SaskEnergy Fourth Quarter Report - December 31, 2015

SaskEnergy Fourth Quarter Report - December 31, 2015

SASKENERGY INCORPORATED

FOURTH QUARTER REPORT December 31, 2015

TABLE OF CONTENTS TABLE OF CONTENTS

Corporate Profile

2

Vision, Mission and Values

3

Financial and Operating Highlights

4

Management’s Discussion and Analysis

5

Introduction

5

Consolidated Financial Results

5

Liquidity and Capital Resources

11

Outlook

11

Consolidated Financial Statements

13

Condensed Consolidated Statement of Financial Position

13

Condensed Consolidated Statement of Comprehensive Income

14

Condensed Consolidated Statement of Changes in Equity

16

Condensed Consolidated Statement of Cash Flows

17

Notes to the Condensed Consolidated Financial Statements

18

CORPORATE PROFILE

SaskEnergy Incorporated First Quarter Report

March 31, 2011

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

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

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

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2015/2016 FOURTH QUARTER REPORT

VISION, MISSION AND VALUES

SaskEnergy Incorporated First Quarter Report

March 31, 2011

VISION

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

MISSION

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

VALUES

.

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2015/2016 FOURTH QUARTER REPORT

FINANCIAL AND OPERATING HIGHLIGHTS

Three months ended December 31

Twelve months ended December 31

2015

2014

2015

2014

FINANCIAL HIGHLIGHTS ($ millions)

248 197 -

809 724

Total revenue

305 377

1,108 1,141

Total expenses

51

85

Consolidated net income (loss)

(72) (99)

(33) (80)

(6)

(3)

Market value adjustments

Income before unrealized market value adjustments

57

88

27

47

14 57 86

44

Dividends

3

17

260 214

Cash provided by operating activities

52

248 299

Capital expenditures

110

2,464 1,195 61.9%

Total assets

2,380 1,159 63.0%

Total net debt

Debt ratio

OPERATING HIGHLIGHTS

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

55

186

56

184

13% warmer

6% warmer

2% warmer

9% colder

Transmission Volumes transported (petajoules)

83

300 1.34

83

282

Peak day natural gas flows (petajoules)

1.42

January 4

Date of peak flow

February 6

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2015/2016 FOURTH 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 twelve month period ended December 31, 2015. In late November, the Government of Saskatchewan announced that, as a next step in the transition to summary budgeting, the fiscal year end of Crown Investments Corporation entities, including SaskEnergy, will change from December 31 to March 31. For the current year, SaskEnergy will report on a 15-month period beginning January 1, 2015 and ending March 31, 2016. Thereafter, SaskEnergy will report on the 12-month periods ending March 31st of each year. 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 26, 2016 and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS). For additional information related to the Corporation, refer to SaskEnergy’s 2014 Annual Report. The following discussion contains certain forward-looking statements that are subject to inherent uncertainties and risks, which are described in the Risk Management and Disclosure section of SaskEnergy’s 2014 Annual Report. All forward-looking statements reflect the Corporation’s best estimates and assumptions based on information available at the time the statements were made. However, actual results and events may vary significantly from those included in, contemplated by, or implied by such statements. The volume of natural gas 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. In order to compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments, realized margin on commodity sales, and realized margin on gas marketing sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. These unrealized market value adjustments vary considerably with the market prices of natural gas, drive significant changes in the Corporation’s consolidated net income, and may obscure other business factors that are also important to understanding the Corporation’s financial results. The measures referred to above are non-IFRS measures, in that there is no standardized definition, and may not be comparable to similar measures presented by other entities. CONSOLIDATED FINANCIAL RESULTS

Consolidated Net Income

Three months ended December 31

Twelve months ended December 31

2015

2014 Change

2015

2014 Change

(millions)

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

$

57

$

88

$

27

$

30 71 22

$

47

$

41 66 11

(5) (1)

(2) (1)

(76) (23)

(68) (12)

