NEWFOUNDLAND AND LABRADOR HYDRO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2017 (Unaudited)

Transcription

1 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2017 (Unaudited)

2 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited) June 30 December 31 As at (millions of Canadian dollars) Notes ASSETS Current assets Cash and cash equivalents Short-term investments Trade and other receivables Inventories Current portion of sinking funds Current portion of reserve fund Prepayments Deferred asset Total current assets Non-current assets Property, plant and equipment 4 2, ,279.3 Intangible assets Long-term investments Investment in joint arrangement Other long-term assets Total assets 2, ,895.6 Regulatory deferrals Total assets and regulatory deferrals 3, ,059.4 LIABILITIES AND EQUITY Current liabilities Short-term borrowings Trade and other payables Current portion of long-term debt Deferred credits Current portion of deferred contributions Derivative liability Total current liabilities Non-current liabilities Long-term debt 8 1, Deferred contributions Decommissioning liabilities Employee future benefits Total liabilities 2, ,807.6 Shareholder s equity Share capital Contributed capital Reserves Retained earnings Total equity Total liabilities and equity 2, ,711.0 Regulatory deferrals Total liabilities, equity and regulatory deferrals 3, ,059.4 Commitments and contingencies (Note 19) See accompanying notes

3 CONSOLIDATED STATEMENT OF PROFIT AND COMPREHENSIVE INCOME (Unaudited) Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) Notes (Restated - (Restated - Notes 22,23) Notes 22,23) Energy sales Other revenue Revenue Fuels Power purchased Operating costs Transmission rental Depreciation and amortization 4, Net finance expense Other income 16 (1.6) (13.3) (0.1) (8.5) Expenses (Loss) profit before regulatory adjustments (10.8) Regulatory adjustments 6 (43.0) 11.8 (49.7) 52.1 Profit for the period Other comprehensive income Total items that may or have been reclassified to profit or loss Regulatory adjustment Net fair value gain (loss) on available-for-sale financial (4.2) 10.0 Reclassification adjustments related to: Disposals of available-for-sale financial instruments (2.1) (2.5) (4.5) (5.1) Other comprehensive income (loss) for the period (8.6) 6.0 Total comprehensive income for the period See accompanying notes

4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) Employee Share Contributed Fair Value Benefit Retained (millions of Canadian dollars) Notes Capital Capital Reserve Reserve Earnings Total Balance at January 1, (18.4) Profit for the period Other comprehensive income Net change in fair value of available-for-sale financial instruments (4.2) - - (4.2) Net change in fair value of financial instruments reclassified to profit or loss (4.5) - - (4.5) Regulatory adjustment Total comprehensive (loss) income for the period - - (8.7) Contributed capital Dividends (3.4) (3.4) Balance at June 30, (18.3) (Restated - Notes 22,23) Balance at January 1, (21.5) Profit for the period Other comprehensive income Net change in fair value of available-for-sale financial instruments Net change in fair value of financial instruments reclassified to profit or loss (5.1) - - (5.1) Regulatory adjustment Total comprehensive income for the period Contributed capital Dividends (6.3) (6.3) Balance at June 30, (20.4) See accompanying notes

5 CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) Notes (Restated - (Restated - Notes 22,23) Notes 22,23) Operating activities Profit for the period Adjustments for the following non-cash items: Depreciation - capital assets Amortization - intangible assets Amortization - sinking fund discount (2.8) (3.3) (5.9) (6.6) Employee benefits Regulatory adjustments (43.0) 11.8 (49.7) 52.1 Net changes in PPA fair value (2.1) (13.0) (0.4) (8.7) Other (0.6) 0.9 (0.4) Changes in non-cash working capital balances Net cash provided from operating activities Investing activities Additions to property, plant and equipment 4 (99.3) (52.4) (167.8) (77.3) Additions to intangible assets 5 - (1.2) (0.1) (1.6) Increase in short-term investments - (13.2) (14.5) (13.2) Increase in sinking funds - - (2.4) (2.4) Other Changes in non-cash working capital balances Net cash used in investing activities (82.8) (51.2) (168.0) (82.3) Financing activities Issuance of long-term debt Dividends paid to Nalcor Energy 13 (1.4) (2.5) (3.4) (6.3) Increase (decrease) in short term borrowings (49.0) (47.0) (63.0) Increase in contributed capital Other (0.1) 0.9 (0.2) 1.1 Rate stabilization plan refund (8.0) - (127.3) - Net cash (used in) provided from financing activities 36.6 (44.4) (59.5) Net increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Interest received Interest paid See accompanying notes

