SaskEnergy Second Quarter Report - September 30, 2021

Second 4XDUWHU5HSRUW

September 

Responsible energy for a sustainable Saskatchewan

VISION

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Environmental sustainabiltty and economic prosperity for future = _.. generations. -,,.�...__-,

CORPORATE VISION Providlng critical energy for a greener Saskatchewan and reducing our en1issions from operations by 35 per cent by 2030.

MISSION SaskEner-gy delivers natural gas and ener-gy solutions responsibly to the residents, businesses and industries of Saskatd1evvan.

VALUES

• ;,.'! f �

�� SPIRIT

We support a respectful dynamic and a diverse wo · rk environment that encou. rage.s achievement. RELATIONSHIPS We succeed through strong internal and external co.llaboration. trust and open .communicatio· n.

alw;ays c·ommitted ta our personal safety, the safety of our team , ond thepub · lic.

A'1l. INTEGRITY "iiiflWe are accountablefor our decisions.. our actions. and the resuln. 0 STEWARDSHIP' · We are responsible in our use of all resources.

TABLE OF CONTENTS

Financial and Operating Highlights

1 2 3 4 9

1\/lanagement's Discussion and .A.nalysis Introduction Operating Envirnnment

Consolidated Financial Results Liquidity and Capital Resour-ces Capital Additions Outlook Consolidat , ed Financial Stat , ements

1 0 11 1 3

Financial and Operating Highlights

CONSOLIDATED FINANCIAL INFORMATION ($ millions)

Three months ended September 30

Six months ended September 30

2021

2021

2020

2020

40 51

94

Delivery

41 46

99 93

100

Transportation and storage

1 4 3

2 5 7

Commodity margin

- -

1

Asset optimization margin Customer capital contributions Total revenue and margins

(4)

8

10

99 24 44 31

208

95 22 39 28

199

51 83 61 10 29

Employee benefits

47 79 57

Operating and maintenance Depreciation and amortization

7

Saskatchewan taxes Net finance expense

6

9

14

14

27

(1)

(1)

Other (gains)

-

(2)

Total expenses

119

233

109

217

(20)

(25)

Loss before unrealized market value adjustments

(14)

(18)

37 17 38

52 27

Market value adjustments CONSOLIDATED NET INCOME Cash provided by operating activities Cash used in investing activities Cash used in financing activities

18

30 12 81

4

102

25

(89)

(122)

(61)

(103)

49

19

39

26

2

6

Dividends declared

2

5

3,385 1,683 58.8%

Total assets Total net debt

3,217 1,564 58.7%

Debt ratio

OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm

2 2

6 8

3 2

9 8

Commercial

41 45

82 96

Industrial

39 44

73 90

Total

25% warmer 12% warmer

7% warmer

Weather (compared to last 30 years) Transmission energy (petajoules) Domestic

10% colder

72

151

71

143

8

10

Export

3

4

Total

80

161

74

147

Cash from Operations $ Millions

Cash used in investing activities $ Millions

(Loss) income before MVA $ Millions

120

20

175

10

161

109

102

122

125

(10)

90

81

103

(18)

(25)

75

(40)

60

2021 2020 2019

2021 2020 2019

2021 2020 2019

Management Discussion and 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, 2021. Using financial and operating results as its basis, the MD&A describes the Corporation’s past performance and future prospects, enabling readers to view SaskEnergy from the perspective of management. The MD&A is presented as at November 17, 2021, and should be read in conjunction with the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with International Financial Reporting 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 2020-21 Annual Report. The MD&A contains certain forward-looking statements that are subject to inherent uncertainties and risks. Many of these risks are described in the Risk Management and Disclosure section of SaskEnergy’s 2020-21 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 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 2021-22 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 asset optimization 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. Unrealized market value adjustments vary considerably with 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. The discussion of the Corporations results that follow in the MD&A set out on the following pages is a comparison of the results for the six months ended September 30, 2021 to the results for the six months ended September 30, 2020, unless otherwise noted.

p.2

Management Discussion and Analysis

OPERATING ENVIRONMENT SaskEnergy monitors a number of important factors that could influence financial performance. Global Energy Uncertainty