$

51

$

85

Consolidated net income (loss)

$

(72)

$

123

$

(33)

$

118

Income before unrealized market value adjustments of $88 million for the twelve months of 2015 was $41 million higher than 2014. Low natural gas prices and a commodity rate increase effective July 1, 2014 have contributed to higher realized commodity margins in 2015 compared to 2014. Transportation revenue also increased as a result of higher contracted demand volumes and a rate increase effective January 1, 2015. Delivery revenue declined due to lower volumes delivered to residential and commercial customers, a result of 2015 being significantly warmer on a consistent basis than 2014. Operating and maintenance expenses have decreased from 2014, as the Corporation implemented a number of both short and long term cost reduction initiatives during the year. Gas Marketing activities improved in 2015 compared to 2014, generating higher margins. This was achievable despite selling 50% less gas in a lower natural gas market price environment with smaller pricing differentials between current and forward prices. A small favourable unrealized market value adjustment was recognized on natural gas contracts outstanding at the end of 2015, as the improvement in market value from the expiration of contracts more than offset the unfavourable impact of lower

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2015/2016 FOURTH QUARTER REPORT

market prices. Natural gas liquid prices have also declined from the levels experienced in 2014, resulting in an additional impairment of natural gas liquid extraction assets being recognized in 2015. The fourth quarter of 2015 reported $57 million of income before unrealized market value adjustments, which was $30 million higher than the $27 million reported in 2014. This is primarily due to higher customer contribution revenue relating to transmission projects, and lower operating and maintenance expenses. A higher realized margin on commodity sales resulting from a rate increase and higher transportation revenue, resulting from higher contracted volumes plus a rate increase also contributed to the favourable variance. These results were partially offset by a decline in delivery revenue, a result of warmer than normal weather in the fourth quarter reducing the volume of natural gas delivered.

Natural Gas Prices

Natural gas prices are set in an open market and are influenced by a number of variables including production, demand, natural gas storage levels and economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months and the demand for natural gas to generate incremental electricity for air conditioning in the summer, weather has the greatest impact on natural gas prices in the near term. Due to the high degree of uncertainty associated with weather, natural gas prices can be very volatile. Prices remained low throughout 2015, with forward natural gas prices reaching their lowest levels since 1998 in early December. Demand for heating load was muted with an unseasonably warm fourth quarter, while production remained near record levels. Natural gas in storage in North America ended the injection season at the highest level on record, remaining at record levels through December. The AECO monthly index, the benchmark price for natural gas in western Canada, averaged $2.62/GJ in 2015, down from an average of $4.19/GJ during the same time period in 2014. Of particular note in 2015 was the low volatility in AECO natural gas prices, which was approximately 50% less volatile than historical levels. The following chart presents AECO natural gas prices. Most natural gas in Saskatchewan is priced at a differential to the AECO price and is typically between $0.05 per gigajoule (GJ) and $0.20 per GJ higher than AECO.

$12.00

$10.00

$8.00

AECO Monthly

$6.00

Forward Price

$4.00

$2.00

$0.00

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Natural Gas Sales and Purchases

Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated gas marketing activities. These activities are presented together, as required by IFRS. 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.

Commodity Sales to Customers

SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel. The commodity rate, which is reviewed April 1 and November 1 of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with natural gas sold to distribution customers without earning a profit or incurring a loss over the long term. For rate-setting purposes, SaskEnergy accumulates differences between the commodity revenue earned and the cost of natural gas sold in a Gas Cost Variance Account (GCVA). The balance in the GCVA, which is not recorded for financial reporting purposes, is either recovered from or refunded to customers as part of future commodity rates.

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2015/2016 FOURTH QUARTER REPORT

For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. Consequently, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. The most notable differences are the elimination of intercompany costs in the preparation of the consolidated financial statements, including transportation costs paid to TransGas (a wholly owned subsidiary), as well as the timing related to recognition of financial derivative settlements. While a gain or loss is commonly reported in the Corporation’s consolidated financial statements, it should not be taken as indicative of the results recorded within the GCVA.

