SaskEnergy Third Quarter Report - September 30, 2015

SASKENERGY INCORPORATED

THIRD QUARTER REPORT September 30, 2015

TABLE OF CONTENTS TABLE OF CONTENTS

Corporate Profile

Vision, Mission and Values

Financial and Operating Highlights

Management’s Discussion and Analysis

Introduction

Consolidated Financial Results

Liquidity and Capital Resources

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

CORPORATE PROFILE

SaskEnergy Incorporated First Quarter Report

March 31, 2011

SaskEnergy Incorporated (SaskEnergy or the Corporation) is a Saskatchewan Crown corporation governed by The SaskEnergy Act . It is a designated subsidiary of Crown Investments Corporation of Saskatchewan (CIC). CIC is also a Crown corporation and effectively operates as the Province’s holding company for commercial Crown corporations (such as SaskEnergy, SaskPower, SaskTel and SGI) and various commercial investments. SaskEnergy’s main business is the natural gas Distribution Utility. SaskEnergy owns and operates the Distribution Utility, which has the exclusive legislated franchise to distribute natural gas within the Province of Saskatchewan. The Provincial Cabinet regulates SaskEnergy’s delivery and commodity rates. All rate changes are subject to review by the Saskatchewan Rate Review Panel, an independent body, prior to receiving Provincial Cabinet approval.

SaskEnergy’s corporate structure includes four wholly owned and two indirect wholly owned operating subsidiaries as follows:

Bayhurst Gas Limited (Bayhurst) owns, produces, and sells natural gas from its storage facilities in the western area of Saskatchewan. Bayhurst also owns a gross overriding royalty on several properties in Saskatchewan and Alberta. Bayhurst has two wholly owned subsidiaries as follows: Bayhurst Energy Services Corporation (BESCO) is an energy services company. BESCO owns a 50 per cent interest in a natural gas processing plant in southeastern Saskatchewan, which is operated through a joint arrangement with ATCO Energy Solutions. BESCO is also the sole owner and operator of a gathering and processing facility in Coleville as well as a bulk compressed natural gas fueling facility in Weyburn. BG Storage Inc. (BGSI) owns a 50 per cent interest in a natural gas storage business, which is operated through a joint arrangement with Faro Energy Ventures Ltd. Many Islands Pipe Lines (Canada) Limited (MIPL) is a transmission company that owns nine natural gas transmission pipeline interconnections into Alberta, two into the United States, and one into Manitoba, all of which connect to the TransGas Limited pipeline system. MIPL is regulated by the National Energy Board. Saskatchewan First Call Corporation ( Sask 1 st Call ) provides a centralized “Call Before You Dig” underground facility screening and notification service. Sask 1 st Call was established primarily for safety reasons to maintain a database of oil, natural gas, and other underground infrastructures. Sask 1 st Call provides a service whereby landowners and other stakeholders can contact Sask 1 st Call to request the location of pipeline- and non-pipeline-related facilities of its subscribers. Sask 1 st Call’s rate structure is intended to operate on a break-even basis. TransGas Limited (TransGas) owns and operates the Transmission Utility and has the exclusive legislated franchise to transport natural gas within the Province of Saskatchewan. It also owns and operates a non-regulated natural gas storage business which is integrated with the transmission pipeline system. TransGas’ transportation and storage rates are subject to Provincial Cabinet approval. TransGas has a Customer Dialogue process where business, operational and rate matters are openly discussed with a representative group of customers. As a Crown corporation, SaskEnergy is committed to ensuring that all corporate activities are in strategic alignment with the Government of Saskatchewan’s Crown Sector Priorities. 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.

2015 THIRD QUARTER REPORT

VISION, MISSION AND VALUES

SaskEnergy Incorporated First Quarter Report

March 31, 2011

VISION

To create a competitive advantage for Saskatchewan through safe, innovative energy solutions.

MISSION

Our team of engaged employees and business partners develops and delivers safe, reliable natural gas solutions that benefit our customers and Saskatchewan.

