2014 SaskEnergy Annual Report
2014 ANNUAL REPORT
To create a competitive advantage for Saskatchewan through safe, innovative energy solutions. Vision
Our team of engaged employees and business partners develops and delivers safe, reliable natural gas solutions that benefit our customers and Saskatchewan. Mission
Values
SAFETY We never compromise the safety of our employees and the public. RECOGNITION We take time to recognize the individual and team contributions of our employees. ACCOUNTABILITY We are accountable for our decisions, our actions and the results.
Communication We have open, honest and respectful communication that builds strong relationships. COMMUNITY We are leaders in developing a diverse workforce, supporting our communities and environmental stewardship.
SPIRIT We create a positive and dynamic work environment that enables personal achievement, work life balance and business success.
INTEGRITY We are honest, respectful and apply high ethical standards.
Corporate Profile
4
Letter of Transmittal
7
Minister’s Message
8
Chair’s Message
9
President’s message
10
Financial and Operating Highlights
13
Corporate Highlights
16
Management’s Discussion & Analysis
19 19 19 25 31 32 34 35 36 36 37 38 39 40 41 42 43 66 66 70 72 80
Introduction
Strategic Scorecard Measures Consolidated Financial Results Liquidity And Capital Resources Risk Management And Disclosure
Critical Accounting Policies And Estimates
Accounting Policy Changes
Consolidated Financial Statements
Management’s Responsibility For Consolidated Financial Statements Management’s Report on Internal Control Over Financial Reporting
Independent Auditor’s Report
Consolidated Statement of Financial Position Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements
Corporate Governance
Board of Directors Executive Committee
Corporate Governance Disclosure
Stakeholder Engagement
Glossary of Key Success Measures
82
Supplementary Information
85
2014 Annual Report SaskEnergy
Corporate Profile
Crown Investments Corporation of Saskatchewan
SaskEnergy Incorporated
Many Islands Pipe Lines (Canada) Limited
Saskatchewan First Call Corporation
TransGas Limited
Bayhurst Gas Limited
Transmission and Storage
Natural Gas in Storage/ Royalty Interest
Interprovincial Transmission
Underground Facility Screening and Notification Service
Bayhurst Energy Services Corporation
BG Storage Inc.
Energy Services Company
Storage Joint Arrangements
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 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.
4
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 facility in the west-central area of Saskatchewan. Bayhurst also owns a gross overriding royalty on several properties in Saskatchewan and Alberta. Bayhurst Energy Services Corporation (BESCO) , a wholly owned subsidiary of Bayhurst Gas Limited, 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 an unincorporated joint arrangement with ATCO Energy Solutions. BG Storage Inc. (BGSI) , a wholly owned subsidiary of Bayhurst Gas Limited, owns a 50 per cent interest in a natural gas storage business, which is operated through an unincorporated joint arrangement with Faro Energy Ventures Ltd. Many Islands Pipe Lines (Canada) Limited (MIPL) is a transmission company that owns nine transmission pipeline interconnections to Alberta, two into the United States, and one into Manitoba, all of which connect to the TransGas system. MIPL is regulated by the National Energy Board.
Saskatchewan First Call Corporation ( Sask 1st Call ) provides a centralized “Call Before You Dig” underground facility screening and notification service. Sask 1st Call was established primarily for safety reasons to maintain a database of oil, natural gas and other underground infrastructures. Sask 1st Call provides a service whereby landowners and other stakeholders can contact Sask 1st Call to request the location of pipeline- and non-pipeline-related facilities of its subscribers. Sask 1st Call’s rate structure is intended to recover all operational costs and 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 as well as gathering and processing facilities, which are 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.
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2014 Annual Report SaskEnergy
ACHIEVING GROWTH
The 132-kilometre Bayhurst-to-Rosetown transmission pipeline project increased capacity to meet growing provincial load requirements, driven largely by potash mining, power production facilities and enhanced oil recovery.
Letter of Transmittal
February 27, 2015
Her Honour the Honourable Vaughn Solomon Schofield, S.O.M., S.V.M.
Lieutenant Governor of Saskatchewan
Madam:
I respectfully submit the annual report of SaskEnergy Incorporated for the year ended December 31, 2014, in accordance with The SaskEnergy Act . The Consolidated Financial Statements are in the form approved by the Treasury Board, and have been reported on by the Corporation’s auditors.