Commodity Margin

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

Three months ended December 31

Twelve months ended December 31

2015

2014 Change

2015

2014 Change

(millions)

$

89

$

290

Commodity sales

$

113

$

(24)

$

310

$

(20)

Commodity purchases 1

(72)

(250)

(101)

29

(301)

51 31 98

17

40 15

Realized margin on commodity sales Impact of fair value adjustments

12

5

9

(1)

(94)

93

(83)

$

16

$

55

Margin on commodity sales

$

(82)

$

98

$

(74)

$

129

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 volatility of natural gas prices and to offer rates that are competitive to other utilities. The two objectives naturally oppose each other, and the balance between the two may change depending on existing market conditions. In order to ensure a secure supply of natural gas, SaskEnergy contracts for the physical delivery of natural gas using non-financial derivatives, referred to as forward or physical natural gas contracts. The purchase price contained in these forward contracts may be fixed, or it may be based on a variable index price. While fixed price contracts reduce the impact of natural gas price volatility, variable or market prices can assist in offering competitive rates depending on the pricing environment. SaskEnergy uses financial derivatives and physical swaps to manage the future purchase price of natural gas. 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 $40 million margin on commodity sales, with average revenue of $4.29 per GJ and average cost of gas sold of $3.71 per GJ. This compared to a favourable realized margin of $9 million for the same period in 2014. The higher realized commodity margin in 2015 is a result of low natural gas market prices allowing the Corporation to reduce the average cost of commodity purchases, combined with the Corporation’s first commodity rate increase in six years to $4.84 per GJ effective July 1, 2014. This was slightly offset by lower volumes delivered to residential and commercial customers, a result of warmer weather. During the fourth quarter of 2015, the Corporation realized a $17 million favourable margin on commodity sales which was $5 million higher than the same period of 2014, a result of the low natural gas market prices allowing for the Corporation to realize a lower average cost of commodity purchases.

Gas Marketing Activity

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. Low natural gas market prices in the past few years created opportunities for the Corporation to purchase relatively low-priced natural gas which has been injected into storage facilities to be sold in the future when prices are higher. The Corporation also optimizes transmission and storage capacity during off peak periods, by purchasing and selling natural gas in the open market to generate additional margins. The margins earned on this activity benefit customers by reducing pressure on transmission and distribution rates. Lastly, SaskEnergy provides natural gas supply options to larger end-use customers in Saskatchewan through non-regulated contract sales.

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2015/2016 FOURTH QUARTER REPORT

Gas Marketing Margin

The gas marketing margin, as reported in the consolidated financial statements, was as follows:

Three months ended December 31

Twelve months ended December 31

2015

2014 Change

2015

2014 Change

(millions)

$

41

$

150

Gas marketing sales

$

60

$

(19)

$

408

$

(258)

Gas marketing purchases 1

(34)

(131)

(56)

22

(394)

263

7

19

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

4

3

14

5

(5) (1)

(14)

16

(21)

8

(22)

(1)

(23)

22

(12)

11

$

1

$

4

Margin on gas marketing sales 1 Net of change in inventory

$

(3)

$

4

$

10

$

(6)

The year to date realized margin on gas marketing sales for 2015, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $19 million. This was an increase of $5 million from the same period last year as higher margins were realized as purchases executed at lower market prices reduced the average cost of natural gas per GJ. This was achievable despite lower market prices and smaller forward pricing differentials constraining opportunities for the Corporation to transact significant volumes of purchases and sales. There were 47 PJs of natural gas sold in the twelve months of 2015 compared to 95 PJs in the same period of 2014. During the fourth quarter, the Corporation realized a $7 million margin in 2015 compared to a $4 million margin in 2014, which is also a result of declines in the natural gas price environment from 2014.