VALUES

2015 THIRD QUARTER REPORT

FINANCIAL AND OPERATING HIGHLIGHTS

Three months ended September 30

Nine months ended September 30

2015

2014

2015

2014

FINANCIAL HIGHLIGHTS ($ millions)

141 161 -

561 527

Total revenue

214 221

803 764

Total expenses

(20)

Consolidated net (loss) income

(7)

39 19

(7)

Market value adjustments

(Loss) income before unrealized market value adjustments

(13)

10 34 56

Dividends

203 130

Cash provided by operating activities

196 189

Capital expenditures

104

2,375 1,146 62.1%

Total assets

2,287 1,098 58.8%

Total net debt

Debt ratio

OPERATING HIGHLIGHTS

Distribution Volumes distributed (petajoules) Weather (compared to last 30 years)

131

128

2% warmer

10% warmer

16% colder

Transmission Volumes transported (petajoules)

217 1.34

199

Peak day natural gas flows (petajoules)

1.37

January 4

Date of peak flow

February 6

2015 THIRD QUARTER REPORT

MANAGEMENT’S DISCUSSION & 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 nine month period ended September 30, 2015. 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. This MD&A is presented as at November 20, 2015 and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Accounting 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 2014 Annual Report. The following discussion contains certain forward-looking statements that are subject to inherent uncertainties and risks, which are described in the Risk Management and Disclosure section of SaskEnergy’s 2014 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 distributed is sensitive to variations in the 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 nine months of 2015 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 gas marketing 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. These unrealized market value adjustments vary considerably with the 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. CONSOLIDATED FINANCIAL RESULTS

Consolidated Net Income

Three months ended September 30

Nine months ended September 30

2015

2014 Change

2015

2014 Change

(millions)

(Loss) income before unrealized market value adjustments Impact of fair value adjustments Revaluation of natural gas in storage

(13)

(6) (1)

(12)

(5)

(1)

(11)

(20)

Consolidated net (loss) income

(7)

(13)

(5)

Income before unrealized market value adjustments of $31 million for the first nine months of 2015 was $11 million higher than the first nine months of 2014. Low natural gas prices and a commodity rate increase effective July 1, 2014 have contributed to higher realized commodity margins in the first nine months of 2015 compared to 2014. Transportation revenue also increased, a result of higher contracted demand volumes and a rate increase effective January 1, 2015. Delivery revenue declined due to lower volumes consumed, a result of the winter heating season of 2015 being significantly warmer than 2014 combined with higher heating values in 2015, which means that customers need to consume less gas by volume to heat their homes. In recent years, increasing imports of natural gas from Alberta, which has a higher heating value than conventional Saskatchewan production, increased the average heating value of gas sold. Additionally, new production within Saskatchewan is increasingly sourced from gas associated with oil production, which has higher heat values than conventional production. Operating and maintenance expenses have increased over 2014, due to transportation expenses related to the provision of additional transportation services which have increased transportation revenues. Natural gas market prices have been low through the first nine months of 2015 and are expected to remain low for the remainder of the year. Low prices together with small differentials between current and forward prices create limited gas

2015 THIRD QUARTER REPORT

marketing opportunities compared to prior years. While the decline in natural gas prices generates unfavourable unrealized market value adjustments on natural gas purchase contracts and natural gas in storage, over the first nine months the settlement of existing contracts has resulted in favourable market value adjustments. Natural gas liquid prices have also declined from the low levels experienced in 2014, resulting in an impairment of gas processing assets being recognized in 2015. The third quarter of 2015 reported a $13 million loss before unrealized market value adjustments and equaled the loss for the third quarter of 2014. A higher realized margin on commodity sales and higher transportation revenue, both results of rate increases, were partially offset by a decline in delivery revenue, a result of 2015 weather being closer to normal and higher heating value of natural gas sold, which have reduced the volume of natural gas delivered.