Another quarter into the global pandemic and the energy complex continued to look towards higher energy demand post-pandemic. While most commodities saw some level of price stabilization this quarter, oil prices remained above their pre-pandemic highs and moved up again to levels not seen since the price crash of 2014. Within the energy complex, no commodity saw price volatility like that in the global natural gas market. European and Asian benchmark prices (TTF and JKM respectively) quadrupled since the beginning of the summer storage-injection season. Global supply was impacted by lower receipts out of Norway, Russia, and the Gulf Coast. Global demand was driven by a push to recover below average storage levels and the need for electrical generation in the face of low hydro (North America) and low wind generation (North Sea). Underdeveloped base-load electric generation in Europe even resulted in a surge in coal prices as generation facilities switched back to coal. The North American gas market has become more connected to the global market due to growth to-date (and underway) in export capacity for liquefied natural gas (LNG). U.S. LNG export capacity is near 10 per cent of local production and Canadian LNG capacity should near that same ratio when BC’s LNG Canada facility comes on-line later this decade. In the meantime, facility expansions in Louisiana will help more Canadian gas reach the Gulf Coast for export by the end of 2022. The current limit to LNG liquefaction and transport capacity does isolate North American gas prices from the global extremes, but the primary hub for natural gas price in North America (Henry Hub) is still seeing prices up 100 per cent since April and daily price swings of over 10 per cent occurred over the last few days of the quarter – prices end the quarter at high levels rarely seen since the start of the shale gas revolution ten years ago. Prices in Western Canada were further isolated from high levels (though not volatility) due to an active maintenance season on TC Energy’s NGTL system. This maintenance activity resulted in limitations to export capacity out of Alberta – resulting in (relatively) low prices at AECO upstream of the maintenance bottlenecks. Besides a one week period in August where firm transportation was partially curtailed, SaskEnergy and its customers were still able to source gas upstream of the bottleneck due to a portfolio of firm transportation contracts. Saskatchewan Natural Gas The prior fiscal year ended with lower expectations for gas demand driven by customer de-contracting and lower utilization of remaining contracts. With the economy continuing to recover and an improved outlook for agri-business development, forecasted demand has now stabilized for the next few years. Rising energy prices do present a risk for energy-intensive industries. Local supply continues to trend toward increased dependence on associated gas, leaving local supply highly dependent on the volatile global oil market. With higher prices, rig activity in the province has improved, but not enough to expect meaningful gas supply increases. Natural Gas Prices The AECO daily index averaged $3.41 per GJ throughout the quarter compared to $2.12 per GJ the year prior — the downward pressure of maintenance being overpowered by high prices downstream. The end of the quarter again saw extreme volatility with a range of $0.75 to $4.95 in the span of only four days. Traditionally, most natural gas in Saskatchewan (TEP) is priced at a differential to the AECO price. This AECO to TEP differential for the quarter averaged $0.27 per GJ premium compared to flat the year prior. The differential had found relative stability until pipeline maintenance dislocated prices through the latter part of the quarter. Looking forward, winter prices remain elevated as concerns for global storage supplies (particularly in the event of a cold winter) outweigh the relatively high local storage levels.

p.3

Management Discussion and Analysis

The following chart shows AECO natural gas prices:

AECO Monthly Index Historical Prices

$6.00

Forward Price at Sept 30, 2021

Limited Export Capacity from Alberta 2015-Present Average Price $2.16/GJ

$5.00

$4.00

$3.00

$2.00

$1.00

$0.00

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

CONSOLIDATED FINANCIAL RESULTS Consolidated Net Income

Three months ended September 30,

Six months ended

September 30,

(millions)

2021

2020 Change 2021

2020 Change

$

(20)

$

(25)

Loss before unrealized market value adjustments

$

(14)

$

(6)

$

(18)

$

(7)

37

52

Impact of fair value adjustments Revaluation of natural gas in storage

16

21

24

28

-

-

2 4

(2)

6

(6)