[Original signed by J. Reiter]
Honourable Jim Reiter Minister Responsible for SaskEnergy
7
2014 Annual Report SaskEnergy
Minister’s Message
On behalf of Premier Brad Wall and the Government of Saskatchewan, I present the SaskEnergy 2014 Annual Report. I was proud to be appointed Minister Responsible for SaskEnergy in mid-2014, supporting the Corporation as it provides essential infrastructure and energy services to support the provincial economy. My interactions with SaskEnergy leadership and employees leave me impressed with the organization’s commitment to public safety and timely, cost-effective service delivery, benefiting both its customers and the Province of Saskatchewan. These efforts directly support our Government’s long-term commitment to steady economic growth and shared prosperity. In the coming years, SaskEnergy will continue to align with Crown Sector Priorities and support the Saskatchewan Growth Plan by making strategic investments in both infrastructure and human capital. Within an ever-changing business environment, the Corporation’s continuing focus on operational efficiency and prudent capital spending has it well-positioned to meet its mandates. I would like to thank all SaskEnergy employees, management and the Board of Directors for their contributions to the company in 2014.
Sincerely,
[Original signed by J. Reiter]
Honourable Jim Reiter Minister Responsible for SaskEnergy
8
Chair’s Message
On behalf of the SaskEnergy Board of Directors, it is my pleasure to join the Minister Responsible for SaskEnergy, the Honourable Jim Reiter, in presenting the SaskEnergy 2014 Annual Report. As outlined within this report, 2014 saw SaskEnergy deliver on initiatives and produce strong results in its fundamental mandates of public safety, timely service delivery and effective rate management. Aligned closely with the Government of Saskatchewan’s Crown Sector Priorities, these focus areas are clearly established and well-communicated across all levels of the Corporation. This clear business alignment and the teamwork it enables were evident in the Corporation’s co-ordinated response to the bitterly cold temperatures of winter 2013/2014 and other weather-related situations throughout the year. On behalf of the Board, I express my thanks to the employees across the Province who came together in an extended team effort to keep our natural gas system running smoothly and our customers safe. This clarity of purpose is also evident at the Board table, where we rely on the SaskEnergy Executive and management — and, by extension, employees — to provide the information we need to make decisions. In that regard, we have been pleased with the knowledge, professionalism and diligence of everyone with whom we have worked. Looking ahead, SaskEnergy will continue to build on its successful efficiency and productivity initiatives to deliver value to customers and to the Government of Saskatchewan. As part of this ongoing effort, the Corporation recently completed a thorough review of its five-year capital investment plan to sharpen its focus on those key infrastructure projects which will most efficiently accommodate provincial growth and improve service delivery. I would like to recognize the contributions of Sharon Hodgson, Alfred Labas and Allan Kerpan, who left the Board in 2014, and welcome Kelly Bannister, Linda Clavelle and Dr. Denis Jones as new members. The Board is committed to the effective stewardship of SaskEnergy, and thanks the Executive team, management and employees for their contributions this past year.
[Original signed by S. Barber]
Susan Barber, Q.C. Chair, SaskEnergy Board of Directors
9
2014 Annual Report SaskEnergy
President’s message
“Through a variety of innovative safety programs, SaskEnergy saw provincial line contact numbers drop by 23 per cent…”
SaskEnergy/TransGas celebrated many accomplishments throughout 2014, a year which also saw some significant challenges for our teams across the Province, and the company as a whole. Provincial growth was strong once again in 2014, resulting in 7,332 new distribution customers and a four per cent increase in the volume of gas transported within the Province (a 34 per cent increase since 2009). Within this context of high customer activity levels, SaskEnergy was able to deliver value from a number of planned initiatives while maintaining a strong focus on safe, reliable service to customers amid challenging circumstances. These included one of the coldest winters Saskatchewan has experienced in the past 30 years. The unprecedented demand for natural gas from the onset of the winter heating season required tremendous flexibility from our teams to make the operational adjustments and system enhancements necessary to maintain service to customers. The support provided by industrial customers in the Province was also appreciated. Overall, the increased commitment to third-party transmission capacity to transport additional volumes, together with the higher costs of natural gas purchases in winter, raised capital and operating expenses and adversely affected our 2014 financial metrics.
