SaskEnergy Second Quarter Report - September 30, 2017

SASKENERGY INCORPORATED

SECOND QUARTER REPORT September 30, 2017

TABLE OF CONTENTS VISION, MISSION AND VALUES

As a Crown corporation, SaskEnergy is committed to ensuring that all corporate activities align with the Government of Saskatchewan’s Crown Sector Strategic Priorities and the Saskatchewan Plan for Growth. Providing safe, reliable, high quality service to its customers is critically important to the Corporation – as is the provision of infrastructure necessary for the Province to grow and prosper.

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

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

VALUES Community

Integrity

Communication

Safety

Accountability

Recognition

Spirit

TABLE OF CONTENTS

Financial and Operating Highlights

Management’s Discussion and Analysis

Introduction

3 3 4 9

Industry Overview

Consolidated Financial Results Liquidity and Capital Resources

Capital Expenditures

10 10

Outlook

Consolidated Financial Statements

Condensed Consolidated Statement of Financial Position Condensed Consolidated Statement of Comprehensive Income Condensed Consolidated Statement of Changes in Equity Condensed Consolidated Statement of Cash Flows Notes to the Condensed Consolidated Financial Statements

12 13 15 16 17

FINANCIAL AND OPERATING HIGHLIGHTS

SaskEnergy Incorporated First Quarter Report

March 31, 2011

Three months ended September 30

Six months ended September 30

2017

2016

2017

2016

FINANCIAL HIGHLIGHTS ($ millions)

Total revenue

145

146

311

264

Total expenses

143

140

315

204

Consolidated net income (loss)

(4)

Market value adjustments

(3)

(1)

Income before unrealized market value adjustments

(7)

(3)

(10)

Other Comprehensive Income

(1)

Comprehensive Income

(7)

(5)

(10)

Dividends

Cash provided by operating activities

112

Capital expenditures

102

Total assets

2,531

2,518

Total net debt

1,238

1,201

Debt ratio

59.2%

60.0%

OPERATING HIGHLIGHTS

Distribution

Volumes distributed (petajoules)

Residential/Farm

2 3

6 7

Commercial

Industrial

32 37

61 74

60 73

Total

Weather (compared to last 30 years)

22% warmer

7% warmer

8% warmer

14% warmer

Transmission

Volumes transported (petajoules)

Domestic

64 12 76

125

124

Export

14 74

Total

144

139

2017-18 SECOND QUARTER REPORT

MANAGEMENT’S DISCUSSION & ANALYSIS

INTRODUCTION

The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the six months ended September 30, 2017. 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 November 20, 2017 and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS). For additional information related to the Corporation, refer to SaskEnergy’s 2016-17 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 2016-17 Annual Report. All forward-looking statements reflect the Corporation’s best estimates and assumptions based on information available at the time the statements were made. However, actual results and events may vary significantly from those included in, contemplated by, or implied by such statements. The volume of natural gas delivered to customers is sensitive to variations in the weather, particularly through the prime heating season of November to March. Additionally, changes in market value adjustments may cause significant fluctuations in net income due to the volatility of natural gas prices. Therefore, the condensed consolidated financial results for the first six months of 2017-18 should not be taken as indicative of the performance to be expected for the full year. In order to compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments, realized margin on commodity sales, and realized margin on gas marketing sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. These unrealized market value adjustments vary considerably with the market prices of natural gas, drive significant changes in the Corporation’s consolidated net income, and may obscure other business factors that are also important to understanding the Corporation’s financial results. The measures referred to above are non-IFRS measures, in that there is no standardized definition, and may not be comparable to similar measures presented by other entities.

