ANNUAL REPORT 2015 CONNECTIONS - NAV CANADA · retirement, as of December 31, 2015. John was the architect of this unique organization, and NAV CANADA’s reputation today as a world

ANNUAL REPORT

2015CONNECTIONS

http://www.navcanada.ca

ON THE COVER:

Vanessa RobertsonATC Evaluations and Investigations Inspector, Head Office

A CROSS-COUNTRY CONNECTION

Although they now reside in different parts of the country, the NAV CANADA Flight Inspection team works together and remains connected.

In September of 2015, a new western base for Flight Operations was established in Kelowna, B.C., in addition to the main base located in Ottawa. The crew of Pilots and Technical Flight Inspectors use one of the two NAV CANADA CRJ200 aircraft to cover the western Flight Information Regions (FIRs), significantly reducing travel time and improving service.

The western crew remains in close connection with the Ottawa base, which is responsible for overall Flight Operations coordination and coverage of the eastern FIRs using the Company’s Dash 8 and second CRJ200 aircraft. Flight Operations Dispatch and Aircraft Maintenance Control for both bases are located in Ottawa, and all Technical Flight Inspection team members are managed from the main base. To maintain aerodrome and region qualifications, the Pilots will occasionally operate from their sister base, offering them the opportunity to reconnect.

Daily contact and coordination keeps both of the busy Flight Operations bases operating at high efficiency, ensuring an optimal schedule for flight checks and a swift response to navigation aid outages across Canada.

ABOVE:

From left to right: Dave Lindal, Pilot in Command & ACP Standards Pilot; Denis Nemet, Technical Flight Inspector; Nick Cobbett, Pilot in Command; Jim Manton, Pilot in Command; David Narinesingh, Technical Flight Inspector; Timothy Nikolai, Chief Pilot; Kalie Hayden, Aircraft Maintenance Engineer, Execaire; Mark Boyer, Technical Flight Inspector; Rick Alden, Flight Engineer, Execaire. Missing from photo: John Machin, Technical Flight Inspector

TABLE OF CONTENTSMESSAGE FROM THE CHAIR OF THE BOARD 2

MESSAGE FROM THE PRESIDENT AND CEO 6

BUSINESS PLAN UPDATE 14

CELEBRATING OUR PEOPLE 20

CORPORATE GOVERNANCE 26

ADVISORY COMMITTEE REPORT 36

ADVISORY COMMITTEE 37

CONSOLIDATED FINANCIAL STATEMENTS 38

OFFICERS AND OTHER INFORMATION 76

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“Connections and collaboration are built into the foundations of NAV CANADA.”

Marc Courtois Chair of the Board

MESSAGE FROM THE CHAIR OF THE BOARD MARC COURTOIS

It is a great pleasure to introduce NAV CANADA’s Annual Report for fiscal 2015. In my three years as Chair, I have come to appreciate the essential role played by our Company and other air navigation service providers (ANSPs) in sustaining global aviation and the many connections it makes possible around the world.

If we visualize a globe spanned by flight paths, its disparate regions bound

together by thousands of flights each day, we see how aviation unites our world. These flights connect people, families, businesses and nations, supporting trade, enhancing living standards, promoting understanding and making all of us global citizens.

As members of the organization that manages the world’s second-largest ANSP by traffic volume, NAV CANADA people are keenly aware of the critical role they play in this essential global industry. They understand the collaborative nature of modern aviation. They know it is a shared effort requiring strong, seamless connections among everyone involved – from aircrews to airport operators to ANSPs.

Connections and collaboration are built into the foundations of NAV CANADA, now approaching its 20th anniversary. In this regard, we can thank our retiring President and CEO, John Crichton, for pioneering what has come to be known as the NAV CANADA model.

As founding Chair in 1995, and President and CEO from 1997 to 2015, it was John’s vision that brought together the stakeholders of the air navigation system (ANS) to share in its oversight. He always recognized the value of

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connections. The NAV CANADA model has stood the test of time.

It was also John’s vision for the Company to move forward into the age of global, space-based air traffic surveillance with its investment in Aireon. I am pleased to say that John has agreed, at the request of the Board and Neil Wilson, to remain engaged in the success of Aireon by becoming its Chair.

Safety

Safety is NAV CANADA’s first priority and here again connections are key, beginning with our links to the safety regulator, Transport Canada.

NAV CANADA is the only aviation organization that shares a Safety Oversight Committee with Transport Canada. This committee and other forums help us to maintain open consultation and communication on safety issues. We consider our relationship with Transport Canada as a partnership committed to improving the safety of the ANS.

In addition, NAV CANADA has always recognized that safety risk must be managed in close collaboration with our industry partners. We need strong working relationships to support exchanging safety information and working together to address safety risks.

In evaluating our safety initiatives, we benchmark our safety data against other ANSPs and our past performance. In fiscal 2015, we continued our outstanding safety record, especially as measured by the rate of IFR-to-IFR losses of separation, a key safety benchmark. The five-year moving average was 0.75 per 100,000 aircraft movements, keeping NAV CANADA in the top decile of major ANSPs.

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RATE OF IFR-TO-IFR LOSSES OF SEPARATION

‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15

Note: The data in the above chart reflects losses of separation between two aircraft

operating under instrument flight rules.

We look forward to the contribution our Aireon joint venture will make to global aviation safety and efficiency. Aireon will use satellite-based Automatic Dependent Surveillance-Broadcast (ADS-B) to deliver near-real-time aircraft position updates anywhere ADS-B-equipped aircraft fly, including over oceans and remote

regions. This project continues to progress toward full operations in 2018.

Points of Pride

NAV CANADA recognizes that strong connections among the people delivering and supporting our services are our greatest strength. These

connections foster effective teams comprised of people who learn from one another, share insights and grow together.

We see the strength of these connections among colleagues and between individuals and their communities during the Company’s annual Points of Pride program. This year, it was again my privilege and pleasure to present the Chairman’s Awards at National Awards Night 2015. The nine winners of the Chairman’s Awards are Anne Breen, Tej Dhaliwal, DJ Moon, Derek Yakielashek, Dean Gallop, Bridget Terpstra, François Bisaillon, Will Johnston and Debbie Purkiss. John Crichton was given a special Chairman’s Award to recognize his exceptional contribution to all of NAV CANADA’s activities.

Communities

NAV CANADA people have a strong tradition of connecting with and supporting their communities, and the Company is proud to support their efforts in this regard.

Over the past year, we enhanced the amount of matching dollars available for employee charitable fundraisers across the country, at the same time as we made the transition from one national Company-driven campaign to many local campaigns in each Flight Information Region (FIR) as chosen by employees.

This change has been well received, and more information on the many initiatives undertaken is available on page 20 of this Annual Report.

Business and Finance

As a private-sector, non-share capital corporation, NAV CANADA remains strongly connected to the world of business and finance. We receive no government funding; we charge for our services; we raise money in the debt capital markets;

Rianne HedleyFlight Service Specialist, Fort St. John Flight Service Station

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we invest in our infrastructure; and we balance our budget.

The Company’s strong financial performance in the fiscal year that ended August 31, 2015, demonstrates the success of our practiced fiscal discipline and the efforts of all employees to maintain our global industry leadership.

The combination of industry growth and our effective cost control has allowed the Company to keep rates stable for 11 years. Customer service charges today are on average just five per cent higher than they were in 1999. That is 32 percentage points less than the change in the Consumer Price Index over the same time period.

We cannot overlook the close connection between commercial aviation and the global economic outlook, which remains uncertain. While healthier air traffic figures are encouraging, we recognize the ever-present threat of economic and geopolitical instability.

With falling oil prices, a weakened dollar, and uncertainty about China’s

impact on the global economy, the Company will continue to maintain its fiscal discipline.

CEO Transition

In closing, my colleagues on the Board of Directors and I want to express our deep gratitude and appreciation to John Crichton, as he ends his many years of service to NAV CANADA with a well-deserved retirement, as of December 31, 2015.

John was the architect of this unique organization, and NAV CANADA’s reputation today as a world leader in safe, efficient and cost-effective air navigation services is a tribute to his vision and leadership over two decades. On behalf of the Board of Directors, I wish him all the best.

I also want to welcome Neil R. Wilson, formerly Executive Vice President, Administration and General Counsel, as President and CEO, effective January 1, 2016.

Neil joined the Company in 2002 following a career at a major Canadian law firm, where he was involved in establishing NAV CANADA.

The Board is confident that, with his deep experience and leadership, he will have great success building on the progress of our first 20 years.

Throughout these changes, our greatest strength continues to be the people of NAV CANADA. The key to the NAV CANADA model has been to tap their talent, initiative and enthusiasm to power the Company’s progress.

As we build on this legacy, we will keep our focus on the value of connections, among ourselves and with our aviation colleagues and customers. By working together – by sharing experience, information and insights – we will continue to provide the strong and effective support that global aviation requires.

Marc Courtois Chair of the Board

Sébastien BourgonSupervisor, Montreal Tower

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“The actions of NAV CANADA employees daily exceed expectations in their efforts to deliver safe and efficient air navigation services.”

John Crichton President and CEO

Will I make my connection? Anyone who flies has asked this question, and it suggests a world of associations with air travel and its role in connecting the world. We’ve chosen Connections as the theme of this year’s Annual Report, because connections of many kinds are at the heart of our industry, our Company and the services we provide.

Not only do we want to make connecting flights when we travel,

our reason for travelling is frequently to connect – with family, friends, colleagues and the many sights of the world beyond home. NAV CANADA plays an important role in ensuring that all those connections are made safely and efficiently.

Making and sustaining connections is essential to fulfilling that role. Our employees make connections with colleagues to deliver services. They make connections with customers and partners to ensure those services are safe and efficient. And they connect to the worlds of technology and finance to manage our business and create the tools needed for the air navigation system (ANS).

Connections are also at the heart of the NAV CANADA model. People often ask me about this model, wanting to know how and why it works. We began to shape it in the early 1990s by making connections, bringing together employees, customers and government – the stakeholders of the ANS.

These connections provided the foundation on which we built the private-sector, non-share capital corporation structure, with a Board of Directors involving all of the

MESSAGE FROM THE PRESIDENT AND CEO JOHN CRICHTON

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stakeholder groups. This structure continues to provide both thrust and lift to NAV CANADA.

THE SAFETY CONNECTION

Safety is our only real product and our primary focus. Through the efforts of our employees, our safety policies, practices and procedures continue to improve. The result is a consistently strong safety record that puts us in the top rank of global ANSPs, an achievement in which everyone at NAV CANADA can take pride.

The Chair referred to our safety performance, as measured by the rate of IFR-to-IFR losses of separation per 100,000 aircraft movements, where we are consistently in the top decile of major ANSPs worldwide. This achievement is directly linked to the safety focus of our people, and to their success in finding new approaches to

managing air traffic and effectively applying advanced technologies.

Mandatory Briefing Application

NAV CANADA people are quick to adapt new technology to improve our work processes, particularly when it comes to safety. This was the impetus behind the development of the Mandatory Briefing Application, which streamlines the mandatory briefing process for operational employees.

This tablet-based application has reduced safety risk and demonstrated the value of mobile applications in Operations. It has been implemented at all Area Control Centres (ACCs) and six Towers, with expansion planned to all operational units.

Safety Pillar

Employees connect to support organizationally-based safety in our Safety Pillar initiative. We first introduced this initiative in 2013 and now have “pillar reps” from

every Flight Service Station, Flight Information Centre, Tower and Area Control Centre specialty. These representatives follow up with operators on aviation occurrence reports, inform colleagues about measures to reduce risks identified through operating irregularities (OIs) and make recommendations for mitigating risks.

Sharing Safety Information

Sharing safety information, one of our most important safety practices, depends on strong connections. We continue to facilitate the Canadian Aviation Safety Officer Partnership (CASOP), which shares best practices and manages safety risks in our industry.

CASOP held its 10th biannual forum in Winnipeg in May 2015, with representatives from 24 organizations attending. Topics included laser strikes, runway incursions and the operation of unmanned aerial vehicles in civilian airspace.

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Halifax ILS Repair

We are also working with the Canadian Business Aviation Association (CBAA) Partners-in-Safety program. This new program, announced in June 2015, is designed to ensure that CBAA members have access to the tools they need to comply with current safety regulations.

NAV CANADA will be providing Aviation Occurrence data on CBAA member aircraft types semi-annually, with a report indicating trends in events such as runway incursions, missed approaches and altitude deviations.

For a decade now, NAV CANADA has supported international reporting of safety data through the Civil Air Navigation Services Organization (CANSO). More than 40 countries now contribute safety data to this initiative.

THE PEOPLE CONNECTION

To fulfil our mission to be the world’s most respected ANS, we are committed to creating a productive and fulfilling workplace.

We can see the results of our efforts in the growing level of employee engagement. Our last employee engagement survey placed the combined total of engaged and somewhat engaged employees at 88 per cent, and I am confident that engagement will continue to grow.

We certainly see engagement in the actions of NAV CANADA employees, who daily exceed expectations in their efforts to deliver safe and efficient air navigation services. Here I would like to highlight two groups who responded with energy and professionalism to emergencies in the year.

Halifax ILS Repair

When an Airbus A320 landed short at Halifax International Airport on March 28, 2015, it knocked out a CAT II Instrument Landing System (ILS), which is critical to maintaining airport operations. Through the extraordinary efforts of a cross-functional team from Engineering, Construction Services, Communications/Navigation/Surveillance and Technical Operations, the ILS was returned to service on April 16.

This was an impressive accomplishment, especially given the amount of damage and the difficult weather conditions at the site. It demonstrates the power of connections and collaboration among a team working together to support a common goal.

Fighting Wildfires

We saw similar dedication displayed by Flight Service Specialists and Electronics Technologists during last summer’s forest fires near the town of La Ronge, Saskatchewan. With fire approaching La Ronge on July 4, the 7,900 residents were ordered to evacuate, including the crew at the La Ronge Flight Service Station.

Within days, the Specialists were back on duty, volunteering to support firefighting aircraft flying out of the La Ronge airport. Their work was critical to supporting the fixed-wing aircraft and helicopters involved in firefighting.

Our thanks also go to all other NAV CANADA employees affected by last summer’s fires, particularly

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in British Columbia, Alberta and Saskatchewan, who worked to support fire crews, manage diverted traffic and protect our equipment on the ground.

Site Visits

Our efforts to strengthen engagement in fiscal 2015 included visits by senior executives to sites in our seven Flight Information Regions. The emphasis was on two-way communication with employees at each site. Key messages focused on the need for trust and open communication in support of problem solving and innovation at the working level, and this was combined with union-management meetings and local recognition events.

Collective Bargaining

With approximately 87 per cent of our workforce represented by eight unions, collective bargaining is an important focus. All of our collective agreements have been renewed.

This includes a one-year extension, to March 31, 2017, of the collective agreement with the Canadian Air Traffic Control Association (CATCA), Unifor Local 5454, representing approximately 1,900 Air Traffic Controllers. A similar agreement was reached and ratified with the Air Traffic Specialists Association of Canada (ATSAC) Unifor Local 2245, representing Flight Service Specialists.

Healthy Minds

The power of peer-to-peer connections has long been integral to our culture at NAV CANADA. Five years ago, we deliberately built on this tradition in launching our mental health initiative, Healthy Minds. As part of that initiative, in 2012 NAV CANADA became one of the first private-sector companies in Canada to implement a mental health peer support program.

Called Light the Way, this program seeks to create compassionate and caring workplaces, where people

stand up to the stigma of mental illness. The Canadian Mental Health Association (CMHA) recognized our efforts last February with its prestigious C.M. Hincks Award.

Points of Pride

Appropriately, the Light the Way program was also recognized within the Company at our 2015 National Awards Night. I was pleased to present a President’s Award for Outstanding Achievement to the team that put the program together.

I was also pleased to present President’s Awards to the Mandatory Briefing Application team, and to individual winners Nancy Fletcher, Corporate Controller, Head Office, and Maureen Stevens, Flight Service Specialist, Îles-de-la-Madeleine.

ATCA Recognition

Just a few weeks after our own Awards Night, I was proud to see so many deserving NAV CANADA people recognized in the 2015 Awards program of the Air Traffic Control Association (ATCA) in Washington, D.C. The winners included:

• Sid Koslow, Vice President and Chief Technology Officer, receiving the Glen A. Gilbert Memorial Award for his career contributions to our industry;

• Anne Breen, Andy Pitas Memorial Award;

• Maureen Stevens, Air Traffic Control Specialist of the Year Award;

• DJ Moon, ATCA Airway Transportation Systems Specialist of the Year Award; and

• François Bisaillon, ATCA Life Cycle Management Award.

ATCA also recognized the Light the Way program with its Chairman’s Citation of Merit.

THE COMMUNITY CONNECTION

Recognizing our employees’ impressive commitment to their communities, the Company increased its financial support for charitable campaigns in 2015. Funding goes directly to the seven Flight Information Regions, the NAV CENTRE and the National Capital Region (NCR) for matching contributions to local charities chosen by employees as the focus of their group fundraisers.

In response, our people have embraced causes such as the Janeway Children’s Hospital Foundation in St. John’s, the United Way in Moncton, the Old Brewery Mission in Montreal, KidSport in Winnipeg, Shock Trauma Air Rescue in Edmonton and the B.C. Cancer Foundation in Vancouver.

NCR employees continue their strong support for the Ottawa Hospital Foundation and the Children’s Hospital of Eastern Ontario (CHEO). In 2015, their efforts generated more than $375,000 in donations (including a matching Company contribution) to support cancer research at the Ottawa Hospital. Employee fundraising also resulted in a $130,000 contribution to CHEO.

The Toronto, Montreal and Vancouver FIRs have taken Hope Air to heart. This charity provides free flights for Canadians who are in financial need and must travel to vital medical care.

This year’s Toronto ATC Charity Golf Tournament raised $100,000 for Hope Air for the second year in a row, which included a matching Company contribution. Similar events in Montreal and Vancouver added to the total and, as a result, Hope Air received nearly $220,000 in combined contributions from these employee charitable events in calendar 2015.

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THE SERVICE CONNECTION

With 40,000 customers and 12 million aircraft movements a year, NAV CANADA is the world’s second-largest ANS by traffic volume. Our customers and the connections we provide them are the focus of our operations, and the people of Service Delivery provide and support those services.

Customer Survey

In fiscal 2015, NAV CANADA surveyed senior leaders of our top 16 customers to gain a better understanding of their perspectives on the Company’s performance in the priority areas of safety, service charges, efficiency, cost effectiveness and the environment.

Participating organizations were Air Canada, Air France, Air Transat, American Airlines, British Airways, Cathay Pacific Airways, Delta, Emirates, FedEx, Jazz Aviation LP, KLM Royal Dutch Airlines, Korean Air, Lufthansa, Porter Airlines, United Airlines and WestJet. The average score for overall satisfaction was 8.7 out of 10.

North Atlantic Milestones

We were proud to be named a co-recipient, with NATS, of the 2015 IHS Jane’s ATC Award in the Service Provision category. The award recognized our joint implementation of the Gander Automated Air Traffic System (GAATS+) – the world’s most advanced oceanic air traffic system.

The system increases automated data exchange with other air traffic facilities and integrates safety net tools, including conflict prediction and conflict alert. The Jane’s ATC Award demonstrates the strong connections between NAV CANADA and NATS. GAATS+ provides us with the foundation for broadening our collaboration.

Customer Consultations

Maintaining close connections with customers and understanding their needs is essential to effective service delivery, and we meet regularly with them in regional Area Operations Consultation Meetings (AOCMs) and numerous other forums. Customer attendance at these meetings is growing.

At airports across Canada, we continue to work with our aviation partners to improve runway safety and prevent runway incursions and excursions. The Runway Safety and Incursion Prevention Panel (RSIPP) met three times during the fiscal year, addressing topics such as runway safety enhancements included in new Transport Canada standards (TP 312).

The new requirements, including mandatory hold lines, runway edge lights and inset lights, runway distance remaining depiction, borders for small signs, and Runway End Safety Areas (RESAs), will help to improve runway safety.

Flight Operations

In order to help our Flight Inspection team make faster, more efficient connections, NAV CANADA Flight Operations has established a western base at Kelowna, British Columbia. Basing aircraft and crew in the west eliminates travel time before and after operational missions.

It also reduces the time needed to respond to navigation aid outages and increases crew and aircraft availability for flight checks. One CRJ200, four line Pilots, one management Pilot, and four Technical Flight Inspectors are now based in Kelowna.

New Waterloo Tower

In southwestern Ontario, our Construction Services team broke ground for a new control tower at the Region of Waterloo International Airport. The new tower, which will replace the

old one built more than 45 years ago, is scheduled for completion in 2017. The new tower will be significantly taller, improving sightlines to all runways, taxiways and aprons.

Tower refurbishments also took place during the fiscal year in Toronto and Vancouver. And the Montreal ACC made the transition to an entirely paperless operation.

Environmental Responsibility

NAV CANADA connects with our aviation customers to help them reduce the impact of their operations on the environment. A variety of collaborative initiatives have helped customers reduce greenhouse gas (GHG) emissions. It is estimated that customers saved more than 500 million litres of fuel in fiscal 2014, with a corresponding reduction in GHG emissions of more than 1.3 million metric tons.

In implementing the new technology and procedures associated with these initiatives, the Company will be adhering to the new Airspace Change Communications and Consultation Protocol (ACCCP), drafted by NAV CANADA in conjunction with the Canadian Airports Council and approved by the Minister of Transport in June 2015.

This is a voluntary protocol, involving new commitments for collaboration with airports and a more comprehensive approach to public and stakeholder outreach associated with airspace changes that have a material impact on community noise levels.

THE TECHNOLOGY CONNECTION

Aireon Advances

Communication satellites have been connecting people since Telesat Canada launched Anik A1 in 1972. In 2018, our Aireon joint venture

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will put ADS-B into space on board the Iridium NEXT constellation of communication satellites, bringing air traffic surveillance – and a quantum leap in fuel and GHG savings – to the entire globe.

This joint venture brings together not only NAV CANADA and Iridium, but also ENAV of Italy, the Irish Aviation Authority (IAA) and Naviair of Denmark as investors, with NATS of the UK one of the first committed customers.

Together with our Aireon partners – ENAV, the IAA and Naviair – we applaud the decision of the International Telecommunications Union (ITU) to adopt a primary allocation of the 1090 MHz frequency band for the reception by satellite of ADS-B signals. The ITU decision expands the protection of that frequency, which already existed for aircraft-to-ground-based communications.

I am also grateful to our colleagues at Innovation, Science and Economic Development Canada, and Transport

Canada, for their tireless efforts which led to this important decision.

