2015-16 SaskEnergy Annual Report

2 0 1 5 - 1 6 A N N U A L R E P O R T

CONTENTS

4 CORPORATE PROFILE

7 LETTER OF TRANSMITTAL

8 MINISTER’S MESSAGE

9 CHAIR’S MESSAGE

21

46

MANAGEMENT’S DISCUSSION & ANALYSIS 21 Introduction 21 Strategic Scorecard Measures 29 Industry Overview 31 Consolidated Financial Results 39 Liquidity and Capital Resources 40 Capital Expenditures 40 Outlook 42 Risk Management and Disclosure 44 Critical Accounting Policies and Estimates 45 Accounting Policy Changes

CONSOLIDATED FINANCIAL STATEMENTS 47 Management’s Responsibility for Consolidated Financial Statements 48 Management’s Report on Internal Control Over Financial Reporting 49 Independent Auditor’s Report 50 Consolidated Statement of Financial Position 51 Consolidated Statement of Comprehensive Income 52 Consolidated Statement of Changes in Equity 53 Consolidated Statement of Cash Flows 54 Notes to the Consolidated Financial Statements

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

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

10 PRESIDENT’S MESSAGE

13 FINANCIAL AND OPERATING HIGHLIGHTS

17 CORPORATE HIGHLIGHTS

80

96

CORPORATE GOVERNANCE 80 Board of Directors 84 Executive Committee 86 Corporate Governance Disclosure 94 Stakeholder Engagement

SUPPLEMENTARY INFORMATION 96 Five Year Consolidated Financial Summary 98 Glossary of Key Success Measures 102 Glossary of Natural Gas Measurements 103 SaskEnergy Incorporated Natural Gas Transmission Pipelines

VALUES

RECOGNITION We take time to recognize the individual and team

COMMUNITY We are leaders in

SPIRIT We create a positive and dynamic work environment that enables personal achievement, work life balance and business success.

developing a diverse workforce, supporting our communities and environmental stewardship.

contributions of our employees.

SAFETY We never compromise

the safety of our employees and the public.

COMMUNICATION We have open, honest and respectful communication that builds strong relationships.

INTEGRITY We are honest, respectful and apply high ethical standards.

ACCOUNTABILITY We are accountable for our decisions, our actions and the results.

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 ATCO Energy Solutions. BESCO is also the sole owner and operator of a gathering and processing facility in Coleville as well as a bulk compressed natural gas fuelling 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 1st Call) provides a centralized “Call Before You Dig” underground facility screening and notification service. Sask 1st Call was established primarily for safety reasons to maintain a database of oil, natural gas and other underground infrastructures. Sask 1st Call provides a service whereby landowners and other stakeholders can contact Sask 1st Call to request the location of pipeline- and non-pipeline-related facilities of its subscribers. Sask 1st 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.

5

2015-16 ANNUAL REPORT SASKENERGY

Edam and Vawn Pipeline Projects In October 2015, the Corporation completed 15 kilometres of new pipeline to provide service to Husky Energy and Serafina Energy enhanced oil recovery operations near Edam and Vawn in west-central Saskatchewan.

LETTER OF TRANSMITTAL

May 26, 2016

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 ended March 31, 2016, 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 J. Reiter]

Honourable Jim Reiter Minister Responsible for SaskEnergy

7

2015-16 ANNUAL REPORT SASKENERGY

MINISTER’S MESSAGE

On behalf of Premier Brad Wall and the Government of Saskatchewan, I present the SaskEnergy 2015-16 Annual Report. Over the past eight years, our government has worked to create the Saskatchewan Advantage — a plan to grow and strengthen Saskatchewan through sound fiscal management and a stable regulatory regime. We’ve done this because we know a growing economy will help us maintain a high quality of life. Once again in 2015-16, SaskEnergy played a key role in supporting this vision by providing high levels of customer service at competitive rates, while realizing operational cost efficiencies. SaskEnergy’s success in these areas has supported the overall strength of our province’s energy sector, which continues to attract billions of dollars in new investment. For example, in early 2016, Husky Energy celebrated the opening of its Edam East heavy oil thermal facility, located near the village of Edam. This natural gas-fueled plant is the first of three heavy oil thermal projects Husky will bring online this year, with the projects expected to create 500 construction jobs and 90 permanent positions. Along with other large-scale infrastructure investment underway across Saskatchewan, these expansion projects indicate that our diversified, resilient economy is well-equipped to weather the economic uncertainty and continue to create opportunity for Saskatchewan families. SaskEnergy will continue to play a significant role in the coming years as the Corporation provides stable, fulfilling careers, responds to the demands of provincial growth, maintains a safe and reliable infrastructure and collaborates effectively with the private sector. My thanks to all SaskEnergy employees, management and the Board of Directors for their contributions to the company throughout the year.