Derivative Instruments

As derivative instruments, natural gas contracts are recorded at fair value using a market approach 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 Fair Value Adjustments

The fair value adjustments at the end of the fourth quarter increased the margin on commodity sales by $15 million as the $104 million unfavourable fair value position at the end of 2014 improved to an $89 million unfavourable position at the end of December 2015. The settlement of natural gas contracts during 2015 contributed to a lower volume of contracts outstanding at the end of 2015. Additionally, the values of the remaining natural gas contracts that are outstanding are closer to market prices, which also improve the fair value adjustment.

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 2015 on gas marketing derivative instruments reduced the gas marketing margin by $14 million compared to the favourable fair value impact of $8 million at the end of December 2014. In 2014, natural gas market prices declined heavily in December, creating a favourable market price differential of $0.76/GJ on gas marketing sales contracts outstanding at the end of 2014. The resulting favourable fair value impact on these natural gas contracts were realized in 2015 as the contracts were settled and replaced with new gas marketing sales contracts with an average market price differential of only $0.16/GJ. This decreased the favourable fair value impact in 2015 compared to 2014.

Revaluation of Natural Gas in Storage

At each reporting period, the Corporation measures the net realizable value of gas marketing natural gas in storage based on forward market prices and anticipated delivery dates. The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. In recent years, low natural gas prices have translated to reduced prices on the forward price curve. AECO’s price decreased from $2.70/GJ at the end of 2014 to $2.35/GJ at the end of 2015, a decrease of $0.35/GJ. The declining market price environment and the relative market stability throughout 2015 provide an opportunity to purchase lower priced natural gas inventory but the declining market prices also create an unfavourable net realizable value impact on longer term higher priced inventory contracts that remain in storage. The result is an unfavourable

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2015/2016 FOURTH QUARTER REPORT

net realizable value impact at the end of 2015 due to declining market prices despite a lower volume of gas in inventory. Consequently, the net realizable value of gas marketing natural gas in storage was $24 million below cost as at December 31, 2015, which $1 million lower than the revaluation adjustment required at December 31, 2014.

Delivery Revenue

1,200

The Corporation earns delivery revenue based on the volume of natural gas delivered to distribution customers plus a basic monthly charge. Delivery revenue is highly dependent on weather as natural gas is primarily used as heating fuel by residential and commercial customers during the cold winter months. Delivery revenue of $215 million is $17 million below 2014. Based on weather data for the past 30 years, 2015 was 6% warmer than normal while 2014 was 9% colder than normal. The warmer weather reduced volumes delivered to residential and commercial customers compared to 2014, resulting in lower delivery revenue. This was partially offset by the full year effect of a delivery rate increase effective September 1, 2014 and increased customer growth. A delivery rate increase, needed to meet SaskEnergy’s revenue requirements, takes effect January 1, 2016.

YTD 2015 - 6% warmer than normal YTD 2014 - 9% colder than normal

1,000

800

600

400

200

-

Jan Feb Mar Apr May Jun Jul

Aug Sep Oct Nov Dec

2015 Actual

2014 Actual

30 year average

During the fourth quarter of 2015, delivery revenue of $64 million was $5 million lower than the fourth quarter of 2014. Weather, which was 13% warmer than normal in the fourth quarter of 2015 compared to only 2% warmer than normal in the same period in 2014, reduced the volume of natural gas delivered to customers.

Transportation and Storage Revenue

The Corporation’s subsidiary, TransGas, provides receipt and delivery transportation through the use of the TransGas Energy Pool (TEP), a notional point where producers, marketers and end-users can match supplies to demand. For receipt service , the Corporation offers both firm and interruptible transportation from points of receipt to TEP. For delivery service, the Corporation offers firm and interruptible service for gas delivered from TEP to consumers within Saskatchewan or for export. A number of customers moved from interruptible service to firm delivery contracts during the second quarter of 2014. When customers contract for firm rather than interruptible service contracts, revenue certainty improves which provides the support required for pipeline expansions. Integral to the Corporation’s transmission system are several strategically located natural gas storage sites with the capacity to provide operational flexibility along with a reliable and competitive natural gas storage service. Year-to-date, transportation and storage revenue of $119 million was $21 million above the same period in 2014. On a quarter-over-quarter basis, transportation and storage revenue of $30 million was $3 million above the fourth quarter of 2014. The increased demand for gas within the province and higher export deliveries resulted in greater receipt, export and delivery revenues. A rate increase effective January 1, 2015 also contributed to higher revenue. Conversely, storage revenue was down slightly from the same period last year due to storage de-contracting, a result of the low natural gas price environment.

