SaskEnergy Second Quarter Report - September 30, 2018

SASKENERGY INCORPORATED

SECOND QUARTER REPORT September 30, 2018

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.

MISSION Deliver natural gas in a safe, reliable, affordable way.

VISION Create customer value through safe, innovative energy solutions.

VALUES Safety

Accountability Collaboration

Spirit

TABLE OF CONTENTS

Financial and Operating Highlights

Management’s Discussion and Analysis

Introduction

3 3 4 9 9

Industry Overview

Consolidated Financial Results Liquidity and Capital Resources

Capital Expenditures

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 Six months ended September 30

Three months ended September 30

2018

2017

2018

2017

FINANCIAL HIGHLIGHTS ($ millions)

Total revenue

169

145

348

311

Total expenses

157

143

324

315

Consolidated net income

(4)

Market value adjustments

(11)

(3)

(17)

Income before unrealized market value adjustments

(3)

Dividends

Cash provided by operating activities

112

Capital expenditures

119

102

Total assets

2,706

2,531

Total net debt

1,311

1,238

Debt ratio

57.1%

59.2%

OPERATING HIGHLIGHTS

Distribution Volumes distributed (petajoules) Residential/Farm

3 3

2 3

8 8

6 7

Commercial

Industrial

38 44

32 37

76 92

61 74

Total

Weather (compared to last 30 years)

50% colder

22% warmer

15% colder

8% warmer

Transmission Volumes transported (petajoules) Domestic

64 12 76

141

125

Export

Total

156

144

2018-19 FIRST 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, 2018. 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 19, 2018 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 2017-18 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 2017-18 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 2018-19 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, take-away capacity 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 during the summer months, weather typically has the greatest impact on natural gas prices in the near term. Due to the high degree of uncertainty associated with weather and recent Alberta pipeline maintenance issues, natural gas prices in western Canada have been very volatile. Natural gas market fundamentals remain in a strong supply position relative to demand over the last number of years due to the advancements in shale gas production. The AECO 5A Spot price for natural gas in Western Canada, had a weighted average price of $1.10 CAD per GJ for the quarter ending September 30th 2018, with a settlement price on September 30th of $2.25 CAD per GJ. Daily and weekly changes in pipeline maintenance in Alberta caused volatility that facilitated the continued lower level pricing in the AECO natural gas market for the majority of the quarter. The end of September saw small amounts of increased pricing because of low storage levels in Alberta and cooler than normal temperatures. One year AECO pricing also continued encroaching extremely low levels at below $1.60 CAD per GJ. A transformational change occurred regarding natural gas transportation in the fall of 2017, when the National Energy Board approved a long-term fixed price contract from Empress (Alberta/Saskatchewan border) to Dawn (Ontario) on TransCanada's mainline. This event resulted in transportation capacity from Alberta to the Saskatchewan border becoming fully contracted. TransCanada Pipelines’ NGTL system in Alberta appears to need expansion of its export capacity in order to meet customer/industry requirements. Until more NGTL capacity is made available, some natural gas is effectively trapped in Alberta resulting in low AECO prices relative to the rest of the continent. Natural gas in Saskatchewan is priced at a differential to the AECO price and has historically traded between $0.05 per GJ and $0.20 per GJ higher than AECO. However, with the NGTL system constrained, the Saskatchewan price differential to AECO has been higher and more volatile, resulting in natural gas prices in Saskatchewan trading between $0.09 per GJ and $2.00 per GJ higher than the AECO price.