Weather Systems

In our continuing modernization of the ANS, we completed the four-year Weather Systems Upgrade Program in June 2015 with the installation of the final 20 Human Weather Observation System (HWOS) sites. This brought the number of new HWOS sites to 183.

The program also deployed 73 Automated Weather Observation System (AWOS) sites. Additional AWOS sites installed through other projects brings the total to 92. New Digital Aviation Weather Cameras (WxCams) are now installed at 160 sites. By the end of 2017, more than 100 WxCam sites will be added and 66 AWOS sites will have a fourth camera installed.

Surveillance Fusion

In 2012, NAV CANADA purchased air traffic surveillance fusion and flight tracking technology from DFS Deutsche Flugsicherung, Germany’s ANSP, for

use in Canadian-controlled airspace. In July 2015, the DFS technology passed its factory acceptance test. The system will facilitate the integration of new surveillance sources, such as satellite-based ADS-B.

CAATS Enhancements

Elsewhere in the Canadian ANS, our Canadian Automated Air Traffic System (CAATS) was enhanced to support a cross-border interface between our Vancouver ACC and Oakland Oceanic. The new automated interface has provided for operational efficiency improvements in Vancouver. CAATS was also enhanced to support Automatic Dependent Surveillance – Contract (ADS-C) functionality.

MARKETING AND SALES

Our NAVCANatm division has made further progress marketing our technology solutions to other ANSPs.

Jean-François RaymondAir Traffic Controller, Montreal Area Control Centre

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Most recently, a three-way consortium contract was signed between ENAV and Techno Sky for the provision of a solution based on the NAV CANADA integrated tower automation suite for six towers in Italy. Software and adaptation development is ongoing with the first tower – Malpensa – scheduled to be online next year.

In addition, NAVCANatm technology will be expanded to four more towers in Australia, in Gold Coast, Cairns, Perth and Brisbane.

On the home front, NAV CANADA will continue to maintain passenger security systems at the country’s airports. The Canadian Air Transport Security Authority (CATSA) has renewed our contract for an additional five years, ensuring our Electronics Technologists will help support aviation security until 2021.

FINANCIAL UPDATE

The Company’s strong financial results in fiscal 2015 reflected a healthy 4.6 per cent growth in air traffic volumes for the fiscal year, combined with good fiscal discipline in all areas.

As a result, revenues before rate stabilization were $1,332 million, compared to $1,272 million in the previous fiscal year. Our operating expenses before rate stabilization were $1,096 million, compared to $1,043 million in fiscal 2014. Interest, depreciation and amortization expense before rate stabilization totalled $238 million, compared to $241 million in fiscal 2014.

At year-end, the notional balance of our rate stabilization account was at its target balance of $98 million.

We also continued to keep rates stable, with no increases (and two rate reductions) over an 11-year period – unheard of in most industries. At the same time, we continued to make substantial contributions to our Pension Plans.

The NAV CANADA Pension Plan assets continue to grow, although more slowly than last year due to low interest rates and market volatility. The Company’s pension obligations remain a concern, particularly our statutory solvency deficiency, which was $556 million as of January 1, 2015.

During the last round of collective bargaining, we introduced changes to pensions for certain bargaining units that will support the long-term sustainability of the Pension Plan.

As reported previously, we have also worked for some time now with the bargaining agents and the Office of the Superintendent of Financial Institutions (OSFI) on an appropriate manner to ensure the sustainability of our Pension Plan. These discussions continued through the fall of 2015.

CONCLUSION

Some moments in life are meant for looking ahead, others for looking back. Retirement from a satisfying career inspires both, causing us to consider the many connections we have made and what we have accomplished together.

As I look back over the more than 20 years I have been part of Canada’s air navigation system, I am struck by how much has been achieved. I always saw tremendous potential in the ANS, particularly in its people, and I am proud of the talent and energy we have unlocked.

Our track record over the past 19 years speaks for itself. Together with our customers and stakeholders, we navigated the early years of

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in Weighted Charging Units

AIR TRAFFIC ACTIVITY

Commencing in fiscal 2015, NAV CANADA began reporting air traffic based on

Weighted Charging Units (WCUs), updated to reflect its current charging structure

and to include air traffic associated with the Daily Charge. Historical WCUs have been

restated to reflect the revised methodology for comparison purposes.

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Abdul AhmadInstallation Technologist, Engineering Program Delivery, Toronto Flight Information Region

much-needed restructuring, the modernization of the air navigation system, which continues, and a series of external shocks, many of them severe.

Through it all, we continued to do our job – to run an essential service vital to our customers’ operations and to keep it operating smoothly 24/7 with an absolute requirement for safety.

Together, we have built one of the world’s most respected ANSPs. Above all, that global reputation is due to the hard work and leadership of our people, who demonstrate daily their commitment to safe, efficient and cost-effective ANS services.

I know that I am leaving NAV CANADA in very capable hands, with Neil Wilson, Executive Vice President, Administration and General Counsel, set to become President and Chief Executive Officer as of January 1, 2016.

I have worked closely with Neil over the years on many complex and challenging files, from the formation of NAV CANADA through all of the turbulence we faced during the post- 9/11 years, through the great recession of 2008-2009, to our most recent, successful collaboration in setting up the Aireon joint venture.

Neil has a broad and deep grasp of the Company’s business and people, and he consistently demonstrates the qualities the Board expects in the next President and CEO. I wish Neil all the best as he takes charge of this great organization.

My sincere thanks, and best wishes, also go to our customers, colleagues, suppliers and business partners in the world of aviation and beyond. You have all been essential elements of this Company’s success, and you will continue to be in the years ahead.

My final words are directed to the people of NAV CANADA. As the Company approaches its 20th anniversary in 2016, I know that our greatest achievement has been to show the world what you are capable of doing. The world has taken note, and in many ways your adventure is just beginning.

As you tackle the continuing challenge of providing safe, efficient and cost-effective air navigation services within Canada and to the rest of the globe, I know that you will work together, as never before, to take this Company and its customers into an exciting future.

Sincerely,

John Crichton President and CEO

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In this section, we provide highlights of our performance against Business Plan priorities during fiscal 2015, and a summary of our business direction for fiscal 2016 and beyond.

BUSINESS PLAN UPDATE

SAFETY

Progress

Details about NAV CANADA’s major safety goals and initiatives, and the progress we have made in delivering on these goals, can be found in our Corporate Safety Report for fiscal 2015 and our Corporate Safety Plan for fiscal 2016. Following are some of the highlights.

The Canadian Aviation Safety Officer Partnership (CASOP) held its 10th biannual forum in Winnipeg in May of this year. There were more than 50 representatives from 24 organizations present.

Similar well-attended meetings of the Runway Safety and Incursion Prevention Panel (RSIPP) were held

throughout the fiscal year to discuss runway incursion/excursion trends and mitigation measures.

Additional safety initiatives not covered elsewhere in this report include the following:

• Safety Management System (SMS) assessments were conducted in the Gander, Moncton and Winnipeg Flight Information Regions, and for the Flight Inspection team;

• NAV CANADA worked with the Calgary Airport Authority to mitigate taxiway incursions, reducing tower-reported taxiway deviations by about 50 per cent in 2015;

• Engineering achieved ISO 9001:2008 certification across all its teams and responsibilities, capping a six-year process;

• Service Delivery/Engineering installed six new Wide Area Multilateration (WAM) sensors at Fredericton Airport to provide additional surveillance coverage;

• Service Delivery/Engineering added the Limited Weather lnformation System (LWIS) feature to the existing Human Weather Observation System (HWOS). LWIS automatically collects and provides wind, temperature, dew point and altimeter data whenever a weather observer is not available; and

• In May 2015, we published the VFR Phraseology Guide to support excellence in radio communications.

Direction

Two more phraseology guides will be published in 2016 to serve as learning tools and reference guides for pilots and ground vehicle operators. The Ground Vehicle Phraseology Guide is scheduled for the spring of 2016, with the IFR Phraseology Guide following in the fall.

A core team with representation from Information Management, and Service Delivery’s Safety Management and Human Factors team, is leading a multi-year project to develop and implement the new NAV CANADA Safety Information System (NC-SIS). This will replace the variety of separate systems we have today, and will enhance our ability to access and analyze accurate and timely SMS data, in order to better share information, gain new insights and apply lessons learned.

The new Mandatory Briefing Application referred to in the President and CEO’s message – which has been rolled out at all ACCs and the Towers in Toronto,

Shelley WhiteFlight Service Specialist, Edmonton Flight Information Centre

15

Vancouver, Calgary, Montreal, Québec and Ottawa – will be introduced to the rest of our operational units in fiscal 2016 to 2018, beginning with the remaining Towers as well as our Flight Information Centres.

The Company will continue to facilitate CASOP and RSIPP, to share best practices and proactively manage safety risks in the industry.

Given the importance of Human Factors to the safe and efficient provision of air navigation services, NAV CANADA has spearheaded an effort to develop a CANSO Human Performance Standard of Excellence (HP SoE). Eight of the world’s most advanced ANSPs are part of this working group, which NAV CANADA is co-chairing, together with NATS of the U.K.

PEOPLE

Progress

Early in fiscal 2016 a one-year contract extension was signed, to March 31, 2017, of the collective agreement with the Canadian Air Traffic Control Association (CATCA), Unifor Local 5454, representing Air Traffic Controllers. A similar agreement was reached and ratified with the Air Traffic Specialists Association of Canada (ATSAC) Unifor Local 2245, representing Flight Service Specialists.

OFFICIAL LANGUAGESNAV CANADA is committed to ensuring respect for the language rights of its employees, customers and all those with whom it does business by ensuring that English and French, the official languages of Canada, are appropriately used in its daily operations. We provide bilingual air traffic services in accordance with the Canadian Aviation Regulations (CARs), and we have made additional efforts to make certain services available bilingually beyond the regions defined in CARs.

The Company makes a significant effort to maintain bilingual work environments in areas where this is required under the Official Languages Act. We have long-established programs to support this commitment, including an extensive investment in Translation and Terminology Services available on a demand basis (translating and revising some 8.5 million words per year); our industry-leading Terminav© database of English-French terminology; and a more recent commitment to language training in the National Capital Region, with a full-time French-language instructor on staff to run this program.

RECRUITMENTIn late January, we launched a new bilingual recruitment website for Air Traffic Services careers. The website features more images of real work environments and employees, and streamlined content on all of the Air Traffic Services career paths, along with a bilingual online application process.

MENTAL HEALTHThe Company has made a major investment in supporting employee mental health. In just one example, close to 160 peer supporters involved in the Company’s Light the Way program and the Chemical Dependency Education and Rehabilitation Program (CDERP) held their first joint conference at the NAV CENTRE in May 2015.

The conference featured guest speakers and discussions on peer support, available resources, compassion fatigue and removing the stigma of mental illness.

Direction

The 2016 employee engagement survey will run during the month of February (rather than from May to June), reducing conflicts with leave and other operational priorities. In conjunction with Aon Hewitt, the survey has been made more user-friendly while allowing us to continue tracking progress over time.

Early in fiscal 2016, the Company added two new services to our Employee Wellness Programs on a one-year, trial basis – Best Doctors and CAREpath. Best Doctors provides access to expert medical specialists who will help employees understand their medical conditions and treatment options, and offers a range of important services including a second opinion regarding medical diagnosis.

CAREpath provides advice and information for those who have been diagnosed with cancer. It provides guidance and support to help employees and family members get the emotional and medical assistance they need, and to help them better understand treatment and related issues.

As part of our overall commitment to Official Languages, the Company continues to promote linguistic duality and support the vitality and development of Official Languages Minority Communities (OLMCs) by identifying partnerships that align with the Company’s operations and geographic presence.

One example is the ongoing provision of free space at the NAV CENTRE for the Centre Culturel de Cornwall, and translation services for the Canadian Aviation Heritage Centre in Montreal.

In addition to these community-level efforts, the Company provides sponsorship to larger national and regional events that promote linguistic duality and that provide access to minority language culture and the arts.

In 2016, we intend to continue our support for the Rendez-vous de la francophonie, the Festival Franco-ontarien, the Fondation Franco-ontarienne, and the Townshippers Association. We have also decided to provide financial support to the Goldbloom Awards, sponsored by the Quebec Community Groups’ Network.

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SERVICE DELIVERY AND TECHNOLOGY

Progress

The Company hosted an Aeronautical Information Management (AIM) meeting in March 2015 to increase understanding of the functions, processes and regulatory mandate of our AIM department and of ICAO’s initiative to move from Aeronautical Information Services (AIS) to AIM. Participants included the Air Transport Association of Canada (ATAC), Air Canada, WestJet, the Canadian Owners and Pilots Association (COPA), the Canadian Business Aviation Association (CBAA), the Royal Canadian Air Force (RCAF) and the Airline Pilots Association (ALPA).

Performance-based Navigation (PBN) working groups and the Canadian Performance-based Aviation Action Team (CPAAT) held a meeting with customers to establish the standard to be used in the design and cyclical review of Standard Terminal Arrival Routes (STARs), and a comprehensive Canadian PBN State Plan drafted by the CPAAT.

At the PBN working groups, NAV CANADA’s Navigation and Airspace team presented the new Change Management and Consultation Process. This outlines the collaborative method NAV CANADA will use to ensure customers are involved throughout the change process, and that we are connecting with the right points of contact.

The NAV CANADA PBN Operations Plan is now published on the corporate website. The April 2014 version is available in the ‘OnBoard’ section under PBN/RNAV as well as on the ‘Operational Publications’ page.

AIRSPACE CHANGESIn keeping with the new Airspace Change Communications and

Consultation Protocol (ACCCP) a series of community roundtables were held over the summer of 2015, in conjunction with the Greater Toronto Airports Authority to discuss potential measures to reduce the noise footprint from aircraft operations.

Discussions focused on options that may improve the noise footprint from aircraft operations occurring during overnight and weekend periods when traffic volumes are slightly lower, and would not impact safety or capacity. The proposals are now subject to detailed analysis.

OTHER FISCAL 2015 HIGHLIGHTSAn agreement was signed with the Oil Sands Group in July 2015 to install and provide Peripheral Air-Ground Links (PAL) communications for the area south of Fort McMurray known as the South Athabasca Oil Sands. This will enable direct controller-pilot communications in the area, including at four private oil sands aerodromes.

Additional PALs were deployed at Hopedale, Saglek and Cape Dyer in Newfoundland and Labrador to support Reduced Lateral Separation (RLatSM) planned for Gander Domestic airspace.

We successfully provided a PANAM special service on the Observation Data Exchange (ODEX) to feed weather information from 14 sites in Southern Ontario to Environment Canada to support the Pan Am and Parapan Am games.

The Construction Services (CS) group completed project activities at approximately 389 sites, and supported or led nine revenue-generating projects. Work was completed at 35 sites in support of Engineering Program Delivery. One project of note includes enhancing the reliability and performance of our power systems, beginning with the new dual redundant power system being finalized at the Toronto ACC.

The third North Atlantic Track (NAT) Operational Forum met in Montreal in October 2014. Sponsored and organized by NAV CANADA, the two-day event drew 86 participants from a range of stakeholders in North Atlantic oceanic airspace, including commercial airlines, air cargo operators, ANSPs, regulatory authorities, industry associations, aviation suppliers and, for the first time, academic institutions conducting aviation research.

Direction

The latest three-year update to the Air Navigation System Plan was published in early October 2015. This is our core ANS planning document with a three-year time horizon.

Meanwhile, in addition to initiatives covered elsewhere in this report, our Technology Road Map was created to guide development and deployment of future ATM technology. Roadmap objectives encompass all aspects of technology evolution, from Human Machine Interface to the main technology platform to training.

NORTH ATLANTIC INITIATIVESIn November 2015, we are scheduled to implement RLatSM on a trial basis in the Gander Oceanic Control Area (OCA) in conjunction with the Shanwick OCA. RLatSM will allow FANS 1/A and RNP 4-compliant aircraft to be laterally separated by 25 nautical miles (NM) instead of 60 NM, thereby adding to the number of fuel-efficient route options and increasing capacity at optimum flight levels.

Together with Reduced Longitudinal Separation Minima (RLongSM) introduced several years ago – and initiatives such as ground-based ADS-B surveillance in Greenland and enhanced GAATS+ features such as GO-FLI – customers flying this airspace are already seeing increased capacity and flexibility to achieve more optimal routes and altitudes.

17

CONTROLLER-PILOT DATA LINK COMMUNICATIONSController-Pilot Data Link Communica-tions, or CPDLC, allows direct electronic communication between controller and pilot using data link, delivering improved customer service by relieving frequency congestion, reducing poten-tial communications errors and contrib-uting to more efficient operations.

CPDLC have been in use in the Gander Oceanic FIR for the last decade, and are now in use in all Canadian Flight Information Regions above Level 290. Domestic CPDLC equipage rates are growing but continue to vary by region. During May 2015 more than 261,000 messages were exchanged in domestic airspace and more than 85,000 in oceanic airspace using the system.

NAV CANADA, in collaboration with customers, continues to examine opportunities to ensure CPDLC are as efficient as they can be. The Company is currently working on an enhancement that will support the future delivery of full route clearances to aircraft, and is examining the feasibility of introducing CPLDC into the lower level airspace in the country.

AIREONThe planned implementation of space-based ADS-B through the Aireon project will provide a further, significant boost to our service delivery capabilities in the North Atlantic and Canadian northern airspace.

We anticipate that Aireon-based services will be implemented in the Gander OCA in 2018, with the first operational use of Aireon data planned to take place concurrently in the Gander and Shanwick OCAs. This will enable longitudinal separation standards on North Atlantic Tracks to be reduced from 40 NM to 15 NM.

Given all of these developments, it was decided that the optimal time for the next NAT Operational Forum would be in the fall of 2016.

Interest in Aireon continues to grow. Agreements or understandings have been reached with Airservices Australia; the Civil Aviation Authority of Singapore (CAAS); the Agency for the Security of Aviation Navigation in Africa and Madagascar (ASECNA); the Airports Authority of India (AAI); the Blue Med Functional Airspace Block (FAB), an ANSP cooperative of Cyprus, Greece, Italy and Malta; Isavia, the Icelandic ANSP; and the Dutch Caribbean Air Navigation Service Provider (DC-ANSP), the air traffic services provider for the Curaçao Flight Information Region.

UAV OPERATIONSUnmanned Air Vehicles (UAVs) – also known as Remotely Piloted Aircraft Systems (RPAS) – pose risks to aviation safety in civilian airspace. NAV CANADA continues to work with Transport Canada as a member of the Canadian Aviation Regulation Advisory Council (CARAC) UAV Systems Program Design Working Group on this issue, addressing the regulatory changes required with respect to integrating UAV operations.

Comments were provided to Transport Canada in August 2015 regarding the UAV Notice of Proposed Amendment (NPA) to the Canadian Aviation Regulations (CARs), addressing within-line-of-sight operations for UAVs under 25 kg. The implementation of the CARs for within-line-of-sight operations (Phase 1), including aircraft registration requirements, is scheduled for completion by the end of 2016.

The Working Group’s Phase 2 report (addressing beyond-line-of-sight operations for UAVs under 25 kg) has been completed and sent to Transport Canada. Consultation on this subsequent NPA to CARs for Phase 2 will commence in the spring of 2016.

UAV Special Flight Operating Certificate applications continue to increase. NAV CANADA will publish, in 2016, a UAV Best Practices template document that will provide uniform

guidance to UAV operators on how to coordinate with NAV CANADA units on an FIR-by-FIR basis.

RADAR RENEWALNAV CANADA operates 42 radar units across the country providing surveillance information for both primary and secondary target tracking. The radars are over 30 years old and in need of an upgrade.

The Radar Electronics Replacement Project is a phased project that will replace the electronics components at 11 operational Terminal Surveillance Radar (TSR) sites as well as the Ottawa Radar Test facility. The operational sites are Hamilton, Toronto, Calgary, Vancouver, Victoria, Edmonton, Winnipeg, Ottawa, Montreal, Mirabel and Halifax.

ILS RENEWALWe are also in the final phase of our multi-year Instrument Landing System (ILS) replacement program. Upon completion, we will have installed a total of 110 modern ILS systems at key airports across the country.

Brian RickettsSupervisor (Oceanic), Gander Area Control Centre

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INFORMATION MANAGEMENT

Progress

In fiscal 2015, the Company strengthened the security of both our mission-critical Operational Data Network and our intranet to protect both from the growing number and sophistication of cyber security threats.

Work continues on the Enterprise Content Management platform. Phase two, completed in fiscal 2015, replaced the employee portal with a modern collaboration platform and introduced electronic forms to replace paper and email for business transactions.

Direction

Phase three of the Enterprise Content Management platform will introduce records management and content archiving.

A major Information Management priority will be making progress on development of the Aireon billing system, to be available in 2017 in advance of the service-ready date in 2018.

A great deal of effort and resources in fiscal 2016 will also be brought to bear on important safety systems such as the Mandatory Briefing Application (with rollout to all operational facilities) and NC-SIS, as noted above.

MARKETING AND SALES

Progress

Fiscal 2015 saw a number of NAVCANatm milestones, including the new contract with ENAV of Italy; the completion of site integration testing of our Air Traffic Services Data Management System (ATSDMS) in Hong Kong; and the five-year renewal of the Company’s maintenance contract with the Canadian Air Transport Security Authority (CATSA).

Direction

The ENAV New Tower Architecture Project continues. It will provide NAV CANADA’s integrated tower automation suite (NAVCANsuite) for six air traffic control towers in Italy. Software and adaptation development is ongoing, and the test bed was installed in Rome to demonstrate the software and adaptation capabilities. The first tower, Malpensa, is scheduled to go online in 2016.

In October 2015, NAV CANADA signed an agreement with Carleton University in Ottawa to work toward establishing an Aerospace Centre of Excellence at our NAV CENTRE in Cornwall, Ont. Potential programs include professional certification courses in pilot training, air traffic management and airport management, with opportunities for additional programs in the future. The goal is to offer a small selection of courses in the fall of 2016.

350

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Fiscal Year 2013

September 2012–August 2015

DOMESTIC CPDLC CONNECTIONS

Gander Domestic Moncton Montreal

Toronto Winnipeg Edmonton

Vancouver

Fiscal Year 2014 Fiscal Year 2015

Catherine ThebeauAir Traffic Controller, Toronto Tower

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FINANCE

Progress

The Company recorded its 11th consecutive year without a service charge increase. Charges are only five per cent higher than they were in 1999 – 32 percentage points less than the change in the Consumer Price Index over the same time period.

Financial results for the year as a whole reflected a continued positive revenue picture compared to budget and the prior year, combined with effective cost control. This enabled us to maintain the notional balance of the rate stabilization account at its target level while also completing the recovery of past pension contributions by the end of fiscal 2015.