[Original signed by J. Reiter]

Honourable Jim Reiter Minister Responsible for SaskEnergy

8

Minister’s Message

CHAIR’S MESSAGE

On behalf of the SaskEnergy Board of Directors, it is my pleasure to join the Minister Responsible for SaskEnergy, the Honourable Jim Reiter, in presenting the SaskEnergy 2015-16 Annual Report. Amid changing commodity markets and increased levels of financial restraint for Saskatchewan Crown corporations, SaskEnergy delivered strong financial results in 2015-16, while continuing to fulfill its safety and customer service mandates. Clear priorities, thorough planning, and a culture of efficiency — the foundation for these achievements — are well-established throughout the Corporation and evident in the Board’s discussions with SaskEnergy Executive and management. Among the many factors influencing the Corporation’s success, perhaps none is greater than SaskEnergy’s emphasis on fostering dialogue with its customers and stakeholders. This approach underpins any project or initiative SaskEnergy undertakes, and is perhaps best exemplified in the strength of the Corporation’s relationship with communities along Last Mountain Lake, where system remediation work is ongoing. As someone with deep family ties to the Regina Beach area, I am proud to support SaskEnergy’s commitment to safe operations in these communities, and thank everyone involved for their professionalism and understanding. Looking ahead, the Board will continue to align SaskEnergy directions with those of the larger Crown sector, focusing on customer service, rate management, financial sustainability, private sector engagement, infrastructure investment, and building an effective workforce. At the same time, the Board will seek to identify and enable further SaskEnergy collaboration opportunities to deliver value to customers and to the Government of Saskatchewan. I would like to recognize the contributions of Dr. Denis Jones, who completed his term on the Board in early 2016. The Board is committed to the effective stewardship of SaskEnergy, and thanks the Executive team, management and employees for their contributions this past year.

[Original signed by S. Barber]

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

9

2015-16 ANNUAL REPORT SASKENERGY

PRESIDENT’S MESSAGE

SaskEnergy/TransGas delivered excellent results in 2015-16, particularly when viewed within the context of provincial and Western Canadian economic conditions. Financial highlights include $135 million in income before market value adjustments for the 15 months ended March 31, 2016 and a Core Growth measure of 3.8 per cent. A continued focus on efficiency gains generated nearly $6 million in cost reductions throughout 2015, bringing total savings in this area to $38 million over the last seven years. This aggressive pursuit of efficiency initiatives was once again a key factor in SaskEnergy’s ability to provide Saskatchewan customers with competitive rates while maintaining high levels of customer satisfaction. SaskEnergy/TransGas employees also responded admirably in aligning with other Saskatchewan Government Ministries and Crown corporations on fiscal restraint measures designed to reduce impact on the provincial budget. This involved many tough decisions throughout the year, and I thank employees for their collective effort in effectively meeting these challenges. SAFETY & SYSTEM INTEGRITY MEASURES Safe, reliable service delivery is SaskEnergy’s top priority and our 2015-16 results reflect the success of our teams throughout the period. Internally, SaskEnergy employees achieved a record safety performance, both in terms of Total Recordable Injury Rate and Preventable Vehicle Collision Frequency Rate. On the public safety “…expanded deployment of the joint Crown Safety Patrol program resulted in a six per cent reduction in third- party line hits in 2015, bringing the total reduction to nearly 30 per cent since 2013.”

