Source - RNS
RNS Number : 4900J
Hydro-Quebec
09 September 2016
 

Regulatory Announcement

 

 

Hydro-Québec

9 September 2016

 

 

 

 

Re:    Hydro-Québec's Half-Yearly Financial Report for 2016

A copy of the Quarterly Report of Hydro-Québec for the Second Quarter ended June 30, 2016 has been submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM

To view this document in PDF format, please paste the following URLs into the address bar of your browser.

http://www.rns-pdf.londonstockexchange.com/rns/4900J_-2016-9-9.pdf

This document is also available as follows:

-        for viewing on Hydro-Québec's website, www.hydroquebec.com; and/or

-        by writing to the Director - International Financing, Cash and Financial Services; Hydro‑Québec, 75 René‑Levesque Boulevard West, 6th Floor, Montréal, Québec, Canada  H2Z 1A4.

Disclosure and Transparency Rule ("DTR") 4.2

The condensed set of consolidated financial statements of Hydro-Québec and its subsidiaries as at the end of the Second Quarter ended June 30, 2016 which are included in the Quarterly Report - Second Quarter 2016, the Message from the President and Chief Executive Officer in such Report, Appendix A below and the Responsibility Statement in Appendix B below together constitute the Half-Yearly Financial Report of Hydro-Québec for 2016 pursuant to DTR 4.2 and is Regulated Information.

APPENDIX A - PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties which could affect our business activities in the remaining six months of Fiscal 2016 are the same as those disclosed in our 2015 Annual Report. They are described in pages 43 to 46 of such report.

These risks are not set out in any order of priority and do not comprise all the risks and uncertainties that Hydro‑Québec may face.

APPENDIX B - RESPONSIBILITY STATEMENT

The following Responsibility Statement is made in accordance with DTR 4.2.10 with respect to Hydro-Québec's Half-Yearly Financial Report.

We confirm that:

§   the Half-Yearly Financial Report has not been audited or reviewed by Auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

§   to the best of our knowledge, the condensed set of consolidated financial statements of Hydro‑Québec and its subsidiaries as at the end of the Second Quarter ended June 30, 2016 was prepared in accordance with the applicable set of accounting standards and gives a true and fair view of the assets, liabilities, financial position and profit of Hydro-Québec and its subsidiaries taken as a whole; and

§   to the best of our knowledge, the Message from the President and Chief Executive Officer contained in the Quarterly Report - Second Quarter 2016, includes a fair review of the important events that have occurred in the first six months of the financial year and their impact on the condensed set of consolidated financial statements and, together with Appendix A above, constitutes a fair review of the information required by DTR 4.2.7.

 

 

 

Jean-Hugues Lafleur



Vice President - Financing, Treasury and Pension Fund



9 September 2016




 

Second Quarter 2016

Message from the Chairman of the Board
and the President and Chief Executive Officer

Second quarter


For the second quarter of 2016, Hydro-Québec posted net income of $306 million.

 

On markets outside Québec, Hydro-Québec Production's net electricity exports decreased by $58 million. The quarter was marked by scheduled maintenance work that resulted in an interruption of exports in April and May on one of the main power transmission links between Québec and New England. This region represents one of Hydro-Québec's largest export markets and has some of the highest electricity prices in northeastern North America. The work, undertaken to ensure the reliability of the transmission system, was completed in eight weeks, two weeks ahead of schedule.

 

On the Québec market, heritage pool supplies provided by Hydro-Québec Production to Hydro-Québec Distribution increased by $25 million compared to the same period last year. This increase is due to temperatures, particularly in April 2016, when they were on average 3°C lower than normal.

 

These two factors essentially account for the variance with second-quarter net income for 2015, which totaled $343 million. Had it not been for the interruption of exports on the major transmission link between Québec and New England, net income for the quarter would have been comparable to last year's.

Summary of results for the first six months


For the six months ended June 30, 2016, Hydro-Québec recorded net income of $1,890 million, compared to $2,133 million in the same period of 2015.

 

On the Québec market, supplies provided by Hydro-Québec Production to Hydro-Québec Distribution decreased by $168 million, mainly as a result of first-quarter temperatures, which were much colder in 2015 than in 2016. On average, temperatures were 5°C lower than normal in the first three months of 2015, whereas they were 1°C higher than normal in the first quarter of 2016.

 

On markets outside Québec, Hydro-Québec Production's net electricity exports decreased by $79 million. On the one hand, maintenance work on a power transmission link between Québec and New England led to an interruption in exports on this intertie in April and May 2016. On the other hand, the positive impact of the company's risk management strategy mitigated the impact of lower energy market prices.

Consolidated results for the first six months


Revenue totaled $7,117 million, compared to $7,538 million in 2015. The difference is primarily due to a $309‑million decrease in revenue from electricity sales in Québec, largely as a result of temperatures, which led to a 4.2‑TWh reduction in electricity sales compared to 2015.

 

Total expenditure amounted to $3,948 million, compared to $4,160 million in the first six months of 2015. The decrease is partly attributable to a $94‑million reduction in short-term market purchases by Hydro-Québec Distribution. It should be recalled that in 2015, the division had to purchase large quantities of energy on the markets to meet ad hoc requirements resulting from the very cold winter temperatures.

 

Financial expenses totaled $1,279 million, compared to $1,245 million in 2015. This increase, which is chiefly due to the foreign currency effect on working capital denominated in U.S. dollars, was mitigated by a decrease in interest expense resulting mainly from debt repayment in 2015.