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Meeting Operational Challenges Summer saw flooding in a number of communities in southeastern Saskatchewan and a well co-ordinated emergency response from SaskEnergy field and office staff in the area. The significant rainfall over this period also accelerated ground shifting in communities where certain soil conditions are present, including resort communities along Last Mountain Lake. Even with increased monitoring of buried infrastructure within those communities, significant effort was required later in the year to respond to an incident at Regina Beach, upgrade pipeline infrastructure and develop longer- term plans to mitigate the risks presented by ongoing ground movement. The discussion and collaborative efforts with these communities were valued. Finally, a system failure at the Prud’homme Storage Cavern in October resulted in infrastructure damage and the unplanned release of approximately 650 terajoules of gas, a situation effectively managed through our Incident Command System and resolved with the assistance of expert third-party contractors. My thanks to everyone — employees, contractors, emergency responders, local officials and residents of the affected communities — involved in overcoming each of these challenges. The spirit of teamwork and co-operation is greatly appreciated, and the lessons learned from each of these circumstances have been captured and included as part of SaskEnergy’s future direction. Public and Employee Safety Results Proactive efforts yielded favourable results for SaskEnergy/ TransGas in 2014, most notably in safety-related initiatives. On the public safety front, the Corporation collaborated with SaskPower and SaskTel to reduce dangerous third-party contacts with buried infrastructure. Through a variety of innovative programs, SaskEnergy saw provincial line contact numbers drop by 23 per cent from 2013 rates — a notable accomplishment, which will be shared with our Canadian Gas Association peer companies. The Corporation also continued to see positive trending in reducing workplace injuries and accidents, recording its best-ever corporate safety performance in 2014, with a Total Recordable Injury Frequency Rate of 2.22. This accomplishment builds on our commitment to the provincial Mission: Zero target and validates the proactive safety programs and processes in place across SaskEnergy and TransGas.
Efficiencies through Collaboration Thanks to an ongoing focus on efficiency/productivity initiatives, SaskEnergy has realized $32 million in incremental savings over the last five years including $4.6 million in 2014, maintaining a flat internal resourcing level while effectively meeting the demands of a growing provincial economy. These savings have been key in allowing SaskEnergy to offer the lowest residential delivery levels in Canada for the better part of the last decade. Many of these savings are the result of collaborative initiatives, including work with SaskPower and SaskTel to streamline a joint servicing approach in the development of new residential subdivisions, and expansion of the joint line locating program, which sees one qualified technician locating multiple buried lines, rather than each company performing this service individually. Over the coming years, these collaboration efforts — whether with peer Crown corporations, private sector companies, technology partners, industrial customers or urban developers — represent continued opportunities for SaskEnergy and TransGas to enhance service delivery and increase the value we provide. Identifying and Mitigating Risk From a leadership perspective, 2014 reinforced the need for a continued proactive approach in risk identification and mitigation, an area where SaskEnergy/TransGas has shown favourable results related to system integrity programming, damage prevention initiatives and strategic projects to actively upgrade infrastructure. While ongoing success in this endeavor requires constant vigilance and mobilization of our entire team, I am confident that SaskEnergy is up to the challenge. The past year also provided numerous opportunities to appreciate the men and women of SaskEnergy/TransGas for their skill, ingenuity and ability to work together to deliver results. I am proud to support the excellent work done by these teams across Saskatchewan.
Sincerely,
[Original signed by D. Kelln]
Doug Kelln President and Chief Executive Officer, SaskEnergy
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2014 Annual Report SaskEnergy
Creating Value
Technology solutions and process service optimization have enabled front-line employees to be more efficient as they manage the Corporation’s more than 380,000 customer accounts.
Financial and Operating Highlights
CONSOLIDATED FINANCIAL INFORMATION
2014
2013
2012
2011
2010
($ millions) Total revenue
908
798
890
953
1,108
Total expenses
829
690
864
903
1,141
Consolidated net (loss) income
79
108
26
50
(33)
Market value adjustments
–
34
(58)
(18)
(80)
Income before unrealized market value adjustments
79
74
84
68
47
Dividends
30
27
39
49
17
Total assets
2,207
2,037
1,924
1,858
2,380
Cash provided by operating activities
244
172
195
185
248
Capital expenditures
224
187
172
144
299
Total net debt
1,064
1,009
935
894
1,159
Debt/Equity ratio
59/41
59/41
60/40
59/41
63/37
Rate of return on equity
11.0% 11.0% 13.6% 10.8%
6.5%
OPERATING STATISTICS Distribution volumes (petajoules) Residential/Farm
37
34
34
34
39
Commercial
33
29
29
30
34
Industrial
108
90
82
82
111
178
153
145
146
TOTAL
184
Transmission volumes (petajoules) Domestic
265
237
226
215
275
Export
3
4
5
24
7
268
241
231
239
TOTAL
282
Number of customers Distribution
373,436
365,749
358,363
352,560
380,768
Transmission
153
148
137
135
153
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2014 Annual Report SaskEnergy
Five-Year Operating Summary – Distribution
2014
2013
2012
2011
2010
Sales in million cubic metres 1
4,639
3,985
3,803
3,794
4,792
Residential annual average usage (cubic metres)
3,020
2,696
2,851
2,856
3,006
Degree days 2
6,193
5,415
5,564
5,531
6,039
Percentage (colder) warmer than normal
(12.5%)
2.4% (0.5%)
0.1%
(9.0%)
PIPELINE (kilometres) Distribution Utility
SaskEnergy Incorporated
68,612
68,092
67,692
67,342
69,015
1 Retail, industrial and natural gas marketing. 2 A unit measuring the extent to which the temperature falls below 18° Celsius. Normal weather in 2014 would have been 5,529 degree days.