10

President’s Message

Weyburn to bring new supply onto the provincial system, creating revenue for both SaskEnergy/TransGas and private sector parties working in the area, while reducing reliance on third-party supply and transport. In addition to these financial benefits, flare gas capture projects and other supply diversification efforts represent a significant opportunity to reduce harmful greenhouse gas emissions in Saskatchewan, capturing natural gas which would otherwise be released into the atmosphere or burned as a waste byproduct. In collaboration with the Ministry of Economy, SaskEnergy will continue to identify opportunities to leverage private sector investment to increase the volume of flare gas captured and processed within the Province. COLLABORATING FOR PROVINCIAL SUCCESS Looking ahead, the ever-changing dynamic of the North American energy sector presents both challenges and opportunities for SaskEnergy/TransGas. Commodity price trends, regulatory and public engagement on infrastructure projects, evolving national and social priorities regarding emissions — factors much larger than our provincial borders are at play, with the potential to fundamentally change the way we operate. Collaboration will be critical to our success in the coming years, as SaskEnergy works with industry associations, other Crown and government entities, and the private sector to develop effective, efficient solutions and provide value to our customers. Encompassed within this collaborative approach is a focus on the development and execution of long-term, joint plans to meet both the current and future infrastructure demands of growth in Saskatchewan. Along with the other members of the SaskEnergy Executive, I extend my thanks to our team across the Province for their contributions to our past and future success.

front, expanded deployment of the joint Crown Safety Patrol program resulted in a six per cent reduction in third-party line hits in 2015, bringing the total reduction to nearly 30 per cent since 2013. System integrity programming was a major focus once again in 2015-16, with $107.5 million dedicated to programs and processes to increase the safety of SaskEnergy/TransGas infrastructure for employees, customers and the public. This included continued system remediation work in the Last Mountain Lake area, where geotechnical conditions have created challenges for buried infrastructure, including natural gas pipelines. Through dedicated effort and innovation — including the use of custom-designed remote monitoring devices and satellite imagery to detect soil movement — our teams continue to work closely with those communities to mitigate risk and increase public safety. SUPPORTING GROWTH An economic advantage for Saskatchewan residential, commercial and industrial customers, low natural gas commodity prices continue to drive strong provincial demand. In 2015, domestic transmission volumes increased once again — part of a 35 per cent increase since 2009. This growth has been driven mainly by industrial demand in the potash, electrical generation and enhanced oil recovery sector, which required significant expansion of TransGas pipelines in 2015 to customer facilities in the west-central part of the Province. Stakeholder engagement remains a critical factor in the success of any growth project, whether driven by community expansion or customer demand. As SaskEnergy seeks to develop long-term infrastructure plans in and around urban centres like Regina and Saskatoon, we will need to continue to effectively collaborate with a wide range of stakeholders — including land owners, rural municipalities, community associations, provincial Ministries and other Crown corporations. Similarly, TransGas teams will work closely with existing and new customers to maintain a solid understanding of their business needs and deliver value to them. DIVERSIFYING SUPPLY Sustained low commodity prices have also reduced interest in conventional natural gas drilling in Western Canada — only one new gas well was drilled in Saskatchewan in 2015, down from a record 2,138 in 2003 — just as demand has increased to historic levels. In response, SaskEnergy has identified opportunities to support the capture of additional volumes of “flare gas” in areas where associated gas is being produced in conjunction with Saskatchewan oil drilling/development in-province. Last year, these efforts saw TransGas install innovative compression and gathering infrastructure near

Sincerely,

[Original signed by D. Kelln]

Doug Kelln President and Chief Executive Officer, SaskEnergy

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2015-16 ANNUAL REPORT SASKENERGY

Flare Gas Capture at Weyburn TransGas installed major transmission infrastructure in the southeastern part of the Province in 2015 to receive vital volumes of natural gas produced in conjunction with oil drilling/development while facilitating gas processing initiatives in the area.

FINANCIAL AND OPERATING HIGHLIGHTS

CONSOLIDATED FINANCIAL INFORMATION

2015-16 1

2015 2

2014 2

2013

2012

2011

($ millions) Delivery

215 119

232

217

194

187

289 151

Transportation and storage Commodity margin Gas marketing margin Customer contributions

98

92 18 32 24 12

85

77 10 41 43 12

40 19 37 12

9

(2)

47 24 61 14

14 33 16

47 29 12

Other revenue

Total revenue (net of cost of gas)

586 115 152 110

442

402

395

365

370

Employee benefits

91

92

89 97 77 11 40

85 85 73 10 39

82 83 68 10 35

Operating and maintenance Depreciation and amortization

118

126

87 12 46

83 11 44

Saskatchewan taxes Net finance expense Other losses (gains)

15 56

(1)

2

8

3

Total expenses

451 135

354

355

316

292

286

Income before unrealized market value adjustments

88

47

79

73 34

84

Market value adjustments

(3)

