Q FINANCIAL REPORT

Transcription

1 Q FINANCIAL REPORT

2 Table of Contents 01 Section 1: Corporate Overview 03 Section 2: Financial Highlights and Recent Developments 08 Section 3: Consolidated Financial Results 11 Section 4: Segmented Results and Analysis 19 Section 5: Liquidity and Capital Resources 24 Section 6: Risk Management Process 24 Section 7: Accounting Policies and Significant Accounting Judgments, Estimates and Assumptions 25 Section 8: Non-GAAP Financial Measures 25 Section 9: Related Party Transactions 25 Section 10: Summary of Quarterly Results 26 Section 11: Subsequent Events 27 Section 12: Outlook Appendix 1 Consolidated Financial Statements March 31, 2017 HEAD OFFICE NALCOR ENERGY T Hydro Place. 500 Columbus Drive F P.O. Box St. John s, NL E. info@nalcorenergy.com Canada A1B 0C9 W. nalcorenergy.com

3 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 SECTION 1: CORPORATE OVERVIEW Nalcor Energy (Nalcor or the Company) is Newfoundland and Labrador s energy company. Nalcor is a Crown corporation established in 2007 under a special act of the Legislature of the Province of Newfoundland and Labrador (the Province). The company s business includes the development, generation, transmission and sale of electricity; the exploration, development, production and sale of oil and gas; industrial fabrication site management; and energy trading. Focused on sustainable growth, the company is leading the development of the province s energy resources and has a corporate-wide framework that facilitates the prudent management of its assets while continuing an unwavering focus on the safety of its workers, contractors and the public. Nalcor s legal structure as at March 31, 2017 included the entities listed below: Entity Name Newfoundland and Labrador Hydro (Hydro) Nalcor Energy Oil and Gas Inc. (Oil and Gas) Nalcor Energy Bull Arm Fabrication Inc. (Bull Arm Fabrication) Nalcor Energy Marketing Corporation (Energy Marketing) Muskrat Falls Corporation (Muskrat Falls) Labrador Transmission Corporation (Labrador Transco) 1 Labrador-Island Link Holding Corporation (LIL Holdco) 1 Labrador-Island Link General Partner Corporation (LIL GP) 1 Labrador-Island Link Operating Corporation (LIL OpCo) 1 Lower Churchill Management Corporation (LCMC) 1 Churchill Falls (Labrador) Corporation Limited (Churchill Falls) Twin Falls Power Corporation Limited (Twin Falls) Labrador-Island Link Limited Partnership (LIL LP) 1 Gull Island Power Corporation (GIPCo) Lower Churchill Development Corporation (LCDC) 1 These entities comprise the Lower Churchill Project (LCP) Description of Interest Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary Wholly owned subsidiary 65.8% owned joint operation of Hydro 33.3% owned joint venture of Churchill Falls Limited partnership in which Nalcor, through LIL Holdco, owns 100% of the 75 Class A limited partnership units Wholly owned subsidiary (inactive) 51% owned subsidiary of Hydro (inactive) The operating structure as at March 31, 2017 reflects organizational changes that resulted in revised operating segments effective January 1, The designation of segments is based on a combination of regulatory status and management accountability. Previously reported segmented information has been presented to conform with the current operating structure. The following summary provides a brief overview of the nature of the operations included in each of the Company s six business segments. Hydro is comprised of both regulated and non-regulated activities. Hydro Regulated activities encompass sales of electricity to customers within the Province that are regulated by the Newfoundland and Labrador Board of Commissioners of Public Utilities (PUB). Hydro Non-Regulated activities include the sale of power, purchased from Churchill Falls, to mining operations in Labrador West as well as costs related to operations that Hydro manages that are not subject to rate regulation by the PUB. Power Development - includes the development activities of the 824 MW Muskrat Falls hydroelectric generating facility currently under construction in Labrador on the Lower Churchill River. Once construction is complete this asset will become part of the Power Supply segment. Power Supply - includes Churchill Falls, the Labrador-Island Link and Labrador Transmission Assets (both components of LCP), the Maritime Link (which is owned by Emera, but consolidated by Nalcor), the Menihek Generating Station, and other support activities for the Power Supply business. LCP Transmission includes the construction and operation of the Labrador Island Link and Labrador Transmission Assets, which consists of transmission lines connecting the Muskrat Falls hydroelectric plant, the Churchill Falls hydroelectric facility, and certain portions of the transmission system in Labrador to the island of Newfoundland. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 1