With regard to the Aireon joint venture, the Company continued to invest in preferred interests during the

year – CDN $36 million in fiscal 2015. We have now invested a total of US $120 million out of our US $150 mil -lion commitment.

On August 6, 2015, the Company completed the early termination of its remaining cross-border capital lease transaction. The Company’s other cross-border capital lease transaction was subject to an early termination in June of 2012.

The two cross-border leasing transactions generated gains of $56 million in fiscal 2004 that helped restore the Company’s rate stabilization account following the severe reduction in the account that resulted from the effects of September 11, 2001.

The lease terminations were achieved by way of negotiated accelerations of the buy-out options. The more recent termination was completed at no net cost to the Company, and eliminated significant although remote contingent exposures.

Direction

The Company will continue to place a major emphasis on prudent financial management, given uncertain global economic conditions, and forecasts of slower growth in the Canadian economy.

The major financial challenge continues to be the Company’s Pension Plans. While their growth continues with strong asset returns, we continue to be challenged by the persistently low interest rate environment and market volatility.

140

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90

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9

versus Consumer Price Index(2)

HISTORY OF NAV CANADA RATE CHANGES(1)

(1) Average changes since charges were fully implemented on March 1, 1999 (2) Consumer Price Index - Growth assumed to be 1.2 per cent for 2015

Credit Ratings

The Company’s debt obligations have been assigned the following ratings and outlooks:

Agency Senior Debt General Obligation Outlook

DBRS Limited AA AA(low) Stable

Moody’s Investors Service Aa2 Aa3 Stable

Standard & Poor’s AA AA- Stable

Mar 1999

Mar 2001

Mar 2003

Mar 2005

Mar 2007

Mar 2009

Mar 2011

Mar 2013

Sept 2015

NAV CANADA Rates

Consumer Price Index

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CELEBRATING OURPEOPLE

At home, you’ll see us at charity runs and cycling events. We might be the person coaching a group of wobbly four-year-olds on the ice, or serving a warm meal to the homeless.

At our workplace, we may be the calm voice that a pilot hears over the radio providing the necessary information for a safe landing. We may be a member of an energetic, multidisciplinary team developing an innovative product to improve efficiency. Or we may be the person who goes the extra mile under difficult

conditions to return an important system to service, reducing the impact on customers.

Our values are respect, excellence and customer service. We practice them every day, making connections with customers, partners and stakeholders, contributing to the Company’s current and future success. We know our actions speak louder than words, so we act with integrity and an eye to the future. We live our values.

We are NAV CANADA.

At NAV CANADA, we understand the importance of commitment and connection – to our company, colleagues and customers, and to our families, friends and communities.

“Our values have a face and it’s yours.”

Richard Dixon Vice President, Human Resources

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A COMMUNITY CONNECTION

“Together, We Make It Better”

Once again NAV CANADA people dug deep into their hearts and demonstrated just how important it is to help others. Throughout fiscal 2015, they gave unselfishly of their time, resources and expertise to make sure their communities were active, vibrant and welcoming places in which to live and work.

The community commitment of our employees is truly inspiring, and this is why we support their efforts through contributions to individual initiatives, and a matching corporate donations program for group fundraisers chosen by employees in each Flight Information Region, in the National Capital Region and in Cornwall.

This past year, employees paddled dragon boats, pulled planes, and were doused in ice to raise money for charities. They coached hockey, soccer, ringette and many other sporting activities. They volunteered with arts and education programs, at rescue shelters for animals, and with hospice programs.

This year, the Company went a step further, expanding the amount of matching dollars available. Our people were quick to step up - supporting hospital foundations, Hope Air, food banks and missions for the homeless, and a host of activities to fight the devastating inroads that cancer has made on the health of family members and friends.

Our people understand the importance of a strong, connected community and we are proud to be able to support their efforts to ‘make it better.’

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LIGHT THE WAY

Light the Way, NAV CANADA’s mental health peer support program, marked its third anniversary in 2015. Since its launch, the program has expanded, and its “no stigma” message has become part of the Company’s culture.

Those employees who look to Light the Way for help are tapping into the support and understanding of some 60 Peer Supporters, who have themselves experienced some type of mental health

challenge in their lives, either personally or through a friend or loved one.

For the pioneering nature of Light the Way, and for the work the entire Light the Way team has put into ensuring its success, the program and the people involved have been recognized with three prestigious awards:

• in February 2015, the C.M. Hincks Award from the Canadian Mental Health Association;

• in October 2015, a NAV CANADA President’s Award for Outstanding Achievement at our National Awards Night in Ottawa; and

• in November 2015, the Chairman’s Citation of Merit Award from the Air Traffic Control Association (ATCA), in a ceremony in Washington, D.C.

C.M. Hincks Award

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NATIONAL AWARD WINNERS 2015

Winners of the Chairman’s Award for Employee Excellence

Winners of the President’s Award for Outstanding Achievement

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SID KOSLOWVICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER

Winner of the Air Traffic Control Association (ATCA) 2015 Glen A. Gilbert Memorial Award

Well-known in the aviation industry for his engineering savvy and his deep experience developing ATM systems, Sid Koslow was presented with the prestigious ATCA 2015 Glen A. Gilbert Memorial Award for outstanding, long-term achievement in the field of aviation on November 4, 2015.

Upon his arrival at NAV CANADA in 1997, Sid established a new model for the design, development and deployment of ATM systems, successfully leading the modernization of the Canadian ANS.

He focused on accelerating the development and deployment of the Company’s ATM systems, using an iterative approach. He emphasized the involvement of Air Traffic Controllers, Flight Service Specialists and Electronics Technologists, leading to rapid adoption rates

and robust functionality for the new systems.

Over the past decade, Sid’s leadership has also advanced partnerships with ANSPs and other industry leaders for the development of systems that jointly enhance services. His guiding hand was behind the establish-ment of NAVCANatm – the subsidiary respon-sible for our global technology sales.

Sid Koslow continues to seek ways to transform aviation. His participation in the Aireon project – to provide global, space-based ADS-B surveillance – is the most recent highlight of a stellar career.

CHAIRMAN’S AWARD FOR EMPLOYEE EXCELLENCE

The Chairman’s Award for Employee Excellence recognizes those employees whose efforts have made a truly significant difference in their workplaces or in their communities.

SAFETYAnne Breen Air Traffic Controller Vancouver ACC

PEOPLETej Dhaliwal Manager, ATM Systems Vancouver ACC

CUSTOMER SERVICEDJ Moon CNS Team Supervisor Vancouver Tower

PERFORMANCEDerek YakielashekAirport Operations Specialist Flight Services Winnipeg ACC

RESOURCE MANAGEMENTDean GallopManager, IM Compliance and Production Control Head Office

Bridget TerpstraIM Compliance and Production Control Analyst Head Office

TECHNOLOGYFrançois Bisaillon Data Systems Coordinator Montreal ACC

COMMUNITY SERVICE Will Johnston Air Traffic Controller Moncton ACC

Debbie Purkiss Disability Management Specialist Head Office

PRESIDENT’S AWARD FOR OUTSTANDING ACHIEVEMENT

The President’s Award for Outstanding Achievement recognizes those individuals or teams of employees who have made an exceptional contribution to NAV CANADA through their dedication to excellence.

Individual Winners

Nancy FletcherCorporate Controller Head Office

Maureen StevensFlight Service Specialist Îles-de-la-Madeleine FSS

Team Winners

MANDATORY BRIEFING APPLICATION TEAMInformation ManagementMatty Compton Filip Filipovich Rob Mitchell Chris ten Den Shawn Thornton Michael Walsh Judy Woodard

OperationsGeorge Avola Dustin HardingBruce Keller Penny ReidJeff Van Dyke Jeff Wearn

LIGHT THE WAY PROGRAM DEVELOPMENT TEAMChris CasseyAnson ChappellKevin DybkaJoanne GaumondPierre GaumondPeter HebertSusan LangdonPaul LutmanDennis MitchellMichael SimardVanessa TraskStephanie WeisnerLyne Wilson

One of aviation’s premier awards, the ATCA Glen A. Gilbert Memorial Award honours the outstanding, long-term achievement of an individual in the field of aviation. The award is on permanent display in the Smithsonian’s National Air and Space Museum.

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CORPORATE GOVERNANCE

BOARD OF DIRECTORS

The Company’s overall approach to corporate governance follows best practices and keeps pace with evolving requirements, including those under applicable securities legislation.

NAV CANADA represents a unique consensus among the major stakeholders in the ANS - the Government of Canada, the commercial air carriers, general aviation, and our unionized employees. Our governance structure reflects this consensus. All four of these major stakeholders are Members of the Company. In addition, there is a Director Member. These five Members elect the directors as follows:

• The Government of Canada elects three directors

• The Commercial Air Carriers elect four directors

• General Aviation elects one director

• The Labour Unions elect two directors

• The Directors elect four directors

The President and CEO of the Company is also a director. The result is a board of directors where all stakeholder interests are represented but none dominates. The Board’s committees are similarly constituted except for the Human Resources & Compensation Committee. The Board discharges its responsibilities directly and through committees. The Board holds five

scheduled meetings each year and unscheduled meetings are held from time to time as required.

BOARD STRUCTURE AND COMPOSITION

The Board is comprised of 15 directors, all of whom are required to be Canadian citizens. One director (the President and CEO) is an employee of the Company. All other directors are “independent” directors as that term is defined in National Instrument 52-110 Audit Committees (NI 52-110).

Our By-laws disqualify from directorship any person elected to the Parliament of Canada or any provincial legislature or territorial legislative assembly; federal, provincial or territorial government employees; and directors or employees of an entity that has a material interest as a supplier, client or customer of the ANS. Every director and officer of the Company is required to sign and abide by our Code of Conduct and Conflict of Interest Guidelines.

DIRECTORS

Directors are elected for terms not exceeding three years, with terms expiring at the Company’s annual meeting. No director, other than the President and CEO, may serve as a director for more than nine years in total. Set out on the next page is information on the current directors, including their Committee membership and meeting attendance records for the fiscal year ended August 31, 2015.

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Marc Courtois

DIRECTOR; CHAIR OF THE BOARDQuebec, CanadaElected by: Board of DirectorsDirector since: February 16, 2012Current term expires: 2018Principal occupation in last five years: Corporate Director

Meeting Attendance/Committee Membership

Board 6/6

Audit & Finance Committee* 5/5

Corporate Governance Committee 4/4

Customer Service Charges Committee* 1/1

Human Resources & Compensation Committee* 11/12

Pension Committee* 5/6

Safety Committee 5/5

* ex officio member. Mr. Courtois is Chair of the Customer Service Charges Committee.

Edward M. Barrett

DIRECTORNew Brunswick, CanadaElected by: Board of DirectorsDirector since: February 7, 2013Current term expires: 2019Principal occupation in last five years: Co-CEO and Chair of Barrett Corporation since 1996.


Board 6/6



Pension Committee 6/6

* Mr. Barrett joined the Human Resources & Compensation Committee on January 14, 2015.

Mary-Ann Bell

DIRECTORQuebec, CanadaElected by: Government of CanadaDirector since: May 30, 2014Current term expires: 2017Principal occupation in last five years: Corporate Director. From 2009 to 2014, Senior Vice President, Quebec and Ontario, Bell Aliant Regional Communications.


Board 6/6


Customer Service Charges Committee 1/1



Safety Committee* 2/2

* Ms. Bell was a member of the Audit & Finance and Pension Committees until January 14, 2015, at which time she moved to the Human Resources & Compensation and Safety Committees.

Jean Coté

DIRECTORQuebec, CanadaElected by: Commercial Air CarriersDirector since: January 14, 2015Current term expires: 2018Principal occupation in last five years: Corporate Director. Prior to January 2015, Vice President, Commercial Operations at Air Transat.


Board 4/4

Audit & Finance Committee 2/2


John W. Crichton

DIRECTOROntario, CanadaElected by: Ex OfficioDirector since: May 26, 1995Current term expires: n/aPrincipal occupation in last five years: President and Chief Executive Officer of the Company


Board 6/6



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Robert J. Davis

DIRECTOR; CHAIR OF SAFETY COMMITTEEOntario, CanadaElected by: Commercial Air CarriersDirector since: April 8, 2009Current term expires: 2018Principal occupation in last five years: Corporate Director


Board 6/6



Michael DiLollo

DIRECTORTrinidad, West IndiesElected by: Commercial Air CarriersDirector since: February 7, 2013 Current term expires: 2016Principal occupation in last five years: Chief Executive Officer of Caribbean Airlines since May 21, 2014. From January to October 2012, Vice President, Airline Operations, Medatlantica Group. President, Transat Tours Canada from 2009 to 2011.


Board 6/6


Customer Service Charges Committee* 1/1


* Mr. DiLollo was a member of the Human Resources & Compensation Committee until January 14, 2015, at which time he moved to the Customer Service Charges Committee.

Bonnie DuPont

DIRECTOR; CHAIR OF HUMAN RESOURCES & COMPENSATION COMMITTEE*Alberta, CanadaElected by: Board of DirectorsDirector since: February 7, 2013Current term expires: 2016Principal occupation in last five years: Corporate Director


Board 6/6

Human Resources & Compensation Committee 12/12


* Ms. DuPont became Chair of the Human Resources & Compensation Committee on January 14, 2015.

Gary Fane

DIRECTORBritish Columbia, CanadaElected by: Labour UnionsDirector since: April 12, 2007Current term expires: 2016Principal occupation in last five years: Executive Director of the British Columbia Nurses’ Union


Board 6/6




James Gouk

DIRECTORBritish Columbia, CanadaElected by: Government of CanadaDirector since: April 12, 2006Term expired*: 2015Principal occupation in last five years: Corporate Director


Board 6/6


Safety Committee** 3/3

Corporate Governance Committee** 1/1

* As of January 2015, Mr. Gouk had served his nine year maximum term on the Board. He currently remains on the Board until the Government Member elects a replacement.

** Mr. Gouk was a member of the Safety Committee until January 14, 2015, at which time he joined the Corporate Governance Committee. Mr. Gouk was Chair of the Human Resources & Compensation Committee until January 14, 2015.

Linda Hohol

DIRECTOR; CHAIR OF AUDIT & FINANCE COMMITTEE*Alberta, CanadaElected by: Board of DirectorsDirector since: February 16, 2012Current term expires: 2018Principal occupation in last five years: Corporate Director


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* Ms. Hohol was a member of the Human Resources & Compensation Committee and Chair of the Customer Service Charges Committee until January 14, 2015 at which time she became Chair of the Audit & Finance Committee and joined the Pension Committee.

29

Arthur J. LaFlamme

DIRECTOROntario, Canada Elected by: General AviationDirector since: February 16, 2012Current term expires: 2018Principal occupation in last five years: Corporate Director. From 2008-2011, Consultant to the Canadian Business Aviation Association and Special Advisor to the President and CEO.


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* Mr. LaFlamme was a member of the Customer Service Charges Committee until January 14, 2015 at which time he joined the Human Resources & Compensation Committee.

Fred Peters

DIRECTOROntario, CanadaElected by: Government of CanadaDirector since: August 20, 2013Current term expires: 2016Principal occupation in last five years: Financial and Management Consultant


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Corporate Governance Committee* 3/3



* Mr. Peters was a member of the Corporate Governance Committee until January 14, 2015 at which time he joined the Audit & Finance Committee.

Robert Reid

DIRECTOR; CHAIR OF CORPORATE GOVERNANCE COMMITTEEOntario, CanadaElected by: Commercial Air CarriersDirector since: April 8, 2009Current term expires: 2018Principal occupation in last five years: Corporate Director


Board 6/6



Scott Sweatman

DIRECTOR; CHAIR OF PENSION COMMITTEEBritish Columbia, CanadaElected by: Labour UnionsDirector since: April 8, 2010Current term expires: 2016Principal occupation in last five years: Partner at Dentons Canada LLP. From February 2010 to March 2013, Partner at Spectrum HR Law LLP.


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GENDER DIVERSITY

The Company and the Board recognize the importance of diversity, including gender, in the selection of directors and executive officers and believe that diversity enhances corporate and board discussion, viewpoints and, ultimately, performance. While there are no targets in place regarding the representation of women on the Board or when hiring executive officers, the Company has an Employment Equity and Diversity Policy that applies when hiring and promoting executive officers. This policy sets out an objective that the Company’s hiring practices are to be as much a reflection

of the Canadian labour market as possible, while improving designated group representation within the workplace and supporting diversity in its business practices.

Two-thirds of the Board’s members are elected by the Company’s stakeholder members and while the Board cannot dictate requirements to those stakeholders, the Corporate Governance Committee of the Board regularly examines the experience, skills and attributes, including gender, required for filling Board vacancies, and communicates these requirements to our stakeholder members for their consideration when electing

directors. The Corporate Governance Committee similarly identifies desirable competencies and attributes, including gender, while ensuring an appropriate mix of skills and experience with respect to those directors elected by the Board.

Currently, 20 per cent of the Board members are women, and 50 per cent of the Board-elected directors are women. There are no women on the Executive Management Committee of the Company, but within the senior management group (which cadre of management are within the definition of executive officers in that they are individuals performing policy-making functions), 24 per cent are women.

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BOARD COMMITTEES

Our Board has six committees, as described below, which do not take action or make decisions on behalf of the Board unless specifically mandated to do so.

AUDIT & FINANCE COMMITTEE

Mandate

Meetings held in fiscal year

Current Membership

Responsible for assisting the Board in fulfilling its oversight responsibilities relating to the Company’s financial reporting and disclosure obligations, including review of annual and interim financial statements, the integrity of the Company’s financial reporting and internal controls, compliance with legal and regulatory requirements, and the qualifications, independence and performance of the Company’s public accountants. In addition, the Committee provides oversight on treasury matters and reviews and recommends to the Board any financing and/or financial risk management transactions proposed by management.

Five Linda Hohol, ChairJean CotéRobert DavisMichael DiLolloGary FaneFred Peters

CORPORATE GOVERNANCE COMMITTEE

Mandate


Current Membership

Develops general policies relating to corporate governance to ensure that the Company has in force an effective corporate governance system that adds value and assists the Company in achieving its objectives.

Four Robert Reid, ChairEdward BarrettMarc CourtoisBonnie DuPontJames GoukScott Sweatman

CUSTOMER SERVICE CHARGES COMMITTEE

Mandate


Current Membership

Assists the Board in fulfilling its responsibilities in establishing or revising the Company’s customer service charges.

One Marc Courtois, ChairMary-Ann BellGary FaneMichael DiLolloLinda Hohol

HUMAN RESOURCES & COMPENSATION COMMITTEE

Mandate


Current Membership

Provides oversight to ensure a high quality of leadership within NAV CANADA, an employee and labour relations strategy that provides for a productive and fulfilling work environment, and ongoing flexibility and productivity throughout the Company. As well, the Committee ensures that the human resources plans and programs reflect the Company’s human resources values and principles.

Twelve Bonnie DuPont, ChairEdward BarrettMary-Ann BellJames GoukArthur LaFlammeRobert Reid

31

PENSION COMMITTEE

Mandate


Current Membership

Oversees the investment management of plan assets and the administration of the Company’s retirement plans, which include two registered pension plans and supplementary retirement arrangements. At the invitation of the Chair, an observer member, nominated by the employees’ unions, attends the meetings.

Six Scott Sweatman, ChairEdward BarrettJean CotéJohn CrichtonLinda HoholFred PetersDaniel Boulet, Observer

SAFETY COMMITTEE

Mandate


Current Membership

Oversees the safety of the Company’s air navigation services and products, primarily by monitoring the integrity and effectiveness of our risk management safety policies.

Five Robert Davis, ChairMary-Ann BellMarc CourtoisJohn CrichtonGary FaneArthur LaFlamme

Paul IdaszElectronics Technologist (CRS), Vancouver Work Centre

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DIRECTOR COMPENSATION

The By-laws of the Company provide that reasonable remuneration be paid to directors (other than the President and CEO) for attendance and participation at meetings of the Board of Directors and committees as fixed by resolution of the Board of Directors. Board members receive annual retainers, meeting fees, travel fees, and have the option of participating in an executive medical health assessment program, which program is a taxable benefit. Board members are also entitled to per diems when they are required to conduct business on behalf of the Board (other than attendance at seminars, trade association meetings, training, or for preparation for Board and/or committee meetings). Directors’ compensation is reviewed every two years. Effective September 1, 2015, the annual retainer for Board members was increased to $56,000 and the Chair of the Board’s Annual Fee was increased to $182,750. No other changes in directors’ compensation have been made since October 21, 2010.

BOARD OF DIRECTORS FEES

Effective September 1, 2015

Annual Retainer $56,000

Board Meeting Attendance Fee 1,500

Board Teleconference Meeting Fee• for meetings more than one hour• for meetings less than one hour

1,000 500

Travel Fee (if required to travel across two provinces for the purpose of attending directors’ or committee meetings)

1,500

Per Diem (1)

• full day• half day

1,250 750

COMMITTEE FEES

Committee Member Annual Retainer per Committee $4,000

Audit & Finance Committee Member Annual Retainer 5,000

Audit & Finance Committee Chair Annual Retainer 15,000

Human Resources & Compensation Committee Chair Annual Retainer 10,000

Annual Retainer for other Committee Chairs 7,500

Committee Meeting Attendance Fee 1,500

Committee Teleconference Meeting Fee• for meetings more than one hour• for meetings less than one hour

1,000 500

OTHER

Chair of the Board Annual Fee(2) $182,750

(1) Per diems are paid to directors when they are required to conduct business on behalf of the Board other than attendance at seminars, trade association meetings, training, or for preparation for Board and/or committee meetings.

(2) The Chair of the Board receives no additional meeting fees or other retainers or fees, but is entitled to reimbursement for travel fees.

33

DIRECTORS’ COMPENSATION FISCAL 2015

Name

Fees Earned

$

All Other Compensation(5)

$

Total

$

Edward Barrett 86,500 7,500 94,000

Mary-Ann Bell 87,500 - 87,500

Paul Brotto(1) 49,500 - 49,500

Jean Coté(2) 45,750 - 45,750

Marc Courtois(3) 175,000 - 175,000

John Crichton(4) - - -

Robert Davis 87,000 1,500 88,500

Michael DiLollo 84,000 12,000 96,000

Bonnie DuPont 91,000 14,500 105,500

Gary Fane 85,000 9,000 94,000

James Gouk 91,000 12,000 103,000

Linda Hohol 99,750 10,500 110,250

Arthur LaFlamme 77,000 3,000 80,000

Fred Peters 80,500 1,500 82,000

Robert Reid 93,500 6,000 99,500

Scott Sweatman 86,000 10,500 96,500

(1) Mr. Brotto retired from the Board on January 15, 2015. (2) Mr. Coté joined the Board on January 15, 2015.(3) Mr. Courtois receives an annual fee as Chair of the Board and no other additional fees for attendance at meetings. He is entitled to reimbursement for travel fees.(4) As President and CEO, Mr. Crichton does not receive directors’ fees.(5) Includes travel fees paid to directors who are required to travel across two provinces for meetings, and per diems, which are paid when a director is required to

conduct business on behalf of the Board of Directors other than attendance at seminars, trade association meetings, training, or for preparation for Board and/or Committee meetings.

