SaskEnergy 2018-19 Annual Report

2018-19 Annual Report

MISSION

Deliver natural gas in a safe, reliable, affordable way.

VISION

Create customer value through safe, innovative energy solutions.

VALUES

SAFETY We are always committed to our safety, the safety of our team and the public. ACCOUNTABILITY We are accountable for our decisions, our actions and the results. SPIRIT We create a positive and dynamic work environment that recognizes achievement and balance while supporting business success. COLLABORATION

We succeed through strong internal and external relationships, trust and open communication.

OUR STORY In 1952, Saskatchewan Power Corporation (SaskPower) was given the authority to supply natural gas within Saskatchewan and the company’s natural gas division engaged in natural gas development, production, transmission and distribution from 1952 to 1988. In April of 1988, Saskatchewan Energy Corporation was incorporated and on June 1, 1988, it commenced operations and acquired the natural gas transmission and distribution assets then owned by SaskPower. In December 1990, the Corporation’s name was changed to Saskatchewan Energy Holdings Ltd. (SaskEnergy) and in May of 1992, Saskatchewan Energy Holdings was amalgamated with its subsidiary, SaskEnergy Incorporated, and continued under the name of SaskEnergy Incorporated. On October 5, 1992, SaskEnergy became a Crown corporation. For 30 years, SaskEnergy Incorporated has been Saskatchewan’s natural gas distribution and transportation company, providing safe and reliable natural gas service to residential, farm, commercial and industrial customers. Today, SaskEnergy has a strong and vibrant workforce of approximately 1,100 employees who work in more than 50 locations across the province. We are responsible for serving more than 397,000 customers in 93 per cent of Saskatchewan communities. Gas is purchased and transported through our more than 70,000 kilometres of distribution lines and 15,000 kilometres of transmission gas lines. Through our subsidiary, TransGas Limited, SaskEnergy owns and operates natural gas gathering, treatment, compression, storage and transmission facilities within Saskatchewan. TransGas transports natural gas for producers, industrial and commercial customers, as well as SaskEnergy. Another subsidiary, Many Islands Pipe Lines (Canada) Limited (MIPL), owns a large diameter low-kilometre transmission gas line system that transports natural gas over the Alberta, Manitoba and United States borders. Our number one priority at SaskEnergy is to maintain a safe and reliable natural gas line system and we are proud to say that we have a 99.9 per cent reliability rating. Thanks to our comprehensive and well-coordinated gas line safety and integrity program, and our dedicated employee team, most customers never experience an unplanned outage. Through our values of Safety, Accountability, Spirit and Collaboration, the SaskEnergy team continues to rise to the challenge of a changing industry and the increased demand for natural gas in Saskatchewan.

TABLE OF CONTENTS

CORPORATE GOVERNANCE 78 BOARD OF DIRECTORS 85 EXECUTIVE COMMITTEE 87 CORPORATE GOVERNANCE DISCLOSURE 96 STAKEHOLDER ENGAGEMENT 78 CONSOLIDATED FINANCIAL STATEMENTS 40 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS 41 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 42 INDEPENDENT AUDITOR’S REPORT 44 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 45 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 46 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 47 CONSOLIDATED STATEMENT OF CASH FLOWS 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 39

1 2 3 4 5 7

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

FINANCIAL AND OPERATING HIGHLIGHTS

11 2018-19 HIGHLIGHTS

13

MANAGEMENT’S DISCUSSION AND ANALYSIS 13 INTRODUCTION 13 STRATEGIC SCORECARD MEASURES 21 INDUSTRY OVERVIEW 22 CONSOLIDATED FINANCIAL RESULTS 30 LIQUIDITY AND CAPITAL RESOURCES 31 CAPITAL EXPENDITURES 32 OUTLOOK 34 RISK MANAGEMENT AND DISCLOSURE 37 CRITICAL ACCOUNTING POLICIES AND ESTIMATES 38 ACCOUNTING POLICY CHANGES

99

SUPPLEMENTARY INFORMATION

101

GLOSSARY OF KEY SUCCCESS MEASURES

SASKENERGY 2018-19 ANNUAL REPORT

CORPORATE PROFILE

Crown Investments Corporation of Saskatchewan

SaskEnergy Incorporated

TransGas Limited

Bayhurst Gas Limited

Many Islands Pipe Lines (Canada) Limited Interprovincial Transmission

Saskatchewan First Call Corporation Underground Facility Screening & Notification Service

Transmission and Storage

Natural Gas In Storage

BG Storage Inc.