4 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 Churchill Falls owns and operates a hydroelectric generating facility which sells electricity to Hydro-Québec and Hydro. Other includes costs associated with Nalcor s operation of the Menihek Generating Station and the related revenues and cost recoveries from Hydro-Québec, the Maritime Link, administration costs related to Power Supply, and costs associated with the management of LCP construction. Energy Markets - includes energy trading activities and commercial activities related to development of energy markets. Energy Trading includes the sale of available Recapture to export markets in eastern Canada and the northeastern United States. Recapture refers to excess energy from the 300 MW block of electricity which Churchill Falls has agreed to sell and deliver to Hydro to service its residential, commercial and industrial Labrador Interconnected customers. Commercial and other includes development costs associated with Gull Island, Phase Two of LCP, and business development activities related to exploring additional markets and sources for future energy generation and transmission. Offshore Development - includes the Oil and Gas business and the Bull Arm Fabrication business. Oil and Gas activities include exploration, development, production, transportation and processing sectors of the oil and gas industry. Bull Arm Fabrication consists of an industrial fabrication site which is leased for major construction of development projects. Corporate includes corporate support and shared services functions. Nalcor maintains appropriate systems of internal control, policies and procedures which provide management with reasonable assurance that assets are safeguarded and its financial information is reliable. The following discussion and analysis includes results as of March 31, 2017 with subsequent event and outlook information updated up to May 9, The Management s Discussion and Analysis (MD&A) is the responsibility of management and the Board of Directors carries out its responsibility for review of this disclosure principally through its Audit Committee. This MD&A was reviewed by the Audit Committee and approved by the Board of Directors on May 9, This MD&A should be read in conjunction with the unaudited condensed consolidated interim financial statements of Nalcor for the three months ended March 31, 2017 and Nalcor s annual audited consolidated financial statements for the year ended December 31, Basis of Presentation Unless otherwise noted, all financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. All financial information is reported in Canadian dollars (CAD), unless otherwise noted. Non-GAAP Financial Measures Certain financial measures in this MD&A are not prescribed by IFRS as contained within Part I of the Chartered Professional Accountants of Canada Handbook. These non-generally accepted accounting principles (Non-GAAP) financial measures are defined in Section 8 - Non- GAAP Financial Measures. Forward-Looking Information Certain statements in this MD&A are forward-looking statements, based on Nalcor s current expectations, estimates, projections and assumptions, which are subject to risks and uncertainties. Statements containing words such as could, expect, may, anticipate, believe, intend, estimate, plan and similar expressions constitute forward-looking statements. By their nature, forward-looking statements require Management to make assumptions and are subject to important unknown risks and uncertainties, which may cause actual results in future periods to differ materially from forecasted results. While Management considers these assumptions to be reasonable and appropriate based on information currently available, there is a risk that they may not be accurate. Nalcor assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or any other reason. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 2

5 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 SECTION 2: SUMMARY OF FINANCIAL RESULTS AND RECENT DEVELOPMENTS FINANCIAL HIGHLIGHTS Key Profit Drivers Key profit drivers vary across each of Nalcor s business segments as there are a combination of regulated operations, operations with long-term and medium-term supply contracts and operations in markets where revenues are driven entirely by commodity prices (export electricity and oil). In addition to the effect that oil prices have on Oil and Gas operations, Oil and Gas may incur impairment expenses and future reversal of such expenses due to changes in projected future cash flows. Certain factors impacting future cash flows include fluctuations in oil price, discount rate and reserves. Any impairment expense or reversal of such expense is reflected in Nalcor s results, and can lead to large fluctuations in profit or loss between financial reporting periods. Also, in the case of Oil and Gas, cash flow and results of operations are significantly influenced by oil production levels in offshore developments in which Nalcor holds equity interests. As a result, it is necessary to consider the underlying key profit drivers and performance of each business segment to understand Nalcor s consolidated performance. Nalcor s profitability is also impacted by exchange rate fluctuations for a number of foreign currencies, the most significant being the CAD/United States Dollar (USD) exchange rate. Nearly all revenue generated by Oil and Gas, Energy Trading and Bull Arm are denominated in USD. Volatility is partially mitigated through USD hedging. However, in general, any fluctuations in the USD exchange rate have a direct impact on Nalcor s profit. Various expenses, capital expenditures and Statement of Financial Position balances include amounts denominated in USD, particularly Hydro s fuel purchases for the Holyrood Thermal Generating Station (HTGS). Cost variances for these fuel purchases as a result of exchange rate fluctuations are captured in the Rate Stabilization Plan (RSP) and do not impact Nalcor s profit. The average exchange rate for first three months of 2017, before the impact of Nalcor s foreign exchange hedging program, was $1.33 CAD per USD as compared to $1.37 CAD per USD for the same period in Hydro Regulated is entitled to the opportunity to recover, through customer rates, all reasonable and prudent costs incurred in providing electricity service to its customers, in addition to a just and reasonable return on rate base, in accordance with Section 80 of the Public Utilities Act. Failure to obtain rate orders on a timely basis as applied for may adversely affect the profit of Hydro Regulated. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 3