Sheldon MooreAir Traffic Operations Specialist, Winnipeg Area Control Centre

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EXECUTIVE COMPENSATION

An executive compensation package at NAV CANADA consists of the following components (referred to as the total compensation package):

• base salary

• annual cash incentive

• long-term cash incentive

• pension plan, and

• benefits and perquisites

The compensation of executives, other than the President and CEO, is recommended by the President and CEO and reviewed and approved by the Human Resources & Compensation Committee. The compensation of the President and CEO is reviewed and approved by the Committee. Base salaries for all Executive Officers, including that of the President and CEO, are designed to be competitive and are determined on the basis of outside market data as well as individual performance and experience level. Actual individual salary levels are determined according to a number of factors, including the individual’s performance, responsibilities and experience. All Executive Officers receive base salaries except the Vice President and Chief Technology Officer who is paid a per diem for days worked. Base salaries are reviewed annually by the Committee.

ETHICAL BUSINESS CONDUCT

NAV CANADA has adopted a Code of Conduct and Conflict of Interest Guidelines which is designed to govern the conduct of all directors and officers, and the disclosure and avoidance of conflicts of interest. This disclosure is updated annually, or more frequently, as required. All of the Company’s directors and officers have signed a Code of Conduct and Conflict of Interest declaration. During fiscal 2015, no proceedings were taken against any director or officer by the Board under the Code of Conduct and Conflict of Interest Guidelines.

In addition, NAV CANADA has a Code of Business Conduct which applies to all directors, officers and employees of the Company. Copies of both the Code of Conduct and Conflict of Interest Guidelines and the Code of Business Conduct are available on the Company’s website and on SEDAR at www.sedar.com. The Corporate Governance Committee has responsibility for reviewing with the Board and management the results of an annual review of compliance with the Code of Conduct and Conflict of Interest Guidelines for directors and officers.

Directors and executive officers who hold office as a director, officer or elected official of another entity or

who are an associate or employee of another entity that might be in conflict with their duty or interest towards the Company, must file a written declaration to this effect with the Company. No director or officer who is in such a position may participate in the consideration of any transaction or agreement in which such other entity has an interest.

The Code of Business Conduct, which applies to all employees, directors and officers of the Company, is reviewed and approved by the Board and complies with the requirements of National Policy 58-201 Corporate Governance Guidelines. The Board is committed to bringing the highest degree of honesty, integrity and ethical conduct to the Company’s operations and business relationships. This commitment is reflected in the NAV CANADA vision and the Company’s values, as well as in all dealings with employees, customers, bargaining agents, suppliers and other stakeholders. The Code of Business Conduct describes how that commitment is put into everyday practice.

The Company has in place policies and processes on whistleblowing. The NAV CANADA whistleblowing system, called SENTINEL, has procedures for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls, auditing or pension plan matters. In addition, whistleblowing mechanisms are in place for the reporting of other serious ethical or legal concerns. SENTINEL ensures that employees have an outlet for reporting concerns relating to the Company that are not being addressed through existing channels, and that concerns regarding accounting, internal controls or auditing matters are directed to the Chair of the Audit & Finance Committee and concerns relating to pension plan matters are directed to the Chair of the Pension Committee.

Base salaries for fiscal 2015 for the five highest paid executives were as follows:

Name and Position

Annual Base Salary

John W. Crichton, President and CEO $596,877

Brian K. Aitken, Executive Vice President, Finance and Chief Financial Officer

$340,000

Sidney Koslow, Vice President and Chief Technology Officer $323,897

Neil R. Wilson, Executive Vice President, Administration and General Counsel

$316,200

Rudy Kellar, Executive Vice President, Service Delivery $316,200

http://www.sedar.com

35

The Code of Business Conduct is not simply a list of rules. It is intended to help employees, directors and officers maintain the very high standard of ethical behaviour expected of a company entrusted with public safety. Throughout the Code of Business Conduct, employees, directors and officers are directed to appropriate internal review and redress mechanisms available within the Company to address specific situations and potential violations. Examples of internal review and redress mechanisms include the NAV CANADA Alternate Dispute

Resolution Process, the NAV CANADA Workplace Accommodation Right of Review Process, the NAV CANADA Official Languages Internal Complaints Procedure, grievance processes available to unionized employees, and the NAV CANADA Internal Complaints Resolution Process.

In addition, the Company has a confi-dential safety reporting program, called ARGUS, which provides employees with the opportunity to identify potential hazards while remaining anonymous. ARGUS ensures that employees who recognize

a potential hazard can report their concerns confidentially. Every employee and manager is encouraged to use the ARGUS program, without fear of recrimination.

The Board, officers and management of the Company are committed to an active disclosure culture. The Company’s Corporate Disclosure Policy (available on the Company’s website) ensures communications to the investing public are timely, accurate, consistent, informative, compliant with legal and regulatory requirements and are broadly disseminated.

Robert AdamsAir Traffic Controller, Moncton Tower

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ADVISORY COMMITTEE REPORTThe NAV CANADA Advisory Committee (NCAC) is made up of 20 key industry stakeholders and provides a format for the NCAC to collectively review issues which are important to NAV CANADA users. In doing so, the NCAC brings the broadest possible perspective to the issue with an ultimate goal of supporting NAV CANADA.

The NCAC meets three times each year. Two meetings are strategically aligned to coincide with a joint briefing with the Board’s Safety Committee and the Annual General Meeting. The third meeting each year provides an opportunity for the NCAC to visit the NAV CANADA facilities within a specific location and to meet with users of the system in that same location.

In June of 2015, the NCAC meeting was in Vancouver and while there we toured the Vancouver Harbour and YVR Airport Towers and we were able to meet with staff at both locations. We also had an opportunity to meet with local air carriers, a commercial helicopter operator and a flight school. As a result, the NCAC was able to better understand the unique and complex nature of providing air navigation services in a coastal mountainous region.

Over the past fiscal year, the NCAC has considered a wide range of issues and this year the NCAC implemented a new SMS-style decision matrix tool which enables us to examine an issue in detail and determine how to action a resolution. In particular, three key areas of focus were identified.

SAFETY PRACTICES AND CULTURE

Throughout the year the NCAC looks at safety in an informal way with each issue we discuss and in a formal way at our joint meeting with the Board’s Safety Committee. NAV CANADA has an industry-leading safety record which is reflected culturally across each level of the organization and with each staff member we meet. On behalf of the NCAC, I would like to thank John David, Vice President, Safety and Quality, and all the NAV CANADA staff for their visible and transparent commitment to safety.

STAFFING

Staff training and staffing levels continues to be an important issue for the NCAC and is a standing item on each NCAC meeting agenda. Over the past year the NCAC has been briefed on the current changes taking place within the staff selection and training process and we are encouraged by the initiatives undertaken to date. Staff levels play an important role in managing the peaks and valleys of traffic flow and the NCAC will continue to monitor and provide input into this important issue.

LEVEL OF SERVICE CHANGES

When it was formed in 1996, NAV CANADA laid out an ambitious objective of providing air navigation services to all users and the NCAC is pleased to support NAV CANADA in its endeavours to do so. On an

ongoing basis the NCAC is briefed by NAV CANADA staff on pending and ongoing changes to the levels of service and we strive to ensure that all user groups are considered. Over the past ten years significant enhancements have been made to the ANS ranging from the introduction of performance-based navigation to the installation of Automated Weather Observation System sites and weather cameras across a network of airports including those in Canada’s most remote areas. On behalf of the NCAC, I am pleased to thank all staff for their continued commitment to all users.

Canada is a vast nation that is stitched together by a network of over 1,800 airports, heliports and registered aerodromes. In addition to these, there is an estimated 3,000+ small grass strips and countless lakes that serve the aviation community. All of these airfields and the pilots and passengers that use them have one thing in common – they all rely on NAV CANADA each and every day.

The NAV CANADA Advisory Committee would like to express our appreciation to John Crichton for the exemplary way he has stewarded the Company and our Canadian aviation legacy. Thank you, John.

We would also like to congratulate Neil Wilson on his appointment as President and CEO and affirm our commitment and support to him in this new role. Congratulations, Neil.

Respectfully submitted,

Stephen Wilcox Chair, NAV CANADA Advisory Committee

37

ADVISORY COMMITTEEAdvisory Committee Member Nominating Association

Stephen Wilcox, ChairTotal Aviation & Airport Solutions

Regional Airports Association Airport Management Council of Ontario

Captain Craig Blandford, Vice ChairAir Canada Pilots Association (ACPA)

Professional Pilots AssociationAir Canada Pilots Association (ACPA)

James Molloy, SecretaryTrue Course Solutions

Regional Aviation AssociationsBritish Columbia Aviation Council (BCAC)

Les AaldersAir Transport Association of Canada (ATAC)

Air Transport Association of Canada (ATAC)

John BaldwinAir Traffic Specialists Association of Canada (ATSAC)

UnionsUnifor Local 2245

Daniel J. BouletInternational Brotherhood of Electrical Workers (IBEW), Local 2228

UnionsIBEW, Local 2228

Captain David Deere WestJet

Commercial UserNational Airlines Council of Canada

Peter DuffeyCanadian Air Traffic Control Association (CATCA), Unifor 5454

UnionsCATCA, Unifor 5454

Bernard GervaisCanadian Owners and Pilots Association (COPA)

Recreational, Non-Commercial Aviation Association COPA

Fred L. JonesHelicopter Association of Canada (HAC)

National Helicopter AssociationHelicopter Association of Canada (HAC)

Mike KarsseboomGreater Toronto Airport Authority (GTAA)

National Airports AssociationCanadian Airports Council

Janet KeimSaskatchewan Aviation Council

Regional Aviation AssociationsSaskatchewan Aviation Council

Devin LyallSummit Air

Regional Aviation Associations Northern Air Transport Association

Paul McGrawAirlines for America (A4A)

Foreign Air Operators AssociationsAirlines for America (A4A)

Howard McLennanMember-At-Large

Association of Canadian Airlines Pilots (ACAP)

Ed RatzlaffAerofoil Consulting Inc.

Regional Aviation AssociationsManitoba Aviation Council

Brian Shury ALPA Canada

Professional Pilots Association Air Line Pilots Association (ALPA)

Bram TilroeAlberta Aviation Council

Regional Aviation AssociationsAlberta Aviation Council

Rudy ToeringCanadian Business Aviation Association (CBAA)

Non-Commercial User AssociationCanadian Business Aviation Association (CBAA)

L. Grant WilsonInternational Air Transport Association (IATA)

Foreign Air Operators AssociationsInternational Air Transport Association (IATA)

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MANAGEMENT’S REPORT TO THE MEMBERS OF NAV CANADAThese consolidated financial statements are the responsibility of management and have been approved by the Board of Directors of NAV CANADA (“the Company”). These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles, Part V – Pre-changeover accounting standards (“Canadian GAAP”) and include amounts that are based on estimates of the expected effects of current events and transactions with appropriate consideration to materiality, judgments and financial information determined by specialists. In addition, in preparing the financial information we must interpret the requirements described above, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information.

Management has also prepared a Management’s Discussion and Analysis (“MD&A”), which is based on the Company’s financial results prepared in accordance with Canadian GAAP. It provides information regarding the Company’s financial condition and results of operations, and should be read in conjunction with these consolidated financial statements and accompanying notes. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because events and circumstances in the future may not occur as expected.

Management has developed and maintains a system of internal control over financial reporting and disclosure controls, including a program of internal audits. Management believes that these controls provide reasonable assurance that financial records are reliable and form a proper basis for preparation of financial statements, and we have signed certificates as required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings in this regard. The internal accounting control process includes management’s communication to employees of policies that govern ethical business conduct.

The Board of Directors has appointed an Audit & Finance Committee that is composed of directors who are independent of the Company and to which the Board of Directors has delegated responsibility for oversight of the financial reporting process. The Audit & Finance Committee meets at least four times during the year with management and independently with each of the internal and external auditors and as a group to review any significant accounting, internal control and auditing matters. The Audit & Finance Committee reviews the consolidated financial statements, MD&A and Annual Information Form before these are submitted to the Board of Directors for approval. The internal and external auditors have free access to the Audit & Finance Committee.

With respect to the external auditors, the Audit & Finance Committee approves the terms of engagement and reviews the annual audit plan, the Independent Auditors’ Report and the results of the audit. It also recommends to the Board of Directors the firm of external auditors to be appointed by the Members of the Company.

The independent external auditors, KPMG LLP, have been appointed by the Members to express an opinion as to whether the consolidated financial statements present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with Canadian GAAP. The report of KPMG LLP outlines the scope of their examination and their opinion on the consolidated financial statements.

John W. Crichton Brian K. Aitken President and Chief Executive Officer Executive Vice President, Finance and Chief Financial Officer

October 23, 2015 October 23, 2015

39

Report on the Consolidated Financial StatementsWe have audited the accompanying consolidated financial statements of NAV CANADA, which comprise the consolidated balance sheets as at August 31, 2015 and 2014 and the consolidated statements of operations, retained earnings, and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, Part V – Pre-changeover accounting standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinions.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of NAV CANADA as at August 31, 2015 and 2014, and its consolidated results of operations and its consolidated cash flows for the years then ended in accordance with Canadian generally accepted accounting principles, Part V – Pre-changeover accounting standards.

Chartered Professional Accountants, Licensed Public AccountantsOttawa, Canada October 23, 2015

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF NAV CANADA

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N AV C A N A D AConsolidated Balance SheetsAs at August 31 (in millions of dollars)

2015 2014

AssetsCurrent assets

Cash and cash equivalents $ 230 $ 193Accounts receivable and other (note 3) 135 114Current portion of capital lease obligations reserve fund (note 10) – 56Other 13 12

378 375Regulatory assets (notes 9 and 17) 57 36Reserve funds

Debt service (notes 4 and 17) 113 112 Capital lease obligations (note 10) – 190

113 302 Investments and other

Investments (note 17) 274 252Investment in preferred interests (notes 5 and 17) 159 96 Embedded derivatives on investment in preferred interests (notes 5 and 17) 108 87Long-term dividend receivable (notes 5 and 17) 15 7Long-term derivative assets (note 17) 3 8

559 450 Accrued pension and other benefits (notes 9 and 14) 189 276Capital assets

Property, plant and equipment (note 6) 645 651 Intangible assets (note 7) 975 1,006

1,620 1,657

$ 2,916 $ 3,096

LiabilitiesCurrent liabilities

Accounts payable, accrued liabilities and other $ 202 $ 187Derivative liabilities (note 17) 14 1Current portion of long-term debt (note 8) 225 25 Current portion of capital lease obligations (note 10) – 56

441 269Rate stabilization account (note 9) 77 76 Long-term liabilities

Long-term debt (notes 8 and 9) 1,725 1,950 Capital lease obligations (note 10) – 161 Regulatory liabilities (note 9) 348 336 Future income tax liability (note 5) 44 35 Other (note 11) 253 241

2,370 2,723

2,888 3,068Retained earnings 28 28

$ 2,916 $ 3,096

See accompanying notes to consolidated financial statements.

On behalf of the Board:

Marc Courtois, Director Linda Hohol, Director

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N AV C A N A D AConsolidated Statements of Operations and Retained EarningsYears ended August 31 (in millions of dollars)

2015 2014

RevenueCustomer service charges (note 12) $ 1,280 $ 1,226Other (note 12) 52 46

1,332 1,272 Rate stabilization (note 9) (40) (35)

1,292 1,237

Operating expensesSalaries and benefits (note 13) 858 817 Technical services 112 108 Facilities and maintenance 68 65 Other 58 53

1,096 1,043 Rate stabilization (note 9) (27) (33)

1,069 1,010

Other expenses Interest 102 104 Depreciation and amortization 136 137

238 241 Rate stabilization (note 9) (1) –

237 241Other loss (income)

Fair value adjustments and other (note 17) (3) (35)Rate stabilization (note 9) (11) 21

(14) (14)

1,292 1,237

Excess of expenses over revenue and other loss (income) (note 1) $ – $ –Retained earnings, beginning of year 28 28

Retained earnings, end of year $ 28 $ 28


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N AV C A N A D AConsolidated Statements of Cash FlowsYears ended August 31 (in millions of dollars)

2015 2014

Cash flows from:

OperationsReceipts from customer service charges $ 1,276 $ 1,219Other receipts 65 38 Payments to employees and suppliers (897) (877)Pension contributions – current service (note 14) (88) (79)Pension contributions – special payments (note 14) (27) (14)Other post-employment payments (note 14) (14) (15)Long-term disability plan surplus refund (note 14) 2 1Interest payments (103) (105)Interest receipts 6 6

220 174 Investing

Capital expenditures (110) (93)Investment in preferred interests (notes 5 and 17) (36) (35)Recoverable input tax payments on termination of capital lease transaction (note 3) (26) –Capital lease obligation reserve fund 1 –Settlement of derivative assets (1) 1Proceeds on investments from trust subject to restructuring (note 17) 11 –

(161) (127)Financing

Repayment of revenue bonds (note 8) (25) (25) Debt service reserve fund (1) (1)

(26) (26)Cash flows from operating, investing and financing activities 33 21

Effect of foreign exchange on cash and cash equivalents 4 1

Increase in cash and cash equivalents 37 22 Cash and cash equivalents, beginning of year 193 171

Cash and cash equivalents, end of year $ 230 $ 193


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N AV C A N A D ANotes to Consolidated Financial StatementsYears ended August 31, 2015 and 2014 (in millions of dollars)

1. NATUREOFOPERATIONS:

NAV CANADA was incorporated as a non-share capital corporation pursuant to Part II of the Canada Corporations Act to acquire, own, manage, operate, maintain and develop the Canadian civil air navigation system (the “ANS”), as defined in the Civil Air Navigation Services Commercialization Act (the “ANS Act”). NAV CANADA has been continued under the Canada Not-for-profit Corporations Act. The fundamental principles governing the mandate conferred on NAV CANADA by the ANS Act include the right to provide civil air navigation services and the exclusive ability to set and collect customer service charges for such services. The core business of NAV CANADA and its subsidiaries (collectively, the “Company”) is to provide air navigation services, for which it collects customer service charges. The core business is the Company’s only reportable segment. The Company’s air navigation services are provided primarily within Canada.

The charges for civil air navigation services provided by the Company are subject to the economic regulatory framework set out in the ANS Act, which provides that the Company may establish new charges and amend existing charges for its services. In establishing new charges or revising existing charges, the Company must follow the charging principles set out in the ANS Act. These principles prescribe that, among other things, charges must not be set at levels which, based on reasonable and prudent projections, would generate revenue exceeding the Company’s current and future financial requirements in relation to the provision of civil air navigation services. Pursuant to these principles, the board of directors of the Company (the “Board of Directors”), acting as rate regulator, approves the amount and timing of changes to customer service charges. The impacts of rate regulation on the Company’s financial statements are described in note 9.

The Company plans its operations to essentially result in an annual financial breakeven position after recording adjustments to the rate stabilization account (note 9).

The ANS Act requires that the Company communicate proposed new or revised charges to customers in advance of their introduction and to consult thereon. Customers may make representations to the Company as well as appeal revised charges to the Canadian Transportation Agency on the grounds that the Company either breached the charging principles in the ANS Act or failed to provide statutory notice.

NAV CANADA is exempt from income taxes as it meets the definition of a not-for-profit organization under the Income Tax Act (Canada); however, its subsidiaries operating in Canada and other jurisdictions are subject to Canadian and foreign taxes.

2. SIGNIFICANTACCOUNTINGPOLICIES:

(a) Financial statement presentation:

These consolidated financial statements include the accounts of the Company’s subsidiaries. All significant intercompany balances and transactions have been eliminated in these consolidated financial statements.

These financial statements are in accordance with Canadian generally accepted accounting principles, Part V – Pre-changeover accounting standards (“Canadian GAAP”).

Certain comparative figures have been reclassified to conform to the current year’s financial statement presentation.

(b) Rate regulation:

The timing of recognition of certain revenue and expenses differs from what would otherwise be expected for companies that are not subject to regulatory statutes governing the level of their charges, the effect of which is described in note 9.

(c) Changes in accounting policies:

There were no changes to accounting policies in the fiscal year ended August 31, 2015 (“fiscal 2015”).

(d) Use of estimates:

In preparing the financial statements, management must make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from such estimates. Significant management estimates include assumptions used in determining the current year’s pension and other post-employment benefits costs, the useful lives of capital assets, asset retirement obligations, fair value of investments as well as estimates related to collective agreements.

(e) Cash and cash equivalents:

Cash and cash equivalents are defined as cash and short-term investments with original terms to maturity of three months or less. Such short-term investments are recorded at fair value. As at August 31, 2015, cash and cash equivalents are comprised of interest bearing bank balances, net of outstanding cheques of $149 (August 31, 2014 – $95) and short-term investments with original terms to maturity of three months or less of $81 (August 31, 2014 – $98).

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2. SIGNIFICANTACCOUNTINGPOLICIES(CONTINUED):

(f) Investments:

All investments are designated as financial assets held-for-trading and are recorded at fair value with the exception of the Company’s investment in preferred interests of Aireon LLC (“Aireon”) which is designated as loans and receivables and is measured at amortized cost. Financial instruments not traded in an active market are valued using indicative market prices (if available) or a discounted cash flow approach. Fair value adjustments (including interest income and realized and unrealized gains and losses) are recognized in the statement of operations except for fair value adjustments of embedded derivatives related to the Company’s investment in Aireon, which are deferred using regulatory accounting.

(g) Capital assets:

Capital assets consist of property, plant and equipment and intangible assets. The majority of the Company’s capital assets are located in Canada.

Capital assets are carried at cost less accumulated depreciation and amortization. Capital assets are depreciated or amortized from the time an asset is substantially completed and ready for productive use. Capital assets are not depreciated or amortized while under development.

The cost of capital assets under development includes materials, labour and other costs that are directly attributable to the development of a capital asset. Interest costs are not capitalized.

Amounts received from third parties related to the installation, development or construction of capital assets are deducted from the carrying amount of the capital asset.

Capital assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in the normal course of business.