Five-Year Operating Summary – Transmission
2014
2013
2012
2011
2010
Peak day natural gas flows (petajoules)
1.26
1.20
1.09
1.07
1.42
Date of peak day flow
Dec. 6
Jan. 18
Jan. 31
Jan. 7
Feb. 6
Storage cavern sites
6
6
7
8
6
Storage caverns
26
27
27
27
24
Storage field sites 1
4
4
3
3
4
Producing field sites 1
1
1
2
1
1
PIPELINE (kilometres) TransGas Limited Transmission
14,291
14,230
14,048
13,889
14,423
Gathering
203
201
201
201
203
Many Islands Pipe Lines (Canada) Limited
435
435
435
435
435
Bayhurst Gas Limited
113
113
113
113
113
15,042
14,979
14,797
14,638
TOTAL
15,174
SYSTEM COMPRESSION TransGas Limited Stations
24
24
24
22
23
Bayhurst Gas Limited Stations
3
3
3
3
3
Mobile Compressor Units
3
1
1
1
7
COMPRESSION HORSEPOWER TransGas Limited
87,720
86,270
85,120
82,250
89,360
Bayhurst Gas Limited
6,300
6,300
6,300
6,300
6,300
94,020
92,570
91,420
88,550
TOTAL
95,660
1 Includes Bayhurst Gas Limited.
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Financial and Operating Highlights
Service Excellence
SaskEnergy’s focus on employee and public safety resulted in strong 2014 results, including the Corporation’s lowest Total Recordable Injury Frequency Rate and a 23 per cent province-wide reduction in the number of third-party line hits.
Corporate Highlights
SaskEnergy’s Strategic Objectives align with the Government of Saskatchewan’s Crown Sector Priorities and Growth Plan. The Corporation’s operating environment, the provincial economy, commodity market fluctuations, and public expectations of pipeline companies have influenced the strategic direction of the Corporation.
System Integrity and Risk Management Initiatives SaskEnergy is committed to safety across its more than 84,000 kilometres of pipeline by leveraging industry best practices with a risk-based asset management system, which is evidenced by its $101 million in 2014 system integrity spending. To maintain the safe and reliable operation of the distribution and transmission networks, the Corporation invested in a number of initiatives throughout the year, including upgrades to 2,349 gas service connections in Regina and Rosetown at a cost of $12.8 million. In addition, TransGas successfully used ultrasonic Electro Magnetic Acoustic Transducer (EMAT) technology for the first time to detect stress, corrosion and cracking in its Beacon Hill- to-Prince Albert pipeline, resulting in the identification of deficiencies and their ultimate management. The Corporation also removed pipelines from bridges in Saskatoon and Moose Jaw, replacing them with underground facilities, in an effort to mitigate ongoing risk associated with the integrity of the bridge structures themselves.
Service Excellence
Damage Prevention Initiatives In addition to its ongoing support of the Sask 1st Call service, SaskEnergy engaged in a number of new initiatives in 2014 to reduce damage to its buried infrastructure. Partnering with Sask 1st Call , the Saskatchewan Common Ground Alliance (SCGA), SaskPower and SaskTel, SaskEnergy launched safety patrols to target neighbourhoods in Regina and Saskatoon where Crown utilities have reported higher percentages of facility contacts. Face-to-face contact was initiated between patrollers and homeowners or local contractors to ensure contact was made with Sask 1st Call for line locates before projects got underway. The Corporation also adopted a line supervision practice in which operations personnel were present during excavations near critical transmission infrastructure in Regina and Saskatoon. As a result of these programs, there was a 23 per cent reduction in third-party line hits (60 fewer line hits province-wide in 2014 compared to 2013), six straight months of reduced line hit damage during the 2014 construction season, and significant damage reduction in Safety Patrol areas. Corporate Safety Performance Safety is the core focus of SaskEnergy/TransGas, and in 2014, the Corporation achieved its best-ever corporate safety performance with a Total Recordable Injury Frequency Rate (TRIR) of 2.22. This is down from 2.46 in 2013, which was also a record year. As part of its continued commitment to safety, SaskEnergy/TransGas also launched its new incident reporting system, Report Everything Online (REO), which combined several safety recording databases into one, easy- to-use platform. REO streamlines the process of reporting hazards, near-misses, and incidents by making the system more accessible through employees’ computer systems and allows the Corporation to ensure that accurate and complete information is being reported to all applicable provincial and federal governing bodies. In addition, through SaskEnergy’s Competency Assessment Program, the Corporation is committed to safe pipeline operations and alignment with Canadian Gas Association directions through formal evaluations of worker skill sets and knowledge, to confirm that SaskEnergy/TransGas employees are well-trained and prepared to work safely on pipelines.
