Page 2 First Quarter 2011

by Hydro Quebec
May 20th, 2011

EXHIBIT 4

LOGO

First Quarter 2011

 

 

    

Message from the Chairman of the Board

and the President and Chief Executive Officer

Summary of

operations

    

Net income totaled $1,402 million, a slight decrease compared to the $1,439 million recorded in first quarter 2010. In the context of colder temperatures in 2011, Hydro-Québec Production reduced its net export volume somewhat in order to meet electricity demand in Québec.

Consolidated operations     

Revenue totaled $3,853 million, compared to $3,821 million in 2010. In Québec, revenue from electricity sales amounted to $3,358 million, a $193-million increase over 2010 due essentially to a 2.7-TWh volume increase stemming from the fact that temperatures were close to normal in winter 2011, whereas they had been exceptionally mild in 2010. Revenue from electricity sales on markets outside Québec was $414 million, a $151-million decrease resulting from higher demand for electricity in Québec.

    

Total expenditure amounted to $1,831 million, or $87 million more than in 2010. It should be mentioned that, in 2010, the mild winter temperatures led to the recognition of a $105-million regulatory asset for revenue variances related to climate conditions, namely the differences between Hydro-Québec Distribution’s actual transmission and distribution revenue and the revenue forecasts established on the basis of the climate normal for rate application purposes. Taxes decreased by $19 million following the abolition of the capital tax in 2011.

     Generation
Segmented operations     

Hydro-Québec Production posted net income of $782 million, a decrease of $42 million compared to first quarter 2010. The $156-million decrease in net electricity exports was partly offset by a $136-million increase in revenue from electricity sales to Hydro-Québec Distribution on account of the colder temperatures in winter 2011.


     Transmission
    

Hydro-Québec TransÉnergie’s net income amounted to $135 million, a $3-million decrease from 2010 due, among other things, to a $2-million decrease in revenue from native load transmission service following a decision by the Régie de l’énergie in May 2011.

     Distribution
    

Hydro-Québec Distribution recorded net income of $477 million, which is stable compared to the same period of 2010. Revenue from electricity sales increased because of the colder temperatures in winter 2011. The increase was offset by higher electricity purchases and by the recognition, in 2010, of a regulatory asset for revenue variances related to climate conditions.

     Construction
    

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

    

The volume of activity in this segment totaled $409 million in first quarter 2011, compared to $512 million in 2010. Among the major projects under way for Hydro-Québec Production are Eastmain-1-A/Sarcelle/Rupert and Romaine-2. Work in progress for Hydro-Québec TransÉnergie mainly revolves around connecting new generating facilities and continued investment in asset sustainability projects.

Investment     

As at March 31, 2011, investments in property, plant and equipment, intangible assets and the Energy Efficiency Plan totaled $749 million, compared to $825 million in 2010. As expected, a large portion of this amount was devoted to the major capital projects of Hydro-Québec Production, especially the Eastmain-1-A/Sarcelle/Rupert and Romaine-2 hydroelectric developments.

    

Hydro-Québec TransÉnergie continued investing in its transmission system to integrate new hydroelectric and wind capacity in Québec. It also carried on with its investments in maintenance and improvement to ensure the reliability and long-term operability of its transmission assets and enhance service quality.

    

Hydro-Québec Distribution kept up investments to handle the growth of its Québec customer base and ensure the quality of its facilities, especially those related to distribution automation. It also continued implementation of the Energy Efficiency Plan.

 

Page 2    First Quarter 2011


Financing     

In January 2011, the reopening of the debenture issue made in January 2009 and maturing in February 2050 raised $0.5 billion at a rate of 4.60%. Hydro-Québec also issued $1.5 billion of floating-rate notes maturing in 2015. These borrowings were all contracted on the Canadian market.

    

The financing program for 2011 amounts to more than $3.0 billion. The amounts raised will be used to support the investment program and to refinance debt maturing during the year, among other things.