Depreciation and amortization of capital assets are calculated on a straight-line basis using the following estimated useful lives:

Capital assets

Estimated useful life (years)

Property, plant and equipmentBuildings 15 to 40Systems and equipment 3 to 25

Intangible assetsAir navigation right 46 Purchased software 5 to 20Internally generated software 5 to 20

(h) Revenue recognition:

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding sales taxes.

(i) Customer service charges:

Revenue is recognized as services are rendered. Rates for customer service charges are those approved by the Board of Directors, acting as rate regulator.

(ii) Other services:

Revenue is recognized as services are rendered. Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract. When the outcome of a transaction involving the rendering of services cannot be estimated reliably, revenue is recognized to the extent of recognized expenses that are considered recoverable.

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(i) Employee future benefits:

The Company has established and maintains defined benefit pension plans for its employees. The plans provide benefits based on age, length of service and best average earnings. Employee contribution rates vary by position and by plan. The majority of employees and retirees are members of a plan that provides benefits that are indexed for inflation. The Company also provides certain health care, life insurance and other post-employment benefits to eligible retirees and their dependents, and long-term disability benefits to eligible employees. The costs of providing these pension and other post-employment benefits are charged to operations as employees render service. The costs of these benefits are actuarially determined using the projected benefits method prorated on services and are based on assumptions that reflect management’s best estimates of expected investment performance, compensation, retirement ages of employees, health-care costs and other factors. The discount rates used to determine the present value of accrued pension and other benefits are based on market interest rates for long-term high quality debt instruments. The expected return on pension plan assets is based on a market-related value of plan assets, which recognizes investment gains and losses over a five-year period. The costs of providing long-term disability benefits are charged to operations as they occur.

Adjustments to post-employment benefits arising from plan amendments are amortized on a straight-line basis over the expected average remaining period of service of the employees covered by the amendments. Adjustments to post-employment benefits arising from transitional balances upon adoption of the current accounting policy on September 1, 2000 are being amortized on a straight-line basis over the expected average remaining period of service of the employees covered by the post-employment benefits, ending on August 31, 2015. Adjustments to long-term disability benefits arising from plan amendments are recognized immediately in the period in which they arise.

Amortization of actuarial gains and losses for post-employment benefits is recognized as a cost for the year if the unamortized net actuarial gain or loss at the beginning of the year exceeds 10% of the greater of the value of the accrued benefit obligation or the market-related value of the plans’ assets. The unamortized amount in excess of 10% of the greater of the value of the accrued benefit obligation and the market-related value of the plans’ assets is amortized over the average remaining service life of active employees (approximately 13 years). Actuarial gains and losses for long-term disability benefits are recognized immediately in the period in which they arise.

A curtailment loss is recognized in the income of the plan when it is probable that the curtailment will occur and the net effects can be reasonably estimated. A curtailment gain is recognized in the income of the plan when an event giving rise to a curtailment has occurred. Gains and losses on settlements of post-employment benefit plans are recognized by the plan when settlement occurs. The settlement and curtailment gains and losses are recognized in the Company’s statement of operations based on the plan year established by the measurement date of the plan. When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.

The cumulative excess of pension contributions over pension expense and the cumulative excess of long-term disability contributions over long-term disability expense are included in accrued pension and other benefits on the balance sheet (note 14). The accrued post-employment benefit liability other than pensions and the accrued pension liability for supplemental pension benefits in excess of tax limits for federally registered pension plans are included in other long-term liabilities (notes 11 and 14).

The Company uses an annual measurement date of May 31 for determining the accounting surplus or deficit of the pension, other post-employment and long-term disability plans and for establishing benefits costs for the ensuing fiscal year, all of which are dependent on the measurement factors at the measurement date.

The latest actuarial valuation for funding purposes of the Company’s pension plans was performed as at January 1, 2015, and future actuarial valuations for funding purposes are expected to be performed annually thereafter.

(j) Foreign currency translation:

Monetary assets and liabilities denominated in foreign currencies are translated at the prevailing rates of exchange at the balance sheet date. Transactions denominated in foreign currencies are translated at the exchange rates prevailing on the transaction dates. Foreign exchange gains and losses are included in the statement of operations, with the exception of the Company’s investment in preferred interests of Aireon (note 17 (c)).

(k) Asset retirement obligations:

An asset retirement obligation is recognized in the period in which the Company incurs a legal obligation to restore land, and/or remove buildings, systems or equipment, if reasonably estimable. The fair value of the liability is equal to the present value of the estimated future restoration or removal expenditures. When the liability is initially recorded, an equivalent amount is capitalized as an inherent cost of the associated buildings, systems or equipment. In each subsequent period, the carrying amount of the asset retirement obligation is adjusted to reflect the fair value of the obligation due to the passage of time and revisions to the timing or amount of cash flows. The capitalized cost is depreciated over the useful life of the capital asset.


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(k) Asset retirement obligations (continued):

Some of the Company’s air navigation system assets, particularly those located on leased sites, may have asset retirement obligations. The majority of these leases are long-term in nature with continuous renewal rights. All other leased facilities are renewed continuously, as the Company is required by the ANS Act to provide air navigation services indefinitely. As a result, no retirement date can be determined and consequently a reasonable estimate of the fair value of any related asset retirement obligations for these facilities cannot be made at this time. If at some future date it becomes possible to estimate the fair value of these asset retirement obligations, the obligation will be recognized at that time.

(l) Future accounting pronouncements – International Financial Reporting Standards (“IFRS”):

In February 2013, the Canadian Accounting Standards Board (“AcSB”) issued an amendment dated March 2013 to the Introduction to Part 1 of the CPA Canada Handbook allowing qualifying entities with rate-regulated activities to adopt IFRS for the first time no later than interim and annual financial statements relating to annual periods beginning on or after January 1, 2015. The Company is a qualifying entity and decided to avail itself of the deferral. As this optional deferral is not reflected in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, the Company applied for and received from the Ontario Securities Commission (“OSC”), the Company’s principal securities regulator, an exemption from, and deferral of, the mandatory changeover date to IFRS subject to certain conditions including, among others, the requirement to provide updated discussion in its annual and interim Management’s Discussion and Analysis regarding its preparations for changeover to IFRS and, if possible, the expected effect of the changeover on its financial statements. In November 2013, the AcSB decided against permitting further deferrals of the mandatory implementation date for first-time adoption of IFRS by rate-regulated entities. Accordingly, the Company will adopt IFRS in the fiscal year ending August 31, 2016, resulting in an IFRS transition date of September 1, 2014 due to the requirement for one year of comparative figures.

In September 2012, the International Accounting Standards Board (“IASB”) decided to restart its comprehensive project on rate-regulated activities with a discussion paper (“DP”) rather than an exposure draft. Restarting the comprehensive project with a DP allows the IASB to conduct a full analysis of the accounting impacts of the various forms of rate regulation; however, it increases the time required to complete the project. In September 2014, the IASB published the DP relating to a final standard which was open for comment until January 2015. Given the time needed to develop a final standard, in December 2012 the IASB decided to develop an interim standard, to provide temporary guidance on accounting for rate-regulated activities for first-time adopters of IFRS. In January 2014, the IASB published the interim standard, IFRS 14 Regulatory Deferral Accounts, which essentially allows the Company to continue to account for regulatory deferral account balances under IFRS in accordance with existing Canadian GAAP. The Company has elected to early adopt this standard upon its transition to IFRS. The interim standard introduces limited changes to previous accounting practices, which are primarily related to presentation and disclosure.

The transition from Canadian GAAP to IFRS is a significant undertaking that will materially affect the Company’s reported financial position and results of operations. As part of its transition to IFRS, the Company has actively monitored ongoing IASB projects, giving consideration to any proposed changes by the IASB as the Company finalized its policy determinations. The Company continues to actively monitor regulatory updates on IFRS adoption in Canada, as issued by the Canadian Securities Administrators and the OSC.

As the Company has been granted exemptive relief by the OSC and is permitted to avail itself of the optional deferral referred to above, the Company is required to quantify the estimated differences between IFRS and Canadian GAAP based on an IFRS transition date of September 1, 2014. The differences between IFRS and Canadian GAAP material to the Company’s statement of financial position are in the areas of employee benefits and the capital lease transaction. Although these differences are material, the Company has the ability to use regulatory accounting to offset some of these differences under the interim IFRS standard Regulatory Deferral Accounts.

Employee benefits, net of regulatory liabilities

i) Defined pension benefits

Policy determinations and impact analyses have been completed for the Company’s defined pension benefits.

Under Canadian GAAP, actuarial gains and losses are deferred off-balance sheet and amortized to earnings before rate stabilization using a “corridor” approach. Under IFRS, such actuarial gains and losses are recognized in other comprehensive income in the period they are incurred, with no subsequent reclassification to earnings. As a consequence, actuarial gains and losses that have been deferred off-balance sheet under Canadian GAAP will be recognized on the statement of financial position upon transition to IFRS. The transition to IFRS will not affect the determination of customer service charges, as the Company uses a rate-regulated approach in determining the recovery of pension costs (described in note 9).

The impact on transition to IFRS is based on actual balances at the date of transition. Based on the pension accounting deficit at September 1, 2014 of $1,174, the impact upon transition to IFRS on accrued defined pension benefits is expected to result in the elimination of the accrued pension asset of $268 recognized under Canadian GAAP, an increase in the accrued pension liability of $1,118 and a corresponding decrease in retained earnings (increase in the deficit) of $1,386. The Company expects to fully offset this impact by recording a regulatory debit of the same amount with a corresponding decrease in the deficit (increase in retained earnings) of $1,386.


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ii) Other post-employment benefits

Policy determinations and impact analyses have been completed for the Company’s other post-employment benefits.

Under Canadian GAAP, actuarial gains and losses are deferred off-balance sheet and amortized to earnings before rate stabilization using a “corridor” approach. Under IFRS, such actuarial gains and losses are recognized in other comprehensive income in the period they are incurred, with no subsequent reclassification to earnings. As a consequence, actuarial gains and losses that have been deferred off-balance sheet under Canadian GAAP will be recognized on the statement of financial position upon transition to IFRS. The Company intends to use a rate-regulated approach in determining the recovery, through customer service charges, of the impact on transition and subsequent re-measurements of other post-employment benefit costs under IFRS.

The impact on transition to IFRS is based on actual balances at the date of transition. Based on the actuarial valuations performed as at September 1, 2014, the impact upon transition to IFRS on other post-employment benefits is expected to result in an increase in accrued other post-employment benefit liabilities of $40 and a corresponding decrease in retained earnings (increase in the deficit) of $40. The Company expects to fully offset this impact by recording a regulatory debit of the same amount with a corresponding decrease in the deficit (increase in retained earnings) of $40.

iii) Accumulating sick leave

Policy determinations and impact analyses have been completed for the Company’s accumulating sick leave benefits.

Under Canadian GAAP, non-vesting accumulating sick leave is not recorded until the leave has been taken; only vested sick leave is recorded and actuarial gains and losses and past service costs are deferred off-balance sheet and amortized to earnings using a “corridor” approach. Under IFRS, a liability for non-vesting sick leave will be recorded and actuarial gains and losses on vested and non-vesting sick leave and vested past service costs will be recognized in net income in the period they are incurred.

The impact on transition to IFRS is based on actual balances at the date of transition. Based on the actuarial valuation performed as at September 1, 2014, the impact on transition to IFRS is expected to result in an increase to vested and unvested sick leave liabilities of $34 and a corresponding decrease in retained earnings (increase in the deficit) of $34. The Company expects to fully offset this impact by recording a regulatory debit of the same amount with a corresponding decrease in the deficit (increase in retained earnings) of $34.

iv) Long-term disability benefits

Policy determinations and impact analyses have been completed for the Company’s long-term disability benefits.

Under Canadian GAAP, long-term disability benefits are recognized as of the Company’s annual measurement date of May 31. Under IFRS, long-term disability benefits are measured as of the reporting date.

The impact on transition to IFRS is based on actual balances at the date of transition. Based on the actuarial valuation performed as at September 1, 2014, the impact upon transition to IFRS is expected to result in a decrease in the accrued long-term disability benefit asset of $4 and a corresponding decrease in retained earnings (increase in the deficit) of $4. The Company expects to fully offset this impact by recording a regulatory debit of the same amount with a corresponding decrease in the deficit (increase in retained earnings) of $4.

Capital lease transaction, net of regulatory liability

Policy determinations and impact analyses have been completed for the capital lease transaction.

Under Canadian GAAP, although the Company is considered to have a variable economic interest in NC ANS QTE 2003-1 Statutory Trust (the “Statutory Trust”), the special purpose entity that was created by a U.S. entity at the inception of the transaction, the Company is not considered to be the primary beneficiary of the Statutory Trust, and therefore is not required to consolidate this entity. Accordingly, capital lease obligations and the related payment undertaking agreements and reserve funds were recognized on the Company’s balance sheet upon entering into the transaction. Under IFRS, the Statutory Trust will be fully consolidated in the Company’s financial statements up to the termination of the capital lease transaction on August 6, 2015 (note 10), as the Company is exposed to and has the power to control the returns of the Statutory Trust. The capital lease obligation will be eliminated in the consolidated financial statements, and the Company will recognize the long-term debt owed by the Statutory Trust on the capital lease transaction.

As a result of these adjustments upon transitioning to IFRS as at September 1, 2014, the table below shows that there is no net impact on retained earnings. The risks associated with this transaction will continue to be disclosed under IFRS reporting.


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(l) Future accounting pronouncements – International Financial Reporting Standards (“IFRS”) (continued):

Transition adjustment debit (credit)

De-recognition of:Property, plant and equipment $ (10)Current portion of capital lease obligations 56Capital lease obligations 161Other regulatory liabilities 2

Recognition of:Current portion of long-term debt (56)Long-term debt (153)

Net impact on retained earnings $ –

Regulatory deferral accounts

As permitted under Canadian GAAP, the Company currently follows specific accounting policies unique to a rate-regulated business (note 9). Under IFRS, the use of regulatory accounting is permitted as discussed above and is expected to have limited impacts on transition to IFRS; these impacts will be related primarily to presentation and disclosure. On transition to IFRS, the Company intends to offset the impacts to retained earnings with adjustments to regulatory deferral accounts, as these impacts will be considered for rate setting using the Company’s regulatory approach.

The Company has also identified other immaterial differences to the statement of financial position as at the transition date between IFRS and Canadian GAAP, which have been considered as part of the transitional adjustments.

In addition to the impacts to the statement of financial position as at the transition date of September 1, 2014, the Company has quantified estimated impacts on the statements of operations and comprehensive income for the year ended August 31, 2015, after applying regulatory accounting, which consist mainly of presentation differences between Canadian GAAP and IFRS. The Company has also identified other immaterial accounting differences between Canadian GAAP and IFRS that are considered as part of the transitional adjustments. The total impact to comprehensive income for the year ended August 31, 2015, after applying regulatory accounting is $nil.

Although the adoption of IFRS will materially affect the Company’s reported financial position, adopting IFRS will not significantly affect customer service charges. This is because the Company will continue to follow a rate regulated approach in determining the rates it charges to customers for air navigation services.

3. ACCOUNTSRECEIVABLEANDOTHER:

Accounts receivable and other were comprised of the following:

August 31, 2015 August 31, 2014

Trade receivables $ 91 $ 89Accrued receivables and unbilled work in progress 19 27 Input tax receivables 26 –Allowance for doubtful accounts (1) (2)

$ 135 $ 114

In August 2015, the Company terminated its capital lease transaction (note 10) resulting in recoverable input tax credits of $26 as at August 31, 2015. These amounts have been received subsequent to year end.

The Company’s exposure to credit and foreign exchange risks, and to impairment losses related to accounts receivable is described in note 17 (c).


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4. RESERVEFUNDS:

Pursuant to the Master Trust Indenture (note 8), the Company is required to establish and maintain certain reserve funds, as follows:

Operations and maintenance reserve fund

The Company is required to maintain a reserve fund of at least 25% of its prior year’s annual operating and maintenance expenses, as defined in the Master Trust Indenture. As at August 31, 2015, the Company met this requirement with an allocation of $270 in undrawn availability under its committed credit facility (note 17 (c)). If at any fiscal year end the amount in the operations and maintenance reserve fund is less than 25% of the Company’s operating and maintenance expense for the year (before rate stabilization, depreciation, amortization, interest and extraordinary expenses), the Company must, at a minimum, increase the balance in the fund to the required level over the following four fiscal quarters through additional contributions or an allocation of its committed credit facility.

Debt service reserve fund

At the end of each fiscal year, the amount in the debt service reserve fund must be equal to the annual projected debt service requirement (principal amortization, interest and fees) on outstanding Master Trust Indenture obligations determined in the manner required by the Master Trust Indenture. Any additional contributions required to be made to the debt service reserve fund must, at a minimum, be made in equal instalments over the following four fiscal quarters. Funds deposited into the debt service reserve fund are held by a Trustee and are released only to pay principal, interest and fees owing in respect of outstanding borrowings under the Master Trust Indenture except that, provided no event of default has occurred and is continuing, surplus funds may be released from time to time at the request of the Company. As at August 31, 2015, the Company had a balance of $113 (August 31, 2014 – $112) of cash and investments in the debt service reserve fund.

The Company met all reserve fund requirements as at August 31, 2015.

The above reserve funds are restricted for the purposes described above.

Pursuant to the General Obligation Indenture (note 8), the Company is required to maintain certain liquidity levels similar to the reserve fund requirements of the Master Trust Indenture. Specifically, the Company must maintain a minimum liquidity level equal to twelve months net interest expense plus 25% of the annual operating and maintenance expenses. Liquidity is defined to include all cash and qualified investments, amounts held in the operations and maintenance and debt service reserve funds and any undrawn amounts available under a committed credit facility. In addition, the Company must maintain cash liquidity equal to twelve months net interest expense. Cash liquidity includes cash and qualified investments held in the reserve funds maintained under the Master Trust Indenture.

The Company met the liquidity covenants of the General Obligation Indenture for the year ended August 31, 2015.

5. INVESTMENTINPREFERREDINTERESTSOFAIREONLLC:

In November 2012, the Company entered into agreements (the “November 2012 agreements”) setting out the terms of its participation in Aireon, a joint venture with Iridium Communications Inc. (“Iridium”). This arrangement has been classified as a joint venture since the Company has joint control over Aireon’s relevant activities. The Company’s investment in Aireon is in preferred interests, which are redeemable and convertible to common equity as described below. As at August 31, 2015, the Company’s share of Aireon’s net residual assets is $nil and therefore the Company’s share of Aireon’s net income (loss) is $nil. The investment in preferred interests of Aireon is in substance a debt instrument. The instrument’s conversion feature into common equity has been bifurcated and treated as a derivative, and the host contract has been classified as loans and receivables.

Aireon’s mandate is to provide global satellite-based surveillance capability for air navigation service providers (“ANSPs”) around the world through Automatic Dependent Surveillance-Broadcast (“ADS-B”) receivers built as an additional payload on the Iridium NEXT satellite constellation. It is expected that Iridium’s launch schedule will enable Aireon to commence commercial operations by calendar year 2018.

Under the terms of the November 2012 agreements, the Company’s overall investment in Aireon is expected to be implemented in five stages for up to a total of $150 U.S. ($197 CDN) by calendar year 2017. Each stage is subject to the successful achievement by Aireon and Iridium of certain specific milestones with respect to, among other things, development of the ADS-B payload, deployment of the Iridium NEXT satellite constellation, marketing Aireon’s ADS-B service to potential ANSP customers, and regulatory approvals of the technology’s use.

In December 2013, the November 2012 agreements were amended to provide for the making of an aggregate investment of $120 U.S. ($158 CDN) in Aireon by three additional major ANSPs, namely ENAV (Italy), the Irish Aviation Authority (“IAA”), and Naviair (Denmark) (the “Additional Investors”). The first stage investment in Aireon by the Additional Investors was made in February 2014, their second stage investment was completed in January 2015 and the remaining two stages are expected to be made by the Additional Investors as key milestones are met over the 2015–2017 calendar year time period.


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5. INVESTMENTINPREFERREDINTERESTSOFAIREONLLC(CONTINUED):

In accordance with the amended agreements, a portion of Iridium’s existing common equity interest in Aireon will be redeemed for a payment from Aireon of $120 U.S. ($158 CDN) to finalize the ownership interests of all of Aireon’s investors. Upon this redemption and the related conversion of all preferred interests into common equity interests, the Company will hold 51% of the fully diluted common equity interests of Aireon, ENAV will hold 12.5%, and each of IAA and Naviair will hold 6%, with the remaining 24.5% being retained by Iridium. This redemption is expected to occur in calendar year 2018.

The Company’s investment in preferred interests of Aireon provides for a 5% annual cumulative dividend (except for the $40 U.S. ($53 CDN) second stage investment that provides for a 10% annual cumulative dividend), calculated from the date of issuance. The preferred interests are redeemable for cash in three annual instalments beginning in November 2020 in the event the preferred interests have not been converted to common equity or redeemed by that time. The cash payments for these mandatory redemptions will include any unpaid dividends. As long as the conversion feature remains unexercised, the Company’s investment in preferred interests does not give the Company any rights to the residual net assets of Aireon and accordingly the financial instrument does not show characteristics of an equity instrument but rather of debt.

The Company may at any time and from time to time elect to convert all or a portion of its preferred interests in Aireon into common equity interests. This conversion feature is accounted for as an embedded derivative.

Upon the initial investment by the Additional Investors in February 2014, the price paid by the Additional Investors for preferred interests in Aireon with substantially the same characteristics was considered to be a reliable estimate of the fair value of Aireon. The Company has also used this valuation to measure the fair value of its investment in Aireon as at August 31, 2015, as it was determined that this represents the best estimate of fair value (note 17).

As at August 31, 2015, the Company had completed the first three stages of its investment in Aireon, and is represented by four out of the eleven directors on Aireon’s board of directors. The Company’s cumulative preferred interest investment of $159 (including transaction costs) in Aireon as at August 31, 2015 has been classified as loans and receivables within financial assets and is measured at amortized cost.

As at August 31, 2015, the Company’s fully diluted common equity interest on a post conversion basis is 36.5% (August 31, 2014 – 26.9%).

The Company’s future income tax assets and liabilities as at August 31, 2015 relate to its investment in Aireon held in one of the Company’s wholly-owned subsidiaries. Aireon is a limited liability company that is headquartered in the United States and is treated as a partnership for U.S federal income tax purposes, and therefore is generally not subject to income taxes directly. Rather, the Company, Iridium and the Additional Investors are each allocated a portion of Aireon’s taxable income (loss) based on their respective tax basis interests in Aireon’s income or loss under U.S. tax regulations. The Company has recognized future income tax liabilities amounting to $39 U.S. ($52 CDN) (August 31, 2014 – $42 CDN) primarily due to the fair value of the embedded derivative on the Company’s investment in Aireon. The Company has recognized future tax assets amounting to $6 U.S. ($8 CDN) (August 31, 2014 – $7 CDN) for operating losses and research and development expenses carried forward that have been allocated to the Company’s subsidiary. The recognition of future tax assets is based on management’s assessment that their realization is probable. The operating losses carried forward will begin to expire in calendar year 2033.

