2016-17 SaskEnergy Annual Report

2 0 1 6 - 1 7 A N N U A L R E P O R T

CONTENTS

17

4

CORPORATE PROFILE

MANAGEMENT’S DISCUSSION & ANALYSIS 17 Introduction 17 Strategic Scorecard Measures 25 Industry Overview 27 Consolidated Financial Results 33 Liquidity and Capital Resources 35 Outlook 36 Risk Management and Disclosure 39 Critical Accounting Policies and Estimates 40 Accounting Policy Changes

6

LETTER OF TRANSMITTAL

7

MINISTER’S MESSAGE

41

8

CONSOLIDATED FINANCIAL STATEMENTS 42 Management’s Responsibility for Financial Statements 43 Management’s Report on Internal Control Over Financial Reporting 44 Independent Auditor’s Report 45 Consolidated Statement of Financial Position 46 Consolidated Statement of Comprehensive Income 47 Consolidated Statement of Changes in Equity 48 Consolidated Statement of Cash Flows 49 Notes to the Consolidated Financial Statements

CHAIR’S MESSAGE

9

PRESIDENT’S MESSAGE

10

71

FINANCIAL AND OPERATING HIGHLIGHTS

CORPORATE GOVERNANCE 71 Board of Directors 76 Executive Committee 78 Corporate Governance Disclosure 85 Stakeholder Engagement

13

CORPORATE HIGHLIGHTS

87

SUPPLEMENTARY INFORMATION 87 Five Year Consolidated Financial Summary 89 Glossary of Key Success Measures 92 Glossary of Natural Gas Measurements 93 SaskEnergy Incorporated Natural Gas Transmission Pipelines

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

SAFETY We never compromise the safety of our employees and the public. COMMUNITY We are leaders in developing a diverse workforce, supporting our communities and environmental stewardship. RECOGNITION We take time to recognize the individual and team contributions of our employees. ACCOUNTABILITY We are accountable for our decisions, our actions and the results. SPIRIT We create a positive and dynamic work environment that enables personal achievement, work life balance and business success. COMMUNICATION We have open, honest and respectful communication that builds strong relationships. INTEGRITY We are honest, respectful and apply high ethical standards.

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2016-17 ANNUAL REPORT SASKENERGY

CORPORATE PROFILE

Crown Investments Corporation of Saskatchewan

SaskEnergy Incorporated

Many Islands Pipe Lines (Canada) Limited

Saskatchewan First Call Corporation

TransGas Limited

Bayhurst Gas Limited

Transmission and Storage

Natural Gas in Storage/ Royalty Interest

Interprovincial Transmission

Underground Facility Screening and Notification Service

Bayhurst Energy Services Corporation

BG Storage Inc.

Energy Services Company

Storage Joint Arrangements

SaskEnergy’s main business is the natural gas distribution utility. SaskEnergy owns and operates the distribution utility, which has the exclusive legislated franchise to distribute natural gas within the Province of Saskatchewan. The Provincial Cabinet regulates SaskEnergy’s delivery and commodity rates. All rate changes are subject to review by the Saskatchewan Rate Review Panel, an independent body, prior to receiving Provincial Cabinet approval.

SaskEnergy Incorporated (SaskEnergy or the Corporation) is a Saskatchewan Crown corporation governed by The SaskEnergy Act . It is a designated subsidiary of Crown Investments Corporation of Saskatchewan (CIC). CIC is also a Crown corporation and effectively operates as the Province’s holding company for commercial Crown corporations (such as SaskPower, SaskTel and SGI) and various commercial investments.

4

Corporate Profile

SaskEnergy’s corporate structure includes four wholly owned and two indirect wholly owned operating subsidiaries, as follows: Bayhurst Gas Limited (Bayhurst) owns, produces and sells natural gas from its two storage facilities in the western area of Saskatchewan. Bayhurst also owns a gross overriding royalty on several properties in Saskatchewan and Alberta. Bayhurst Energy Services Corporation (BESCO) , a wholly owned subsidiary of Bayhurst Gas Limited, is an energy services company. BESCO owns a 50 per cent interest in a natural gas processing plant in southeastern Saskatchewan, which is operated through an unincorporated joint arrangement with Steel Reef Infrastructure Corp. BESCO is also the sole owner and operator of a gathering and processing facility in Coleville as well as a bulk compressed natural gas fueling facility in Weyburn. BG Storage Inc. (BGSI) , a wholly owned subsidiary of Bayhurst Gas Limited, owns a 50 per cent interest in a natural gas storage business, which is operated through a joint arrangement with Faro Energy Ventures Ltd. Many Islands Pipe Lines (Canada) Limited (MIPL) is a transmission company that owns nine transmission pipeline interconnections to Alberta, two into the United States, and one into Manitoba, all of which connect to the TransGas system. MIPL is regulated by the National Energy Board.

Saskatchewan First Call Corporation (Sask 1 st Call) provides a centralized “Call Before You Dig” underground facility screening and notification service. Sask 1 st Call was established primarily for safety reasons to maintain a database of oil, natural gas and other underground infrastructures. Sask 1 st Call provides a service whereby landowners and other stakeholders planning any ground disturbance can contact Sask 1 st Call to request the location of pipeline- and non-pipeline-related facilities of its subscribers. Sask 1 st Call’s rate structure is intended to recover all operational costs and operate on a break-even basis. TransGas Limited (TransGas) owns and operates the transmission utility and has the exclusive legislated franchise to transport natural gas within the Province of Saskatchewan. It also owns and operates a natural gas storage business as well as gathering facilities, which are integrated with the transmission pipeline system. TransGas’ transportation and storage rates are subject to Provincial Cabinet approval. TransGas has a Customer Dialogue process where business, operational and rate matters are openly discussed with a representative group of customers.