Segmented results for the first six months


Generation

Hydro-Québec Production posted net income of $1,114 million, compared to $1,393 million in 2015. Net electricity sales to Hydro-Québec Distribution decreased by $168 million, primarily because of a reduction in peak supplies, which were greater in 2015 on account of the harsh winter. Net electricity exports decreased by $79 million. On the one hand, maintenance work on a power transmission link between Québec and New England led to an interruption in exports on this intertie in April and May 2016. On the other hand, the positive impact of the company's risk management strategy mitigated the impact of lower energy market prices. Financial expenses increased by $37 million, chiefly on account of the foreign currency effect on working capital denominated in U.S. dollars.

Transmission

Hydro-Québec TransÉnergie's net income was $306 million, comparable to the $292 million recorded in the first six months of 2015.

Distribution

Hydro-Québec Distribution's net income totaled $431 million, compared to $434 million in 2015. Revenue from electricity sales decreased by $309 million, mainly because of a 4.2‑TWh volume reduction attributable to the fact that temperatures were much colder than normal in the first three months of 2015, which led to additional sales of 4.3 TWh or $338 million, whereas they were milder than normal in the first quarter of 2016. Electricity purchases, the related transmission costs and fuel purchases decreased by $299 million. More specifically, supplies from Hydro-Québec Production were $168 million lower, while third-party supplies decreased by $87 million, essentially on account of a $94-million reduction in short-term market purchases.  

Construction

The Construction segment includes activities related to the projects carried out by Hydro-Québec Équipement et services partagés and by Société d'énergie de la Baie James (SEBJ).

 

The volume of activity at Hydro-Québec Équipement et services partagés and SEBJ totaled $927 million, compared to $860 million in 2015. Projects under way for Hydro-Québec Production mainly include ongoing construction of the Romaine hydroelectric complex. Work in progress for Hydro-Québec TransÉnergie includes expansion of the transmission system in the Minganie region, implementation of the Chamouchouane-Bout-de-l'Île project, reconstruction of De Lorimier substation and the deployment of related lines, as well as various projects stemming from continued investment in asset reliability and sustainment.

Investment


In the first six months of 2016, Hydro-Québec invested $1,462 million in property, plant and equipment and intangible assets, compared to $1,478 million in 2015.

 

Most of Hydro-Québec Production's investments were allocated to ongoing construction of the Romaine complex. The division also carried out refurbishments at a number of facilities to optimize performance and ensure the long-term operability of the generating fleet.

 

Hydro-Québec TransÉnergie continued investing in its transmission system. Among other things, it continued work to connect the Romaine complex as part of the expansion of the transmission system in the Minganie region and to implement the 735-kV Chamouchouane-Bout-de-l'Île project. The division also conducted facility maintenance and improvement activities to ensure the reliability and long-term operability of its transmission assets and to enhance service quality.

 

Hydro-Québec Distribution kept up investments to handle the growth of its Québec customer base and to ensure the long-term operability of its facilities. In addition, with a view to enhancing service quality, it continued to expand the range of its online self-service options to make it easier for customers to manage their accounts.

Financing


During the second quarter, Hydro-Québec issued medium-term notes for a total amount of $1.0 billion, maturing in 2019. This borrowing was made on the Canadian market.

 

The funds were used to support part of the investment program and to refinance maturing debt.

 

 

 

 

Michael D. Penner

Éric Martel



Chairman of the Board

President and
Chief Executive Officer

 

September 9, 2016


CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

In millions of Canadian dollars
(unaudited)


Three months ended
June 30

Six months ended
June 30


Notes

2016

2015

2016

2015







Revenue


2,815

2,920

7,117

7,538







Expenditure






Operations


593

631

1,182

1,259

Electricity and fuel purchases


422

418

984

1,063

Depreciation and amortization

4

628

658

1,253

1,308

Taxes


240

229

529

530



1,883

1,936

3,948

4,160







Operating income


932

984

3,169

3,378

Financial expenses

5

626

641

1,279

1,245







Net income


306

343

1,890

2,133

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

In millions of Canadian dollars
(unaudited)


Three months ended
June 30

Six months ended
June 30


Note

2016

2015

2016

2015







Net income


306

343

1,890

2,133







Other comprehensive income






Change in deferred gains (losses) on items designated as
cash flow hedges

6

149

(136)

(198)

635

Reclassification to results of deferred (gains) losses
on items designated as cash flow hedges

6

(79)

55

231

(563)

Reclassification to results of net actuarial losses and
past service costs (credits) for employee future benefits


28

85

57

170

Translation differences in financial statements of
foreign operations


1

-

-

-



99

4

90

242







Comprehensive income


405

347

1,980

2,375

 

 

The accompanying notes are an integral part of the consolidated financial statements.



 

CONSOLIDATED BALANCE SHEETS

In millions of Canadian dollars
(unaudited)

Notes

As at June 30, 2016

As at December 31, 2015





ASSETS




Current assets




Cash and cash equivalents


1,595

2,648

Short-term investments


1,416

1,895

Accounts receivable and other receivables


2,208

2,242

Derivative instruments

6

139

274

Regulatory assets


133

122

Materials, fuel and supplies


216

212



5,707

7,393





Property, plant and equipment


61,901

61,558

Intangible assets


964

1,014

Investments


887

859

Derivative instruments

6

278

128

Regulatory assets


3,739

3,939

Other assets


245

308







73,721

75,199





LIABILITIES




Current liabilities




Borrowings


1,291

9

Accounts payable and accrued liabilities


1,855

2,278

Dividend payable


-

2,360

Accrued interest


878

913

Asset retirement obligations


79

85

Derivative instruments

6

90

299

Regulatory liabilities


25

49

Current portion of long-term debt

6

1,358

2,059



5,576

8,052





Long-term debt

6

42,979

43,613

Asset retirement obligations


782

780

Derivative instruments

6

16

5

Regulatory liabilities


385

392

Other liabilities


2,244

2,571

Perpetual debt

6

284

311



52,266

55,724





EQUITY








Share capital


4,374

4,374

Retained earnings


18,436

16,546

Accumulated other comprehensive income


(1,355)

(1,445)



21,455

19,475







73,721

75,199

Contingencies

10







The accompanying notes are an integral part of the consolidated financial statements.




