three ways to make one powerful connection · hydro ottawa holding inc. president and chief ......

Three ways to make onepowerful connection

Hydro Ottawa Holding Inc. 2004 Annual Report

Hydro Ottawaoffers bounty onenergy-wasting fridges.

Telecom Ottawa’s Data Backup andRecovery service lets customerssleep at night.

Energy Ottawa landstrash-to-electricitycontract.

Summary

Distributors’ Charges

Financial Highlights2004 2003

Revenues (thousands)

Power recovery $ 507,838 $ 494,365 Distribution sales 85,689 89,680 Other income 22,232 18,269

615,759 602,314

Earnings from continuing operationsEarnings before interest, taxes and

depreciation (EBITDA) 65,464 47,780 Earnings before interest and

taxes (EBIT) 35,704 20,615 Net earnings 16,013 1,108

Sources (uses) of cashGenerated from operations 37,654 71,401 Capital assets (77,351) (84,377)Financing 28,303 12,983

RatiosWorking capital 1.01* 1.22Debt to equity 50:50 58:42

MWh consumptionMWh consumption** 7,702,018 7,755,187

* excludes notes payable classified as current at December 31, 2004** purchased power

Horizon Utilities Corporation

Hydro One Networks (Urban)

Veridian Connections Inc.

EnWin Powerlines LTD.

London Hydro Inc.

Enersource Hydro Mississauga Inc.

PowerStream

Kitchener-Wilmot Hydro Inc.

Hydro Ottawa Limited

Dis

trib

uto

rs

Toronto Hydro Electric-System Limited

$25.51

$25.40

$22.00

$21.39

$20.85

$20.13

$19.77

$19.35

$18.81

$28.72

2004 saw Hydro Ottawa Holding Inc. move out of a deficit position for the first time in its four-year history. Consolidated net earnings fromcontinuing and discontinued operations increased to $19.7 million from $2.6 million due mainly todecreases in operating, maintenance and adminis-tration costs; the recovery of the cost of regulatoryassets; and the gain on the disposal of discontinuedoperations. As a result, the Corporation’s deficit of $16.9 million became retained earnings of $2.8 million.

* based on an average residential customer using 750 kWh per month.

How three entities –Hydro Ottawa,Energy Ottawa, andTelecom Ottawa –combine to makeone powerful connection.

Hydro Ottawa Holding Inc. connects the threecompanies together, providing leadership within a management structure that includes the chiefoperating officers of each of the three subsidiaries.

Hydro Ottawa Limited powers the City’s economy.We connect almost every home and business in Ottawa to a safe, reliable and cost-effective supply of electrical power.

Energy Ottawa Inc. enhances the City’s environment.We connect the citizens of Ottawa to a more sustainablefuture by using renewable resources and low-impactprocesses to generate green electricity.

Telecom Ottawa Holding Inc. boosts the City’s produc-tivity. We connect public organizations, businesses andconsumers to high-value, productivity-enhancingbroadband network services.

Four years after the amalgamation of five Ottawa-area utilities, Hydro Ottawa Holding Inc. plays acritical role in powering the future of one of Canada’sfastest-growing and most dynamic cities. Throughthe activities of our three subsidiaries, we have apositive impact on the lives and livelihoods of everyresident and business in Ottawa every day. We are a lynchpin in the social wellbeing and economicsuccess of Ottawa and the surrounding regionthrough the stewardship of our assets.

Our corporate governance practices allow for completetransparency and accountability in our dealings withour shareholder, the City of Ottawa. And I am pleased to lead a Board of Directors composed of eminentcommunity and business leaders including the Mayor and two City Councillors.

In many ways however, every citizen of Ottawa is ashareholder of Hydro Ottawa Holding Inc. and ourmission is to generate genuine value for our share-holders, our ratepayers, our customers and the com-munity we serve. This annual report demonstrates the three ways in which we make one powerfulconnection for Ottawa.

Pierre Richard – Chair of the Board of Directors

Letter to Shareholder

Hydro Ottawa Holding Inc. President and ChiefExecutive Officer Ron Stewart is blunt and to the point when he says 2004 was “a tumultuous year”for an organization that oversees three subsidiarycompanies delivering some of the most essential servicesthe citizens of Ottawa receive. But, he’s quick to add,“It was also a phenomenally successful turnaroundyear in a number of areas.”

Among the key achievements Stewart wants tocite are the progress the holding company made“towards establishing a better relationship with ourshareholder, the City of Ottawa, the moves we tookto adopt the most robust standards of corporategovernance, and the implementation of a new, five-year consolidated financial plan.”

The tumult Stewart insists on acknowledging wasperhaps the inevitable product of the process that created the holding company in the first place. “Theprovince has legislated that local electricity distribu-tion companies must be self-sustaining, raise theirown financing and produce a financial return,”Stewart explained. “We are the mechanism throughwhich that all happens. We are the arm’s lengthvehicle through which the City of Ottawa manages its ownership of these critical municipal services and in the process, safeguard the City’s obligations to its residents.”

This compound vision of the holding company as both the steward of the City’s ownership of essentialservices and an instrument of provincial regulationbecame better integrated in 2004 thanks to a processthat Stewart credits the City with initiating. “Theyengaged in an independent review of the governance of Hydro Ottawa Holding Inc. and of the shareholderrelationship,” he said. “And that led to a number of beneficial changes.”

A new board of directors was introduced “withtwo more City Councillors and a full complementof members with excellent community and business

backgrounds.” Transparency and accountabilitybetween Hydro Ottawa Holding and its shareholderwere improved with more regular reporting to City Council.

In August, City Council approved Hydro OttawaHolding’s five-year consolidated financial plan thatrecommended that the City, which had been owed$237.8 million from a transfer of assets following the amalgamation of five local electrical utilities four years ago, invest $37.8 million back into theCorporation and receive payment of the balance.That all happened in late 2004 and early 2005. Thepayback of the City’s loan was, in turn, financedthrough Hydro Ottawa Holding’s placement in early February, 2005, of $200 million in bonds.

Beyond the new financial structure, Hydro OttawaHolding also experienced “a real turnaround in ourfinancial performance,” said Stewart. Total revenuesfor fiscal 2004 were $615 million, up 2.16 percentfrom $602 million the year before. More importantly,net earnings were up more than sevenfold, rising to $19.7 million in fiscal 2004 from $2.6 million the year before, and the company’s deficit was entirely eliminated.

In looking to 2005 and beyond, Stewart becomes animated when he talks about the contribution Hydro Ottawa Holding and its three subsidiaries make to the quality of life in Ottawa.

“We live in one of the largest and fastest-growing metropolitan regions in the country,” he said,“Hydro Ottawa Holding Inc. plays a pivotal role in delivering essential services needed by bothresidents and businesses today, while ensuring those services will continue to meet the ever-growingdemand. These services are not just transactionsbetween businesses and their customers. They alsohelp achieve broader community and social objectives.”

Ron Stewart — President and Chief Executive Officer (CEO)Hydro Ottawa

Holding Inc.

Electricity costs about the sametoday as it did 90 years ago

An electricity bill that The Ottawa Electric Co. sent in 1914to Sherbrooke Avenue resident P. E. Cooke tells a fascinatingtale about the cost of electricity.

Mailing the bill to Mr. Cooke required a one-cent Canada Poststamp; a service that today costs exactly 50 times as much.

And yet Mr. Cooke paid only eight cents per kilowatt-hour forhis electricity, not much less than the 9.15 cents it costs today.

“That says a lot about the efficiency of Hydro Ottawa and of the electricity market,” said Hydro Ottawa COOAnthony Haines.