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 service 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 one 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. BG Storage Inc. (BGSI) is a wholly owned subsidiary of Bayhurst Gas Limited and 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 eight transmission gas line 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 “Click 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 natural gas lines and non-gas line-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 gas line 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 2018-19 ANNUAL REPORT

LETTER OF TRANSMITTAL

May 23, 2019

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, 2019, 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 2018-19 ANNUAL REPORT

MINISTER’S MESSAGE

On behalf of Premier Scott Moe and the Government of Saskatchewan, I am pleased to present the SaskEnergy 2018-19 Annual Report. Each year, SaskEnergy aligns its strategies and performance management plans with the Saskatchewan Crown Sector Strategic Priorities framework. These focus areas are deliberately chosen by our Government to assist commercial Crowns in striking certain balance points — from high levels of reliability and customer service at reasonable rates to investment plans designed to meet future demand, while demonstrating prudent capital prioritization. Throughout its 30 years, and once again in 2018-19, SaskEnergy has done an exemplary job of meeting these requirements. The Corporation provides reliable and affordable service to homes and businesses, along with positive financial returns to the Province of Saskatchewan. Given the rapidly-changing regulatory environment and volatility inherent in its business, SaskEnergy will continue to work closely with key customers and stakeholder groups to develop solutions for the future. I would like to thank all SaskEnergy employees, management and the Board of Directors for their contributions to the company in 2018-19, and extend my congratulations on SaskEnergy’s many accomplishments over its first three decades. Sincerely,

[Original signed by B. Eyre] Honourable Bronwyn Eyre Minister Responsible for SaskEnergy

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SASKENERGY 2018-19 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 2018-19 Annual Report. Like the vast majority of Saskatchewan homeowners, I have natural gas service at my residence and, like most, I have been conditioned to take that service for granted. When I turn up the thermostat, the heat arrives. When I turn the tap, the water is hot in seconds. As a customer, that’s how it should be. As I have come to appreciate, there are countless processes that have to align to allow this to happen for me and the rest of SaskEnergy’s nearly 400,000 customers. With this in mind, the title of this annual report — Keeping Saskatchewan Warm for 30 Years — is not a tagline but an incredible feat that is successfully repeated day in and day out, safely and cost-effectively, in one of the world’s harshest climates. That is a testament to the dedicated people of SaskEnergy and TransGas and, on behalf of the SaskEnergy Board of Directors, I thank you for your dedicated service again this year. We are proud to support your efforts. Over the past year, the Board itself saw significant changes, welcoming four new Directors, whose experience and perspectives will be invaluable in the effective stewardship of SaskEnergy. I extend my thanks to those Board members whose terms ended in 2018-19, three of whom had served for nearly a decade, for providing guidance throughout one of the most active periods in SaskEnergy’s history. [Original signed by S. Barber] Susan Barber, Q.C. Chair, SaskEnergy Board of Directors

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SASKENERGY 2018-19 ANNUAL REPORT

PRESIDENT’S MESSAGE

SaskEnergy enjoyed many successes in 2018-19 and posted strong results across our focus areas. To the outside observer, this performance will add to the narrative of SaskEnergy as a steady, reliable and generally ‘un-noticed’ utility — a reputation we have earned since our inception 30 years ago. Behind the scenes, SaskEnergy is in the midst of a significant transformation. While the traditional load growth of cities and towns is slowing, there is tremendous demand for natural gas in power generation and other industrial sectors in the province. At the same time, the origin of the gas supply to meet customer requirements has changed dramatically. In 2018-19, approximately