 

On behalf of the Board of Directors,


 

/s/ Michelle Cormier

 

/s/ Michael D. Penner

Chair of the Audit Committee

Chairman of the Board



Consolidated Statements of Changes in Equity

 

In millions of Canadian dollars
(unaudited)



Six months ended
June 30


Note

Share capital

Retained

earnings

Accumulated other comprehensive income

Total equity

 







 

Balance as at January 1, 2016


4,374

16,546

(1,445)

19,475

 







 

Net income


-

1,890

-

1,890

 

Other comprehensive income

9

-

-

90

90

 







 







 

Balance as at June 30, 2016


4,374

18,436

(1,355)

21,455

 







 

Balance as at January 1, 2015


4,374

15,759

(2,172)

17,961

 







 

Net income


-

2,133

-

2,133

 

Other comprehensive income

9

-

-

242

242

 







 







 

Balance as at June 30, 2015


4,374

17,892

(1,930)

20,336

 

 



 

 

The accompanying notes are an integral part of the consolidated financial statements.




 

CONSOLIDATED STATEMENTS OF CASH FLOWS

In millions of Canadian dollars
(unaudited)


Three months ended
June 30

Six months ended
June 30


Notes

2016

2015

2016

2015







Operating activities






Net income


306

343

1,890

2,133

Adjustments to determine net cash flows
from operating activities






Depreciation and amortization

4

628

658

1,253

1,308

Amortization of premiums, discounts and issue expenses related to debt securities


42

39

84

77

Excess of (amounts paid over net cost recognized)
net cost recognized over amounts paid
for employee future benefits


(61)

50

(112)

78

Other


28

47

69

283

Regulatory assets and liabilities


(24)

1

(32)

(7)

Change in non-cash working capital items

7

1,097

1,043

(445)

(696)



2,016

2,181

2,707

3,176







Investing activities






Additions to property, plant and equipment


(819)

(840)

(1,420)

(1,425)

Additions to intangible assets


(25)

(26)

(42)

(53)

Net disposal (acquisition) of short-term investments


13

(314)

488

642

Other


(8)

(1)

(10)

2



(839)

(1,181)

(984)

(834)







Financing activities






Issuance of long-term debt


995

-

1,012

13

Repayment of long-term debt


(1,867)

(16)

(1,901)

(900)

Cash receipts arising from credit risk management

6

3,204

1,480

5,719

3,484

Cash payments arising from credit risk management

6

(3,340)

(1,931)

(6,307)

(3,128)

Net change in borrowings


(957)

1,596

1,261

1,675

Dividend paid


-

-

(2,360)

(2,535)

Other


(24)

(60)

(177)

170



(1,989)

1,069

(2,753)

(1,221)







Foreign currency effect on cash and cash equivalents


3

(5)

(23)

21







Net change in cash and cash equivalents


(809)

2,064

(1,053)

1,142







Cash and cash equivalents, beginning of period


2,404

349

2,648

1,271







Cash and cash equivalents, end of period


1,595

2,413

1,595

2,413







Supplementary cash flow information

7











The accompanying notes are an integral part of the consolidated financial statements.



Notes to Consolidated Financial Statements

(UNAUDITED)

For the three- and six-month periods ended June 30, 2016 and 2015

Amounts in tables are in millions of Canadian dollars, unless otherwise indicated.

Note 1              Basis of Presentation

Hydro-Québec's consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP).

These quarterly consolidated financial statements, including these notes, do not contain all the required information regarding annual consolidated financial statements and should therefore be read in conjunction with the consolidated financial statements and accompanying notes in Hydro-Québec's Annual Report 2015.

The accounting policies used to prepare the quarterly consolidated financial statements are consistent with those presented in Hydro-Québec's Annual Report 2015, except for the recent amendments.

Management is of the opinion that these quarterly consolidated financial statements include all the necessary adjustments to present fairly, in all material respects, the consolidated financial position of Hydro-Québec.

Hydro-Québec's quarterly results are not necessarily indicative of results for the year on account of seasonal temperature fluctuations. Because of higher electricity demand during winter months, revenue from electricity sales in Québec is higher during the first and fourth quarters.

Management has reviewed events occurring until September 9, 2016, the date of approval of these quarterly consolidated financial statements by the Board of Directors, to determine whether circumstances warranted the recording or presentation of events subsequent to the balance sheet date.

Note 2              Changes to Accounting Policies

RECENT CHANGES

Hedge accounting

On January 1, 2016, Hydro-Québec early adopted Accounting Standards Update (ASU) 2016‑05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, as issued by the Financial Accounting Standards Board (FASB). This ASU states that hedge accounting may continue to apply to a derivative that has been designated as a hedging instrument if this derivative is novated to a new counterparty, as long as all the other applicable conditions continue to be met. It was applied prospectively and has not had any impact on Hydro-Québec's consolidated financial statements.

Intangible assets

On January 1, 2016, Hydro-Québec adopted ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, as issued by the FASB. This ASU clarifies the circumstances in which a cloud computing arrangement includes an internal-use software licence. It was applied prospectively and has not had any impact on Hydro-Québec's consolidated financial statements.

Consolidation

On January 1, 2016, Hydro-Québec adopted ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, as issued by the FASB. This ASU amends the guidance on the analysis to be performed by a reporting entity in order to determine if it must consolidate certain types of legal entities. It was applied on a modified retrospective basis and has not had any impact on Hydro-Québec's consolidated financial statements.