$

17

$

27

Consolidated net income

$

$

13

$

12

$

15

The loss before unrealized market value adjustments of $25 million in 2021 was $7 million unfavourable compared to the loss of $18 million in 2020. This was a result of delivery revenue decreasing, employee benefit costs increasing, operating and maintenance expenses increasing and additional net finance expenses in 2021. This was partially offset by realized asset optimization margins improving in 2021 and increasing transportation and storage revenue. Decreasing delivery revenues are a result of declining residential customer volumes, as weather was 17 per cent warmer than prior year. Employee benefit costs increased compared to the prior year as certain vacant positions were filled in key areas of the Corporation. Higher operating and maintenance expenses are primarily due to higher transportation expenses as the Corporation increased transportation contracting on TC Energy’s transportation system to meet customer’s increased transportation service requirements. Net finance expenses increased in 2021 as debt retirement fund earnings decreased. Realized asset optimization margins improved in 2021 as a component of the Corporation’s transport capacity, which was secured through asset optimization contracts, declined in 2020 and wound down through 2021, providing a positive variance year over year. Transportation and Storage revenue increased in 2021, a result of rate increases effective April 1, 2021, combined with domestic customers increasing firm transportation contracting on receipt and delivery services. Stronger natural gas market prices at September 30, 2021, lead to the favourable price differential increasing between average contract prices and average market prices on the Corporation’s forward purchase contracts, resulting in a favourable fair value adjustment. In addition, natural gas in storage was recorded at weighted average cost, which was lower than net realizable value at September 30, 2021 and March 31, 2021. There was no impact on net income resulting from revaluation of natural gas in storage.

p.4

Management Discussion and Analysis

Natural Gas Sales and Purchases Included within natural gas sales and purchases are rate-regulated commodity sales to distribution customers and non- regulated asset optimization 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. With the exception of contracts entered into for an entity’s normal usage, IFRS requires derivative instruments such as natural gas purchase and sales contracts to be 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 Sales 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 (SRRP). 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 the sale of natural gas to distribution customers. Regulatory principles require that utilities do not earn a profit or realize losses on the sale of 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. For financial reporting purposes, SaskEnergy prepares its financial statements on a consolidated basis while applying IFRS. Consequently, amounts determined for rate-setting purposes differ from its consolidated financial statements. A gain or loss reported in the Corporation’s consolidated financial statements may not be reflected in the GCVA. 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. 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 opposing objectives may change depending on current 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 may also use 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. Commodity margin on sales to customers

Three months ended September 30,

Six months ended

September 30,

(millions)

2021

2020 Change 2021

2020 Change

$

9 8 1

$

29 27

Commodity sales

$

9 9

$

-

$

34 33

$

(5) (6)

Commodity cost of sales

(1)

2

Realized margin on commodity sales Unrealized fair value adjustments

-

1

1

1

38 39

54 56

14 14

24 25

19 20

35 36

$

$

Margin on commodity sales

$

$

$

$

p.5

Management Discussion and Analysis

Realized Margin on Commodity Sales The Corporation’s $2 million realized margin on commodity sales for the six months ending September 30, 2021 was $1 million higher than 2020. The realized margin per GJ for commodity sales increased in 2021. This was fully offset by commodity sales revenue from residential customers being lower through 2021, as sales volumes are 2 PJ lower than the same period in 2020, a result of weather being 7 per cent warmer than normal in 2021 compared to 10 percent colder than normal in 2020. The GCVA balance increased to $15 million owing from customers at September 30, 2021 compared to $6 million owing from customers at March 31, 2021, a result of the AECO daily index averaging $3.17 per GJ through the six months ending September 30, 2021 compared to an average of $2.37 per GJ throughout the 12 months ending March 31, 2021. Subsequent to the end of the quarter, SaskEnergy received approval to increase its commodity rate to $3.20 per GJ effective November 1, 2021. The last commodity rate adjustment was implemented April 1, 2019 when the commodity rate was decreased to reflect the lower price of natural gas at that point in time. Natural gas market prices have essentially doubled since SaskEnergy last adjusted its commodity rate, a result of recent extreme weather events across North America, higher liquefied natural gas exports and higher natural gas demand. Commodity Unrealized Fair Value Adjustments As natural gas market prices continue to trend higher, the unrealized fair value adjustment on the Corporations commodity derivative instruments increased the commodity margin by $54 million. The favourable price differential between average contract prices and average market prices on future commodity purchase contracts increased from $0.33 per GJ at March 31, 2021 to $1.08 per GJ at September 30, 2021, resulting in the $12 million favourable fair value position at March 31, 2021 increasing to $66 million favourable at September 30, 2021. SaskEnergy segregates a portion of its natural gas purchase contracts for gas that will ultimately be sold to commodity customers. Under IFRS, such contracts are not required to be reported at market value. Asset Optimization 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 find opportunities in the market to take advantage of pricing differentials between transportation hubs, delivery points and time periods. In most cases, the Corporation executes purchase and sales contracts at the same time, thereby mitigating much of the price risk that would normally be associated with such transactions. SaskEnergy also uses purchases and sales of natural gas to mitigate transportation constraints, which are executed at a cost. Asset Optimization margin