65 per cent of that supply was sourced from Alberta — with the percentage forecasted to increase each year. Within this context, SaskEnergy’s 2018-19 successes take on even greater meaning, and I thank the various SaskEnergy work teams across the province for their fine work. Continuing to achieve our targets will require us to adapt many of our business models and processes to meet the demands of today’s markets and customer expectations. Overall affordability means money in the pockets of consumers — for families to apply to their household, or for businesses to become more competitive and to expand. While natural gas is currently the most affordable source of energy for homes, businesses and industrial plants, it must remain so while maintaining or increasing levels of comfort, service or production output. In this regard, SaskEnergy needs to develop a deeper knowledge of our customers’ value propositions. We must also understand how current and planned policies could affect SaskEnergy’s capital expenditures. Through effective rate structure design and meaningful communication, SaskEnergy customers will continue to have confidence in natural gas as their fuel of choice. So why does any of this matter and why does it matter right now? The most obvious answer is the rate of change in our world is accelerating — with no indication of a slowdown. Decisions made today are all part of extended timeline, with future impacts across every aspect of our business. The time to react to these factors is now. To continue to be relevant into the future and to be a strong and vibrant company, SaskEnergy needs to develop a very tight focus on how we add value for our customers. Our near-term strategic priorities will include: • Safe and reliable operation. The safety and reliability of our operations remains our number one priority. We will continue to strive for industry-leading safety and reliability, and drive a strong, performance-based safety culture. • Capital program. Over the next three to five years, SaskEnergy needs to invest $250-$300 million annually for growth opportunities, along with required system maintenance and upgrades. Project execution will be integral to our near- term financial performance and balance sheet strength, but also in positioning the business for the long term. • Complete integration and transformation. Our future success will require a concerted effort to optimize our systems and processes, and drive cost efficiencies to ensure we remain highly competitive and effective in the future. Marking SaskEnergy’s 30 th year as a company served as an opportunity to reflect on the significant changes we have seen, and celebrate all that we have accomplished as a team. These same attributes — adaptability and teamwork — will guide us in the coming years as we continue to fulfill our mission of delivering natural gas to customers in a safe, reliable and affordable way. Sincerely, [Original signed by K. From] Ken From President and Chief Executive Officer, SaskEnergy

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SaskEnergy has an integrated system of natural gas transmission, storage and distribution assets that delivers value to customers and to Saskatchewan. As the province has grown and changed, so too has the nature, scale and location of SaskEnergy’s infrastructure. From an asset base of approximately $719 million in 1988, the province-wide network of SaskEnergy and TransGas compressors, gas lines, stations and other equipment totals more than $2.5 billion today.

of Growth

SASKENERGY 2018-19 ANNUAL REPORT

FINANCIAL AND OPERATING HIGHLIGHTS

CONSOLIDATED FINANCIAL INFORMATION

($ millions)

2018-19

2017-18

2016-17

2015-16 1 12-month period

2014

289 163

Delivery

271 137

240 134

209 121

232

Transportation and storage

98

45 11 29

Commodity margin

41 26 21

25 14 55 10

28 20 58 12

9

Asset optimization margin Customer contributions

14 33 16

4

Other revenue

7

541

503

478

448

402

Total revenue and margins

89

Employee benefits

86

87

90

92

163

Operating and maintenance Depreciation and amortization

132 100

134

124

126

99 15 52

96 12 46 33 70 76

89 12 47

83 11 44

Saskatchewan taxes Net finance expense Other (gains) losses

14 48 13

(11) 407 134

-

(1)

393 110

408

362

355

Total expenses

Income before unrealized market value adjustments

86

47

32

Market value adjustments

34

(30)

(80) (33)

CONSOLIDATED NET INCOME (LOSS)

166

144

146

56

60

Dividends declared

39

29

55

17

2,957 280 (271)

Total assets

2,688

2,505

2,450

2,380

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

312

225

258

248

(258) (58) 255

(198) (37) 198

(210) (47) 212

(283)

-

40

299

Capital expenditures Total net debt Debt/Equity ratio

299

1,313 55/45 12.9%

1,232 56/44

1,210 59/41

1,156 61/39

1,159 63/37

Rate of return on equity OPERATING STATISTICS Distribution energy (petajoules) Residential/Farm

12.2% 8.8% 11.6% 6.5%

42 35

39 33

34 30

32 27

39 34

Commercial

170 247

Industrial

147 219

129 193

127 186

111 184

TOTAL

Transmission energy (petajoules) Domestic

362

325

308

280

275

33

Export

25

18

24

7

TOTAL

395

350

326

304

282

Number of customers Distribution

397,367

394,592

390,886

386,886 380,768

119

Transmission

119

117

123

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 2018-19 ANNUAL REPORT

OPERATING SUMMARY — DISTRIBUTION

2018-19

2017-18

2016-17

2015-16 1 12-month period

2014

6,344 2,681 6,076 (9.8%)

Sales in million cubic metres 2

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

5,004 2,543 5,155

4,785 2,387 4,901

4,881 3,006 6,039

Residential annual average usage (cubic metres)

Degree days 3

Percentage (colder) warmer than normal NATURAL GAS LINE (kilometres) SaskEnergy Incorporated

6.7% 12.2% (9.0%)

70,707

70,180

69,870

69,547

69,015

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 asset optimization. 3 A unit measuring the extent to which the temperature falls below 18° Celsius. Normal weather in 2018-19 (12 months ending March 31, 2019) would have been 5,535 degree days.