Statements of Operations

On January 1, 2016, Hydro-Québec adopted ASU 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225‑20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, as issued by the FASB. It was applied prospectively and has not had any impact on Hydro-Québec's consolidated financial statements.



 

Note 2              Changes to Accounting Policies (continued)

Standards Issued But Not Yet Effective

Investments

In March 2016, the FASB issued ASU 2016‑07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This ASU simplifies the application of the equity method of accounting in the case where a reporting entity increases its level of investment in another entity or its degree of influence over such an entity. The ASU will apply prospectively to transactions as of January 1, 2017. Hydro-Québec is currently examining the impact of this ASU on its consolidated financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU provides guidance on lease definition, recognition and presentation and requires the recognition of assets and liabilities by lessees for all operating and finance leases with a term of more than 12 months. It will apply on a modified retrospective basis to interim and annual financial statements for annual periods beginning on or after January 1, 2019. Hydro-Québec is currently examining the impact of this ASU on its consolidated financial statements.

Financial instruments

In January 2016, the FASB issued ASU 2016‑01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU provides guidance on the recognition and measurement of financial assets and financial liabilities. It will be applied on a simplified retrospective basis to interim and annual financial statements for annual periods beginning on or after January 1, 2018, and should not have any significant impact on Hydro-Québec's consolidated financial statements.

In June 2016, the FASB issued ASU 2016‑13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides new guidance on the impairment of financial assets that are not accounted for at fair value through net income. It will be applied on a modified retrospective basis to the consolidated financial statements for annual periods beginning on or after January 1, 2020. Hydro-Québec is currently examining the impact of this ASU on its consolidated financial statements, but does not intend early adoption.

Revenue

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU provides guidance on the recognition of revenue at the time that goods or services are transferred to a client, for an amount that reflects the payment which the entity expects to receive in exchange for the goods or services.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of this guidance by one year.

In March 2016, the FASB issued ASU 2016‑08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU clarifies the guidance used to determine if an entity is acting on its own behalf or as an intermediary.

In April 2016, the FASB issued ASU 2016‑10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU clarifies guidance on identifying performance obligations and the licensing of intellectual property rights.

In May 2016, the FASB issued ASU 2016‑12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This ASU clarifies the guidance on assessing collectibility, on noncash considerations and on completed contracts on the date of initial application.

These ASUs will apply on a full or simplified retrospective basis to consolidated financial statements for annual periods beginning on or after January 1, 2018. Hydro-Québec is currently examining their impact on its consolidated financial statements, but does not intend early adoption.



 

Note 3              Regulation

Distribution

In decision D-2016-047 of March 23, 2016, the Régie de l'énergie (the Régie) authorized an increase of 0.70% in all Hydro-Québec electricity rates except Rate L, which remains the same. The new rates are effective as of April 1, 2016. The authorized return on the rate base was set at 6.95%, assuming a capitalization with 35% equity.

In decision D-2016-033 of March 7, 2016, the Régie authorized the Distributor to include in its 2016-2017 rates a debit amount of $248 million for variances in supply costs for electricity in excess of the heritage pool in 2013 and 2014, a credit amount of $168 million for revenue variances related to climate conditions in 2015, as well as a credit amount of $3 million corresponding to the balance of the deferral account for the changeover to U.S. GAAP.

In decision D‑2016‑105 of July 5, 2016, the Régie revoked decisions D‑2015‑179 and D‑2016‑069, in which it had approved an agreement regarding use of a generating station during peak demand periods.

Transmission

In decision D-2016-046 of March 23, 2016, the Régie set Hydro-Québec's power transmission rates for 2016. The authorized return on the rate base was set at 6.85%, assuming a capitalization with 30% equity.

In decision D-2016-029 of March 2, 2016, the Régie authorized the Transmission Provider to include in its 2016 rates a credit amount of $46 million corresponding to the balance of the deferral account for the changeover to U.S. GAAP, as well as a credit amount of up to $6 million to implement and apply the North American Electric Reliability Corporation's Critical Infrastructure Protection Version 5 (CIP V5) standards.

In partial and interim decision D‑2016‑077 of May 18, 2016, the Régie authorized the Transmission Provider to create a non-rate‑base deferral account for the recognition of all expenses incurred as of April 11, 2016, as part of the project involving the emergency replacement of PK model circuit breakers. These expenses will bear interest. As at June 30, 2016, $12 million had been recognized in this account.

Note 4              Depreciation and Amortization


Three months ended
June 30

Six months ended
June 30


2016

2015

2016

2015






Property, plant and equipment

546

533

1,097

1,066

Intangible assets

43

39

86

77

Regulatory assets and liabilities

29

71

58

143

Retirement of capital assets

10

15

12

22


628

658

1,253

1,308

Note 5              Financial Expenses


Three months ended
June 30

Six months ended
June 30


2016

2015

2016

2015






Interest on debt securities

623

642

1,244

1,290

Net exchange loss (gain)

5

9

34

(29)

Guarantee fees related to debt securities

54

51

109

102


682

702

1,387

1,363

Less





Capitalized financial expenses

47

54

89

103

Net investment income

9

7

19

15


56

61

108

118







626

641

1,279

1,245



 

Note 6              Financial Instruments

In the course of its operations, Hydro-Québec carries out transactions that expose it to certain financial risks, such as market, liquidity and credit risk. Exposure to such risks and the impact on results are reduced through careful monitoring and implementation of strategies that include the use of derivative instruments.

Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market prices. Hydro-Québec is exposed to three main types of market risk: currency risk, interest rate risk and risk associated with energy and aluminum prices. Active integrated management of these three types of risk aims to limit exposure to each risk and reduce their overall impact on results.