Wanted: Your old fridge

They’re energy thieves and we’re taking them in! Your old fridges, that is. And Hydro Ottawa will evenprovide you a bounty if you turn in one of these

energy-wasting crooks in favour of a new, energy-efficient refrigerator that uses less than half the electricity of a 10-year-old model.

For Anthony Haines, COO of Hydro Ottawa Limited,proof that 2004 was “a difficult but highly successfulyear” lies in a list of accomplishments he is happy toread out to a visitor.

The local electricity distribution company, a sub-sidiary of Hydro Ottawa Holding Inc., “saw a signifi-cant financial improvement due to a number of factorsincluding the recovery of certain regulatory assets,earning the utility’s regulated rate of return for thefirst time ever while we maintained some of the lowestdistribution rates in the province for our customers,”Haines said. “We achieved the best reliability record in our history,” cutting by one-third the frequency and duration of power outages as compared to theaverage over the past three years. In Kanata, signifi-cant investments in infrastructure produced an evengreater improvement, with outages falling by half andmoving Kanata residents toward reliability standardsconsistent with the rest of the City. “And we madegreat strides in improving customer service. We met or exceeded all our customer service targets and weintroduced a new billing system to make sure all our customers get accurate, timely bills.”

There were many other accomplishments last yearthat Haines is keen to discuss. But these first threerepresent the priorities of Hydro Ottawa – maximizingthe return on investment to the company’s share-holder, the City of Ottawa, while maintaining the mostcompetitive rates possible for customers; reducingoutages to the lowest frequency and shortest durationthat is economically feasible; and safeguarding thehealth and wellbeing of the nearly 500 people whomake sure that the lights stay on for the more than274,000 residential and business customers served by Hydro Ottawa.

In the coming year, these priorities will continue, butan increased emphasis will be placed on conservationand demand management initiatives, some of whichbegan in 2004. A bounty is being placed on old, energy-hungry fridges (See sidebar on previous page), smartmeters are being introduced into homes in Ottawa and Hydro Ottawa will be making its own distributionsystem more efficient.

The smart metering initiative will allow homeownersto monitor their electricity consumption and changetheir consumption patterns so as to use less duringpeak hours. Air conditioners can be turned off anddishwashing and laundry can be rescheduled to off-peak times. These efforts reduce the amount of elec-tricity that has to be generated during times of peakdemand, meaning that Ottawa residents will be lessreliant on expensive, spot purchases of imported elec-tricity and that the distribution system itself will notneed to be enlarged as quickly.

Hydro Ottawa will be piloting various smart meteroptions in 2005, with a community-by-communityroll-out starting in 2006. The objective is to have allresidents using smart meters by 2010.

Other initiatives in 2005 and beyond will focus oncontinuing to improve the financial performance ofHydro Ottawa, the cornerstone that allows the localdistribution company to provide safe, low-cost andreliable electricity to Ottawa.

Hydro Ottawa gains ISOenvironmental certificationHydro Ottawa’s Environmental Management Systembecame ISO certified in 2004, putting the utilityamong an elite group of companies committed toprotecting the environment.

The 14001:1996 certification “will allow us to bettermanage the impact of our activities on the localenvironment,” said Hydro Ottawa’s Chief OperatingOfficer (COO) Anthony Haines. Vice president of operations Norm Fraser agreed, adding,“Our voluntary compliance with ISO 14001:1996plays an important role in raising the levels ofquality, safety, reliability and efficiency of ouroperations. It’s an investment both in our companyand in a greener Ottawa.”

Anthony Haines — Chief Operating Officer (COO), Hydro Ottawa Limited

Hydro Ottawa

The pride a person takes in a difficult job well doneis evident throughout a conversation with two HydroOttawa linesmen who are discussing what it took tocomplete a recent, $1.4 million realignment and upgradingof a major power line along Fallowfield Road in Barrhaven.While the job itself technically, was nothing more thanwhat these crew members do every day, this project putspecial demands on them, not the least of which was arequirement to finish it in just six scant weeks. The snow-covered farmer’s field where the line was being relocatedrapidly turned into a mud bowl as the frost went out ofthe ground. A heritage structure on the property had to

be protected. Access to the property had to be negotiatedwith the National Capital Commission, right-of-wayaccess had to be negotiated with the owner of adjacentrailway tracks, and all the usual permits and approvals of any major construction job had to be obtained.

The dawn-to-dusk effort it took to complete the job“indicates the perseverance of this company’s people,”said line supervisor Shane Hook. Coordinator BruceBaker agreed. “We can compete with anybody in thisbusiness and get the job done.”

Tim Vallec — Hydro Ottawa

Linesmen work dawn-to-dusk to finish a major project on time

Left to Right: Betty Burton, Frank Martin,Nancy Norman, Lori Turcotte, Roger Marsh,Carole Lamoreux, Steve White, Mary Beth Macdonald,Sally Barakat and Michel Provost — Hydro Ottawa.

New customer billing system delivered on time, on budgetWhen Hydro Ottawa’s new customer billing system went livelast September, there was nobody happier, prouder or morerelieved than the utility’s Customer Information System (CIS)implementation team.

Led by Roger Marsh, the utility’s director of customer service,the CIS implementation team had to design, develop and test a system over an 18 month period to ensure it was able to growwith the company and be flexible enough to handle the demands of a deregulated electricity market. With the help of a core teamof 10 that swelled to as many as 45, and the direction from aHydro Ottawa executive steering committee, the new systemwent live on time and on budget.

“The team was pretty proud of the accomplishment and theyshould be,” said Marsh. “To bring a big project like this in on time and on budget is quite an achievement. After ninemonths of operation, we’re extremely happy with the system and it is helping us to be more responsive to our customers.It’s responding well.”

Erika Leslie — Hydro Ottawa

Hydro Ottawa employees deliver specialoutings to Gloucester FairEvery June for the past four years, scores of Hydro Ottawa employeeshave volunteered their time so that more than 900 physically andmentally handicapped children can enjoy their own special day at theGloucester Fair.

If Dave Dobbin, COO of Telecom Ottawa, gets his way,Ottawa will become “the most connected community inthe world” and the network services provider he headsup will have played a role in making it so.

Significant steps towards that goal were taken in 2004 when Telecom Ottawa completed its transitionfrom broadband utility, a provider of data pipelinesthat connected its customers to each other and to theInternet, to what Dobbin called “an IT utility that’s all about providing higher-value network services.”

Several acquisitions made in 2003 were successfullyintegrated into Telecom Ottawa’s operations, includ-ing the ISP operations of Trytel in Ottawa andPeterborough, as well as the fibre-optic assets ofCornwall’s local electricity distribution company.Those integrations provided the base on whichTelecom Ottawa expanded its service offerings andtoday the company provides a diverse range of services that create real and tangible benefits for its customers. By using these services over TelecomOttawa’s network, customers gain an enhanced abilityto access, share, secure and manage information.

Last year also saw Telecom Ottawa substantiallycomplete its vast, all-optical network that nowencompasses more than 1,000 km of fibre-opticcable and stretches from Cornwall in the south-east,to Kingston in the west, and, of course, throughoutOttawa and even across the river to Gatineau. It is the largest, all-optical, metropolitan-wide, 10 GigabitEthernet network in North America, which providesOttawa residents and businesses a super-fast reliableand secure connection for exchanging information andconnecting to the world.

A good example of the higher-value service TelecomOttawa brings to its customers is Data BackupRecovery, a service Dobbin said is uniquely suited to the very high bandwidth of Telecom Ottawa’soptical network.

“We saw a real competitive advantage for our customersin Data Backup. Because our network can transmitlarge amounts of data so quickly, we can backup acustomer’s entire server in the same time as otherstake to back up a few files. And we can restore thatfull server image equally swiftly.” (See sidebar on next page.)

