. Employee benefit costs and operating and maintenance costs are also driven by the investment in assets, although less directly. As the number of customers increases, and infrastructure to serve those customers grows, the costs to operate and maintain the system increases. These expenses increase primarily because the amount of work to service and maintain the natural gas system increases as the kilometres of gas line, number of service connections, and amount of compression equipment increases. Additional regulatory requirements and changing public perceptions have resulted in accelerated prevention, detection and mitigation initiatives, adding pressure to transmission, distribution and storage rates.

Other expenses, net finance expenses and other gains, as reported in the condensed consolidated financial statements, were as follows:

Three months ended June 30,

(millions)

2020

2019

Change

Employee benefits

25 38 29

24 37 26

(1) (1) (3)

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

3 2

Impairment loss

(2) (7)

Net finance expenses

Other gains

(2)

2020-21 First Quarter Report

Employee Benefits

Employee benefit costs of $25 million were $1 million higher than 2019-20 as vacant positions in strategic areas of the business have been filled to continue to meet the Corporation’s current and future business needs. Ongoing efficiency efforts and management of planned overtime and vacancies resulted in a reduction of full time equivalents in other areas partially offsetting these increases.

Operating and Maintenance

Higher transportation on the TC Energy transportation system increased operating and maintenance expenses to $38 million in 2020-21, $1 million higher than in 2019-20. Growing demand for imported natural gas from Alberta is resulting in more natural gas being transported and over greater distances. SaskEnergy was able to mitigate the impact of higher transportation and safety and integrity expenditures through continued efficiency efforts.

Depreciation and Amortization

Balancing safety and system integrity with the growing demand for service continues through 2020-21. Strategic capital investments required to ensure the necessary infrastructure is in place to meet increasing load growth, has increased the capital asset base from the previous year, resulting in increased depreciation and amortization. In 2020-21, depreciation and amortization was $29 million, $3 million higher than the same period in 2019-20.

Net Finance Expense

Net finance expenses were $13 million in 2020-21 and equaled 2019-20 as higher debt retirement fund earnings and lower short-term debt interest expense was fully offset by higher long-term debt interest expense.

2020-21 First Quarter Report

LIQUIDITY AND CAPITAL RESOURCES

As a Crown corporation, SaskEnergy’s primary sources of capital are cash from operations, debt — which is borrowed through the province’s General Revenue Fund — and equity advances from CIC, the Province’s Crown corporation holding company. Equity advances are rarely used to finance Crown corporations as CIC prefers to use its Subsidiary Crown Dividend Policy to manage its equity interests in its commercial enterprises. Cash from operations is SaskEnergy’s most important source of capital. As a utility, cash from operations is relatively stable and the Corporation relies upon it to fund its investment in natural gas facilities, including new construction to support provincial growth and integrity spending on existing infrastructure. Long and short-term debt can be borrowed through the Province of Saskatchewan to meet any long or short-term incremental capital requirements, and to repay debt as it matures. Sources of liquidity include Order in Council authority to borrow up to $500 million in short-term loans, and a $35 million uncommitted line of credit with the Toronto-Dominion Bank. By borrowing through the Province, SaskEnergy has access to the Province’s borrowing capacity and North American capital markets. Throughout 2020-21, The SaskEnergy Act allows the Corporation to borrow up to $2,500 million.

Three months ended June 30,

(millions)

2020

2019

Change

Cash provided by operating activities Cash used in investing activities Cash used in financing activities

(5)

(42) (13)

(56) (11)

(2)

Increase/(decrease) in cash and cash equivalents

(6)

Operating Activities

Cash provided by operating activities was $56 million for the three months ended June 30, 2020, a decrease of $5 million from 2019-20. Cash flows from operations are down due to lower commodity and asset optimization margins and higher operating and maintenance costs.

Investing Activities

Cash used in investing activities totaled $42 million for the three months ended June 30, 2020, $14 million less than the three month period ended June 30, 2019. Capital investment levels are lower in 2020-21 due to the deferral of some system expansion projects resulting from changing customer requirements. In addition, the prior year included substantial system growth spending around the city of Saskatoon.