Management of long-term risk

Management of risk associated with debt

Currency risk and interest rate risk - Hydro-Québec uses forward contracts and currency swaps to manage the currency risk associated with long-term debt and perpetual debt, as well as forward contracts and interest rate swaps to modify long-term exposure to interest rate risk. When designated as hedging items, these derivative instruments are recognized as cash flow hedges or fair value hedges, depending on the risk hedged. The impact on results of foreign currency hedging transactions and those associated with debt interest rates is recognized in Financial expenses.

The following table shows the notional amounts, expressed in Canadian dollars and foreign currencies, of forward contracts and swaps used to manage long-term risk:


As at June 30,

 2016a

                As at December 31,

2015a

Forward contracts



U.S. dollars

1,222

2,230

Swaps



Canadian dollars

(8,132)

(9,400)

U.S. dollars

5,730

6,042

Other currencies



Euros

-

61

Yen

1,000

1,000

a)   Figures in parentheses represent amounts to be paid.

Management of short-term risk

Currency risk - Hydro-Québec uses forward contracts to manage its foreign currency risk exposure over the short term. When designated as hedging items, these derivative instruments are recognized as cash flow hedges. The impact of currency risk hedging transactions on results is recognized in the line item affected by the hedged item, namely Revenue, Electricity and fuel purchases, or Financial expenses. The notional amount of open positions in currency sales and purchase contracts as at June 30, 2016 was US$1,031 million and US$845 million, respectively (US$1,129 million in currency sales contracts as at December 31, 2015).

Interest rate risk - Hydro-Québec uses forward rate agreements and interest rate swaps to manage short-term interest rate risk. When designated as hedging items, these derivative instruments are recognized as cash flow hedges. The impact on results of transactions to hedge short-term interest rate risk is recognized in the line item affected by the hedged item, namely Financial expenses.

Price risk - Hydro-Québec uses mainly commodity futures and swaps to manage risk resulting from fluctuations in energy and aluminum prices. When designated as hedging items, these derivative instruments are recognized as cash flow hedges. The impact on results of transactions to hedge the risk related to energy and aluminum prices is recognized in the line item affected by the hedged item, namely Revenue or Electricity and fuel purchases. In this context, Hydro-Québec has traded electricity futures and swaps for which open positions as at June 30, 2016, totaled 19.2 TWh (20.0 TWh as at December 31, 2015), natural gas futures for which open positions as at June 30, 2016, totaled 0.7 million MMBtu (no open position as at December 31, 2015), petroleum product swaps for which open positions as at June 30, 2016, totaled 5.9 million litres (8.5 million litres as at December 31, 2015), as well as aluminum swaps for which open positions as at June 30, 2016, totaled 155,350 tonnes (no open position as at December 31, 2015).



 

Note 6              Financial Instruments (continued)

Fair value

Fair Value Of Derivative Instruments

The following tables present the fair value of derivative instruments by type and depending on whether they are designated as fair value hedges or cash flow hedges, or not designated as hedges:





As at June 30, 2016



Derivatives designated as fair value hedges

Derivatives designated as cash flow hedges

Derivatives not designated

as hedgesa

Gross amounts of

derivatives

recognizedb

Assets






Contracts - Currency risk

-

1,301

517

1,818

Contracts - Currency risk and interest rate risk

2

-

-

2

Contracts - Interest rate risk

740

-

-

740

Contracts - Price risk

-

87

46

133



742

1,388

563

2,693

Liabilities






Contracts - Currency risk

-

(158)

(1,892)

(2,050)

Contracts - Currency risk and interest rate risk

-

-

-

-

Contracts - Interest rate risk

-

-

(5)

(5)

Contracts - Price risk

-

(35)

(22)

(57)



-

(193)

(1,919)

(2,112)

Total


742

1,195

(1,356)

581

 





As at December 31, 2015



Derivatives designated as fair value hedges

Derivatives designated as cash flow hedges

Derivatives not designated

as hedgesa

Gross amounts of

derivatives

recognizedb

Assets






Contracts - Currency risk

-

1,682

157

1,839

Contracts - Currency risk and interest rate risk

1

-

-

1

Contracts - Interest rate risk

573

-

-

573

Contracts - Price risk

-

219

84

303



574

1,901

241

2,716






Contracts - Currency risk

-

(139)

(2,398)

(2,537)

Contracts - Currency risk and interest rate risk

-

-

-

-

Contracts - Interest rate risk

-

(7)

(6)

(13)

Contracts - Price risk

-

(24)

(44)

(68)



-

(170)

(2,448)

(2,618)

Total


574

1,731

(2,207)

98

a)   These derivative instruments are mainly traded as part of Hydro-Québec's risk management. As at June 30, 2016, $(1,473) million was in consideration of amounts received or disbursed [$(2,331) million as at December 31, 2015] with respect to agreements to limit the market value of the main portfolios of derivative instruments. These agreements arise from frameworks applied by Hydro-Québec to reduce its credit risk exposure and limit risk concentration.

 

b)   Fair value measurements of derivative instruments are Level 2 measurements. These measurements are obtained by discounting future cash flows, which are estimated on the basis of the spot rates, forward rates or forward prices (foreign exchange rates, interest rates, and energy or aluminum prices) in effect on the balance sheet date and take into account the credit risk assessment. The valuation techniques make use of observable market data.