A second example is Voice-over-Internet-Protocol, orVoIP, a service Telecom Ottawa introduced in 2004with One Connect. VoIP is a rapidly expanding tech-nology that routes voice communications over theInternet rather than across traditional telephonenetworks. But for Telecom Ottawa, “it’s got to be aboutmore than just replacing phone lines,” Dobbin said.“We’ve got to also provide services that allow ourcustomers to use the phone in new ways to make more money, increase productivity or serve theircustomers better. For us, the V in VoIP stands forvalue; we provide exciting new features that enhancethe mobility and productivity of our customers.”

It’s creating that kind of value for its public andprivate sector customers that will make TelecomOttawa a factor in Ottawa becoming the most connected community in the world.

Partnerships MatterTelecom Ottawa plays well with others, especially if the othersare Ottawa-based developers of cutting-edge technologies.

“We live in the technology heartland of Canada and some of the world’s best telecommunications and networking technologyare being developed by companies right here in Ottawa.” saidTelecom Ottawa’s Chief Operating Officer (COO) Dave Dobbin.“All other things being equal, we will always do business with a local company first.”

Telecom Ottawa is a lead customer for several Ottawa-areaventures. For example, switches from Meriton Networks powerTelecom Ottawa’s network while service control systems byDiatem Networks, Dragonwave Internet radios and fibre-opticcable from Alcatel are all deployed within the network.

“We are often among a leading group of companies thatimplement these new technologies and we let our partners lever that internationally,” Dobbin said. “Every time we help one of them succeed, we’re helping Ottawa succeed.”

Telecom Ottawa

Dave Dobbin — Chief Operating Officer (COO), Telecom Ottawa

Telecom Ottawa’s Backup andRecovery service lets commercialcustomers sleep better

Brad Beamish is responsible for mission-critical datafor Ottawa’s Com-Net Communication Cabling andNetworking Solutions Inc., and he knows only too wellwhat he’s talking about when he says, “I sleep betterwhen the Telecom Ottawa Data Backup is runningon my servers.”

An internal hardware failure last year brought downthe company’s file servers. “Thanks to Telecom Ottawa’sBackup and Recovery service, we suffered no data loss.We were able to retrieve all crucial data and be backup and operational within hours.”

Go-to project managerbrings Everest to OttawaWhen Telecom Ottawa was looking for a point person to pull together the technical, customer liaison andmarketing challenges of a major sponsorship effort, itturned to marketing communications officer Keri Clark.

The Ottawa Carleton District School Board, a majorclient, had approached Telecom Ottawa for help witha special project – beaming live coverage of a MountEverest campaign back to classrooms across the city so students could interact in real time with theclimbers on the mountain.

“We had never done that here at Telecom Ottawa,”Clark said. “We had to solve the technical mysteryof how to bring back real-time video by satellite and then send it out over our fibre network to everyschool in the Board. It was a great challenge for us.”

From a marketing perspective, the challenge wasrewarding “because it allowed us to tell the story of what Telecom Ottawa is and what we do.”

Keri Clark — Telecom Ottawa

‘Extreme tech support’ takes Telecom Ottawa to the top of the worldAt 18,000 feet above sea level, where cold, altitude, thin oxygen and eventhe cold germs of your fellow camp dwellers all take their toll, ensuringthat live audio-video transmissions make it back to Ottawa schoolchildren constitutes a whole different category of technical support.

Just ask Telecom Ottawa network operations manager Steve Gamble.He spent three weeks in a base camp on Mount Everest making sure that the company’s project to beam live coverage of an Everest expeditionback to Ottawa schools went as smoothly as possible.

Gamble was the interface whenever video transmissions needed to bebeamed back via satellite to Telecom Ottawa’s network operationscentre, from where they were distributed across the company’s all-fibrenetwork to every school in the Ottawa Carleton District School Board.

Gamble said the time he spent on Everest was “a life-changingexperience,” but one he would gladly repeat. “It was challenging bothmentally and physically, but I’d do it again in a heartbeat.”

Steve Gamble — Telecom Ottawa

Negawatts – the ultimate clean powerEnergy Ottawa doesn’t just generate megawatts of environmentallyclean electricity; it also generates negawatts, which are even cleaner.

Negawatts is the name given to units of electricity that don’t haveto be generated by the provincial power grid because of conserva-tion efforts or other activities. An innovative pilot project this yearwill see Energy Ottawa install price response systems in threelarge buildings to facilitate negawatt generation.

In two of the buildings, the automated systems will temporarilyreduce certain energy-intensive operations when the spot price ofelectricity rises above certain levels. In the third building, stand-bygenerators will be called into service when high spot prices makethem a lower-cost alternative to taking power from the grid.

Energy Ottawa’s Chief Operating Officer (COO) Marc Brûlé says everybody wins when negawatts are generated. “Instead of building new generating stations or importing expensive anddirty electricity on the spot market, we can see what kind of stand-by generating capacity and load-shedding possibilities are out there, and when it makes sense to use them. The provincewins, the environment wins and the building operators reapeconomic advantages.”

Marc Brûlé — Chief Operating Officer (COO),Energy OttawaEnergy Ottawa

As the COO of Energy Ottawa, Marc Brûlé isdefinitely in the energy business. After all, thissubsidiary of Hydro Ottawa Holding Inc. generatesenough electricity to power more than 13,000 homesin the city. But as he looks to increase that generat-ing capacity over the next few years, Brûlé is alsomost definitely in the business of safeguarding the environment.

“The generation of renewable, green power is really the focus of our business,” Brûlé said. “It’s a greatniche market with a lot of momentum behind it,” headded, referring to the Kyoto Protocol under whichCanada has committed to reducing its production of greenhouse gases, the phasing out of coal-firedgenerating plants in Ontario and “the real desire of Canadians to diversify our sources of power.”

The “crown jewels” of Energy Ottawa’s green powergeneration are a pair of run-of-the-river generatingstations at the Chaudière Falls on the Ottawa Riverthat were built more than 100 years ago. They hadreached the end of their useful lives and were completely rebuilt to make them showcases for

environmental sustainability. Another jewel will beadded to the crown over the next two years as thecompany builds a methane-powered generating plantat the City’s Trail Road landfill facility. (See sidebar on next page.)

Brûlé acknowledges that “green power tends to havehigher production costs so selling our power into thegrid at the spot price for electricity may not beenough.” Fortunately, “there is a growing market forthe green attributes of the power we generate.” Forexample, in 2004 Energy Ottawa won a contract toprovide the federal government with up to 90 gigawatthours of electricity a year for the next five years forup to $8.3 million, a premium price for the environ-mentally friendly nature of the company’s electricity.

With Ontario having a target of generating 10 percentof its electricity from renewable sources by 2010,“our strategy is to build more plants based on long-term contracts that buy both the power and its green attributes,” said Brûlé. This includes looking atcreating more capacity at Chaudière Falls, where thecompany is using only about half of its water allotment.

When Energy Ottawa’s power generation plant at theCity’s Trail Road landfill facility comes on stream in 2006,it will be capturing millions of tonnes of climate-changingmethane gas and converting it into enough greenelectricity to power as many as 5,000 Ottawa homes.

The roughly $70 million, 20 year green energy contractwith the Province of Ontario will also generate a returnfor the city, which will save about $2 million in capitalcosts and about $200,000 annually in maintenance andoperating costs while earning about $140,000 a year from royalty payments.

From greenhouse gas to greenpower to just plain green

Left to Right: Peter Filipowich — City of Ottawa and Greg Clarke — Energy Ottawa

Heritage plant refurbished togenerate modern green powerWhen Energy Ottawa’s director of generation, Geoff Sayre, heardone observer comment recently that it was impossible to detect themonths of heavy-duty refurbishing work he and his team has com-pleted on one of the company’s generating stations at ChaudièreFalls, he took it as a compliment.