Customer Capital Contribution Revenue

The Corporation receives capital contributions from customers in exchange for the construction of new, customer-specific service connections. 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 contributions can vary significantly period over period as varying factors influence their receipt and revenue recognition. The contributions received, less potential refunds, are recognized as revenue once the related property, plant, and equipment is available for use. The amount of contributions refundable are estimated and recorded in deferred revenue until the eligible refund period expires. During 2015, the Corporation refined the estimation process used to calculate the amount of contribution that is deferred for potential refund. The new estimate is based on the customer’s requested delivery capacity rather than management’s estimate of customer’s future delivery, and is considered a more reliable estimate of the amounts likely to be refunded. Customer capital contribution revenue of $38 million for the twelve months of 2015 was $5 million above the same period last year. The fourth quarter customer capital contribution revenue of $24 million was $8 million higher than 2014, a result of the $12 million impact resulting from the change in estimate related to transmission project customer contributions being

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2015/2016 FOURTH QUARTER REPORT

recognized in the fourth quarter. This increase in contribution revenue was partially offset by a decrease in transmission system customer connections, a result of fewer capital projects in 2015.

Other Revenue

Other revenue primarily consists of revenues from natural gas liquid extraction operations from two separate gas plants, consisting of compression and gathering revenue; gas processing revenue and the sale of natural gas liquids. In addition, Royalty revenues are generated from a gross overriding royalty on several natural gas-producing properties in Saskatchewan and Alberta. Other revenue of $12 million for the twelve months of 2015 is $4 million lower than 2014, a result of declining natural gas liquid prices. The $4 million of revenue for the fourth quarter of 2015 was comparable to 2014.

Other Expenses

Other expenses, as reported in the consolidated financial statements, are as follows:

Three months ended December 31

Twelve months ended December 31

2015

2014 Change

2015

2014 Change

(millions)

$

22 32 23

$

91

Employee benefits

$

24 41 23

$

(2) (9)

$

92

$

(1) (8)

118

Operating and maintenance Depreciation and amortization

126

87 12

-

83 11

4 1

3

Saskatchewan taxes

2

1

$

80

$

308

Other Expenses

$

90

$

(10)

$

312

$

(4)

With strong growth in the provincial economy in recent years, the Corporation has experienced significant growth in its customer base and pipeline facilities. The increasing investment in facilities directly increases ongoing operating and maintenance costs, depreciation and amortization and corporate capital taxes. Other expenses of $308 million for the twelve months in 2015 represent a slight decrease of $4 million over the same period in 2014. On a quarterly basis, other expenses of $80 million were $10 million below 2014. In both cases, the Corporation was able to realize lower operating and maintenance expenses through austerity program cost reduction initiatives relating to contract/consulting, materials/supplies, vehicle, sustenance and advertising expenses despite increasing cost pressures driven by growth in customer base and customer facilities. This was partially offset by increased transportation expenses, depreciation and amortization expenses and Saskatchewan taxes, all being a direct result of the growth in pipeline facilities.

Net Finance Expenses

Net finance expenses, before the impact of fair value adjustments, were $46 million for the twelve months of 2015 and were $2 million higher than 2014. Increased earnings on debt retirement funds were fully offset by the higher debt financing needed to fund the Corporation’s capital expenditure requirements. There was also a $3 million unfavourable fair value adjustment on debt retirement funds during 2015, an outcome of higher interest rates on fixed-rate investments. On a quarterly basis, net finance expenses of $13 million, before the impact of fair value adjustments, were slightly above 2014 due to increased levels of debt.