Natural Gas Prices

Natural gas prices are set in an open market and are influenced by a number of variables including production, demand, natural gas storage levels 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 generate incremental electricity for air conditioning in the summer, weather has the greatest impact on natural gas prices in the near term. Due to the high degree of uncertainty associated with weather, natural gas prices can be very volatile. Prices remained low in the first three quarters of 2015 as a result of continued record levels of production and unseasonable warm winter weather in the west. Natural gas storage filled at above average rates throughout the injection season. Storage is expected to end the injection season at the highest level on record. The AECO monthly index, the benchmark price for natural gas in western Canada, averaged $2.66/GJ in the first three quarters of 2015, down from an average of $4.31/GJ during the same time period in 2014. The following chart presents AECO natural gas prices. Most natural gas in Saskatchewan is priced at a differential to the AECO price and is typically between $0.05 per gigajoule (GJ) and $0.20 per GJ higher than AECO.

$12.00

$10.00

$8.00

AECO Monthly Price

Forward Price at September 30, 2015

$6.00

$4.00

$2.00

$0.00

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Natural Gas Sales and Purchases

Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing activities. Although presented together within the consolidated financial statements in accordance with IFRS, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately.

2015 THIRD QUARTER REPORT

Commodity Sales to Customers

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. 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 natural gas sold to distribution customers without earning a profit or incurring a loss over the long term. For rate-setting purposes, 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 recorded for financial reporting purposes, 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. The most notable differences are the elimination of intercompany costs in the preparation of the consolidated financial statements, including transportation costs paid to TransGas, as well as the timing related to recognition of financial derivative settlements. While a gain or loss is commonly reported in the Corporation’s consolidated financial statements, it should not be taken as indicative of the results recorded within the GCVA.

Commodity Margin

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

Three months ended September 30

Nine months ended September 30

2015

2014 Change

2015

2014 Change

(millions)

201

Commodity sales

(9)

197

Commodity purchases 1

(31)

(178)

(38)

(200)

22 26

(1) (2)

23 16

Realized margin on commodity sales Impact of fair value adjustments

1 1

(2) (3)

(3)

Margin on commodity sales

(5)

1 Net of change in inventory

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. On a consolidated basis, the Corporation realized a $23 million margin on commodity sales, with average revenue of $4.23 per GJ and average cost of gas sold of $3.77 per GJ. This compared to an unfavourable realized margin of $3 million for the same period in 2014. The higher commodity margin in 2015 is a result of the Corporation’s first commodity rate increase in six years to $4.84 per GJ effective July 1, 2014, combined with low natural gas market prices that have allowed the Corporation to reduce the average cost of commodity purchases. This was partially offset by lower volumes consumed, a result of warmer weather and higher heat values in 2015. SaskEnergy manages the purchase price of natural gas it buys through its natural gas price risk management program with two objectives: to reduce the volatility of natural gas prices and to offer rates that are competitive to other utilities. The two objectives naturally oppose each other, and the balance between the two may change depending on existing 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 uses financial derivatives and physical swaps to manage the future purchase price of natural gas. As derivative instruments, natural gas contracts are recorded at fair value until the settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in either commodity sales or commodity purchases depending on the specific contract. Upon settlement of the contract, the amount paid or received by SaskEnergy becomes realized and is recorded in commodity sales or purchases. For the first nine months of 2015, fair value adjustments increased the margin on commodity sales by $16 million as the $104 million unfavourable fair value position at the end of 2014 improved to an $88 million unfavourable position at the end of September 2015. The settlement of contracts during the first nine months of 2015 contributed to a lower volume of contracts outstanding at September 30, 2015. Additionally, the remaining contracts have a lower average contract price, which improves the fair value.

2015 THIRD QUARTER REPORT

Due to the seasonality of the weather in the Province, the volume of commodity sales to customers declines significantly in the second and third quarters. However, some of the costs associated with the Corporation’s price risk management strategy do not decline with the decreasing sales volumes. As such, declining margins on commodity sales are not unusual during the second and third quarters. For the third quarter of 2015, the Corporation realized a $1 million unfavourable margin on commodity sales which was comparable to the margin in the same period of 2014. An unfavourable fair value adjustment of $2 million for the third quarter of 2015 was the result of the natural gas market prices declining in September 2015.

