Financial Strength

We will create sustainable growth in our business and our earnings, by improving productivity and pursuing business growth opportunities that leverage our strengths.

Reliable dividends and long-term growth in the company’s value are at the heart of Hydro Ottawa’s commitment to our shareholder. In 2009, Hydro Ottawa continued to deliver on that commitment, while providing effective and reliable service to our customers, containing costs and improving productivity.

Since the adoption of a dividend policy by the company’s shareholder five years ago, Hydro Ottawa has delivered dividends of $87.2 million, while growing shareholder equity in the company by $80.9 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.

The main indicators of financial strength on an annual basis are net income and revenue. Hydro Ottawa achieved superior performance in 2009, with a consolidated net income of $29.4 million.

This enabled the Corporation to pay dividends of $17.6 million to its shareholder, exceeding forecasts by $3.6 million. All operating divisions exceeded their financial targets in 2009, and each made a positive contribution to net income.

When normalized to exclude one-time impacts, net income was $28.7 million compared to $24.7 million in the previous year.²

The company’s strong financial performance was due to continued productivity improvements and effective cost management, as well as increased revenues from commercial and residential energy management services, the company’s growing customer base and an increase to electricity distribution rates of 1.18 percent in accordance with the Ontario Energy Board’s Incentive Regulation Mechanism.

At the same time, the company continued to invest in its capital infrastructure. In 2009, $79.9 million was invested in capital assets, of which $79.4 million, or 99.4 percent, was invested in Hydro Ottawa Limited’s electricity distribution and general plant initiatives. The company invested $38.5 million to maintain the reliability of existing infrastructure, and $14.9 million to deploy new infrastructure to meet the City’s growing needs.

In the energy generation business, the company continued to employ fixed price contracts to reduce exposure to spot market prices, which have been below historical averages in the past few years. In 2009, the company secured 20-year fixed price contracts with the Province of Ontario for a portion of the power produced from its Chaudière Falls generating stations through the Renewable Energy Standard Offer Program (RESOP), worth an estimated $70 million over the 20-year life of the contracts. 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.

In addition to these pricing strategies, Energy Ottawa maintained its energy production near the record levels achieved in 2008. The Chaudière Falls generating stations continued to achieve production above historical levels, due to minimal maintenance shut-downs, relatively favourable water levels and the addition of the Grinder Powerhouse in late 2007. At the Trail Road plant, expansion to the gas collection system undertaken in 2008, and upgrades to the gas treatment system in 2009 are expected to increase production in 2010 and beyond.

The company’s energy management and conservation business lines saw growth across the board, with Energy Ottawa’s commercial energy management services business increasing revenues by nearly 130 percent, and Hydro Ottawa Limited’s Conservation and Demand Management (CDM) results also exceeding expectations. This reflects strong demand for these services in both the private and public sectors, with more than one hundred commercial energy management projects completed by the company in 2009. Projects undertaken with the City of Ottawa have continued to reduce the City’s energy costs, with more than $3.0 million in savings achieved by the end of 2009. Demand for residential conservation programs delivered in partnership with the province also continued to be strong.

Overall, the Hydro Ottawa Group of Companies achieved a Return on Equity of 9.1 percent in 2009.

Access to affordable capital is critical to business success, and is primarily influenced by a company’s credit rating. In 2009, the Dominion Bond Rating Service (DBRS) upgraded its rating on Hydro Ottawa’s Senior Unsecured Debt to ‘A’ from ‘A (low)’, continuing a trend of strengthening credit ratings over the past several years. In announcing the upgrade, DBRS cited Hydro Ottawa’s strong financial profile, conservative financial policies, strong operational performance and low business risk. This followed a similar upgrade by Standard & Poor’s Ratings Services, which in 2008 raised its long-term corporate credit and senior unsecured debt rating for Hydro Ottawa to ‘A’ from ‘A-’.

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. In 2008, Hydro Ottawa’s shareholder endorsed a targeted growth strategy involving three basic components: expanding our distribution business beyond our current service territory; expanding our hydroelectric and other renewable generation capacity; and building on our existing core strengths to diversify our business lines, focusing on business opportunities that are compatible, low risk, and offer stable long-term returns.

In 2009, Hydro Ottawa continued to actively evaluate and pursue opportunities to expand its electricity distribution, renewable generation and energy services business lines.

In October 2006, the Government of Ontario provided publicly owned utilities a two-year exemption, later extended indefinitely, from paying the 33 percent electricity transfer tax when they sell electricity assets to other publicly owned electrical utilities in Ontario. In light of this change, Hydro Ottawa continues to assess opportunities to grow its electricity distribution business beyond its current service territory. The company also continues to explore new opportunities for renewable energy generation, particularly small- and medium-sized renewable projects envisaged by Ontario’s Green Energy and Green Economy Act. And, as noted above, revenues in the company’s energy management services business increased by nearly 130 percent in 2009.

In support of the company’s objective to pursue business growth in areas that build on existing core strengths, Hydro Ottawa in 2009 made a modest strategic investment in Streetlight Intelligence Inc., which manufactures adaptive street lighting systems that can significantly reduce the energy and maintenance costs of street lighting. This technology is in the early stages of commercialization, and is well positioned to be a market leader in meeting an increasing demand for more energy efficient street lighting. Hydro Ottawa currently holds 4,166,667 shares in this company, as well as options and warrants for the purchase of additional shares.

^{1 Adjusted for dividends paid the following year.
2 See MD&A for an explanation of how normalized net income is calculated.}