2018-19 SECOND QUARTER REPORT

AECO Monthly Index Historical Prices

SaskEnergy Incorporated First Quarter Report $14.00

March 31, 2011

Conventional Natural Gas

$12.00

$10.00

$8.00

Shale Gas Revolution

$6.00

$4.00

Forward Price at September 30, 2018

$2.00

$0.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

CONSOLIDATED FINANCIAL RESULTS

Consolidated Net Income

Three months ended September 30

Six months ended September 30

(millions)

2018

2017 Change

2018

2017 Change

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

1 7 4

(4)

7 1

(3)

7 7

(5)

(3)

(7)

Consolidated net income (loss)

(4)

Net income before unrealized market value adjustments was $7 million for the six months ended September 30, 2018, $10 million favourable compared to the $3 million net loss in 2017, primarily due to a $13 million impairment recovery relating to two natural gas liquid extraction plants that have been reclassified as assets held for sale. The sale of the two plants is effective October 1, 2018. Higher commodity, delivery and transportation and storage revenue also contributed to the favourable variance over 2017. With respect to core operations, the delivery rate increase effective November 1, 2017 combined with increased transportation loads and a transportation rate increase effective May 1, 2018 will continue to contribute to higher revenues compared to 2017. A large portion of SaskEnergy’s revenue is dependent on customers’ use of natural gas to heat their premises. Weather was 15 per cent colder than normal through the six months ending September 30, 2018 compared to 8 per cent warmer than normal for the same period in 2017, which also contributed to higher delivery revenue. Employee benefits and operating and maintenance costs remain relatively comparable to 2017 as cost management efforts have continued to be a focus while continuing to provide safe and reliable service.

2018-19 SECOND QUARTER REPORT

SaskEnergy Incorporated First Quarter Report In general, the long term market price of natural gas is trending relatively flat, which means that there are constrained price differentials between current and forward market prices, limiting opportunities to use storage to generate gas marketing margins. The Corporation may be able to take advantage of the TCPL mainline, through diversions to other locations when capacity is underutilized, which may improve the unfavourable gas marketing results through the remainder of 2018-19. March 31, 2011 During April through September 2018, lower priced natural gas purchase contracts related to the Corporation’s commodity business were settled, which had an unfavourable impact on unrealized fair value adjustments. Also, during the same period, the AECO near-month natural gas spot price increased from $1.07 per GJ at the end of March 2018 to $1.63 per GJ. The impact of higher market prices on outstanding purchase contracts, partially offset by the net effect of expiring purchase contracts, generated a $4.0 million favourable unrealized fair value adjustment. When natural gas market prices increased through the six months ended September 30, 2018, the unfavourable net realizable value adjustment to gas in storage at the end of March 2018 improved by $17 million, resulting in a favourable 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. The Corporation identifies 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 profi t or realize losses on the sale of natural gas to customers over the long term. 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, higher commodity margins in one year are often followed by lower 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)

2018

2017 Change

2018

2017 Change

Commodity sales

Commodity purchases 1

(21)

(15)

(6)

(47)

(36)

(11)

Realized margin on commodity sales Impact of fair value adjustments

(1)

6 9

12 25

2 2

10 23

Margin on commodity sales

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 naturally oppose each other. Reducing the impact of price volatility requires establishing certainty in the cost of gas, while 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.

2018-19 SECOND QUARTER REPORT

SaskEnergy Incorporated First Quarter Report 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. March 31, 2011 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 $12 million and $5 million margin on commodity sales for the six months and three months ending September 30, 2018, $10 million and $6 million above the same periods in 2017. Average revenue was $2.60 per GJ and average cost of gas sold was $2.10 per GJ during April through September 30, 2018, resulting in a margin of $0.50 per GJ. This compared to an average commodity margin of $0.17 per GJ through the same period in 2017. Margins were higher in 2018 primarily due to a lower average cost of gas sold, as natural gas market prices reached significant lows during the six month period. Higher volumes sold in 2018 (22 PJs) compared to 9 PJs sold in the same period of 2017 also contributed to higher margins in 2018.

Commodity Fair Value Adjustments

The fair value adjustments at the end of September 30, 2018 improved the margin on commodity sales by $25 million as the $37 million unfavourable fair value position at March 31, 2018 improved to $12 million unfavourable. This was a result of increasing natural gas market prices, particularly on purchase contracts. A higher volume of natural gas contracts outstanding at September 30, 2018 was also a contributing driver to the favourable effect.