Gas Marketing Sales

Three months ended September 30

Nine months ended September 30

2015

2014 Change

2015

2014 Change

(millions)

109

Gas marketing sales

(57)

348

(239)

Gas marketing purchases 1

(36)

(97)

(338)

241

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

(3) (1)

(9)

(7) (1)

(8)

(1)

(11)

Margin on gas marketing sales 1 Net of change in inventory

(4)

(10)

SaskEnergy’s gas marketing activity employs several different strategies, all of which attempt to optimize storage and transportation capacity available to the Corporation to earn a positive margin. The most significant gas marketing activity is focused on utilizing the storage capabilities of a depleted gas field in west-central Saskatchewan. The primary strategy involves the purchase of natural gas accompanied by a forward sales contract that essentially locks in a future profit margin. Low natural gas market prices in the past few years created opportunities for the Corporation to purchase relatively low-priced natural gas which has been injected into storage facilities to be sold in the future when prices are higher. The Corporation also optimizes transmission and storage capacity during off peak periods, by purchasing and selling natural gas in the open market to generate additional margins. The margins earned on this activity benefit customers by reducing pressure on transmission and distribution rates. Lastly, SaskEnergy provides natural gas supply options to larger end-use customers in Saskatchewan through non-regulated contract sales. The realized margin on gas marketing sales, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $12 million. This was an increase of $2 million from the same period last year as higher margins were partially offset by low market prices for natural gas and forward market pricing limited the opportunities for the Corporation to transact significant volumes of purchases and sales. There were 34 PJ of natural gas sold in the first nine months of 2015 compared to 80 PJ in the same period of 2014. On a third quarter basis, the Corporation realized a $4 million margin in 2015 which was a result of a higher realized margin, partially offset by lower volumes. Transactions undertaken through the Corporation’s gas marketing strategies create risk, especially given the volatility of natural gas market prices. The Corporation enters into various natural gas contracts in its gas marketing activities. These contracts are derivative instruments and, as such, are recorded at fair value until the date of settlement. Changes in fair value positions are recorded in either gas marketing sales or gas marketing purchases, depending on the specific natural gas contract. Once settled, the amount paid or received for the contract is recorded in gas marketing sales or gas marketing purchases, as appropriate. During the first nine months of 2015, fair value adjustments on derivative instruments reduced the margin on gas marketing sales by $9 million. The fair value position slightly declined from $8 million unfavourable at the end of September 2014 to $9 million unfavourable at the end of September 2015. The results are comparable and reflect the Corporation’s lower volume of outstanding contracts at the end of the period due to contracts settling in the first nine months of 2015, which has been offset by the impact of declining natural gas market prices in September 2015. At each reporting period, the Corporation measures the net realizable value of gas marketing natural gas in storage 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. In recent years, low natural gas prices have translated to reduced prices on the forward price curve. AECO’s price decreased to $2.60/GJ at the end of September, down $0.10/GJ from the end of 2014 and down $0.17/GJ from the end of August. As forward contracts settle, their market value adjustments become realized in net income leaving a lower volume of natural gas contracts outstanding compared to the end of 2014. The result is improved market value adjustments despite declining market prices. Consequently, the net realizable value of gas marketing natural gas in storage was $23 million below cost as at September 30, 2015, which is unchanged from the revaluation adjustment required at December 31, 2014.

2015 THIRD QUARTER REPORT

Delivery Revenue

Weather

The Corporation earns delivery revenue based on the volume of natural gas delivered to distribution customers plus a basic monthly charge. Delivery revenue is highly dependent on weather as natural gas is primarily used as heating fuel by residential and commercial customers during the cold winter months. Delivery revenue of $151 million was $12 million below 2014 as the first three quarters of 2015 were 2% warmer than normal, based on weather data for the past 30 years, compared to 16% colder than the same period in 2014. The warmer weather decreased customer consumption compared to 2014 resulting in lower delivery revenue. Additionally, the natural gas SaskEnergy is selling to customers has a much higher heating value in 2015, compared to 2014 which means that customers need to consume less gas by volume to heat their homes. Lower consumption due to weather

YTD 2015 - 2% warmer than normal YTD 2014 - 16% colder than normal

and heating value has reduced revenue, however this has been partially offset by a delivery rate increase effective September 1, 2014 and increased customer growth. A delivery rate increase planned for September 1, 2015, needed to meet SaskEnergy’s revenue requirements, has been deferred to January 1, 2016. During the third quarter of 2015, delivery revenue of $32 million was $3 million below the third quarter of 2014. There was a decrease in the volume of natural gas delivered to customers in 2015, slightly offset by the prior year’s third quarter rate increase.

