2017-18 SaskEnergy Annual Report

ANNUAL REPORT 2017-18

TABLE OF CONTENTS

CORPORATE GOVERNANCE 73 BOARD OF DIRECTORS 78 EXECUTIVE COMMITTEE 80 CORPORATE GOVERNANCE DISCLOSURE 88 STAKEHOLDER ENGAGEMENT 73 CONSOLIDATED FINANCIAL STATEMENTS 43 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS 44 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 45 INDEPENDENT AUDITOR’S REPORT 46 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 47 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 48 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 49 CONSOLIDATED STATEMENT OF CASH FLOWS 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 42 90 SUPPLEMENTARY INFORMATION 90 FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY 92 GLOSSARY OF KEY SUCCCESS MEASURES 95 GLOSSARY OF NATURAL GAS MEASUREMENTS 96 SASKENERGY INCORPORATED NATURAL GAS TRANSMISSION PIPELINES

1 3 4 5 6 8

CORPORATE PROFILE LETTER OF TRANSMITTAL MINISTER’S MESSAGE CHAIR’S MESSAGE PRESIDENT’S MESSAGE

FINANCIAL AND OPERATING HIGHLIGHTS

12 2017-18 YEAR AT A GLANCE

14

MANAGEMENT’S DISCUSSION AND ANALYSIS 14 INTRODUCTION 14 STRATEGIC SCORECARD MEASURES 23 INDUSTRY OVERVIEW 26 CONSOLIDATED FINANCIAL RESULTS 33 LIQUIDITY AND CAPITAL RESOURCES 34 CAPITAL EXPENDITURES 35 OUTLOOK 36 RISK MANAGEMENT AND DISCLOSURE 40 CRITICAL ACCOUNTING POLICIES AND ESTIMATES 41 ACCOUNTING POLICY CHANGES

MISSION

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

VISION

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

VALUES

SAFETY We never compromise the safety of our employees

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.

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.

SASKENERGY 2017-18 ANNUAL REPORT

CORPORATE PROFILE

Crown Investments Corporation of Saskatchewan

SaskEnergy Incorporated

TransGas Limited

Bayhurst Gas Limited

Many Islands Pipe Lines (Canada) Limited

Saskatchewan First Call Corporation

Transmission and Storage

Natural Gas In Storage

Interprovincial Transmission

Underground Facility Screening & Notification Service

Bayhurst Energy Services Corporation

BG Storage Inc.

Energy Services Company

Storage Joint Arrangements

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. 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’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 storage facility in the western area of Saskatchewan. 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, Saskatchewan.

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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SASKENERGY 2017-18 ANNUAL REPORT

MAKING COMMUNITIES SAFER

SaskEnergy is continuing its work with pipeline research groups and other utilities to use new technology to ensure the safe operation of its system. Satellite technology is already in use, detecting ground movement of as little as three millimetres at Last Mountain Lake. In addition, testing has begun with the use of Unmanned Aerial Vehicles (UAV) to quickly and inexpensively monitor isolated rural stations.

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SASKENERGY 2017-18 ANNUAL REPORT

LETTER OF TRANSMITTAL

May 24, 2018

His Honour the Honourable W. Thomas Molloy, O.C., S.O.M. Lieutenant Governor of Saskatchewan

Sir: I respectfully submit the annual report of SaskEnergy Incorporated for the fiscal period ending March 31, 2018, 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 B. Eyre] Honourable Bronwyn Eyre Minister Responsible for SaskEnergy

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SASKENERGY 2017-18 ANNUAL REPORT

MINISTER’S MESSAGE

On behalf of Premier Scott Moe and the Government of Saskatchewan, I am pleased to present the SaskEnergy 2017-18 Annual Report. Over the past year, SaskEnergy has continued to show solid alignment with our government’s established Crown Sector Priorities by providing safe, reliable, high quality products and services to support Saskatchewan’s economy. SaskEnergy has also been effective in identifying and implementing ways to deliver its services more efficiently to keep service levels high and rates as low as possible. As a government, we have emphasized the strategic execution of capital investment plans across the Crown sector, and SaskEnergy should be commended for its efforts to increase public safety, ensure energy security, and support economic growth through major capital work over the past year. As the dynamics of the energy sector shift in response to market forces, Saskatchewan companies will require well-planned and well-executed pipeline infrastructure projects both within and outside the borders of our province. To this end, the Government of Saskatchewan will continue to do its part in supporting and standing up for our energy sector. I would like to thank all SaskEnergy employees, management and the Board of Directors for their contributions to the company in 2017-18. [Original signed by B. Eyre] Honourable Bronwyn Eyre Minister Responsible for SaskEnergy