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 into storage 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)

2018

2017 Change

2018

2017 Change

Gas marketing sales

116

103

Gas marketing purchases 1

(59)

(44)

(15)

(115)

(90)

(25) (12) (28)

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

(6) (2)

(3)

(1) (3)

(24)

(7)

Margin on gas marketing sales

(1)

(7)

(17)

1 Net of change in inventory

The realized margin on gas marketing sales at September 30, 2018, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was a gain of $1 million for the six month period. This was $12 million lower than the same period in 2017. The Corporation increased its gas marketing activity in response to natural gas price volatility resulting in the Corporation selling higher volumes of natural gas at lower margins compared to the same period in 2017. The Corporation sold 77 PJs in 2018 compared to 42 PJs in the same period of 2017.

Gas Marketing Fair Value Adjustments

The Corporation enters into various natural gas contracts (swaps and forwards) in its gas marketing strategies, which are subject to volatility of natural gas market prices. The fair value adjustment at September 30, 2018 on gas marketing derivative instruments decreased the gas marketing margin by $24 million for the six month period. The September 30, 2018, AECO near month price increased $0.56 per GJ to $1.63 per GJ compared to March 31, 2018, resulting in an unfavourable impact on gas marketing natural gas sales contracts. At the end of September 30, 2018, the volume of outstanding purchase and sale contracts was 103 PJs lower than at March 31, 2018.

2018-19 SECOND QUARTER REPORT

Revaluation of Natural Gas in Storage

SaskEnergy Incorporated First Quarter Report 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 continued out 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 increasing market price environment in the six months ending September 30, 2018 had a favourable impact on financial results. Through much of 2017-18, the Corporation was able to purchase lower priced natural gas and inject it into storage, reducing the average cost of gas in storage. The increase in natural gas market prices at September 30, 2018 improved the net realizable value by $16 million compared to the end of March 2018. March 31, 2011

Revenue

Three months ended September 30

Six months ended September 30

(millions)

2018

2017 Change

2018

2017 Change

Delivery revenue

43 36

39 34

4 2

95 73

85 68

Transportation and storage revenue Customer capital contributions

4 2

6 1

(2)

7 4

8 3

(1)

Other revenue

1 5

179

164

Delivery Revenue

Weather

1,200

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 $95 million and $43 million for the six months and three months ending September 30, 2018 respectively, $10 million and $4 million higher than the same periods in 2017. Weather was 15 per cent colder than normal through the six months ending September 30, 2018, compared to 8 per cent warmer than normal weather in 2017, contributing to higher revenues in the current period. Rate increases effective November 1, 2017 also contributed to the year over year growth. The rate adjustment was a response to rising operating costs related to expanding natural gas infrastructure and continued focus on safety and integrity programs to maintain infrastructure and manage increasing regulatory requirements.

1,000

YTD 2018-19 - 15% colder than normal

YTD 2017-18 - 8% warmer than normal

800

600

400

200

Apr May Jun Jul

Aug Sep Oct Nov Dec Jan Fe b Mar

2018-19 Actual

2017-18 Actual

2018-19 Budget

Transportation and Storage Revenue

The Corporation generates transportation revenue by taking delivery of gas from customers at various receipt points in Saskatchewan and Alberta, and delivering natural gas to customers at various delivery points in the province. The transportation toll structure consists of a receipt service charge 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 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. Transportation and storage revenue was $73 million and $36 million for the six months and three months ending September 30, 2018, $5 million and $2 million higher than the same periods in 2017. Industrial customer and power generation related load growth continues to increase demand for natural gas within the province and is driving higher transportation revenue. A rate increase effective May 1, 2018 also contributed to higher revenue and helped address increasing costs to continue providing high quality, safe and reliable service to customers.