    

/s/ Michael L. Turcotte

  

/s/Thierry Vandal

    

Michael L. Turcotte

  

Thierry Vandal

    

Chairman of the Board

   President and Chief Executive Officer
    

May 20, 2011

  

 

First Quarter 2011    Page 3


CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

CONSOLIDATED STATEMENTS OF OPERATIONS

 

In millions of Canadian dollars

(unaudited)

           Three months ended
March 31
 
       Notes         2011         2010   

Revenue

              3,853         3,821   

Expenditure

        

Operations

        599         631   

Electricity and fuel purchases

        340         333   

Depreciation and amortization

     4         615         617   

Taxes

        253         272   

Regulatory deferrals

        24         (109
                1,831         1,744   

Operating income

        2,022         2,077   

Financial expenses

     5         620         638   

Net income

              1,402         1,439   

 

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

 

In millions of Canadian dollars

(unaudited)

   Three months ended
March 31
 
       2011         2010   

Balance, beginning of period

     13,965         13,336   

Net income

     1,402         1,439   

Balance, end of period

     15,367         14,775   

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

 

Page 4    First Quarter 2011


Consolidated Balance Sheets

 

In millions of Canadian dollars

(unaudited)

   As at March 31,
2011
     As at December 31,
2010
 

ASSETS

                 

Current assets

     

Cash and cash equivalents

     579         80   

Short-term investments

     215         1,230   

Accounts receivable and other receivables

     2,574         1,813   

Derivative instruments

     1,398         889   

Regulatory assets

     58         43   

Materials, fuel and supplies

     297         321   
       5,121         4,376   

Property, plant and equipment

     55,659         55,512   

Goodwill and intangible assets

     1,238         1,235   

Investments

     116         114   

Derivative instruments

     958         952   

Regulatory assets

     1,112         1,144   

Other assets

     2,691         2,565   
                 
       66,895         65,898   

LIABILITIES

                 

Current liabilities

     

Borrowings

     844         18   

Accounts payable and accrued liabilities

     1,847         2,017   

Dividend payable

     -         1,886   

Accrued interest

     504         909   

Derivative instruments

     435         308   

Regulatory liabilities

     71         58   

Current portion of long-term debt

     1,378         1,933   
       5,079         7,129   

Long-term debt

     37,954         36,439   

Asset retirement obligations

     517         504   

Derivative instruments

     2,130         2,114   

Regulatory liabilities

     -         1   

Other long-term liabilities

     851         857   

Perpetual debt

     275         288   
       46,806         47,332   

EQUITY

                 

Share capital

     4,374         4,374   

Retained earnings

     15,367         13,965   

Accumulated other comprehensive income

     348         227   
     15,715         14,192   
       20,089         18,566   
       66,895         65,898   

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

 

On behalf of the Board of Directors,  
/s/ Jacques Leblanc   /s/Michael L. Turcotte

Jacques Leblanc

Chair of the Audit Committee

 

Michael L. Turcotte

Chairman of the Board

 

First Quarter 2011    Page 5


CONSOLIDATED STATEMENTS OF CASH FLOWS

 

In millions of Canadian dollars

(unaudited)

           Three months ended
March 31
 
      Notes      2011     2010  

Operating activities

       

Net income

        1,402        1,439   

Adjustments to determine net cash flows from operating activities

       

Depreciation and amortization

     4         615        617   

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

     5         26        32   

Regulatory deferrals

        24        (109

Other

        (52     (92

Change in non-cash working capital items

     6         (1,343     (1,128

Net change in accrued benefit assets and liabilities

        (122     (140
                550        619   

Investing activities

       

Additions to property, plant and equipment

        (687     (775

Additions to intangible assets

        (28     (17

Cash receipts from the government reimbursement for the 1998 ice storm

        2        5   

Disposal of investments

        1        -   

Costs related to Energy Efficiency Plan

        (34     (33

Net disposal of short-term investments

        1,017        1,580   

Other

        2        1   
                273        761   

Financing activities

       

Issuance of long-term debt

        1,960        534   

Repayment of long-term debt

        (772     (12

Cash receipts arising from credit risk management

        638        90   

Cash payments arising from credit risk management

        (1,092     (259

Net change in short-term borrowings

        830        643   

Dividend paid

        (1,886     (2,168
                (322     (1,172

Foreign currency effect on cash and cash equivalents

              (2     (5

Net change in cash and cash equivalents

        499        203   

Cash and cash equivalents, beginning of period

              80        472   

Cash and cash equivalents, end of period

              579        675   

Supplementary cash flow information

     6                    

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

 

Page 6    First Quarter 2011


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

In millions of Canadian dollars

(unaudited)

   Three months ended
March 31
 
      2011     2010  

Net income

     1,402        1,439   

Other comprehensive income

    

Change in deferred gains on items designated as cash flow hedges

     160        25   

Reclassification to operations of deferred gains on items designated as cash flow hedges

     (39     (164
       121        (139

Comprehensive income

     1,523        1,300   

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

 

First Quarter 2011    Page 7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

For the three-month periods ended March 31, 2011 and 2010

Amounts shown in tables are in millions of Canadian dollars.