Note 6              Financial Instruments (continued)

The impact of offsetting derivative instruments is shown in the table below:




As at June 30, 2016


As at December 31, 2015



Gross
amounts of derivatives

recognized

Gross amounts

 offseta

Cash  (received) paid as

collateralb

Net amounts presented on the balance sheet

Gross
amounts of derivatives recognized

Gross amounts

offseta

Cash  (received) paid as

collateralb

Net amounts presented on the balance sheet

Assets










Current

633

(483)

(11)

139

452

(178)

-

274

Long-term

2,060

(1,523)

(259)

278

2,264

(2,136)

-

128



2,693

(2,006)

(270)

417

2,716

(2,314)

-

402

Liabilities









Current

(1,925)

1,835

-

(90)

(2,550)

2,251

-

(299)

Long-term

(187)

171

-

(16)

(68)

63

-

(5)



(2,112)

2,006

-

(106)

(2,618)

2,314

-

(304)

Total


581

-

(270)

311

98

-

-

98

a)   The gross amounts of derivatives offset are related to contracts traded according to International Swaps and Derivatives Association (ISDA) guidelines and constituting enforceable master netting arrangements. Such master netting arrangements apply to all derivative instrument contracts traded over the counter.   

b)   Cash amounts offset represent amounts received or paid under collateral exchange agreements signed in compliance with ISDA guidelines.

 

Moreover, although certain derivatives cannot be offset for lack of enforceable master netting agreements, margin calls may result in amounts received from or paid to clearing agents, based on the fair value of the instruments concerned. As at June 30, 2016, $18 million receivable from clearing agents in consideration of net cash payments was included in Accounts receivable and other receivables, under Current assets on the balance sheet (nil as at December 31, 2015). In addition, $89 million payable to clearing agents in consideration of net cash receipts was included in Accounts payable and accrued liabilities, under Current liabilities on the balance sheet ($316 million as at December 31, 2015).

 



 

Note 6              Financial Instruments (continued)

The impact of derivative instruments on results and other comprehensive income is presented in the tables below. It should be noted that most derivative instruments traded are designated as cash flow hedges or fair value hedges and therefore reduce the volatility of results, except for the ineffective portion of the hedges, which is insignificant. Derivative instruments which are not designated as hedges, but which nonetheless provide an economic hedge for at-risk opposite positions, also reduce the volatility of results. The sensitivity of results is thus limited to net exposure to unhedged risks.





Three months ended
June 30, 2016


Losses (gains) on derivatives designated
as fair value hedges

Losses (gains) on derivatives designated
as cash flow hedges

Losses (gains)
on derivatives
not designated
as hedges


 
Recognized
in results

Effective portion recognized in Other comprehensive income

Ineffective portion recognized in results

Effective portion reclassified
from Other comprehensive income to results

Recognized
in results

Contracts - Currency risk

-

(205)

-

(44)a

(23)

Contracts - Currency risk and
interest rate risk

(1)

-

-

-

-

Contracts - Interest rate risk

(52)

-

-

1b

-

Contracts - Price risk

-

56

7c

(36)c

(6)


(53)d

(149)

7

(79)

(29)e

Impact of hedged items on results

51


-

79

16

 





Three months ended
June 30, 2015


Losses (gains) on derivatives designated
as fair value hedges

Losses (gains) on derivatives designated
as cash flow hedges

Losses (gains)
on derivatives
not designated
as hedges


 
Recognized
in results

Effective portion recognized in Other comprehensive income

Ineffective portion recognized in results

Effective portion reclassified from Other comprehensive income to results

Recognized
in results

Contracts - Currency risk

-

250

2a

129a

24

Contracts - Currency risk and
interest rate risk

2

-

-

-

-

Contracts - Interest rate risk

123

(3)

-

1b

(1)

Contracts - Price risk

-

(111)

-

(75)c

(18)


125d

136

2

55

5e

 

Impact of hedged items on results

(119)


-

(55)

(17)

 

a)   The impact on results of currency risk hedging transactions is recognized in the line item affected by the hedged item. Therefore, $(20) million was recognized in Revenue in 2016 ($12 million in 2015), and $(24) million in Financial expenses ($119 million in 2015).

b)   The impact on results of interest rate risk hedging transactions is recognized in the line item affected by the hedged item. Therefore, $1 million was recognized in Financial expenses in 2016 and 2015.

c)   The impact on results of transactions to hedge energy and aluminum price risk is recognized in the line item affected by the hedged item. Therefore, $(29) million was recognized in Revenue in 2016 [$(75) million in 2015].

d)   The impact on results of fair value risk hedging transactions, including the ineffective portion, which amounts to $(2) million in 2016 ($6 million in 2015), is recognized in the line item affected by the hedged item, namely Financial expenses.

e)   These instruments are essentially related to integrated risk management transactions. The impact of these instruments on results is recognized in the line item affected by the managed risk. Therefore, $(5) million was recognized in Revenue in 2016 [$(18) million in 2015], $(5) million in Electricity and fuel purchases [$(3) million in 2015], and $(19) million in Financial expenses ($26 million in 2015).

 

 

Note 6              Financial Instruments (continued)





Six months ended
June 30, 2016


Losses (gains) on derivatives designated
as fair value hedges

Losses (gains) on derivatives designated
as cash flow hedges

Losses (gains)
on derivatives
not designated
as hedges


 
Recognized
in results

Effective portion recognized in Other comprehensive income

Ineffective portion recognized in results

Effective portion reclassified
from Other comprehensive income to results

Recognized
in results

Contracts - Currency risk

-

381

-

553a

220

Contracts - Currency risk and
interest rate risk

(1)

-

-

-

-

Contracts - Interest rate risk

(168)

(2)

-

2b

-

Contracts - Price risk

-

(181)

-

(324)c

(46)


(169)d

198

-

231

174e

Impact of hedged items on results

159


-

(231)

(223)

 





Six months ended
June 30, 2015


Losses (gains) on derivatives designated
as fair value hedges

Losses (gains) on derivatives designated
as cash flow hedges

Losses (gains)
on derivatives
not designated
as hedges


 
Recognized
in results

Effective portion recognized in Other comprehensive income

Ineffective portion recognized in results

Effective portion reclassified from Other comprehensive income to results

Recognized
in results

Contracts - Currency risk

-

(556)