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2016-17 ANNUAL REPORT SASKENERGY

LETTER OF TRANSMITTAL

May 25, 2017

Her Honour the Honourable Vaughn Solomon Schofield, S.O.M., S.V.M.

Lieutenant Governor of Saskatchewan

Madam:

I respectfully submit the annual report of SaskEnergy Incorporated for the fiscal period ending March 31, 2017, in accordance with The SaskEnergy Act . The Consolidated Financial Statements are in the form approved by the Treasury Board, and have been reported on by the Corporation’s auditors.

[Original signed by D. Duncan]

Honourable Dustin Duncan Minister Responsible for SaskEnergy

6

Letter of Transmittal

MINISTER’S MESSAGE

On behalf of Premier Brad Wall and the Government of Saskatchewan, I present the SaskEnergy 2016-17 Annual Report. SaskEnergy enjoyed another strong operational and financial year in 2016-17, effectively meeting the needs of its residential, commercial and industrial customers across Saskatchewan. In doing so, SaskEnergy continues to be effective in fulfilling the priorities our government has outlined for Crown corporations. Despite the downturn in natural resource commodity markets, Saskatchewan saw strong oil and gas sales in 2016-17, relative to other Western provinces, and steady industrial investment from the potash and enhanced oil recovery sectors. While these accomplishments were enabled by clear government policies designed to make Saskatchewan a destination of choice for investors and business, provincial infrastructure providers like SaskEnergy/TransGas continue to play a vital role in delivering results for customers. Looking ahead, the energy sector will continue to play a foundational role in the Saskatchewan economy and SaskEnergy will be called upon to support provincial growth by collaborating with the private sector, Crown peers and other stakeholder groups. I would like to thank all SaskEnergy employees, management and the Board of Directors for their contributions to the company in 2016-17.

Sincerely,

[Original signed by D. Duncan]

Honourable Dustin Duncan Minister Responsible for SaskEnergy

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2016-17 ANNUAL REPORT SASKENERGY

CHAIR’S MESSAGE

On behalf of the SaskEnergy Board of Directors, it is my pleasure to join the Minister Responsible for SaskEnergy, the Honourable Dustin Duncan, in presenting the SaskEnergy 2016-17 Annual Report. The Board was pleased with SaskEnergy’s 2016-17 results, including effective rate management, solid financial performance and a continued commitment to safe and reliable service delivery. Within these accomplishments, the SaskEnergy Executive team, management and employees should be commended for the leadership they showed in support of provincial fiscal restraint directives. The past year will also be remembered for Executive leadership changes at SaskEnergy, including the retirement of Doug Kelln, who was appointed President and CEO in 2004. I would like to extend my thanks to Doug for his leadership and the solid counsel he provided to the Board throughout his time as President. I would also like to recognize the contributions of departing Board members Victor Thomas, Grant Gayton and Norm Beug, while welcoming Ron Barsi, Annette Revet, Tina Svedahl and Alice Wong as new Directors. As well, in 2016-17, the Provincial Government outlined the need for transformational change within the Crown sector — structural, administrative and operational shifts to ensure the sustainability of financial health and reliable service delivery to the people of Saskatchewan. The Board is confident that, under the leadership of Ken From and his Executive team, SaskEnergy is well-positioned to make a meaningful contribution to these important initiatives, and we look forward to another successful year in 2017-18.

[Original signed by S. Barber]

Susan Barber, Q.C. Chair, SaskEnergy Board of Directors

8

Chair’s Message

PRESIDENT’S MESSAGE

revenue. While residential growth slowed from recent years, SaskEnergy added 4,000 new accounts throughout the year, bringing the distribution total to 390,886 customers, with a further 4,500 expected in 2017-18. Both industrial and residential customers continued to benefit from low natural gas commodity prices, though the long-term effects of this price environment are increasing both the costs and risks associated with supply acquisition. Each year since Saskatchewan became a net importer of natural gas, the gap between provincial demand and supply has grown, to the point where slightly more than 60 per cent of gas consumed in the province in 2016-17 was imported from Alberta. Given the cost and potential volatility of third-party transport tolls, SaskEnergy’s ability to affordably secure required supply will continue to directly affect virtually all aspects of its operations. Financially, SaskEnergy delivered strong results last year, with $70 million in operating net income and a debt-to-equity ratio that exceeded the 2016-17 target. Aggressive management of operating costs contributed to this achievement, offsetting such factors as slightly below-average delivery revenue (due to warmer than normal weather) and higher third-party transport costs. I extend my thanks to our employees for the significant role they played in meeting our fiscal restraint commitments in 2016-17 and the manner in which they did so. Similar levels of dedication will be required from SaskEnergy and TransGas teams as we continue to ensure our priorities are aligned and well-designed to meet current challenges. These include maturing our process safety practices to mitigate the risk of high-consequence events and evolving our stakeholder engagement efforts in engaging communities, landowners and interest groups. On a more fundamental level, regulations and codes related to climate change mitigation could have long-term implications for SaskEnergy’s business. To succeed within a constantly-evolving business environment, SaskEnergy will require organizational alignment and a continued focus on our core operations. Different ways of thinking will be required as we encounter new or evolving challenges. Most importantly, it is essential that we have the right people leading our company into the future. In that regard, I continue to be impressed with the dedication and resourcefulness of our teams and am confident that SaskEnergy will achieve its goals in the years ahead.