“The guy said the building looked completely unchanged,” Sayresaid. “So that means we did our job properly.”

The job entailed completely refurbishing a 100 year old, inefficientgenerating station and turning it into a state-of-the-art, high-efficiency, high-output, fully automated plant that meets the moststringent requirements for certification as a green power generatingplant. When it went online in March, it became the second refurbishedplant operated by Energy Ottawa to win the federal government’sEco-Logo stamp of approval.

For Sayre, who said his job is to develop generating projects thatmeet Energy Ottawa’s mandate to produce only green power, theChaudière Falls project brought extra rewards. “There’s some realbeauty in the heritage structure itself,” he said. “We were ableto retain that while we completely modernized the plant.”

Todd Beckstead — Hydro Ottawa,Geoff Sayre and Mike Poulin — Energy Ottawa

Glenn Mooney — Energy Ottawa and his wife Pam

Energy Ottawa helps cancer patients ‘just be kids’Every August, about 60 young cancer patients and their siblings are happythat Energy Ottawa’s manager of commercial accounts, Glenn Mooney andhis wife Pam, have the time to organize and run the Eastern Ontario editionof Camp Quality, a week-long program of activity that takes children either in treatment for cancer or in remission from the disease. The camp allows“kids to be just kids,” said Mooney.

Now in its fifth year, this year’s camp will see local children and their familiesagain gather at what Mooney calls “a pretty luxurious place” at ProvidencePoint in Lanark County. Everybody at camp, from the medical personnel to the kitchen staff, are volunteers, Mooney said, which makes “looking forvolunteers our biggest challenge.” An adult companion for every child alsogoes to camp, with the companion continuing to provide support to the cancerpatient and his or her family through the balance of the year. The volunteerdirectors raise nearly $30,000 every year to cover the expense of organizingboth the camp and other activities throughout the year.

Hydro Ottawa customer support assistant Martha Ripley knows first handthe value of all that effort. Her seven year old son and his two older sistersattended last year’s camp. “They really liked it and had a great time,” Ripleysaid. “They made it very special for everybody.”

Mooney would agree that the kids enjoy a special week at camp. But he alsobelieves he does too. “I’ve met a lot of amazing families and I’ve learned a lot, personally.”

Introduction And Corporate Structure

Hydro Ottawa Holding Inc. is wholly owned by the Cityof Ottawa. Our principal business is the oversight of our main subsidiary – Hydro Ottawa – a regulatedelectricity Distribution Company that owns and operatesdistribution infrastructure in the City of Ottawa and the Village of Casselman. Hydro Ottawa is the secondlargest municipally owned LDC (Local DistributionCompany) in Ontario in terms of number of customersand asset base. We have two other subsidiaries that alsodeliver essential services for the citizens of Ottawa:

• Energy Ottawa – A power generation company that produces EcoLogo certified “green power” fromhydroelectric generating stations at Chaudière Fallson the Ottawa River near Parliament Hill; and

• Telecom Ottawa – A specialized telecommunicationscarrier providing broadband services mainly topublic institutions in the City and Internet servicesin Ottawa and other parts of Eastern Ontario.Telecom Ottawa carries out its activities throughthree operating subsidiaries, Telecom OttawaLimited, Telecom Ottawa Regional Limited and2038455 Ontario Inc.

Regulatory Environment

Opening of the Ontario Electricity Market

On May 1, 2002, the Ontario electricity market wasopened to competition at both the wholesale and retaillevels. An unusually warm summer in 2002, together withshutdowns of certain nuclear generating units, resulted in a high demand for electricity that could not be met byOntario-based generators and required importation ofexpensive electricity generated outside of Ontario. Higherthan expected electricity prices and price volatilityresulted in significant consumer concerns.

Electricity Price and Distribution Rate Freezes

In November 2002, the Ontario government introducedthe Electricity Pricing, Conservation and Supply Act,2002, commonly referred to as Bill 210. This legislationfixed the price of electricity charged to eligible consumersat 4.3¢/kWh (kilowatt hour) retroactive to May 1, 2002.The Act also froze distribution rates charged by elec-tricity distributors at then current levels and deferredfurther rate increases and certain cost recoveries bydistributors. The legislation also deemed certain costsand variance accounts of distributors to be “regulatoryassets” which are reflected on a distributor’s balancesheet until the manner and timing of disposition isdetermined by the Ontario Energy Board (OEB).Transmission rates and wholesale market charges were also capped. The price freezes and rate caps were intended to continue until at least May 1, 2006.During this period, the Ontario Electricity FinancialCorporation (OEFC) was to compensate distributors forthe difference between the price they paid to purchaseelectricity and the fixed price paid by eligible consumersto the distributor.

Management’sDiscussion and Analysis

This Management’s Discussion andAnalysis (MD&A) is intended to provide a review and analysis of theCorporation’s results of operations and financial position based upon ourConsolidated Financial Statements for the years ended December 31, 2004and 2003. All amounts are expressed in Canadian dollars.

Shirley Mears —Senior Vice President, and Chief Financial Officer (CFO)Hydro Ottawa Holding Inc.

15

Further Regulatory Changes

Following its election in October 2003, the new Ontariogovernment introduced further regulatory changes.The price of electricity charged to eligible consumers was increased to 4.7¢/kWh for the first 750 kWh ofmonthly consumption and 5.5¢/kWh thereafter. Thedifference between the new two-tier increased fixed price and the cost of electricity purchased continue to be recoverable from the OEFC. Distributors were also advised at the end of 2003 that a distribution rate increase would be permitted in 2005 to achieve thefull-regulated rate of return, provided that an amountequal to the value of one year of incremental returnswould be spent on energy conservation and demandmanagement (CDM) measures.

The Electricity Restructuring Act, 2004

In December 2004, the Ontario government passed the Electricity Restructuring Act, 2004 most of whichcame into force by February 2005. This legislationimplements a hybrid market model for Ontario’selectricity sector. The OEB will assume responsibility for establishing the prices at which electricity providedby certain Ontario Power Generation (OPG) generatingstations will be sold and for setting a regulated priceplan (RPP) for consumers currently eligible for the two-tier fixed commodity price. The RPP will be implementedin April 2005 and will continue with a two-tier structureat new prices of 5.0¢/kWh for the first 750 kWh and5.8¢/kWh thereafter. The OEB will adjust the RPP period-ically to ensure price stability while passing on the truecost of electricity. The 2004 Act created the OntarioPower Authority (OPA) to perform middle and long-rangeplanning of the power system, encourage conservationand to ensure adequate electricity supply. Electricitydistributors will have an increased role in promotingconservation, managing electricity demand and pro-moting the use of alternative and renewable energysources. The 2004 Act makes municipally owneddistributors and their affiliates subject to municipalaccess to information laws. The Independent MarketOperator (IMO) was renamed as the IndependentElectricity System Operator (IESO) pursuant to the 2004 Act and certain of its functions were assigned to the OPA and the OEB.

Regulation of Electricity Distributors

The OEB regulates the business of electricity distributorslike Hydro Ottawa and has broad powers relating tolicensing, establishing standards of service and codes of conduct. It also regulates the rates distributors cancharge customers.

Distribution Rates

Under the Ontario Energy Board Act, 1998, as amended,the OEB approves or fixes the rates and charges thatlicensed electricity distributors can charge their customers.The OEB has issued an Electricity Distribution RateHandbook that outlines the principles, policies andprocedures used to establish distribution rates.