Transportation and Storage Revenue

The Corporation’s subsidiary, TransGas, provides receipt and delivery transportation through the use of the TransGas Energy Pool (TEP), a notional point where producers, marketers and end-users can match supplies to demand. On the receipt side, the Corporation offers both firm and interruptible transportation from points of receipt to TEP. On the delivery side, the Corporation offers firm and interruptible service for gas delivered from TEP to consumers within Saskatchewan or for export. Integral to the Corporation’s transmission system are several strategically located natural gas storage sites with the capacity to provide operational flexibility along with a reliable and competitive natural gas storage service. Year-to-date, transportation and storage revenue of $89 million was $18 million above the same period in 2014. On a quarter- over-quarter basis, transportation and storage revenue of $31 million was also $7 million above the third quarter of 2014. This was primarily due to higher contracted demand volumes combined with a rate increase effective January 1, 2015, resulting in higher direct and receipt revenue, and increased recoveries for its service to import natural gas from Alberta. The higher direct and receipt revenue is a result of a number of customers moving from interruptible service to firm delivery contracts during the second quarter of 2014. When customers transfer from interruptible to firm contracts it increases demand revenue for TransGas and also improves revenue certainty which is more supportive of required pipeline expansions. Conversely, storage revenue was down slightly from the same period last year due to customer preference to buy/sell at the market rather than use storage, a result of the low natural gas price environment.

Customer Capital Contribution Revenue

The Corporation receives capital contributions from customers in exchange for the construction of new, customer-specific service connections. These contributions, less potential refunds, are recognized as revenue once the related property, plant, and equipment is available for use. The volume and magnitude of these contributions can vary significantly period over period as varying factors influence their receipt. Generally, customer capital contributions mirror the projects themselves – those related to the transmission system tend to be larger but less frequent than contributions related to the distribution system. Customer capital contribution revenue of $14 million, driven by the year-to-date distribution system customer connections, was $3 million below the same period last year due to a decline in customer connection activity. The third quarter customer capital contribution revenue of $9 million was $1 million higher than 2014, related to an increase in distribution system customer connections for the three month period ending September 2015.

2015 THIRD QUARTER REPORT

Other Revenue

Other revenue primarily consists of revenues from natural gas processing operations and royalty revenues. The Corporation’s natural gas processing operations include gas processing at two separate gas plants and the sale of natural gas liquids from the processing operations. Royalty revenue is generated from a gross overriding royalty on several natural gas-producing properties in Saskatchewan and Alberta. Other revenue of $8 million for the first nine months of 2015 is $5 million lower than 2014 as a result of lower natural gas liquid prices. The $2 million for the third quarter of 2015 was $2 million lower than 2014, also due to the decline in natural gas liquid prices.

Other Expenses

Other expenses consist of employee benefits, operating and maintenance, depreciation and amortization, and Saskatchewan taxes. With strong growth in the provincial economy in recent years, the Corporation has experienced significant growth in its customer base and pipeline facilities. The increasing investment in facilities directly affects depreciation and amortization and corporate capital taxes. Other expenses of $228 million for the first nine months in 2015 represent a slight increase of $6 million over the same period in 2014. For the third quarter of 2015, other expenses of $76 million were $1 million above 2014 with the primary driver for both being cost increases to transport additional gas into Saskatchewan to meet growing demand combined with an increase in depreciation and amortization resulting from increases to the capital asset base.

Net Finance Expenses

Net finance expenses, before the impact of fair value adjustments, were $33 million in 2015 and equaled 2014. Increased earnings on debt retirement funds were fully offset by the higher debt financing needed to fund the Corporation’s growing capital expenditure requirements. There was also a $4 million unfavourable fair value adjustment on debt retirement funds during 2015, an outcome of increased interest rates on fixed-rate investments. On a quarterly basis, net finance expenses of $12 million, before the impact of fair value adjustments, were slightly above 2014 due to increased levels of debt.