Three months ended September 30,

Six months ended

September 30,

(millions)

2021

2020 Change 2021

2020 Change

$

52 48

$

82 77

Asset optimization sales

$

33 33

$

19 15

$

70 74

$

12

Asset optimization cost of sales

3 9

4

5

Realized margin on asset optimization sales Unrealized fair value adjustments Revaluation of natural gas in storage

-

4

(4)

(1)

(2)

2 2 4

(3) (2) (1)

5 6 7

(7) (6) (4)

-

-

$

3

$

3

Margin on asset optimization sales

$

$

$

$

Realized Margin on Asset Optimization Sales The realized margin on asset optimization sales, which removes fair value adjustments on derivative instruments and the revaluation of natural gas in storage, was $9 million higher than 2020. Transportation capacity within Alberta was secured through asset optimization transportation contracts in 2020 to meet customer obligations while no capacity was contracted through asset optimization opportunities in 2021. The incremental transportation contracts in 2020 had an unfavourable effect on the unrealized margin on asset optimization sales.

p.6

Management Discussion and Analysis

Asset Optimization Unrealized Fair Value Adjustments The Corporation enters into various natural gas contracts in its asset optimization strategies, which are subject to volatility of natural gas market prices until the natural gas contracts are realized. Unrealized fair value adjustments on the Corporation’s asset optimization derivative instruments decreased the margin on asset optimization sales by $2 million. Stronger natural gas market prices at September 30, 2021 increased the favourable price differential between average contract prices and average market prices on future asset optimization purchase contracts by $0.98 per GJ, resulting in a $14 million favourable fair value adjustment. This was fully offset by the $16 million unfavourable fair value adjustment resulting from the unfavourable price differential on outstanding asset optimization sale contracts increasing from $0.18 per GJ to $1.27 per GJ. Revaluation of Natural Gas in Storage The carrying amount of natural gas in storage is adjusted to reflect the lower of weighted average cost and net realizable value. At each reporting period, the Corporation measures net realizable value of natural gas in storage held for asset optimization transactions based on forward market prices and anticipated delivery dates. Asset optimization natural gas in storage was recorded at weighted average cost at September 30, 2021 and March 31, 2021, as forward natural gas market prices continue to increase and exceed weighted average cost. There was no impact on net income resulting from revaluation of natural gas in storage. Revenue

Three months ended September 30,

Six months ended

September 30,

(millions)

2021

2020 Change 2021

2020 Change

$

40 51

$

94

Delivery revenue

$

41 46

$

(1)

$

99 93 10

$

(5)

100

Transportation and storage revenue Customer capital contributions

5

7

3

7

8

(5) (1)

(3) (1)

$

94

$

201

Revenue

$

95

$

$

202

$

Delivery Revenue Natural gas delivery rates are designed to recoup all distribution facility and operating costs necessary for delivery of natural gas to customers throughout the year. Natural gas storage and transportation costs as well as ongoing investments related to safety, system integrity and growing infrastructure are also factored into delivery rates. Other considerations impacting natural gas delivery services include regulatory code compliance and industry best practices regarding safety. To minimize these impacts on delivery service ratepayers, the Corporation strives to make the most effective use of materials, technology, resources and collaborate with other Crown corporations. Delivery revenue is primarily driven by the number of customers and the amount of natural gas they consume. Weather is the most significant external factor affecting delivery revenue, as residential and commercial customers consume natural gas primarily as heating fuel. Delivery revenue decreased $5 million in 2021 due to residential customer volumes decreasing 3 PJ as weather was 7 per cent warmer than normal in 2021 compared to 10 per cent colder than normal in 2020. In alignment with Saskatchewan Crown Sector Strategic Priorities, the Corporation continues its customer focus through continuous improvements in service delivery and identifying ways to advance quality of service to the province’s The Corporation generates transportation revenue by receiving natural 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 receipt service charges, which customers pay when they contract to deposit gas on the natural gas transportation system, and delivery service charges that customers pay when they contract to take delivery off the natural gas transportation system. For receipt and delivery services, the Corporation offers both firm and interruptible transportation contracts. Under a firm service contract, the customer has a right to deliver or receive a population while keeping rates competitive. Transportation and Storage Revenue