Electricity distributors are required to deliver electricityon behalf of retailers and to sell electricity to theirStandard Supply Service customers. Distributors purchasetheir electricity requirements in the wholesale marketadministered by the IESO, charge their customers for the electricity commodity price, the costs of transmission,IESO fees and other electricity wholesale market costs and collect and remit the debt retirement charge set by the Ontario government to assist with the repayment of the outstanding indebtedness of the former OntarioHydro. Distributors charge their customers a distributioncharge that is intended to recover the distributors’ costs of delivering electricity and operating and maintainingtheir distribution system. This charge usually includes a fixed charge and a charge based on the amount ofelectricity consumed. At levels set by the OEB, distributionrates also include amounts intended to provide returns on equity and debt for distributors.

GST (paid to federal government) 7%

Debt Retirement Charge (paid to provincial government) 7%

Distribution Charges (Hydro Ottawa’s portion of the bill) 21%

Transmission Charges (paid to Hydro One) 11%Commodity and Other

Wholesale Charges (paid to IESO for generation) 54%

2004 Breakdown of Average Residential Monthly Bill (750 kWh)

The current Ontario government has allowed electricitydistributors to apply for increases in their distributionrates effective March 1, 2005, for implementation April 1, 2005, which will allow electricity distributors toachieve the full 9.88% rate of return on equity originallypermitted by the OEB. However, an amount equal to thevalue of the first year’s increase must be dedicated toenergy conservation and demand management (CDM)measures approved by the OEB. Distributors were alsoallowed to apply for a further distribution rate increaseto recover a portion of the distributors’ regulatory assetbalances and for certain adjustments for 2005 PILs(Payment in lieu of taxes). Hydro Ottawa receivedapproval of its CDM plan in December 2004 andtherefore included these amounts in its application for a distribution rate increase.

In December 2004, the OEB also determined that itwould allow LDCs to apply, on a voluntary basis, for lost revenue and shared savings mechanisms for 2005,with the expectation that further mechanisms will beput in place as part of the approval and fixing of 2006 distribution rates. These mechanisms allow LDCs to be compensated when conservation programsreduce demand for electricity, and allow LDCs to share in the benefits of successful conservation anddemand management programs.

An OEB process is underway to redesign electricitydistribution rates for May 2006. A draft 2006 electricitydistribution rate handbook has been issued by OEB staff and was the subject of hearings in early 2005.The 2006 electricity distribution rate proceeding isdiscussed in greater detail below under the heading2006 Electricity Distribution Rates.

Regulatory Assets

Electricity distributors incurred certain transition costsin preparation for market opening in May 2002 andestablished certain variance accounts, as prescribed bythe OEB, that allow them to track and accrue certaincosts for future recovery. Variance accounts include itemssuch as the difference between the distributors’ costs ofpurchasing electricity and the amounts billed to theircustomers. Hydro Ottawa has typically called theseaccounts “regulatory assets” if the distributor’s costsexceed the amount billed and “regulatory liabilities”if the amount billed exceeds costs.

In December 2003, the OEB issued filing guidelines withrespect to the recovery of regulatory assets. The OEB’sfiling guidelines provided that:

• distributors would be permitted to recover 25% ofregulatory assets in their rates; and

• the balance of approved regulatory assets would be recovered over a three-year period (2005, 2006and 2007).

Based on these guidelines, Hydro Ottawa filed anapplication with the OEB for permission to recover thefirst 25% of its December 31, 2002, regulatory assetbalance of approximately $37 million. This applicationwas approved on an interim basis, and a distributionrate increase was implemented on April 1, 2004.

In a December 9, 2004, Decision with Reasons, the OEBset out different levels of review depending on the levelsof transition costs being claimed as regulatory assets ona per-customer basis. Since Hydro Ottawa’s transitioncosts were $27 per customer at the 2003 year-end, theCompany will only be subject to a “minimum review” onits application for approval of its 2003 regulatory assetsbalance, performed by way of a written hearing withwritten submissions from intervenors.

Most LDCs, including Hydro Ottawa, did not have finalapproval of regulatory assets in time to implement rateincreases for regulatory assets recovery on April 1, 2005.Those LDCs will continue to recover regulatory assets on an interim basis through 2005, based on 2003 year-end balances less 2004 recoveries.

Metering

Under the OEB’s Distribution System Code, distributorsare obliged to provide certain metering services. Theseinclude the installation, maintenance and verification ofmeters, meter reading, data manipulation and provisionof data to market participants, such as the IESO andretailers.

On July 14, 2004, the Minister of Energy issued adirective to the OEB asking it to develop and implementsmart meters, a plan to manage demand for electricity,make more efficient use of current supply and reducereliance on external sources. The Ontario government istargeting the installation of 800,000 smart meters byDecember 31, 2007, and installation of smart meters forall Ontario customers by December 31, 2010.

17

In January 2005, the OEB submitted its implementationplan to the Ministry of Energy. The proposed smartmetering system would measure how much electricity acustomer uses each hour of the day. Distributors woulduse this data to charge customers a price that variesdepending on when the electricity is consumed. Theproposed system would be similar to the way largercustomers are presently being charged.

The final decision on what Smart Meter plan will beadopted will now be made by the Minister of Energy.

2006 Electricity Distribution Rates

The OEB has established a process for setting distribu-tion rates for LDCs based on updated revenue require-ments to become effective May 1, 2006. The result of theOEB’s policy process will be a revised Rate Handbookthat will provide filing requirements for 2006 distribu-tion rate applications. Distributors will be required tofile individual cost of service applications in mid-2005 for May 1, 2006 implementation.

A distributor’s rate base is currently the amount of itsyear-end net fixed distribution assets plus a workingcapital allowance. Hydro Ottawa’s current rate base,established in 1999, is $380 million. The maximumreturns on equity and debt rates were set in 2000. Themaximum allowed return on deemed equity for theinitial period to 2006 was set at 9.88% per annum. Thedebt rate for utilities the size of Hydro Ottawa with acapital structure deemed to be composed of 40% equityand 60% debt was set at 6.9% per annum. The approvedrates of return on equity and debt are applied againstthese percentages of the rate base.

It is anticipated that the rate increase scheduled for2006 will include an increase in Hydro Ottawa’s ratebase against which it is permitted to earn a rate ofreturn. The draft 2006 Distribution Rate Handbookprovides for a reduced maximum return on equity of9.61% per annum and reduced debt rates, dependent on the size of the LDC’s rate base.

Other Regulatory Developments

On December 21, 2004, the Ontario government issued a discussion paper entitled “Electricity Transmission and Distribution in Ontario – A Look Ahead”. The paperdoes not make specific recommendations with respect to the transmission and distribution sectors, but raisesnumerous questions for consultation.

The distribution-related questions for consultation relate to: barriers that impede efficiency gains;regulatory incentives for LDCs to seek greaterefficiencies; consolidation; asset swaps and creativepooling arrangements to simplify the configuration ofthe distribution sector; and competition. Submissionsfrom interested parties were filed by February 28, 2005.Depending upon the outcome of this consultationprocess, further legislative changes or OEB initiativesaffecting electricity distributors may be implemented.

Description and General Development of our Business

Hydro Ottawa Holding

The role of Hydro Ottawa Holding is to: assess thestrategic value of the business activities of each ofour subsidiaries; evaluate the performance of each of these subsidiaries; and provide strategic direction to our subsidiaries on matters of financing, risk mitiga-tion, taxation, laws and regulations, public affairs,human resources, and business development. We do thiswith a staff of about 12 people. We are also responsiblefor ensuring that our subsidiary companies abide byOEB regulations and codes applicable to them.