6 1. DESCRIPTION OF BUSINESS Newfoundland and Labrador Hydro (Hydro or the Company) is incorporated under a special act of the Legislature of the Province of Newfoundland and Labrador (the Province). The principal activity of Hydro is the generation, transmission and sale of electricity. Hydro s operations include both regulated and non-regulated activities. Hydro is a 100% owned subsidiary of Nalcor Energy (Nalcor). Hydro s head office is located at 500 Columbus Drive in St. John s, Newfoundland and Labrador A1B 0C9, Canada. Hydro holds interests in the following entities: A 65.8% interest in Churchill Falls (Labrador) Corporation Limited (Churchill Falls). Churchill Falls is incorporated under the laws of Canada and owns and operates a hydroelectric generating plant and related transmission facilities situated in Labrador which has a rated capacity of 5,428 megawatts (MW). A 51% interest in Lower Churchill Development Corporation (LCDC), an inactive subsidiary. LCDC is incorporated under the laws of Newfoundland and Labrador and was established with the objective of developing all or part of the hydroelectric potential of the Lower Churchill River. 2. SIGNIFICANT ACCOUNTING POLICIES 2.1 Statement of Compliance and Basis of Measurement These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards 34 - Interim Financial Reporting and have been prepared using accounting policies consistent with those used in the preparation of the annual audited consolidated financial statements for the year ended December 31, These condensed consolidated interim financial statements do not include all of the disclosures normally found in Hydro s annual audited consolidated financial statements and should be read in conjunction with the annual audited consolidated financial statements. Interim results will fluctuate due to the seasonal nature of electricity demand and water flows, as well as timing and recognition of regulatory items. Due to higher electricity demand during the winter months, revenue from electricity sales is higher during the first and fourth quarters. These condensed consolidated interim financial statements have been prepared on a historical cost basis, except for financial instruments at fair value through profit or loss and available-for-sale financial assets which have been measured at fair value. The condensed consolidated interim financial statements are presented in Canadian dollars (CAD) and all values rounded to the nearest million, except when otherwise noted. The condensed consolidated interim financial statements were approved by Hydro s Board of Directors (the Board) on August 7, Basis of Consolidation The condensed consolidated interim financial statements include the financial statements of Hydro, its subsidiary company, LCDC, and its share of investments in a joint operation and a joint arrangement. Intercompany transactions and balances have been eliminated upon consolidation. Effective June 18, 1999, Hydro, Churchill Falls, and Hydro-Québec entered into a Shareholders Agreement (the Shareholders Agreement) which provided, among other matters, that certain of the strategic operating, financing and investing policies of Churchill Falls be subject to approval jointly by representatives of Hydro and Hydro-Québec on the Board of Directors of Churchill Falls. Although Hydro holds a 65.8% ownership interest, the agreement changed the nature of the relationship between Hydro and Hydro-Québec, with respect to Churchill Falls, from that of majority and minority shareholders, respectively, to that of a joint operation. Accordingly, Hydro has recognized its share of assets, liabilities and profit or loss in relation to its interest in Churchill Falls subsequent to the effective date of the Shareholders Agreement

7 Churchill Falls holds 33.33% of the equity share capital of Twin Falls Power Corporation Limited (Twin Falls). This investment is accounted for using the equity method. 3. DEFERRED ASSET The deferred asset represents Hydro s asset related to the power purchase agreement (PPA) with Nalcor Energy Marketing Corporation (Energy Marketing). The PPA, which became effective on October 1, 2015, allows Energy Marketing to purchase available recapture energy from Hydro for resale in export markets or through agreements with counterparties. Additionally, the PPA allows for the use of Hydro s transmission service rights by Energy Marketing to deliver electricity, through rights which are provided to Hydro pursuant to a Transmission Service Agreement with Hydro-Québec dated April 1, The PPA can be terminated by either party with notice provided 60 days prior to the intended termination date. At June 30, 2017, Management assessed the anticipated term of the contract and determined no change in accounting treatment was required. The deferred asset is amortized into income on a straight-line basis over the assumed 12 month term of the contract, which commenced on January 1, The components of change are as follows: June 30 December 31 As at (millions of Canadian dollars) Deferred asset, beginning of period Additions Amortization (25.5) (61.2) Deferred asset, end of period