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SASKENERGY 2017-18 ANNUAL REPORT

CHAIR’S MESSAGE

On behalf of the SaskEnergy Board of Directors, it is my pleasure to join the Minister Responsible for SaskEnergy, the Honourable Bronwyn Eyre, in presenting the SaskEnergy 2017-18 Annual Report. SaskEnergy delivered strong financial results in 2017-18, including $110 million in income before unrealized market value adjustments, a 12.2 per cent consolidated return on equity, and a strong debt-to-equity ratio. Annual measures related to operational efficiency, customer satisfaction and greenhouse gas reductions also exceeded targets. Certainly, these outcome-based metrics provide a measure of corporate performance. However, they can be heavily affected, positively or negatively, by factors outside of SaskEnergy’s control — weather, natural gas market conditions, and decisions by regulators, customers and third-party transporters, among others. In many ways, an analysis of specific actions over the past year paints a more meaningful picture of SaskEnergy’s chosen focus areas. In 2017-18, the Corporation dedicated $109 million toward system integrity initiatives across its more than 85,000 kilometres of pipeline. After weighing a range of options, SaskEnergy leadership made the difficult decision to remove natural gas service from customers in sections of the Last Mountain Lake area where frequent ground movement had created unsafe conditions. Finally, in January, 150 employees and managers delivered an outstanding effort to restore natural gas service in the Melfort area after the largest outage in SaskEnergy history, deemed to be the result of unreported third-party infrastructure damage. As Board Chair over the last five years, I have consistently noted the desire to increase the safety of Saskatchewan communities as a motivating factor for projects and recommendations brought before the SaskEnergy Board of Directors, and we are proud to support these efforts. This focus is fundamental to SaskEnergy and well-embedded within decision-making processes and operational practices across the company, regardless of financial conditions, market changes or other variables in the business environment. 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

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SASKENERGY 2017-18 ANNUAL REPORT

PRESIDENT’S MESSAGE

Any analysis of SaskEnergy’s annual performance should begin with the headings of “safety”, “reliability”, and “affordability” — the three pillars of our commitment to customers across Saskatchewan. Safety-related efforts in 2017-18 led to a reduction in third-party contacts with SaskEnergy’s gas pipelines, which are now down a total of 37 per cent since 2013. SaskEnergy also continued work to systematically upgrade service connections in communities prone to ground shifting and move high pressure pipelines away from developed areas in growing cities. Meanwhile, overall system reliability has increased, thanks to the continued development of capital plans to increase flexibility in acquiring and transporting gas supply. Throughout the year, approximately $4.2 million in savings was realized through various efficiency and process improvements. These efforts contributed to SaskEnergy’s ability to provide the lowest residential delivery rate in Western Canada, while also achieving high levels of satisfaction from our residential, commercial and industrial customers. Building on this foundation of success, the SaskEnergy Board of Directors and leadership came together in 2017-18 to develop the SaskEnergy 2018-2023 Strategic Plan. That process highlighted how significantly SaskEnergy’s business environment has changed in recent years and the accompanying changes that will be required for our company to continue to meet customer and stakeholder demands. Primary among the factors driving SaskEnergy’s business decisions is the ongoing shift in provincial gas supply and demand. In 2017-18, approximately 65 per cent of the gas consumed in the province was imported from Alberta and that figure is expected to grow each year, increasing our reliance on interconnecting pipelines. Meeting provincial demand also requires investment in our own infrastructure, as SaskEnergy’s pipeline system is now being re-configured in certain areas of the province. While these investments will contribute to higher income, they will also increase operating costs and put pressure on delivery and transportation rates. To meet SaskEnergy’s mission of safe, reliable and affordable natural gas delivery, a focus on SaskEnergy’s core operations will be required. Along with the other members of the SaskEnergy Executive team, I extend my thanks to our skilled, dedicated and professional teams across the province for their contributions in 2017-18. Amid ever-changing market factors and economic conditions, our people have been the constant factor and remain the cornerstone of our future success. [Original signed by K. From] Ken From President and Chief Executive Officer, SaskEnergy