Section 73 of the Ontario Energy Board Act, 1998,restricts our business activities generally to those wepresently carry on, that is to say, electricity distributionand generation and related services (such as energyprocurement consulting), and broadband data andinternet services. Certain peripheral activities that we do not carry on are also permitted, such as water and sewer system management, gas distribution, waterheater rentals (as of November 2004, we are no longerengaged in this business) and the retail sale of energy on a competitive basis. However, the ShareholderDeclaration of the City specifically prohibits us fromretailing electricity or natural gas in a manner thatexposes us to a commodity price risk, unless approved by the City.

The restrictions imposed by section 73 will apply to the entire Hydro Ottawa Holding group of companies as long as the City continues to indirectly own morethan 50 percent of the voting rights of our LDC. TheOEB’s Affiliate Relationships Code prevents us fromsubsidizing competitive or non-monopoly activities withelectricity distribution revenues. The establishment of our business in separate operating subsidiaries isdesigned to ensure compliance with this Code and other requirements of the Electricity Act, 1998, the OEB and its various codes.

The charts below provide a percentage breakdown of ourcapital assets and revenues by business segment as atDecember 31, 2004.

Strategic Priorities

As the Ottawa region expands and evolves as a regionaleconomic hub, and as its population base continues togrow, we have a pivotal role in the region. Ottawa isamong the fastest-growing and largest metropolitanregions in the country. Like other metropolitan regions,Ottawa faces a complex, long-term infrastructurechallenge: to improve and replace aging systems and,at the same time, to accommodate the demands of newgrowth; and just as the City itself has a requirement to re-invest in essential infrastructure – roads, waterdelivery, and public transit – we must do likewise,particularly in electricity distribution.

Our strategic priorities are to:

• provide superior customer service and an excellentemployment environment;

• build shareholder value by expanding our asset base and earning new revenue from our businesses,improving on core competencies, exiting activitieswhere we cannot compete effectively, and seekingalliances and partnerships;

• improve system reliability, increase customersatisfaction and enhance our reputation; and

• increase our productivity by improving capitalefficiency and labour productivity.

We have made significant strides in recent years to meetthe increasing electricity distribution infrastructureneeds in the City. However, there will always remainrequirements to improve and expand our assets.

While Ottawa continues to expand and evolve as aregional economic hub: our people, businesses and public organizations require an infrastructure providingessential services that will lead them forward andactively support their efforts to make Ottawa a greatplace to live, work and contribute to the collectiveenterprise of community-building. Over the next fiveyears, electricity consumption in the City is expected to increase, owing to factors such as the construction of thousands of new homes, along with demand formillions of square feet of new commercial space.

Hydro Ottawa 87%

Telecom Ottawa 7%

Energy Ottawa 6%

Hydro Ottawa 97.94%

Telecom Ottawa 1.87%Energy Ottawa 0.19%

Revenue Allocation (2004)

Capital Asset Breakdown by Company (2004)

19

To continue delivering a high standard of reliability and operational excellence, and to provide essentialinfrastructure and related services in a growingeconomic region, our current intention is to invest some $400 million over the next five years to repair,improve, modernize and expand our operations, largelyin electricity distribution and green power generation.By far, the largest portion of these expenditures will be invested in Hydro Ottawa, particularly in meetingnew demand and improving system reliability. Cash flow is expected to fund more than 75% of the cost ofthese investments, the balance by debt. Our businessesare capital-intensive, requiring a long-term approach to financing capital assets.

Our 2004-2009 Financial Plan

In August 2004, we developed a financial plan to carryout our strategic priorities to 2009. Through this plan we accomplished the following:

• refinanced the debt owing to the City on a long-term basis. Until recently, we were financed in the amount of $237.8 million in the form of promis-sory notes held by the City. This debt was provided by the City at the above-market interest rate of 6.9% per annum set as the appropriate rate by the OEB. In early 2005 we refinanced $200 millionof that debt with long-term borrowings;

• converted a portion of the promissory notes held bythe City into equity through a direct re-investmentin our company. In connection with repaying thepromissory notes held by the City, the City agreed to convert $37.8 million of the promissory notes into share capital of Hydro Ottawa Holding. Thisconversion was completed on December 31, 2004.This re-investment by the City will help us topragmatically undertake capital investments to achieve planned growth in the future; and

• instituted a dividend policy. In order to enable theCity to derive financial value in the future as theshareholder of Hydro Ottawa Holding, we intend to target an annual dividend to the City, determinedas a percentage of audited net income.

A key objective for Hydro Ottawa Holding is to operatewithin a more progressive financial structure thatfeatures access to long-term debt capital at marketrates. While we have benefited from having received our initial debt financing from our shareholder – theCity – the growing scale and scope of our operationsbrings a requirement to access debt capital on a morecommercial and cost-efficient basis. This is intended tostrengthen our financial position and increase our long-term financial value to the City and its taxpayers.

Key Performance Drivers And Financial Implications

The three businesses operated by Hydro Ottawa Holdinguse a number of key performance drivers to track theprogress of their operations.

Hydro Ottawa’s metrics concentrate on financial per-formance, service quality standards and accomplishmentof major, specifically identified, high priority projects.The company’s metrics for targeting and monitoringfinancial performance are net income, planned capitalexpenditures on reliability capital and planned capitalexpenditures on general capital. The metrics for trackingand monitoring performance for customer service areestablished by the OEB as part of its service qualityindicators. These standards include:

• timeliness in connecting new customers;

• telephone accessibility for customer enquiries;

• response times to customer written enquiries;

• response times to emergencies; and

• achieving targeted levels of system reliability for the duration and frequency of outages.

Energy Ottawa’s metrics focus on financial performance,customer satisfaction and generation availability. Thekey metric for tracking and monitoring financial per-formance is earnings before interest and taxes (EBIT).The company tracks and monitors the percentage of timethe generating plants are available for production. Theplants’ actual production is dependent upon water flow,ice blockages, and maintenance downtime. Availability is therefore the key determinant of production.

Telecom Ottawa’s metrics concentrate on financialperformance, service quality standards and networkreliability. The key metric for tracking and monitoringfinancial performance is EBIT. As most large customerinstallations involve construction of fibre facilities intothe customer’s premises, construction times are criticalfor realizing revenue. Both construction and implemen-tation delays can cause delays in revenue recognition.

The company tracks and monitors the average customerinstallation time. The company’s network reliability is important for ensuring customer satisfaction and italso has implications with respect to customer ServiceLevel Agreements (SLAs). These SLAs outline theacceptable levels of performance from the company’s core network. The company tracks and monitors thenetwork’s reliability in relation to the SLA service level commitments.

Hydro Ottawa – Our Core Business

Hydro Ottawa is the second largest municipally owned electricity utility in Ontario, based on number of customers. In 2004, the company had the lowestdistribution rates in Ontario, among the 10 largestelectricity distribution companies, for a residentialcustomer using 750 KW/h per month. Almost 90% of our consolidated assets and about 98% of our consoli-dated revenues relate to Hydro Ottawa. The LDCemploys about 480 people.

Service Territory

Hydro Ottawa’s service territory covers more than 1,050 square kilometres in the Ottawa area. It servesover 274,000 residential, commercial and industrialaccounts or about 88% of the customer base in the City.The remaining customers are served directly by HydroOne. Hydro Ottawa also provides electricity distributionin the Village of Casselman (located just outside ofOttawa), having acquired the electricity distributionassets of Casselman Hydro in 2002.

The demand for electricity in the City over the period2005-2009 is expected to grow at an average rate of 1.5% per year, based on our internal forecasts, before the effects of new conservation programs are considered.

Business Operations

Hydro Ottawa’s business involves buying, transformingand distributing electricity. It buys the electricity fromthe IESO at wholesale market rates. The electricity istypically received at transformer stations owned andmaintained by Hydro One. Hydro Ottawa then trans-forms that electricity to “primary distribution voltages”at its own substations. From there, power is delivered to customers using a network of overhead lines andunderground cable.

