News Release: Nalcor Energy Releases Business and Financial Report for 2019 and First Quarter Financial Results for 2020

July 2nd, 2020

June 30, 2020, St. John’s, NL – Nalcor Energy released its annual Business and Financial Report today, including the Annual Audited Consolidated Financial Statements for the year ended December 31, 2019, as well as its Unaudited Condensed Consolidated Interim Financial Statements financial results for the first quarter of 2020.

“In another challenging year where the Muskrat Falls Project remained centre stage, again in 2019, Nalcor delivered on its commitment of reliable service to its customers and safety for its employees,” said Stan Marshall, President and CEO. “As we progress through 2020, we face additional challenges stemming from the COVID-19 pandemic which is negatively impacting our society, our communities and our business. Our dedicated employees will continue to work on behalf of the people of the Province as we implement protocols to allow them to do so safely.”

2019 Financial Highlights:

  • Nalcor’s profit for the year ended December 31, 2019 was $126 million compared to $180 million in 2018, a decrease of $54 million. Key drivers of the decrease include higher oil royalties paid to the Province and an increase in depletion in Oil and Gas in addition to lower realized export market prices and lower energy volumes available for export by Energy Trading. Also contributing to the decrease, was the expensing of borrowing and operating costs in LCP Transmission as a result of the construction and commissioning of the Labrador Transmission Assets being substantially complete. These decreases were partially offset by higher oil sales volumes in Oil and Gas.
  • Capital expenditures for the year ended December 31, 2019 were $1,195 million compared to $1,384 million in 2018, a decrease of $189 million. The primary driver of the decrease was lower capital incurred within LCP Transmission and Muskrat Falls as assets near completion, in addition to lower planned capital spend in Hydro Regulated.
  • Total assets as at December 31, 2019 were $19 billion, which were comparable to $19 billion as at December 31, 2018.
  • Debt to capital as at December 31, 2019, was 62 per cent, which was comparable to 64 per cent as at December 31, 2018.

2019 Developments

In 2019, construction of the Muskrat Falls Project reached 99 per cent completion. All dams are in operation, the reservoir has been created, all required concrete has been poured, and electricity was successfully delivered from Labrador to the Island over the Labrador-Island Link

(LIL). Surplus energy powered homes across the Island reducing the amount of power required from the Holyrood Thermal Generating Station (HTGS). This provided a benefit to Hydro customers as it reduced the amount of oil required to run the HTGS.

In 2019, the Island Interconnected System saw a historical peak in customer demand of 1,784 MW. Hydro served customers through that peak, and all year round, with reliable power. Hydro also completed important capital projects to ensure the Province’s key electricity assets are in reliable operating condition now and into the future.

To ensure reliable electricity delivery to our customers, in November, Hydro filed its 2019 annual update to the comprehensive Reliability and Resource Adequacy Study which was filed with the Board of Commissioners of Public Utilities (PUB) in 2018.

Hydro is working with provincial and federal governments to implement the Province’s first fast-charging network and is expected to complete installation of chargers by the end of 2020.

In September 2019, electricity rate changes for all customers were approved by the Board of Commissioners of Public Utilities (PUB). This approval marked the conclusion of Hydro’s most recent General Rate Application (GRA), originally filed in 2017. The resulting new electricity rates went into effect on October 1, 2019.

Significant modernization work was completed on Generating Unit 3 at the Churchill Falls Generating Station. Churchill Falls successfully completed the annual maintenance and capital refurbishment plan that resulted in a Guaranteed Winter Availability Contract season reaching 98.66 per cent performance, exceeding its target of 92.5 per cent.

For the 10th consecutive year, Churchill Falls surpassed 95 per cent of its environmental targets and milestones and implemented a residential curbside recycling program, the first across Labrador.