INDUSTRY OVERVIEW

Natural gas prices are set in an open market and are influenced by a number of factors including production, demand, natural gas storage levels and economic conditions. Given the high demand for natural gas to heat homes and businesses during the cold winter months, and the demand for natural gas to produce electricity for air conditioning, weather typically has the greatest impact on natural gas prices in the near term. Due to the high degree of uncertainty associated with weather, natural gas prices can be very volatile. Natural gas market fundamentals have remained in a reasonably strong supply position relative to demand over the last number of years due to the advancements in shale gas production. The AECO monthly index, the benchmark price for natural gas in Western Canada, settled at $0.90 per gigajoule (GJ) for the month of September 2017. Throughout the six months ending September 30, 2017, market prices have fluctuated modestly with an overall downward trend. The low prices experienced during the summer and into the fall were largely due to pipeline maintenance in Alberta, which resulted in limited transportation available from AECO to the Saskatchewan border. The index declined from $2.59 per GJ at the end of March 2017 to $0.90 per GJ at the end of September 2017. This was a 65 per cent decline in the six month period as noted in the AECO Monthly Index Historical Prices chart. Most natural gas in Saskatchewan is priced at a differential to the AECO price and is typically between $0.05 per GJ and $0.20 per GJ higher than AECO. However, throughout the summer of 2017, AECO – TEP differentials were often much higher due to transportation curtailments on TransCanada Pipelines NGTL system.

2017-18 SECOND QUARTER REPORT

SaskEnergy Incorporated First Quarter Report

March 31, 2011

AECO Monthly Index Historical Prices

$14.00

Conventional Natural Gas

$12.00

$10.00

$8.00

Shale Gas Revolution

$6.00

Forward Price at Sept. 30, 2017

$4.00

$2.00

$0.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

CONSOLIDATED FINANCIAL RESULTS

Consolidated Net Income

Three months ended September 30

Six months ended September 30

(millions)

2017

2016 Change

2017

2016 Change

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

(7)

(3)

(10)

56 14

(50) (21)

(3)

(6)

(7)

Consolidated net income (loss)

(4)

(64)

The loss before unrealized market value adjustments was $3 million for the six months ending September 30, 2017, $7 million favourable compared to the $10 million loss in 2016, due primarily to the net reversal of a $10 million impairment taken on non-core storage assets. The non-core storage asset is transferring from a single cash generating unit and into a larger cash generating unit of storage assets, a result of changing corporate strategy. In general, the long term price of natural gas is flat, which means that there are less favourable price differentials between current and forward market prices and limited opportunities to use storage to generate gas marketing margins. This is resulting in the continued impairment of the remaining non-core storage, treatment, gathering and energy service assets. With respect to core operations, the delivery rate increases effective November 1, 2016, and November 1, 2017 combined with increased transportation loads will continue to contribute to higher revenues compared to 2016. Both operating and maintenance, and depreciation have increased compared to 2016, a result of growth in the Corporation’s natural gas infrastructure and customer base. Continued cost management efforts have resulted in employee benefits remaining unchanged from the prior year.

2017-18 SECOND QUARTER REPORT

SaskEnergy Incorporated First Quarter Report A large portion of SaskEnergy’s revenue is dependent on customer’s use of natural gas to heat their premises. Normally, customers do not use large volumes of gas in the first and second quarter of the fiscal year and when weather is warmer than normal, 8 per cent warmer than normal year-to-date, generating net income during the first two quarters is challenging. Net income was favorably affected by the recognition of insurance proceeds in the first quarter that related to an incident at the Prud’homme storage caverns in 2014. March 31, 2011 During April through September 2017, higher priced natural gas purchase contracts related to the Corporation’s commodity business were delivered, which had a favourable impact on unrealized fair value adjustments. Also, during the same period, the AECO near-month natural gas spot price declined from $2.59 per GJ at the end of March 2017 to $0.90 per GJ. The net effect of expiring contracts that were out of the money, partially offset by the impact of lower market prices on outstanding contracts generated a $6 million favourable unrealized fair value adjustment. When natural gas market prices decreased through the six months ended September 30, 2017, the unfavourable net realizable value adjustment to gas in storage at the end of March 2017 increased by $7 million, resulting in an unfavourable impact on the Corporation’s consolidated net income.

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. IFRS requires these activities to be presented together within the consolidated financial statements; however, the Corporation manages these activities as distinct and separate businesses and, as such, the MD&A addresses these natural gas sales and purchases separately. In the third quarter of 2016, the Corporation started to identify certain natural gas purchase contracts as own-use contracts. The Corporation enters into these contracts to acquire the natural gas it needs to meet expected sales to commodity customers. These non-financial derivative contracts are not recorded at fair value, rather, the contracts are accounted for as a purchase at the time of delivery. Natural gas contracts, not identified as own-use purchases, are classified as derivative instruments, which are recorded at fair value until their settlement date. Changes in the fair value of the derivative instruments, driven by changes in future natural gas prices, are recorded in net income through natural gas sales or natural gas purchases depending on the specific contract. Upon settlement of the natural gas contract, the amount paid or received by SaskEnergy becomes realized and is recorded in natural gas sales or purchases.

