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.
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2015 THIRD QUARTER REPORT
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