SaskEnergy Third Quarter Report - December 31, 2016

SASKENERGY INCORPORATED

THIRD QUARTER REPORT December 31, 2016

VISION, MISSION AND VALUES

TABLE OF CONTENTS

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. 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 Community

Integrity

Communication

Safety

Accountability

Recognition

Spirit

TABLE OF CONTENTS Financial and Operating Highlights

2

Management’s Discussion and Analysis

3

Introduction

3 3 4 9 9

Industry Overview

Consolidated Financial Results Liquidity and Capital Resources

Capital Expenditures

Outlook

10

Consolidated Financial Statements

12

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

12 13 15 16 17

FINANCIAL AND OPERATING HIGHLIGHTS

SaskEnergy Incorporated First Quarter Report

March 31, 2011

Three months ended December 31

Nine months ended December 31

2016

2015

2016

2015

FINANCIAL HIGHLIGHTS ($ millions)

233 162

497 366 131

Total revenue

248 197

534 504

Total expenses

71 26

Consolidated net income Market value adjustments

51

30

96

(6)

(9)

Income before unrealized market value adjustments

45

35

57

39

14 39 72

14

Dividends

14 57 86

34

120 156

Cash provided by operating activities

171 184

Capital expenditures

2,275 1,250 59.3%

Total assets

2,464 1,195 61.9%

Total net debt

Debt ratio

OPERATING HIGHLIGHTS

Distribution Volumes distributed (petajoules) Residential/Farm

13 10 32 55

19 17 92

11

18 15 91

Commercial

9

Industrial

34 54

128

Total

124

5% warmer

8% warmer

Weather (compared to last 30 years)

13% warmer

6% warmer

Transmission Volumes transported (petajoules) Domestic

89

213

77

191

1

16

Export

6

19

90

229

Total

83

210

2

2016-17 SECOND 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 months ended December 31, 2016. On November 30, 2015, the Government of Saskatchewan announced a change in the year end for CIC and its subsidiaries from December 31 to March 31. SaskEnergy reported a 15-month period ended March 31, 2016 to transition to the new fiscal period and will report on 12- month periods ending March 31st each year thereafter. 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 February 13, 2017 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 2015-16 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 2015-16 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 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 2016-17 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.

INDUSTRY OVERVIEW

Natural gas prices are set in an open market and are influenced by a number of factors 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 produce electricity for air conditioning, weather typically 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. In response to the low prices in 2015 and early 2016, North American production slowed, while growth in natural gas demand continued to rise, particularly in the industrial and power generation sectors. This changing supply/demand balance for natural gas initiated a quick recovery of the AECO monthly index, the benchmark price for natural gas in Western Canada, as the index improved from $1.02 per GJ at the end of March 2016 to $3.45 per GJ at the end of December 2016. This was a $2.48 per GJ (243 per cent) recovery in the nine month period as noted in the AECO Monthly Index Historical Prices chart. Most natural gas in Saskatchewan is priced at a differential to the AECO price and is typically between $0.05 per GJ and $0.20 per GJ higher than AECO.

3

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report $14.00

AECO Monthly Index Historical Prices

March 31, 2011

Conventional Natural Gas

$12.00

$10.00

$8.00

Shale Gas Revolution

$6.00

Forward Price at December 31, 2016

$4.00

$2.00

$0.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

CONSOLIDATED FINANCIAL RESULTS

Consolidated Net Income

Three months ended December 31

Nine months ended December 31

2016

2015 Change

2016

2015 Change

(millions)

Income before unrealized market value adjustments Impact of fair value adjustments Revaluation of natural gas in storage

$

45 13 13

$

35 69 27

$

57

$

(12)

$

39

$

(4)

(5) (1)

18 14

(8) (1)