Financing Activities

Cash used in financing activities was $13 million through the three months ended June 30, 2020, compared to $11 million used in financing activities in 2019-20. The Corporation used $21 million for interest payments, $25 million to pay long-term debt, and $129 million to pay short-term debt. The Corporation borrowed an additional $150 million in long-term debt at a premium of $11 million to support its capital investment requirements and repay short-term debt. SaskEnergy’s debt ratio at the end of June 30, 2020 of 58 per cent debt and 42 per cent equity is equal to the debt ratio at the end of 2019-20. This is within the Corporation’s long-term target range of 58 to 63 per cent debt.

2020-21 First Quarter Report

CAPITAL ADDITIONS

Capital additions, as reported in the consolidated financial statements, were as follows:

Three months ended June 30,

(millions)

2020

2019

Change

Strategic

Customer growth System expansion

(1)

16 24

28 37

(12)

Operational

Risk management

Reliability of natural gas service Business and technology optimization

4 2

5 2

(1)

Capital additions

(14)

Capital additions during 2020-21 of $42 million were $14 million lower than prior year as spending on system expansion projects declined. Higher spending on transmission urban infrastructure projects in the prior year resulted from growth in and around the City of Saskatoon. This consisted of a multi-year initiative that addressed increased natural gas capacity and moving high pressure transmission lines further away from populated areas.

Customer growth spending in 2020-21 consists of urban, rural and large industrial customer projects to the distribution system and is consistent with prior year.

Risk management spending in 2020-21 consists of system integrity projects, specifically pipeline integrity projects and is consistent with the prior year.

OUTLOOK

SaskEnergy continues to focus on the impacts of the COVID-19 pandemic, promoting and maintaining the health and safety of the Corporation’s personnel and the public while maintaining its ability to deliver core services. In addition to the pandemic, the volatility of global oil prices continues to create uncertainty for producers and consumers of natural gas. Over 70 per cent of the production of natural gas in Saskatchewan is associated with oil production; hence, as oil producers were forced to shut-in wells due to record low oil prices, associated natural gas production was also shut-in. The reduction in Saskatchewan gas supply will require more natural gas to be imported from Alberta. Changing customer demand, global supply chain disruptions, and social distancing requirements have caused challenges and delays to system improvements, but have not impacted the Corporation’s ability to transport or market natural gas. SaskEnergy will continue to monitor and manage the impact of both COVID-19 and the volatility of oil prices on its business strategies as both situations evolve.

2020-21 First Quarter Report

Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at June 30, 2020

As at March 31, 2020 (audited)

(millions)

Notes

(unaudited)

Assets Current assets Cash and cash equivalents

Trade and other receivables

111

155

Natural gas in storage held for resale

26 14

13 13 11 15

Inventory of supplies Debt retirement funds

Fair value of derivative instruments

171

208

Right-of-use assets Intangible assets

15 73

Property, plant and equipment

2,763

2,801

Debt retirement funds

139

125

3,161

3,222

Liabilities and Province's equity Current liabilities Short-term debt

150

279 120

Trade and other payables

Dividends payable

3 9

Current portion of long-term debt

34 19

Contract liability Refund liability

Fair value of derivative instruments Current portion of lease liability

5 7

311

488

Lease liability

7 5

Employee future benefits

Provisions

238

292

Deferred revenue Long-term debt

1,485 2,051

1,325 2,122

Province's equity

Equity advances

Other components of equity

Retained earnings

1,029 1,110

1,024 1,100

3,161

3,222

(See accompanying notes)

2020-21 First Quarter Report

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Three Months Ended June 30, 2020

For the Three Months Ended June 30, 2019

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 9)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 9)

Total

(millions)

Notes

Revenue Natural gas sales

10 11 12

62 58 47

(2)

60 58 47

55 54 46

60 54 46

Delivery

- - -

Transportation and storage Customer capital contributions

169

(2)

167

164

169

Expenses Natural gas purchases (net of change in inventory)

65 25 38 29

(14)

51 25 38 29

49 24 37 26

66 24 37 26

Employee benefits

- - - - -

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

3 2

Impairment loss on trade and other receivables

162

(14)