Achieving Growth
Distribution and Transmission Growth In 2014, economic and population growth in Saskatchewan benefited SaskEnergy, as the Corporation added 7,332 customers to its distribution base, bringing total customers to 380,768. With the continued expansion of its system, SaskEnergy has added, on average, approximately 5,300 customers per year during the past 10 years. Transmission volume in 2014 increased by 14 petajoules (PJ), or 5.2 per cent, from 2013. SaskEnergy has made significant investments in its distribution and transmission system to connect customers in a wide range of key Saskatchewan industries, including power production, potash mining and enhanced oil recovery. Bayhurst-to-Rosetown Pipeline Project In 2014, TransGas completed the 132-kilometre Bayhurst-to- Rosetown pipeline project. This pipeline increases gas receipt capacity from Alberta while adding storage cycling capacity at the Bayhurst Gas Field and helps to manage increasing supply requirements as natural gas production in Saskatchewan declines. The pipeline also will allow TransGas to meet growing load requirements on the northern part of its system, which have been driven by added industrial activity, namely potash mines, new gas-fired power plants and enhanced oil recovery projects. With an investment of $70 million, half of the 2014 TransGas capital budget, the Bayhurst-to-Rosetown pipeline project was the Corporation’s largest capital project in 2014, and one of its largest pipeline projects in recent history.
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Our Team
Creating Value
Response to Extreme Weather Conditions SaskEnergy and TransGas employees showed their commitment to safe, reliable service delivery throughout extreme weather conditions in 2014. With the first quarter of the year marked by sustained periods of intense cold, teams across the Province implemented flexible solutions to ensure the provincial gas system was meeting the high levels of customer demand. In mid-summer, heavy rain affected several communities in the Province, creating flooding conditions and washing away portions of highway in some areas. With the destruction of property came the loss of power and natural gas services for many residents, requiring emergency response from SaskEnergy field staff. The volunteer effort continued at flood recovery centres, where employees went above and beyond to address the concerns of affected customers. The significant rainfall throughout the summer also triggered increased ground shifting in many Saskatchewan communities, requiring elevated system integrity efforts throughout the year. Meter Exchanges To comply with Measurement Canada regulations and ensure safe and reliable service to customers, SaskEnergy exchanges a number of customer meters each year. SaskEnergy, along with third-party contractor teams, removed and replaced approximately 37,000 meters throughout the Province in 2014 — a record number and 12,000 more than in 2013. SaskEnergy accelerated the rate of meter replacements due to the introduction of stricter Measurement Canada compliance requirements that were implemented in 2014. The larger number of meter replacements was achieved through effective planning of internal and external resources to maximize field technician productivity, and greater coordination with customers. Joint Servicing Collaboration Project In collaboration with SaskPower and SaskTel, SaskEnergy initiated a Joint Servicing project in 2014 to streamline the process for installing service line facilities to urban residences in Regina and Saskatoon. Building on the success of the collaborative Joint Trenching project, which started four years ago to streamline the installations of gas distribution mains, joint servicing ensures a more efficient approach to installing the services to homes. Plans are now in place to streamline the application process to allow customers to make one-time applications to both SaskEnergy and SaskPower for service, using either company’s online application form.
Productivity and Efficiency Initiatives In 2014, SaskEnergy realized $4.6 million in efficiency savings and process improvements through a combination of business process changes and new technologies, the expanded deployment of mobile compression, improved external resource procurement strategies and the increased use of natural gas vehicles. In the coming years, efficiency savings will be realized through collaboration efforts, further deployment of mobile compression, and continued strides toward effectively managing current interconnections for importing Alberta supply.
Champion of Volunteers for the 2014 North American Indigenous Games
SaskEnergy’s Champion of Volunteers program is an example of the Corporation’s efforts to support communities across Saskatchewan. As the Champion of Volunteers for the 2014 North American Indigenous Games in Regina, SaskEnergy was proud to lead a group of volunteers that came together to support participants and proudly showcase Aboriginal sport, culture, unity and teamwork. Liquefied Natural Gas (LNG) Pilot Project SaskEnergy began a pilot project with Ferus Natural Gas Fuels for the use of LNG to serve the town of Aberdeen and surrounding rural customers throughout the 2014/15 winter. The project, which commenced in November, will evaluate the capability of LNG as an extra source of gas supply when winter system demands peak, and to assess opportunities where LNG or compressed natural gas (CNG) can be used as a portable pipeline alternative to the financial commitment required for looping existing pipelines. The operation involves a mobile LNG storage and vaporization unit, which serves as a secure source of supply during peak demand loads. The LNG trailer allowed SaskEnergy to postpone the estimated $5 million in capital costs that would be required to loop the transmission line to meet demand in this growing area.