77 28

$

71

$

131

Consolidated net income

$

51

$

20

$

30

$

101

Income before unrealized market value adjustments was $35 million for the nine months ended December 31, 2016, $4 million unfavourable compared to the $39 million net income in 2015. Delivery rate increases effective January 1 and November 1, 2016 combined with a transportation rate increase effective January 1, 2016 have addressed growing operating cost pressure and are contributing to higher revenues compared to 2015. Both operating and maintenance, and depreciation are increasing compared to 2015, a result of recent growth in the Corporation’s natural gas infrastructure and customer base. Customer capital contributions are lower than 2015 as the provincial economy and customer growth has slowed in 2016. The customer capital contribution revenue in the quarter ending December 31, 2015 also included the impact of changing the estimate of deferred customer contribution revenue related to transmission projects. Aggressive management of operating costs is evidenced by employee benefits expense declining as the Corporation continues to manage overtime and staffing levels. Commodity rate decreases effective January 1 and November 1, 2016 reduced the realized commodity margin in 2016 compared to 2015. The gas marketing margin declined in 2016 as natural gas market prices increased through 2016. This reduced price differentials between current and forward market prices and limited gas marketing opportunities. During April through December 2016, higher priced natural gas purchase contracts related to the Corporation’s commodity business expired, which had a positive impact on unrealized fair value adjustments. In addition, natural gas market prices recovered significantly by the end of June 2016 and continued through to December. The AECO near-month natural gas spot

4

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report price increased from $1.02 per GJ at the end of March 2016 to $3.45 per GJ at the end of December 2016, generating a $70 million favourable unrealized fair value adjustment on outstanding natural gas contracts. When natural gas market prices increased throughout the nine months ended December 31, 2016, the unfavourable net realizable value impact at the end of March 2016 improved by $27 million at December 31, 2016, resulting in a favourable impact on the Corporation’s consolidated net income. March 31, 2011

Natural Gas Sales and Purchases (normal use)

Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing 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. In the third quarter of 2016, the Corporation started to identify certain natural gas purchase contracts as own-use contracts. The Corporation enters into these contracts to acquire the natural gas it needs to meet expected sales to commodity customers. These non-financial derivative contracts are not recorded at fair value, rather, the contracts are accounted for as a purchase at the time of delivery. Other natural gas contracts are classified as derivative instruments and 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. The commodity rate, which is reviewed in April and November 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. Consequently, higher commodity margins in one year are often followed by a commodity rate reduction and lower commodity margins in the subsequent year, as is the case in 2015-16 and 2016-17. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. As a result, 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 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.

Three months ended

Nine months ended December 31

December 31

2016

2015 Change

2016

2015 Change

(millions)

$

80

$

125

Commodity sales

$

89

$

(9)

$

160

$

(35)

Commodity purchases 1

(67)

(110)

(72)

5

(139)

29

13 29

15 82

Realized margin on commodity sales Impact of fair value adjustments

17

(4)

21

(6)

(1)

30

6

76

$

42

$

97

Margin on commodity sales

$

16

$

26

$

27

$

70

1 Net of change in inventory

SaskEnergy manages the purchase price of natural gas it buys through its natural gas price risk management program with two objectives – to reduce the impact of natural gas price volatility, 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 purchase contracts. In the third quarter of 2016, the Corporation started to identify natural gas purchase contracts as own-use contracts, which are not recorded at fair value. The purchase price contained in forward or physical natural gas 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. Implementing the own-use natural gas purchase strategy, will reduce the variability in fair value adjustments in the Corporations financial statements. SaskEnergy’s price risk management strategy will govern non-own-use purchases to reduce the impact of price changes on realized gas purchase costs which add to the variability in fair value adjustments.

5

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report 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 $15 million margin on commodity sales for the nine months ending December 31, 2016 compared to the $21 million margin for the same period in 2015. Average revenue was $3.71 per GJ and average cost of gas sold was $3.30 per GJ during April through December 2016, resulting in a margin of $0.41 per GJ. This compared to an average commodity margin of $0.54 per GJ through the same nine month period in 2015. Lower margins in 2016 were a result of commodity rate decreases from $4.84 per GJ to $4.30 effective January 1, 2016, and to $3.65/GJ effective November 1, 2016. March 31, 2011

The realized margin on commodity sales of $13 million for the three months ending December 31, 2016 was $4 million below the $17 million margin in 2015 due primarily to the lower commodity rates.