Commodity Margin

SaskEnergy sells natural gas to its distribution customers at a commodity rate approved by Provincial Cabinet based on the recommendations of the Saskatchewan Rate Review Panel. The commodity rate, which is reviewed in April and November of each year, is determined based on rate-setting principles and is designed to recover the realized costs associated with natural gas sold to distribution customers without earning a profit. Regulatory principles require that utilities do not earn a profit or realize losses on the sale of natural gas to customers over the long term. Consequently, 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 included in SaskEnergy’s financial statements, is either recovered from, or refunded to customers as part of future commodity rates. Consequently, lower commodity margins in one year are often followed by higher commodity margins in the subsequent year. For financial reporting purposes, the Corporation prepares its financial statements on a consolidated basis while applying IFRS. As a result, the amounts determined for rate-setting purposes are different than those reported within its consolidated financial statements. The most notable differences are the elimination of intercompany costs in the preparation of the consolidated financial statements and how derivative instrument settlements are recognized in the cost of gas. A gain or loss reported in the Corporation’s consolidated financial statements may not indicate a similar adjustment in the GCVA.

Three months ended

Six months ended September 30

September 30

(millions)

2017

2016 Change

2017

2016 Change

Commodity sales

(3)

(7)

Commodity purchases 1

(15)

(16)

(36)

(43)

Realized margin on commodity sales Impact of fair value adjustments

(1)

1 5

(2) (4)

2 2

(51)

Margin on commodity sales

(6)

(51)

1 Net of change in inventory

SaskEnergy’s natural gas price risk management program has two objectives: to reduce the impact of natural gas price volatility on the cost of gas and to support rates that are competitive with other utilities. The two objectives direct activities that naturally oppose each other. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while

2017-18 SECOND QUARTER REPORT

supporting competitive rates often means allowing purchase prices to follow market prices. As a result, the balance between the two objectives may change depending on current market conditions.

SaskEnergy Incorporated First Quarter Report

March 31, 2011 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. Identifying own-use natural gas purchase contracts reduces the variability of fair value adjustments in the Corporation’s financial statements. SaskEnergy’s price risk management strategy will govern purchases not identified as own-use purchases to reduce the impact of price changes on realized gas purchase costs which add to the variability in fair value adjustments. 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 $2 million margin on commodity sales for the six months ending September 30, 2017 consistent with the same period in 2016. Average revenue was $3.61 per GJ and average cost of gas sold was $3.44 per GJ during April through September 2017, resulting in a margin of $0.17 per GJ. This compared to an average commodity margin of $0.12 per GJ through the same period in 2016. Margins were lower in 2016 primarily due to the sale of excess gas, a result of a much warmer than normal 2015-16 winter, at prices below the average cost of gas. Lower volumes sold in 2017 (10.4PJs) partially offset the higher margin of $0.17 per GJ in 2017 as there was 12 PJs sold in the same period of 2016.

A $1 million unfavourable margin for the three months ending September 30, 2017 was $2 million lower than the $1 mill ion favourable margin in 2016, due to higher priced inventory from the prior year being sold in the current quarter.

Commodity Fair Value Adjustments

The fair value adjustments at the end of September 30, 2017 increased the margin on commodity sales by $2 million as the $35 million unfavourable fair value position at March 31, 2017 improved to $33 million unfavourable at September 2017. The settlement of higher priced natural gas purchase contracts during the three months contributed to a lower volume of contracts outstanding.

Gas Marketing Margin

SaskEnergy uses its access to natural gas markets to execute purchases and sales of natural gas to generate margins. By utilizing off peak transportation and storage capacity, SaskEnergy is able to take advantage of pricing differentials between transportation hubs and time periods while minimizing its exposure to price risk. Its primary strategy is to purchase and inject gas when prices are relatively low, and sell the gas in the future when prices are higher. In most cases the purchases and sales are executed at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions.