6 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 For the period ended March 31 (millions of dollars) Revenue (millions of dollars) Profit (millions of dollars) Funds from operations (FFO) (millions of dollars) Earnings before interest, taxes, depreciation, depletion, amortization and accretion (EBITDA) (millions of dollars) Return on capital employed (ROCE) 1,2 8.6% 4.7% 7.0% Capital expenditures (millions of dollars) Oil production (bbls) 826, , ,258 Realized oil price (CAD/bbl) $67.07 $54.29 $85.05 Electricity sales (GWh): Regulated 2,693 2,641 2,763 Export sales Hydro Québec 7,143 9,840 10,307 Export deliveries Hydro Québec 10,000 9,840 10,307 Export other markets Realized electricity price Other Export Markets (CAD/MWh) $34.92 $30.24 $ See Section 8 - Non-GAAP Financial Measures 2 Rolling 12 month average 3 Including Maritime Link Profit Nalcor s profit for the three months ended March 31, 2017 was $57 million compared to $28 million for the same period in 2016, an increase of $29 million. Key drivers of the increase included higher oil revenue as a result of increased production and higher oil prices; higher prices and volumes related to export sales in Energy Trading; and a reduction in gas turbine fuel expense as well as the recognition of the Prudence Order in Q in Hydro Regulated. These increases were partially offset by higher depletion and production costs associated with increased production in Oil and Gas; higher depreciation and amortization in Hydro Regulated and Oil and Gas; increases in other fuel costs in Hydro Regulated; lower unrealized gains on commodity contracts in Energy Trading; lower realized gains on commodity contracts in Oil and Gas; and reduced revenue in Churchill Falls as a result of the impact of the Renewal Contract. A detailed discussion of the performance of each of Nalcor s segments is contained in Section 4 Segmented Results and Analysis. FFO and EBITDA FFO for the three months ended March 31, 2017 were $100 million compared to $60 million for the same period in 2016, an increase of $40 million. EBITDA for the quarter was $117 million compared to the same period in 2016 of $79 million, an increase of $38 million. These increases were primarily due to increased revenues and gas turbine fuel savings, as mentioned in the profit analysis above. ROCE 2017 ROCE of 8.6% compared to 4.7% for the same period in 2016, increased primarily due to increased profit, as a result of the drivers noted above. Capital Expenditures 2017 capital expenditures, excluding Maritime Link, of $548 million were $90 million higher than the same period in 2016, primarily due to increases in capital incurred in Muskrat Falls, LCP Transmission, and Hydro Regulated. Additional details on Nalcor s capital expenditures are provided in Section 5 Liquidity and Capital Resources. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 4

7 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 Statement of Financial Position As at (millions of dollars) March December December Total assets 14,486 14,062 12,322 Capital assets, net 12,076 11,417 8,324 Long-term debt (net of sinking funds) 6,155 5,873 6,008 Shareholder s equity 4,552 4,263 3,475 Debt to capital (%) 60% 61% 65% Total Assets March 31, $14.5 billion December 31, $14.1 billion Investments & Restricted Cash, $1.2 Other Assets and Regulatory Deferrals, $1.2 Other Assets and Regulatory Deferrals, $1.2 Investments & Restricted Cash, $1.5 PPE, $11.4 PPE, $12.1 Nalcor s total assets as at March 31, 2017 was $14.5 billion, which remained consistent from December 31, The composition of the Company s assets as at March 31, 2017 included property, plant and equipment (PPE) of $12.1 billion (December 31, $11.4 billion), investments and restricted cash primarily from the proceeds of the LCP financing of $1.2 billion (December 31, $1.5 billion), and other assets and regulatory deferrals totaling $1.2 billion (December 31, $1.2 billion). The change in the composition of assets during 2017 was primarily the result of an increase in capital expenditures related to Muskrat Falls and LCP Transmission assets, partially offset by a reduction in investments and restricted cash used to fund these expenditures. Additional details on Nalcor s capital expenditures are provided in Section 5 Liquidity and Capital Resources. Total Liabilities and Equity Total liabilities at March 31, 2017 were $9.7 billion compared to $9.5 billion at December 31, 2016, primarily due to an increase in Maritime Link costs that are recognized as deferred credits in the Consolidated Statement of Financial Position as well as new debt issuances in Hydro, partially offset by a decrease in Hydro s short-term borrowings. Equity as at March 31, 2017 was $4.6 billion compared to $4.3 billion at December 31, 2016, primarily due to additional equity contributions from the Government of Newfoundland and Labrador (the Shareholder), combined with an increase in profit during the period. Further details on changes in the Consolidated Statement of Financial Position are included in Section 3 Consolidated Financial Results. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 5