(80) (33)

(58)

(24)

CONSOLIDATED NET INCOME (LOSS)

111

85 44

79 30

107

26 39

Dividends declared

17

27

65

Total assets

2,464

2,380

2,207

2,037

1,924

2,450

Cash provided by operating activities Cash used in investing activities

260

248

244

172

195

347

(215)

(283)

(221)

(181)

(150)

(241) (100)

Cash (used in) provided by financing activities

(47)

40

(25)

(10)

(25)

Capital expenditures

214

299

224

187

172 935

244

Total net debt

1,195 62/38

1,159 63/37

1,064 59/41

1,009 59/41

1,156 61/39 18.8%

Debt/Equity ratio

60/40

Rate of return on equity

12.3% 6.5% 11.0% 11.0% 13.6%

OPERATING STATISTICS Distribution volumes (petajoules) Residential/Farm

34 29

39 34

37 33

34 29 90

34 29 82

47 41

Commercial

Industrial

123 186

111 184

108 178

159 247

153

145

TOTAL

Transmission volumes (petajoules) Domestic

277

275

265

237

226

366

Export

23

7

3

4

5

28

300

282

268

241

231

TOTAL

394

Number of customers Distribution

385,858 380,768 373,436 365,749 358,363

386,886

Transmission

133

153

153

148

137

133

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 ended March 31, 2016, shown here compared to 12-month fiscal periods ended December 31. 2 Certain comparative amounts have been reclassified to conform with the current fiscal year’s presentation.

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2015-16 ANNUAL REPORT SASKENERGY

OPERATING SUMMARY – DISTRIBUTION

2015-16 1

2015 4,792 2,534 5,210

2014 4,811 3,006 6,039

2013 4,639 3,020 6,193

2012 3,985 2,696 5,415

2011 3,803 2,851 5,564

Sales in million cubic metres 2

6,382 3,579 7,417 9.0%

Residential annual average usage (cubic metres)

Degree days 3

Percentage warmer (colder) than normal

6.0% (9.0%)

(12.5%)

2.4% (0.5%)

PIPELINE (kilometres) SaskEnergy Incorporated

69,489

69,015

68,612

68,092

67,692

69,547

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 ended March 31, 2016, shown here compared to 12-month fiscal periods ended December 31. 2 Retail, industrial and natural gas marketing. 3  A unit measuring the extent to which the temperature falls below 18° Celsius. Normal weather in 2015 (12 months ended December 31, 2015) would have been 5,500 degree days. Normal weather in 2015-16 (15 months ended March 31, 2016) would have been 8,076 degree days.

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

2015-16 1

2015 1.31

2014 1.42

2013 1.26

2012 1.20

2011 1.09

1.35

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

Jan. 4

Feb. 6

Dec. 6

Jan. 18

Jan. 31

Jan. 16/16

6

6

6

6

7

6

22

24

26

27

27

22

4 1

4 1

4 1

4 1

3 2

4 1

14,397

14,423

14,291

14,230

14,048

14,397

Gathering

297 441

203 435 113

203 435 113

201 435 113

201 435 113

297 441

Many Islands Pipe Lines (Canada) Limited

Bayhurst Gas Limited

21

21

15,156

15,174

15,042

14,979

14,797

TOTAL

15,156

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

24

23

24

24

24

24

3

3 7

3 3

3 1

3 1

3

13

13

COMPRESSION HORSEPOWER TransGas Limited

70,435

89,360

87,720

86,270

85,120

70,435

Bayhurst Gas Limited

6,300

6,300

6,300

6,300

6,300

6,300

82,615

95,660

94,020

92,570

91,420

TOTAL

82,615

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 ended March 31, 2016, shown here compared to 12-month fiscal periods ended December 31. 2 Includes Bayhurst Gas Limited.