OPERATING SUMMARY — TRANSMISSION

2018-19

2017-18

2016-17

2015-16 1 12-month period

2014

1.50

Peak day natural gas flows (petajoules)

1.50

1.36

1.35

1.42

Feb. 7

Date of peak day flow Storage cavern sites Storage caverns Storage field sites 2 Producing field sites 2

Dec. 29

Jan. 12

Jan. 16

Feb. 6

6

6

6

6

6

18

18

18

22

24

4 1

4 1

4 1

4 1

4 1

NATURAL GAS LINE (kilometres) TransGas Limited Transmission

14,458

14,373

14,465

14,397

14,423

167 443

Gathering

289 443

297 445

297 441

203 435 113

Many Islands Pipe Lines (Canada) Limited

22

Bayhurst Gas Limited

22

21

21

TOTAL

15,090

15,127

15,228

15,156

15,174

SYSTEM COMPRESSION TransGas Limited Stations

24

25

25

24

23

1 3

Many Islands Pipe Lines (Canada) Limited Stations

-

-

-

-

Bayhurst Gas Limited Stations Mobile Compressor Units COMPRESSION HORSEPOWER TransGas Limited

3

3

3

3 7

17

17

17

13

77,248

82,841

79,765

76,315

89,360

5,040 6,300

Many Islands Pipe Lines (Canada) Limited

-

-

-

-

Bayhurst Gas Limited

6,300

6,300

6,300

6,300

TOTAL

88,588

89,141

86,065

82,615

95,660

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.

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SASKENERGY 2018-19 ANNUAL REPORT

QUARTERLY FINANCIAL AND OPERATING HIGHLIGHTS 2018-19 FINANCIAL HIGHLIGHTS ($ millions) Q1 Q2

March 31, 2019

Q3

Q4

933 767 166

Total revenue Total expenses

179 167

169 157

272 196

313 247

Consolidated net income (loss) Market value adjustments

12

12 11

76 10

66

32

6

5

Income (loss) before unrealized market value adjustments

134

6

1

66

61

60

Dividends

-

-

17 63 85

43

280 299

Cash provided by operating activities

59 38

32 81

126

Capital expenditures

95

OPERATING HIGHLIGHTS Distribution

247

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

48

44

70

85

1% colder 15% colder 10% colder

3% colder

50% colder

Transmission

395

Energy transported (petajoules)

77

79

110

129

2017-18 FINANCIAL HIGHLIGHTS ($ millions)

March 31, 2018

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

80 27

34

2

(3)

8

Income (loss) before unrealized market value adjustments

110

(8)

5

60

53

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

9

To recognize SaskEnergy’s 30-year anniversary as a company in 2018, all employees were provided with a Safety Commitment Coin as part of the annual Safety Stand Down week. The coin highlights SaskEnergy’s updated Safety value, reinforces the Corporation’s

of Safety

alignment with the goal of Mission: Zero, and serves as a reminder to keep personal, process and public safety top of mind.

2018-19 Highlights

Deliver safe, reliable and affordable natural gas...

37% reduction in line hits over the last six years

$115 million in dedicated system integrity spending

Lowest ever preventable vehicle collision rate

Third-lowest delivery rates in Canada

$2.95 per gigajoule Lowest commodity rate since 1999

Tied the 24-hour provincial record 1.50 petajoules consumed

...to benefit our customers and Saskatchewan.

Construction underway on the South Saskatoon Gas Line to better serve the Saskatoon area Installed gas line and station to serve SaskPower Chinook Power Station near Swift Current

Three new Compressor Stations (Macklin, Bayhurst, Rush Lake) to support industrial customers

Record 432 internal environmental reviews of corporate projects

2,775 new distribution customers added

97.7% of provincial meters now equipped with Advanced Metering Infrastructure modules

Tune-Up Assistance Program Provided home heating tune-ups to qualifying low-income customers to highlight the importance of annual furnace maintenance

SaskEnergy exists to provide service to its residential, commercial and industrial customers and support the growth they create. Starting with a distribution customer base of 282,448 in 1988, SaskEnergy now provides natural gas to 397,367 Saskatchewan customers in 17 cities, 150 towns, 59 First Nations, 161 villages and 46 resorts. Demand from industrial customers has also risen dramatically over the past three decades: in 1988, approximately 115 petajoules of gas were transported within the province. In 2018-19: 362 petajoules.