 

Note 1 Basis of Presentation

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles as set forth in Part V of the Canadian Institute of Chartered Accountants (CICA) Handbook, “Pre-changeover Accounting Standards,” and reflect the decisions of the Régie de l’énergie (the “Régie”). These decisions affect the timing of the recognition of certain transactions in the consolidated operations, resulting in the recognition of regulatory assets and liabilities, which Hydro-Québec considers it is likely to recover or settle subsequently through the rate-setting process. The quarterly consolidated financial statements, including the present notes, do not contain all the required information regarding the audited 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 2010.

The accounting policies used to prepare the quarterly consolidated financial statements are consistent with those presented in Hydro-Québec’s Annual Report 2010.

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.

 

Note 2 Change in Accounting Policy

Future Change

In February 2008, the Canadian Accounting Standards Board (AcSB) confirmed that publicly accountable enterprises would be required to apply International Financial Reporting Standards (IFRS) in their interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. In September 2010, the AcSB authorized rate-regulated entities to defer the adoption of IFRS to January 1, 2012. Since Hydro-Québec is entitled to exercise this deferral right, it will present its 2011 financial statements in accordance with Part V of the CICA Handbook, “Pre-changeover Accounting Standards.”

 

Note 3 Effects of Rate Regulation on the Consolidated Financial Statements

Transmission

In decision D-2011-061 of May 5, 2011, the Régie set Hydro-Québec’s power transmission rates for 2011. The new rates take into account a 7.21% return on the rate base, assuming a capitalization with 30% equity.

Distribution

In decision D-2011-036 of March 31, 2011, the Régie imposed an across-the-board reduction of 0.41% in Hydro-Québec’s electricity rates, effective April 1, 2011. This reduction takes into account a 7.26% return on the rate base, assuming a capitalization with 35% equity.

In decision D-2011-028 of March 9, 2011, the Régie authorized the amortization of an amount of $33 million in 2011 for the 2010 revenue variances related to climate conditions, stipulating that the balance of these variances must be amortized over five years as of 2012, in compliance with decision D-2009-016. An amortization expense of $8 million was recorded in this regard for the three months ended March 31, 2011.

In decisions D-2011-039 and D-2011-028, the Régie also asked the Transmission Provider and the Distributor to recognize in a separate account the variances between the recognized pension cost and the cost authorized in the rate decisions. The amortization terms and conditions for this account have not yet been determined. As at March 31, 2011, an amount of $12 million had been recognized as a regulatory liability.

 

Page 8    First Quarter 2011


Note 4    Depreciation and Amortization

 

      Three months ended
March 31
 
      2011        2010  

Property, plant and equipment

     542           538   

Intangible assets

     27           24   

Regulatory assets and liabilities

     45           55   

Write-offs

     1           -   
       615           617   

Note 5    Financial Expenses

 

      Three months ended
March 31
 
      2011        2010  

Interest

       

Interest on debt securities

     619           615   

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

     26           32   
       645           647   

Net exchange loss

     8           10   

Guarantee fees related to debt securities

     47           46   
       55           56   

Less

       

Capitalized financial expenses

     76           63   

Net investment income

     4           2   
       80           65   
       620           638   

Note 6    Supplementary Cash Flow Information

 

      Three months ended
March 31
 
      2011      2010  

Change in non-cash working capital items

     

Accounts receivable and other receivables

     (764      (548

Materials, fuel and supplies

     24         9   

Accounts payable and accrued liabilities

     (188      (175

Accrued interest

     (415      (414
       (1,343      (1,128

Investing activities not affecting cash

     

Increase in property, plant and equipment

     13         62   

Interest paid

     944         928   

 

First Quarter 2011    Page 9


Note 7 Employee Future Benefits

 

                      Three months ended
March 31
 
     Pension Plan      Other plans  
      2011      2010      2011      2010  

Accrued benefit cost recognized

     30         5         31         29   

 

Note 8 Segmented Information

The following tables contain information related to operations and assets by segment:

 

       

Three months ended

March 31, 2011

 
      Generation      Transmission      Distribution      Construction      Corporate
and Other
Activities
    

Intersegment
eliminations

and
adjustments

    Total  

Revenue

                   

External customers

     454         16         3,376         —           7         —          3,853   

Intersegment

     1,523         746         20         409         323         (3,021     —     

Net income

     782         135         477         —           5         3        1,402   

Total assets as at March 31, 2011

     30,911         18,188         13,292         452         4,321         (269     66,895   