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Financial and Operating Highlights

QUARTERLY FINANCIAL AND OPERATING HIGHLIGHTS

15 Months Ended March 31, 2016 1

2015-16 CONSOLIDATED FINANCIAL INFORMATION

Q1

Q2

Q3

Q4

Q5

($ millions) Total revenue Total expenses

275 220

145 146

141 161 (20)

247 196

262 236

1,070

959 111

Consolidated net income (loss) Market value adjustments

55

(1)

51 (6)

26

6

4

(7)

(21)

(24)

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

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

61

36

34

55

61

247

1% warmer

5% warmer

2% warmer 13% warmer 14% warmer

9% warmer

Transmission

Volumes transported (petajoules)

90

62

65

83

94

394

12 Months Ended December 31, 2014 1

2014 CONSOLIDATED FINANCIAL INFORMATION

Q1

Q2

Q3

Q4

($ millions) Total revenue Total expenses

362 299

227 244 (17) (11)

214 221

305 377 (72) (99)

1,108 1,141

Consolidated net income (loss) Market value adjustments

63 24

(7)

(33) (80)

6

Income (loss) before unrealized market value adjustments

39

(6)

(13)

27

47 17

Dividends

6

3

5

3

Cash provided by operating activities

80 29

93 56

23

52

248 299

Capital expenditures

104

110

OPERATING HIGHLIGHTS Distribution

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

66

35

27

56

184

17% colder

21% colder 10% warmer

2% warmer

9% colder

Transmission

Volumes transported (petajoules)

92

58

49

83

282

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 ended March 31, 2016, shown here compared to a 12-month fiscal period ended December 31.

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2015-16 ANNUAL REPORT SASKENERGY

System Integrity Initiatives SaskEnergy spent $92 million on system integrity initiatives in 2015, and an additional $15.5 million in the first three months of 2016, reflecting its commitment to safety. More than $5 million was spent on mitigation projects throughout the Province, with a focus on Last Mountain Lake and the communities of Regina Beach and Saskatchewan Beach, to increase gas service integrity in communities with possible slope movement.

CORPORATE HIGHLIGHTS

SaskEnergy’s Strategic Objectives align with the Government of Saskatchewan’s Crown Sector Strategic Priorities and the Saskatchewan Plan for Growth. The Corporation’s operating environment, the provincial economy, commodity market fluctuations, and public expectations of pipeline companies have influenced the strategic direction of the Corporation.

Damage Prevention Initiatives As part of its risk and asset management strategy, SaskEnergy engaged in a number of initiatives to reduce damage to its buried infrastructure. As a result, there was a six per cent reduction in third-party line hits in 2015, helping to add to a total reduction of nearly 30 per cent since 2013. In partnership with Sask 1st Call , the Saskatchewan Common Ground Alliance (SCGA), SaskPower and SaskTel, SaskEnergy expanded its Safety Patrol program during the 2015 construction season and added three new patrollers to its fleet. Originally monitoring neighbourhoods in Regina and Saskatoon where Crown utilities have reported higher percentages of facility damages, the program was extended to 16 other communities. The patrollers initiated face-to-face contact with homeowners, local contractors and customers in rental stores and businesses in Regina and Saskatoon to increase awareness of the requirement to contact Sask 1st Call for line locates before projects got underway. Other initiatives included a new Sask 1st Call mobile application, supervised crossings, tri-locates, collaborating with SCGA to ensure greater contractor awareness, providing information to businesses that rent digging equipment and public awareness advertising.

SERVICE EXCELLENCE

System Integrity and Risk Management Initiatives SaskEnergy spent $92 million on system integrity initiatives in 2015, and an additional $15.5 million in the first three months of 2016, reflecting the Corporation’s commitment to safety across its more than 84,000 kilometres of pipeline. SaskEnergy invested in a number of initiatives throughout the year to manage risk and ensure the safe and reliable operation of its distribution and transmission networks, including upgrades to 2,311 gas service connections in Regina, Regina Beach and Rosetown. More than $5 million was spent on mitigation projects throughout the Province, with a focus on Last Mountain Lake and the communities of Regina Beach and Saskatchewan Beach, to increase gas service integrity in communities with possible slope movement. SaskEnergy would like to thank all of these communities, and in particular the town of Regina Beach — the mayor, town council and all residents — for their cooperation and discussion. Corporate Safety Performance Safety is at the core of SaskEnergy’s business and, in 2015, the Corporation achieved its best-ever safety performance with a Total Recordable Injury Frequency Rate (TRIR) of 1.86 (injuries per 100 employees). This is down from 2.22 in 2014, which was also a record year. In 2015, SaskEnergy experienced its lowest-ever Preventable Vehicle Collision (PVC) Frequency Rate for the second consecutive year. In alignment with industry best practices, the Corporation achieved an overall audit score of 94 per cent in the Certificate of Recognition (COR) Program, which assesses the elements of SaskEnergy’s safety management system against COR Program requirements. Other 2015 safety initiatives included a new employee safety orientation program, which was developed internally to ensure all new and transferred employees receive a consistent introduction to corporate safety practices and procedures. In addition, SaskEnergy rolled out the first phase of a corporate Automated External Defibrillator (AED) Program, which saw the installation of 26 AED machines at various area offices, as well as training, setup, service and support.