8 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 Debt to Capital Debt to capital decreased slightly to 60% for the period ending March 31, 2017 compared to 61% at December 31, 2016, primarily due to increased shareholder contributions and profit, partially offset by an increase in net debt, primarily associated with new debt issuances in Hydro as well as increased Class B limited partnership unit contributions. RECENT DEVELOPMENTS HYDRO REGULATED General Rate Application Hydro filed a General Rate Application (GRA) in July 2013, using a 2013 Test Year, requesting a rate adjustment effective January 1, Due to the length of time the GRA process required and the delay in obtaining a rate change, in November 2014 Hydro filed an amended GRA based on 2014 and 2015 Test Years. The amended GRA filing requested new rates for Industrial Customers effective January 1, 2015 and the remainder of customer rates effective February 1, The PUB approved interim rates effective July 1, The public hearing of Hydro s GRA concluded in early December 2015 and final arguments were filed at the end of January Hydro received Board Order No. P.U. 49(2016) (the GRA Order) on December 1, Hydro has recorded its best estimate of the impact of the GRA Order in its 2016 financial results, based upon Management's interpretation of the Order. In January 2017, Hydro filed an application with the PUB seeking approval of final customer rates in compliance with the GRA Order (the GRA Compliance Application). On May 1, 2017, Hydro received Board Order No. P.U. 14 (2017). In response, Hydro will be filing an additional application to the PUB seeking approval of final customer rates, which are anticipated to be effective July 1st, Regulatory risk remains around the timing and approval of this application. RSP Surplus Refund In July 2016, Hydro filed an application with the PUB for approval of a plan to refund the balance in the RSP Surplus to Newfoundland Power and Hydro s Island Interconnected Rural customers. Newfoundland Power also filed an application to refund their portion of the RSP Surplus balance to their customers. The RSP Surplus to be refunded is approximately $140 million. The PUB has approved both applications. Disposition of these funds began in Q with Hydro providing approximately $119 million to Newfoundland Power for disposition to their customers. At the end of Q1 2017, Hydro has refunded approximately 80% of the balance due to its customers. Supplemental Capital Hydro has filed six supplemental capital applications in The largest related to the refurbishment of a penstock at Bay d Espoir for $9 million. Three of the six applications have been approved with the remaining applications currently under review by the PUB. In March 2017, Hydro identified one unforeseen capital project related to damage sustained on transmission lines TL 201 and TL 212 during the March 2017 windstorm. Hydro used the Allowance for Unforeseen account to initiate this work and has subsequently applied to have the Allowance for Unforeseen replenished to $1 million. This application is currently before the PUB. The Allowance for Unforeseen is intended to permit a utility to act expeditiously to deal with events affecting the electrical system which cannot wait for specific approval by the PUB due to the urgent nature of the work and the serious negative consequences associated with any delays in repairing the electrical system. Other Regulatory Activity The Phase II investigation and hearing into supply issues and power outages on the Island Interconnected System is ongoing. The focus of this proceeding continues to be on the reliability and adequacy of the Island Interconnected System leading up to, and after, the interconnection of Muskrat Falls. The schedule for the proceeding has not yet been finalized and the timing of the hearing has not been determined. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 6

9 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 CHURCHILL FALLS The initial term of the 1969 Power Contract between Churchill Falls and Hydro-Québec expired in A Renewal Contract commenced September 1, 2016 and resulted in a decrease in the contract rate from mills per kwh to 2.0 mills per kwh as well as a change in the contract methodology from revenue recognition based upon the energy delivered to Hydro-Québec to revenue recognition based upon an interim Annual Energy Base agreed upon by both parties, which can differ from energy delivered. The Renewal Contract expires on August 31, 2041 and since 2017 will be the first full year of the Renewal Contract, revenue for Churchill Falls will be lower compared to prior year. In August 2016, Churchill Falls received judgment from the Québec Court of Appeal upholding the 2014 Québec Superior Court ruling on the motion filed by Churchill Falls to address the inequities of the pricing terms of the 1969 Power Contract between Churchill Falls and Hydro-Québec. The Court ruled against Churchill Falls. On April 20, 2017, Churchill Falls was granted leave to appeal the case to the Supreme Court of Canada. A hearing date is anticipated to be scheduled within 12 months. In addition, Churchill Falls received judgment from the Québec Superior Court regarding a Motion for Declaratory Judgment filed by Hydro- Québec relating to the interpretation of the 1969 Power Contract between Churchill Falls and Hydro-Québec and the associated Renewal Contract. The Court ruled in favour of Hydro-Québec. Churchill Falls has filed a Notice of Appeal with the Québec Court of Appeal. The date of the appeal hearing has not yet been set but it is anticipated that it will be scheduled for some time in As a result of the expiration of the sub-lease between Twin Falls and Churchill Falls regarding the right to develop hydroelectric power on the Unknown River, a further sub-lease was signed between Hydro and Churchill Falls, naming Hydro as the lessee of the transmission lines and related assets. The lease term was originally for a six-month period, expiring March 31, 2017, but was extended to October 31, MUSKRAT FALLS AND LCP TRANSMISSION On February 14, 2017 Muskrat Falls Corporation and Astaldi Canada finalized the negotiated terms for an agreement to complete construction of the powerhouse and intake civil works for the Muskrat Falls generation facility. The increase in contract value associated with this agreement will result in an increase in the capital cost estimate, before financing costs, for LCP from the $9.1 billion announced in June 2016 to $9.4 billion. OIL AND GAS As a result of drilling and completion activities at the White Rose (WR) and Hibernia Southern Extension (HSE), combined with the continued use of water injection wells at HSE, production volumes, revenue and depletion increased compared to the same period in Nalcor and partners continue to evaluate a sanction decision for the White Rose Extension Project, which may materially impact results in future periods. BULL ARM FABRICATION In preparation for the conclusion of the Hebron project and ExxonMobil Canada Properties exit from the Bull Arm Fabrication site, Bull Arm issued an expression of interest on March 9, 2017 to assess and quantify the opportunities for the site post-hebron. The deadline for submissions was April 25, 2017 and Management is currently assessing the results. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 7