p.7

Management Discussion and Analysis

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 only pay receipt and delivery tolls when they deliver or receive gas. Integral to the Corporation’s transmission system are several strategically located natural gas storage sites, which have the capacity to provide operational flexibility along with a reliable and competitive natural gas storage service. Receipt and delivery service revenues combined for a $7 million increase in 2021 compared to 2020, due to rate increases effective April 1, 2021 on receipt and delivery services as the Corporation addresses increasing third party transportation expenses. Domestic customers also increased firm transportation contracting in 2021 compared to 2020, which contributed to increasing transportation revenue in 2021. Storage revenue in 2021 of $5 million equaled 2020 as the abundant supply of natural gas, coupled with small or even negative differentials between current and forward natural gas market prices, limits the demand for natural gas storage to customers with relatively low load factors who use the service to mitigate receipt transportation charges. 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 the distribution system. The volume and magnitude of customer capital contributions can vary significantly across reporting periods as various factors influence their receipt and recognition as revenue. Customer capital contributions in 2021 were $3 million lower than 2020. Transmission system customer capital contributions recognized in 2021 are $nil while contributions of $4 million recognized in 2020 relate to a third party customer growth capital project that was finalized in 2020. This decline was partially offset by distribution system customer capital contributions increasing $1 million in 2021 compared to 2020, due to increased customer activity. Expenses SaskEnergy’s expenses are driven to a large degree by its investment in the Corporation’s transmission, distribution and storage systems. Depreciation and amortization, net finance expenses and Saskatchewan taxes are directly tied to the investment in facilities. As the level of investment in facilities increases, these expenses also increase. Employee benefits and operating and maintenance expenses are also driven by the Corporation’s investment in facilities, although less directly. Work to service and maintain the natural gas system grows as infrastructure, specifically the kilometres of gas lines, number of service connections, and amount of compression equipment, to serve an increasing number of customers grows. Additional regulatory requirements and changing public perceptions are accelerating prevention, detection and mitigation initiatives, adding pressure to transmission, distribution and storage rates.

Three months ended September 30,

Six months ended

September 30,

(millions)

2021

2020 Change 2021

2020 Change

$

24 44 31

$

51 85 61 10

Employee benefits

$

22 39 28

$

(2) (5) (3) (1)

$

47 77 57

$

(4) (8) (4) (1)

Operating and maintenance Depreciation and amortization

7

Saskatchewan taxes

6

9 2

-

(2)

Impairment loss on trade and other receivables

-

-

4

$

106

$

205

$

95

$

(11)

$

192

$

(13)

$

14

$

29

Net finance expenses

14

-

$

27

$

(2)

$

(1)

$

(1)

Other gains

$

-

$

1

$

(2)

$

(1)