Three months ended

Six months ended September 30

September 30

(millions)

2017

2016 Change

2017

2016 Change

Gas marketing sales

103

Gas marketing purchases 1

(44)

(40)

(4)

(90)

(61)

(29)

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

6 4 3

2 5

(1) (3)

(5) (6)

(1)

(7)

(21)

Margin on gas marketing sales

(9)

(14)

1 Net of change in inventory

The realized margin on gas marketing sales at September 30, 2017, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $13 million and $8 million for the six and three month periods respectively. This was $2 million higher than the same periods in 2016. The Corporation increased its gas marketing activity in response to the natural gas price volatility created by disruptions on the NGTL transmission system. This resulted in the Corporation selling higher volumes of natural gas at higher margins compared to the same period in 2016. The Corporation sold 42 PJs in 2017 compared to 35 PJs in the same period of 2016.

2017-18 SECOND QUARTER REPORT

Gas Marketing Fair Value Adjustments

SaskEnergy Incorporated First Quarter Report 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 September 30, 2017 on gas marketing derivative instruments increased the gas marketing margin by $4 million for the six month period. At the end of September 30, 2017, the AECO near month price dropped to $0.90 per GJ, having a favourable impact on gas marketing natural gas sales contracts. At the end of September 2017, the volume of outstanding contracts was 27 PJs less than at March 31, 2017, which also contributed to the favourable impact on the gas marketing margin. March 31, 2011

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. As much of the natural gas in storage is held to meet future sales contracts, it is not unusual to see net realizable value adjustments on gas in storage offset the impact of fair value changes. The declining market price environment in the six months ending September 30, 2017 had both favourable and unfavourable impacts on financial results. The Corporation was able to purchase lower priced natural gas and inject it into storage, reducing the average cost of gas in storage. However, the decrease in natural gas market prices throughout September 2017 reduced the net realizable value by an additional $7 million compared to the end of March 2017.

Revenue

Three months ended September 30

Six months ended September 30

(millions)

2017

2016 Change

2017

2016 Change

Delivery revenue

39 34

35 33

4 1

85 68

77 65

8 3

Transportation and storage revenue Customer capital contributions

6 1

6 3

8 3

8 5

Other revenue

(2)

164

155

Delivery Revenue

Delivery Revenue is driven by the number of customers and the amount of natural gas they consume. As residential and commercial customers consume natural gas primarily as heating fuel, weather is the factor that most affects delivery revenue. Delivery revenue was $85 million and $39 million for the six months and three months ending September 2017 respectively, $8 million and $4 million higher than the same periods in 2016. An 8.6 per cent rate increase effective November 1, 2016 contributed to the higher revenues. The rate increase was a response to rising operating costs related to expanding natural gas infrastructure and greater focus on safety and integrity programs that address the aging infrastructure and increasing regulatory requirements.

Weather

1,200

1,000

YTD 2017-18 - 8% warmer than normal

YTD 2016-17 - 19% warmer than normal

800

600

400

200

Apr May Jun Jul

Aug Sep Oct Nov Dec Jan Feb Mar

2017- 18 Act ual

2016- 17 Act ual

2017- 18 Normal Weather

Transportation and Storage Revenue

The Corporation generates transportation revenue by taking delivery of gas from customers at various receipt points in Saskatchewan and Alberta, and delivering natural gas to customers at various delivery points in the Province. The transportation toll structure consists of a receipt service charge that customers pay when they put gas onto the pipeline transportation system, and a delivery service charge, which customers pay when they take delivery off of the pipeline transportation system. Gas delivered to the system by customers is considered to be part of the TransGas Energy Pool (a notional point where producers, marketers and end-users can match supplies to demand) until it is delivered to the end-use customer. For receipt and delivery services, the Corporation offers both firm and interruptible transportation. Under a firm service contract, the customer has a right to deliver or receive a specified quantity of gas on each day of the contract. With a firm contract, customers pay for the amount of capacity they have contracted for whether they use it or not. Under an

2017-18 SECOND QUARTER REPORT

interruptible contract, customers may deliver or receive gas only when there is available capacity on the system and pay receipt and delivery tolls when they deliver or receive gas.