Hydro Ottawa had total assets of approximately $530 million as at December 31, 2004, including about$383 million of capital assets. Distribution system assets consist of 70 distribution substations and approxi-mately 37,000 distribution transformers. Hydro Ottawadistributes electricity utilizing 3,040 km of overheadlines, 1,790 km of underground cable and 71,000 poles.

The company’s electricity sales over the twelve monthsended December 31, 2004 totalled 7,514,934 MWh(megawatt hour). Hydro Ottawa’s customers arecategorized as residential, general service, large users(greater than 5 MW peak demand) and street lighting.Ninety percent of the LDC’s customers fall into theresidential category and less than 0.01% are large users.The largest single customer is the federal government.

Total Revenue (2004)

Total Customers by Type (2004)

Residential Service44.44%

Other 0.56%Large Users6.85%

General Service48.15%


Other 0.005%

Large Users0.004%



Other 3.38%Large Users2.33%


Distribution Revenue (2004)

21

The strategically most important aspects of HydroOttawa’s business are:

• managing within a regulatory regime;

• system reliability;

• timely and accurate billing and collection;

• consistently earning a full regulated rate of return;

• supporting the growing customer base (HydroOttawa plans to add 4,000 residential customersand 400 commercial customers in 2005);

• conservation leadership;

• maximizing the efficiency of the workforce (increasingthe number of calls per agent at the call centre andincreasing the productive proportion of hours workedby field employees);

• meeting or exceeding OEB customer service targets; and

• continuing with active safety and environmentalstewardship programs.

Maintaining an electrical distribution system poses avariety of risks centered on the “hands-on” work thatmust be done every day. The safety of our people is andmust be a priority put into practice daily. Success in this area is evidenced by our recent accomplishment of 1,750,000 net worker hours at Hydro Ottawa withouta lost time injury – our LDC leads the industry inOntario. In comparison to other electrical distributionutilities across Canada, Hydro Ottawa ranks in the topten utilities of comparable size in all areas of safetyperformance that are routinely benchmarked.

Our operations people work under conditions that canpose a hazard if all forms of energy (electrical, kinetic,thermal, etc.) are not properly controlled. Mitigation ofthese hazards and risks is accomplished through theimplementation and continuous improvement of ourhealth and safety management system. This systemincludes comprehensive training programs; detailedpolicies, procedures and safe work practices; inspectionprograms and other systems to detect deficiencies,identify remedial actions and track them to completion.The performance of the health and safety system isaudited externally on a regular basis to ensure legisla-tive compliance and to establish new best practiceswhenever we can. We are committed to having ourprogram conform to the new OHSAS 18001 standard for safety by 2007.

Competition

As a LDC, Hydro Ottawa does not currently facecompetition from other LDCs or electricity retailers.

The Ontario Energy Board Act and the Electricity Act,1998 established a regime to permit independentretailers to sign up customers and use a LDC’sdistribution network and billing system for the sale of electricity to consumers who enroll with theretailers. Detailed rules governing the relationshipbetween LDCs and retailers are prescribed in the OEB’s Retail Settlement Code and the Standard Supply Service Code. Approximately 12% of HydroOttawa’s customers purchase their electricity through an electricity retailer. Hydro Ottawa providesdistribution services to these customers.

Best Reliability Record Since 2001SAIDI/SAIFI

2004

2003**

2003*

2002

2001 1.220.96

1.321.39

1.441.46

11.982.47

0.660.76

SAIDI – System Average Interruption Duration IndexSAIFI – System Average Interruption Frequency Index

* 2003 SAIDI/SAIFI including August 2003 blackout

** 2003 SAIDI/SAIFI excluding August 2003 blackout

Workforce Reduction

A difficult decision was taken to downsize HydroOttawa’s workforce late in 2003. The cutbacks werenecessary because our operating costs had been risingeach year while electricity rates had been frozen. Ouractions were intended to address this imbalance while,at the same time, ensuring we did not compromisesafety, our effectiveness or the quality of our services.Most people who left the company did so through avoluntary program. A further workforce reductionbrought about by process efficiencies gained from theimplementation of a new customer information andbilling system, was initiated in late 2004 under anagreement reached with the International Brotherhoodof Electrical Workers (IBEW Local 636) union in thecollective bargaining process.

Company Objectives

Hydro Ottawa’s main goals going forward are to:

• grow and maximize revenue;

• maintain strong customer service;

• improve operational efficiency; and

• consistently achieve the rates of return approved by the OEB.

The company also hopes to acquire the distribution assetsof Hydro One within the City used to serve approximately37,000 Ottawa customers if, as and when the Ontariogovernment adopts a policy to facilitate this purchase oncommercially acceptable terms. This would be advanta-geous to Hydro Ottawa because it would permit us tospread our costs over a larger customer base.

Energy Ottawa – Our Electricity Generation Business

Energy Ottawa is first and foremost a “green power”electricity generator. It currently operates two generat-ing stations on the Ottawa River in the vicinity of theChaudière Falls near Parliament Hill. In 2004, theseplants achieved production of 82,000 MWh for theOntario electricity grid. This represents about 1.1% ofthe total annual electricity consumption in the City byHydro Ottawa. Energy Ottawa is a 28.33% shareholderin Chaudière Water Power Inc. (CWPI), which acting asan agent for the principals, operates and maintains theChaudière dam on the Ottawa River. Energy Ottawaalso provides certain energy conservation consultingservices to businesses and institutions in the Ottawaarea on a limited basis.

Energy Ottawa had revenues from continuing operationsof $5.3 million in 2004, over 92% of which were derivedfrom power generation and the balance mainly fromenergy conservation consulting activities. It employseight people. As a power generator, Energy Ottawa holds a generator licence from the OEB and operates in accordance with the Electricity Act, 1998 and theOntario Energy Board Act, 1998.

The prices that the company receives for the electricityit generates are determined for the most part by spotmarket prices, which fluctuate hourly and are dependenton supply and demand.

Energy Ottawa’s two hydroelectric generating stations on the Ottawa River are low cost generators of electricity.As such, they are well placed to compete in a bid-basedmarket such as Ontario’s, where the hourly price ofelectricity is a function of rapidly fluctuating supply and demand. With virtually no fuel costs and minimaloverhead and maintenance costs, it is highly unlikelythat the spot market price would ever fall below EnergyOttawa’s cost of production.

On May 7, 2004, Energy Ottawa was awarded a five-yearcontract with the Government of Canada (until March31, 2009) to supply to the IESO-controlled grid up to90,000 MWh/year (the equivalent of 10,000 homes) ofEcoLogo-certified electricity from the Chaudière Fallsstations. The company sells this power into the spotmarket at the spot market price. Energy Ottawa alsoreceives a payment for each kWh of electricity produced.The aggregate value of the payments, or “green powerpremium”, the company may receive over the term of thecontract is estimated to be up to $8.3 million. This is thelargest ever green power contract awarded by the federalgovernment in Ontario.

In 2003, Energy Ottawa took action aimed at increasingmarket share in its water heater rental business byincluding gas heaters among its rental offerings. In late 2004 we sold the water heater rental business forproceeds of $11.25 million.

Our plans for Energy Ottawa also call for expansion into other areas of green power generation, initiallythrough landfill gas conversion. In August 2004, EnergyOttawa signed a Gas Utilization Agreement with the City.The Gas Utilization Agreement provides Energy Ottawaaccess to gases produced at the City’s Trail Road landfillsite for the purpose of generating electrical energy.