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2014 Annual Report SaskEnergy
Our Team
In response to one of the coldest winters Saskatchewan has experienced in the past 30 years, SaskEnergy and TransGas teams worked long hours to ensure the provincial gas system was meeting the high levels of customer demand.
Management’s Discussion & Analysis
Each year, SaskEnergy comprehensively sets, measures and reports on specific scorecard targets within its strategic mandates. The following discussion outlines the Corporation’s 2014 performance relative to its strategic scorecard measures, which are further defined in the Glossary of Key Success Measures. Service Excellence SaskEnergy is committed to providing high standards of safe and reliable service with effective customer solutions, as evidenced by its Service Excellence mandate. Within Service Excellence, there are three categories of measures — Efficient Operations, Safety/Vigilance and Customer Satisfaction, with our success measured by industry benchmarking and customer surveys. In alignment with the Crown Sector Priority of financial stability and a continued emphasis on operational efficiency, SaskEnergy and TransGas are committed to the cost- effective delivery of natural gas services to all customers in Saskatchewan. The Corporation realized $4.6 million in efficiency savings and process improvements in 2014. These efforts are reflected within the annual scorecard measures, most prominently in SaskEnergy’s ability to successfully offer competitive delivery rates to its customers each year. Efficiency does not come at the expense of a safe and reliable system, as acknowledged by the Corporation’s $101 million in 2014 system integrity spending. Integrity- related budgets are being actively managed over the coming years while continuing to maintain strong results in the areas of gas leaks, failures, third-party contacts and other integrity measures. Continued commitment to system integrity and asset management efforts will always be a key focus area for SaskEnergy/TransGas. Perhaps the best indicator of SaskEnergy’s success in delivering safe, reliable, and affordable services is formal feedback from its customers. Recognizing that customers are vital to a successful business, both SaskEnergy and TransGas conduct annual surveys in an effort to gather feedback on customer expectations and overall satisfaction.
Introduction The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the year ended December 31, 2014. Using financial and operating results as its basis, the MD&A describes the Corporation’s past performance and future prospects, enabling readers to view SaskEnergy from the perspective of management. The MD&A is presented as at February 27, 2015, and should be read in conjunction with the Corporation’s audited consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS). 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 the MD&A. 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 Corporation’s financial results are subject to fluctuations, especially given the volatility of natural gas prices. 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. Strategic Scorecard Measures SaskEnergy’s four strategic mandates — Service Excellence, Achieving Growth, Our Team and Creating Value — were set out in the 2014 Business Plan and support the vision, mission and values of the Corporation. They play a vital role in SaskEnergy’s business planning and reporting, and help employees determine how their everyday work and effort contribute to the Strategic Plan and overall direction of the Corporation.
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2014 Annual Report SaskEnergy
Service Excellence
2013 Actual
2014 Actual
2014 Target
2015 Target
Strategic Measure
Comments
Efficient Operations • Distribution ° Operation, Maintenance and
$305
$307
$304 Increased activity levels for response to extreme weather events as well as safety and integrity initiatives increased costs in 2014.
$316
Administration (OM&A) Costs per Customer ° Competitive Residential Delivery Rates
Competitive with Industry
Competitive with Industry
Competitive with Industry
A typical residential customer in Saskatchewan paid $446 for delivery service in 2014, which was the lowest amount across Canada.
Competitive with Industry
• TransGas
7.1%
7.8%
7.1% This metric is a proxy for the relative efficiency of the Transmission Utility operations. TransGas OM&A reflected strong resource management,
° Operation, Maintenance and Administration Costs per Book Value of Assets Managed
7.4%
particularly in light of the efforts related to the response to the extreme cold weather that characterized the early part of 2014.
Safety/Vigilance • SaskEnergy Leaks per 1,000 kilometres of Mains
6.00
5.99
6.90 The target was achieved as a result of system integrity programs, which proactively identify and recommend replacement of service connections flagged as “high risk” (2,349 service upgrades in 2014). 0.13 Mitigated through mature Plant Integrity, In-Line Inspection and Cathodic Protection programs, reportable pipeline
5.99
0.11
0.07
• TransGas Pipeline Failures per 1,000 kilometres of Pipe
0.07
failures for 2014 were well below the Canadian Energy Pipeline Association (CEPA) industry failure rate of 0.476.
5.2%
• Safety and Integrity
6.2%
6.0% The metric finished the year in the target range given the focus placed on risk-based integrity programming ($101 million) in 2014.
6.2%
Customer Satisfaction • SaskEnergy
89%
88%
89% The 2014 SaskEnergy survey results show strong levels of customer satisfaction in virtually all areas, including safety and reliability. 90% Customer survey results in 2014 reflect continued strong satisfaction with TransGas business services despite the challenges that the extreme cold in early 2014 created for TransGas and its customers.