Commodity Fair Value Adjustments

The fair value adjustments for the nine month period ended December 31, 2016 increased the margin on commodity sales by $82 million as the $100 million unfavourable fair value position at March 31, 2016 improved to $18 million unfavourable at December 31, 2016. The settlement of higher priced natural gas purchase contracts during the nine months contributed to a lower volume of contracts outstanding. In addition, the prices of the remaining natural gas purchase contracts are closer to market prices due to the recovery of AECO market prices during the first three quarters. For example, at the end of March 2016 the forward price for delivery of natural gas at AECO in January 2017 was $2.68 / GJ. By the end of December 2016 that price had increased $0.77 / GJ to $3.45. This recovery in prices has contributed to the favourable market value adjustments.

Gas Marketing Margin

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 primary strategy involves the purchase and storage injection of natural gas accompanied by a forward sales contract that essentially locks in a future profit margin. Traditionally this strategy has produced significant margins; however, due to low natural gas market prices and lower differentials between current and forward market prices, the opportunities to generate significant margins have also diminished. The Corporation also leverages its storage facilities by purchasing low cost natural gas and injecting it into storage, to hold and sell when gas prices recover. Lastly, SaskEnergy provides natural gas supply options to larger end-use customers in Saskatchewan through non-regulated contract sales.

Three months ended

Nine months ended December 31

December 31

2016

2015 Change

2016

2015 Change

(millions)

$

41

$

113

Gas marketing sales

$

41

$

-

$

116

$

(3) (1) (4) (2)

Gas marketing purchases 1

(41)

(102)

(34)

(7) (7) (6)

(101)

-

11

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

7

15

(11)

(12)

(5) (1)

(10)

13

27

14

(1)

28

$

2

$

26

Margin on gas marketing sales 1 Net of change in inventory

$

1

$

1

$

4

$

22

The realized margin on gas marketing sales at December 31, 2016, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $11 million. This is $4 million lower compared to the same period of 2015, as market conditions limited the opportunities for the Corporation to transact significant volumes of purchases and sales at margins similar to the same period in 2015. The Corporation increased its gas marketing activity, although at smaller margins, with 49 PJs of natural gas sold in the nine months ended December 31, 2016 compared to 37 PJs in the same period of 2015.

Gas Marketing Fair Value Adjustments

The Corporation enters into various natural gas contracts (swaps, options and forwards) in its gas marketing strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at December 31, 2016 on gas marketing derivative instruments reduced the gas marketing margin by $12 million for the nine month period and $11 million for the three month period compared to $10 million and $5 million unfavourable for the same periods in 2015. At the end of March, SaskEnergy had 26.4 PJ of purchase contracts with an unfavourable fair value of $7 million, and 38.7 PJ of Sales contracts with a favourable fair value of $9 million. At December 31, 2016 these purchase contracts had matured. The elimination of the market value adjustments on the purchase contracts has favourably affected financial results. Meanwhile, many of the sales contracts in place at the end of March 2016 remain, and with the rise in gas prices, the change in the value of these contracts adversely affected the margin on gas sales at the end of the third quarter. The impact of the higher gas prices on outstanding sales contracts exceeded the impact of expiring purchase contracts for a net impact on gas margin of $12 million.

6

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report Revaluation of Natural Gas in Storage

March 31, 2011 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. As much of the natural gas in storage is held to meet future sales contracts, it is not unusual to see net realizable value adjustments on gas in storage offset the impact of fair value changes. The declining market price environment at the end of March 2016 provided an opportunity for the Corporation to purchase lower priced natural gas and inject it into storage, which reduced the average cost of gas in storage. When natural gas market prices increased throughout the nine months ended December 31, 2016, the $34 million unfavourable net realizable value impact at the end of March 2016 improved by $27 million to $7 million at the end of December.