The future income tax assets and liabilities are presented net on the balance sheet as a future income tax liability of $33 U.S. ($44 CDN).


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The table below shows the balance sheet impact of the Company’s investment in preferred interests of Aireon and the impact of the use of regulatory accounting relating to the investment:

August 31, 2015 August 31, 2014

Current assetsDerivative assets and other $ 3 $ –

Investments and otherInvestment in preferred interests 159 96Embedded derivative on investment in preferred interests 108 87Long-term dividend receivable 15 7

Derivative liabilities – (1)Future income tax liability (44) (35)

Balance sheet impact of the investment in preferred interests of Aireon, before regulatory accounting

$ 241

$ 154

Regulatory assets

Derivative liabilities $ – $ 1

Future income tax liability 44 35

$ 44 $ 36

Regulatory liabilities

Embedded derivative on investment in preferred interests $ (108) $ (87)

Unrealized foreign exchange gain on the investment (30) (3)

Unrealized fair value gain on foreign exchange hedging transaction (3) –

Long-term dividend receivable (15) (7)

$ (156) $ (97)

Net balance sheet impact of the investment in preferred interests of Aireon, after regulatory accounting

$ 129

$ 93

The net balance sheet impact of the Company’s investment in preferred interests of Aireon above reflects the actual amounts paid for the Company’s investment in Aireon (at the exchange rates prevailing on the dates of the transactions and including unamortized transaction costs). As at August 31, 2015, the net regulatory accounting balances of $112 (August 31, 2014 – $61) comprised of regulatory assets of $44 (August 31, 2014 – $36) and regulatory liabilities of $156 (August 31, 2014 – $97) referred to above, defer the accounting recognition of transactions related to the Company’s investment in Aireon on the Company’s consolidated statements of operations. As a result, there is no impact on the Company’s consolidated statements of operations for the year ended August 31, 2015 related to the Company’s investment in Aireon. These amounts are not considered for rate setting purposes until realized in cash.

6. PROPERTY,PLANTANDEQUIPMENT:

Property, plant and equipment were comprised of the following:

August 31, 2015 August 31, 2014

Cost

Accumulated depreciation

Net book value

Cost

Accumulated depreciation

Net book value

Land and buildings $ 377 $ (219) $ 158 $ 368 $ (206) $ 162Systems and equipment 1,174 (759) 415 1,131 (706) 425Property, plant and equipment under development

72

–

72

54

–

54

1,623 (978) 645 1,553 (912) 641 Net increase from capital lease – – – 30 (20) 10

$ 1,623 $ (978) $ 645 $ 1,583 $ (932) $ 651

During the year ended August 31, 2015, the Company capitalized to property, plant and equipment $19 of internal labour and travel costs (August 31, 2014 – $21).

On August 6, 2015, the Company terminated its remaining capital lease transaction by negotiating an acceleration of the purchase option (note 10). As at August 31, 2015, the cost of assets under the capital lease was $nil (August 31, 2014 – $274), and accumulated depreciation and other credits amounted to $nil (August 31, 2014 – $246).

The Company recorded depreciation expense of $81 during the year ended August 31, 2015 (August 31, 2014 – $81).


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7. INTANGIBLEASSETS:

Intangible assets were comprised of the following:

August 31, 2015 August 31, 2014

Cost

Accumulated amortization

Net book value

Cost

Accumulated amortization

Net book value

Air navigation right $ 1,367 $ (690) $ 677 $ 1,367 $ (665) $ 702Purchased software 287 (157) 130 285 (141) 144Internally developed software 221 (81) 140 207 (68) 139 Intangible assets under development 24 – 24 17 – 17Goodwill 4 – 4 4 – 4

$ 1,903 $ (928) $ 975 $ 1,880 $ (874) $ 1,006

During the year ended August 31, 2015, the Company capitalized to intangible assets $15 of internal labour and travel costs (August 31, 2014 – $10).

The Company recorded amortization expense of $55 during the year ended August 31, 2015 (August 31, 2014 – $56).

8. LONG-TERMDEBT:

Because NAV CANADA is a non-share capital corporation, the Company’s initial acquisition of the ANS and its ongoing requirements are financed with debt. Until February 21, 2006, all indebtedness was incurred and secured under a Master Trust Indenture that provided the Company with a maximum borrowing capacity, which declines each year. On February 21, 2006, the Company entered into a new indenture (the “General Obligation Indenture”) that established an unsecured borrowing program that qualifies as subordinated debt under the Master Trust Indenture. The borrowing capacity under the General Obligation Indenture does not decline each year. In addition, there is no limit on the issuance of notes under the General Obligation Indenture so long as the Company is able to meet an additional indebtedness test.

(a) Security:

The Master Trust Indenture established a borrowing platform secured by an assignment of revenue and the debt service reserve fund. The General Obligation Indenture is unsecured, but provides a set of positive and negative covenants similar to those of the Master Trust Indenture. In addition, under the terms of the General Obligation Indenture, no further indebtedness may be incurred under the Master Trust Indenture; furthermore, the amount of the Company’s $675 syndicated bank credit facility (note 17 (c)) that is secured under the Master Trust Indenture is limited to the declining amount of outstanding bonds issued under the Master Trust Indenture. As at August 31, 2015, this amount is $550 and will decline by $25 on March 1 of every year in conjunction with the annual principal repayment of the series 97-2 amortizing bonds. The remaining $125 of the $675 credit facility ranks pari passu to the borrowings under the General Obligation Indenture and will increase by $25 on March 1 of each year to offset the decline in the amount secured under the Master Trust Indenture. The $550 portion of the credit facility along with the $250 series 96-3 bonds and $300 series 97-2 bonds gives a total of $1,100 of indebtedness secured under the Master Trust Indenture and ranking ahead of General Obligation Indenture debt.

As bonds mature or are redeemed under the Master Trust Indenture, they may be replaced with notes issued under the General Obligation Indenture. Borrowings under the General Obligation Indenture are unsecured and repayment is subordinated and postponed to prior payment of Master Trust Indenture obligations unless the Company can meet an additional indebtedness test.


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(b) Borrowings:

Long-term debt outstanding was comprised of the following:

August 31, 2015 August 31, 2014

Bonds and notes payableIssued under the Master Trust Indenture:

7.40% revenue bonds, series 96-3, maturing June 1, 2027 $ 250 $ 2507.56% amortizing revenue bonds, series 97-2, maturing March 1, 2027 300 325

550 575

Issued under the General Obligation Indenture:4.397% general obligation notes, series MTN 2011-1, maturing February 18, 2021 250 2505.304% general obligation notes, series MTN 2009-1, maturing April 17, 2019 350 3501.949% general obligation notes, series MTN 2013-1, maturing April 19, 2018 350 3504.713% general obligation notes, series MTN 2006-1, maturing February 24, 2016 450 450

1,400 1,400

Total bonds and notes payable 1,950 1,975Adjusted for deferred financing costs and discounts (6) (7)Adjusted for regulatory realized hedging transaction asset (note 9 (h)) (1) (1)Adjusted for regulatory realized hedging transaction liability (note 9 (i)) 7 8

Carrying value of total bonds and notes payable 1,950 1,975Less: current portion (1) (225) (25)

Total long-term debt outstanding $ 1,725 $ 1,950

(1) The Company intends to refinance $250 of the $450 principal amount of the series MTN 2006-1 general obligation notes on a long-term basis on or before their maturity date of February 24, 2016 and has the ability to do so by utilizing the Company’s undrawn credit facility, if required (see note 17 (c)). Accordingly, the remaining $200 is classified in the current portion of long-term debt together with $25 related to the series 97-2 amortizing revenue bonds.

The Company is in compliance with all covenants of the Master Trust Indenture and the General Obligation Indenture as at August 31, 2015.

The series 96-3 and 97-2 bonds and the series MTN 2009-1, MTN 2006-1, MTN 2011-1 and MTN 2013-1 notes are redeemable in whole or in part at the option of the Company at any time at the higher of par and the Canada yield price plus a redemption premium. The series 97-2 bonds are amortizing bonds repayable in 20 consecutive equal annual instalments of principal payable on March 1 of each year. The instalment payments commenced on March 1, 2008 and will be made until maturity on March 1, 2027. The instalment of principal due within the next twelve months relating to these amortizing bonds is classified in the current portion of long-term debt.


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9. FINANCIALSTATEMENTIMPACTOFRATEREGULATION:

In accordance with disclosures required for entities subject to rate regulation, the Company’s regulatory balances are as follows:

August 31, 2015 August 31, 2014

Regulatory assetsRegulatory unrealized hedging transaction assets (a) $ 13 $ 1Regulatory future income tax (b) 44 35

$ 57 $ 36

Rate stabilization account liabilityOperating deferrals (c) $ 96 $ 82Gains on capital lease transaction (d) – 9 Fair value adjustments (e) (19) (15)

$ 77 $ 76

Regulatory liabilitiesRegulatory pension and long-term disability liabilities (f) $ 189 $ 229Regulatory unrealized hedging transactions liabilities (a) 6 8 Other regulatory liabilities (g) 153 99

$ 348 $ 336

Long-term debtRegulatory realized hedging transaction asset (h) $ (1) $ (1)Regulatory realized hedging transaction liability (i) 7 8

$ 6 $ 7

In order to mitigate the effect on its operations of unpredictable and uncontrollable factors, principally unanticipated fluctuations in air traffic levels, the Company maintains a rate stabilization mechanism. Amounts are added to or deducted from the rate stabilization account based upon variations from amounts used when establishing customer service charges.

When establishing customer service charges, the Board of Directors considers the balance in the rate stabilization account, adjusted notionally for the non-credit related portion of the fair value variance from face value on investments. The Board of Directors also considers the balance of the accrued pension benefit asset (net of its regulatory liability) when determining the level of customer service charges, as discussed in note 9 (f) below.

The long-term target liability balance of the rate stabilization account is 7.5% of total planned annual expenses net of other loss (income), excluding non-recurring items, on an ongoing basis. For fiscal 2015, the target balance is $98 (for the fiscal year ended August 31, 2014 (“fiscal 2014”) – $93). As at August 31, 2015, the balance in the rate stabilization account adjusted notionally for the $21 net non-credit related fair value variance from face value on investments (note 17 (b)) and after recording additional pension expense as described in note 9 (f) below, was a liability of $98 (August 31, 2014 – $93).


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The table below shows the impact of rate stabilization adjustments on the excess of expenses over revenue and other loss (income) as reported in the statements of operations:

August 31, 2015 August 31, 2014

Before rate stabilization:Revenue $ 1,332 $ 1,272Expenses 1,334 1,284Other income (3) (35)

1 23Rate stabilization adjustments:

Favourable variances from planned results (30) (56)Initial approved adjustment (1) (8) (11) Additional drawdown related to pension (2) 37 44

(1) (23)

Excess of expenses over revenue and other loss (income), after rate stabilization $ – $ –

(1) The initial approved adjustment is combined with the revenue variances from planned results on the statements of operations.

(2) The additional drawdown related to pension is combined with the operating expenses variances from planned results on the statements of operations.

The following are the changes in the rate stabilization account for the years ended:

August 31, 2015 August 31, 2014

Liability balance, beginning of period $ 76 $ 53Variances from planned results:

Revenue higher than planned, before approved adjustment 32 24Operating expenses lower than planned, before drawdown related to pension 10 11Other expenses higher than planned (1) –Other income higher (lower) than planned (11) 21Total variances from planned results 30 56

106 109

Initial approved adjustment (j) 8 11Additional drawdown related to pension (37) (44)

Liability balance, end of period $ 77 $ 76

(a) Regulatory unrealized hedging transactions assets and (liabilities):

Regulatory unrealized hedging transactions assets and (liabilities) are as follows:

August 31, 2015 August 31, 2014

Unrealized fair value losses (gains) on foreign exchange hedging transactions (1) $ (3) $ 1

Unrealized fair value losses (gains) on forward-dated interest rate swap agreements maturing in February 2016 (2) 13 (8)Unrealized fair value losses (gains) on forward-dated interest rate swap agreements maturing in April 2019 (2) (3) –

$ 7 $ (7)

(1) The Company has hedged its foreign exchange risk on its fourth stage investment in preferred interests in Aireon, which is expected to be made in the fiscal year ending August 31, 2016.

(2) The Company intends to cash settle these forward-dated interest rate swap agreements in February 2016 and April 2019 respectively, when the anticipated refinancings are expected to occur. When the anticipated transactions occur, the realized gains or losses will be reclassified to a regulatory realized hedging transaction asset or liability (notes 9 (h) and 9 (i)).


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9. FINANCIALSTATEMENTIMPACTOFRATEREGULATION(CONTINUED):

(b) Regulatory future income tax:

As at August 31, 2015, the Company had a future income tax liability of $44 (August 31, 2014 – $35) within one of its wholly-owned subsidiaries due to temporary differences (note 5). Income taxes are not considered for rate setting purposes until the temporary differences are realized. The recognition of income taxes on the Company’s consolidated statements of operations has been fully offset by the application of regulatory accounting (note 5).

(c) Operating deferrals:

Should actual revenue exceed the Company’s actual expenses, such excess is reflected as a liability (or as a reduction of an asset) in the rate stabilization account. Conversely, should actual revenue be less than actual expenses, such shortfall is reflected as an asset (or as a reduction of a liability) in the rate stabilization account. An asset balance in the rate stabilization account represents amounts recoverable through future customer service charges, while a liability balance represents amounts returnable through future customer service charges.

(d) Gains on capital lease transaction:

During fiscal 2004, the Company realized $56 of net present value benefits (net of expenses) under two capital lease transactions, which were reflected as gains in the Company’s financial statements for that year using regulatory accounting. Under Canadian GAAP applicable to companies that are not subject to regulatory statutes governing the level of their charges, these benefits would have been recorded over the terms of the long-term capital leases.

On June 7, 2012 the Company terminated one of its two capital lease transactions and on August 6, 2015 the Company terminated its remaining capital lease transaction (note 10). As a result, the gains related to both capital lease transactions have been fully realized under regulatory accounting and under Canadian GAAP applicable to companies not subject to regulatory statutes governing the level of their charges.

(e) Fair value adjustments:

As at August 31, 2015, the total of fair value variances from face value on investments recorded on the Company’s balance sheet was $22 (August 31, 2014 – $18), of which $19 (August 31, 2014 – $15) is from fair value adjustment losses recorded on investments currently held by the Company. During the year ended August 31, 2015, this amount increased due to negative fair value adjustments of $4 on its investments based on higher discount rates used to fair value the investments, which is consistent with changes in market conditions during the year (note 17 (b)).

(f) Regulatory pension and long-term disability liabilities:

Included in regulatory liabilities as at August 31, 2015 is $181 (August 31, 2014 – $221) relating to the recovery through customer service charges of pension contributions and $8 (August 31, 2014 – $8) of long-term disability (“LTD”) contributions (note 14). Accrued pension and other benefit assets, net of their regulatory liabilities are as follows:

August 31, 2015 August 31, 2014

Pension LTD Total Total

Accrued pension and other benefit assets (note 14) $ 181 $ 8 $ 189 $ 276

Regulatory liabilitiesBalance, beginning of period (221) (8) (229) (269)Regulatory decrease 77 – 77 84 Additional rate stabilization drawdown related to pension (37) – (37) (44)

Balance, end of period (181) (8) (189) (229)

Accrued pension and other benefit assets, net of their regulatory liabilities

$ –

$ –

$ –

$ 47

The accrued pension and other benefit assets, net of their related regulatory liabilities, represent the cumulative amounts by which Company contributions to the pension and LTD benefit plans have exceeded the amounts expensed.

The Company uses a regulatory approach to determine its expense for pension and LTD, which is charged to the statement of operations. The objective of this approach is to establish benefit expense to reflect the cash cost of the plans. The difference between the pension and LTD expense for regulatory purposes and pension benefit and LTD costs as determined by Canadian GAAP Section 3461, Employee Future Benefits, is included in pension and LTD expense in salary and benefits expense on the statement of operations and in the pension and LTD regulatory liability on the balance sheet.


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For several years prior to fiscal 2008, pension expense was lower than the Company’s actual contributions to the pension plan. In 2008, the Board of Directors approved a policy by which the fiscal 2008 cumulative balance of contributions made in excess of pension expense would be expensed over a period no longer than 15 years. Accordingly for fiscal 2015, the regulatory approach for determining annual pension expense for the Company’s registered pension plans includes an amount equal to the Company’s originally planned annual pension contributions ($84), going concern special payments ($24), plus an amount ($19) to reduce the net cumulative balance of recoverable pension contributions made in the past in excess of pension expense plus an amount related to supplemental pension benefits in excess of tax limits for federally registered pension plans ($5).

To further accelerate the reduction of the balance in the accrued pension benefit asset (net of its regulatory liability), the Board of Directors approved, effective September 1, 2010, that if at the end of a quarterly reporting period the “notional” balance (described above) of the rate stabilization account is greater than the target balance, the excess over the target will be recorded as additional pension expense in the reporting period. For the year ended August 31, 2015 this amounted to an additional $37 (year ended August 31, 2014 – $44) of pension expense. During the year ended August 31, 2015, the accrued pension benefit asset, net of its related regulatory liability, decreased by $47 from $47 as at August 31, 2014 to $nil as at August 31, 2015 resulting in a full recovery of the cumulative balance of pension contributions made in excess of pension expense.

(g) Other regulatory liabilities:

Other regulatory liabilities are as follows:

August 31, 2015 August 31, 2014

Regulatory liabilities on investment in preferred interests (1)

Embedded derivative on investment in preferred interests $ 108 $ 87Unrealized foreign currency translation gains on investment in preferred interests 30 3 Long-term dividend receivable 15 7

Unrealized foreign currency translation gains on net capital lease obligations – 2

$ 153 $ 99

(1) The fair value adjustment on the embedded derivative, the unrealized foreign currency translation gains, and the accrued dividends on preferred interests are not considered for rate setting purposes until realized in cash. The recognition of these items on the Company’s consolidated statements of operations has been fully offset by the application of regulatory accounting (note 5).

(h) Regulatory realized hedging transaction asset:

The regulatory realized hedging transaction asset as at August 31, 2015 consists of the remaining $1 (August 31, 2014 – $1) deferred loss on the bond forward that was settled April 16, 2013, which has been applied to the series MTN 2013-1 obligation.

(i) Regulatory realized hedging transaction liability:

The regulatory realized hedging transaction liability as at August 31, 2015 consists of the remaining $7 (August 31, 2014 – $8) deferred gain on the bond forward settled February 18, 2011, which has been applied to the series MTN 2011-1 obligation.

(j) Initial approved adjustment:

The Board of Directors approved an $8 transfer to the rate stabilization account to be recorded in fiscal 2015 (fiscal 2014 – $11) in order to achieve planned breakeven results of operations. The adjustment was transferred from revenue evenly throughout the year.

10.CAPITALLEASETRANSACTION:

During fiscal 2004, the Company entered into two long-term lease transactions with U.S. entities. These transactions involved the lease/leaseback of certain of the Company’s air navigation equipment and software for periods of 24 years, with purchase options after 20 years. As a result of the leaseback transactions, the Company had long-term capital lease obligations that were reflected on the balance sheet. These were collateralized through payment undertaking agreements using the proceeds that were received on the head lease transactions (included in the capital lease obligations reserve fund). On June 7, 2012, the Company terminated one of the two capital lease transactions.

On August 6, 2015, the Company terminated its remaining capital lease transaction by negotiating an acceleration of the purchase option. This termination resulted in a $nil net impact on the statement of operations after transaction costs.


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10.CAPITALLEASETRANSACTION(CONTINUED):

The de-recognition of the balances as a result of the termination of the capital lease on August 6, 2015 had the following impacts on the Company’s financial statements:

Adjustment debit (credit)

Current portion of capital lease obligations reserve fund $ (22)Capital lease obligations reserve fund (174)Property, plant and equipment (9)Current portion of capital lease obligations 22Capital lease obligations 183

Net impact on termination of capital lease transaction $ –

This capital lease transaction is included on the consolidated balance sheets as follows:

August 31, 2015 August 31, 2014

Current portion of capital lease obligations reserve fund $ – $ 56Capital lease payment undertaking agreements reserve fund – 153 Property, plant and equipment – 10Current portion of capital lease obligations – (56)Capital lease obligations – (161)Other regulatory liabilities – 2

$ – $ –

Interest expense during the year ended August 31, 2015 of $10 (year ended August 31, 2014 – $11) relating to the capital lease obligations, and the amortization of the net increase from the capital lease (note 6) are fully offset by, and are recorded net of, interest income of $11 (year ended August 31, 2014 – $12) from the payment undertaking agreements included in the capital lease obligations reserve fund.

11. OTHERLONG-TERMLIABILITIES:

Other long-term liabilities were comprised of the following:

August 31, 2015 August 31, 2014

Accrued post-employment benefit liabilities other than pensions (note 14) $ 194 $ 183Accrued pension benefit liability – supplemental pension benefits (note 14) 59 56 Non-derivative financial liability (note 17 (a)) – 2

$ 253 $ 241


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12.REVENUE:

Customer service charges by type of service provided were as follows:

August 31, 2015 August 31, 2014

Enroute $ 679 $ 641Terminal 476 464Daily / annual / quarterly 78 75North Atlantic and international communication 47 46

$ 1,280 $ 1,226

Customer service charges include:

i) Enroute charges related to air navigation services provided or made available to aircraft during the enroute phase of the flight, whether they overfly Canadian-controlled airspace or take-off or land in Canada;

ii) Terminal charges related to air navigation services provided or made available to aircraft at or in the vicinity of an airport;

iii) Daily / annual / quarterly charges related to enroute and terminal air navigation services. These charges generally apply to propeller aircraft; and

iv) North Atlantic and international communication charges related to certain air navigation and communication services provided or made available to aircraft while in airspace over the North Atlantic ocean, which is outside of Canadian sovereign airspace but for which Canada has air traffic control responsibility pursuant to international agreements. The international communication charges also include services provided or made available while in Canadian airspace in the north.