of Supporting Customers

SASKENERGY 2018-19 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 performance for the 12 months ending March 31, 2019. 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 23, 2019, 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 asset optimization sales. Each measure removes the impact of fair value adjustments on financial and derivative instruments and the revaluation of natural gas in storage to the lower of cost and net realizable value. Unrealized market value adjustments vary considerably with 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 refreshed its mission, vision and values while continuing to align with the Crown Sector Strategic Priorities identified by CIC. The four new strategic mandates — One Company, One Team; Industry Leader; Fuel of Choice; Business and Technology

Optimization — as set out in the Business Plan, support the vision, mission and values of the Corporation. These mandates and strategic priorities provide guidance to SaskEnergy in its business planning process as well as its performance management and reporting. They 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 convey shareholder strategic direction for the Province’s Crown corporations.

The government’s strategic plan identified five core strategic and three near-term priorities. Core Strategic Priorities: • Customer Focus

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

Crown corporations consider all potential structure, administration and operational changes to achieve financial sustainability and the sustainability of high- quality service delivery to the people of Saskatchewan. Near-term Priorities: • Strong Earnings • Prioritize Investments • Transformational Change During 2018-19, SaskEnergy demonstrated support of these priorities. SaskEnergy exceeded its net income target reporting net income of $134 million before market value adjustments. Provincial growth and a colder than normal winter resulted in higher revenues; however, the higher demand for natural gas resulted in higher than planned costs in order to meet that demand. SaskEnergy managed these increased costs through efficiencies and effective resource management. SaskEnergy continues to evolve its capital prioritization process for capital investments. Ongoing monitoring of the portfolio of projects allows for a fluid and adaptive capital plan, ensuring capital is being effectively deployed to maximize value for the Corporation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Transformational change was at the forefront as SaskEnergy continued to improve service to customers, enhance operational efficiencies and improve revenue growth and earnings. Opportunities to collaborate with other Crowns and ministries also continued to be of benefit. 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 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 2018-19 performance relative to its strategic scorecard targets for the 12 months ending March 31, 2019, which are further defined in the Glossary of Key Success Measures.

Create customer value through safe, innovative energy solutions. VISION

MISSION

Deliver natural gas in a safe, reliable, affordable way.

BUSINESS PRIORITY AREAS

STRATEGIC MANDATES

1.1 1.2 1.3 1.4 2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4

Leadership

Employee Experience Strategic Workforce Enterprise Alignment

ONE COMPANY, ONE TEAM

Safety

INDUSTRY LEADER

Leading Practice Alignment Enterprise Risk Management

Financial Strength

Rates Management

FUEL OF CHOICE

Core Growth

Environmental Sustainability Stakeholder Relations

Business Process Improvement Leveraging Information Business-Driven Technology Management

BUSINESS & TECHNOLOGY OPTIMIZATION

Digital Business

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SASKENERGY 2018-19 ANNUAL REPORT

ONE COMPANY, ONE TEAM SaskEnergy has an integrated workforce focused on a common mission. By demonstrating its

values, the Corporation creates a work environment that is supportive and empowering.

March 31, 2018 Actual

March 31, 2019 Actual

March 31, 2019 Target

March 31, 2020 Target

March 31, 2021 Target

March 31, 2022 Target

March 31, 2023 Target

Strategic Measure Employee Experience Employee Survey Workforce Diversity Youth (30 years of age or less) First Nations/Métis

Below Public Sector Norm

Above Public Sector Norm

Non-survey Year

Public Sector Norm

Non-survey Year

Above Public Sector Norm

Non-survey Year

12.8%

11.5%

16.0% 15.0% 15.5% 16.0% 16.5%

15.7%

15.4%

16.0% 15.5% 16.0% 16.5% 17.0%

Employee Experience SaskEnergy is committed to the attraction, retention and engagement of its employees. Fair and competitive total rewards offerings provide a foundation for these activities. However, employee experience is primarily dependent on a positive corporate culture, supportive managers/supervisors, trust in leadership and opportunities to perform meaningful work. SaskEnergy’s focus during 2018-19 was to increase alignment with its updated mission, vision and values. This included the integration of consistent accountability expectations into performance management and other processes, identifying opportunities for greater internal collaboration and helping employees work through change. A comprehensive employee survey was conducted in June 2018, with a strong employee response rate of 83 per cent. The overall engagement score of 60 per cent is 12 per cent below the public sector norm, a benchmark achieved using results from similar Canadian companies. While overall employee performance remains strong with high engagement in the areas of safety, leadership and diversity, the survey identified areas of opportunity for better communication and information flow, compensation and work/life balance.