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SASKENERGY 2017-18 ANNUAL REPORT

SUSTAINABLE INFRASTRUCTURE

SaskEnergy began a 10-year program to upgrade older service connections in Saskatoon, completing 500 by March 31, 2018. A similar program in Regina has been underway since 2011, with 13,500 service connection upgrades now complete. Service connections have also been upgraded in Rosetown, Humboldt, Pense, Leader, Cabri, Kyle and Prelate.

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SASKENERGY 2017-18 ANNUAL REPORT

FINANCIAL AND OPERATING HIGHLIGHTS

CONSOLIDATED FINANCIAL INFORMATION

($ millions)

2017-18

2016-17

2015-16 1 12-month period

2014

2013

271 137

Delivery

240 134

209 121

232

217

Transportation and storage Commodity margin Gas marketing margin Customer contributions

98

92 18 32 24 12 89 97 77 11 40

41 26 21

25 14 55 10

28 20 58 12

9

14 33 16

7

Other revenue

503

478

448

402

395

Total revenue and margins

86

Employee benefits

87

90

92

132 100

Operating and maintenance Depreciation and amortization

134

124

126

96 12 46 33 70 76

89 12 47

83 11 44

14 48 13

Saskatchewan taxes Net finance expense Other losses (gains)

0

(1)

2

393 110

408

362

355

316

Total expenses

Income before unrealized market value adjustments

86 30 56 55

47

79

34

Market value adjustments

(80) (33)

-

CONSOLIDATED NET INCOME (LOSS)

144

146

79 30

39

Dividends declared

29

17

2,688

Total assets

2,505

2,450

2,380

2,207

312

Cash provided by operating activities Cash used in investing activities Cash (used in) provided by financing activities

225

258

248

244

(258) (58) 255

(198) (37) 198

(210) (47) 212

(283)

(221) (25) 224

40

Capital expenditures Total net debt Debt/Equity ratio Rate of return on equity

299

1,232 56/44 12.2%

1,210 59/41

1,156 61/39

1,159 63/37

1,064 59/41

8.8% 11.6% 6.5% 11.0%

OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm

39 33

34 30

32 27

39 34

37 33

Commercial

147 219

Industrial

129 193

127 186

111 184

108 178

TOTAL

Transmission energy (petajoules) Domestic

325

308

280

275

265

25

Export

18

24

7

3

TOTAL

350

326

304

282

268

Number of customers Distribution

394,592

390,886

386,886

380,768 373,436

119

Transmission

117

123

153

153

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. For comparative purposes, the unaudited 12-month period ending March 31, 2016 is shown.

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SASKENERGY 2017-18 ANNUAL REPORT

OPERATING SUMMARY — DISTRIBUTION

2017-18

2016-17

2015-16 1 12-month period

2014

2013

5,607 2,736 5,787 (4.8%)

Sales in million cubic metres 2

5,004 2,543 5,155

4,785 2,387 4,901

4,881 3,006 6,039

4,639 3,020 6,193

Residential annual average usage (cubic metres)

Degree days 3

Percentage (colder) warmer than normal

6.7% 12.2% (9.0%)

(12.5%)

PIPELINE (kilometres) SaskEnergy Incorporated

70,180

69,870

69,547

69,015

68,612

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. 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 2017-18 (12 months ending March 31, 2018) would have been 5,522 degree days.