8 4. PROPERTY, PLANT AND EQUIPMENT Transmission Generation and Construction (millions of Canadian dollars) Plant Distribution Other in Progress Total Cost Balance at January 1, , ,746.9 Additions Disposals (6.1) (3.2) (3.4) - (12.7) Transfers (216.0) - Other adjustments (0.4) (0.1) (0.1) - (0.6) Decommissioning liabilities and revisions (13.9) (12.9) Balance at December 31, , ,981.4 Additions 0.1 (0.1) Disposals (0.1) (0.2) (0.4) - (0.7) Transfers (2.7) - Balance at June 30, , ,148.5 Depreciation Balance at January 1, Depreciation Disposals (1.8) (1.0) (2.4) - (5.2) Balance at December 31, Depreciation Disposals - - (0.2) - (0.2) Balance at June 30, Carrying value Balance at January 1, , ,122.8 Balance at December 31, , ,279.3 Balance at June 30, , ,

9 5. INTANGIBLE ASSETS Computer Feasibility Assets Under (millions of Canadian dollars) Software Studies Development Total Cost Balance at January 1, Additions Transfers (0.1) - Balance at December 31, Additions Balance at June 30, Amortization Balance at January 1, Amortization Balance at December 31, Amortization Balance at June 30, Carrying value Balance at January 1, Balance at December 31, Balance at June 30, REGULATORY DEFERRALS Remaining Recovery January 1 Reclass & Regulatory June 30 Settlement (millions of Canadian dollars) 2017 Disposition Activity 2017 Period (years) Regulatory asset deferrals 2014 cost deferral 38.7 (37.7) (1.0) - n/a 2015 cost deferral 24.5 (27.7) n/a 2016 cost deferral 32.4 (36.1) n/a Asset disposal Deferred energy conservation costs n/a Deferred foreign exchange on fuel (0.2) n/a Deferred lease costs (0.7) Energy supply deferral n/a Foreign exchange losses (1.1) Hearing costs (0.1) Phase Two hearing costs n/a (70.5) Regulatory liability deferrals Deferred power purchase savings (0.4) - - (0.4) Insurance amortization and proceeds (4.4) (4.1) n/a Labrador refund - (0.9) - (0.9) 2.50 Rate stabilization plan (RSP) (343.6) (111.1) n/a (348.4) (116.5) - 4 -

10 6.1 Regulatory Adjustments Recorded in the Consolidated Statement of Profit and Comprehensive Income Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) (Restated - (Restated - Note 22) Note 22) RSP amortization (17.4) (3.1) (43.6) (7.5) RSP fuel deferral (9.6) RSP interest Rural rate adjustment 0.7 (1.8) (2.4) (3.8) Total RSP activity (26.1) 14.0 (32.7) cost deferral cost deferral (3.2) - (3.2) cost deferral (3.7) - (3.7) - Amortization of deferred foreign exchange losses Deferred energy conservation (0.2) (0.1) (0.3) (0.2) Deferred foreign exchange on fuel - (0.4) (0.2) 0.8 Deferred lease costs 0.4 (1.6) 0.7 (1.6) Employee benefits actuarial loss 0.1 (0.1) Energy supply deferral (11.2) - (11.2) - Fuel supply deferral Hearing costs (0.1) Insurance amortization and proceeds (0.2) (0.1) (0.3) (0.3) Non-customer contributions in aid of construction (0.1) - (0.6) - Phase Two hearing costs (0.2) (0.5) (0.4) (0.5) (43.0) 11.8 (49.7) 52.1 Hydro s regulatory deferrals will be, or are expected to be, reflected in customer rates in future periods and have been established through the rate setting process. In the absence of rate regulation, these amounts would be reflected in operating results in the year and profit for the period ended June 30, 2017 would have decreased by $49.7 million (2016 an increase of $52.1 million). 6.2 RSP Refund As per Board Order P.U. 36 (2016), the RSP was reduced by $127.3 million relating to the refund of the utility surplus balance. The reduction was comprised of $125.8 million refund to customers and $1.5 million in administrative costs Cost Deferral In Board Order P.U. 22 (2017), the Board approved the 2014 cost deferral of $37.7 million, resulting in a decrease in income in Q of $1.0 million, and the disposition of the balance from the RSP Cost Deferral In Board Order P.U. 22 (2017), the Board approved the 2015 cost deferral of $27.7 million, resulting in an increase in income in Q of $3.2 million, and the disposition of the balance from the RSP Cost Deferral The 2016 cost deferral of $32.4 million consisted of energy supply costs of $31.0 million and other costs (net of allowances) of $1.4 million. As a result of Board Order P.U. 22 (2017), $31.0 million was re-classified to the energy supply deferral. The Board approved the remaining 2016 costs of $5.0 million, which resulted in an increase in income of $3.7 million in Q2 2017, and the disposition of the balance from the RSP. 6.6 Energy Supply Deferrals The energy supply deferral account includes $31.0 million which was re-classified from the 2016 cost deferral. In Board Order P.U. 22 (2017), the Board approved the deferral of energy supply costs with recovery subject to a future Board order. The net impact in Q results in an increase in income of $11.2 million.

