2017-18 SaskEnergy Annual Report

SASKENERGY 2017-18 ANNUAL REPORT

RISK MANAGEMENT AND DISCLOSURE SaskEnergy is subject to a number of risks in transmission, storage, distribution and sale of natural gas as well as its business development activities. The Corporation’s effectiveness at managing risk directly affects its performance. The nature of natural gas, and the operation of high pressure pipelines, means that risk management is a critical operational focus for all employees at SaskEnergy. SaskEnergy’s approach to risk management is to thoroughly examine its operating activities to identify existing and emerging risks, effectively communicate those risks throughout the organization and actively manage them through its Enterprise Risk Management (ERM) process. SaskEnergy undertakes annual risk assessments that are used as inputs to the strategic and business planning process. The ERM process establishes roles and responsibilities as well as a general strategy for the Corporation to manage its risks. While risk management is the responsibility of all levels of management, the Board of Directors and Executive Committee set the tone and provide leadership direction for ERM. The Executive Committee is responsible for formally identifying strategic risks that impact the Corporation’s goals, participating in the risk assessment process and developing strategic risk management plans. As many of the risks facing the organization change frequently, the Corporation’s risk management plans remain adaptive and flexible in addressing risks. The Board of Directors is responsible for the risk management policy and framework. The Board oversees risk management efforts by reviewing annual reports on risk management processes and controls, and ensuring that key corporate initiatives appropriately address the identified risks. At the beginning of the fiscal year, the following risks were identified as those requiring strategic focus: Interest Groups Public objection to industry infrastructure development from a cultural, safety, environmental, or societal perspective exposes SaskEnergy to the risk of higher costs, delays or even project cancellations. In recent years, the ability of landowners and interest groups to make claims and oppose projects in regulatory and legal forums has increased. This “not in my backyard” philosophy could impact the Corporation’s ability not only to develop new facilities, through delays and additional costs, but also to operate existing facilities, and could potentially affect the integrity and reliability of the natural gas pipeline distribution system. Through various programs and strategies, including stakeholder engagement, Aboriginal consultation,

Consolidated net income, including the impact of fair value adjustments, is expected to be $68 million in 2018-19. Natural gas prices are a key risk to this forecast. A $1.00 per GJ increase in the price of natural gas will allow SaskEnergy to recover $19 million of the $33 million net realizable value adjustment reported at the end of March 31, 2018 on natural gas in storage and would allow SaskEnergy to increase the $12 million market value adjustment reported on natural gas contracts to $41 million. Conversely, a $1.00 per GJ decline in natural gas prices would adversely affect net income to a similar degree. During 2018-19, a number of derivative instruments are expected to expire resulting in a reversal of the favourable fair market value adjustments reported in the prior period. Further declines in natural gas prices could contribute negatively to the unfavourable impact that is expected from the fair market value reversal. Weather will be another key factor affecting 2018-19 financial results. Forecasted results are based on normal weather as defined by the 30-year average. To the extent that weather is colder than normal, delivery revenue will increase, and to the extent that weather is warmer than normal, delivery revenue will be lower. Transportation, storage, and other revenue items are typically not impacted by weather, as is the case with operating expenses. Commodity revenue and gas purchases are both affected by weather but typically offset each other. SaskEnergy’s financial performance is expected to remain strong. Capital expenditure requirements and rising costs will remain a challenge throughout the forecast period as SaskEnergy adjusts to continued customer load growth, infrastructure renewal requirements and shifting natural gas supply dynamics. A low natural gas price environment will continue to create challenges from a gas marketing perspective, but could create opportunities to reduce commodity rates to customers. Delivery and transportation revenue will continue to grow along with growth in operating costs. The outcome will be moderate rate pressure assuming rate increases are regular. SaskEnergy will continue to focus on providing safe and reliable service to its customers and investing in safety and growth initiatives while actively seeking operating and capital deployment efficiencies through collaboration and technology initiatives.

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