In response to survey findings, SaskEnergy gathered employee feedback on key engagement drivers and began developing a comprehensive action plan. SaskEnergy has established its internal benchmark as “Above Public Sector Norm”. Given the result of the survey, this metric for 2018-19 is considered below target. Workforce Diversity Aligned with Crown Sector Strategic Priorities, SaskEnergy generates 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. This has been an area of strategic focus for the Corporation for several years. The results for these metrics continue to be lower than target as the focus of vacancy management has limited the opportunities to hire.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

INDUSTRY LEADER Through its Industry Leader mandate, SaskEnergy leads in the categories that matter most. Strong personal, public, and process safety programs generate leading results. Integrated asset management practices support infrastructure systems, programs and plans.

SaskEnergy achieves consistent profitability from operations while maintaining a debt-to-equity ratio benchmarked against industry standards.

March 31, 2018 Actual

March 31, 2019 Actual

March 31, 2019 Target

March 31, 2020 Target

March 31, 2021 Target

March 31, 2022 Target

March 31, 2023 Target

Strategic Measure Personal Safety Total Recordable Injury Frequency Rate Safety/Vigilance SaskEnergy Leaks per 1,000 Kilometres of Mains TransGas Natural Gas Line Failures per 1,000 Kilometres of Gas Line Safety and Integrity Financial Strength Debt/Equity Ratio Consolidated Return on Equity Income Before Unrealized Market Value Adjustments (millions)

Second Quartile

Second Quartile

Second Quartile

1.73*

1.70

1.70

1.70

10.07

12.79

5.50

5.30

5.10

5.00

4.90

0.28

0.14

0.07

0.07

0.07

0.07

0.07

6.72%

6.70%

6.10% 6.80% 6.90% 6.90% 6.60%

55/45

56/44

59/41

59/41

60/40

62/38

63/37

12.9%

12.2%

7.2% 6.1% 6.5% 6.5% 6.4%

$134

$110

$68

$64

$70

$73

$76

*Beginning in 2019-20, the Corporation will be reporting its actual Total Reportable Injury Frequency Rate.

Personal Safety SaskEnergy focuses on a ‘safety first’ work environment. Employee and public safety are at the core of every activity at SaskEnergy. Having each employee return home safely at the end of every day is the Corporation’s top priority. SaskEnergy recognizes that the safety culture and the individual decisions made by employees and contractors each day will ultimately determine success. Key initiatives undertaken during 2018-19

included the maturing of the Unified Management System, enhancements to systems to report, track, analyze and learn from incidents, and the introduction of a Corrective and Preventative Action process. As of the end of the 2018-19 fiscal year, SaskEnergy achieved a Total Recordable Injury Frequency Rate (TRIF) of 2.08, meaning there were 2.08 recordable injuries for every 100 employees. This is an improvement from the 2017-18 rate of 2.43.

16

SASKENERGY 2018-19 ANNUAL REPORT

Safety/Vigilance SaskEnergy continues its strong emphasis on integrity-related initiatives addressing issues such as gas leaks, gas line failures and third-party line hits to ensure safe and reliable service. SaskEnergy’s service upgrade program ensures safe and reliable natural gas service to customers. This program, together with enhanced leak survey processes and damage prevention initiatives, is aimed at reducing leaks. The damage prevention initiative seeks to reduce leaks resulting from external interference and includes a number of measures such as increased supervision at excavation sites and increasing public awareness. These efforts have resulted in a 37 per cent reduction in line hits since 2013. Despite these efforts, unique ground conditions associated with 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 SaskEnergy’s leaks metric being higher than historical levels and greater than the 2018-19 target of 5.50. TransGas continued to manage risk for its transmission lines using a combination of aerial and ground patrols, state-of-the-art remote monitoring, inspection digs and in-line inspection tools that look for the early signs of corrosion and check for unreported damage. In 2018-19, there were four failures on the transmission system resulting in this metric being higher than target. One occurred due to a third party digging prior to the lines being located. A second was discovered by a leak surveyor, and a third was found through direct examination while performing a planned repair. The fourth failure was the result of a rupture of a natural gas line in a remote part of the province. There was no loss of natural gas service to customers as a result of any of these failures. SaskEnergy achieved the safety and integrity target, demonstrating the Corporation’s commitment to the safety and integrity of its gas line system. Financial Strength SaskEnergy preserves an adequate capital structure while providing reasonable financial returns to its holding company, CIC, and competitive rates to customers. The Corporation balances the interests of both CIC and its customers, while focusing on annual profitability and efficient operations with a long-term view of financial sustainability.