Having spent the first 26 years of my career working for the provincial natural gas utility, I was proud to return to SaskEnergy as President and Chief Executive Officer earlier this year. While my previous years with the company provided me with the technical and professional qualifications to lead the organization, the nine years I spent away from SaskEnergy were vital in shaping the way that I see the company’s current strengths and future opportunities as a variety of new factors affect the natural gas industry in potentially disruptive ways. SaskEnergy’s success in meeting its mandate — delivering affordable natural gas to customers in a safe, reliable way — is evident throughout its 2016-17 results. The realization of approximately $4 million in efficiency and process improvement savings brought the total in this area to $42 million since 2009, and enabled SaskEnergy to continue to offer customers one of the lowest natural gas delivery rates in Canada. This was accomplished without compromising our corporate safety focus, evidenced by a record-low internal Total Recordable Injury Frequency Rate (for the fourth consecutive year), strong results related to the frequency of pipeline leaks/failure, and continued reduction in the number of third-party line hits across the SaskEnergy system. Despite the subdued provincial economic environment in 2016-17, natural gas remained an attractive fuel source for Saskatchewan industry and power generation, resulting in a seven per cent increase in total provincial load, and a nearly three per cent increase in overall SaskEnergy/TransGas

Sincerely,

[Original signed by K. From]

Ken From President and Chief Executive Officer, SaskEnergy

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2016-17 ANNUAL REPORT SASKENERGY

FINANCIAL AND OPERATING HIGHLIGHTS

2015-16 1 12-month period

2015-16 1 15-month period

CONSOLIDATED FINANCIAL INFORMATION

2016-17 1

2014

2013

2012

($ millions) Delivery

209 121

289 151

232

217

194

240 134

Transportation and storage Commodity margin Gas marketing margin Customer contributions

98

92 18 32 24 12

85

28 20 58 12

47 24 61 14

9

(2)

25 14 55 10

14 33 16

47 29 12

Other revenue Total revenue

478

448

586 115 152 110

402

395

365

Employee benefits

90

92

89 97 77 11 40

85 85 73 10 39

87

Operating and maintenance Depreciation and amortization

124

126

134

89 12 47

83 11 44

96 12 46 33

Saskatchewan taxes Net finance expense Other losses (gains)

15 56

0

3

(1)

2

Total expenses

408

362

451 135

355

316

292

Income before unrealized market value adjustments

70 76

86

47

79

73 34

Market value adjustments

(30)

(24) 111

(80) (33)

CONSOLIDATED NET INCOME (LOSS)

146

56 55

79 30

107

Dividends declared

65

17

27

29

Total assets

2,450

2,450

2,380

2,207

2,037

2,505

Cash provided by operating activities Cash used in investing activities

258

347

248

244

172

225

(210)

(241) (100)

(283)

(221)

(181)

(198)

Cash (used in) provided by financing activities

(47)

40

(25)

(10)

(37)

Capital expenditures

212

244

299

224

187

198

Total net debt

1,156 61/39

1,156 61/39

1,159 63/37

1,064 59/41

1,009 59/41

1,210 59/41 8.8%

Debt/Equity ratio

Rate of return on equity

11.6% 18.8% 6.5% 11.0% 11.0%

OPERATING STATISTICS Distribution volumes (petajoules) Residential/Farm

32 27

47 41

39 34

37 33

34 29 90

34 30

Commercial

Industrial

127 186

159 247

111 184

108 178

129 193

153

TOTAL

Transmission volumes (petajoules) Domestic

280

366

275

265

237

308

Export

24

28

7

3

4

18

304

394

282

268

241

TOTAL

326

Number of customers Distribution

386,886 386,886 380,768 373,436 365,749

390,886

123 3

153

153

148

Transmission

123 3

117

1  On November 30, 2015, the Government of Saskatchewan announced a change in the year end for CIC and its subsidiaries from December 31 to March 31, commencing with the 2015-16 fiscal year. Accordingly, for the 2015-16 fiscal year the Corporation reported a 15-month fiscal period ending March 31, 2016. For comparative purposes, the unaudited 12-month period ending March 31, 2016 is shown. 2 Certain comparative amounts have been reclassified to conform with the current fiscal year’s presentation. 3 Corrected from the customer figure of 133 included in the 2015-16 Annual Report.

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Financial and Operating Highlights

2015-16 1 12-month period

2015-16 1 15-month period

OPERATING SUMMARY – DISTRIBUTION

2016-17 1

2014 4,881 3,006 6,039

2013 4,639 3,020 6,193

2012 3,985 2,696 5,415

Sales in million cubic metres 2

4,785 2,387 4,901

6,382 3,579 7,417

5,004 2,543 5,155 6.7%

Residential annual average usage (cubic metres)

Degree days 3

Percentage warmer (colder) than normal

12.2% 9.0% (9.0%)

(12.5%)

2.4%

PIPELINE (kilometres) SaskEnergy Incorporated

69,547

69,547

69,015

68,612

68,092

69,870

1 On November 30, 2015, the Government of Saskatchewan announced a change in the year end for CIC and its subsidiaries from December 31 to March 31, commencing with the 2015-16 fiscal year. Accordingly, for the 2015-16 fiscal year the Corporation reported a 15-month fiscal period ending March 31, 2016. For comparative purposes, the unaudited 12-month period ending March 31, 2016 is shown. 2 Retail, industrial and natural gas marketing. 3 A unit measuring the extent to which the temperature falls below 18° Celsius. Normal weather in 2016-17 (12 months ending March 31, 2017) would have been 5,524 degree days. Normal weather in 2015-16 (12 months ending March 31, 2016) would have been 5,582 degree days.