p.8

Management Discussion and Analysis

Employee Benefits Employee benefit costs were $4 million higher in 2021 compared to 2020 due to filling certain vacant positions in strategic areas of the business as the Corporation continues to focus on meeting current and future business needs. Operating and Maintenance Operating and maintenance expenses were $8 million higher than 2020, primarily resulting from higher transportation expenses as the Corporation increased transportation contracting on TC Energy’s transportation system. This is compounded by the Corporation utilized asset optimization transactions in 2020 to meet a portion of customer transportation requirements. The result being higher transportation costs through operating and maintenance expenses in 2021 compared to 2020 as growing demand and increasing natural gas imports from Alberta continue to result in more natural gas being transported, and over greater distances. This was partially offset by reducing the allowance for doubtful accounts estimate in 2021 as the improved provincial economic outlook continued through the quarter. In 2020, the Crown Utility Deferral Payment Program was offered to help alleviate the impacts of COVID-19 on customers. The result being increased trade receivables and the related allowance for doubtful accounts estimate growing through to the end of September 30, 2020. Customers could elect to pay outstanding balances over a 12 month period starting from September 2020, which extended the timeframe trade receivables from customers remained outstanding. Depreciation and Amortization Balancing safety and system integrity with the demand for service continued through 2021. Strategic capital investments required to ensure the necessary infrastructure is in place to meet current customer demand were put into service and is resulting in increased depreciation and amortization. Depreciation and amortization was $4 million higher than the same period in 2020. Net Finance Expenses Net finance expenses for 2021 were $2 million higher than 2020 with lower debt retirement fund earnings contributing to the year over year variance. Debt retirement funds are monies set aside, typically 1per cent of a debt issuance, to retire the long-term debt upon maturity. The Corporation makes regular contributions to the funds, which are held and invested by the Saskatchewan Ministry of Finance, and can be impacted inversely by interest rate movements. LIQUIDITY AND CAPITAL RESOURCES As a Crown corporation, SaskEnergy’s primary sources of capital are cash from operations and debt — which is borrowed through the Province’s General Revenue Fund. Cash from operations is SaskEnergy’s most important source of capital. As a utility, cash from operations is relatively stable and the Corporation relies on it to fund a significant proportion of its investment in its natural gas facilities, and the debt servicing costs on those investments. 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. Under The SaskEnergy Act , the Corporation may borrow up to $2,500 million of debt upon approval of the Lieutenant Governor in Council.

Three months ended September 30,

Six months ended

September 30,

(millions)

2021

2020 Change 2021

2020 Change

$

38

$

102

Cash provided by operating activities Cash used in investing activities Cash provided by financing activities Increase in cash and cash equivalents

$

25

$

13

$

81

$

21

(89)

(122)

(61)

(28)

(103)

(19)

49

19

39

10

26

(7) (5)

$

(2)

$

(1)

$

3

$

(5)

$

4

$

p.9

Management Discussion and Analysis

Operating Activities Cash provided by operating activities increased $21 million in 2021 compared to 2020 as cash flows from operations returned to normal levels, driven by higher asset optimization margins and transportation and storage revenue as the Corporation and province return to a more normal business environment in 2021. Investing Activities Cash used in investing activities increased $19 million compared to 2020, primarily due to capital investment required for system expansion, as the Corporation completes projects to meet natural gas demand. This was partially offset by decreasing investment in customer growth initiatives. Financing Activities Cash provided by financing activities decreased $7 million in 2021 compared to 2020. The Corporation used $29 million for interest payments and $11 million for dividend payments. This was offset by the Corporation increasing short-term debt by $23 million to fund operations through the warmer summer months. In addition, during the first quarter of the fiscal year, the Corporation borrowed an additional $50 million of long-term debt to support its capital investment requirements. The debt has an interest rate of 2.8 per cent and matures in 2052. SaskEnergy’s debt-to-equity ratio at the end of September 30, 2021 of 59 per cent debt and 41 per cent equity is within the Corporation’s long-term target range of 58 to 63 per cent debt. CAPITAL ADDITIONS SaskEnergy ensures that responsive customer service and safe and reliable natural gas delivery are priorities of its capital management governance.

Three months ended September 30,

Six months ended

September 30,

(millions)

2021

2020 Change 2021

2020 Change

Strategic Customer growth System expansion

$

6

$

12 68 80

$

13 18 31

$

(7)

$

21 34 55

$

(9)

59 65

41 34

34 25

Operational Risk management

20

34

17

3

29 11

5

4 1

6 2

Reliability of natural gas service

7 2

(3) (1) (1)

(5) (2) (2)

Business and technology optimization

4

25 90

42

26 57

44 99

$

$

122

Capital additions

$

$

33

$

$

23

Capital additions of $122 million through 2021 were $23 million higher than the Corporation’s 2020 investment. This is due to higher system expansion spending in the current year on the 85-kilometre gas line from Rosetown to Vanscoy. The project was initiated in 2019-20 but was deferred through 2020-21 due to the COVID-19 pandemic changing priorities of the Corporation’s capital investment requirements. The project resumed in 2021 and will increase gas line capacity from Rosetown to the Saskatoon Bypass gas line. Investment in customer growth projects declined in 2021 as transportation service customers continue to defer projects requiring transmission system investment. Risk management spending on the distribution system increased $5 million in 2021 as the Corporations service upgrade program returned to normal levels year over year as the prior year focused on a risk based approach while limiting public interactions with customers. Reliability of natural gas service spending decreased in 2021 by $5 million as the Corporation reduced spending on building and leasehold improvements compared to 2020.