SaskEnergy Incorporated First Quarter Report

March 31, 2011 Transportation and storage revenue was $68 million for the six months ending September 30, 2017, $3 million higher than the same period in 2016, while revenue was $34 million for the three months ending September 30, 2017, $1 million higher than the same period in 2016. Industrial customer and power generation related load growth continues to increase demand for natural gas within the province and is driving higher transportation revenue.

Customer Capital Contributions

The Corporation receives capital contributions from customers to partially offset the cost of constructing facilities to connect them to the transmission and distribution systems. Generally, contributions related to transmission system projects tend to be larger but less frequent than contributions related to distribution system projects. The volume and magnitude of customer contribution revenue can vary significantly period-over-period as their receipt and recognition as revenue is primarily driven by customer activity. The contributions received, less potential refunds, are recognized as revenue once the related property, plant and equipment is available for use. The Corporation may refund a customer for some or all of the contributions they make depending on how much gas they consume or transport through the system. The amount of contributions expected to be refunded is estimated and recorded in deferred revenue until the eligible refund period expires or a refund is earned by the customer. Customer capital contribution revenue for the three months and six months ending September 30, 2017 remain unchanged from the same periods in 2016.

Other Revenue

Other revenue primarily consists of gas processing fees and natural gas liquid sales from two natural gas liquid extraction plants. Compression and gathering service revenue and royalty revenues comprise the remaining balance of other revenue. Royalty revenues are generated from a gross overriding royalty on several natural gas-producing properties in Saskatchewan and Alberta, which have diminished due to the continuing decline of conventional natural gas production and as a result of low natural gas prices. Other revenue of $3 million is lower than prior year as a safety shut down during 2017 at one of the Corporation’s natural gas extraction plants decreased revenue in comparison to the same six month period in 2016.

Other Expenses and Net Finance Expense

Three months ended

Six months ended September 30

September 30

(millions)

2017

2016 Change

2017

2016 Change

Employee benefits

20 33 25

20 31 24

41 68 49

41 61 47

Operating and maintenance Depreciation and amortization

2 1 1

7 2 1

Saskatchewan taxes

Other Expenses

166

156

Net finance expense

Other (losses) gains

Expenditures on safety and integrity initiatives, strong customer growth, and the need to import more natural gas from Alberta as Saskatchewan natural gas production declines are key factors contributing to higher expenses. Employee benefits expense of $41 million for the six months ending September 30, 2017 remained unchanged from the same period in 2016. The Corporation continues to manage vacant positions and overtime costs through productivity and efficiency initiatives. Operating and maintenance expense of $68 million are $7 million higher than the same period in 2016, due to rising third party pipeline transportation costs as additional cross border transportation capacity is required to import gas from Alberta. This was part ially offset by continued cost management initiatives. Depreciation and amortization of $49 million for the six months ending September 30, 2017 slightly increased above prior year as capital additions increase the asset base and depreciation and amortization. Net finance expenses, before the impact of fair value adjustments, were $2 million higher than the same period in 2016. During the six months ending September 30, 2017, SaskEnergy issued $121 million of long term debt which was used to reduce short term debt balances and repay $59 million of maturing long term debt. Effective April 1, 2017, the Corporation early adopted IFRS 9 Financial Instruments. Under the new financial instruments standard, debt retirement funds are classified as fair value through other comprehensive income. As a result any market value adjustments associated with debt retirement funds no longer impact net income as they are recorded in other comprehensive income.