10 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 SECTION 3: CONSOLIDATED FINANCIAL RESULTS CONSOLIDATED STATEMENT OF PROFIT AND COMPREHENSIVE INCOME For the period ended March 31 (millions of dollars) Variance Revenue Fuels Power purchased Operating costs (1) Production, marketing and transportation costs Transmission rental and market fees Depreciation, depletion and amortization Net finance expense (2) Other expense (income) 1 (8) Profit before regulatory adjustments (18) Regulatory adjustments (7) 40 (47) Profit for the period Other comprehensive (loss) income for the period (10) 1 (11) Total comprehensive income for the period Revenue Revenue for the period ended 2017 was $280 million compared to $263 million for the same period in 2016, an increase of $17 million, primarily due to an increase in Oil and Gas revenue resulting from increased HSE production volumes and prices, higher realized export prices and higher volumes of export sales in Energy Trading, higher revenue achieved under the Guaranteed Winter Availability Contract (GWAC), and increased energy and demand sales in Hydro Regulated. These increases were partially offset by a decrease in Hydro Regulated revenue resulting from customer rate reductions associated with the normal operation of the RSP, and a decrease in power sales in Churchill Falls due to changes in the contract rate and methodology on power sales under the Renewal Contract with Hydro- Quebec. The impact of the decreased revenue in Hydro Regulated related to the RSP is largely offset in the regulatory adjustments line. Fuels Fuel costs for the period ended 2017 were $84 million compared to $73 million for the same period in 2016, an increase of $11 million, primarily due to higher prices per barrel of No.6 fuel, partially offset by reduction in fuel consumed by the Holyrood plant combustion turbine. The majority of the variances in No.6 fuel are offset through the RSP in the regulatory adjustments line. Power purchased Power purchases for the period ended 2017 were comparable to the same period in Operating costs Operating costs for the period ended 2017 were comparable to the same period in Production, marketing and transportation costs Oil and Gas production, marketing and transportation costs for the period ended 2017 were $9 million compared to $5 million for the same period in 2016, an increase of $4 million, primarily due to increased production volumes at HSE as well as increased project operating costs at WR and HSE. Transmission rental and market fees Transmission rental and market fees for the period ended 2017 were comparable to the same period in NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 8

11 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 Depreciation, depletion and amortization Depreciation, depletion and amortization expenses for the period ended 2017 were $41 million compared to $30 million for the same period in 2016, an increase of $11 million, mainly due to increased depletion resulting from increased production at HSE, increased levels of investment in property, plant and equipment as well as increased amortization of intangible exploration assets. Net finance expense Net finance expense for the period ended 2017 was comparable to the same period in Other expense (income) Other expense for the period ended 2017 was $1 million compared to income of $8 million for the same period in 2016, a decrease of $9 million. The decrease is primarily due to the fact that Energy Trading held no commodity contracts during the three months ended 2017, while there were favourable settlements and unrealized mark-to-market gains recognized on commodity contracts held during the same period in As well, Oil and Gas recognized losses on the settlement of commodity contracts in the three months ended 2017 compared to a gain in the same period in These decreases were partially offset by more favourable foreign exchange on USD transactions in Oil and Gas. Regulatory adjustments Regulatory adjustments for the period ended 2017 of $7 million in recoveries were favourable compared to expenses of $40 million for the same period in 2016, an increase of $47 million. The increase was primarily due to RSP amortization and deferred fuel costs as a result of the normal operation of the RSP, combined with a favorable variance relating to a non-recurring allowance for the impact of the Prudence Order recognized in Q NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 9

12 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 CONSOLIDATED STATEMENT OF FINANCIAL POSITION HIGHLIGHTS Significant changes in the Consolidated Statement of Financial Position between March 31, 2017 and December 31, 2016 include: (millions of dollars) Increase ASSETS (Decrease) Explanation Restricted cash (184) Decreased primarily due to funding requirements relating to construction costs of the Labrador-Island Link and Labrador Transmission Assets, partially offset by the maturity of short-term investments to restricted cash in Muskrat Falls during the period. Short-term investments (77) Decreased due to scheduled draw-downs of structured deposit notes in the LCP entities. Trade and other receivables (18) Decreased primarily due to a decrease in harmonized sales tax receivable in Muskrat Falls related to the timing of payments, partially offset by an increase in harmonized sales tax receivable in LIL LP and increases in utility and industrial customer receivables in Hydro Regulated. Property, plant and equipment 659 Increased primarily due to capital expenditures related to LCP, Oil and Gas, Hydro, as well as additions to the Maritime Link; net of depreciation and depletion. Other long-term assets 36 Increased primarily due to long-term advances to a supplier in relation to construction of LCP, partially offset by a decrease in sinking funds in Hydro. LIABILITIES AND EQUITY Short-term borrowings (93) Increased due to a reduction in promissory notes related to Hydro's funding requirements. Trade and other payables (115) Decreased primarily due to a reduction in capital accruals in Muskrat Falls, LCP Transmission and Oil and Gas. Long-term debt including current portion 283 Increased due to new debt issuance in Hydro during the period. Class B limited partnership units 37 Increased due to contributions and accrued interest on the Class B partnership units. Deferred credits, including current portion 154 Increased primarily due to deferred energy sales related to the Maritime Link. Shareholder contributions 243 Increased due to additional equity injections from the Province to fund capital expenditures. Retained earnings 57 Increased due to profit during the period. Regulatory deferrals, net of regulatory assets (126) Decreased primarily due to RSP payout to rate payers that commenced in Q NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 10