ACHIEVING GROWTH

Distribution and Transmission Growth From January 1, 2015 to December 31, 2015, population growth in Saskatchewan benefited SaskEnergy, as the Corporation added 5,090 customers to its distribution base, bringing total customers to 385,858. Distribution customers grew to 386,886 by March 31, 2016. Transmission volume in 2015 increased by 18 petajoules (PJ), or 6.4 per cent, from 2014, and totaled 394 PJ for the 15 months ended March 31, 2016. SaskEnergy has made significant investments in its distribution and transmission system to connect customers in a wide range of key Saskatchewan industries, including enhanced oil recovery, potash production and power production.

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2015-16 ANNUAL REPORT SASKENERGY

Edam and Vawn Pipeline Projects In October 2015, the Corporation completed 15 kilometres of new pipeline to provide service to Husky Energy and Serafina Energy enhanced oil recovery operations near Edam and Vawn in west-central Saskatchewan. SaskEnergy, through its subsidiary TransGas Limited, used an innovative odourant injection system on this project, thereby enhancing process safety and reducing cost. As the cost of these projects was paid by the customers, TransGas worked closely with Husky and Serafina to ensure that the cost was within their expectations. Consistent with Crown Sector Strategic Priorities, TransGas was able to provide timely access to its transportation service through this project, while collaborating with customers to provide service at a reasonable cost. Flare Gas Capture in Southeastern Saskatchewan Capturing the volumes of natural gas produced in conjunction with Saskatchewan oil drilling/development represents a key opportunity to increase Saskatchewan gas production and, in turn, decrease the need for natural gas imports from Alberta to meet Saskatchewan’s growing energy demands. To this end, TransGas installed major transmission infrastructure in the southeastern part of the Province in 2015 to receive vital associated/flare gas volumes while facilitating gas processing initiatives in the area. To deliver an effective compression solution, TransGas leveraged a modular design, as well as learnings from a previous build at Saskatoon, to allow for two mobile trailers to be docked and operate as one system. In addition, TransGas utilized new project management processes to keep on-track and work through issues. Designed and installed in a record seven months, this new compression allowed previously constrained gas producers in the area to generate revenue through incremental volume flow, while creating increased transport revenues for TransGas.

Meter Exchanges SaskEnergy, along with a third-party contractor team, removed and replaced approximately 41,000 meters throughout the Province in 2015 — another record number, which is 4,000 more than 2014 and 16,000 more than in 2013. A further 18,000 meters were exchanged during the first three months of 2016. SaskEnergy accelerated the rate of meter replacements due to the introduction of stricter Measurement Canada compliance requirements that were implemented in 2013, and to ensure compatibility with its new Advanced Metering Infrastructure. The larger number of meter replacements was achieved through effective planning to maximize field technician productivity, and greater coordination with customers to ensure that most meter exchanges were completed by appointment. Response to Northern Forest Fires In late June 2015, smoke from the forest fires in northern Saskatchewan blew south, blanketing many cities and towns in the southern half of the Province, and even crossing the border into the United States. While the air quality decreased in these regions, the situation was significantly worse at Air Ronge, La Ronge, Montreal Lake, Weyakwin and other northern communities. The level of urgency from SaskEnergy/ TransGas crews and other first responders grew, and their response was outstanding. The efforts of SaskEnergy/ TransGas employees and their response to the fires were recognized internally at the annual SaskEnergy Employee Awards of Excellence, and externally, with recognition at the Legislative Building in Regina in November 2015.

CREATING VALUE

Productivity and Efficiency Initiatives In 2015, SaskEnergy realized $5.9 million in efficiency savings and process improvements through a combination of joint servicing activity with other Saskatchewan Crown corporations, the use of mobile compression and business process changes. With a multi-year financial focus, savings will continue to be gained through efficiencies achieved through planned Crown collaboration initiatives, business process changes and leveraging technology solutions. Further efficiencies related to strategic capital deployment have also been identified for future periods. In addition to the planned efficiencies that SaskEnergy incorporated into the Business Plan for 2015, further restraint measures were undertaken in alignment with provincial government heightened cost management. Within this direction, SaskEnergy re-evaluated the inputs that were included as part of the 2015 Business Plan and also undertook restraint measures including salary freezes, vacancy management, reduced travel and training costs and reduced advertising and sponsorships.