2017-18 SECOND QUARTER REPORT

SaskEnergy Incorporated First Quarter Report Employee benefits expense of $20 million for the three months ending September 30, 2017 remain unchanged from prior year. Operating and maintenance expense of $33 million for the second quarter are slightly higher than the same period in 2016, due to increasing third party transportation costs. Depreciation and amortization of $25 million for the three months ending September 30, 2017 is $1 million higher than the same period in 2016, as capital additions increase the asset base and depreciation nd amortization. Net finance expense of $12 million is $1 million higher than the same three month period in 2016. During the second quarter, the corporation repaid $40 million of maturing long term debt. March 31, 2011

LIQUIDITY AND CAPITAL RESOURCES

Three months ended

Six months ended September 30

September 30

(millions)

2017

2016 Change

2017

2016 Change

Cash provided by operating activities Cash used in investing activities

112

(67)

(56)

(11)

(104)

(87)

(17)

Cash provided by (used in) financing activities

(4)

(11)

(5)

(6)

Increase (decrease) in cash and cash equivalents

(4)

(1)

(3)

(11)

As a Crown corporation, SaskEnergy’s primary sources of capital are cash from operations, debt – which is borrowed through the province’s General Revenue Fund – and equity advances from CIC, the Province’s crown corporation holding company. Equity advances are rarely used to finance Crown corporations as CIC prefers to use its Subsidiary Crown Dividend Policy to manage its equity interests in its commercial enterprises. Cash provided from operations is SaskEnergy’s most important source of capital. As a utility, cash from operations is relatively stable and the Corporation relies upon it to fund dividends, debt servicing costs, and a significant proportion of its investment in pipeline facilities. Long- and short-term debt can be borrowed through the Province of Saskatchewan to meet any long- or short-term incremental capital requirements, and to repay debt as it matures. Sources of liquidity include Order-in-Council authority to borrow up to $500 million in short-term loans, and a $35 million uncommitted line of credit with the Toronto-Dominion Bank. By borrowing through the province, SaskEnergy has access to the province’s borrowing capacity and North American capital markets. The SaskEnergy Act allows the Corporation to borrow up to $1,700 million.

Operating Activities

Cash from operating activities of $112 million for the six months ended September 30, 2017 was $31 million higher than the same period in 2016. Higher transportation revenue and delivery revenue contributed to higher operating cash flows compared to 2016. The Corporation also took advantage of low natural gas market prices by purchasing and injecting lower priced natural gas into storage.

Investing Activities

Cash used in investing activities totaled $104 million for the six months ended September 30, 2017; $17 million higher than 2016. Capital investment levels are increasing in 2017 compared to 2016, primarily due to higher investment in safety and integrity programming to maintain a safe and reliable system.

Financing Activities

Cash used in financing activities was $11 million during the three months of 2017 compared to $5 million in 2016. From a cash management perspective, SaskEnergy uses cash from operations to pay for its investing activities, dividend payments and debt servicing costs (including interest payments and sinking fund installments). Any remaining cash from operations is applied to reducing the short-term debt balance. If there is insufficient cash from operations, SaskEnergy will borrow more debt, usually short-term debt, to meet its cash requirements. SaskEnergy issued $119 million of long-term debt during the first two quarters which was used to repay $59 million of maturing debt and $61 million of new long-term debt. SaskEnergy’s debt ratio at September 30, 2017 of 59 per cent equaled March 31, 2017, while September 30, 2016 was 60 per cent.

2017-18 SECOND QUARTER REPORT

CAPITAL EXPENDITURES

SaskEnergy Incorporated First Quarter Report

Three months ended

Six months ended September 30

September 30

March 31, 2011

(millions)

2017

2016 Change

2017

2016 Change

Customer growth and system expansion

35 25

28 22

7 3

49 44

42 35

7 9

Safety and system integrity

Information systems

3 2

- -

5 4

5 2

Vehicles & equipment, buildings, furniture

102

SaskEnergy continues to invest in its pipeline system to accommodate growth in the natural gas customer base and its increasing reliance on Alberta Gas to meet load requirements. Capital expenditures of $102 million for the six months ended September 30, 2017 are $18 million higher than the same period in 2016. Customer growth and system expansion is $7 million above the same period in 2016, a result of higher spending on transmission system growth, specifically, increased spending on two compression expansion projects in the current year. Safety and system integrity capital expenditures are $9 million higher than 2016, primarily due to faster progress on distribution system integrity programs.