Other (Losses) Gains

Recent changes in the oil and gas industry have led to declining natural gas and natural gas liquid prices, which have adversely affected cash flows generated from natural gas liquid extraction plant assets. An impairment loss on natural gas liquid extraction plant assets of $3 million was recorded in the first quarter of 2015 and in the fourth quarter of 2014 to recognize the impact of a decline in natural gas liquid prices on the asset’s value in use. The 2015 impairment loss plus losses on other asset disposals were partially offset by $5 million of insurance proceeds relating to Prud’homme and Landis incidents that occurred in prior years. The Prud’homme insurance proceeds were disclosed as a contingent asset in the December 31, 2014 financial statements. The 2014 impairment loss on the extraction plant assets plus losses on other asset disposals were fully offset by a $5 million gain recorded for the sale of storage and distribution assets and the Corporation’s interest in an ethane extraction plant.

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2015/2016 FOURTH QUARTER REPORT

LIQUIDITY AND CAPITAL RESOURCES

Three months ended December 31

Twelve months ended December 31

2015

2014 Change

2015

2014 Change

(millions)

$

57

$

260

Cash provided by operating activities Cash used in investing activities

$

52

$

5

$

248

$

12 68

(83)

(215)

(98)

15

(283)

28

(47)

Cash provided by (used in) financing activities

47

(19)

40

(87)

Increase (decrease) in cash and cash equivalents

$

2

$

(2)

$

1

$

1

$

5

$

(7)

Cash from operations and debt borrowed from the Province of Saskatchewan’s General Revenue Fund are the primary sources of liquidity and capital for SaskEnergy. Generally, SaskEnergy finances its investment activity with cash from operations. To the extent that cash from operations is insufficient to support its investment activity, debt servicing costs and dividends, additional short and long term debt is used. Sources of liquidity include Order in Council authority to borrow up to $500 million in short-term loans, which was increased by $100 million in the third quarter of 2015. The Corporation holds a $35 million uncommitted line of credit with the Toronto-Dominion Bank. Over the longer term, The SaskEnergy Act allows the Corporation to borrow up to $1,700 million.

Operating Activities

Cash from operating activities was $260 million in 2015, an increase of $12 million from the twelve months of 2014, which is a result of higher transportation revenue and the commodity rate increase both improving cash flow in 2015 compared to 2014. Gas Marketing activities increased margins and cash flows in 2015 as the lower natural gas price environment generated a lower average cost of gas sold per GJ in 2015 versus 2014.This is partially offset by lower commodity volumes sold and lower delivery service revenue, both due to the warmer than normal weather in 2015 compared to the significantly colder weather in 2014.

Investing Activities

Cash used in investing activities totaled $215 million for the twelve months of 2015, $68 million below 2014. Capital investment levels have declined in 2015 due to lower system growth and customer connection levels compared to 2014. The majority of 2015 capital investment focused on $61 million of customer connection projects, which are a result of Saskatchewan residential and industrial growth, as well as safety and integrity programming of $52 million, a sign of the Corporation’s ongoing commitment to a safe, reliable system. The Bayhurst-to-Rosetown pipeline project was completed in 2014, which was the Corporation’s largest capital investment project in recent years, contributing $70 million to the record high level of capital investment in 2014. The Corporation funds its substantial capital requirements with cash from operations and debt from the Province of Saskatchewan.