Revenue

Three months ended December 31

Nine months ended December 31

2016

2015 Change

2016

2015 Change

(millions)

$

77 34

$

154

Delivery revenue

$

64 30 24

$

13

$

135

$

19

99 17

Transportation and storage revenue Customer capital contributions

4

90 35

9

9 2

(15)

(18)

7

Other revenue

4

(2)

9

(2)

$

122

$

277

$

122

$

-

$

269

$

8

Delivery Revenue

Weather

Delivery Revenue is driven by customer growth and the amount of natural gas customers consume. As residential and commercial customers consume natural gas primarily as heating fuel, weather is the factor that most affects delivery revenue within a reporting period. Delivery revenue was $154 million for the nine months, and $77 million for the three months ending December 31, 2016, $19 million and $13 million higher than the same periods in 2015. A 4.5 per cent rate increase effective January 1, 2016 and an 8.6 per cent increase effective November 1, 2016 contributed to higher revenues. The rate increases help the Corporation offset increasing operating costs related to the growing natural gas infrastructure and increasing focus on safety and integrity programs that address the aging infrastructure. Colder weather in October and December 2016 compared to 2015 also contributed to higher revenue in 2016.

1,200

1,000

YTD 2016-17 - 8% warmer than normal YTD 2015-16 - 10% warmer than normal

800

600

400

200

-

Apr May Jun Jul

Aug Sep Oct Nov Dec Jan Feb Mar

2016-17 Actual

2015-16 Actual

2016-17 Budget

Transportation and Storage Revenue

The Corporation generates transportation revenue by taking delivery of 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 which customers pay when they put gas onto the pipeline transportation system, and a delivery service charge, which customers pay when they take delivery off of the pipeline 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. Under an interruptible contract, the customer may deliver or receive gas only when there is available capacity on the system. With a firm contract, customers pay for the amount of capacity they have contracted for whether they use the capacity or not. With an interruptible contract, customers only pay receipt and delivery tolls when they deliver or receive gas. Transportation and storage revenue was $99 million for the nine months and $34 million for the three months ending December 31, 2016, $9 million and $4 million above the same periods in 2015. Industrial customer and power generation related load growth continues to increase demand for natural gas within the province and is driving higher transportation revenue. A 2.5 per cent transportation rate increase effective January 1, 2016, is also contributing to the higher transportation revenue year-over-year.

7

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report 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. The contributions received, less potential refunds, are recognized as revenue once the related property, plant and equipment is available for use. Customers may earn a refund of some or all of the contributions they make depending on how much gas they flow. The amount of contributions expected to be refunded is estimated and recorded in deferred revenue until the eligible refund period expires or a refund is earned by the customer. Customer capital contribution revenue for the nine months and three months ended December 31, 2016 was $18 million and $15 million below the same periods in 2015. The downturn in the provincial economy is translating into lower distribution and transmission customer connections in 2016 compared to 2015. Customer capital contribution revenue in the December 2015 quarter also included the impact of changing the estimate of deferred transmission customer contributions.

March 31, 2011

Other Revenue

Other revenue was $2 million below the same nine month and three month periods in 2015 and primarily consists of gas processing fees and natural gas liquid sales from two natural gas liquid extraction plants. Compression and gathering service revenue and royalty revenues comprise the remaining balance of other revenue. Royalty revenues are generated from a gross overriding royalty on several natural gas-producing properties in Saskatchewan and Alberta, which have diminished due to the continuing decline of conventional natural gas production, a result of low natural gas prices.