2a

(477)a

(198)

Contracts - Currency risk and
interest rate risk

(13)

-

-

-

-

Contracts - Interest rate risk

(3)

5

-

2b

7

Contracts - Price risk

-

(84)

(3)c

(88)c

(16)


(16)d

(635)

(1)

(563)

(207)e

Impact of hedged items on results

20


-

563

210

a)   The impact on results of currency risk hedging transactions is recognized in the line item affected by the hedged item. Therefore, $53 million was recognized in Revenue in 2016 ($62 million in 2015), and $500 million in Financial expenses [$(537) million in 2015].

b)   The impact on results of interest rate risk hedging transactions is recognized in the line item affected by the hedged item. Therefore, $2 million was recognized in Financial expenses in 2016 and 2015.

c)   The impact on results of transactions to hedge energy and aluminum price risk is recognized in the line item affected by the hedged item. Therefore, $(324) million was recognized in Revenue in 2016 [$(91) million in 2015].

d)   The impact on results of fair value risk hedging transactions, including the ineffective portion, which amounts to $(10) million in 2016 ($4 million in 2015), is recognized in the line item affected by the hedged item, namely Financial expenses.

e)   These instruments are essentially related to integrated risk management transactions. The impact of these instruments on results is recognized in the line item affected by the managed risk. Therefore, $(61) million was recognized in Revenue in 2016 ($4 million in 2015), $(5) million in Electricity and fuel purchases [$(7) million in 2015], and $240 million in Financial expenses [$(204) million in 2015].



 

Note 6              Financial Instruments (continued)

During the first six months of 2016, Hydro-Québec did not reclassify any amounts from Accumulated other comprehensive income to results after having discontinued cash flow hedges (net gain of $3 million during the first six months of 2015).

As at June 30, 2016, the net amount of gains presented in Accumulated other comprehensive income that would be reclassified to results in the next 12 months was estimated at $118 million ($116 million as at June 30, 2015).

As at June 30, 2016 and 2015, the maximum period during which Hydro-Québec hedged its exposure to the variability of cash flows related to anticipated transactions was three years.

Fair Value Of Other Financial Instruments

Fair value measurements for other financial instruments are Level 2 measurements. Fair value is obtained by discounting future cash flows, based on rates observed on the balance sheet date for similar instruments traded on capital markets.

The fair value of cash equivalents, receivables - accounts receivable, other receivables and financial liabilities approximates their carrying amount because of the short-term nature of these financial instruments, except in the case of the items presented in the table below:



As at June 30, 2016

As at December 31, 2015



Carrying amount

Fair value

Carrying amount

Fair value

Long-term debta

44,337

63,423

45,672

62,106

Perpetual debt

284

192

311

237

a)   Including the current portion.

 

Accounts receivable and other receivables

Accounts receivable and other receivables include unbilled electricity deliveries, which totaled $719 million as at June 30, 2016 ($1,093 million as at December 31, 2015).

Note 7              Supplementary Cash Flow Information


Three months ended
June 30

Six months ended
June 30


2016

2015

2016

2015






Change in non-cash working capital items





Accounts receivable and other receivables

914

868

18

(329)

Materials, fuel and supplies

-

(6)

(4)

3

Accounts payable and accrued liabilities

(173)

(180)

(404)

(324)

Accrued interest

356

361

(55)

(46)


1,097

1,043

(445)

(696)






Investing activities not affecting cash





Increase in property, plant and equipment

31

16

42

31






Interest paid

172

171

1,087

1,121



 

Note 8              Employee Future Benefits

 








Three months ended
June 30


Pension Plan

Other plans


2016

2015

2016

2015






Current service cost

106

111

11

11

Interest on obligations

191

220

12

13

Expected return on plan assets

(333)

(326)

(1)

-

Amortization of net actuarial loss

61

73

6

6

Amortization of past service costs (credits)

4

7

(1)

(1)






Net cost recognized

29

85

27

29

 








Six months ended
June 30


Pension Plan

Other plans


2016

2015

2016

2015






Current service cost

212

222

23

22

Interest on obligations

382

440

24

26

Expected return on plan assets

(667)

(652)

(2)

(1)

Amortization of net actuarial loss

123

146

13

12

Amortization of past service costs (credits)

8

14

(2)

(2)






Net cost recognized

58

170

56

57

 

Since January 1, 2016, Hydro-Québec has been using a more precise method to estimate the cost of services rendered and interest on its employee future benefit plan obligations. These costs were previously estimated by applying an average weighted discount rate based on the interest rate curve used to measure employee future benefit obligations at the beginning of the year. Under the new method, separate discount rates based on the interest rate curve are used to reflect the various payment maturity dates of the projected benefits.

In addition, the assumption regarding the expected long-term rate of return on Pension Plan assets was revised downward for the year ending December 31, 2016.

These changes in accounting estimates were applied prospectively. For the three- and six-month periods ended June 30, 2016, they resulted in decreases of $23 million and $46 million, respectively, in the net cost of employee future benefits.





 

Note 9              Accumulated Other Comprehensive Income





 




Six months ended
June 30, 2016


Cash flow
hedges

Employee 
future
 benefits

Translation differences

Accumulated other comprehensive income






Balance, beginning of period

233

(1,678)

-

(1,445)

Other comprehensive income before reclassifications

(198)

-

-

(198)

Amounts reclassified to results

231

57

-

288

Other comprehensive income

33

57a

-

90





Balance, end of period

266

(1,621)

-

(1,355)

 





 




Six months ended
June 30, 2015


Cash flow
hedges

Employee
future
 benefits

Translation differences

Accumulated other comprehensive income






Balance, beginning of period

(187)

(1,985)

-

(2,172)

Other comprehensive income before reclassifications

635

-

-

635

Amounts reclassified to results

(563)

170

-

(393)

Other comprehensive income

72

170a

-

242






Balance, end of period

(115)

(1,815)

-

(1,930)



 

a)   Other comprehensive income includes the change in the employee future benefit regulatory asset, which totaled $(85) million as at June 30, 2016 (nil as at June 30, 2015).