2018-19 SECOND QUARTER REPORT

Customer Capital Contributions

SaskEnergy Incorporated First Quarter Report 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 six months and three months ending September 30, 2018 are $1 million and $2 million below the same periods in 2017 as there are fewer distribution customer contributions. March 31, 2011

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 comprise the remaining balance of other revenue. Other revenue of $4 million and $2 million for the six and three month periods ending September 30, 2018 approximated revenues for the same periods in 2017. The Corporation has entered into an agreement for the sale of the two natural gas liquid extraction plants effective October 1, 2018. The sale closed on October 1, 2018 as intended.

Other Expenses and Net Finance Expense

Three months ended

Six months ended September 30

September 30

(millions)

2018

2017 Change

2018

2017 Change

Employee benefits

20 38 28

20 33 25

42 70 53

41 68 49

1 2 4

Operating and maintenance Depreciation and amortization

5 3

Saskatchewan taxes

(1)

Other Expenses

173

166

Net finance expense

Other gains (losses)

(1)

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 rising cost pressures. Employee benefits expense of $42 million for the six months ending September 30, 2018 were $1 million higher than the same period in 2017, a result of lower allocations to capital in 2018. The Corporation continues to manage vacant positions and overtime costs through productivity and efficiency initiatives. Operating and maintenance expense of $70 million and $38 million are $2 million and $5 million higher than the same six month and three month periods in 2017, due to small increases across several expense categories as the Corporation continues to focus on cost management initiatives in a period of rising costs. Depreciation and amortization of $53 million and $28 million for the six and three month periods ending September 30, 2018 are $4 million and $3 million higher than the same periods in 2017 as capital additions increase the asset base. Net finance expenses approximated the same six month and three month periods in 2017. During the first quarter ending June 30, 2018, SaskEnergy issued $101 million of long term debt while in the second quarter, the Corporation issued another $50 million of long-term debt with both issues receiving extended terms of 30 and 40 years respectively. Both issuances were used to fund capital asset requirements and reduce short term debt balances. Other gains (losses) through the six months ending September 30, 2018 were $13 million, compared to an $8 million gain the same period in 2017. The current period gain relates to the impairment recovery on two natural gas liquid extraction plants that were classified as assets held for sale. The prior year gain relates to insurance proceeds received relating to a wellhead fire in 2014 and an impairment recovery relating to a natural gas storage facility. The current period recoveries were partially offset by impairment on other storage assets.

2018-19 SECOND QUARTER REPORT

LIQUIDITY AND CAPITAL RESOURCES

SaskEnergy Incorporated First Quarter Report

Three months ended

Six months ended September 30

March 31, 2011

September 30

(millions)

2018

2017 Change

2018

2017 Change

Cash provided by operating activities Cash used in investing activities

(7)

112

(21) (15)

(81)

(67)

(14)

(119)

(104)

Cash provided by (used in) financing activities

(11)

Increase (decrease) in cash and cash equivalents

(4)

(3)

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. In September 2018 an Order-in-Council authorized changes to The SaskEnergy Act that increased the borrowing limit from $1,700 to $2,500 million.

Operating Activities

Cash from operating activities of $91 million for the six months ended September 30, 2018 was $21 million lower than the same period in 2017. Higher commodity sales, delivery revenue and transportation revenue contributed to higher operating cash flows compared to 2017. However, this was offset by the Corporation taking advantage of low natural gas market prices by purchasing and injecting lower priced natural gas into storage while managing employee benefit and operating and maintenance costs.

Investing Activities

Cash used in investing activities totaled $119 million for the six months ended September 30, 2018; $15 million higher than 2017. Capital investment levels are increasing in 2018 compared to 2017, primarily due to higher investment in customer growth and system expansion projects, as increasing growth in the transmission and distribution systems continues to drive higher customer requirements for natural gas.

Financing Activities

Cash provided by financing activities was $32 million during the six months of 2018 compared to $11 million used in 2017. 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 $101 million of long-term debt including a premium of $1 million during the first quarter which was used to repay $72 million of short term debt and $29 million to invest in capital expenditures. SaskEnergy issued $50 million of long-term debt during the second quarter with the objectives of funding capital expenditures and taking advantage of low long term interest rates. SaskEnergy’s debt ratio at September 30, 2018 of 57 per cent is slightly higher than the 56 per cent at March 31, 2018.