Other Expenses and Net Finance Expense (before FVA)

December 31

December 31

2016

2015 Change

2016

2015 Change

(millions)

$

21 34 24

$

62 95 71

Employee benefits

$

22 32 23

$

(1)

$

66 90 66

$

(4)

Operating and maintenance Depreciation and amortization

2 1

5 5

2

9

Saskatchewan taxes

3

(1)

9

-

$

81

$

237

Other Expenses

$

80

$

1

$

231

$

6

$

12

$

34

Net finance expense (before FVA)

$

13

$

(1)

$

37

$

(3)

Increasing expenditures in safety and integrity initiatives, strong customer growth, and the need to import more natural gas from Alberta as Saskatchewan natural gas production declines are key factors contributing to increases in other expenses. Employee benefits expense of $62 million for the nine months and $21 million for the three months ending December 31, 2016 are $4 million and $1 million lower, respectively, than prior year. Productivity and efficiency initiatives over the last few years have enabled the Corporation to more effectively schedule work, and manage overtime and vacant positions. Additionally, as the pace of the Provincial economy slows the volume of work required declines as demands for service diminish. Operating and maintenance expense of $95 million year-to-date and $34 million for the quarter are $5 million and $2 million higher than the same periods in 2015, due to rising third party transportation costs as additional cross border transportation capacity is required to import gas from Alberta. This was partially offset by an elevated focus on managing operating costs. Depreciation and amortization of $71 million for the nine months and $24 million for the three months ending December 31, 2016 are $5 million and $1 million above prior year as capital additions increase the asset base and depreciation and amortization. Net finance expenses, before the impact of fair value adjustments, were $3 million lower year-to-date and $1 million lower for the quarter compared to the same periods in 2015. Lower interest rates allowed the Corporation to replace maturing long-term debt with debt bearing a lower interest rate. As a result of higher interest rates on fixed-rate investments, SaskEnergy recognized a $1 million unfavourable fair value adjustment on debt retirement funds at December 31, 2016.

8

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report LIQUIDITY AND CAPITAL RESOURCES

March 31, 2011

Three months ended

Nine months ended December 31

December 31

2016

2015 Change

2016

2015 Change

(millions)

$

39

$

120

Cash provided by operating activities Cash used in investing activities

$

57

$

(18)

$

171

$

(51)

(69)

(156)

(83)

14

(184)

28 18

29

24

Cash provided by (used in) financing activities

28

1

6

$

(1)

$

(12)

Decrease in cash and cash equivalents

$

2

$

(3)

$

(7)

$

(5)

Cash provided from operations and debt borrowed from the Province of Saskatchewan’s General Revenue Fund is the primary source of liquidity and capital for SaskEnergy. Generally, SaskEnergy finances its investment activity with cash from operations. To the extent that cash from operations is insufficient to support investment activity, debt servicing costs and dividends, additional short and long term debt is borrowed. Sources of liquidity include Order in Council authority to borrow up to $500 million in short-term loans. 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.

Operating Activities

Cash from operating activities of $120 million for the nine months ended December 31, 2016 was $51 million lower than the same period in 2015. Natural gas sales declined in 2016, a result of commodity rate decreases and warmer weather. Both contributed to lower cash from operations in 2016 compared to 2015. The Corporation also took advantage of low natural gas market prices by purchasing and injecting lower priced natural gas into storage. Higher transportation revenue and delivery revenue combined with lower employee benefits expense partially offset the decreases in operating cash flows compared to 2015.

Investing Activities

Cash used in investing activities totaled $156 million for the nine months ended December 31, 2016; $28 million lower than 2015. Capital investment levels are declining in 2016 compared to 2015, primarily due to lower investment in customer connections and system expansions, while spending on safety and integrity programming to maintain a safe and reliable system remains consistent with 2015.