13 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 SECTION 4: SEGMENTED RESULTS AND ANALYSIS The following presents an overview of the Company s profit for the three months ended March 31, 2017, by business segment, in comparison to the three months ended March 31, This discussion should be read in conjunction with Note 25 of the condensed consolidated interim financial statements for the three months ended March 31, 2017: For the period ended March 31 (millions of dollars) Variance Regulated 11 (3) 14 Non-Regulated 1-1 Hydro 12 (3) 15 Muskrat Falls - (1) 1 Power Development - (1) 1 LCP Transmission Churchill Falls (7) Other Power Supply (7) Energy Trading 2 6 (4) Commercial and Other Energy Markets 2 6 (4) Oil and Gas Bull Arm Fabrication Offshore Development Corporate (4) (5) 1 Profit for the period HYDRO HYDRO REGULATED The operations of Hydro are influenced by many external factors including regulation, performance of the domestic economy, weather patterns and fuel costs. The demand for electricity is met through a combination of hydroelectric generation, thermal generation and power purchases including wind generation. Hydro uses the RSP, as directed by the PUB, to annually adjust customer rates, both as a means to smooth rate impacts for island electricity consumers and to protect Hydro Regulated s profit from the majority of variations related to the HTGS fuel costs. Fuel costs fluctuate as a result of variations in electricity sales, fuel prices and hydraulic production. The electricity rates in effect for the three months of 2017 reflect interim rates which were implemented on July 1, Hydro s rates are also adjusted annually, on July 1, for the cost of fuel consumed at the HTGS which occurs through the normal operation of the RSP. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 11

14 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 Financial Highlights For the period ended March 31 (millions of dollars) Variance Revenue (20) Fuels Power purchased Operating costs Depreciation and amortization Net finance expense (2) Profit for the period 4 37 (33) Regulatory adjustments (7) 40 (47) Profit (loss) for the period 11 (3) 14 Revenue Revenue for the period ended 2017 was $175 million compared to $195 million for the same period in 2016, a decrease of $20 million. The decrease was primarily due to customer rate reductions associated with the normal operation of the RSP, partially offset by higher energy sales and increased demand revenue. The impact of decreased revenue related to the RSP and energy sales is largely offset in the regulatory adjustments line. Fuels Fuel costs for the period ended 2017 were $84 million compared to $73 million for the same period in 2016, an increase of $11 million, primarily due to higher prices per barrel of No. 6 fuel, partially offset by reduction in fuel consumed by the Holyrood combustion turbine. The majority of variances in No. 6 fuel are offset through the RSP in the regulatory adjustments line. The following tables summarize fuel consumed and average price: For the period ended March 31 (millions of dollars) No. 6 fuel consumption: Millions of barrels Average price (CAD/bbl) $66.44 $43.44 $72.62 Gas Turbine fuel consumption: Millions of liters Average price (CAD/liter) $0.69 $0.57 $0.85 Diesel fuel consumption: Millions of liters Average price (CAD/liter) $0.95 $0.87 $1.05 Fuel costs are summarized below: For the period ended March 31 (millions of dollars) No. 6 fuel and other Gas Turbine fuel Diesel NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 12

15 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 Energy supply is summarized below: For the period ended March 31 (GWh) Generation: Hydraulic generation 1 1,474 1,363 1,590 Holyrood generation Standby generation 1, Thermal diesel generation Purchases ,693 2,641 2,763 1 Includes Hydro generation only. 2 Includes Gas Turbine and Diesel generation. 3 Purchases include generation from Exploits, recall energy for use in Labrador, wind and other sources. Energy sales are summarized below: For the period ended March 31 (GWh) Newfoundland Power 2,061 2,037 2,121 Hydro Rural Industrials Losses ,693 2,641 2,763 Power purchased Power purchased for the period ended 2017 was comparable with the same period in Operating costs Operating costs for the period ended 2017 were $33 million compared to $31 million for the same period in 2016, an increase of $2 million. This increase was primarily due to higher costs related to salaries and benefits, system equipment maintenance, transportation and insurance. These increases were partially offset by a reduction in equipment rental expense. Depreciation and amortization Depreciation and amortization for the period ended 2017 was $19 million compared to $17 million for the same period in 2016, an increase of $2 million. The increase was primarily due to increased levels of investment in property, plant and equipment. Net finance expense Net finance expense for the period ended 2017 was $17 million compared to $19 million for the same period in 2016, representing a decrease of $2 million. The decrease was primarily due to higher capitalized interest related to an increase in Hydro s 2017 capital program, and lower interest as a result of the retirement of long-term debt in 2016 that was refinanced during 2017 at a lower interest rate. Regulatory adjustments Regulatory adjustments for the period ended 2017 of $7 million in recoveries were favourable compared to expenses of $40 million for the same period in 2016, an increase of $47 million. The increase was primarily due to RSP amortization and deferred fuel costs as a result of the normal operation of the RSP, combined with a favorable variance relating to a non-recurring allowance for the impact of the Prudence Order recognized in Q NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 13