OPERATING SUMMARY — TRANSMISSION

2017-18

2016-17

2015-16 1 12-month period

2014

2013

1.50

Peak day natural gas flows (petajoules)

1.36

1.35

1.42

1.26

Dec. 29

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

Jan. 12

Jan. 16

Feb. 6

Dec. 6

6

6

6

6

6

18

18

22

24

26

4 1

4 1

4 1

4 1

4 1

14,373

14,465

14,397

14,423

14,291

289 443

Gathering

297 445

297 441

203 435 113

203 435 113

Many Islands Pipe Lines (Canada) Limited

22

Bayhurst Gas Limited

21

21

TOTAL

15,127

15,228

15,156

15,174

15,042

SYSTEM COMPRESSION TransGas Limited Stations Bayhurst Gas Limited Stations Mobile Compressor Units COMPRESSION HORSEPOWER TransGas Limited 3

25

25

24

23

24

3

3

3

3 7

3 3

17

17

13

82,841

79,765

76,315

89,360

87,720

6,300

Bayhurst Gas Limited

6,300

6,300

6,300

6,300

TOTAL

89,141

86,065

82,615

95,660

94,020

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. For comparative purposes, the unaudited 12-month period ending March 31, 2016 is shown.

2 Includes Bayhurst Gas Limited. 3 Includes BESCO assets.

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SASKENERGY 2017-18 ANNUAL REPORT

QUARTERLY FINANCIAL AND OPERATING HIGHLIGHTS

March 31, 2018

2017-18 Financial Highlights ($ millions)

Q1

Q2

Q3

Q4

912 768 144

Total revenue Total expenses

166 172

145 143

271 203

330 250

Consolidated net income (loss) Market value adjustments

(6)

2

68

81 27

34

2

(3)

8

Income (loss) before unrealized market value adjustments

110

(8)

5

60

54

39

Dividends

-

-

16 61 81

23

312 255

Cash provided by operating activities

73 37

39 65

139

Capital expenditures

72

OPERATING HIGHLIGHTS Distribution

219

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

37

37

66

79

5% colder

3% warmer

22% warmer

6% colder

9% colder

Transmission

350

Energy transported (petajoules)

68

76

100

106

March 31, 2017

2016-17 Financial Highlights ($ millions)

Q1

Q2

Q3

Q4

795 649 146

Total revenue Total expenses

118

146 140

233 162

298 283

64 54 57

Consolidated net income (loss) Market value adjustments

6

71 26

15

76

13

(20)

Income (loss) before unrealized market value adjustments

70

(3)

(7)

45

35

29

Dividends

-

-

14 39 72

15

225 198

Cash provided by operating activities

54 29

27 55

105

Capital expenditures

42

OPERATING HIGHLIGHTS Distribution

193

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

38

35

55

65

7% warmer 5% warmer 5% warmer 7% warmer

17% warmer

Transmission

326

Energy transported (petajoules)

65

74

90

97

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SASKENERGY 2017-18 ANNUAL REPORT

RECORD NATURAL GAS CONSUMPTION

SaskEnergy set three new natural gas consumption records in 2017-18, driven by distribution customer growth as well as increased industrial sector demand for enhanced oil recovery and power production. SaskEnergy has plans for continued investment in pipeline capacity and compressor stations, which will provide additional horsepower to move larger volumes of gas to where it is needed by customers.

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SASKENERGY 2017-18 ANNUAL REPORT

Achieved a 3.5 per cent reduction in third- party line hits, marking the fourth consecutive year of decreased facility damage as a result of public awareness initiatives. Completed the installation of a new 16-kilometre transmission pipeline to provide an additional 10 terajoules (TJ) per day of system capacity for the Success-to-Rosetown intersystem. Another 50 TJ per day will be available once compression is added at the Success Compressor Station in 2019. Launched the new ExpressAddress website — a collaborative eSask initiative with SaskEnergy managing operations — that allows residents to notify multiple organizations of upcoming moves. This service has grown significantly, with nearly 28,000 requests received in 2017-18 compared to 11,479 in 2007. Dedicated $109 million toward system integrity initiatives, reflecting SaskEnergy’s commitment to safety across its more than 85,000 kilometres of pipeline. Installed 31,773 Advanced Metering Infrastructure (AMI) gas modules throughout the province, bringing the total to nearly 373,000 or 94 per cent of SaskEnergy distribution meters. SaskEnergy’s AMI modules provide customer service benefits including billing based on the amount of actual gas consumption, rather than estimated consumption, and automatic and secure meter readings. Celebrated 20 years of the SaskEnergy Network, a collaboration between SaskEnergy and independent contractors and retailers that sell and install natural gas equipment and appliances. Through this initiative, SaskEnergy and industry serve mutual customers with better services, information and tools to help customers understand the advantages of natural gas and choose the best appliances or equipment for their homes and businesses.