p.10

Management Discussion and Analysis

OUTLOOK SaskEnergy began its return to a “new normal” operating environment in the first half of 2021-22 as the Province continued to monitor and remove COVID-19 pandemic restrictions. The Corporation continues to promote and maintain the health and safety of personnel and the public while maintaining its ability to deliver core services. In addition to the pandemic, the volatility of global oil prices continues to create uncertainty for natural gas production. More than 70 per cent of the production of natural gas in Saskatchewan is associated with oil production; hence, as oil producers face price instability and uncertain capital markets, variable oil production contributes to variable natural gas production. The reduction in Saskatchewan gas supply will need to be met by increased imports from Alberta. As SaskEnergy adapts to flat or declining customer demand, there will be an increased focus on core operations and operational excellence to safeguard its financial strength into the future. In 2021-22, income from operations is forecasted to be $34 million, which is a decrease of $25 million from the 2020-21 result. The decrease is primarily due to large transmission customer connections that were completed in the prior year resulting in higher customer contribution revenue. The number of residential customers connecting to SaskEnergy’s distribution system is expected to remain level compared to 2020-21, with 3,000 new customers forecasted in 2021-22. Energy efficiency programs offered by the Corporation and implemented by SaskEnergy customers continue to influence the amount of natural gas they use. Initiatives targeted to support a greener energy strategy, increasing Government policy and regulations, and increasing needs for business and technology support create cost pressure for SaskEnergy. To offset the decline in revenue and increased costs, SaskEnergy will continue to focus on operational excellence, achieving cost savings through business process improvements, leveraging technology and collaboration with other Crown corporations and Executive government. SaskEnergy is committed to providing solutions and service that benefit customers and Saskatchewan by leveraging the Corporation’s expertise and the province’s private sector. Throughout 2021-22, SaskEnergy will make $251 million in net capital investments in the province, including maintaining the safety and reliability of the natural gas transmission and distribution systems, meeting regulatory compliance, and optimizing the Corporation’s business systems.

p.11

Condensed Consolidated Financial Statements 1 3 CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 1 4 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1 6 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 1 7 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Notes to the Consolidated Financial Statements

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1 8 1 8 20 20 20 2 2 2 4 2 5

GENERAL INFORMATION BASIS OF PREPARATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURAL GAS IN STORAGE HELD FOR RESALE FINANCIAL AND DERIVATIVE INSTRUMENTS FINANCIAL RISK MANAGEMENT ASSETS HELD FOR SALE PROPERTY, PLANT AND EQUIPMENT

2 6 2 6 2 7 2 7 2 8 2 9 2 9 29

LEASE LIABILITY LONG-TERM DEBT COMMITMENTS AND CONTINGENCIES UNREALIZED MARKET VALUE ADJUSTMENTS NATURAL GAS SALES AND PURCHASES DELIVERY REVENUE TRANSPORTATION AND STORAGE REVENUE NET FINANCE EXPENSES

Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

p.43

September 30, 2021

March 31, 2021 (audited)

Notes

(millions)

(unaudited)

ASSETS Current assets Trade and other receivables

$

99 56 15

$

165

Natural gas in storage held for resale

4

15 14

Inventory of supplies Assets held for sale

1

7 5

4

84

Fair value of derivative instruments

17

255

215

12 73

Right-of-use assets Intangible assets

15 77

2,896

Property, plant and equipment

8

2,851

149

Debt retirement funds

136

$

3,385

$

3,294

LIABILITIES AND PROVINCE'S EQUITY Current liabilities Bank indebtedness

$

1

$

-

287 121

Short-term debt

264 116

Trade and other payables

2

Dividends payable Contract liability

7 5 6 5 8

14

6 3

Refund liability

Current portion of lease liability Fair value of derivative instruments

9 5

23

457

411

4 5 6

Employee future benefits

4 5 7

Deferred revenue

Lease liability

9

201

Provisions

227

1,535 2,208

Long-term debt

10

1,485 2,139

Province's equity Equity advances

72

72

-

Other components of equity

(1)