Financing Activities

Cash provided by financing activities was $24 million during the nine months of 2016 compared to $6 million in 2015. From a cash management perspective, SaskEnergy uses cash from operations to pay for its investing activities, dividend payments and debt servicing costs (including interest payments and sinking fund installments). Any remaining cash from operations is applied to reducing the short-term debt balance. If there is insufficient cash from operations, SaskEnergy will borrow more debt, usually short-term debt, to meet its cash requirements. Excluding short-term debt repayments and borrowings, cash used in financing was $6 million in 2016 compared to $119 million in 2015. Long-term debt of $84 million matured in 2016, which was replaced with $133 million of new long-term debt. In comparison, 2015 operating cash flows were $51 million higher than in 2016 and were sufficient to pay the $50 million of debt that matured in 2015, plus cover operating cash requirements without requiring new long-term debt. SaskEnergy’s debt ratio at December 31, 2016 was 59 per cent compared to 61 per cent at March 31, 2016 and 62 per cent at December 31, 2015. CAPITAL EXPENDITURES

Three months ended

Nine months ended December 31

December 31

2016

2015 Change

2016

2015 Change

(millions)

$

35 30

$

77 65 10

Customer growth and system expansion

$

43 31

$

(8) (1) (2) (4)

$

101

$

(24)

Safety and system integrity

65 11

-

4

Information systems

6 4

(1) (5)

-

2

Vehicles & equipment, buildings, furniture

7

$

69

$

154

$

84

$

(15)

$

184

$

(30)

SaskEnergy continues to invest in its pipeline system to accommodate growth in the natural gas customer base and its increasing reliance on Alberta Gas to meet load requirements. Capital expenditures of $154 million for the nine months ended December 31, 2016 are $30 million below the same period in 2015. Customer growth and system expansion capital

9

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report expenditures are $24 million lower than 2015, primarily due to slower distribution customer growth, combined with reduced spending on the Advanced Metering Infrastructure (AMI), meter exchange programs and vehicle and equipment purchases. OUTLOOK March 31, 2011 The transition to the Corporation’s new fiscal year-end will report 12-month periods ending March 31 st , which changes the perspective of the Corporation’s financial reporting cycle. When reporting a December 31 st year-end, the Corporation incurred peak winter heating loads from January through March and these results typically remained prominent through the summer months, which have low heating loads. With the Corporation’s new fiscal period beginning April 1, the financial results and peak winter heating loads are absent until the third and fourth quarter. Losses will be common during the first two quarters in the absence of the winter heating load and the financial results for the third and fourth quarter demonstrate the impact weather and heating loads have on the Corporation’s financial results. Due to the low natural gas price environment, Saskatchewan natural gas production and exploration will remain slow. Until prices increase and improve the economics of natural gas exploration and development in Saskatchewan, producers are unlikely to increase their investment in Saskatchewan production. At the same time, customer growth within the Province continues to increase natural gas load growth, increasing the dependency on importing natural gas from Alberta. The growing dependency on Alberta supply is increasing operating costs for the Corporation, as gas is being transported further distances. Market Prices With the warm weather through the 2015-16 winter, the amount of gas in storage throughout North America at the beginning of April 2016 was much higher than usual. Natural gas prices reached 20-year lows and the AECO near month spot price closed at $1.02 per GJ at the end of March 2016. Through the summer and into the third quarter, near month gas prices recovered to $3.45 per GJ, while prices farther into the future actually declined from their levels in March. Storage injection levels were strong through the summer of 2016, reaching normal Saskatchewan storage levels going into the winter heating season. Natural gas prices are currently very sensitive to winter weather forecasts, with warmer forecasts creating downward pressure on prices and colder forecasts putting upward pressure on rates. The gas price volatility could create gas marketing opportunities for the Corporation based on the spreads between spot prices and forward prices. Commodity Margin In accordance with standard utilty regulatory practice, the Corporation does not earn a margin on commodity sales to customers. With the natural gas price declines in recent years, the Corporation has implemented commodity rate reductions effective January 1, 2016, and November 1, 2016, reducing the commodity rate to $3.65 per GJ, the lowest rate in 16 years. This is contributing to lower commodity revenue in comparison to the same three quarters in 2015-16. Commodity margins are expected to improve in the fourth quarter, a result of peak winter heating loads, but are expected to remain lower than prior years. The commodity margin is highly dependent on winter weather conditions and customer consumption during the heating season, placing uncertainty on the fourth quarter results. The commodity rate decrease that was approved in combination with the delivery rate increase will more than offset the delivery service rate increase, such that customers will see an overall reduction on their bills. Gas Marketing Margin SaskEnergy purchased and injected low priced natural gas into storage as market prices declined earlier in 2016. These lower cost purchases reduced the average cost of natural gas, improving the margins on sales contracts through the end of December 2016. At the end of the third quarter, natural gas spot prices increased, while the forward price curve remained relatively unchanged through the first nine months of the fiscal period. This reduced gas marketing opportunities. SaskEnergy has been successful in taking advantage of opportunities as they arose and will continue to monitor natural gas prices for additional opportunities through the remainder of the year. As a result, while current market conditions are not supportive of large projected gains, it is expected that opportunities will arise throughout the fourth quarter that will allow some additional gas marketing margins to be created. Delivery Revenue In recent years, the pace of Saskatchewan’s provincial economy and residential customer growth contributed to growing delivery revenue. However, in 2016, the number of customer connections has declined, while industrial and commercial demand for service continues to be strong. Overall, delivery revenue is higher for the first nine months of 2016-17 due to delivery rate increases effective January 1, 2016 and November 1, 2016. Regular delivery service rate increases are required to offset cost pressures related to maintaining a reliable distribution system, and increasing Alberta supply costs. The Corporation continues to focus on internal efficiencies to help offset cost pressures and ensure delivery service rates remain competitive. The fourth quarter will see delivery revenues increase due to winter weather conditions, which are expected to return to more seasonably colder temperatures compared to the unseasonably warm winter during 2015-16.