Reduced the amount of risk to the distribution system, and to the public, associated with high levels of ground movement within six Last Mountain Lake communities. While these efforts resulted in a total of 230 customers having their natural gas service permanently removed, affected customers were offered a fuel transition allowance to assist in transitioning appliances to alternate fuel sources. Provided competitive residential delivery rates to customers, offering among the lowest rates in the country and the lowest delivery rate in Western Canada. Added 3,706 customers to the SaskEnergy distribution system, bringing total customers to 394,592. Obtained an overall audit score of 90 per cent in the Energy Safety Canada Certificate of Recognition (COR) program, which evaluates an organization’s safety programs against provincial and industry standards. Completed two transmission pipeline projects to support enhanced oil recovery activities in the province, providing customers with increased receipt capacities and the capacity for future developments in the areas. Committed to the Truth & Reconciliation Calls to Action for the corporate sector, which include ensuring Aboriginal peoples have access to jobs, training and education opportunities, and that Aboriginal communities gain long-term benefits from projects related to economic development. Completed the Distribution Foundation Project, which converted computer-aided design (CAD) files into Geographic Information Systems (GIS) databases to allow SaskEnergy to leverage the data related to its assets, make the data more accessible, increase analytical capabilities and provide future savings. Developed a standard for installing slipstream technology on new mobile compressor units to capture vented gas and redirect it back into the engine air intake for use as a supplemental fuel source, thereby reducing greenhouse gas emissions and operating costs.

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SASKENERGY 2017-18 ANNUAL REPORT

LAYING THE GROUNDWORK FOR GROWTH

In 2017-18, SaskEnergy completed the first phase of a seven-year, $60 million project in Regina to move high pressure transmission lines away from developed areas of the city, while significantly increasing natural gas capacity to serve the growing number of homes, businesses and industry.

Final design work and pipeline easement negotiations were completed for a 2018 construction start on a $70 million project to increase natural gas capacity for the City of Saskatoon and areas south and east of the city. This project will also move major high pressure transmission pipelines further away from populated areas.

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SASKENERGY 2017-18 ANNUAL REPORT

MANAGEMENT’S DISCUSSION & ANALYSIS

INTRODUCTION The Management’s Discussion and Analysis (MD&A) highlights the primary factors that affected SaskEnergy’s consolidated financial condition and performance for the 12 months ending March 31, 2018. Using financial and operating results as its basis, the MD&A describes the Corporation’s past performance and future prospects, enabling readers to view SaskEnergy from the perspective of management. The MD&A is presented as at May 24, 2018, 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 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.

The government’s strategic plan identified five strategic priorities based on the principle of Keeping Saskatchewan Strong.

Strategic Priorities: • Customer Focus

• Financial Sustainability • Infrastructure Investment • Private Sector Engagement • Labour Force In addition, the Provincial Government has issued messaging around the need for transformational change. Crown corporations are expected to consider all potential structure, administration and operational changes in order to achieve financial sustainability and the sustainability of high-quality service delivery to the people of Saskatchewan. For the 2017-18 fiscal year, SaskEnergy received three specific directives to support the Province’s priorities. • Continue to monitor and manage the time it takes to complete new connect requests for customers; • Continue to meet the needs of a growing residential, commercial and industrial customer base through upgrades to SaskEnergy’s distribution and transmission network; and, • Recommend rate adjustments that continue to take long-term return targets into consideration. During 2017-18, SaskEnergy made progress on all 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. SaskEnergy’s rate strategy continues to be driven by delivering high quality customer

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MANAGEMENT’S DISCUSSION AND ANALYSIS

service in a cost effective manner. This continues to be achieved while providing safe and reliable management of the Corporation’s extensive natural gas infrastructure, while maintaining industry comparable rate of return targets. 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 2017-18 performance relative to its strategic scorecard targets for the 12 months ending March 31, 2018, which are further defined in the Glossary of Key Success Measures.