CAPITAL EXPENDITURES

Three months ended

Six months ended September 30

September 30

(millions)

2018

2017 Change

2018

2017 Change

Customer growth and system expansion

43 31

35 25

8 6 1 1

65 44

49 44

Safety and system integrity

Information systems

4 3

3 2

6 4

5 4

Vehicles & equipment, buildings, furniture

119

102

2018-19 SECOND QUARTER REPORT

SaskEnergy Incorporated First Quarter Report SaskEnergy continues to invest in its pipeline system to accommodate increasing demand from new and existing customers and its increasing reliance on Alberta gas to meet load requirements. Capital expenditures of $119 million for the six months ended September 30, 2018 are $17 million higher than the same period in 2017. Customer growth and system expansion is $16 million above the same period in 2017, a result of higher spending on distribution system growth relating to industrial customers and transmissi n system growth relating to increasing compression requirements to meet natural gas demand in the Province resulting in bringing additional Alberta supply onto the transmission system. March 31, 2011

OUTLOOK

With the Corporation’s fiscal period beginning April 1, peak winter heating loads only begin to have a positive impact on the financial results in the third and fourth quarters. 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 weather conditions through the winter months. Assuming normal weather conditions for 2018-19, net income before market value adjustments is expected to be approximately $87 million, a decrease of $35 million over the 2017-18 actual result. This decrease is primarily due to lower commodity margins as the commodity rate is expected to decrease effective November 1, 2018. While SaskEnergy continues to effectively manage expenses, increased transportation costs to move natural gas into and throughout the province will create cost pressure. 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 maintaining a safe and reliable pipeline system and increasing regulatory requirements, will require incremental investments in pipeline facilities. SaskEnergy is projecting to invest nearly $268 million in capital investment, net of customer contributions, during 2018-19. This additional investment will be funded primarily through cash from operations with the remaining from 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. The Corporation continues to work with other Crown corporations, and other business enterprises, to investigate solutions to more efficiently serve customers and maintain facilities. Since 2009, SaskEnergy has achieved $48 million of operating efficiency savings and another $4 million has been targeted for 2018-19.

Operating Expenses

In order to maintain the integrity of the transmission and distribution systems, address growing regulatory requirements and manage the shift 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 $4 million as a direct result of capital expenditures, while operating expenses (employee obligation costs and operating and maintenance) are expected to rise by $33 million even with projected efficiency savings of $4 million in 2018-19 and continued focus on cost management efforts. The cost increases are due to rising third-party transportation costs related to importing more natural gas over longer distances to meet growing load requirements.

Revenue

Regular and moderate delivery rate increases provide additional delivery revenue to help offset increasing cost pressures resulting from customer growth, integrity investments and the growing regulatory compliance efforts. Customer connections, which are closely related to the strength of the provincial economy, are expected to increase modestly to 3,600 new customers through 2018-19. Industrial and commercial demand for service is expected to continue to grow. SaskEnergy currently expects delivery and transportation and storage revenue to increase by $26 million in 2018-19, driven by colder than normal weather to date, increased revenue for gas transported from Alberta, and a transportation and storage rate increase effective May 1, 2018.

Gas Marketing and Commodity Margins

While long term natural gas prices have slightly decreased from the end of March 2018, near term natural gas prices have increased. Over a longer period, forward gas prices have displayed a flat to slightly increasing trend suggesting that the likelihood of significantly higher prices in the future is low. 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 high margins required to support SaskEnergy’s non-core storage business. The Corporation may be able to take advantage of TCPL mainline through diversions to other locations when capacity is underutilized which would result in favourable gas marketing results.