Nalcor Energy Marketing (NEM) delivered 95 per cent of available Recapture energy from the Churchill Falls Generating Station to market. This provided 1.189 terawatt hours of energy to customers in New York, New England, Ontario and the Maritimes, and in addition to other energy trading activity realized revenues of $36 million. NEM managed the delivery of 215 GWh of Recapture energy from the Churchill Falls Generating Station over the LIL to serve load on the Island and imported 232 GWh of market energy via the Maritime Link to economically displace thermal generation at HTGS.

In March, 2019 the Government of Newfoundland and Labrador announced the establishment of a new Crown corporation focused solely on oil and gas activities.

First Quarter Financial Highlights for 2020:

  • Nalcor recorded a loss for the three months ended March 31, 2020 of $171 million compared to a profit of $92 million for the same period in 2019, a decrease of $263 million. The key drivers of the decrease relate to a non-cash impairment of oil and gas assets of $225 million and lower profit in Hydro Regulated as a result of timing differences primarily related to supply costs associated with the implementation of the 2017 GRA. The decrease in profit associated with Hydro Regulated is temporary and anticipated to reverse later in 2020.
  • The non-cash impairment of White Rose and Hibernia South Extension assets in Oil and Gas is a result of the significant decrease in oil price due to global events that have caused increased supply and decreased demand amid the current COVID-19 pandemic. The oil and gas industry as a whole is dealing with the decline in global oil prices and the recognition of an impairment charge is consistent with other industry participants. Oil and Gas assets generate significant cash flows for the Province through oil sales as well as royalty payments.
  • Capital expenditures for the three months ended March 31, 2020 were $171 million compared to $284 million in 2019, a decrease of $113 million. The primary driver of the decrease was lower capital incurred in LCP Transmission and Muskrat Falls as assets near completion.
  • Total assets as at March 31, 2020 were $19 billion, which were comparable to $19 billion as at December 31, 2019.
  • Debt to capital as at March 31, 2020 was 63 per cent, which was comparable to 62 per cent as at December 31, 2019.

Other Recent Developments

The COVID-19 pandemic affected business and operations as a significant portion of our workforce moved to a “work-from-home” model, while many employees continued to safely report to work and ensure we were able to keep the lights on for the people of our province.

Construction and commissioning activities of the Muskrat Falls generation and transmission sites were suspended and the sites were placed into care and maintenance mode. A limited number of people remained at the sites maintaining essential systems and operations. In June, work restarted on the project which looks very different following COVID-19. The number of workers

and productivity levels are greatly reduced compared to pre-COVID-19 as new safety measures were implemented.

The result of lost construction time will result in at least a four-month overall project delay. Depending upon the level of productivity achieved in the coming months under the new health guidelines, final completion could be delayed an additional two-to-six months. Rough estimates for a six month delay are up to $200 million dollars, before financing and interest payments. As a result of the delay in finishing the project, there are bond and interest payments which would now need to be funded through the Province. For a delay of six months beyond the end of this year, this would equate to approximately $400 million. A more definitive cost and schedule is currently in progress and updates will be provided when the impacts of COVID-19 are better known.

While GE Grid continues to face challenges, they remain committed to delivering the quality software needed to operate the LIL safely and reliably. Their software development work continued at GE’s facility in Stafford, UK.

In late February, Hydro’s 2020 Capital Budget Application received regulatory approval by the PUB. Hydro’s 2020 capital plan strikes the balance of investing in reliability for customers while maintaining reasonable capital expenditure levels.

On January 17, the ‘storm of the century’ brought historical snowfall and hurricane-force winds to eastern Newfoundland. But thanks to extensive preparation, hard work and planning, Hydro’s system performed with only minimal issues.

Hydro reported excellent reliability levels at its HTGS, greatly exceeding the targeted forced outage rate. This resulted in excellent supply related reliability for our customers through the winter period.

In addition to managing energy exports out of Labrador, in the early part of 2020 NEM worked closely with Hydro to import energy to support water levels and minimize thermal production on the Island.

Nalcor’s 2019 and Q1 2020 Business and Financial Reports are available online: nalcorenergy.com.