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

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

Saskatchewan Crown Sector Priorities & Saskatchewan Plan for Growth

Service Excellence

Achieving Growth

STRATEGIC MANDATES

Our Team

Creating Value

FOCUS AREAS

Infrastructure

People/ Resourcing

Financial Capability

Productivity Resource Management Collaboration

Strong Earnings Focus Efficiencies Supply Options

Safety Growth Strategic Capital

KEY DIRECTIONS

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SASKENERGY 2017-18 ANNUAL REPORT

SERVICE EXCELLENCE SaskEnergy continued its commitment to provide safe and reliable service to customers through effective customer solutions and responsiveness as evidenced by the Corporation’s Service Excellence mandate. In alignment with the Crown Sector Strategic Priorities, SaskEnergy focuses on timely completion of new customer connection requests.

Success in Service Excellence is measured by three areas categorized as Efficient Operations, Safety/Vigilance and Customer Satisfaction. Industry benchmarking and customer surveys are also tools used by the Corporation to analyze results and gauge the level of success.

March 31, 2017 Actual

March 31, 2018 Actual

March 31, 2018 Target

March 31, 2019 Target

March 31, 2020 Target

March 31, 2021 Target

March 31, 2022 Target

Strategic Measure Efficient Operations Distribution Operation, Maintenance and Administration

$290

$298

$322

$327

$331

$335

$338

Costs per Customer

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 Operation,

6.5%

7.0%

7.1% 6.8% 6.7% 6.6% 6.4%

Maintenance and Administration Costs per Book Value of Assets Managed Safety/Vigilance SaskEnergy Leaks per 1,000 kilometres of Mains TransGas Pipeline Failures per 1,000 kilometres of Pipe Safety and Integrity

12.79

5.25

5.7

5.6

5.5

5.4

5.4

0.14

0.00

0.07

0.07

0.07

0.07

0.07

6.7%

5.8%

6.9% 6.0% 6.0% 6.0% 6.0%

Customer Satisfaction SaskEnergy

90% 92%

89% 94%

89% 89% 89% 89% 89% 93% 93% 93% 93% 93%

TransGas

16

MANAGEMENT’S DISCUSSION AND ANALYSIS

Efficient Operations Continued focus on efficiency initiatives and aggressive cost management favourably impacted the results for the efficiency metrics in 2017-18. However, many of the initiatives implemented in response to the provincial government’s directive for fiscal restraint in the past few years were deemed to be temporary in nature. The Corporation will 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 is committed to the cost-effective delivery of natural gas services to its customers. The Corporation realized approximately $4.2 million in 2017-18 ($4.0 million in 2016-17) in efficiency and process improvement savings. These efforts are reflected in the measure Operation, Maintenance and Administration Costs per Customer and SaskEnergy’s continued ability to successfully offer competitive residential delivery rates to its customers. A typical residential customer in Saskatchewan paid $529 for delivery service in 2017-18 ($500 in 2016-17), which is the second lowest of the major utilities across Canada. Residents of Hamilton, Ontario paid the lowest rate at $409. SaskEnergy had the fourth lowest total residential natural gas utility rate (delivery and commodity combined) in Canada. 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. In 2017-18, TransGas OM&A results continued to reflect strong resource management efforts and a commitment to efficient operations throughout the year.

Safety/Vigilance The Corporation’s efficiency focus does not conflict with its ongoing commitment to maintaining a safe and reliable system. System integrity programming is actively managed to maintain positive 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. One of the key initiatives SaskEnergy continued in 2017-18 was the service upgrade program. This major integrity initiative inspects and upgrades service lines to ensure safe and reliable gas service to communities. This program, together with enhanced leak survey processes and damage prevention initiatives, is aimed at reducing leaks. Despite these efforts, the unique ground conditions of a long winter with many freeze and thaw cycles started to cause failures of a certain type of fitting used during early system installations. This resulted in the metric for leaks being higher than target. TransGas continued to reduce risks for its transmission pipelines through in-line inspections, visual inspections, damage prevention initiatives and the cathodic protection program. In 2017-18, there were two specialized inspections performed for cracking and corrosion. One of these was a first for the TransGas system, utilizing innovation and technology to ensure a safe and reliable system. Pipeline failures on the transmission system were higher than target for 2017-18. There were two leaks reported, up from the one in the previous year. The first leak was a pinhole leak detected through an on-site inspection and was repaired immediately. The second was an unreported line hit and was not detected until it ruptured. SaskEnergy and TransGas invested $109 million toward safety and integrity initiatives in 2017-18, including capital and operating ($91 million in 2016-17).