Income from operations was affected by the colder than normal weather and increased load growth in 2018-19, which positively impacted delivery and transportation revenue. In addition, by utilizing off-peak transportation and storage capacity, the Corporation was able to generate asset optimization margins that were higher than planned. This higher than anticipated demand for natural gas meant higher costs to transport natural gas in Saskatchewan, increasing operating and maintenance expenses in 2018-19. SaskEnergy was able to mitigate the impact of transportation cost increases through operating efficiencies and employee vacancy management. SaskEnergy’s renewed focus on core delivery, transportation and storage of natural gas triggered a financial gain from the divestiture of its natural gas processing plant assets at Coleville and Kisbey. Capital investment levels during the year were managed as planned. Expansion of the natural gas system to meet increasing customer demand and investment in the safety and integrity of the system were the key drivers for capital investment in 2018-19. Net income before market value adjustments was $134 million at March 31, 2019. These strong financial earnings provided an improved debt-to-equity ratio with less debt required to execute on capital projects. As a result, the Corporation’s debt levels were also lower than planned for the period. SaskEnergy’s consolidated debt-to-equity ratio was 55 per cent debt and 45 per cent equity at March 31, 2019. The lower debt-to-equity ratio was a result of a combination of the colder winter in 2017-18 generating higher cash flows and higher net income in 2018-19. The consolidated return on average equity for the period ending March 31, 2019 was 12.9 per cent, which is higher than the target set for the year. The Corporation had a larger than anticipated equity balance at year-end as last year’s actual earnings were greater than estimated in the budgeted metric, and net income exceeded budget.

17

MANAGEMENT’S DISCUSSION AND ANALYSIS

FUEL OF CHOICE SaskEnergy is regarded as a trusted supplier of energy and, as a product, natural gas is regarded as a socially and financially sound choice for customers.

Natural gas prices are more competitive thanks to innovative transport and delivery strategies. Importantly, SaskEnergy has been successful in minimizing the environmental impact of its operations and supply.

March 31, 2018 Actual

March 31, 2019 Actual

March 31, 2019 Target

March 31, 2020 Target

March 31, 2021 Target

March 31, 2022 Target

March 31, 2023 Target

Strategic Measure Business Growth Investment Core Growth – SaskEnergy and TransGas Revenue Growth

5.7%

1.5%

3.2% 4.7% 4.0% 4.0% 4.0%

Efficient Operations Distribution Operation,

$324

$290

$336

$342

$347

$353

$360

Maintenance and Administration Costs per Customer

Competitive Residential Delivery Rates

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Competitive with Industry

Transmission Operation,

6.3%

6.5%

7.0% 6.7% 6.4% 5.8% 5.4%

Maintenance and Administration Costs per Book Value of Assets Managed

Customer Satisfaction SaskEnergy

90% 84%

90% 92%

90% 90% 90% 90% 90% 90% 90% 90% 90% 90%

TransGas

Environmental Greenhouse Gas Emissions (Tonnes of CO 2 e/million Running Horsepower Hours) Community Relationship Total Contracts – Percentage of Indigenous Labour Content

326

324

395

325

325

325

325

18%

16%

16% 16% 17% 18% 19%

18

SASKENERGY 2018-19 ANNUAL REPORT

Business Growth Investment SaskEnergy’s growth strategy continues to enhance 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. SaskEnergy’s distribution utility customer base as at March 31, 2019 was 397,367, which is an increase of 2,775 active, metered customers compared to 3,706 in 2017-18. The transmission system experienced provincial load growth of 12.9 per cent due primarily to increased demand in the enhanced oil recovery, power generation and mining sectors. These major transmission customers are expected to continue to grow and expand their operations, further increasing demand for natural gas. Efficient Operations and Competitive Rates There is a continued focus on efficiency while maintaining a sustainable level of spending to achieve strategic goals and high 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. In 2018-19, the Corporation realized approximately $4 million in efficiency and process improvement savings. These efforts are reflected in the Operation, Maintenance and Administration Costs per Customer measure and in SaskEnergy’s continued ability to successfully offer competitive residential delivery rates to its customers. In 2018-19, SaskEnergy achieved its goal of having competitive residential delivery rates with the major utilities across Canada. A typical residential customer in Regina paid $537 for delivery service in 2018-19, which is the third-lowest in Canada. Hamilton, Ontario remains the lowest with a rate of $416. SaskEnergy had the fifth-lowest total residential natural gas utility rate (delivery and commodity combined) in Canada in 2018-19. SaskEnergy provides price protection for its distribution customers through the practice of hedging natural gas purchases. As a result, customers typically pay higher costs for natural gas but are not subject to the volatility of market prices. Customers have consistently provided positive survey