2015-16 1 12-month period

2015-16 1 15-month period

OPERATING SUMMARY – TRANSMISSION Peak day natural gas flows (petajoules)

2016-17 1

2014 1.42

2013 1.26

2012 1.20

1.35

1.35

1.36

Date of peak day flow Storage cavern sites Storage caverns Storage field sites 2 Producing field sites 2 PIPELINE (kilometres) TransGas Limited Transmission

Jan. 16 Jan. 16 4

Feb. 6

Dec. 6

Jan. 18

Jan. 12

6

6

6

6

6

6

22

22

24

26

27

18

4 1

4 1

4 1

4 1

4 1

4 1

14,397

14,397

14,423

14,291

14,230

14,465

Gathering

297 441

297 441

203 435 113

203 435 113

201 435 113

297 445

Many Islands Pipe Lines (Canada) Limited

Bayhurst Gas Limited

21

21

21

15,156

15,156

15,174

15,042

14,979

TOTAL

15,228

SYSTEM COMPRESSION TransGas Limited Stations Bayhurst Gas Limited Stations Mobile Compressor Units

24

24

23

24

24

25

3

3

3 7

3 3

3 1

3

13

13

17

COMPRESSION HORSEPOWER TransGas Limited 3

76,315

76,315

89,360

87,720

86,270

79,765

Bayhurst Gas Limited

6,300

6,300

6,300

6,300

6,300

6,300

82,615

82,615

95,660

94,020

92,570

TOTAL

86,065

1  On November 30, 2015, the Government of Saskatchewan announced a change in the year end for CIC and its subsidiaries from December 31 to March 31, commencing with the 2015-16 fiscal year. Accordingly, for the 2015-16 fiscal year the Corporation reported a 15-month fiscal period ending March 31, 2016. The 12-month period ending March 31, 2016 is shown for comparative purposes. 2 Includes Bayhurst Gas Limited. 3 Includes BESCO assets. 4 January 16, 2016

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2016-17 ANNUAL REPORT SASKENERGY

QUARTERLY FINANCIAL AND OPERATING HIGHLIGHTS

12 Months Ending March 31, 2017 1

2016-17 FINANCIAL HIGHLIGHTS

Q1

Q2

Q3

Q4

($ millions) Total revenue Total expenses

118

146 140

233 162

298 283

795 649 146

64 54 57

Consolidated net income (loss) Market value adjustments

6

71 26

15

13

(20)

76

Income (loss) before unrealized market value adjustments

(3)

(7)

45 14 39 72

35 15

70 29

Dividends

Cash provided by operating activities

54 29

27 55

105

225 198

Capital expenditures

42

OPERATING HIGHLIGHTS Distribution

Energy distributed (petajoules)

38

35

55

65

193

Weather (compared to last 30 years)

17% warmer

7% warmer

5% warmer

5% warmer

7% warmer

Transmission

Energy transported (petajoules)

65

74

90

97

326

15 Months Ending March 31, 2016 1

2015-16 FINANCIAL HIGHLIGHTS

Q1

Q2

Q3

Q4

Q5

($ millions) Total revenue Total expenses

275 220

145 146

141 161 (20)

247 196

262 236

1,070

959

Consolidated net income (loss) Market value adjustments

55

(1)

51 (6)

26

111 (24)

6

4

(7)

(21)

Income (loss) before unrealized market value adjustments

49 10 89 31

(5) 10 80 41

(13)

57 14 57 86

47 21 87 30

135

Dividends

10 34 56

65

Cash provided by operating activities

347 244

Capital expenditures

OPERATING HIGHLIGHTS Distribution

Energy distributed (petajoules)

61

36

34

55

61

247

Weather (compared to last 30 years)

1% warmer

5% warmer

2% warmer 13% warmer 14% warmer

9% warmer

Transmission

Energy transported (petajoules)

90

62

65

83

94

394

1  On November 30, 2015, the Government of Saskatchewan announced a change in the year end for CIC and its subsidiaries from December 31 to March 31, commencing with the 2015-16 fiscal year. Accordingly, the 12-month fiscal period ending March 31, 2017 is compared to the 2015-16 15-month fiscal period ending March 31, 2016.

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Financial and Operating Highlights

CORPORATE HIGHLIGHTS Accomplished the lowest corporate leak rates in history — zero leaks for TransGas and 5.25 leaks per 1,000 kilometres of distribution mains for SaskEnergy.