17

SASKENERGY 2017-18 ANNUAL REPORT

Customer Satisfaction SaskEnergy believes that a true indicator of the Corporation’s success in delivering safe, reliable and affordable services is formal feedback from customers. Customers are vital to the success of any business, and both SaskEnergy and TransGas conduct annual surveys in an effort to gather feedback on customer experiences, expectations and overall satisfaction. In 2017-18, overall customer satisfaction with SaskEnergy remained high at 90 per cent. The highest rated area in relation to SaskEnergy’s customer service continues to be ‘providing reliable service’ at 95 per cent satisfaction. ‘Being a company that takes initiative to meet customer needs’ and ‘being committed to helping customers use energy efficiently’ rank lower in satisfaction at 83 per cent and 80 per cent, respectively. The lower percentages are a result of longer wait times for customers in the phone queue as resources to address customer calls were strained due to efforts required to manage vacancies as well as issues associated with higher call volumes. 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 2017-18 continued to reflect strong satisfaction with TransGas customer services and interactions with the customer service team on a day-to-day basis. As a result of feedback from the survey, TransGas will continue to explore opportunities for improvements to the customer service business system, through system builds and enhancements.

18

MANAGEMENT’S DISCUSSION AND ANALYSIS

ACHIEVING GROWTH SaskEnergy’s growth strategy 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, 2017 Actual

March 31, 2018 Actual

March 31, 2018 Target

March 31, 2019 Target

March 31, 2020 Target

March 31, 2021 Target

March 31, 2022 Target

Strategic Measure Business Growth Investment Core Growth – SaskEnergy and TransGas Revenue Growth Diversified Non-Core Business Return on Non-Core Assets Total Capital Investment (millions) Percentage of Third-Party Capital Investment Associated Gas Capture as a Percentage of 2014 Saskatchewan Sourced Volume

1.5%

2.9%

2.1% 3.0% 3.0% 3.0% 3.0%

(5.5%)

1%

(1.4%)

(1.0%)

1.5% 4.9% 11.2%

$2.7

$5.9

$12.7

$41.0

$15.6

$6.8

$3.2

6%

2%

20% 59% 41%

2%

0%

31%

31%

35% 36% 36% 37% 37%

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 2017-18, the distribution utility increased its active customer base by 3,706 customers (4,000 customers in 2016-17) and the transmission utility increased provincial load by 2.3 per cent from 2016-17. The slowdown in provincial growth continued to impact the rate of growth in the Corporation’s utility businesses in 2017-18 as reflected in the result for the Core Growth metric.

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 have historically created a wider revenue base; however, the low natural gas price environment and a general lack of optimism in forward pricing of the natural gas commodity have limited opportunities in recent years. The Return on Non-Core Assets metric tracks the return earned by the Corporation from its investment in non-core assets. The lack of optimism in future gas prices resulted in further write-downs of the Corporation’s natural gas storage assets in Bayhurst, negatively impacting this metric.

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SASKENERGY 2017-18 ANNUAL REPORT

During 2017-18, SaskEnergy reviewed the future prospects of its non-core business with the objective to maximize enterprise value. As a result, certain gathering, treatment and compression assets are being marketed for sale. SaskEnergy endeavors to work with private sector partners to grow its non-core business. However, the economic climate continues to cause those in the industry to proceed cautiously, resulting in very little activity in the sector in 2017-18. 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 the Corporation’s plans for liquefied natural gas OUR TEAM Our Team is comprised of employees, contractors and business partners. These groups work collaboratively to develop mutually beneficial solutions for customers while improving the efficiency and effectiveness of work processes. With the provincial government’s mandate to demonstrate cost restraints, SaskEnergy continued aggressive vacancy management in 2017-18. While significant savings have been realized in the short term, aggressive vacancy management will continue to impact customer service levels. Retirements in key

(LNG) and compressed natural gas (CNG) initiatives. The metric for Associated Gas Capture as a Percentage of Saskatchewan Sourced Volume is 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 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. operating areas are further exacerbating the longer-term impacts of vacancy management as the experience and knowledge of those retirees is lost. However, efforts to foster a results-focused culture, along with effective leadership development and succession management practices, continue to provide positive results. The Our Team mandate also reflects SaskEnergy’s commitment to providing “the right resource at the right place at the right time”. Within Our Team, there are three categories of measures — Physical Safety, Employee Engagement and Workforce Diversity.