86%
93%
• TransGas
94%
93%
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Management’s Discussion & Analysis
The Diversified Non-Core Business measures reflect the value of developing new revenue streams within the commodity and unregulated business environment. Successful efforts in this area create a wider revenue base and strongly align SaskEnergy with the Crown Sector Priority of forming partnerships and joint arrangements with the private sector to facilitate growth in the Saskatchewan economy.
Achieving Growth Achieving Growth includes all areas of our business — continuing to build on the foundation of our core business of serving growing residential, commercial, and industrial customers’ needs as well as finding new opportunities through partnerships and technology developments. The measures within Achieving Growth represent the Corporation’s commitment to facilitating growth in Saskatchewan. The Business Growth Investment measure recognizes the fundamental importance of core revenue growth in the Corporation’s two utilities as a key indicator of the success of the business. In this regard, provincial growth has directly contributed to an increased distribution customer base and increased demand for natural gas from industrial facilities.
Achieving Growth
2013 Actual
2014 Actual
2014 Target
2015 Target
Strategic Measure
Comments
Business Growth Investment • Core Growth – SaskEnergy and TransGas Revenue Growth
2.2%
4.3%
2.8% Target was exceeded, as the Distribution Utility earned additional delivery revenues as a result of the colder than normal weather in 2014.
3.6%
Diversified Non-Core Business • Net Revenue (millions)
$30.5
$28.0
$22.9 Net revenue was generated primarily from unregulated businesses in the areas of gas storage/commodity activities at the Pierceland and Totnes facilities, gas processing at the Kisbey Gas Processing Plant, and the CNG fuelling station in Weyburn. $62.0 Total capital investment in non-core projects is above the target due
$22.1
$45.6
• Total Capital Investment (millions) Percentage of Third-Party Capital Investment
$6.9
$87.0
primarily to the increased third-party capital investment in the southeast Saskatchewan ethane extraction plant during 2014. assets reduced 2014 income and lowered the Return on Equity below target. The 2013 result was favourable given the previous volatility in the natural gas commodity price, which allowed for gas marketing transactions to be undertaken at a significant margin.
26%
83%
66%
87%
19.6%
• Return on Equity
20.1%
12.5% The impairment of gas processing
10.6%
21
2014 Annual Report SaskEnergy
recognizes that these processes are merely the foundation for safety and that the individual decisions made by employees and contractors each day will ultimately determine success in this vital area. SaskEnergy also recognizes the importance of engaged employees to a successful organization. Through initiatives like the Leadership Network and Leadership Development Program, as well as all-employee meetings and various training and development opportunities, the Corporation has made positive strides in developing leadership skills at all levels and, by extension, overall employee engagement has improved. Given the competitive nature of the Saskatchewan job market, this will remain a key focus in coming years. SaskEnergy sees workforce diversity as a key business success measure, in line with Crown Sector Priorities, and strives to be reflective of Saskatchewan’s population by providing equal opportunity to qualified people, recognizing First Nations, Métis and youth represent a large portion of Saskatchewan’s future labour force.
Our Team Our Team, a broad and diverse group that includes our employees, contractors and business partners, develops mutually beneficial solutions to manage the pile of work. With an increasingly competitive labour market and high levels of retirements, attention to a performance culture and our reputation for leadership development are fundamental to success. The Our Team mandate reflects SaskEnergy’s commitment to providing “the right resource at the right place at the right time.” Within Our Team, there are three categories of measures — Physical Safety, Employee Engagement and Workforce Diversity. Employee and public safety are at the core of every activity at SaskEnergy. Sending each and every employee home safely at the end of the day is the Corporation’s top priority. Working with industry peers and other stakeholder groups to share knowledge, SaskEnergy continually strives to develop a safety- first work environment, where processes and procedures have been documented as meeting or exceeding the continually evolving best-practice standards. Importantly, the Corporation
Our Team
2013 Actual
2014 Actual
2014 Target
2015 Target
Strategic Measure
Comments
Physical Safety • Total Recordable Injury Frequency Rate
Second Quartile
Third Quartile
Second Quartile
The Total Recordable Injury Frequency rate was 2.22. This represents the Corporation’s best-ever recorded rate.
Second Quartile
Employee Engagement • Employee Survey
At or above Hay Survey Norm
While a major survey is conducted every two years, with the last being in 2013, a brief ‘pulse’ survey of employees was conducted in 2014. It showed continued strong pride in working for SaskEnergy and positive trending across several factors that impact engagement. “Open Communication” and “Accountability” remain as potential areas for improvement.