148

139

156

Net income before the following

(12)

Finance income Finance expenses

13 13 13

- - -

(15) (13)

(14) (13)

Net finance expenses

Other gains

2 8

- -

Total net (loss) income

(4)

(12)

Items that may be reclassified back to profit or loss

Change in fair value of debt retirement funds designated as FVOCI

Comprehensive (loss) income

(4)

(10)

(See accompanying notes)

2020-21 First Quarter Report

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)

Other Components of Equity

Retained Earnings

Equity Advances

Total

(millions)

Balance as at April 1, 2019 as previously stated

1,024

1,098

Prior period adjustment

(19)

Restated balance as at April 1, 2019

1,005

2 2

1,079

Comprehensive income

Balance as at June 30, 2019

1,005

1,081

Balance as at April 1, 2020 Comprehensive income

1,024

4 5

1,100

- -

Dividends

(3)

Balance as at June 30, 2020

1,029

1,110

(See accompanying notes)

2020-21 First Quarter Report

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

For the Three Months Ended June 30

(millions)

Notes

2020

2019

Operating activities Net income

Add (deduct) items not requiring an outlay of cash Net change in fair value of derivative instrument assets and liabilities Change in revaluation of natural gas in storage to net realizable value

9 9

(8) (4)

Depreciation and amortization

29 13

26 13

Net finance expenses

Net loss (gain) on disposal of assets

(2) (1)

- -

Other non-cash items

35 21 56

51 10 61

Net change in non-cash working capital related to operations

Cash provided by operating activities

Investing activities Additions to intangible assets

(2)

Additions to property, plant and equipment

(40)

(54)

Net proceeds on disposal of assets

- -

Decommissioning costs

(1)

Cash used in investing activities

(42)

(56)

Financing activities Debt retirement funds redemptions Debt retirement funds installments

(8)

Proceeds from long-term debt Repayment of short-term debt Repayment of long-term debt

161

106

(129)

(47)

(25)

Repayment of principal on lease liability

(1)

Interest paid Dividends paid

(21)

(18) (43) (11)

(2)

Cash used in financing activities

(13)

Increase (decrease) in cash and cash equivalents

(6)

Cash and cash equivalents, beginning of period Increase (decrease) in cash and cash equivalents

1 1

(6)

Cash and cash equivalents, end of period

2020-21 First Quarter Report

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

For the Three Months Ended June 30, 2020

1. General information

SaskEnergy Incorporated (SaskEnergy or the Corporation) is a Saskatchewan provincially owned Crown corporation operating under authority of The SaskEnergy Act . The address of SaskEnergy’s registered office and principal place of business is 1777 Victoria Avenue, Regina, Saskatchewan, Canada S4P 4K5. The Corporation owns and operates natural gas-related businesses located both within and outside Saskatchewan. The condensed consolidated financial statements should not be taken as indicative of the performance to be expected for the full year due to the seasonal nature of the natural gas utility business. By virtue of The Crown Corporations Act, 1993 , SaskEnergy has been designated as a subsidiary of Crown Investments Corporation of Saskatchewan (CIC), a Saskatchewan provincially owned Crown corporation. Accordingly, the financial results of SaskEnergy are included in the consolidated financial statements of CIC. As a provincial Crown corporation, SaskEnergy and its wholly owned subsidiaries are not subject to Federal or Provincial income taxes in Canada.

2. Basis of preparation

a. Statement of compliance

The Corporation’s condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). The condensed consolidated financial statements do not include all the information required for the Corporation’s annual consolidated financial statements. Accordingly, these statements should be read with reference to the annual report for the year ended March 31, 2020. The accounting policies used in the preparation of these condensed consolidated financial statements conform with those used in the Corporation's most recent annual consolidated financial statements, with the exception of amendments to International Financial Reporting Standards adopted effective April 1, 2020, which are discussed in note 3.

The condensed consolidated financial statements were authorized for issue by the Board of Directors on August 19, 2020.