1,105 1,177

Retained earnings

1,084 1,155

$

3,385

$

3,294

The accompanying notes are an integral part of the condensed consolidated financial statements

p.13

Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Three Months Ended September 30, 2021

For the Three Months Ended September 30, 2020

Income before Unrealized Market Value Adjust- ments

Income before Unrealized Market Value Adjust- ments

Unrealized Market Value Adjust- ments (Note 12)

Unrealized Market Value Adjust- ments (Note 12)

Total

Total

(millions)

Notes

REVENUE Natural gas sales

$

61 40 51

$

(7)

$

54 40 51

$

42 41 46

$

(3)

$

39 41 46

13 14 15

- - -

Delivery

- - -

Transportation and storage Customer capital contributions

3

3

8

8

155

(7)

148

(3)

134

137

EXPENSES Natural gas purchases (net of change in inventory)

56 24 44 31

(44)

12 24 44 31

21 22 39 28

13

42 22 39 28

(21)

- - - -

Employee benefits

- - - -

Operating and maintenance Depreciation and amortization

7

7

Saskatchewan taxes

6

6

162

(44)

118

(21)

116

137

NET (LOSS) INCOME BEFORE THE FOLLOWING

(7)

37

30

-

18

18

(14)

- -

(14)

Net finance expenses

16

(14)

- -

(14)

1

1

Other gains

-

-

TOTAL NET (LOSS) INCOME

$

(20)

$

37

$

17

(14)

$

$

18

$

4

ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO NET (LOSS) INCOME Change in fair value of debt retirement funds designated as FVOCI (1)

-

(1)

(1)

(1)

(1)

-

COMPREHENSIVE (LOSS) INCOME

$

(20)

$

36

$

16

$

$

17

$

3

(14)

The accompanying notes are an integral part of the condensed consolidated financial statements (1) Fair value through other comprehensive income (FVOCI)

p.14

Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the Six Months Ended September 30, 2021

For the Six Months Ended September 30, 2020

Income before Unrealized Market Value Adjust- ments

Income before Unrealized Market Value Adjust- ments

Unrealized Market Value Adjust- ments (Note 12)

Unrealized Market Value Adjust- ments (Note 12)

Total

Total

(millions)

Notes

REVENUE Natural gas sales

$

111

$

(16)

$

95 94

$

104

$

(5)

$

99 99 93 10

13 14 15

94

- - -

Delivery

99 93 10

- - -

100

100

Transportation and storage Customer capital contributions

7

7

312

(16)

296

(5)

301

306

EXPENSES Natural gas purchases (net of change in inventory)

104

(68)

36 51 85 61 10

(35)

72 47 77 57

13

107

51 85 61 10

- - - -

Employee benefits

47 77 57

- - - -

Operating and maintenance Depreciation and amortization

Saskatchewan taxes

9

9

Impairment (gain) loss on trade and other receivables

(2)

-

(2)

2

2

-

309

(68)

241

(35)

264

299

NET INCOME BEFORE THE FOLLOWING

3

52

55

7

30

37

(29)

- -

(29)

- -

(27)

Net finance expenses

16

(27)

1

1

2

Other gains

2

TOTAL NET (LOSS) INCOME

$

(25)

$

52

$

27

$

$

30

$

12

(18)

ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO NET (LOSS) INCOME Change in fair value of debt retirement funds designated as FVOCI (1)

-

1

1

-

4

4

COMPREHENSIVE (LOSS) INCOME

$

(25)

$

53

$

28

$

$

34

$

16

(18)

The accompanying notes are an integral part of the condensed consolidated financial statements (1) Fair value through other comprehensive income (FVOCI)

p.15

Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Other Components of Equity

Retained Earnings

Equity Advances

Total

(millions)

BALANCE, AT APRIL 1, 2020 Comprehensive income (loss)

1,100

$

1,024

$

72

$

4

76

81

- -

(5)

(21)

Dividends

(21)

-

BALANCE, AT MARCH 31, 2021 (audited)

1,155

1,084

72

(1)

28

Comprehensive income

27

- -

1

(6)

Dividends

(6)

-

BALANCE, AT SEPTEMBER 30, 2021 (unaudited)

$

1,177

$

1,105

$

72

$

-

The accompanying notes are an integral part of the condensed consolidated financial statements

p.16

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