Other (Losses) Gains

Recent changes in the oil and gas market have led to declining natural gas and natural gas liquid prices, which have adversely affected cash flows generated from gas processing plant assets. An impairment on gas processing plant assets of $3 million was recorded in the first quarter of 2015 to recognize the impact of a decline in natural gas liquid prices on their value in use. In addition, a customer specific transmission pipeline was sold in the third quarter, which resulted in a loss on the retirement of the pipeline assets that is recorded in other losses and gains. Upon sale of the pipeline, SaskEnergy recognized a customer contribution related to the pipeline that was no longer refundable, resulting in no impact to the financial results on the sale of the pipeline. These two losses contrast the $3 million gain recorded in the second quarter of 2014 for the sale of storage and distribution assets. LIQUIDITY AND CAPITAL RESOURCES

Three months ended September 30

Nine months ended September 30

2015

2014 Change

2015

2014 Change

(millions)

203

Cash provided by operating activities Cash used in investing activities Cash used in financing activities (Decrease) increase in cash and cash equivalents

11 48

196

(57)

(132)

(105)

(185)

(75)

(49)

(7)

(68)

(4)

(10)

(8)

Cash from operations and debt borrowed from the Province of Saskatchewan’s General Revenue Fund are the primary sources of liquidity and capital for SaskEnergy. Sources of liquidity include Order in Council authority to borrow up to $500 million in short-term loans, which was increased by $100 million in the third quarter of 2015. The Corporation holds a $35 million uncommitted line of credit with the Toronto-Dominion Bank. Over the longer term, The SaskEnergy Act allows the Corporation to borrow up to $1,700 million. Cash from operating activities was $203 million in 2015, an increase of $7 million from the first nine months of 2014. This is due to a higher commodity rate in 2015 increasing cash flow compared to 2014. This was partially offset by lower volumes sold to customers and lower delivery service revenue, both due to higher heat values of natural gas sold in 2015 and the near normal weather in 2015 compared to the extreme weather in 2014. The decline in natural gas prices continues to limit the Corporation’s gas marketing activities. The volume of gas marketing natural gas in storage of 25 PJ at the end of September