10

2016-17 THIRD QUARTER REPORT

SaskEnergy Incorporated First Quarter Report Transportation Revenue Transportation and storage service rate increases implemented effective January 1, 2016 are resulting in higher transportation and storage revenue compared to 2015. The rate increases are addressing rising capital and operating costs related to an increasing focus on system integrity, emergency response, public awareness and the increasing cost of importing natural gas supply from Alberta. On December 16, 2016, a new transportation record was achieved with eight of the top ten Saskatchewan load peak days occurring during the past winter. Natural gas market prices are forecasted to remain low making expansion of Saskatchewan natural gas production uneconomical. Continued load growth within the industrial sector, increases the amount of natural gas imported into the province. Rising demand for natural gas will continue to be sourced from natural gas production in Alberta. Importing natural gas generally requires SaskEnergy to transport the gas over longer distances, which increases operating, maintenance, compression, and capital costs. In the short term, the current transportation rates are expected to cover these higher transportation costs and no rate increases are expected through 2017- 18. Other Expenses March 31, 2011 In response to the economic downturn in the Province and increasing pressures on transportation and delivery rates, SaskEnergy has made a significant effort to manage costs throughout 2016-17. The growing investment in pipeline infrastructure and increasing dependency on Alberta natural gas supply resulting from growth in the customer base and industrial customer load is increasing pressure on operating costs. In the face of these cost pressures, the Corporation is focused on finding efficiencies in its operations through collaboration with other Crown Corporations, business process changes and technology initiatives The Corporation has achieved more than $38 million in efficiencies since 2009, with another $4 million planned this fiscal year. The Corporation is expecting staffing levels to remain consistent through 2016. Leveraging efficiency and productivity initiatives, SaskEnergy will continue to meet the Province’s growing natural gas requirements while keeping cost increases to a minimum. Capital Investment SaskEnergy will continue to focus its efforts on providing safe and reliable service to customers while managing rate pressure through judicious expense management. Spending is focused on upgrading infrastructure to meet industrial customer load growth, new service requirements, as well as the integrity of the transmission, distribution and storage systems. The Corporation is forecasting to invest $216 million in capital projects ($197 after customer contributions) for the 12 months ending March 31, 2017. This is well below the budgeted capital investment for the year of $292 million ($249 after customer contributions) due primarily to customer projects that did not proceed during the year at the customers' request. 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 $83 million for 2016-17.