2018-19 SECOND QUARTER REPORT

SaskEnergy Incorporated First Quarter Report Lower natural gas market prices are expected to reduce the average cost of gas, which is expected to result in a lower commodity rate for customers in 2018-19. As part of the normal course of business, commodity rates are reviewed regularly and adjusted as required. In September, the Corporation applied to the Saskatchewan Rate Review Panel for a 26.5 per cent decrease to its Commodity Rate from $3.65 per GJ to $2.65 per GJ, as well as a 3.7% increase to its Delivery Service Rate, both effective April 1, 2019. In addition, SaskEnergy has also asked the Panel to support an interim rate of $2.65 per GJ effective November 1, 2018. This partial decrease will allow customers to take advantage of lower rates during the winter heating season while allowing the Panel necessary time to properly analyze SaskEnergy’s application. March 31, 2011

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, shifting natural gas supply dynamics and regulatory compliance. Delivery and transportation revenue will continue to grow, partially offset by increased 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, process changes and technology initiatives. Weather will be a key factor affecting 2018-19 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.

2018-19 SECOND QUARTER REPORT

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SaskEnergy Incorporated First Quarter Report

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

March 31, 2011

As at September 30, 2018 (unaudited)

As at March 31, 2018 (audited)

(millions)

Notes

Assets Current assets Cash

Trade and other receivables

72 62 13 31 38

141

Natural gas in storage held for resale

37 11

Inventory of supplies Assets held for sale

6 5

Fair value of derivative instruments

217

258

Intangible assets

Property, plant and equipment

2,312

2,260

Debt retirement funds

112

106

2,706

2,688

Liabilities and Province's equity Current liabilities Bank indebtedness

Short-term debt

194

254 127

Trade and other payables

Dividends payable

23 50 35 50

Current portion of long-term debt

50 44 28

Deferred revenue

Fair value of derivative instruments Current portion of finance lease obligation

405

544

Finance lease obligation Employee future benefits

3 6

9 6

Provisions

120

128

Deferred revenue Long-term debt

1,180 1,719

1,031 1,723

Province's equity Equity advances

Other components of equity

(3)

(1)

Retained earnings

918 987

894 965

2,706

2,688

2018-19 SECOND QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Three Months Ended September 30, 2018

For the Three Months Ended September 30, 2017

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

10 11 12

87 43 36

(3)

84 43 36

66 39 34

(1)

65 39 34

Delivery

- - - -

Transportation and storage Customer capital contributions

4 2

6 1

Other

172

(3)

169

146

(1)

145

Expenses Natural gas purchases (net of change in inventory)

80 20 38 28

(14)

66 20 38 28

59 20 33 25

61 20 33 25

Employee benefits

- - - -

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

171

(14)

157

143

145

Income before the following

(3)

Finance income Finance expenses

- - -

(13) (13)

(12) (12)

Net finance expenses

Other gains

Total net income

(3)

Items that cannot be reclassified back to profit or loss

Change in fair value of debt retirement funds designated as FVOCI

(2)

(1)

Comprehensive income

(4)

2018-19 SECOND QUARTER REPORT

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Six Months Ended September 30, 2018

For the Six Months Ended September 30, 2017

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

10 11 12

175

(6)

169

141

147

Delivery

95 73

- - - -

95 73

85 68

- - - -

85 68

Transportation and storage Customer capital contributions

7 4

8 3

Other

354

(6)

348

305

311

Expenses Natural gas purchases (net of change in inventory)

162

(23)

139

126

133

Employee benefits

42 70 53

- - - -

42 70 53

41 68 49

- - - -

41 68 49

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

335

(23)

312

292

299

Income before the following

(1)

Finance income Finance expenses

- - -

(26) (25)

(25) (24)

Net finance expenses

Other gains

Total net income (loss)

(3)

(1)

(4)

Items that cannot be reclassified back to profit or loss

Change in fair value of debt retirement funds designated as FVOCI

(2)

(1)

Comprehensive income (loss)

(3)

(2)

(5)

2018-19 SECOND QUARTER REPORT

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