2015 THIRD QUARTER REPORT

2015 is 9 PJ lower than September 2014 and has declined by 5 PJ from year end as existing sales contracts have been settled, contributing to cash from operating activities. Cash used in investing activities totaled $132 million for the first nine months of 2015, $53 million below 2014. Capital investment levels have declined in 2015 due to lower system growth and customer connection levels compared to 2014. The Bayhurst-to-Rosetown pipeline project that was completed in 2014 was the Corporation’s largest capital investment project in recent years, contributing to high capital investment levels in 2014. The majority of the year to date capital investment focus on $58 million of system expansion and growth initiatives, which are a result of Saskatchewan residential and industrial growth, as well as safety and integrity programming of $54 million, a sign of the Corporation’s ongoing commitment to a safe, reliable system. The Corporation funds its high level of capital requirements with cash from operations and debt from the Province of Saskatchewan. Cash used for financing activities was $75 million during the first nine months of 2015. In the first quarter of 2015, given the Corporation’s relatively high short-term debt balances and attractive interest rates on long-term debt, the Corporation issued $50 million of long term debt at an effective interest rate of 2.7%, the proceeds of which were used to repay $62 million of its short-term debt. With decreased capital spending through the first nine months of 2015, long term debt requirements declined from 2014 and cash from operations has been utilized to meet current year capital spending and operating requirements. SaskEnergy’s debt ratio at September 30, 2015 was 62%, slightly lower than December 31, 2014 and slightly higher than the Corporation’s long-term target of 57%. OUTLOOK In close alignment with Saskatchewan Crown Sector Priorities and the Saskatchewan Plan for Growth, SaskEnergy’s 2015 efforts will continue to focus on the four strategic mandates: Service Excellence, Achieving Growth, Our Team and Creating Value. The Corporation is financially well-positioned to achieve its business objectives in 2015 and over the five-year planning horizon. Currently, 2015 is characterized by a forward pricing curve for natural gas that shows a very small differential between current market prices and future market prices, which is good for customers and large consumers of natural gas who value stability and low prices. The $4.84 per GJ commodity rate approved on July 1, 2014, combined with a lower average cost of gas, due to declines in market prices, will continue to provide favourable margins on commodity sales in 2015 and reduce the Gas Cost Variance Account owing from customers. On October 21, 2015, Cabinet approved a $0.54 per GJ reduction to the commodity rate to $4.30 per GJ, based on the recommendations of the Saskatchewan Rate Review Panel. The commodity rate reduction will take effect January 1, 2016 together with an average 4.5% increase to the delivery rate. The Corporation’s gas marketing activities are not expected to provide the margins that were typical prior to 2014 when traditionally volatile natural gas prices allowed for price arbitrage transactions to be undertaken at relatively high margins. Based on current market conditions, the forecasted gas marketing margin for 2015 is only slightly higher than the 2014 margin. In line with expectations, the volume of gas marketing activity has declined by 57% in 2015, however by leveraging its assets and expertise SaskEnergy has found several opportunities throughout the year which will allow it to achieve slightly higher margins than in 2014. The Corporation’s business is subject to price risk related to movements in natural gas and natural gas liquids prices, financial derivative contracts are used to manage natural gas price risk, resulting in SaskEnergy’s earnings being exposed to changes in the market value of these contracts. Based on the contracts outstanding at the end of September 30, 2015, a $0.50/GJ increase across all future natural gas price points would result in a market value gain of $46 million, while a decrease of $0.50/GJ would result in a market value loss of $28 million. The Corporation expects to see the pace of Saskatchewan’s economy slow to moderate levels in 2015 as commodity prices are not expected to recover significantly before the end of the year. In light of this, SaskEnergy has tempered its expectations for customer connection rates to levels closer to the ten year average. Actual results through to the end of the third quarter of 2015 have supported this expectation as growth in delivery revenue has declined due to slower customer growth, compounded by reduced customer consumption due to warmer weather and higher heat values. Residential customer capital contributions have declined and are forecasted to be lower than in 2014. Industrial and commercial demand for service is expected to continue at strong levels and exhibit steady growth through 2015, which will slightly mitigate the declines related to residential customers. The heightened focus on security of natural gas supply and the need to look at cost effective options for sourcing that supply will continue in 2015. Saskatchewan production levels for conventional natural gas have been in steady decline for the past several years and are expected to remain at current levels going forward. As major industrial projects come on line, load pressures will increase and operating costs to meet those loads will continue to increase, though not to the same degree as in 2014.

2015 THIRD QUARTER REPORT

The outlook for labour markets and contractor demand was unclear given the downturn in the provincial economy but pressure has lessened in some areas during the downturn. The Corporation continues to pursue its resourcing strategy which calls for relatively stable employee levels augmented by third party contract resources. In addition, efficiency initiatives have enhanced productivity and will continue to allow SaskEnergy to meet its business commitments in a nimble and cost effective manner with a focus on cost savings in employment, contract and consulting, advertising and vehicle costs. SaskEnergy will continue to focus its efforts on providing safe and reliable service to customers without creating undue rate pressure. Spending will focus on upgrading infrastructure to meet load and service requirements, as well as the integrity of transmission, distribution and storage systems. The 2015 capital plan also includes growth-related projects such as gas processing and associated gas capture where current opportunities appear limited. The Corporation has spent $130 million on capital projects in 2015 with plans to spend a total of $221 million on capital investment by the end of 2015. These capital expenditures will be funded through operating cash flows and debt made available through the Province at what are expected to be historically low interest rates. In summary, SaskEnergy will continue to focus on investing in safety and growth initiatives and realizing efficiencies, while forecasting income before unrealized market value adjustments of $81 million in 2015.

