mean that delivery revenue and residential customer capital contribution levels are forecasted to be lower than 2014. Industrial and commercial demand for service is expected to continue at strong levels and exhibit steady growth through 2015, which will slightly mitigate the declines related to residential customers. The heightened focus on security of natural gas supply and the need to look at cost effective options for sourcing that supply will continue in 2015. Saskatchewan production levels for conventional natural gas have been in steady decline for the past several years and are expected to remain at current levels going forward. As major industrial projects come on-line, load pressures will increase and operating costs to meet those loads will continue to increase, though not to the same degree as in 2014. Third-party transportation expenses, which were the key driver of higher operating costs in 2014, will decrease in 2015 as the investment in the Bayhurst-to-Rosetown pipeline will assist in managing third-party transportation requirements. Labour markets and contractor demand are expected to remain tight over the near term. The Corporation will continue pursuing its resourcing strategy, which calls for relatively stable employee levels augmented by third-party contract resources. In addition, efficiency initiatives will enhance productivity and will allow SaskEnergy to meet its business commitments in a nimble and cost effective manner. The 2015 outlook will include expenditures required to provide safe and reliable service to customers without creating undue rate pressure. Spending will focus on upgrading infrastructure to meet load and service requirements, as well as the integrity of transmission, distribution and storage systems. The 2015 capital plan also includes funding for growth-related projects such as gas processing and associated gas capture. The Corporation plans to spend $238 million on capital investment in 2015, which 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 targeting an income before unrealized market value adjustments of $73 million in 2015. Risk Management And Disclosure The transmission, storage, distribution and sale of natural gas are subject to a number of risks that can affect SaskEnergy’s success in achieving its business objectives. The Corporation does not seek to eliminate risk, but rather ensures existing and emerging risks are identified, communicated and effectively managed through its Enterprise Risk Management (ERM) Policy. The ERM Policy establishes roles and responsibilities, as well as a general strategy for the Corporation to manage its risks. The Corporation identifies and manages its risks in support of its vision, mission and values as set out in the Strategic Plan and throughout its operations. Risk management is the responsibility of all levels of management in the Corporation; however, the Board of Directors and Executive Committee set the tone for
Cash used in investing activities totaled $283 million, $62 million above 2013. The majority of the capital investment was focused on system expansion, which was a result of Saskatchewan residential and industrial growth as well as changes in natural gas supply, and safety and integrity programming. The Corporation funds its capital requirements with cash from operations and debt from the Province of Saskatchewan. Cash received from financing activities was $40 million during 2014, as the Corporation increased its cash position by $64 million related to debt financing and paid dividends to CIC of $24 million. Given the Corporation’s relatively high short-term debt balances at the end of 2013 and attractive rates on long-term debt, the Corporation converted $246 million of short-term debt to long-term debt during the first half of 2014 at a weighted average interest rate of 3.2%. The Corporation also repaid $50 million of long-term debt that matured during the second quarter. SaskEnergy’s debt ratio at the end of the period was 63% debt and 37% equity, higher than the Corporation’s long-term target of 57% debt and 43% equity, a result of the negative impact of market value adjustments on retained earnings and the increased debt to finance capital expenditures in 2014. Outlook In close alignment with Saskatchewan Crown Sector Priorities and the Saskatchewan Plan for Growth, SaskEnergy’s 2015 efforts will continue to focus on the four strategic mandates: Service Excellence, Achieving Growth, Our Team and Creating Value. The Corporation is financially well-positioned to achieve its business objectives in 2015 and over the five-year planning horizon. The extreme weather in 2014 drove market volatility for the price of natural gas; however, that level of volatility is not expected to continue. The forecast period is characterized by a forward pricing curve for natural gas that shows very little differential between current market prices and future market prices, which is beneficial for customers and large consumers of natural gas who value stability and low prices. The $4.84 per GJ commodity rate approved on July 1, 2014, combined with a lower average cost of gas due to declines in market prices, will contribute to more favourable margins in 2015. The Corporation’s gas marketing activities are not expected to provide the high margins that were typical prior to 2014 when traditionally volatile natural gas prices allowed for price arbitrage transactions to be undertaken at relatively high margins. The gas marketing margin expected in 2015 is forecast to be slightly higher than the 2014 margin based on market conditions at the end of 2014. SaskEnergy will continue to look for opportunities throughout the year to extract additional value out of gas markets by leveraging its assets and expertise. The Corporation expects to see the pace of Saskatchewan’s economy slow to moderate levels in 2015 as commodity prices continue to decline. In light of this, SaskEnergy has tempered its expectations for customer connection rates to levels closer to the ten-year average. These lower expectations
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Management’s Discussion & Analysis
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