Removed and replaced approximately 36,000 gas meters throughout the province to meet Measurement Canada compliance requirements and ensure compatibility with SaskEnergy’s Advanced Metering Infrastructure (AMI). Improved operational efficiency by discontinuing cashiering services in Regina and Saskatoon, utilizing customer service resources more effectively. Achieved $181,000 in new annual savings by switching approximately 21,000 customers to paperless billing. This level of switch-over was largely due to enrollments now being completed on customer service calls, made possible by an upgrade to MyAccount, and through the discontinuation of the billing option that allowed customers to receive both paper and paperless bills. Completed a four-year project to convert all Standard Practice Instructions to an industry-leading new Construction, Operating and Maintenance Procedures (COMP) program one year earlier than anticipated. Dedicated $91 million toward system integrity initiatives, reflecting SaskEnergy’s commitment to safety across its more than 85,000 kilometres of pipeline. Installed 49,879 AMI gas modules throughout the province, bringing the total to nearly 341,000 or 87 per cent of SaskEnergy distribution meters.

Achieved the lowest Total Recordable Injury Frequency Rate (TRIF) and the third-lowest preventable vehicle collision (PVC) frequency rate on record.

Implemented a root cause analysis solution to systematically improve operating and reporting procedures to eliminate hazards and determine acceptable thresholds for risk. Completed six pipeline replacements and relocations at four locations to accommodate the new Regina Bypass.

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2016-17 ANNUAL REPORT SASKENERGY

SAFETY

Corporate Personal Safety Performance In 2016-17, SaskEnergy achieved its best-ever safety performance during a 12-month span with a Total Recordable Injury Frequency Rate (TRIF) of 1.63 (injuries per 100 employees). This is down from 2.09 in 2015-16, which was also a record year. As a measure of SaskEnergy’s alignment with industry best practices, the Corporation achieved an overall audit score of 90 per cent in the Certificate of Recognition (COR) Program, which assesses the elements of SaskEnergy’s safety management system against COR Program requirements. Other 2016-17 safety initiatives included an updated Drug & Alcohol Policy, which involved training modules for employees and managers, the implementation of a new Material Safety Data Sheets (MSDS) database, and improvements to competency management in relation to mandatory safety training.

Damage Prevention Initiatives SaskEnergy engages in a number of initiatives to reduce damage to its buried infrastructure as part of its risk and asset management strategy. As a result of these initiatives, there was an 11 per cent reduction in third- party line hits in 2016-17, helping to achieve a total reduction of 35 per cent since 2013. In partnership with Sask 1 st Call, the Saskatchewan Common Ground Alliance (SCGA), SaskPower and SaskTel, SaskEnergy expanded its Safety Patrol program during the 2016-17 construction season to include complete visual inspections of targeted transmission line easements in high-risk areas. Easements in Regina, Saskatoon, Moose Jaw and White City were patrolled twice monthly, with additional once-a-month patrols completed in the communities of Kindersley, Humboldt, Swift Current, Yorkton and Estevan. Other initiatives included the promotion of the Sask 1 st Call mobile application and website as well as continued efforts around supervised crossings, joint Crown line locates, working with SCGA to ensure greater contractor awareness, providing information to businesses that rent digging equipment, and public awareness advertising.

Enhancements to Crossing Coordination Process

As a key component of the Corporation’s commitment to reducing risk to its assets, the TransGas Crossing Coordination department reviews, assesses and processes applications submitted by third parties proposing to work near TransGas facilities. Historically, numerous permit letters were issued and contracts were modified at a local level without legal oversight. In 2016-17, crossing inquiries were streamlined and made paperless, a process was developed to combine multiple permits within one Facility Crossing Agreement, and technology was utilized to create a more efficient workflow. In addition, facility crossing agreements are now legally enforceable and govern for the life of an asset, making the new process fully compliant with regulatory standards.

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Safety

EFFICIENCY

Environmental Efficiencies As part of continuing efforts to reduce the environmental impact of its operations, SaskEnergy achieved a number of efficiencies during 2016-17. Through the ongoing modernization of its compressor fleet, the Corporation exceeded its 2016-17 target for compressor emissions reductions by nearly 20 per cent. In addition, repairs completed as part of the annual compressor station leak detection and repair program will save SaskEnergy approximately $159,000, or nearly 44 terajoules (TJ), of lost gas per year and reduce greenhouse gas emissions by 18,000 tonnes CO 2 e per year. SaskEnergy also leveraged its contractor safety orientation to include content related to environmental management and protection for contractors, thereby reducing redundancy, administrative oversight and reporting, and roll-out costs.

Productivity and Efficiency Initiatives In 2016-17, SaskEnergy realized approximately $4 million in efficiency savings and process improvements through collaboration efforts with other Saskatchewan Crown corporations, business process changes, leveraging technology solutions and the expanded use of mobile compression. Revenue initiatives such as the utilization of spare transport capacity to undertake gas marketing transactions and export excess natural gas at a margin also contributed to the total efficiency result. The continued deployment of AMI, in conjunction with SaskPower, generated significant savings through reduced manual meter reading costs and billing efficiencies resulting from billing customers on actual consumption rather than estimates. Further efficiencies related to strategic capital deployment have also been identified for 2017-18.

Expansion of Mobile Compression In 2016-17, TransGas added four more mobile compressors to its fleet, as well as one docking station at Moosomin, bringing the system total to 17 mobile units and 20 docking stations. Mobile compressors give TransGas the flexibility to move compression to where it is required, whether it’s for temporary power requirements while a stationary unit is under repair, when a stationary unit has reached the end of its useful life, or for seasonal tasks such as storage field injection. As modern, low-emission units that combine flexibility of operation with reduced maintenance requirements, mobile compressors allow TransGas to quickly respond to requests from industrial clients without large capital investments.