Financing Activities

Cash used for financing activities was $47 million during the twelve months of 2015 compared to a source of funds in 2014. In the first quarter of 2015, given the Corporation’s relatively high short-term debt balances and attractive interest rates on long- term debt, the Corporation issued $50 million of long term debt at an effective interest rate of 2.7%, the proceeds of which were used to repay $62 million of its short-term debt. With decreased capital spending in 2015, long term debt requirements declined from 2014 and $50 million of long term debt was repaid in the fourth quarter while cash from operations has been utilized to meet the 2015 capital spending and operating requirements. SaskEnergy’s debt ratio at December 31, 2015 was 62%. OUTLOOK In late November, the Government of Saskatchewan announced that, as a next step in the transition to summary budgeting, the fiscal year end of Crown Investments Corporation entities, including SaskEnergy, will change from December 31 to March 31. For the current year, SaskEnergy will report on a 15-month period beginning January 1, 2015 and ending March 31, 2016. Thereafter, SaskEnergy will report on the 12-month periods ending March 31st of each year. In close alignment with Saskatchewan Crown Sector Priorities and the Saskatchewan Plan for Growth, SaskEnergy’s 2015/2016 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 2015/2016 and over the five-year planning horizon.

11

2015/2016 FOURTH QUARTER REPORT

Market Prices Since December 2015, natural gas prices have continued to weaken and we anticipate prices will remain low throughout the fifth quarter of 2015/2016. It is expected 2016 will continue to be characterized by a forward pricing curve for natural gas that shows a very small differential between current market prices and future market prices. This is good for customers and large consumers of natural gas who value stability and low prices. The lower price environment will continue to lower the average cost of gas sold and have a favourable impact on margins through the fifth quarter of 2015/2016 and forward. Commodity Margin 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, provided favourable margins on commodity sales in the first four quarters of 2015 and reduced the Gas Cost Variance Account owing from customers. On October 21, 2015, Cabinet approved a $0.54 per GJ reduction to the commodity rate to $4.30 per GJ, based on the recommendations of the Saskatchewan Rate Review Panel. The commodity rate reduction takes effect January 1, 2016 together with an average 4.5% increase to the delivery rate, resulting in an overall bill decrease for customers. Gas Marketing Margin Based on current market conditions, the volume of gas marketing activity has declined by 50% in the first four quarters of 2015/2016, however by leveraging its assets and expertise SaskEnergy has found several opportunities which allow it to maintain slightly higher margins through 2015/2016 and forward. Delivery Revenue The weather through the first four quarters of 2015/2016 have been warmer than normal, with the fourth quarter winter heating season registering 13% warmer than normal. The warmer weather has decreased delivery volumes and revenue, resulting in the fifth quarter forecast being revised to incorporate the impact of weather being 10% warmer than normal. In addition, the pace of Saskatchewan’s provincial economy has slowed through 2015 and the Corporation tempered its expectations for customer connection rates to levels closer to the ten year average. Residential customer capital contributions declined and are forecasted to be lower than recent years, while industrial and commercial demand for service is expected to continue at strong levels and exhibit steady growth. A delivery rate increase takes effect January 1, 2016 which will provide additional revenue to alleviate cost pressures related to maintaining a safe and reliable distribution system. The Corporation will also continue to focus on efficiencies that will offset cost pressures to ensure Delivery Service Rates remain competitive. Transportation Revenue Transportation and storage service rate increases implemented effective January 1, 2016 will increase transportation service rates by an average of 2.5% and storage rates by an average of 5.8% for an overall average 3.0% increase. The rate increase will address increasing capital and operating costs to continue providing high quality, safe and reliable service to transmission customers including an increased focus on system integrity, emergency response and public awareness. Another major factor for the rate adjustment is the increasing cost of importing natural gas supply from Alberta. Other Expenses 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 2016. 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 recent years. The Corporation continues to pursue its resourcing strategy which calls for relatively stable employee levels augmented by third party contract resources. In addition, efficiency initiatives have enhanced productivity and will continue to allow SaskEnergy to meet its business commitments in a nimble and cost effective manner with a focus on cost savings in employee benefits, contract and consulting, advertising and vehicle costs. Capital Investment SaskEnergy will continue to focus its efforts on providing safe and reliable service to customers while trying to mitigate 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 Corporation has spent $214 million on capital projects in the first twelve months with plans to spend an additional $37 million in the fifth quarter of 2015/2016. 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 $34 million for the fifth quarter of 2015/2016 bringing total income before unrealized market value adjustments to $122 million for the fifteen month period ending March 31, 2016.