2020-21 First Quarter Report

2. Basis of preparation (continued)

b. Basis of measurement

The condensed consolidated financial statements have been prepared on the historical cost basis except for the following items, which are described in Note 3:

Financial instruments classified as at fair value through profit or loss Financial instruments classified as at fair value through other comprehensive income Employee future benefits Provisions Natural gas in storage held for resale Property, plant and equipment

c. Functional and presentation currency

The condensed consolidated financial statements are presented in Canadian dollars, the Corporation’s functional currency, unless otherwise stated. All financial information presented in Canadian dollars has been rounded to the nearest million.

d. Use of estimates and judgments

In the application of the Corporation’s accounting policies, management is required to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised as well as any future periods affected.

Information about critical judgments in applying accounting policies that have a significant effect on the amounts recognized in the condensed consolidated financial statements include:

Revenue recognition related to unbilled revenue Existence of decommissioning liabilities Designation of own-use derivative contracts

2020-21 First Quarter Report

2. Basis of preparation (continued)

Information about significant management estimates and assumptions that have a risk of resulting in a significant adjustment within the next financial period include:

Estimated unbilled revenue Net realizable value of natural gas in storage held for resale Fair value of financial and derivative instruments Useful lives and amortization rates for right-of-use assets Useful lives and amortization rates for intangible assets Useful lives and depreciation rates for property, plant and equipment Recoverable amount of non-financial assets

Estimated unearned customer capital contributions Estimated future cost of decommissioning liabilities

e. Change in accounting estimate

Following the implementation of the results of a decommission study, the estimated amount of cash flows to settle the obligation to dismantle or restore capital assets was increased. Additionally, there was a change in the current market discount rates applied to present value the obligation, which resulted in a decrease to the provision. These changes in the estimate was applied prospectively resulting in a net decrease in provisions of approximately $54 million.

3. Summary of changes in significant accounting policies

a. Change in accounting policies

Effective April 1, 2020 the Corporation adopted the following amended IFRS on a prospective basis:

Changes to the Conceptual framework



 Amendments to IFRS 3 Business combinations  Amendments to IAS 1 Presentation of financial statements and IAS 8 Accounting policies, Changes in Accounting Estimates and Errors The adoption of these amended standards has resulted in no changes within the condensed consolidated financial statements for the period ended June 30, 2020 and are not expected to have a material impact in the future.

b. Future changes in accounting policies

The following new or amended accounting standards are not effective for the period ended June 30, 2020 and have not been applied in preparing these condensed consolidated financial statements:  Amendments to IFRS 10, Consolidated financial statements  IAS 28, Investments in associates and joint ventures

The Corporation is currently analyzing these changes to determine the full impact upon adoption.

2020-21 First Quarter Report

4. Natural gas in storage held for resale

As at June 30, 2020

As at March 31,

2020

(millions)

Cost

Revaluation to net realizable value

(3)

(7)

The net realizable value of natural gas in storage at the end of the quarter was $3 million below cost (March 31, 2020 - $7 million below cost). As at June 30, 2020, the Corporation expects that $25 million of the current inventory value could be sold or consumed within the next fiscal year and $1 million of the current inventory value could be sold or consumed after more than one fiscal year.

5. Financial and derivative instruments

For recurring and non-recurring fair value measurements, the Corporation estimates the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the reporting date under current market conditions. This requires the Corporation to make certain assumptions, including the principal (or most advantageous) market, the most appropriate valuation technique and the most appropriate valuation premise. The Corporation’s own credit risk and the credit risk of the counterparty have been taken into account in determining the fair value of financial assets and liabilities, including derivative instruments.

In measuring fair value, the Corporation classifies items according to the fair value hierarchy based on the amount of observable inputs.

Level 1 valuations use quoted prices (unadjusted) that are available in active markets for identical assets or liabilities as at the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide ongoing pricing information.

Level 2 valuations are based on inputs that are either directly or indirectly observable for the asset or liability as at the reporting date. Inputs include quoted market prices, time value, volatility factors and broker quotations which can be substantially observed or corroborated in the marketplace.

Level 3 inputs are unobservable for the particular assets and liabilities as at the reporting date. The Corporation did not classify any of its fair value measurements within Level 3.

2020-21 First Quarter Report

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