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2016-17 ANNUAL REPORT SASKENERGY

GROWTH

Distribution and Transmission Growth As a result of continued population growth in Saskatchewan, SaskEnergy added 4,000 customers to its distribution base in 2016-17, bringing total customers to 390,886. SaskEnergy’s active customer base has grown by nearly seven per cent since 2012, requiring the addition of more than 1,700 kilometres of distribution pipeline during the same timeframe. Transmission volume increased by 22 petajoules (PJ), or 7.2 per cent, compared to the same 12-month period last year. SaskEnergy continues to make significant investments in its distribution and transmission system to connect customers in a wide range of key Saskatchewan industries, including enhanced oil recovery, power production and potash mining.

Customer Connections and Southeast Receipt Expansion Projects TransGas completed a number of projects in 2016-17 to provide additional receipt, delivery and system capacity to its customers and its provincial pipeline system. A new 28-kilometre, 114-millimetre pipeline was put into service in November 2016 to increase capacity to PCS Rocanville, creating the capacity to deliver upwards of 11 TJ of natural gas per day. In addition, a 324-millimetre pipeline was installed in December 2016 to provide additional receipt and system capacity in southeastern Saskatchewan. This new 28-kilometre pipeline loops an existing 168-millimetre pipeline and provides an additional 15 TJ of system capacity per day. TransGas also installed a 168-millimetre pipeline and meter station to provide Steel Reef Infrastructure Corp. additional receipt capacity of 8.5 TJ per day near Alameda. Construction started in mid-July and the pipeline was put into service in late August.

Saskatoon Town Border Station #5 In December 2016, the Corporation completed a fifth town border station (TBS) in Saskatoon to meet the city’s current and future natural gas needs. TBS #5 provides another natural gas feed into the west side of the city, which reduces the dependency on the other two TBS facilities that supply gas to the area and increases the capacity of district regulating stations. Through the addition of this station, SaskEnergy is able to provide a number of commercial customers, as well as new and expanded subdivisions, safe and reliable natural gas service and has ensured the infrastructure is in place to manage the 50-year growth plan for the west side of the city.

16

GROWTH

INTRODUCTION The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the 12 months ending March 31, 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. The MD&A is presented as at May 25, 2017, and should be read in conjunction with the Corporation’s audited consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS). On November 30, 2015, the Government of Saskatchewan announced a change in the year end for Crown Investments Corporation (CIC) and its subsidiaries from December 31 to March 31, commencing with the 15-month period ending March 31, 2016. Consequently, while the financial statements compare a 12-month period to a 15-month period, for the purposes of the MD&A, the results of the current fiscal year will be compared against the unaudited results of the 12-month period ending March 31, 2016. 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 the MD&A. 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 Corporation’s financial results are subject to variation, especially given the volatility of natural gas prices. In order to compare financial performance from period to period, the Corporation uses the following measures: income before unrealized market value adjustments, realized margin on commodity sales, and realized margin on gas marketing sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. 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. STRATEGIC SCORECARD MEASURES SaskEnergy’s four strategic mandates — Service Excellence, Achieving Growth, Our Team and Creating Value — as set out in the Business Plan, support the vision, mission and values of the Corporation. They also align with the Crown Sector Strategic Priorities as identified by CIC. These mandates and strategic priorities provide guidance to SaskEnergy in its business planning process as well as its performance management and reporting. These strategic priorities and mandates also assist employees in making a link between their everyday efforts and their contribution to the Strategic Plan and the overall direction of the Corporation. The Crown Sector Strategic Priorities and the Saskatchewan Plan for Growth convey shareholder strategic direction for the Province’s Crown Corporations. MANAGEMENT’S DISCUSSION & ANALYSIS

The government’s strategic plan identified three critical issues and five strategic priorities based on the principle of Steady Growth.

Critical Issues

• Continued focus on improving operational efficiency through transformational change • Increased collaboration amongst the Crown corporations • Increased scrutiny of Crown corporation capital budget requirements

Strategic Priorities

• Customer Focus • Financial Sustainability • Infrastructure Investment • Private Sector Engagement • Labour Force

17

2016-17 ANNUAL REPORT SASKENERGY

For the 2016-17 fiscal year, SaskEnergy received two specific directives through the Saskatchewan Plan for Growth. SaskEnergy’s role in facilitating provincial growth was to: • Reduce the time it takes to complete new connect requests for customers; and, • Meet the needs of a growing residential, commercial and industrial customer base through upgrades to SaskEnergy’s capital network (transmission expansion). During 2016-17, SaskEnergy made progress on both of these directives. The distribution utility set a target to complete the average customer connection request within the customer’s required timeline. This target was achieved in most instances and opportunities for improvement continue to be identified. With respect to transmission upgrades and expansion, the operations and system planning groups work together to ensure the safe and reliable operation of the natural gas system and strategize on how best to respond to anticipated load growth in the coming years in a timely and cost effective manner. Each year, as part of the business planning process, SaskEnergy incorporates the Province’s strategic directives and evaluates the continued relevance of the performance metrics contained in the previous year’s scorecard. Any changes deemed appropriate are made and associated targets are developed for each metric. The final scorecard, including metrics and targets for the five-year planning horizon, is presented to the Corporation’s Board of Directors for approval as part of the annual business plan approval. The CIC Board reviews the business plan and confirms compliance with the Crown Sector Strategic Priorities prior to its approval. Progress toward these targets is monitored and reported throughout the year. Regular reporting on those specific scorecard targets allows management to closely monitor progress and take any corrective action necessary to achieve the targets. The following discussion outlines the Corporation’s 2016-17 performance relative to its strategic scorecard targets for the 12 months ending March 31, 2017, which are further defined in the Glossary of Key Success Measures.