responses to questions about stable natural gas prices as opposed to prices that move with the market. In 2018-19, TransGas results were better than target with respect to its efficiency metric. TransGas’ commitment to efficient operations was demonstrated primarily through its resource management efforts. Customer Satisfaction SaskEnergy believes that a true indicator of the Corporation’s success in delivering safe and reliable service is formal feedback from customers. Continuing to provide high levels of customer service that are efficient and effective is a key objective for the Corporation. SaskEnergy and TransGas conduct annual surveys in an effort to gather feedback on customer experiences, expectations and overall satisfaction. SaskEnergy recognizes customers’ expectations are changing. To meet those expectations, SaskEnergy is preparing a modernized experience for customers. This includes refreshed website content designed to more effectively meet the expectations of customers. SaskEnergy’s customer satisfaction survey, completed in 2018-19, indicated 90 per cent of customers are satisfied with SaskEnergy’s service delivery. Key drivers to this year’s results are being a company that takes initiative to meet customers’ needs, providing high standards of customer service, and maintaining among the lowest natural gas rates in Canada. The TransGas customer survey results indicated that 84 per cent of customers are satisfied with TransGas’ customer services and interactions with the customer service team. The key driver of this year’s decrease in the results relate to customer concerns with the business system. TransGas continues to explore opportunities for improvements in this area through system builds and enhancements.

19

MANAGEMENT’S DISCUSSION AND ANALYSIS

Environmental SaskEnergy continues to concentrate on environmental sustainability throughout its operations by measuring the intensity of greenhouse gas (GHG) emissions relative to the amount of compression used to transport natural gas. This measure is calculated using a cumulative average at the end of each quarter. The 2018-19 compressor emissions reduction target was exceeded by 17 per cent. As the compressor fleet is modernized, increased operating efficiency is being reflected through decreased emissions intensity. The federal government published new oil and gas methane regulations in April 2018 to reduce methane releases from the Canadian oil and gas sector. The regulations will apply to SaskEnergy’s transmission and storage activities and will focus on reducing leaks and routine venting of natural gas. The federal Greenhouse Gas Pollution Pricing Act (GGPPA) and regulations came into force on April 1, 2019. Under the Act, SaskEnergy is legally responsible for collecting and remitting a federal carbon tax on natural gas delivered to non-exempt customers, and TransGas is required to pay the carbon tax on emissions as part of the Output Based Pricing System (OBPS). SaskEnergy participated as an intervener in the Province’s constitutional challenge of the GGPPA; however, the Saskatchewan Court of Appeal ruled in

favour of the federal government that it does have the constitutional power to implement a carbon tax. It is expected the Province of Saskatchewan will appeal this decision to the Supreme Court of Canada. The federal government is also consulting with industry on the Clean Fuel Standard Regulations, which aim to reduce the carbon intensity of common fuels. SaskEnergy has been involved in regulatory development through engagement with industry associations (Canadian Energy Pipeline Association and the Canadian Gas Association) and Environment and Climate Change Canada. Final regulations for the natural gas portion of the Clean Fuel Standard are expected in 2023. In addition, the federal government published the Multi-Sector Air Pollutant Regulations for stationary combustion engines on June 28, 2016, which sets mandatory limits for Nitrogen Oxide emissions that impact air quality. The Corporation continues to work to ensure compliance will all new regulations. Community Relationship Total Contracts as a Percentage of Indigenous Labour is above target to the end of 2018-19. Commitment of Indigenous content was achieved on the awards of large construction projects.

BUSINESS & TECHNOLOGY OPTIMIZATION

Optimization supports better workflow, decision- making and enhanced customer and employee experience. Trusted information is securely available to staff, customers and stakeholders through integrated

business processes and systems. Investments increase effectiveness and/or generate internal efficiencies that enable SaskEnergy to create value.

March 31, 2018 Actual

March 31, 2019 Actual

March 31, 2019 Target

March 31, 2020 Target

March 31, 2021 Target

March 31, 2022 Target

March 31, 2023 Target

Strategic Measure To be reported on in 2019-20

N/A

N/A

N/A

N/A

N/A

N/A

N/A

20

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