11 6.7 Labrador Refund Pursuant to Board Order P.U. 22 (2017), the Board ordered Hydro to refund Labrador Industrial Transmission customers excess revenues relating to the period from 2014 to The Board also ordered that Hydro apply a rate reduction for a 30 month period to Hydro s rural customers on the Labrador Interconnected System relating to excess revenue collected. 7. OTHER LONG-TERM ASSETS June 30 December 31 (millions of Canadian dollars) Long-term receivables Reserve fund Sinking funds Less: current portion of reserve fund (7.5) (4.9) Less: current portion of sinking funds (82.0) (75.2) Other long-term assets, end of period June 30 December 31 As at June 30 (millions of Canadian dollars) Sinking funds, beginning of period Contributions Earnings Mark-to-market adjustment (8.5) 3.8 Sinking funds, end of period Less: current portion (82.0) (75.2) Sinking fund installments due over the next five years are as follows: (millions of Canadian dollars) Sinking fund installments DEBT 8.1 Short-term Borrowings Hydro maintains a $50.0 million CAD or USD equivalent unsecured demand operating credit facility with its banker and as at June 30, 2017, there were no amounts drawn on this facility ( $nil), and none of the borrowing limit has been used to issue irrevocable letters of credit ( $0.3 million). Borrowings in CAD may take the form of Prime Rate Advances, Bankers Acceptances (BAs), and letters of credit, with interest calculated at the Prime Rate or prevailing Government BA fee. Borrowings in USD may take the form of Base Rate Advances, London Interbank Offer Rate (LIBOR) Advances and letters of credit. The facility also provides coverage for overdrafts on Hydro's bank accounts, with interest calculated at the Prime Rate. On January 24, 2017 Hydro cancelled the irrevocable letter of credit for $0.3 million ( $0.3 million) as it was no longer required. On March 31, 2017 Nalcor replaced an intercompany loan in the amount of $225.0 million to Hydro. This loan will mature on September 30, 2017 and has an interest rate of 1.112%. In addition, Hydro utilized its government guaranteed promissory note program to fulfil its short-term funding requirements. As at June 30, 2017, there were $163.0 million in promissory notes outstanding with a maturity date of July 5, 2017 bearing an interest rate of 0.60% ( $210.0 million bearing an interest rate of 0.63%). Upon maturity, the promissory note was reissued

12 June 30 December 31 As at (millions of Canadian dollars) Promissory notes - borrowed from Nalcor Promissory notes - borrowed from external markets Churchill Falls maintains a $10.0 million CAD or USD equivalent unsecured demand operating credit facility with its primary banker. There were no amounts drawn on this facility as at June 30, 2017 ( $nil), however $1.0 million of the borrowing limit has been used to issue irrevocable letters of credit ( $1.0 million). Churchill Falls has issued an additional irrevocable letter of credit in the amount of $1.0 million ( $1.0 million), which does not impact the borrowing limit of the operating credit facility. Borrowings in CAD may take the form of Prime Rate Advances, BAs, or letters of credit, with interest calculated at the Prime Rate or prevailing Government BA fee. Borrowings in USD may take the form of Base Rate Advances. The facility also provides coverage for overdrafts on Churchill Falls bank accounts, with interest calculated at the Prime Rate. Churchill Falls has issued three irrevocable letters of credit, totalling $2.0 million ( $2.0 million), to ensure satisfactory management of its waste management and compliance with a certificate of approval for the transportation of special hazardous wastes granted by the Department of Environment and Conservation. 8.2 Long-term Debt The following table represents the value of long-term debt measured at amortized cost: Face Coupon Year of Year of June 30 December 31 As at (millions of Canadian dollars) Value Rate % Issue Maturity Hydro V X* Y* AB* AD* AF / Total debentures 1, , ,071.6 Less: Sinking fund investments in own debentures , ,014.3 Less: payments due within one year Total debentures 1, *Sinking funds have been established for these issues. Hydro s promissory notes and debentures are unsecured and unconditionally guaranteed as to principal and interest and, where applicable, sinking fund payments, by the Province. The Province charges Hydro a guarantee fee of 25 basis points annually on the total debt (net of sinking funds) with a remaining term to maturity of less than 10 years and 50 basis points annually on total debt (net of sinking funds) with a remaining term to maturity greater than 10 years for debt outstanding as of December 31, For debt issued subsequent to December 31, 2010, the guarantee rate is 25 basis points annually on the total debt (net of sinking funds) with an original term to maturity of less than 10 years and 50 basis points annually on total debt (net of sinking funds) with an original term to maturity greater than 10 years. The fee for the period ended June 30, 2017 was $2.1 million ( $2.3 million). On January 20, 2017 Hydro issued new long-term debt through the reopening and sale of $300.0 million of Series AF debentures to its underwriting syndicate. The debentures mature on December 1, 2045 with a coupon rate of 3.60% paid semi-annually