MISSION

VISION

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

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

Saskatchewan Crown Sector Priorities & Saskatchewan Plan for Growth

SaskEnergy Strategic Mandates

Service Excellence

Achieving Growth

Our Team

Creating Value

Infrastructure

People/Resourcing

Financial Capability

Focus Areas

Safety

Productivity

Strong Earnings Focus

Growth

Resource Management

Key Directions

Efficiencies

Strategic Capital

Collaboration

Supply Options

18

Management’s Discussion & Analysis

SERVICE EXCELLENCE SaskEnergy is committed to providing safe and reliable service to customers. Effective customer solutions and responsiveness are also important aspects of the service commitment as evidenced by the Corporation’s Service Excellence mandate. In alignment with the Crown Sector Strategic Priorities, SaskEnergy focused on reducing the time it takes to complete new customer connection requests. Efficient Operations, Safety/Vigilance and Customer Satisfaction make up the three categories of measures against which success is measured related to the Service Excellence mandate. Industry benchmarking and customer surveys are also tools used by the Corporation to analyze results and gauge the level of success.

March 31, 2021 Target

March 31, 2020 Target

March 31, 2019 Target

March 31, 2018 Target

March 31, 2017 Target

March 31, 2017 Actual

March 31, 2016 Actual

Strategic Measure

Efficient Operations

Distribution Operation, Maintenance and Administration Costs per Customer

$298

$300

$305

$319

$320

$321

$321

Competitive with Industry

Competitive Residential Delivery Rates

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Transmission

7.0%

6.6%

7.1%

7.1%

7.1%

7.1%

7.1%

Operation, Maintenance and Administration Costs per Book Value of Assets Managed

Safety/Vigilance

5.25

SaskEnergy Leaks per 1,000 kilometres of Mains TransGas Pipeline Failures per 1,000 kilometres of Pipe

6.7

5.8

5.5

5.4

5.3

5.3

0.00

0.00

0.09

0.07

0.07

0.07

0.07

5.8%

Safety and Integrity

5.3%

5.4%

5.5%

5.5%

5.5%

5.5%

Customer Satisfaction

89%

SaskEnergy

87%

89%

89%

89%

89%

89%

94%

TransGas

90%

93%

93%

93%

93%

93%

Efficient Operations Efficiency directives from the provincial government resulted in aggressive cost management in the 2016-17 fiscal year, which favourably impacted the results for the efficiency metrics by year-end. However, the more extreme expenditure restraints have been identified by management as temporary in nature and the Corporation has recognized the need to return to a more sustainable level for certain operating expenses for future years in order to maintain customer service levels. In alignment with the Crown Sector Priority of financial stability and a continued emphasis on operational efficiency, SaskEnergy and TransGas are committed to the cost-effective delivery of natural gas services to its customers. The Corporation realized approximately $4 million in efficiency and process improvement savings in 2016-17. These efforts are reflected in the measure Operation, Maintenance and Administration Costs per Customer and SaskEnergy’s ability to successfully offer competitive residential delivery rates to its customers. Customer connection activity levels moderated in 2016-17 relative to previous years and this, combined with collaboration efforts for AMI and joint service installations, assisted the Corporation in effectively managing costs during the year.

19

2016-17 ANNUAL REPORT SASKENERGY

A typical residential customer in Saskatchewan paid $500 (2015-16: $453) for delivery service in 2016-17, which is the second lowest of the major utilities across Canada. Residents of Hamilton, Ontario paid the lowest rate at $466. When looking at combined commodity and delivery service, Saskatchewan customers paid the fifth lowest in Canada at March 31, 2017. SaskEnergy provides its distribution customers with price protection through the practice of hedging natural gas purchases. As a result, in a low and declining natural gas price environment, customers typically pay higher costs for natural gas but are not subject to the volatility of market prices. SaskEnergy does not earn a profit or incur losses on the sale of natural gas to its customers, therefore the costs associated with the supply of natural gas are recovered over time. Customers have consistently provided very positive survey responses to questions about stable natural gas prices as opposed to prices that move with the market. The TransGas metric Operation, Maintenance and Administration Costs (OM&A) per Book Value of Assets Managed is a proxy for the relative efficiency of the transmission utility operations. TransGas OM&A reflected strong resource management efforts and a commitment to efficient operations throughout the year. Safety/Vigilance The Corporation’s ongoing commitment to system integrity programming is unwavering. All efficiency efforts were implemented so as not to compromise a safe and reliable system. Integrity-related budgets are being actively managed to maintain strong results in the areas of gas leaks, pipeline failures, third-party line hits and other integrity measures. The Corporation participates in industry working groups to ensure its operations reflect industry best practice, which continues to evolve at a dynamic pace. The targets related to safety and vigilance for both SaskEnergy and TransGas were surpassed as a result of the continued focus that the Corporation has placed on its risk-based integrity programming. One of the key initiatives SaskEnergy undertook in 2016-17 was the continuation of the service upgrade program. This major integrity initiative inspects and upgrades service lines to ensure safe and reliable gas service in communities that have experienced significant ground shifting. This program, together with enhanced leak survey processes and the damage prevention initiative aimed at reducing leaks due to external interference, has resulted in the fewest leaks on the system since those statistics were first recorded in the early 1980s. The 2016-17 result reflects a 6.5 per cent decrease in total leaks relative to 2015-16 and a 35 per cent decrease in line hits since 2013. TransGas continued to reduce risks for its transmission pipelines through in-line inspections, visual inspections, damage prevention initiatives and the cathodic protection program. The result was zero leaks experienced in 2016-17.