OUTLOOK

With the Corporation’s fiscal period beginning April 1, peak winter heating loads are absent from the financial results until the third and fourth quarter. Without revenue from heating loads it is not uncommon for SaskEnergy to experience minimal net income and even losses through the first two quarters. Factors that are expected to affect SaskEnergy through the remainder of the year include the growth of the provincial economy, reliance on imported natural gas and interconnected pipeline systems, and Saskatchewan winter weather conditions over the next six months. Assuming normal weather conditions for the balance of 2017-18, net income before market value adjustments is expected to be approximately $105 million, an increase of $36 million over the 2016-17 actual result. This increase is primarily due to the assumed settlement of the litigation related to the SaskEnergy Place building purchase which would see approximately $12 million in prior lease payments returned to SaskEnergy. In addition, during the second quarter of 2017-18, a $15 million impairment reversal was recorded. This relates to a storage field asset, which due to a change in corporate strategy is moving from the non-core gas storage facility cash generating unit, into a larger pool of core storage assets, where it will be used to provide storage service and transmission avoidance to customers within a regulatory framework. The continued growth in natural gas demand combined with declining conventional gas production means that more gas will be imported or acquired from gas production associated with oil production. This shift in source of supply, together with an aging pipeline system and increasing regulatory requirements, will require incremental investments in pipeline facilities. SaskEnergy is projecting to invest more than $280 million over the remainder of the year. This additional investment will be funded through cash from operations and an additional $160 million of incremental borrowing. The additional load growth will generate more revenue for the Corporation; however, the investment in infrastructure will also increase operating costs and put pressure on delivery and transportation rates. On October 4, 2017, the Saskatchewan Rate Review Panel recommended to Cabinet an average delivery rate increase of 2.95 per cent effective November 1, 2017. The Corporation continues to work with other Crown corporations, and other business enterprises, to investigate technological solutions to more efficiently serve customers and maintain facilities. Since 2009, SaskEnergy has achieved $42 million of operating efficiency savings and another $4 million has been targeted for 2017-18.

Operating Expenses

As the pipeline and distribution system continues to age, and supply shifts from conventional Saskatchewan production to associated gas production and Alberta supply, additional investments are required that do not generate additional revenue. Expenditures to address safety and system integrity do not increase revenues and therefore add pressure to utility rates. Consequently, the average cost of serving customers is expected to rise. Depreciation expense and finance expense are expected to rise by $10 million as a direct result of capital expenditures, while operating expenses (employee obligation costs and operating and maintenance) are expected to rise by $7 million even with projected efficiency savings of $4 million in 2017- 18. The cost increases are primarily due to rising third-party transportation costs related to importing more natural gas over longer distances to meet growing load requirements. The Corporation is expecting staffing levels to remain relatively stable through 2017 as efficiencies and productivity gains are realized. SaskEnergy will continue to meet the Province’s growing natural gas requirements while keeping cost increases to a minimum and staffing at efficient levels.

2017-18 SECOND QUARTER REPORT

Revenue

SaskEnergy Incorporated First Quarter Report The delivery rate increase effectiv November 1, 2016 and the recommended rate increase November 1, 2017 will provide additional delivery revenue to help offset increasing cost pressures resulting from customer growth and integrity investments experienced in recent years. Customer connections, which are closely related to the strength of the provincial economy, were expected to increase modestly to 4,500 new customers through 2017-18. This estimate is now expected to realize between 3,800-4,000 new customers, slightly less than the 4,500 new customers initially expected. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects revenue to increase by $60 million in 2017-18, driven by a six per cent increase in load and the delivery rate increase effective November 1, 2017. March 31, 2011

Gas Marketing and Commodity Margins

While long term natural gas prices have remained relatively unchanged from the end of March 2017, near term natural gas prices have declined. Over a longer period, forward gas prices have displayed a downward trend suggesting that the likelihood of higher prices in the future is small. Current market prices are fairly representative of long term prices, resulting in the differential between current and forward prices being fairly small. This differential is the driver for much of SaskEnergy’s gas marketing activity in the past, with the exception of summer to winter spreads. These market conditions adversely affect the prospect for generating the margins required to support SaskEnergy’s non-core storage business. The November 1, 2016 commodity rate reduction to $3.65 per GJ will reduce commodity revenue during 2017-18; however, lower natural gas market prices are expected to reduce the average cost of gas by an equal amount. Consequently, favourable margins are expected by the end of March 31, 2018 on commodity sales. As part of the normal course of business, commodity rates are reviewed regularly and adjusted as required.