11

2016-17 THIRD QUARTER REPORT

CONSOLIDATED FINANCIAL STATEMENTS

SaskEnergy Incorporated First Quarter Report

March 31, 2011

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at December 31, 2016 (unaudited)

As at March 31, 2016 (audited)

(millions)

Notes

Assets Current assets Cash

$

-

$

11

114 134

Trade and other receivables

104

Natural gas in storage held for resale

4

86 11 10 11

13

Inventory of supplies Debt retirement funds

9 9

Fair value of derivative instruments

5

279

233

60

Intangible assets

57

2,145

Property, plant and equipment

2,068

91

Debt retirement funds

92

$

2,575

$

2,450

Liabilities and Province's equity Current liabilities Bank indebtedness

$

1

$

-

329 119

Short-term debt

299 105

Trade and other payables

14 75 60 37

Dividends payable

21

Current portion of long-term debt

6

100

Deferred revenue

61

Fair value of derivative instruments

5

109 695

635

8

Employee future benefits

8

124

Provisions

130

6

Deferred revenue Long-term debt

6

944

6

870

1,717

1,709

Province's equity

72

Equity advances Retained earnings

72

786 858

669 741

$

2,575

$

2,450

(See accompanying notes)

12

2016-17 THIRD QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Three Months Ended December 31, 2016

For the Three Months Ended December 31, 2015

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 8)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 8)

Total

Total

(millions)

Notes

Revenue Natural gas sales

$

121

$

(10)

$

111

9

$

130

$

(4)

$

126

77 34

- - - -

77 34

Delivery

64 30 24

- - - -

64 30 24

Transportation and storage Customer capital contributions

9 2

9 2

Other

4

4

243

(10)

233

252

(4)

248

Expenses Natural gas purchases (net of change in inventory)

108

(41)

67 21 34 24

9

106

3

109

21 34 24

- - - -

Employee benefits

22 32 23

- - - -

22 32 23

Operating and maintenance Depreciation and amortization

2

2

Saskatchewan taxes

3

3

189

(41)

148

186

3

189

Income before the following

54

31

85

66

(7)

59

1

(5)

(4)

Finance income Finance expenses

-

1

1

(13) (12)

-

(13) (17)

(13) (13)

-

(13) (12)

Net finance expenses

(5)

1

3

-

3

Other gains

4

-

4

Total net income and comprehensive income

$

45

$

26

$

71

$

57

$

(6)

$

51

(See accompanying notes)

13

2016-17 THIRD QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Nine Months Ended December 31, 2016

For the Nine Months Ended December 31, 2015

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 8)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 8)

Total

Total

(millions)

Notes

Revenue Natural gas sales

$

238 154

$

(18)

$

220 154

9

$

276 135

$

(11)

$

265 135

- - - -

Delivery

- - - -

99 17

99 17

Transportation and storage Customer capital contributions

90 35

90 35

7

7

Other

9

9

515

(18)

497

545

(11)

534

Expenses Natural gas purchases (net of change in inventory)

212

(115)

97 62 95 71

9

240

(6)

234

62 95 71

- - - -

Employee benefits

66 90 66

- - - -

66 90 66

Operating and maintenance Depreciation and amortization

9

9

Saskatchewan taxes

9

9

449

(115)

334 163

471

(6) (5)

465

Income before the following

66

97

74

69

2

(1)

1

Finance income Finance expenses

2

(4)

(2)

(36) (34)

-

(36) (35)

(39) (37)

-

(39) (41)

Net finance expenses

(1)

(4)

3

-

3

Other gains

2

-

2

Total net income and comprehensive income

$

35

$

96

$

131

$

39

$

(9)

$

30

(See accompanying notes)

14

2016-17 THIRD QUARTER REPORT

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