13 9. DEFERRED CONTRIBUTIONS Hydro has received contributions in aid of construction of property, plant and equipment. These contributions are deferred and amortized to other revenue over the life of the related property, plant and equipment asset. June 30 December 31 As at (millions of Canadian dollars) Deferred contributions, beginning of period Additions Disposals - (0.1) Amortization (0.7) (1.1) Deferred contributions, end of period Less: current portion (1.2) (1.1) DECOMMISSIONING LIABILITIES Hydro has recognized liabilities associated with the retirement of portions of the Holyrood Thermal Generating Station (HTGS) and the disposal of Polychlorinated Biphenyls (PCB). The reconciliation of the beginning and ending carrying amounts of decommissioning liabilities for June 30, 2017 and December 31, 2016 are as follows: June 30 December 31 As at (millions of Canadian dollars) Decommissioning liabilities, beginning of period Liabilities settled - (0.8) Accretion Revisions - (12.9) Decommissioning liabilities, end of period EMPLOYEE FUTURE BENEFITS 11.1 Pension Plan Employees participate in the Province s Public Service Pension Plan, a multi-employer defined benefit plan. The employer s contributions for the period ended June 30, 2017 of $4.6 million ( $4.4 million) are expensed as incurred Other Benefits Hydro provides group life insurance and health care benefits on a cost shared basis to retired employees, and in certain cases, their surviving spouses, in addition to a severance payment upon retirement. In 2017, cash payments to beneficiaries for its unfunded other employee future benefits were $1.8 million ( $1.7 million). An actuarial valuation was performed as at December 31, Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) (Restated - (Restated - Component of benefit cost Note 22) Note 22) Current service cost Interest cost Total benefit expense for the period

14 12. ACCUMULATED OTHER COMPREHENSIVE INCOME The components of, and changes in, accumulated other comprehensive income are as follows: Items that may or have been reclassified to profit or loss: Six months ended (millions of Canadian dollars) Available-for-sale financial instruments Balance at January Net fair value (loss) gain during the period (4.2) 10.0 Amounts reclassified to profit or loss (4.5) (5.1) Balance at June (millions of Canadian dollars) Employee future benefits Balance at January 1 (18.4) (21.5) Regulatory adjustment Balance at June 30 (18.3) (20.4) 13. SHAREHOLDER'S EQUITY 13.1 Share Capital June 30 December 31 As at (millions of Canadian dollars) Common shares of par value of $1 each Authorized - 25,000,000 Issued, paid and outstanding - 22,503, Contributed Capital June 30 December 31 As at (millions of Canadian dollars) Contributed capital, beginning of period Additions Contributed capital, end of period During 2017, the Churchill Falls (Labrador) Corporation Trust (the Trust) contributed capital in the amount of $nil ( $0.3 million). In addition, Lower Churchill Management Corporation (LCMC) contributed $2.1 million ( $14.9 million) in additions to property, plant and equipment Dividends Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) Declared during the year Final dividend - prior period: $0.02/share ( $0.05) Interim dividend - current period: $0.13/share ( $0.23)

15 14. OPERATING COSTS Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) (Restated - (Restated - Notes 22,23) Notes 22,23) Salaries and benefits Maintenance and materials Professional services Rental and royalty expense Travel and transportation Equipment rental Other NET FINANCE EXPENSE Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) Finance income Interest on sinking fund Interest on reserve fund Other interest income Finance expense Long-term debt Debt guarantee fee Accretion Other interest expense Interest capitalized during construction (2.5) (0.7) (4.0) (1.2) Net finance expense