12

2015/2016 FOURTH QUARTER REPORT

CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

SaskEnergy Incorporated First Quarter Report

March 31, 2011

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at December 31, 2015 (unaudited)

As at December 31, 2014 (audited)

(millions)

Notes

Assets Current assets Cash

$

3

$

5

116 123

Trade and other receivables

5 6

148 140

Natural gas in storage held for resale

12

Inventory of supplies Debt retirement funds

12

8 7

7

Fair value of derivative instruments

7

21

269

333

56

Intangible assets

49

2,050

Property, plant and equipment

1,912

89

Debt retirement funds

86

$

2,464

$

2,380

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

$

325 121

$

299 117

Trade and other payables

14 83 77 93

Dividends payable

3

Current portion of long-term debt

9

50 90

Deferred revenue

Fair value of derivative instruments

7

107 666

713

9

Employee future benefits

10 95

113

Provisions

6

Deferred revenue Long-term debt

6

887

9

908

1,728

1,685

Province's equity

72

Equity advances Retained earnings

72

664 736

623 695

$

2,464

$

2,380

(See accompanying notes)

13

2015/2016 FOURTH QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Three Months Ended December 31, 2015

For the Three Months Ended December 31, 2014

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 11)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 11)

Total

Total

(millions)

Notes

Revenue Natural gas sales

$

130

$

(4)

$

126

12

$

173

$

17

$

190

64 30 24

- - - -

64 30 24

Delivery

69 27 16

- - - -

69 27 16

Transportation and storage Customer capital contributions

15

4

4

Other

15

3

3

252

(4)

248

288

17

305

Expenses Natural gas purchases (net of change in inventory)

106

3

109

12

157

118

275

22 32 23

- - - -

22 32 23

Employee benefits

24 41 23

- - - -

24 41 23

Operating and maintenance Depreciation and amortization

3

3

Saskatchewan taxes

2

2

186

3

189

247

118

365

Income (loss) before the following

66

(7)

59

41

(101)

(60)

-

1

1

Finance income Finance expenses

1

2

3

(13) (13)

-

(13) (12)

(12) (11)

-

(12)

Net finance expenses

1

2

(9)

4

-

4

Other gains (losses)

5

(3)

-

(3)

Total net income (loss) and comprehensive income (loss)

$

57

$

(6)

$

51

$

27

$

(99)

$

(72)

(See accompanying notes)

14

2015/2016 FOURTH QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the Twelve Months Ended December 31, 2015 (unaudited)

For the Twelve Months Ended December 31, 2014 (audited)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 11)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 11)

Total

Total

(millions)

Notes

Revenue Natural gas sales

$

440 215 119

$

(15)

$

425 215 119

12

$

718 232

$

11

$

729 232

- - - -

Delivery

- - - -

Transportation and storage Customer capital contributions

15

98 33 16

98 33 16

38 12

38 12

Other

15

824

(15)

809

1,097

11

1,108

Expenses Natural gas purchases (net of change in inventory)

381

(15)

366

12

695

98

793

91

- - - -

91

Employee benefits

92

- - - -

92

118

118

Operating and maintenance Depreciation and amortization

126

126

87 12

87 12

83 11

83 11

Saskatchewan taxes

689 135

(15)

674 135

1,007

98

1,105

Income before the following

-

90

(87)

3

5

(3)

2

Finance income Finance expenses

4

7

11

(51) (46)

-

(51) (49)

(48) (44)

-

(48) (37)

Net finance expenses

(3)

7

(1)

-

(1)

Other (losses) gains

5

1

-

1

Total net income (loss) and comprehensive income (loss)

$

88

$

(3)

$

85

$

47

$

(80)

$

(33)

(See accompanying notes)

15

2015/2016 FOURTH QUARTER REPORT

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