Note 10            Contingencies

GUARANTEES

In accordance with the terms and conditions of certain debt securities issued outside Canada, Hydro-Québec has undertaken to increase the amount of interest paid to non-residents in the event of changes to Canadian tax legislation governing the taxation of non-residents' income. Hydro-Québec cannot estimate the maximum amount it might have to pay under such circumstances. Should an amount become payable, Hydro-Québec has the option of redeeming most of the securities in question. As at June 30, 2016, the amortized cost of the long-term debts concerned was $4,347 million.

LITIGATION

In the normal course of its development and operating activities, Hydro-Québec is sometimes party to claims and legal proceedings. Management is of the opinion that an adequate provision has been made for these legal actions. Consequently, it does not foresee any significant adverse effect of such contingent liabilities on Hydro-Québec's consolidated operating results or financial position.

Among other ongoing actions, some Aboriginal communities have instituted proceedings against the governments of Canada and Québec, as well as against Hydro-Québec, based on demands concerning their ancestral rights. In particular, the Innus of Uashat mak Mani-Utenam are demanding $1.5 billion in damages resulting from various operations carried out on land they claim as their own. Hydro-Québec is challenging the legitimacy of these claims.

Moreover, in June 2009, the Innus of Uashat mak Mani-Utenam served notice that they had filed for an injunction to suspend work at the Romaine complex jobsite, and in May 2010, an application was added for an interlocutory injunction to suspend work on the related tie lines. In March 2015, a proposed out-of-court settlement for the injunction proceedings was accepted by a vast majority of the applicants. A motion was filed in November 2015 to have the courts declare as inadmissible the injunctions being brought by dissident claimants. This motion was granted in February 2016, but the decision was appealed in March 2016.

As well, in November 2006, the Innus of Pessamit reactivated a case instituted in 1998 aimed at obtaining, among other things, the recognition of ancestral rights related to Québec lands on which certain hydroelectric generating facilities belonging to the Manic-Outardes complex are located. The Innus of Pessamit are claiming $500 million. Hydro-Québec is challenging the legitimacy of this claim. In July 2015, the Superior Court granted a motion in which the Innus of Pessamit requested that proceedings be suspended until the end of January 2017 so that they could pursue discussions with the Québec government.



 

Note 11            Segmented Information

The following tables present information on segment results and assets:


Three months ended
June 30, 2016


Generation

Transmission

Distribution

Construction

Corporate and Other Activities

Intersegment eliminations and adjustments

Total

Revenue








External customers

292

22

2,489

-

12

-

2,815

Intersegment customers

1,055

780

19

558

423

(2,835)

-

Net income (loss)

265

155

(145)

-

31

-

306

 


Three months ended
June 30, 2015


Generation

Transmission

Distribution

Construction

Corporate and Other Activities

Intersegment eliminations and adjustments

Total

Revenue








External customers

353

31

2,525

-

11

-

2,920

Intersegment customers

1,044

794

20

519

404

(2,781)

-

Net income (loss)

265

148

(94)

-

24

-

343

 

 


Six months ended
June 30, 2016


Generation

Transmission

Distribution

Construction

Corporate and Other Activities

Intersegment eliminations and adjustments

Total

Revenue








External customers

919

43

6,130

-

25

-

7,117

Intersegment customers

2,496

1,563

40

927

823

(5,849)

-

Net income

1,114

306

431

-

39

-

1,890

Total assets as at June 30, 2016

32,840

21,050

13,352

54

6,596

(171)

73,721

 


Six months ended
June 30, 2015


Generation

Transmission

Distribution

Construction

Corporate and Other Activities

Intersegment eliminations and adjustments

Total

Revenue








External customers

1,000

51

6,481

-

6

-

7,538

Intersegment customers

2,714

1,594

42

860

795

(6,005)

-

Net income

1,393

292

434

-

14

-

2,133

Total assets as at June 30, 2015

32,700

20,491

13,667

60

7,410

(174)

74,154

 

Note 12            Comparative Information

Some corresponding period data of the prior year have been reclassified to conform to the presentation adopted in the current periods.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)

Amounts shown in tables are in millions of Canadian dollars.

 









Three months ended
June 30

Six months ended
June 30

Summary of Operations

2016

2015

Change (%)

2016

2015

Change (%)










Revenue

2,815

2,920

3.6

Ü

7,117

7,538

5.6

Ü

Expenditure

1,883

1,936

2.7

Ü

3,948

4,160

5.1

Ü

Financial expenses

626

641

2.3

Ü

1,279

1,245

2.7

Û

Net income

306

343

10.8

Ü

1,890

2,133

11.4

Ü










 

 




2016

Consolidated Financial Information by Quarter

Q1

Q2

Q3

Q4






Net Income

1,584

306



Revenue

4,302

2,815



Revenue from Electricity Sales in Québec

3,647

2,540



Revenue from Electricity Sales Outside Québec

555

258








 

 

 

 

 




2015

Consolidated Financial Information by Quarter

Q1

Q2

Q3

Q4






Net Income

1,790

343

339

675

Revenue

4,618

2,920

2,804

3,412

Revenue from Electricity Sales in Québec

3,984

2,512

2,300

2,866

Revenue from Electricity Sales Outside Québec

625

301

419

355






 

Note: Throughout the Consolidated Financial Highlights, certain comparative figures have been reclassified to conform to the presentation adopted in the current periods.


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
IR EAENNEEAKEAF

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