16 16. OTHER INCOME Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) Mark-to-market of commodity swaps Settlement of commodity swaps (1.9) Loss on disposal of property, plant and equipment Asset disposal costs - - (0.2) 0.2 Net PPA gain (2.1) (13.0) (0.4) (8.7) Unrealized foreign exchange (gain) loss Other - (1.0) - (1.0) Other income (1.6) (13.3) (0.1) (8.5) (a) Net Change in PPA Fair Value Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) PPA gains Settlement of realized profit (9.8) (7.5) (19.3) (13.3) Mark-to-market of derivative (5.1) (20.8) (6.6) (26.0) (14.9) (28.3) (25.9) (39.3) PPA losses Amortization of deferral Net PPA gain (2.1) (13.0) (0.4) (8.7) 17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT 17.1 Fair Value The estimated fair values of financial instruments as at June 30, 2017 and December 31, 2016 are based on relevant market prices and information available at the time. Fair value estimates are based on valuation techniques which are significantly affected by the assumptions used including the amount and timing of future cash flows and discount rates reflecting various degrees of risk. As such, the fair value estimates below are not necessarily indicative of the amounts that Hydro might receive or incur in actual market transactions. As a significant number of Hydro s assets and liabilities do not meet the definition of a financial instrument, the fair value estimates below do not reflect the fair value of Hydro as a whole. Establishing Fair Value Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the nature of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 - valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 - valuation techniques using inputs for the asset or liability that are not based on observable market data (unobservable inputs)

17 The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. For assets and liabilities that are recognized at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. There were no transfers between Level 1, 2 and 3 fair value measurement for the period ended June 30, 2017 and the year ended December 31, Carrying Fair Carrying Fair Level Value Value Value Value As at (millions of Canadian dollars) June 30, 2017 December 31, 2016 Financial assets Sinking funds - investments in Hydro debt issue Sinking funds - other investments Reserve fund Long-term receivables Financial liabilities Derivative liabilities Long-term debt (including amount due within one year before sinking funds) 2 1, , , ,333.7 The fair values of cash and cash equivalents, short-term investments, trade and other receivables, short-term borrowings and trade and other payables approximate their carrying values due to their short-term maturity. The fair values of Level 2 financial instruments are determined using quoted prices in active markets, which in some cases are adjusted for factors specific to the asset or liability. Level 2 fair values of other risk management assets and liabilities and long-term debt are determined using observable inputs other than unadjusted quoted prices, such as interest rate yield curves and currency rates. Level 3 financial instruments include the derivative liability relating to the PPA with Energy Marketing and represents the future value provided to Energy Marketing through the contract. The following table summarizes quantitative information about the valuation techniques and unobservable inputs used in the fair value measurement of Level 3 financial instruments as at June 30, 2017: (millions of Canadian dollars) Carrying Value Valuation Techniques Derivative liability (PPA) 25.2 Modelled pricing Significant Unobservable Input(s) Volumes (MWh) Range % of available generation The derivative liability arising under the PPA is designated as a Level 3 instrument as related volumes are not readily determinable to estimate a portion of the fair value of the derivative liability. Hence, fair value measurement of this instrument is based upon a combination of internal and external pricing and volume estimates. As at June 30, 2017, the effect of using reasonably possible alternative assumptions for volume inputs to valuation techniques may have resulted in a $nil million to a +$2.9 million change in the carrying value of the power purchase derivative liability