Summary

Although, SaskEnergy’s financial performance is expected to remain strong, there are risks to the outlook. Capital expenditure requirements and rising costs will remain a challenge throughout the forecast period as SaskEnergy adjusts to continued customer load growth, infrastructure renewal requirements and shifting natural gas supply dynamics. A low natural gas price environment will continue to create challenges from a gas marketing perspective. Delivery and transportation revenue will continue to grow, but so will operating costs. SaskEnergy will continue to focus on providing safe and reliable service to its customers and investing in safety and growth initiatives while actively seeking operating and capital deployment efficiencies through collaboration and technology initiatives. Weather will be a key factor affecting 2017-18 financial results. Forecasted results are based on normal weather as defined by the 30-year average. To the extent that weather is colder than normal, delivery revenue will increase, and to the extent that weather is warmer than normal, delivery revenue will be lower. Assuming weather is not extremely cold, transportation, storage, and other revenue items are typically not impacted by weather, as is the case with operating expenses. Commodity revenue and gas purchases are both affected by weather but typically offset each other.

2017-18 SECOND QUARTER REPORT

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SaskEnergy Incorporated First Quarter Report

March 31, 2011

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at September 30, 2017 (unaudited)

As at March 31, 2017 (audited)

(millions)

Notes

Assets Current assets Cash

Trade and other receivables

111

Natural gas in storage held for resale

104

86 12

Inventory of supplies Debt retirement funds

7 5

Fair value of derivative instruments

190

222

Intangible assets

Property, plant and equipment

2,182

2,129

Debt retirement funds

2,531

2,505

Liabilities and Province's equity Current liabilities Bank indebtedness

Short-term debt

254 119

293 104

Trade and other payables

Dividends payable

- -

14 59 32 40

Current portion of long-term debt

Deferred revenue

41 38

Fair value of derivative instruments

454

542

Other payables

9 7

5 7

Employee future benefits

Provisions

121

127

Deferred revenue Long-term debt

1,081 1,678

960

1,647

Province's equity

Equity advances Retained earnings

784

786

Other components of equity

(3)

853

858

2,531

2,505

(See accompanying notes)

2017-18 SECOND QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Three Months Ended September 30, 2017

For the Three Months Ended September 30, 2016

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 9)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 9)

Total

(millions)

Notes

Revenue Natural gas sales

66 39 34

(1)

65 39 34

63 35 33

69 35 33

Delivery

- - - -

Transportation and storage Customer capital contributions

6 1

6 3

Other

146

(1)

145

140

146

Expenses Natural gas purchases (net of change in inventory)

59 20 33 25

61 20 33 25

56 20 31 24

(6)

50 20 31 24

Employee benefits

- - - -

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

143

145

136

(6)

130

Income before the following

(3)

Finance income Finance expenses

- - -

(12) (12)

(11) (11)

(11) (10)

Net finance expenses

Other gains

Total net (loss) income

(3)

(7)

Change in fair value of debt retirement funds designated as FVOCI

(1)

Comprehensive (loss) income

(4)

(7)

2017-18 SECOND QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Six Months Ended September 30, 2017

For the Six Months Ended September 30, 2016

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 9)

Income before Unrealized Market Value Adjustments

Unrealized Market Value Adjustments (Note 9)

Total

(millions)

Notes

Revenue Natural gas sales

141

147

117

(8)

109

Delivery

85 68

- - - -

85 68

77 65

- - - -

77 65

Transportation and storage Customer capital contributions

8 3

8 5

Other

305

311

272

(8)

264

Expenses Natural gas purchases (net of change in inventory)

126

133

104

(74)

30 41 61 47

Employee benefits

41 68 49

- - - -

41 68 49

41 61 47

- - - -

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

292

299

260

(74)

186

Income before the following

(1)

Finance income Finance expenses

- - -

(25) (24)

(23) (22)

(23) (18)

Net finance expenses

Other gains

Total net (loss) income

(3)

(1)

(4)

(10)

Change in fair value of debt retirement funds designated as FVOCI

(1)

Comprehensive (loss) income

(3)

(2)

(5)

(10)

2017-18 SECOND QUARTER REPORT

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