 

     

Three months ended

March 31, 2010

 
      Generation      Transmission      Distribution      Construction      Corporate
and Other
Activities
    Intersegment
eliminations
and
adjustments
    Total  

Revenue

                  

External customers

     614         17         3,177         —           13        —          3,821   

Intersegment

     1,447         768         19         512         323        (3,069     —     

Net income (loss)

     824         138         476         —           (2     3        1,439   

Total assets as at March 31, 2010

     29,960         17,787         12,740         431         4,233        (308     64,843   

 

Note 9 Comparative Information

Some corresponding period data of the previous year have been reclassified to conform to the presentation adopted in the current period, or restated in accordance with the changes to accounting policies described in Note 2 to the consolidated financial statements published in Hydro-Québec’s Annual Report 2010.

 

Page 10    First Quarter 2011


CONSOLIDATED FINANCIAL HIGHLIGHTS

 

In millions of Canadian dollars

(unaudited)

   Three months ended
March 31
Summary of Operations    2011      2010      Change (%)

Revenue

     3,853         3,821         0.8       é

Expenditure

     1,831         1,744         5.0       é

Financial expenses

     620         638         2.8       ê

Net income

     1,402         1,439         2.6       ê

LOGO

 

First Quarter 2011    Page 11


     Highlights

Generation

    

A model for environmental integration

 

In its twelfth annual inventory of global electricity production from renewable sources, the Observatoire des énergies renouvelables (Observ’ER) noted that the Eastmain-1-A/ Sarcelle/Rupert project constitutes “a prime example of how to incorporate environmental constraints.” Based in France, Observ’ER is a world reference in the fields of renewable energy and sustainable development.

Transmission

    

Decisions of the Régie de l’énergie

 

In February, the Régie de l’énergie authorized Hydro-Québec TransÉnergie to build Lachenaie substation north of Montréal, to connect it to the grid by looping an existing 315-kV circuit and to perform related work. This $51-million project will help meet long-term demand in the Mille-Îles Est–Lanaudière area. The facilities are scheduled to come on stream in October 2013.

 

Also in February, the Régie gave its approval to the project to rebuild 315/120/25-kV Bélanger substation, to build a 315-kV tap line for this facility, to modify Duvernay, Montréal-Nord and Bout-de-l’Île substations, and to carry out related work on the distribution system. The total cost of the project is $190 million and commissioning is planned for April 2014.

 

In March, the Régie authorized Hydro-Québec TransÉnergie to build 315/120-kV Pierre-Le Gardeur substation. This $87-million project will help meet Hydro-Québec Distribution’s regional load growth. Commissioning is scheduled for October 2014.

 

In May, the Régie set Hydro-Québec TransÉnergie’s power transmission rates and conditions of service for 2011. Among other things, the decision calls for a decrease in revenue from native load transmission service, down to $2,645 million from $2,651 million.

Distribution

    

Decision of the Régie de l’énergie

 

The Régie de l’énergie’s decision for the 2011–2012 rate year calls for an across-the-board reduction of 0.41% in Hydro-Québec Distribution’s rates, effective April 1, 2011.

 

Energy efficiency

 

Hydro-Québec has reached the milestone of 300,000 energy-hungry fridges and freezers collected under the RECYC-FRIGO Environnement™ program. Given the great public response, the program has been extended until the end of 2011.

 

Page 12    First Quarter 2011


Technological innovation

    

Partner in excellence

 

L’École de technologie supérieure (ÉTS) paid tribute to Hydro-Québec with an award for its excellence as a partner in research and innovation. Hydro-Québec’s researchers have collaborated with those at the engineering school on numerous projects in such fields as electric grid simulation, atmospheric icing and dielectric materials. In addition, Hydro-Québec Production and Hydro-Québec’s research institute are among the six cofounders of the ÉTS-led Consortium de recherche en fabrication et réparation des roues d’eau [research consortium on runner manufacturing and repair], which was launched in 2011.

Environment

    

Ten years of commitment to the environment

 

Created on March 1, 2001, the Fondation Hydro-Québec pour l’environnement is celebrating 10 years of commitment to the environment in all of Québec’s administrative regions. Over the past decade, it has allocated $9.7 million to 160 projects designed to protect natural environments that are crucial to sustaining plants and wildlife.

 

Hydro-Québec, 75, boul. René-Lévesque Ouest, Montréal (Québec) H2Z 1A4

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