18 17.2 Risk Management Market Risk In the course of carrying out its operating, financing and investing activities, Hydro is exposed to possible market price movements that could impact expected future cash flow and the carrying value of certain financial assets and liabilities. Market price movements to which Hydro has significant exposure include those relating to prevailing interest rates, foreign exchange rates, most notably the USD/CAD, and current commodity prices, most notably the spot prices for diesel fuel, electricity, and No. 6 fuel. These exposures are addressed as part of Nalcor s Financial Risk Management Policy. The components of the change impacting the carrying value of the derivative liability for the period ended June 30, 2017 are as follows: (millions of Canadian dollars) Level II Level III Total Balance at January 1, (51.1) (51.1) Changes in profit or loss Mark-to-market Settlements Total Balance at June 30, (25.2) (25.2) Balance, January 1, (61.2) (59.3) Changes in profit or loss Mark-to-market Settlements (1.9) Total (1.9) Balance at June 30, (21.9) (21.9) 18. RELATED PARTY TRANSACTIONS Hydro enters into various transactions with its parent and other affiliates. These transactions occur within the normal course of operations and are measured at the exchange amount, which is the amount of consideration agreed to by the related parties. Related parties with which Hydro transacts are as follows: Related Party Relationship Nalcor 100% shareholder of Hydro Churchill Falls Joint arrangement of Hydro The Province 100% shareholder of Nalcor Twin Falls Joint venture of Churchill Falls Labrador-Island Link Limited Partnership Partnership in which Nalcor owns 75 Class A Units Energy Marketing Wholly owned subsidiary of Nalcor Labrador-Island Link Operating Corporation (LIL Opco) Wholly owned subsidiary of Nalcor LCMC Wholly owned subsidiary of Nalcor Muskrat Falls Corporation (Muskrat Falls) Wholly owned subsidiary of Nalcor Nalcor Energy Bull Arm Fabrication Inc. Wholly owned subsidiary of Nalcor Nalcor Energy Oil and Gas Inc. Wholly owned subsidiary of Nalcor PUB Agency of the Province The Trust Created by the Province with Churchill Falls as the beneficiary Routine operating transactions with related parties are settled at prevailing market prices under normal trade terms. Outstanding balances due to or from related parties are non-interest bearing with no set terms of repayment, unless otherwise stated

19 (a) On March 31, 2017 Nalcor replaced an intercompany loan in the amount of $225.0 million to Hydro. This loan will mature on September 30, 2017 and has an interest rate of 1.112%. (b) For the period ended June 30, 2017, Lower Churchill Management Corporation contributed $2.1 million ( $8.7 million) in additions to property, plant and equipment. 19. COMMITMENTS AND CONTINGENCIES (a) Hydro has received claims instituted by various companies and individuals with respect to power delivery claims and other miscellaneous matters. Although the outcome of such matters cannot be predicted with certainty, Management believes that Hydro's exposure to such claims and litigation, to the extent not covered by insurance policies or otherwise provided for, is not expected to materially affect its financial position. (b) Outstanding commitments for capital projects total approximately $131.1 million as at June 30, 2017 (December 31, $153.1 million). 20. SUPPLEMENTARY CASH FLOW INFORMATION Three months ended Six months ended For the period ended June 30 (millions of Canadian dollars) Trade and other receivables Prepayments (1.8) (1.4) Inventories Trade and other payables (4.1) 11.2 Changes in non-cash working capital balances Related to: Operating activities Investing activities

20 21. SEGMENT INFORMATION Hydro operates in four business segments. The operating structure as at June 30, 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. Hydro Regulated activities encompass sales of electricity to customers within the Province that are regulated by the PUB. Hydro Non-Regulated activities include the sale of recall power, purchased from Churchill Falls, to mining operations in Labrador West as well as costs of Hydro that are excluded from the determination of customer rates. Churchill Falls operates a hydroelectric generating facility which sells electricity to Hydro-Québec and Hydro. Energy Marketing includes the sale of electricity and transmission costs to Nalcor Energy Marketing. Hydro Churchill Energy Non-Regulated Inter- Regulated Falls Marketing Activities Segment Total (millions of Canadian dollars) For the six months ended June 30, 2017 Energy sales (1.5) Other revenue Revenue (0.3) Fuels Power purchased (1.4) 52.1 Operating costs (0.4) Transmission rental Depreciation and amortization Net finance expense (income) 34.7 (0.4) Other expense (income) (0.3) - - (0.1) Expenses (1.4) Preferred dividends - (1.2) (Loss) Profit before regulatory adjustments (11.5) (0.1) 9.7 Regulatory adjustments (49.7) (49.7) Profit (loss) for the period (0.1) 59.4 Capital expenditures Total assets 2, ,

21 Hydro Churchill Energy Non-Regulated Inter- Regulated Falls Marketing Activities Segment Total (millions of Canadian dollars) For the six months ended June 30, 2016 (Restated - Notes 22,23) Energy sales (1.9) Other revenue Revenue Fuels Power purchased (1.9) 52.3 Operating costs Transmission rental Depreciation and amortization Net finance expense (income) 37.1 (0.6) Other expense (income) (8.7) - - (8.5) Expenses (1.8) Preferred dividends - (2.2) Profit (loss) before regulatory adjustments (0.1) (0.1) 81.5 Regulatory adjustments (Loss) profit for the period (5.2) (0.1) (0.1) 29.4 Capital expenditures Total assets 2, ,838.4 Hydro Churchill Energy Non-Regulated Inter- Regulated Falls Marketing Activities Segment Total (millions of Canadian dollars) For the three months ended June 30, 2017 Energy sales (0.7) Other revenue Revenue (0.2) Fuels Power purchased (0.7) 24.0 Operating costs (0.1) Transmission rental Depreciation and amortization Net finance expense (income) 17.7 (0.2) Other expense (income) (2.0) - - (1.6) Expenses (0.6) Preferred dividends - (0.5) (Loss) profit before regulatory adjustments (15.7) (0.1) (10.8) Regulatory adjustments (43.0) (43.0) Profit for the period (0.1) 32.2 Capital expenditures Total assets 2, ,