16 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 HYDRO NON-REGULATED Financial Highlights For the period ended March 31 (millions of dollars) Variance Revenue Power purchased Profit for the period 1-1 Results of Hydro Non-Regulated for the period ended March 31, 2017 were comparable with the same period in POWER DEVELOPMENT MUSKRAT FALLS Financial Highlights For the period ended March 31 (millions of dollars) Variance Other expense - 1 (1) Loss for the period - (1) 1 Results of Muskrat Falls for the period ended March 31, 2017 were comparable with the same period in See Section 5 Liquidity and Capital Resources for additional details on capital expenditures incurred in the segment during the period ended March 31, POWER SUPPLY LCP TRANSMISSION Financial Highlights For the period ended March 31 (millions of dollars) Variance Operating costs - 1 (1) Net finance income - (1) 1 Profit for the period Results of LCP Transmission for the period ended March 31, 2017 were comparable with the same period in See Section 5 Liquidity and Capital Resources for additional details on capital expenditures incurred during the period ended March 31, NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 14

17 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 CHURCHILL FALLS Financial Highlights For the period ended March 31 (millions of dollars) Variance Revenue (7) Operating costs Depreciation and amortization Preferred dividends (1) (1) - Profit for the period (7) Revenue Revenue for the period ended 2017 was $31 million compared to $38 million for the same period in 2016, a decrease of $7 million. The decrease was primarily due to lower energy sales to Hydro-Québec, as a result of a decrease in GWh billed and a 20% decrease in the rate charged in accordance with the Renewal Contract which came into effect September 1, This decrease is partially offset by higher revenue achieved under the Guaranteed Winter Availability Contract (GWAC) between Churchill Falls and Hydro-Québec. For the three months ended March 31, 2017, Churchill Falls derived 46% of its revenue from the GWAC ( %), 30% from sales to Hydro-Québec under the Power Contract and Renewal Contract ( %), and 24% from other revenue ( %). Other revenue includes the sale of energy to Hydro. Operating Costs Operating costs for the period ended 2017 were consistent with the same period in Depreciation and amortization Depreciation and amortization for the period ended 2017 were consistent with the same period in Preferred dividends Preferred dividends for the period ended 2017 were consistent with the same period in OTHER POWER SUPPLY Financial Highlights For the period ended March 31 (millions of dollars) Variance Revenue Operating costs Profit for the period Results for Other Power Supply for the period ended March 31, 2017 were comparable with the same period in See Section 5 Liquidity and Capital Resources for additional details on capital expenditures incurred during the period ended March 31, NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 15

18 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 ENERGY MARKETS ENERGY TRADING Financial Highlights For the period ended March 31 (millions of dollars) Variance Revenue Power purchased Operating costs Transmission rental and market fees Other expense (income) 1 (6) 7 Profit for the period 2 6 (4) Revenue Revenue for the period ended 2017 was $11 million compared to $7 million for the same period in 2016, an increase of $4 million. The increase was primarily due to higher average export electricity prices and volumes, partially offset by unfavourable foreign exchange on USD sales. Prices and volumes for the quarter for sales in export markets are summarized in the table below. For the period ended March Average Export Electricity Price (USD/MWh) 1, Realized Export Electricity Price (USD/MWh) 2, Realized Export Electricity Price (CAD/MWh) 3, Export sales (GWh) The Average Export Electricity Price reflects prices realized in the export market. 2 The Realized Export Price (USD) includes the impact of electricity commodity price hedges and financial transmission rights. Average and realized export electricity price for 2017 are comparable as there were no electricity commodity price hedges during the quarter. 3 The Realized Export Electricity Price (CAD) includes the impact of electricity commodity prices, financial transmission rights and foreign exchange. 4 Q average and realized export electricity price decreased as result of declines in demand and milder weather in eastern Canada and the northeastern United States compared to the same period in Power purchased Power purchased for the period ending 2017 was comparable to the same period in Operating costs Operating costs for the period ending 2017 were comparable to the same period in Transmission rental and market fees Transmission rental and market fees for the period ending 2017 were comparable to the same period in Other expense (income) Other expense for the period ended 2017 was $1 million compared to other income of $6 million for the same period in 2016, a decrease of $7 million. The decrease is primarily due to the fact that Energy Trading held no commodity contracts during the three months ended 2017, while there were favourable settlements and unrealized mark-to-market gains recognized on commodity contracts held during the same period in NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 16