Other revenue was as follows:

August 31, 2015 August 31, 2014

Service and development contracts $ 29 $ 26Conference centre services 10 12Aeronautical publications 5 4Other 8 4

$ 52 $ 46

The Company has two customers that each individually represent more than 10% of total revenue before rate stabilization. For the year ended August 31, 2015, revenue from the largest customer was $236 (year ended August 31, 2014 – $223) and revenue from the second largest customer was $152 (year ended August 31, 2014 – $146), together representing 29% (year ended August 31, 2014 – 29%) of the total revenue of the Company before rate stabilization. The revenue from these two major customers arose from air navigation services.

13.SALARIESANDBENEFITS:

Salaries and benefits expenses were comprised of the following:

August 31, 2015 August 31, 2014

Salaries and other $ 530 $ 523Overtime 94 86Fringe benefits 68 62Pensions (notes 9 (f) and 14) 166 146

$ 858 $ 817


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14.EMPLOYEEFUTUREBENEFITS:

The Company maintains defined benefit plans that provide pension, other post-employment and LTD benefits to employees. The Company uses an annual measurement date of May 31 when determining the accounting surplus or deficit of its plans and establishing benefit costs for the coming fiscal year, both of which are dependent on the measurement factors at that time.

Information about the Company’s pension benefits and LTD plans, using the measurement date of May 31, is as follows:

Pension benefits LTD Total

2015 2014 2015 2014 2015 2014

Change in benefit obligations

Benefit obligations at June 1, prior year $ 5,337 $ 4,863 $ 30 $ 34 $ 5,367 $ 4,897Current service cost 165 158 – – 165 158 Interest cost on benefit obligations 229 204 – – 229 204 Benefits paid (169) (169) (6) (6) (175) (175)Actuarial losses 394 281 7 2 401 283

Benefit obligations at May 31 5,956 5,337 31 30 5,987 5,367

Change in plan assetsFair value of plan assets at June 1, prior year 4,340 3,974 39 35 4,379 4,009 Actual gains on plan assets 685 420 – – 685 420Employer contributions 118 82 4 10 122 92 Plan participants' contributions 34 33 – – 34 33 Benefits paid (169) (169) (6) (6) (175) (175)

Fair value of plan assets at May 31 5,008 4,340 37 39 5,045 4,379

Funded status at May 31 surplus (deficit) (948) (997) 6 9 (942) (988)Unamortized net losses not yet recognized 1,019 1,158 – – 1,019 1,158 Unamortized past service cost 14 15 – – 14 15 Employer contributions (refunds) after May 31 37 36 2 (1) 39 35

122 212 8 8 130 220

Reclassification to accrued pension benefit liability – supplemental pension benefits

59

56

–

–

59

56

Accrued pension and other benefits asset at August 31

$ 181

$ 268

$ 8

$ 8

$ 189

$ 276

The Company has fully recovered the balance of the accrued pension benefit asset (net of its related regulatory liability) through customer service charges (see note 9 (f)).


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Information about the Company’s other post-employment benefit plans, using the measurement date of May 31, is as follows:

Other benefits

2015 2014

Change in benefit obligations

Benefit obligations at June 1, prior year $ 222 $ 201Current service cost 7 7 Interest cost on benefit obligations 9 8 Benefits paid (6) (8)Actuarial losses 8 14

Benefit obligations at May 31 240 222

Change in plan assetsEmployer contributions 6 8 Benefits paid (6) (8)

Deficit at May 31 (240) (222)Unamortized net losses not yet recognized 36 28 Unamortized past service cost 8 9Employer contributions after May 31 2 2

Accrued benefit liability at August 31 $ (194) $ (183)

Weighted-average assumptions at the measurement date of May 31 were as follows:

Pension benefits LTD Other benefits

2015 2014 2015 2014 2015 2014

Benefit obligations at end of year

Discount rate 3.90% 4.30% 2.50% 2.72% 3.73% 4.09%Rate of inflation 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Benefit costs during the yearDiscount rate 4.30% 4.20% 2.50% 2.72% 4.09% 4.06%Rate of inflation 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%Expected long-term rate of return on plan assets

5.70%

5.90%

– %

– %

– %

– %

The market-based discount rate is based on the yield on long-term high quality corporate bonds, with maturities matching the estimated cash flows of the plan. A 0.25% decrease in the discount rate would increase the accounting deficit by approximately $296. Conversely, a 0.25% increase in the discount rate would decrease the accounting deficit by approximately $261.

The pension plans had an accounting deficit of $948 as at the annual measurement date of May 31, 2015. The deficit as at May 31, 2015 decreased from a deficit of $997 as at May 31, 2014, primarily due to investment returns on plan assets that were more positive than expected by $458 and changes in mortality assumptions of $22 partially offset by a 40 basis point decrease in the discount rate used to measure plan obligations ($423).

Between May 31, 2015 and August 31, 2015, the pension plans’ accounting deficit decreased to approximately $866, primarily due to a 20 basis point increase in the market-based discount rate used to determine pension obligations, partially offset by negative investment returns on plan assets.


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14.EMPLOYEEFUTUREBENEFITS(CONTINUED): The average rate of compensation increase is expected to be equal to the rate of inflation with an adjustment for merit and productivity gains.

An increase of 5.0% in drug and other health benefit costs was assumed for 2015 and an increase of 5.0% in drug and other health benefit cost was assumed for 2016. The impact of a one percent change in the assumed drug and other health benefit cost trend rate would have the following effects:

1% increase 1% decrease

Effect on current service cost and interest cost on accrued benefit obligation $ 1 $ (1)

Effect on benefit obligation $ 27 $ (21)

Pension plan assets at the measurement date (May 31):

2015 2014

Equities 47% 53%

Public debt 24% 25%Private debt 1% 1%Canadian real return bonds 16% 14%Absolute return strategies 1% –%Real estate 11% 7%

Pension plan assets are subject to investment risks. These risks are managed through diversification among different asset classes, risk factors and geographies and adherence to established investment guidelines. In addition, investment risk relative to plan liabilities is managed via implementation of liability driven investment strategies, including a 20% Canadian real return bond overlay.

The Company’s benefit costs, which are included in salaries and benefits on the statements of operations and in capital expenditures for the year ended August 31 were as follows:

Pension benefits LTD Other benefits

2015 2014 2015 2014 2015 2014

Benefit costs arising from events in the year:Current service cost, net of plan participants’ contributions

$ 131

$ 125

$ –

$ –

$ 7

$ 7

Interest cost on accrued benefit obligation 229 204 – – 9 8Actual returns on plan assets (685) (420) – – – –Actuarial losses arising during the year on accrued benefit obligation

394

281

7

2

8

14

Elements of benefit costs before recognizing long term nature

69

190

7

2

24

29

Deferrals of amounts arising during the year:Excess of actual return over expected return 458 206 – – – – Actuarial losses on benefit obligation (394) (281) – – (8) (14)

Amortization of previously determined amounts:Net actuarial losses on benefit obligation 75 76 – – – – Past service cost 1 1 – – 1 1

Benefit costs $ 209 $ 192 $ 7 $ 2 $ 17 $ 16

Pension expense for fiscal 2015 was $166 (fiscal 2014 – $146) consisting of pension benefit costs of $209, partially offset by $40 relating to regulatory pension adjustments and $3 included in the cost of capital assets.


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The Company’s contributions to its benefit plans for the years ended August 31 were as follows:

2015 2014

Company contributions to funded pension plans $ 118 $ 95 Benefits paid directly to beneficiaries for:

Non-funded supplemental pension benefits 1 1 Other non-funded post-employment benefits 6 8

Company contributions to the funded LTD plan 8 8

LTD plan surplus refund (1) (1)

132 111

Less: amounts capitalized (4) (4)

$ 128 $ 107

Pension (other than the supplemental pension plan) and LTD benefits are funded. Other post-employment benefits are not funded.

Actuarial valuations for pension funding purposes are performed annually as at January 1 and are required to be filed with the Office of the Superintendent of Financial Institutions Canada (“OSFI”) by June of the same year. Accordingly, contributions for the annual period beginning July 1, 2015 are based on the January 1, 2015 actuarial valuations. The regulations governing the funding of federally regulated pension plans require actuarial valuations to be performed on both a going concern and a solvency basis. The actuarial valuations performed as at January 1, 2015 reported a going concern deficit of $268 and a statutory solvency deficiency (based on an average of solvency ratios over the 3 most recent consecutive years) of $556.

Since January 1, 2014, actuarial valuations of the Company’s registered pension plans have included the mortality assumptions from the 2014 Public Sector Mortality Table (published by the Canadian Institute of Actuaries). The impact of adopting these unadjusted base mortality rates and improvement scales in 2014 was an increase in the pension plans’ going concern liabilities of $272 and an increase in the pension plans’ solvency liabilities of $446. Going concern pension contributions for the fiscal year ended August 31, 2015 were $118 (fiscal 2014 – $95) including $27 (fiscal 2014 – $14) of special payments.

The Company is currently meeting its pension solvency funding requirements with letters of credit. Pension funding regulations came into effect on April 1, 2011 permitting solvency special payments to be replaced by letters of credit provided the total value of the letters of credit does not exceed 15% of the pension plan’s assets. As of August 31, 2015, the Company has put in place letters of credit totalling $410 (representing 8% of registered pension plan assets as at August 31, 2015) to meet its cumulative pension solvency funding requirements to the end of calendar year 2015. For the annual period beginning July 1, 2015, letters of credit are based on the January 1, 2015 actuarial valuations.

The amount of required Company contributions and additional letters of credit in future years will be dependent on the investment returns of plan assets, the discount rates and other assumptions that will be used in future actuarial valuations to determine plan liabilities, as well as any changes in pension plan design or funding requirements that may be enacted.

15.TRANSACTIONSWITHTHEGOVERNMENTOFCANADA:

The Company has arrangements with a number of federal government departments and agencies for the provision of various services, such as enhanced security services, weather forecasting and observation, and facilities. These arrangements are based on commercially negotiated terms and conditions.

The Company also has an agreement with the Department of National Defence (“DND”) relating to the exchange of a variety of services with DND such as airspace controls, facilities, information and protocols and systems, for mutual benefit without significant cost or expense to either party.

The Government of Canada has maintained an indemnification program at no cost to the Company, which protects the Company from a terrorist-related loss that may be in excess of the Company’s insurance coverage. This program has been in place since December 2001 and the current undertaking runs until December 31, 2015. The Company is contractually obligated to indemnify the Government of Canada for any loss suffered by or claimed against it which is covered by the Company’s aviation operations liability insurance.


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16.GUARANTEES:

The Company has not provided any material guarantees other than indemnification commitments typically provided in the ordinary course of business as described below. These indemnification commitments require the Company to compensate the counterparties for costs and losses incurred as a result of various events and are similar to the type of indemnifications required by the Company from suppliers of services and products, or by other companies in the aviation industry.

The Company has provided the following significant indemnification commitments:

Capital lease transactions

As described in note 10, during fiscal 2004 the Company entered into two lease transactions with respect to a portion of its air navigation equipment and software. On June 7, 2012 and August 6, 2015, the Company terminated the two capital lease transactions by negotiating an acceleration of the purchase options. The Company has agreed to indemnify the other parties to the transactions for certain costs or liabilities, including with respect to certain taxes that may be imposed on such party with respect to the leased equipment, or as a result of such party’s participation in the lease transactions. These indemnification commitments survive the termination of these lease transactions, but only with respect to events that occurred prior to the termination of the lease transactions. These indemnification commitments do not provide for any limit on the maximum amount of the potential indemnification

Provision of service and system sales

(i) The Company has entered into five agreements for the sale and maintenance of technology that would indemnify the counterparties up to a maximum of $1,000 for each occurrence and in the aggregate for losses sustained as a result of the negligence of the Company. In addition, the Company has entered into one agreement for the sale and maintenance of technology that would indemnify the counterparty up to a maximum of the Company’s ANS liability insurance coverage of $5,034 U.S. ($6,623 CDN). The Company’s ANS liability insurance provides coverage for these indemnification commitments. These indemnities survive termination of the agreements.

(ii) The Company entered into an agreement, which has now ended, with Natural Resources Canada for the production of civil aeronautical information products, which would indemnify the counterparty up to a maximum of $100 for each occurrence and in the aggregate, for losses sustained by the counterparty arising out of or in any way connected with the agreement. The Company’s liability insurance provides coverage for this indemnification commitment. This indemnity survives termination of the agreement.

(iii) The Company has entered into a sales agreement for the supply of an air traffic services data management system and provision of related services, which would indemnify the counterparty up to a maximum of $35 U.S. ($46 CDN) for the cumulative liability of the Company in relation to any claim in any manner howsoever arising out of or in connection with the agreement. The Company’s liability insurance provides coverage for this indemnification commitment. This indemnity survives termination of the agreement.

Banking and credit agreements

The Company has agreed to indemnify its banks against costs or losses resulting from changes in laws and regulations, which would increase the banks’ costs and from any legal claims resulting from defaults, misrepresentations, negligence or wilful misconduct of the Company or from environmental liabilities. These indemnification commitments extend for an unlimited period of time and do not provide for any limit on the maximum potential amount.

Indemnity with respect to third party sponsored asset-backed commercial paper (ABCP)

In connection with the restructuring of third party sponsored ABCP (see note 17), the Company (as a member of the Pan-Canadian Investors Committee) agreed to indemnify the indenture trustees of the ABCP trusts should the trustees suffer certain losses only as a result of acting in accordance with extraordinary resolutions passed by the requisite number of noteholders of the trusts. As part of the indemnity agreement, the Company acknowledged that the trustees have the benefit of existing contractual indemnities under the trust indenture and agreed to subordinate its recoveries to any entitlement of the trustees. Further, all members of the Pan-Canadian Investors Committee committed to provide additional protection beyond the contractual indemnification afforded by the trust indentures. The protection provided by members of the Committee is on a several basis and pro rata among the Committee members based upon their respective and aggregate investments in third party sponsored ABCP. While the indemnity survives the closing of the ABCP restructuring, the terms of the court-sanctioned restructuring plan have effectively eliminated the Company’s exposure.


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Other agreements

In the ordinary course of business the Company provides indemnification commitments to counterparties in transactions such as service arrangements, provision of maintenance services, system sales, sales of assets, licensing agreements, lease and site usage transactions, contribution agreements, and director and officer indemnification commitments. These indemnification commitments require the Company to compensate the counterparties for costs and losses as a result of various events such as results of litigation claims, environmental contamination or statutory sanctions that may be suffered by a counterparty or third party as a consequence of the transaction or in limited cases, for liabilities arising from acts performed by or the negligence of the indemnified parties. The terms of these indemnification commitments vary based on the contract. Certain indemnification agreements extend for an unlimited period and generally do not provide for any limit on the maximum potential amount. The nature of these indemnification commitments does not permit a reasonable estimate of the aggregate potential amount that could be required to be paid. The Company has acquired liability insurance that provides coverage for most of the indemnification commitments described in this paragraph.

Historically, the Company has not made any significant payments under any indemnification commitments and no material amount has been accrued in the financial statements with respect to these indemnification commitments.

17.FINANCIALINSTRUMENTSANDFINANCIALRISKMANAGEMENT:

(a) Summary of financial instruments:

Fair value is defined as the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The best evidence of fair value is quoted bid or ask prices in an active market. Quoted prices are not always available for transactions in inactive or illiquid markets. In these instances, internal models, normally with observable market-based inputs, are used to estimate fair value. Where financial instruments trade in inactive markets, or when using models where observable parameters do not exist, as described in note 17 (b), greater management judgment is required for valuation purposes. Financial instruments traded in a less active market have been valued using indicative market prices, discounted cash flow models or other valuation techniques. Fair value estimates normally do not consider forced or liquidation sales. The calculation of estimated fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values.


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17.FINANCIALINSTRUMENTSANDFINANCIALRISKMANAGEMENT(CONTINUED):

(a) Summary of financial instruments (continued):

As at August 31, 2015, the classification of the Company’s financial instruments, as well as their carrying amounts and fair values are as follows:

Financial assets and liabilities

Classification

Carrying amount

Fair Value

Cash and cash equivalents (1) Held-for-trading (8) $ 230 $ 230Accounts receivable (1) Loans and receivables 135 135Other current assets

Derivative assets (2) Derivative financial assets 1 1 Reserve funds

Debt service (1) Held-for-trading (8) 113 113 Investments and other

MAV II and ABCP (3) Held-for-trading (8) 274 274Preferred interests in Aireon LLC (4) Loans and receivables 159 159 Embedded derivative on investment in preferred interests (5) Derivative financial assets 108 108 Long-term dividend receivable (4) Loans and receivables 15 4 Long-term derivative assets (2) Derivative financial assets 3 3

Accounts payable, accrued liabilities and otherAccounts payable and accrued liabilities (1) Other financial liabilities 199 199 Non-derivative financial liability (6) Other financial liabilities 3 3

Derivative liabilities (2) Derivative financial liabilities 14 14 Current portion of long-term debt (7) Other financial liabilities 225 225 Long-term debt

Bonds and notes payable (7) Other financial liabilities 1,725 2,033

(1) Due to the short term maturity of these financial assets and liabilities, the carrying amount is a reasonable approximation of fair value.

(2) Short-term and long-term derivative assets and liabilities are recorded at fair value determined using prevailing forward foreign exchange market rates and interest rates at the balance sheet date. The Company uses derivative financial instruments to manage risks from fluctuations in foreign exchange rates and interest rates. The Company’s derivative assets consist of forward-dated interest rate swap agreements and forward purchases of foreign currency. Where permissible, the Company accounts for these financial instruments as cash flow hedges which ensures that counterbalancing gains and losses are recognized in income in the same period. With hedge accounting, changes in the fair value of derivative financial instruments designated as cash flow hedges are deferred and are included in regulatory assets or regulatory liabilities (note 9 (a)). When an anticipated transaction related to the interest rate swap agreements is subsequently recorded, the regulatory amounts deferred are reclassified to a regulatory liability or asset within the related asset or liability (notes 9 (h) and (i)). When the anticipated transaction related to the forward purchase or sale of foreign currency is subsequently recorded, the regulatory amounts are reversed and recognized with the underlying transaction. At the inception of entering into a hedging contract, the relationship between the hedged item and the hedging item is formally documented, in accordance with the Company’s risk management objectives and strategies. The effectiveness of the hedging relationship, as discussed below, is assessed at inception of the contract related to the hedging item and then again at each balance sheet date to ensure the relationship is and will remain effective. Where hedge accounting is not permissible and derivatives are not designated in a hedging relationship, they are classified as held-for-trading and the changes in fair value are immediately recognized in the statement of operations.

(3) The fair value is calculated as the present value of the expected future cash flows discounted using the prevailing market interest rates adjusted for risks specific to the instrument for a similar term.

(4) As discussed in note 5, preferred interests in Aireon provide for an annual cumulative dividend calculated from the date of issuance, and will be redeemed for cash in three annual instalments beginning in November 2020 (in the event the preferred interests have not been converted to common equity or redeemed by that time). These non-derivative financial assets with fixed payments are measured at amortized cost. The fair value of the preferred interest and long-term dividend receivable is estimated by discounting cash flows at prevailing market interest rates for new investments with substantially similar terms. Dividends are not considered for rate setting purposes until the cash is received. This is achieved by recording a regulatory liability (note 9 (g)).

(5) The Company may at any time and from time to time elect to convert all or a portion of its preferred interests in Aireon into common equity interests. This conversion feature is an embedded derivative and accordingly is separated from the host contract and accounted for as a stand-alone derivative instrument. This instrument is recorded at fair value based on valuation techniques described in note 5.


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(6) The non-derivative financial liability consists of a liability that is recorded at fair value using an enterprise valuation technique. During Q4 fiscal 2015, the shareholders’ agreement for one of the Company’s subsidiaries was amended by all parties. As part of the amendment, the put option previously contained in the agreement was eliminated in exchange for the payment of $2 to the non-controlling shareholders as well as a purchase commitment of $2 over the next 5 years. In accordance with the amended shareholders’ agreement, under certain circumstances a non-controlling shareholder could compel a purchase of their shares at a price equal to their fair value at that time, subject to certain adjustments.

(7) Bonds and notes payable are initially recognized at fair value, net of financing fees, premiums, discounts and regulatory assets and liabilities that arise from cash settlements on hedging transactions that qualify as effective hedges for accounting purposes. They are subsequently measured at amortized cost. Any difference between the carrying amount and the maturity amount is recognized in the statement of operations over the life of the bond or note payable using the effective interest rate method. The fair value of the Company’s bonds and notes payable is determined using secondary market ask prices at the reporting date.

(8) These financial instruments were classified or designated as held-for-trading upon initial recognition by the Company either due to the presence of embedded derivatives or their original short term to maturity. Investments in Master Asset Vehicle II (“MAV II”), Ineligible Asset Tracking notes and ABCP are discussed in note 17 (b).

There has been no change in classification of financial instruments since August 31, 2014.

(b) Fair value hierarchy:

Financial instruments recorded at fair value on the balance sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3 Inputs for the assets or liabilities that are not based on observable active market data (unobservable inputs).

The Company recognizes transfers between levels of the fair value measurement hierarchy at the beginning of the fiscal year in which the change occurs. As at September 1, 2014, the Company transferred its embedded derivatives on its investment in preferred interests of Aireon from Level 2 to Level 3. This transfer is due to the passage of time since the most recent input of observable market data, and the increased level of judgment used in determining the fair value.

The method used to determine the fair value of financial instruments is described in note 17 (a).

The table below illustrates the classification of the Company’s financial instruments valued and recognized at fair value:

August 31, 2015

Level 1 Level 2 Level 3 Total

Financial assets:

Cash and cash equivalents $ 230 $ – $ – $ 230 Other current assets Derivative assets – 1 – 1 Debt service reserve fund 113 – – 113Investments – MAV II and ABCP – – 274 274Embedded derivative on investment in preferred interests – – 108 108 Long-term derivative assets – 3 – 3

$ 343 $ 4 $ 382 $ 729

Financial liabilities:Accounts payable, accrued liabilities and other Non-derivative financial liability $ – $ – $ 3 $ 3 Derivative liabilities – 14 – 14

$ – $ 14 $ 3 $ 17


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(b) Fair value hierarchy (continued):

August 31, 2014

Level 1 Level 2 Level 3 Total

Financial assets:

Cash and cash equivalents $ 193 $ – $ – $ 193Debt service reserve fund 112 – – 112Capital lease obligations reserve fund – – 37 37Investments – MAV II and ABCP – – 252 252Long-term derivative assets – 8 – 8 Embedded derivatives on investment in preferred interests – 87 – 87

$ 305 $ 95 $ 289 $ 689

Financial liabilities:Derivative liabilities $ – $ 1 $ – $ 1

Other long-term liabilities

Non-derivative financial liability – – 2 2

$ – $ 1 $ 2 $ 3

MAV II notes, Ineligible Asset Tracking notes and other restructured ABCP investments (discussed below) are measured at fair value using Level 3 inputs. The following table presents the fair value variances on these financial instruments used for rate setting purposes:

August 31, 2015 August 31, 2014

Face value

Fair value variances

Fair value

Face value

Fair value variances

Fair value

MAV II notesClass A-1 $ 191 $ (12) $ 179 $ 191 $ (9) $ 182Class A-2 94 (8) 86 94 (7) 87

285 (20) 265 285 (16) 269 Ineligible Asset Tracking notes 2 (1) 1 2 (1) 1ABCP 9 (1) 8 20 (1) 19

$ 296 $ (22) $ 274 $ 307 $ (18) $ 289

The MAV II notes received as a result of the restructuring of third party sponsored ABCP by the Pan-Canadian Investors Committee in January 2009 include a pooling of leveraged investments as well as traditional assets and cash. The leveraged investments are subject to a potential requirement to post additional collateral based on certain triggers being met (a margin call). Traditional assets are un-levered investments and include residential and commercial mortgage backed securities, corporate credit and cash equivalents. The Class A-1 and A-2 notes provide for the payment of interest on a quarterly basis provided that the three month Canadian Dollar Offered Rate (“CDOR”), is above 50 basis points. The MAV II notes benefit from a margin funding facility to meet potential margin calls. This margin funding facility is being provided by certain international and Canadian banks.