March 31, 2017 Actual

March 31, 2018 Actual

March 31, 2018 Target

March 31, 2019 Target

March 31, 2020 Target

March 31, 2021 Target

March 31, 2022 Target

Strategic Measure Physical Safety Total Recordable Injury Frequency Rate

Third Quartile

Second Quartile

Second Quartile

Second Quartile

Second Quartile

Second Quartile

Second Quartile

Employee Engagement Employee Survey

N/A At or above Survey Norm

N/A

At or above Survey Norm

At or above Survey Norm

At or above Survey Norm

At or above Survey Norm

Workforce Diversity Youth (30 years of age or less)

11.5%

12.6%

16.0% 17.0% 18.0% 18.0% 18.0%

15.4%

First Nations/Métis

15.1%

16.0% 16.0% 17.0% 17.0% 17.0%

20

MANAGEMENT’S DISCUSSION AND ANALYSIS

Physical Safety SaskEnergy continually strives to develop a ‘safety first’ work environment. Employee and public safety are at the core of every activity at SaskEnergy. Having each employee home safely at the end of every day is the Corporation’s top priority. SaskEnergy utilizes collaboration with industry peers and associations to understand best practices and uses this information to adopt new processes and procedures that align with leading practices. Safety culture is a growing area of focus for SaskEnergy and understanding how safety culture can be measured and effectively managed is pertinent. The Corporation’s approach is to utilize collaboration and the assistance of third-party consultants to accomplish this. Process Safety continues to be another area of emphasis by improving investigation processes to learn from incidents in order to prevent recurrences. A project is also underway to upgrade and enhance the corporate hazard reporting application. The Total Recordable Injury Frequency (TRIF) rate was 2.43 at the end of March 2018 (1.63 in 2016-17). This means there were 2.43 reportable injuries for every 100 employees. Based on the Canadian Gas Association (CGA) benchmark information, this result places SaskEnergy in the third quartile relative to its CGA counterparts. Employee Engagement SaskEnergy is striving to enhance and unify a positive culture with a more consistent ‘One Company, One Team’ approach after reorganizing and streamlining several business units around common work objectives. With the success built on having an aligned and engaged team, there is continued focus on building strong leaders and providing an overall positive employee experience. Employee engagement was last formally measured in 2013. An RFP process was recently completed with Executive Council to select a new service for gathering employee feedback. Plans are now underway to use a new survey tool to help focus efforts related to employee engagement and overall employee experience. SaskEnergy is evolving to a continuous feedback model beginning with a benchmarking survey and followed by ongoing feedback opportunities on a variety of topics through the entire employee lifecycle. Overall, employee performance remains strong, but management’s current sense is that resourcing limitations may be impacting energy levels, capacity and engagement. As part of the ongoing efforts to focus and develop leaders, SaskEnergy continues to use a variety of options including stretch assignments, coaching, mentoring, Leadership

Network discussions and internal learning sessions. As well as job-specific required training, certain discretionary job and competency-related training is also being selectively provided to support the ongoing development of employees. The Corporation plans to launch another intake of its internal Leadership Development Program later this year. As well, all employees are encouraged to have a personal development plan that targets specific areas for growth. Workforce Diversity In line with Crown Sector Strategic Priorities, SaskEnergy strives to build a workforce reflective of Saskatchewan’s population by providing equal opportunity to qualified people, recognizing that First Nations, Métis and youth represent a large portion of Saskatchewan’s current and future labour force. SaskEnergy’s successful workforce transition strategies are reflected in the consistently strong results related to the percentage of youth employed by the Corporation. This has been an area of strategic focus for the Corporation for several years; however, 2017-18 results are lower than target as the focus on vacancy management has limited opportunities to hire employees.

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