OUR TEAM

Developing Leaders and Realizing Training Efficiencies In alignment with the Crown Sector Priority of building an effective workforce through innovative strategies that attract, retain and develop skilled workers, SaskEnergy remains committed to developing its leaders at all levels. The most recent Leadership Development Program class, which included two SaskWater participants, concluded its program in early 2015. Other leadership learning opportunities throughout 2015 included internally-facilitated learning sessions, mentoring and stretch job assignments. The Executive and employees in the Generation Energy (Gen-E) group (ages 30 and under) also came together in an annual session to promote dialogue on business topics. The use of online tools, e-learning and video to effectively deliver information and training continued to bring efficiencies to learning on management, leadership, technical and compliance topics.

18

Corporate Highlights

Expanded Advanced Metering Infrastructure (AMI) Roll-out In 2015, more than 125,000 AMI gas modules were installed throughout the Province, bringing the total to nearly 279,000 modules (73 per cent of SaskEnergy distribution meters). As of March 31, 2016, more than 11,000 additional modules were installed. The modules, which resulted in $1.5 million in frontline resourcing savings in 2015 (and $0.5 million in the first three months of 2016), provide regular information on natural gas consumption to SaskEnergy using a two-way wireless communication system. Customer service levels have been increased as well — meter read visits/submitting meter reads is no longer required and billing questions are answered more quickly and efficiently. No safety issues have occurred relative to the deployment. Crown Collaboration Initiatives Given the effectiveness of recent multi-Crown efforts such as joint line location, AMI, joint servicing and similar private sector projects, collaboration focus is inherent within SaskEnergy’s efforts to optimize the use of resources and develop efficient solutions to improve service. In 2015, SaskEnergy and SaskTel aligned their provincial vegetation management control services under SaskEnergy’s existing contractor to provide leverage for SaskTel to achieve significant savings. In addition, SaskEnergy oversaw a competitive bid process and award to select Records and Information Management software, in alignment with the provincial government 2011 mandate for all government entities to be compliant with The Archives Act 2004 , to improve and secure electronic records management. The negotiated award to OpenText Corporation includes preferential software and maintenance pricing available for all Saskatchewan Government entities until September 30, 2016. SaskPower and SaskEnergy also collaboratively entered into five-year agreements for Employee and Family Assistance Programs, achieving an estimated 27 per cent in savings over five years. Expanded Use of Mobile Compression Since purchasing its first mobile compressor in 2010, TransGas has seen its fleet grow to include 13 units, with another four compressors expected later in 2016. Mobile compressors have given TransGas the flexibility to move compression to where it is required, whether it is for seasonal tasks such as field injection, for temporary power while a stationary unit is under repair, or to replace units that have reached the end of their useful life. Mobile compressors are modern low-emission units that combine flexibility of operation with reduced maintenance requirements, allowing TransGas to quickly respond to requests from industrial clients without large capital investments. As gas supply has rapidly grown in southeastern Saskatchewan, SaskEnergy/TransGas has used mobile compressors to bring this gas onto its storage and distribution systems.

Environmental Efficiencies As part of its commitment to reducing negative environmental impacts in the Province, SaskEnergy achieved a number of environmental efficiencies during 2015. Through the modernization of its compressor fleet, the Corporation exceeded its reduction target for compressor emissions by nearly 10 per cent. In addition, a record number of projects were reviewed by SaskEnergy’s Environment and Sustainability group, the 2015 emissions reduction target was more than doubled through leak repairs and greenhouse gas emissions were reduced by 8,800 tonnes. The Environment and Sustainability group is monitoring regulatory developments pertaining to climate change and air pollutants. While no emissions regulations were implemented, in March 2016 the Federal Government announced commitments toward reducing oil and gas industry methane emissions by 40 to 45 per cent over the next decade, using 2012 levels as a benchmark. SaskEnergy also entered into an agreement with the Ministry of Environment that allows the Corporation to screen and clear certain projects internally in a streamlined fashion relative to the Ministry.