19 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 COMMERCIAL AND OTHER Results of Commercial and Other for the period ended March 31, 2017 were primarily capital in nature. See Section 5 Liquidity and Capital Resources for additional details on capital expenditures incurred during the period ended March 31, OFFSHORE DEVELOPMENT OIL AND GAS Nalcor Oil and Gas is currently a joint venture working interest partner in three developments in the Newfoundland and Labrador offshore. It owns a 4.9% working interest in the Hebron Project, the Province s fourth offshore oil project which was sanctioned for development on December 31, 2012; a 5.0% working interest in the White Rose Extension Project, which produced first oil from the North Amethyst field in May 2010; and a 10.0% working interest in the HSE, which produced first oil in June Financial Highlights For the period ended March 31 (millions of dollars) Variance Revenue Operating costs 1 3 (2) Production, marketing and transportation costs Depreciation, depletion and amortization Net finance expense Other expense (income) 2 (3) 5 Profit for the period Revenue Revenue for the period ended 2017 was $54 million compared to $15 million for the same period in 2016, an increase of $39 million. The increase was primarily due to an increase in HSE production volumes as a result of continued increases in water injection support and a higher average Dated Brent price per barrel, as shown in the table below. Oil production for the quarter was 826,532 barrels as compared to 336,234 barrels for the same period in 2016, an increase of 490,298 barrels. Oil price data for the period ended 2017 with 2016 and 2015 comparatives are summarized in the table below. The average Dated Brent price reflects prices available in the market. The Realized Price (USD) includes the impact of oil commodity price hedges, and Realized Price (CAD) also includes the impact of foreign exchange. For the period ended March Average Dated Brent Price (USD/bbl) Realized Price (USD/bbl) Realized Price (CAD/bbl) Oil Production (bbls) 826, , ,258 Operating costs Operating costs for the period ended 2017 were $1 million compared to $3 million for the same period in 2016, a decrease of $2 million. This decrease was primarily due to an accounting policy decision in July 2016 to capitalize salaries and benefits of exploration department personnel as well as timing of professional service costs. NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 17

20 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 Production, marketing and transportation costs Production, marketing and transportation costs for the period ended 2017 were $9 million compared to $5 million in 2016, an increase of $4 million. This increase was primarily due to an increase in HSE production volumes, consistent with the table above, and an increase in project operating costs associated with HSE and the WR Extension Project. Depreciation, depletion and amortization Depreciation, depletion and amortization costs for the period ended 2017 were $17 million compared to $8 million for the same period in 2016, an increase of $9 million. This increase primarily relates to an increase in depletion associated with higher production volumes and an increase in the amortization of intangible exploration assets. Net finance expense Net finance expense for the period ended 2017 is consistent with the same period in Other expense (income) Other expense for the period ended 2017 was $2 million compared to other income of $3 million for the same period in 2016, a decrease of $5 million. The decrease primarily relates to realized losses on settlements of oil commodity contracts compared to a gain in the same period in 2016, during which Oil and Gas realized gains on settlements of similar oil commodity contracts. In addition, a loss on disposal of assets was incurred during the current period. These losses were partially offset by more favourable foreign exchange on USD transactions. BULL ARM FABRICATION Revenue related to Bull Arm Fabrication is primarily generated through leasing arrangements associated with large construction projects. The site is currently under lease to ExxonMobil Canada Properties until completion of the Hebron Project. Site project work consists of construction of the gravity-based structure, fabrication of the Living Quarters module and integration, hook-up and commissioning of all platform components. Financial Highlights For the period ended March 31 (millions of dollars) Variance Revenue 5 6 (1) Other expense - 1 (1) Profit for the period Results of Bull Arm for the period ended 2017 were comparable with the same period in CORPORATE Financial Highlights For the period ended March 31 (millions of dollars) Variance Operating costs 4 5 (1) Loss for the period (4) (5) 1 Operating costs Operating costs for the period ended 2017 were comparable to the same period in NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 18

21 MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2017 SECTION 5: LIQUIDITY AND CAPITAL RESOURCES CASH FLOW HIGHLIGHTS For the period ended March 31 (millions of dollars) Variance Cash and cash equivalents, beginning of period (6) Net cash provided from operating activities (49) Net cash used in investing activities (559) (263) (296) Net cash provided from financing activities Cash and cash equivalents, end of period Operating activities: For the period ended March 31 (millions of dollars) Variance Net cash provided from operating activities (49) Cash provided from operating activities for the period ended 2017 was $27 million compared to cash provided from operating activities of $76 million in The decrease in cash resources of $49 million was primarily due to unfavourable operating working capital variances. Investing Activities: For the period ended March 31 (millions of dollars) Variance Additions to property, plant and equipment and intangible assets (540) (454) (86) (Increase) decrease in long-term receivables (52) 2 (54) Decrease in investments (including short-term) (195) Changes in non-cash working capital balances (41) (80) 39 Other (3) (3) - Net cash used in investing activities (559) (263) (296) Cash used in investing activities during the period ended 2017 was $559 million compared to $263 million in The increase in cash used in investing activities was largely due to fewer redemptions and reclassifications of structured deposit notes to restricted cash related to the Muskrat Falls and LCP Transmission, given that the majority of these investments had been drawn down during Increased additions to property, plant and equipment and intangible assets also contributed to the increase, along with additional longterm advances to a supplier related to the construction of Muskrat Falls assets, partially offset by increases in capital accruals in the Muskrat Falls and LCP Transmission. Financing Activities: For the period ended March 31 (millions of dollars) Variance Issuance of long-term debt Decrease in restricted cash Class B limited partnership unit contributions (10) Decrease in short-term borrowings (93) (14) (79) Increase in shareholder contributions RSP payout (119) - (119) Other (3) 1 (4) Net cash provided from financing activities During 2017, $524 million was provided from financing activities, compared to $140 million in The increase was primarily due to proceeds from Hydro s issuance of Series AF debentures, higher shareholder contributions and additional reductions in restricted cash in NALCOR ENERGY 2017 Q1 FINANCIAL REPORT 19