The Ineligible Asset Tracking notes, also received as a result of the restructuring of third party sponsored ABCP, track the performance and repayment of the related underlying assets that have significant exposure to the U.S. residential mortgage market.

Within its Level 3 financial instruments, the Company holds $9 of bank sponsored ABCP for which a restructuring has been completed. This trust is rated AA (low) (sf) by DBRS. It continues to pay interest on a monthly basis.

The Company is aware of a number of trades in the restructured notes that have occurred prior to August 31, 2015, but does not consider them to constitute an active market for Level 1 accounting valuation purposes. Accordingly, the Company has not used these trades to determine the fair value of such notes. As described below, the Company has used a discounted cash flow approach to determine the fair value of these investments, incorporating available information regarding market conditions as at the measurement date, August 31, 2015. The estimates arrived at by the Company are subject to measurement uncertainty and are dependent on market conditions as at the measurement date.

If an active market for the restructured notes were to develop in the future, the Company would change its valuation technique to determine the fair value of its notes using quoted market prices.


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The Company’s total provision for expected credit losses on Level 3 investments as at August 31, 2015 is $1 (August 31, 2014 - $1). This amount is included in the fair value variance from face value on investments of $22. The estimate of expected credit losses relates to Ineligible Asset Tracking notes and was arrived at by estimating the expected realization of the underlying assets. As of August 31, 2015, the MAV II Class A-1 and A-2 notes and other ABCP were rated AA (low) (sf), A (low) (sf) and AA (low) (sf), respectively by DBRS. As these are investment grade ratings, the Company has not provided for any credit losses with respect to these notes.

The Company has used a discounted cash flow approach to determine the fair value of these investments, taking into account the expected risk and return profile of the notes in comparison to market returns. After deducting the estimated credit losses referred to above, the Company used a discount factor appropriate for a high yield instrument for the Ineligible Asset Tracking notes.

The Company has used the following expected rates and discount factors as at August 31, 2015:

Restructured notes Return Market discount factor

MAV II Class A-1 BAs minus 50 basis points BAs plus 3.9%MAV II Class A-2 BAs minus 50 basis points BAs plus 6.0%Ineligible Asset Tracking notes BAs plus 30 basis points BAs plus 27.1%Other ABCP BAs plus 33 basis points BAs plus 3.9%

The Company believes that the market discount factors shown above are reflective of functioning market returns for products with maturities and risk profiles similar to the respective notes.

The following tables summarize the changes in the fair value of financial instruments classified in Level 3:

August 31, 2015

Embedded derivative on

investment in preferred interests

MAV II and

Ineligible Asset Tracking notes

Other ABCP

Total

Fair value as at September 1, 2014 $ – $ 270 $ 19 $ 289 Transfer into Level 3 87 – – 87 Proceeds (1) – – (11) (11)Net increase in fair value 3 – – 3Net increase in fair value provision – (4) – (4)Effect of foreign exchange 18 – – 18

Fair value as at August 31, 2015 $ 108 $ 266 $ 8 $ 382

August 31, 2014

MAV II and Ineligible Asset Tracking notes

Other ABCP

Total

Fair value as at September 1, 2013 $ 250 $ 11 $ 261 Net decrease in fair value provision 19 4 23 Net decrease in credit provision 1 4 5

Fair value as at August 31, 2014 $ 270 $ 19 $ 289

(1) As at August 31, 2014, $10 of the Company’s other ABCP was held in a trust that was not covered by the January 2009 restructuring of third party sponsored ABCP. This trust was subject to a Companies’ Creditors Arrangement Act plan of arrangement that was sanctioned by the Ontario Superior Court. As part of the arrangement, the Company received proceeds of $10 from the court appointed monitor for the trust in September 2014. During fiscal 2015, the Company received a return of principal of $1 against the remaining other ABCP.

During fiscal 2015, the Company increased its fair value provision by $4 on MAV II and Ineligible Asset Tracking notes and other ABCP (which is determined using a discounted cash flow approach) thereby decreasing their carrying value.

The Company increased the fair value of the embedded derivative on its investment in preferred interests of Aireon by $3 during fiscal 2015.


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(c) Financial risk management:

The Company is exposed to several risks as a result of holding financial instruments. The following is a description of these risks and how they are managed.

(i) Market risk:

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, foreign exchange risk and other price risk. The objective of market risk management is to contain market risk exposures within acceptable parameters, as set out in the Company’s treasury policy that is approved by the Board of Directors. Interest rate risk, foreign exchange risk and other price risk are discussed below.

The price risks associated with investments in MAV II and Ineligible Asset Tracking notes and other ABCP are discussed earlier in this note. The use of the discounted cash flow approach described in note 17 (b) resulted in a carrying value for these investments of $274 on notes with a face value of $296. The difference of $22 is composed of fair value variances of $21 due to the discounting of cash flows at market rates and an estimate of credit losses of $1.

A change of 50 basis points in the market discount factors would impact the fair value variance by approximately $2. There is no assurance that the fair value of the Company’s investments in MAV II and Ineligible Asset Tracking notes and other ABCP will not decline, or that significant deterioration in financial markets will not cause margin calls in excess of MAV II’s ability to meet them, resulting in a significant credit loss. The estimated fair value of the Company’s investments, including the estimate of expected credit losses, may change in subsequent periods. Any such changes could be material and would be reflected in the statement of operations as they occur.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The following table summarizes financial assets and liabilities exposed to interest rate risk:

August 31, 2015 August 31, 2014

Floating rate financial assets:

Cash and cash equivalents $ 230 $ 193Debt service reserve fund investments 113 112 Investments in MAV II, Ineligible Asset Tracking notes and other ABCP 274 289

Total floating rate financial assets $ 617 $ 594

Fixed rate financial liabilities:Bonds and notes payable $ 1,950 $ 1,975

Investments included in the Company’s cash and cash equivalents and debt service reserve fund earn interest at prevailing and fluctuating market rates. The investments in MAV II notes also earn interest at variable rates. Earnings on these instruments fall when interest rates decline. A 100 basis point change in variable interest rates would result in an annual difference of approximately $6 in the Company’s earnings before rate stabilization.

Interest rate risk related to the Company’s fixed-interest long-term debt relates to the re-setting of interest rates upon maturity and refinancing of the debt. The Company mitigates this source of interest rate risk by spreading maturities of borrowings over periods currently up to and including 2027 so that only a portion of outstanding debt will mature in any given fiscal year. In addition, the Company has International Swaps and Derivatives Association Agreements in place and, in November 2010, entered into a bond forward transaction in order to mitigate the impact of fluctuating interest rates on interest costs relating to the Company’s MTN 2011-1 issue, which settled on February 18, 2011. A gain of $11 on the bond forward was deferred and included in long-term debt. This gain has been applied to the series MTN 2011-1 obligation and is being amortized to income using the effective interest rate method.

In June 2012, the Company entered into forward-dated interest rate swap agreements totaling $200 under which the Company will notionally pay a fixed rate of interest in exchange for receiving a floating rate of interest based on the three month CDOR rate with the purpose of mitigating the potential impact of rising interest rates on the cost of refinancing a portion of the Company’s $450 series MTN 2006-1 notes that will mature on February 24, 2016. The Company intends to cash settle these agreements in February 2016 and offset any gain or loss at that time against a portion of the cost of refinancing the above mentioned notes.


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In July 2012, the Company entered into a bond forward transaction in the amount of $250 with the purpose of mitigating the potential impact of rising interest rates on the cost of refinancing the Company’s $250 series MTN 2010-1 notes that matured on April 29, 2013. A loss of $2 on the bond forward was deferred and included in long-term debt. The loss has been applied to the series MTN 2013-1 obligation and is being amortized to income using the effective interest rate method.

In January 2015, the Company entered into forward-dated interest rate swap agreements totaling $200 under which the Company will notionally pay a fixed rate of interest in exchange for receiving a floating rate of interest based on the three month CDOR rate with the purpose of mitigating the potential impact of rising interest rates on the cost of refinancing a portion of the Company’s $350 series MTN 2009-1 notes that will mature on April 17, 2019. The Company intends to cash settle these agreements in April 2019 and offset any gain or loss at that time against a portion of the cost of refinancing the above mentioned notes.

The Company has not entered into any other derivative contracts to manage interest rate risk.

Foreign exchange risk

The Company is exposed to foreign exchange risk on sales and purchases that are denominated in currencies other than the Canadian dollar, which is the functional currency of the Company. The Company invoices and receives the vast majority of its revenue in Canadian dollars and also incurs operating expenses and capital expenditures primarily in Canadian dollars. In some cases, the Company uses forward exchange contracts to purchase or sell foreign currencies to mitigate its foreign exchange risk on contractual agreements in foreign currencies. Accordingly, the Company does not have a significant exposure to losses arising from fluctuations in exchange rates, except for the investments in and contractual obligations relating to the investment in preferred interests in Aireon mentioned below.

The Company has acquired preferred interests in Aireon and has agreed to acquire additional preferred interests pursuant to the terms and conditions of agreements executed in November 2012 (note 5). These agreements were modified in December 2013 to allow the Additional Investors to invest in Aireon. The agreements are denominated in U.S. dollars. As at August 31, 2015, the Company’s investment in preferred interests was $120 U.S. ($158 CDN) excluding transaction costs and the Company’s outstanding commitment was $30 U.S. ($36 CDN) (note 17 (c)). The Company has purchased $15 U.S. ($16 CDN) to hedge the Canadian dollar cost related to a portion of the outstanding commitment.

Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or foreign exchange risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

In order to mitigate the risk of losses arising from investment activities, the Company only invests in highly-rated (see credit risk discussion below) and short-term instruments, excluding investments in MAV II, Ineligible Asset Tracking notes, other ABCP and Aireon. The price risks associated with investments in MAV II, Ineligible Asset Tracking notes and other ABCP are discussed earlier in this note. The price risk associated with the investment in preferred interests of Aireon has not been quantified as it is a start-up company and a sensitivity analysis would not be representative of the risks inherent in the investment. The estimated fair value of the Company’s investments, including the estimate of expected credit losses, may change in subsequent periods. Any such changes could be material and would be reflected in the statement of operations as they occur.

(ii) Credit risk:

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum credit risk to which the Company is exposed as at August 31, 2015 represents the carrying amount of cash equivalents, accounts receivable, reserve funds, investments, long-term dividend receivable, forward contracts to purchase or sell foreign currencies and forward-dated interest rate swaps.

Cash equivalents and the debt service reserve fund are invested in accordance with the Company’s restrictive investment policy to manage credit risk. The Company invests only in short-term obligations – usually for periods of 90 days or less. Excluding investments in MAV II, Ineligible Asset Tracking notes and other ABCP, described in note 17 (b), the Company limits investments to obligations of the federal government, certain provincial governments, entities guaranteed by a federal or provincial government or other obligations of entities rated by at least two rating agencies in the top two categories for long-term debt or the highest category for short-term debt. The Company does not invest in instruments with exposure to underlying synthetic assets. The Company’s portfolio is diversified, with dollar and percentage limits on investment counterparties. None of the Company’s holdings in cash equivalents or in current investments are past due or impaired, and all have long-term ratings of either AAA or AA or short-term ratings in the highest category (R1 (high)).

Credit risk with respect to investments in MAV II and Ineligible Asset Tracking notes and other ABCP is discussed earlier in this note.


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(c) Financial risk management (continued):

(ii) Credit risk (continued):

The Company’s additional planned investments in preferred interests of Aireon are subject to the satisfaction of certain conditions, increasing the likelihood of the successful achievement of Aireon’s mandate and reducing the Company’s overall risk of a financial loss on its investment in Aireon including dividends receivable thereon.

Accounts receivable are primarily short-term receivables from customers that arise in the normal course of business. The Company provides air navigation services to various aircraft operators, including Canadian and foreign commercial air carriers as well as small general aviation aircraft. Credit limits and compliance with payment terms are monitored by the Company to manage its exposure to credit loss. The Company has established a maximum credit limit of $4 for its largest air navigation services customers, and it has other credit control measures that reduce its credit exposure. The Company’s general payment terms provide for payment periods of 30 days for air navigation services and payment periods of up to 45 days for some other types of services. Shorter payment terms are imposed where customer circumstances warrant. The Company’s credit policies also require payments in advance or satisfactory security to be posted under certain circumstances.

The Company establishes an allowance for doubtful accounts that represents its estimate of losses expected to be incurred in respect to accounts receivable.

The aging of trade accounts receivable was as follows:

August 31, 2015 August 31, 2014

Gross balance Allowance Net balance Net balance

0–30 days $ 89 $ – $ 89 $ 86 31–60 days – – – –61–90 days 1 – 1 – Over 91 days 1 (1) – 1

Total $ 91 $ (1) $ 90 $ 87

As at August 31, 2015, $2 of trade accounts receivable (August 31, 2014 – $2) were past due. The remainder of past due amounts not provided for in our allowance for doubtful accounts relate primarily to the Company’s other revenue and are considered collectible.

There was no significant change to the Company’s allowance for doubtful accounts during the year ended August 31, 2015.

(iii) Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to evaluate current and expected liquidity requirements under both normal and stressed conditions to ensure that it maintains sufficient reserves of cash and cash equivalents or an available undrawn committed credit facility to meet its liquidity requirements in the short and longer term. Under the Company’s Master Trust Indenture and General Obligation Indenture, the Company is required to maintain certain reserve funds and liquidity levels, as described in note 8.

The Company has a revolving credit facility with a syndicate of Canadian financial institutions and separate letter of credit facilities for pension funding purposes. The credit facilities are utilized as follows:

August 31, 2015

Credit facilitiesCredit facility with a syndicate of Canadian financial institutions (1) $ 675 Letter of credit facilities for pension funding purposes (2) 415

Total available credit facilities 1,090 Less: Outstanding letters of credit (2) 427

Undrawn committed borrowing capacity 663Less: Operations and maintenance reserve fund allocation (3) 270

Credit facilities available (4) $ 393

(1) The Company’s credit facility with a syndicate of Canadian financial institutions in the amount of $675 is comprised of two equal tranches maturing on September 12, 2018 and September 12, 2020. The credit facility agreement provides for loans at varying rates of interest based on certain benchmark interest rates, specifically the Canadian prime rate and the Canadian bankers’ acceptance rate, and on the Company’s credit rating at the time of drawdown. A utilization fee is also payable on borrowings in excess of 25% of the available facility. The Company is required to pay commitment fees, which are dependent on the Company’s credit rating. The Company is in compliance with the credit facility covenants as at August 31, 2015.


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(2) The letter of credit facilities for pension funding purposes are comprised of three facilities with Canadian financial institutions totaling $415 (note 14) of which $250 will mature on December 31, 2015 and $165 will mature on December 31, 2016, unless extended. The Company intends to seek extensions of these maturity dates. Of the $427 in letters of credit shown above as outstanding as at August 31, 2015, $410 was drawn for pension solvency funding purposes.

(3) The operations and maintenance reserve fund may be used to pay operating and maintenance expenses, if required.

(4) The Company intends to re-finance $250 of the $450 principal amount of the series MTN 2006-1 general obligation notes on a long-term basis on or before their maturity date of February 24, 2016 and may utilize some portion of the credit facilities to re-finance the series MTN 2006-1 notes should the Company decide not to issue new long-term debt in advance of the maturity.

The following table presents the contractual maturities of the Company’s financial liabilities owed by the Company and its contractual commitments as at August 31, 2015:

Remaining payments – for years ending August 31

Total 2016 2017 2018 2019 2020 Thereafter

Accounts payable, accrued liabilities and other

$ 202

$ 202

$ –

$ –

$ –

$ –

$ –

Derivative liabilities 14 14 – – – – – Long-term debt (including current portion) (1), (2) 1,950 475 25 375 375 25 675 Interest payments (2) 536 89 76 74 65 45 187 Operating leases 52 8 8 7 7 6 16 Purchase obligations 130 31 26 19 10 12 32Other long-term obligations (3) 253 11 11 11 13 13 194Investment in preferred interests of Aireon (4)

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16

–

20

–

–

–

Total contractual obligations $ 3,173 $ 846 $ 146 $ 506 $ 470 $ 101 $ 1,104

(1) Payments represent principal of $1,950. The Company may refinance all or a portion of principal maturities at their maturity dates. The Company may choose to repay a portion of these maturities with available cash or may increase the size of a re-financing to generate additional liquidity or for other purposes.

(2) Further details on interest rates and maturity dates on long-term debt are provided in note 8 to these financial statements.

(3) Includes long-term obligations for post-employment benefits, accrued pension benefit liability for the Company’s supplemental pension plan and other.

(4) Payments represent contractual obligations to invest in preferred interests of Aireon subject to conditions pursuant to the agreements described in note 5. Amounts are presented in $CDN translated using the $U.S. foreign exchange rate at the current balance sheet date with the exception of the future investment in preferred interests of Aireon planned for fiscal 2016 that is translated using the hedged rate.

The Company’s contributions to its pension plans are discussed in note 14 to these financial statements.


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18.CAPITALDISCLOSURES:

The Company is a non-share capital corporation and, as discussed in note 1, must not set customer service charges higher than what is needed to meet its current and future financial requirements for the provision of civil air navigation services. The Company views capital as the sum of its issued long-term debt, retained earnings, rate stabilization account and other regulatory liabilities, less the accrued pension and other benefits asset, as depicted in the following table. This definition of capital is used by management and may not be comparable to measures presented by other companies. The Company’s capital is as follows:

August 31, 2015 August 31, 2014

Carrying value of total bonds and notes payable (note 8) $ 1,950 $ 1,975 Retained earnings 28 28 Regulatory assets (note 9) (57) (36) Rate stabilization account liability (note 9) 77 76 Regulatory liabilities (note 9) 348 336 Accrued pension and other benefits asset (note 14) (189) (276)

Total capital $ 2,157 $ 2,103

In addition to tracking its capital as defined above for purposes of managing capital adequacy, the Company also takes into consideration known contingent exposures and off-balance sheet obligations such as funding obligations of its defined benefit pension plans.

The Company’s main objectives when managing capital are:

(a) to safeguard the Company’s ability to continue as a going concern;

(b) to provide funds for the ongoing acquisition of systems and equipment necessary to implement and maintain a modern, cost-efficient ANS technology platform;

(c) to ensure the funding of reserve funds as well as working capital and liquidity requirements;

(d) to maintain the Company’s credit ratings to facilitate access to capital markets at competitive interest rates; and

(e) to minimize interest costs incurred by the Company subject to appropriate risk mitigation actions.

Given that the Company has no share capital, these objectives are achieved through a process that determines an appropriate period and level of cost recoveries through customer service charge rate setting, as well as the appropriate amount of debt and committed credit facilities. This process includes the Company’s operational and capital budgeting process and considers the overall economic and capital market environment. The level of debt and committed credit facilities are approved by the Board of Directors. The Company is not subject to any externally imposed capital requirements.

There were no changes in the Company’s approach to capital management during the year ended August 31, 2015.

19.CONTINGENCIES:

The Company is party to legal proceedings in the ordinary course of its business. Management does not expect the outcome of any of these proceedings to have a material adverse effect on the consolidated financial position or results of operations of the Company.


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OFFICERS AND OTHER INFORMATION John W. CrichtonPresident and Chief Executive Officer

Brian K. Aitken, CPA, CA Executive Vice President, Finance and Chief Financial Officer

Raymond G. Bohn Vice President, Revenue and Pension Administration

Andrew Campbell Vice President, Customer and Commercial Services

John F. David Vice President, Safety and Quality

Richard J. DixonVice President and Human Resources Officer

Rudy KellarExecutive Vice President, Service Delivery

Sidney KoslowVice President and Chief Technology Officer

Larry LachanceVice President, Operations

Charles LapointeVice President, Technical Operations

Claudio SilvestriVice President and Chief Information Officer

Kim TroutmanVice President, Engineering

Neil R. WilsonExecutive Vice President, Administration and General Counsel

LEGAL COUNSELGowling Lafleur Henderson LLP

AUDITORSKPMG LLP

BANKERSRoyal Bank of Canada

CORPORATE AND FINANCIAL INFORMATIONInquiries for additional information relating to the Company should be directed to:

NAV CANADACommunications 77 Metcalfe Street, Ottawa, Ontario, Canada K1P 5L6

General inquiries can also be made by calling 1-800-876-4693 or by visiting our Internet site at www.navcanada.ca.

Copies of the Company’s Financial Statements, Management’s Discussion and Analysis, and Annual Information Form are available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

NOTICE OF ANNUAL MEETINGThe Annual Meeting of the Members of NAV CANADA will be held on Wednesday, January 13, 2016, at 4:00 p.m. at the Shaw Centre, 55 Colonel By Drive, Ottawa, Ontario.


http://www.sedar.com

JOHN CRICHTON, C.M.Chair of the Board, 1995-1997 President and CEO, 1997-2015

John Crichton is the architect of one of the most successful transformations of a government agency into a self-sustaining corporation. He forged the stakeholder consensus that led to the formation of NAV CANADA on November 1, 1996, and then led the Company through two decades of innovation and achievement. Under John’s direction, the talented employees of NAV CANADA have proven their unique model works, making it a world leader in ANS safety, technology and service delivery.

N AV C A N A D A . C A



Documents

ANNUAL REPORT 2015 CONNECTIONS - NAV CANADA · retirement, as of December 31, 2015. John was the architect of this unique organization, and NAV CANADA’s reputation today as a world