Report on Operations

Shareholder Value

Over the past three years, the Hydro Ottawa Group of Companies has delivered dividends to its shareholder of over $40 million, while growing in value by nearly $50 million.¹ This achievement reflects a determined effort to increase the company’s financial strength, continually enhance its operational efficiency and effectiveness, position the company for future growth and increase its long-term value.

 

FINANCIAL STRENGTH

Financial strength is critical to Hydro Ottawa’s long-term business objectives, including the creation of long-term value for the company’s shareholder, and delivering a safe, reliable and sustainable power supply to Ottawa residents.

The main indicators of financial strength on an annual basis are net income and revenue. Hydro Ottawa achieved superior performance in 2007, with a consolidated net income of $27.291 million. This enabled the Corporation to declare a dividend of $16.375 million to its shareholder, exceeding forecasts by more than $2 million. All three operating divisions exceeded their financial targets in 2007, and each made a positive contribution to net income.

When normalized to exclude the impact of regulatory asset recovery, and other non-recurring items, including adjusting results to reflect the statutory tax rate, net income was $25.1 million compared to $19.8 million in the previous year. This year over year increase of nearly 27 percent continues a trend of steady growth over the past five years.

The company’s strong financial performance was due mainly to productivity improvements and effective cost management, with Gross Controllable Costs below forecasts due to enhanced productivity, reduced administration costs and other measures. At the same time, the company continued to invest in its capital infrastructure, investing $41 million in 2007 to ensure the continued reliability of the distribution network.

When normalized to exclude the impact of regulatory asset recovery and other non-recurring items, net income was $25.1 million compared to $19.8 million in the previous year. This year over year increase of nearly 27 percent continues a trend of steady growth over the past five years.

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In the energy generation business, fixed price contracts were employed to reduce exposure to spot market prices, which have been below historical averages in the past few years. Since September 1, 2007, Energy Ottawa’s production has been nearly 100 percent protected from exposure to the spot market, through a combination of long-term power-purchase agreements, participation in the province’s Standard Offer Program, and a fixed price contract with the City of Ottawa. Energy Ottawa’s commercial energy management services business continued to grow, surpassing revenue expectations by 50 percent in 2007.

The objectives set out in Telecom Ottawa’s three-year business strategy, initiated in 2006, were achieved sooner than expected. This strategy involved strengthening the company’s focus on its core competencies – providing broadband facilities to large users with high bandwidth requirements, including large businesses, government departments, the MUSH sector (municipalities, universities, schools and hospitals), and other telecommunications carriers. The successful implementation of this strategy led to improved profitability and an Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margin of 48 percent.

Consolidated net revenues, which exclude flow-through items such as the cost of purchasing power from the provincial grid, increased by 8.0 percent on a year over year basis, continuing a trend of steady revenue growth.Overall, the Hydro Ottawa Group of Companies achieved a Return on Equity of 9.4% in 2007, while improving its cash flow from operations by $17.7 million on a year over year basis.

Access to affordable capital is critical to business success, and is primarily influenced by a company’s credit rating. In 2007, Hydro Ottawa’s quarterly rating with Standard & Poors (S&P) remained at A-, while the Dominion Bond Rating Service (DBRS) annual rating remained at A (low). Both agencies revised the trend on Hydro Ottawa’s credit rating from stable to positive during the course of 2007, reflecting both a greater degree of confidence in the regulation of the sector as a whole and continuing improvement in Hydro Ottawa’s financial metrics driven by strong operational performance and the company’s relatively low risk profile.

Over the longer term, shareholder value is tied not only to efficient and effective operations, but also to the company’s prospects for future growth in value.

Both rating agencies revised the trend on Hydro Ottawa’s credit rating from stable to positive during the course of 2007, reflecting both a greater degree of confidence in the regulation of the sector as a whole and continuing improvement in Hydro Ottawa’s financial metrics driven by strong operational performance and the company’s relatively low risk profile.

Value growth in the electricity distribution business is closely linked with growth in the number of electricity customers within the company’s service territory, along with growth in assets. In 2007, Hydro Ottawa Limited added 4,613 net new customers to its network, an increase of 1.8 percent, which is consistent with customer growth in previous years.

Hydro Ottawa has an objective of providing service to all electricity customers in Ottawa, as set out in the Corporation’s Shareholder Declaration. In October 2006, the Government of Ontario created an opportunity for progress on this objective by lifting the moratorium on the purchase and sale of distribution assets by Hydro One, as part of a strategy to increase structural efficiency in Ontario’s electrical distribution sector. At the same time, the province provided provincially and municipally owned utilities a two-year exemption from paying the 33 percent electricity transfer tax when they sell electricity assets to other provincially and municipally owned electrical utilities in Ontario. In light of these changes, Hydro Ottawa initiated discussions with Hydro One regarding customers within Ottawa currently served by Hydro One. Any transaction to transfer these customers to Hydro Ottawa would have to be completed on commercially reasonable terms.

In 2007, two new generation projects came online, increasing Energy Ottawa’s generation capacity by approximately 35 percent.

Growth for Energy Ottawa is closely linked to new energy generation projects. In 2007, two new generation projects came online, increasing the company’s generation capacity by approximately 35 percent. The joint venture five megawatt (MW) Trail Road landfill gas to energy plant began production in January 2007, while the Chaudière Grinder hydroelectric facility on the Ottawa River added a further 0.7 MW of capacity in December 2007. Both of these facilities have been awarded 20-year power purchase agreements from the Ontario government, ensuring stable long-term revenues. Energy Ottawa continues to explore new opportunities for renewable energy generation, particularly in the areas of hydro and landfill gas, and to grow its energy management services business.

 

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1 Does not include gains or dividends from the sale of Telecom Ottawa.