19

2015-16 ANNUAL REPORT SASKENERGY

Northern Fires Response In late June 2015, smoke from the forest fires in northern Saskatchewan blew south, blanketing many cities and towns in the southern half of the Province, and even crossing the border into the United States. The level of urgency from SaskEnergy/TransGas crews and other first responders grew, and their response was outstanding.

MANAGEMENT’S DISCUSSION & ANALYSIS

INTRODUCTION The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the 12 months ended December 31, 2015 plus the three months ended March 31, 2016. 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 ended March 31, 2016, which is compared to a 12-month period ended December 31, 2014. 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 26, 2016, 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). The following discussion contains certain forward-looking statements that are subject to inherent uncertainties and risks, which are described in the Risk Management and Disclosure section of 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 fluctuations, 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. These unrealized market value adjustments vary considerably with the market prices of natural gas, drive significant changes in the Corporation’s consolidated net income and may obscure other business factors that are also important to understanding the Corporation’s financial results. The measures referred to above are non-IFRS measures, in that there is no standardized definition, and they may not be comparable to similar measures presented by other entities. STRATEGIC SCORECARD MEASURES SaskEnergy’s four strategic mandates as set out in the Business Plan — Service Excellence, Achieving Growth, Our Team and Creating Value — support the vision, mission and values of the Corporation. They also align with the Crown Sector Strategic Priorities as identified by Crown Investments Corporation of Saskatchewan (CIC). These mandates and strategic priorities play a vital role in SaskEnergy’s business planning process, performance management and reporting. They also help employees determine how their everyday efforts contribute to the Strategic Plan and overall direction of the Corporation and Province. The Crown Sector Strategic Priorities for 2015 – 2017 and the Saskatchewan Plan for Growth convey the shareholders strategic direction for the Province’s Crown corporations.

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 • Increased collaboration amongst the Crown corporations • Increased scrutiny of Crown corporation’s capital budget requirements

Strategic Priorities

• Customer Focus • Financial Stability

• Private Sector Engagement • Infrastructure Investment • Skilled Labour Shortage

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2015-16 ANNUAL REPORT SASKENERGY

SaskEnergy received two specific growth directives through the Saskatchewan Plan for Growth. In order to facilitate growth in the provincial economy, SaskEnergy’s role is 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). 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 business plan approval. The CIC Board reviews the business plan and confirms compliance with the Crown Sector Strategic Priorities prior to their 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 2015 performance relative to its strategic scorecard targets for the 12 months ended December 31, 2015, which are further defined in the Glossary of Key Success Measures. The performance results for the 15-month period ended March 31, 2016 are provided for information purposes.

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

22

Management’s Discussion & Analysis

SERVICE EXCELLENCE SaskEnergy is committed to providing safe and reliable service to its customers. Effective customer solutions and responsiveness are also important aspects of the service commitment as evidenced by its Service Excellence mandate. In alignment with Crown Sector Strategic Priorities, SaskEnergy focused on reducing the time it takes to complete new connect 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 provide a valuable gauge against which results can be analyzed.

Service Excellence

March 31, 2021 Target

March 31, 2016 Actual 1

March 31, 2020 Target

December 31, 2015 Target

March 31, 2019 Target

December 31, 2015 Actual

March 31, 2018 Target

December 31, 2014 Actual

March 31, 2017 Target

Strategic Measure

Efficient Operations

Distribution Operation, Maintenance and Administration Costs per Customer Competitive Residential Delivery Rates

$300

$316

$305

$375

$317

$318

$319

$320

$321

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Transmission

6.7%

7.4%

7.1%

8.5%

7.1%

7.1%

7.1%

7.1%

7.1%

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

Safety/Vigilance

5.9

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

6.0

6.0

6.7

5.8

5.6

5.5

5.4

5.3

0.00

0.07

0.11

0.00

0.09

0.08

0.07

0.07

0.07

5.9%

Safety and Integrity

6.2%

5.2%

5.3%

5.4%

5.5%

5.5%

5.5%

5.5%

Customer Satisfaction

87%

SaskEnergy

86%

89%

87%

89%

89%

89%

89%

89%

90%

TransGas

93%

93%

90%

93%

93%

93%

93%

93%

1 For the 15 months ended March 31, 2016

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2015-16 ANNUAL REPORT SASKENERGY

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