2015 THIRD QUARTER REPORT

CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

SaskEnergy Incorporated First Quarter Report

March 31, 2011

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at September 30, 2015 (unaudited)

As at December 31, 2014 (audited)

(millions)

Notes

Assets Current assets Cash

Trade and other receivables

148 140

133

Natural gas in storage held for resale

14 15

Inventory of supplies Debt retirement funds

Fair value of derivative instruments

247

333

Intangible assets

1,988

Property, plant and equipment

1,912

Debt retirement funds

2,375

2,380

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

229 106

299 117

Trade and other payables

Dividends payable

133

Current portion of long-term debt

50 90

94 89

Deferred revenue

Fair value of derivative instruments

107 666

661

Employee future benefits

10 95

112

Provisions

Deferred revenue Long-term debt

887

908

1,676

1,685

Province's equity

Equity advances Retained earnings

627 699

623 695

2,375

2,380

(See accompanying notes)

2015 THIRD QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Three Months Ended September 30, 2015

For the Three Months Ended September 30, 2014

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 10)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 10)

Total

(millions)

Notes

Revenue Natural gas sales

70 32 31

(3)

67 32 31

136

143

- - - -

Delivery

35 24

- - - -

35 24

Transportation and storage Customer capital contributions

9 2

8 4

Other

144

(3)

141

207

214

Expenses Natural gas purchases (net of change in inventory)

67 21 29 22

70 21 29 22

135

137

- - - -

Employee benefits

20 30 20

- - - -

20 30 20

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

143

146

210

2 5

212

(Loss) income before the following

(6)

(5)

(3)

(1)

Finance income Finance expenses

(13) (12)

(13) (13)

(12) (11)

(12) (10)

Net finance expenses

(1)

(2)

Other (losses) gains

Total net loss and comprehensive loss

(13)

(7)

(20)

(13)

(7)

(See accompanying notes)

2015 THIRD QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Nine Months Ended September 30, 2015

For the Nine Months Ended September 30, 2014

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 10)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 10)

Total

(millions)

Notes

Revenue Natural gas sales

310 151

(11)

299 151

545 163

(6)

539 163

- - - -

Delivery

- - - -

89 14

Transportation and storage Customer capital contributions

71 17 13

Other

572

(11)

561

809

(6)

803

Expenses Natural gas purchases (net of change in inventory)

275

(18)

257

538

(20)

518

69 86 64

- - - -

69 86 64

Employee benefits

68 85 60

- - - -

68 85 60

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

503

(18)

485

760

(20)

740

Income before the following

(4)

Finance income Finance expenses

(38) (33)

(38) (37)

(36) (33)

(36) (28)

Net finance expenses

(4)

(5)

Other (losses) gains

Total net income and comprehensive income

(See accompanying notes)

2015 THIRD QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)

Other Components of Equity

Retained Earnings

Equity Advances

Total

(millions)

Balance as at January 1, 2014

745

673

- - -

Comprehensive income

- -

(14)

Dividends

(14)

Balance as at September 30, 2014

770

698

Balance as at January 1, 2015

695

623

- - -

Comprehensive income

- -

(30)

Dividends

(30)

Balance as at September 30, 2015

699

627

(See accompanying notes)

2015 THIRD QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

For the Nine Months Ended September 30

(millions)

Notes

2015

2014

Operating activities Net income and comprehensive 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

(7)

10 10

(3)

(11)

64 37

Depreciation and amortization

60 28

Net finance expenses Other losses (gains)

(4)

133

109

Net change in non-cash working capital related to operations

203

Cash provided by operating activities

196

Investing activities Additions to intangible assets

(8)

(4)

(124)

Additions to property, plant and equipment

(181)

(2)

Decommissioning costs

- -

Net proceeds on disposal of assets Cash used in investing activities

(132)

(185)

Financing activities Debt retirement funds installments Debt retirement funds redemptions

(8)

(70) (23)

Decrease in short-term debt

(148)

Dividends paid

(19)

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

246

(50) (34)

(36) (75)

Interest paid

Cash used in financing activities

(7)

(Decrease) increase in cash and cash equivalents

(4)

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

2015 THIRD QUARTER REPORT

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