-3%
At or above Hay Survey Norm
-3%
Workforce Diversity • Youth (30 years of age or less)
18.0%
19.0%
17.0% SaskEnergy’s successful workforce transition strategies are reflected in the consistently strong results related to
18.9%
the percentage of youth employed by the Corporation. This has been an area of focus for the Corporation for several years.
15.5%
• First Nations/Métis
14.6%
15.5% The 2014 results exceed the Saskatchewan Human Rights
15.0%
Commission target of 13.1 per cent. First Nations/Métis representation has been a focus of the Corporation for several years.
22
Management’s Discussion & Analysis
Recognizing the Corporation’s opportunity to play a key role in a province-wide strategy related to GHG reductions, SaskEnergy developed a new intensity-based performance measure for 2014. The new measure tracks tonnes of carbon dioxide per million running horsepower hours, to reflect the efforts SaskEnergy has undertaken, and will continue to undertake, to reduce GHG emissions by operating more efficiently while delivering increased volumes of natural gas to customers. Acting as a responsible and contributing member of the communities it serves is an essential part of SaskEnergy’s business strategy. Working closely with customers and Saskatchewan communities helps ensure successful business operations and is consistently noted in SaskEnergy Customer Satisfaction surveys as a key strength for the Corporation. SaskEnergy continues to work with CIC to align its Community Relationship scorecard measures with industry best practices and Crown Sector Priorities. Another important element of SaskEnergy’s contribution to Saskatchewan involves supporting the strong and vibrant Aboriginal labour and business markets. This growing market serves as an opportunity to create new, sustainable business and employment opportunities for Aboriginal people today, and into the future.
Creating Value Creating Value requires SaskEnergy to perform with an entrepreneurial spirit, consistently demonstrating that the Corporation is nimble, adaptable and flexible, while always focused on efficiency and results. SaskEnergy’s Creating Value mandate measures are in place to ensure that the Corporation is adding value for its shareholder, customers and employees through financially strong and sustainable operations, sound corporate governance and relationships within the communities it serves. Within Creating Value, there are three categories of measures — Financial Strength, Environmental and Community Relationship. SaskEnergy strives to maintain an appropriate capital structure while providing reasonable financial returns to its holding company, Crown Investments Corporation (CIC) and competitive rates to customers. The Corporation works hard to balance the interests of both CIC and its customers — focusing on annual profitability and long-term sustainability. SaskEnergy is also focused on environmental sustainability throughout its operations, and has made significant progress in the controllable aspects of its corporate greenhouse gas (GHG) emissions. While increased natural gas usage is beneficial to achieving emission targets in other sectors and in the Province as a whole, this creates challenges for SaskEnergy in terms of achieving its overall GHG emission reduction targets.
23
2014 Annual Report SaskEnergy
CREATING VALUE
2013 Actual
2014 Actual
2014 Target Comments
2015 Target
Strategic Measure
Financial Strength • Debt/Equity Ratio
63/37
59/41
61/39 Equity levels were impacted by the
63/37
unfavourable market value adjustments as well as lower earnings levels than anticipated. Outstanding debt was on target due to capital expenditures finishing the year at planned amounts. 8.0% Lower earnings than planned impacted this metric; however, that impact was partially offset by the lower equity level (see above). $62 Delaying the commodity rate change until natural gas prices stabilized negatively impacted earnings. The extreme cold
10.2%
• Consolidated Return on Equity
11.0%
6.5%
$73
$79
• Income Before Unrealized Market Value Adjustments (millions)
$47
weather in early 2014 led to higher expenses, which more than offset the associated additional delivery revenue.
Environmental • Internal Energy Efficiencies (in $ millions, assuming $4 per GJ) 1
N/A
$0.05
$0.15 The Corporation exceeded its
$0.21
target, achieving $205,000 in energy efficiencies, due to the implementation of energy saving technologies such as LED lighting retrofits and industrial equipment upgrades. 355 This new measure reflects the intensity of greenhouse gas emissions relative to the amount of compression used to transport natural gas. With the extreme weather experienced in the first quarter of 2014, the Corporation was forced to utilize older compression units to move the necessary amounts of natural gas. These units are less efficient than the newer compressors in the fleet. 1.3% The target was achieved through completion of 558 events, projects or programs with 309 communities benefiting from SaskEnergy support. 12% The 2014 result was favourably
440
New for 2014
• Greenhouse
390
Gas Emissions (Tonnes of CO 2 e/ million running horsepower hours)
Community Relationship • Community Sponsorships as a Percentage of Net Income
1.1%
New for 2014
1.3%
13%
21%
• Total Contracts – Percentage of Aboriginal Labour Content
15%
impacted by a few large contracts awarded within the construction and communications areas to companies with significant Aboriginal employee representation.
1 This measure has been discontinued for the 2015 Business Plan.
24
Management’s Discussion & Analysis
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