SaskEnergy/TransGas’ investment toward safety and integrity initiatives in 2016-17, including capital and operating, was $91 million.

Customer Satisfaction Perhaps the best indicator of SaskEnergy’s success in delivering safe, reliable and affordable services is formal feedback from customers. Recognizing that customers are vital to the success of any business, both SaskEnergy and TransGas conduct annual surveys in an effort to gather feedback on customer experiences, expectations and overall satisfaction. The 2016-17 SaskEnergy survey results show strong levels of customer satisfaction within a number of key areas including reliable service, informing the public of safety-related initiatives and being environmentally responsible. In the 2016-17 survey, more than three-quarters of customers indicated they are confident in SaskEnergy’s safety efforts. However, restraint efforts are having an impact on customer calls and, by the end of the 2016-17 fiscal year, data reflected higher call volumes and longer wait times for customers in the phone queue. This has resulted in an increase in the rate of ‘dropped calls’ or customers who hang up before they speak to a customer service representative. The TransGas customer survey results in 2016-17 continued to reflect strong satisfaction with TransGas business services despite the challenges that have been encountered with the TransGas customer service interface system, which was completed in mid-2016-17.

20

Management’s Discussion & Analysis

ACHIEVING GROWTH SaskEnergy continues to build on the foundation of its core businesses of transmission, distribution and storage services to support a growing residential, commercial and industrial customer base. In addition, the Corporation seeks new opportunities to facilitate provincial economic growth through partnerships and technology developments. The measures within the mandate of Achieving Growth represent the Corporation’s commitment to facilitating growth in Saskatchewan.

March 31, 2021 Target

March 31, 2020 Target

March 31, 2019 Target

March 31, 2018 Target

March 31, 2017 Target

March 31, 2017 Actual

March 31, 2016 Actual

Strategic Measure

Business Growth Investment

2.9%

Core Growth – SaskEnergy and TransGas Revenue Growth

3.8%

3.3%

3.4%

3.4%

3.5%

3.5%

Diversified Non-Core Business

1%

Return on Non-Core Assets

N/A

4.4%

9.1%

10.8%

11.1%

11.1%

$5.9

Total Capital Investment (millions)

$15.3

$13.6

$4.4

$4.5

$4.4

$4.4

2.4%

Percentage of Third-Party Capital Investment

25%

1%

1%

1%

1%

1%

31%

22%

31%

36%

36%

37%

37%

Associated Gas Capture as a Percentage of 2014 Saskatchewan Sourced Volume

Business Growth Investment The Core Growth measure recognizes the fundamental importance of core revenue growth in the Corporation’s two utilities as a key indicator of the continued success of the business. In prior years, it was the growth in the provincial economy that directly contributed to a larger distribution customer base and greater demand for natural gas from industrial facilities. In 2016-17, the distribution utility increased its active customer base by 4,000 customers and the transmission utility increased provincial load by seven per cent. The slowdown in provincial growth has impacted the rate of growth in the Corporation’s utility businesses as reflected in the result for the Core Growth metric for 2016-17. Diversified Non-Core Business The Non-Core Business measures reflect the value of developing new revenue streams within the commodity and unregulated business environment. Efforts in this area create a wider revenue base and strongly align SaskEnergy with the Crown Sector Priority of forming partnerships and joint ventures with the private sector to facilitate growth in the Saskatchewan economy. The Return on Non-Core Assets metric was introduced in 2016-17 and tracks the return earned by the Corporation from its investment in non-core assets. Given the current low natural gas price environment and a general lack of optimism in forward pricing of the natural gas commodity, the Corporation recorded write-downs in the fourth quarter on some of its natural gas storage assets in Bayhurst. There was also a write-down on certain waste heat recovery assets given the ongoing operational issues related to the reliability of the heat exchanger technology. Given these write-downs, the return on non-core assets was lower than anticipated. SaskEnergy endeavors to work with private sector partners to grow its non-core business. However, the economic climate has caused those in the industry to proceed cautiously, resulting in very little activity in the sector in 2016-17. The results for the metric related to third-party capital investment are a reflection of this environment. The slowdown in the oil industry also impacted plans for liquefied natural gas (LNG) and compressed natural gas (CNG) initiatives. The metric for Associated Gas Capture as a Percentage of Saskatchewan Sourced Volume was new for 2016-17. This metric was designed to reflect the efforts being undertaken on flare gas capture to satisfy some of the Saskatchewan demand for natural gas while reducing greenhouse gas emissions. Further upside comes from the opportunity to mitigate third-party transport costs to import the supply from Alberta. Although progress is being made on projects to acquire associated gas and convert it into CNG or LNG at the wellhead, the low price environment for natural gas is causing third-party investors to proceed slowly and with caution.

21

2016-17 ANNUAL REPORT SASKENERGY

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