22 Hydro Churchill Energy Non-Regulated Inter- Regulated Falls Marketing Activities Segment Total (millions of Canadian dollars) For the three months ended June 30, 2016 (Restated - Notes 22,23) Energy sales (1.0) Other revenue Revenue (0.1) Fuels Power purchased (0.9) 24.9 Operating costs Transmission rental Depreciation and amortization Net finance expense 18.3 (0.3) Other (income) expense (0.4) 0.1 (13.0) - - (13.3) Expenses (7.1) 10.0 (0.9) Preferred dividends - (0.9) (Loss) profit before regulatory adjustments (0.4) (0.1) 24.4 Regulatory adjustments Profit (loss) for the period (2.4) (0.4) (0.1) 12.6 Capital expenditures Total assets 2, , PRIOR PERIOD ADJUSTMENTS The January 1, 2016 and the three months and six months ended June 30, 2016 figures have been restated as a result of a misstatement relating to the calculation of the other post-employment benefit health and dental liabilities for retirees. The January 1, 2016 figures have been restated to reduce reserves by $9.3 million and increase opening retained earnings by $8.7 million. In addition, January 1, 2016 and June 30, 2016 balances have been restated for contributions received from LCMC that were previously netted. This presentation adjustment has resulted in an increase in property, plant and equipment and contributed capital of $8.7 million. The following table summarizes the adjustments to the affected accounts from the previously issued 2016 consolidated financial statements to the current year comparative figures:

23 Previously stated Adjustment Restated Three months ended June 30 (millions of Canadian dollars) Statement of Profit and Comprehensive Income Operating costs* 42.0 (0.3) 41.7 Regulatory adjustments 12.0 (0.2) 11.8 Statement of Cash Flows Profit for the period Employee benefits 1.9 (1.8) 0.1 Additions to property, plant and equipment Six months ended June 30 (millions of Canadian dollars) Statement of Profit and Comprehensive Income Operating costs* 85.9 (0.3) 85.6 Regulatory adjustments 52.3 (0.2) 52.1 Statement of Cash Flows Profit for the period Employee benefits 3.0 (1.4) 1.6 Additions to property, plant and equipment (millions of Canadian dollars) Statement of Changes in Equity Employee Future Benefits Reserve, January (9.3) 21.5 Retained Earnings, January Profit for the period ended June * See Note 23 for additional comparative figures changes impacting operating costs

24 23. COMPARATIVE FIGURES Certain of the comparative figures have been reclassified to conform to the basis of presentation adopted during the current reporting period. The changes have been summarized as follows: Previously reported Transmission rental reclassification Reclassified balance Three months ended June 30 (millions of Canadian dollars) Operating costs 46.7 (4.7) 42.0 Transmission rental Six months ended June 30 (millions of Canadian dollars) Operating costs 95.5 (9.6) 85.9 Transmission rental SUBSEQUENT EVENTS The Sub-lease between Twin Falls and Churchill Falls dated November 15, 1961 giving Twin Falls the right to develop hydroelectric power on the Unknown River expired on December 31, A sub-lease was signed between Hydro, Churchill Falls and Twin Falls naming Hydro as the sub-lessee of the transmission lines and related assets from Churchill Falls to Labrador West, covering the period of January 1 to June 30, The term of this Sub-lease between Hydro and Churchill Falls was extended to the earlier of October 31, 2017 or the date of a long term sublease signed by those parties. A sub-lease was signed between Hydro and Churchill Falls, naming Hydro as the sublessee of the transmission lines effective July 1, 2017 and expiring on May 16, The parties also signed a lease of identical term under which Churchill Falls leases equipment related to the transmission lines to Hydro. During July 2017, Hydro converted a $50.0 million ( $50.0 million) unsecured demand operating credit facility with its banker to a $200.0 million committed revolving term credit facility, with a maturity date of July 27,