23

In November 2004, Energy Ottawa signed a RenewableEnergy Supply Contract with the OEFC for the purchaseof electrical energy and related products from the City ofOttawa’s Trail Road landfill. This contract was enteredinto under the auspices of Ontario’s program to supportrenewable energy initiatives. Energy Ottawa intends toconstruct a generation plant in 2005/2006 at the TrailRoad site capable of producing 5 MW (megawatts) ofelectricity, under a fixed-price turnkey contract with anestimated cost of approximately $10 – $12 million. Theplant will produce approximately 40,000 MWh annuallyfrom the conversion of landfill gas. This is enough powerto serve about 4,000 to 5,000 homes annually. The plantwill also reduce annual greenhouse gas emissions by up to 1.3 million tonnes relative to 1990 levels by preventinglandfill gas from being released into the atmosphere andreduce an additional 65,000 tonnes of carbon dioxide bydisplacing coal-generated electricity.

Energy Ottawa’s strategies include:

• maximizing the availability and profitability ofexisting generating assets;

• adding incremental hydroelectric generationthrough the development of existing water rights on the Ottawa River;

• constructing the Trail Road landfill methane gasconversion project; and

• developing other small, green power generationprojects.

Telecom Ottawa – A Specialized Broadband DataCarrier and Internet Services Provider

Telecom Ottawa is the holding company for TelecomOttawa Limited, Telecom Ottawa Regional Limited and 2038455 Ontario Inc.

The Telecom Ottawa companies operate a broadbanddata transmission carrier in Eastern Ontario, with a connection to the federal Government in Gatineau,Quebec. They do this over a high-speed, 1,000 kilometre,10 gigabit Ethernet, all-optical-fibre network. This tech-nology has been well received by the market. They alsoprovide Internet services in Ottawa, Cornwall andPeterborough, Ontario. Telecom Ottawa’s customers are mainly public sector organizations, businesses andtelecommunications carriers in Eastern Ontario, served

under long-term contracts. In January 2004, TelecomOttawa entered into a 10-year strategic agreement with the Ottawa-Carleton District School Board.The agreement calls for Telecom Ottawa to provide the Board with high-capacity bandwidth networkconnection to 154 locations, including secondary schools, elementary schools and other facilities thatserve nearly 78,000 students and 6,600 teachers andadministrative staff. Telecom Ottawa serves just aboutall of the MUSH (Municipalities, Universities, Schoolsand Hospitals) sector in Ottawa – the municipality, allfour universities and community colleges, every schoolfrom the three major school boards in the City and eight of nine hospitals.

Telecom Ottawa had consolidated revenues of $13.1 million in 2004, compared to $6.9 million in 2003 of which 95% were derived from the provision of broadband data services mainly to public sectororganizations and 5% from internet services provided to residential users. The companies have a total of 72 employees. Certain of its activities are regulated by the Canadian Radio and Television Commission.

In 2004, Telecom Ottawa entered into two agreementswith third party companies to obtain certain value-added services for its customers. The first agreement,entered into with Gridway Computing Corporation,allows for the provisioning of outsourced data storageservices to end customers using Telecom Ottawa’snetwork, and customer service and billing capabilities,while leveraging Gridway’s existing data centre andsoftware expertise. The second agreement, with OneConnect Limited, allows Telecom Ottawa to supply its customers with Voice-over-Internet-Protocol (VoIP)services using One Connect’s VoIP infrastructure. Both of these agreements reduce Telecom Ottawa’s level ofrequired capital investment and operational support,from what they would be if the company provided theservices directly.

Telecom Ottawa’s priorities are to:

• ensure a high level of availability of existingservices to existing customers;

• add to its broadband data offerings by providing agreater number of value-added services to existingcustomers; and

• maximize the value of its fibre optic network byadding incremental customers, on terms that ensurefull cost recovery well within the term of thecontract.

Telecom Ottawa is in an advantageous position to winnew business from commercial and federal governmentclients due to its good reputation in providing reliable,quality services and the large amount of availablecapacity in its network. Another advantage enjoyed byTelecom Ottawa is that its fibre-optic network extendsthroughout the City so that most new customers onlyrequire limited fibre extensions from their premises tothe network. The company’s marketing efforts in thefuture will be increasingly targeted at the commercialmarketplace with increased direct sales focus and alarger sales team. As Telecom Ottawa adds value-addedservices to its product offerings, average revenue percustomer is expected to increase.

Hydro Ottawa Holding Inc.Consolidated Financial Results

Operating Data Year ended December 31(audited – in thousands of dollars)

2004 2003 2002 (1) 2001(1)

Total Revenues 615,759 602,314 599,417 552,367

Net Earnings (Loss) from Continuing Operations 16,013 1,108 (12,603) 3,246

Net Income (Loss) 19,700 2,599 (12,603) 3,246

Retained Earnings (Deficit) 2,804 (16,896) (19,495) (8,530)

Balance Sheet Data

Total Assets 587,909 547,244 514,487 519,320

Shareholder’s Equity 231,257 173,732 171,133 182,098

(1) For the period ended December 31, 2004, we changed the presentation of certain financial information from that shown in our audited 2003financial statements. As a result, certain 2003 financial information shown here has been reclassified from the presentation in 2002 and 2001 and may not be directly comparable to 2002 and 2001 numbers.

Revenue. Revenue is earned from electricity distribution;sales of power generated, installation contracts for others;and communication services and fibre-based connectivityproducts. Consolidated revenue increased $13.4 million.

Hydro Ottawa’s power recovery increased $13.5 millionprimarily as a result of an increase in the spot marketand fixed commodity price for eligible customers, and a 2.2% increase in customer base. Energy Ottawa’selectricity sales decreased $2.0 million primarily due to a 6-month shut down of Generating Station #4. Thisdecrease was partially offset by a $0.8 million increaseas a result of a significant five-year “green power”contract awarded by the Government of Canada.

Revenue 2001-2004

2004

2003

2002

2001

615,759

602,314

599,417

552,367

25

Distribution sales decreased by $4.0 million, dueprimarily to an OEB directive requiring a reduction in the amount of PILs that could be charged in thedistribution rates by distributors.

Communication services and product revenue increased$5.8 million mainly due to:

• twelve months of revenue generated fromacquisitions that occurred late in 2003;

• implementation of contracts with two large schoolboards; and

• increased sales to the commercial sector followingchanges in sales strategy.

Other revenue decreased by $1.9 million mainly related to a reduction in recoverable work, particularly the streetlighting business.

Expenses. The largest component of total expenses is thecost of power purchased from the provincial government,which has fluctuated based on the commodity price forelectricity. Purchased power increased by $14.3 million,mainly as a result of the increased commodity prices andcustomer base noted above. Other expenses decreased by$15.6 million as a result of a $7.9 million decrease inoperating, maintenance and administration expense, adecrease in restructuring costs of $2.5 million and anincrease of $7.8 million in the recovery of provision forregulatory assets, offset by an increase in amortization of $2.6 million.

The $7.9 million decrease in operating, maintenance and administration expense is due to the following:

• bad debt expense declined $3.4 million. Legislationin 2002 prohibiting utilities from disconnecting

consumers for non-payment of their accountsresulted in increased bad debt expense in 2003.A review of existing billing backlogs dating back to market opening identified additional write-offs in that year. In 2004, the expense has decreased,having worked through collection problems thatarose from the temporary moratorium on discon-necting customers for non-payment contained in the legislation;

• inventory write-offs declined $2.5 million. InSeptember 2003, subsequent to the implementationof the new enterprise business accounting system,Hydro Ottawa performed its first full physicalinventory count since its incorporation. Severalshortages and discrepancies were identified andrecorded in 2003. A physical inventory count washeld at the end of November 2004 and no significantshortages or discrepancies were identified; and

• expenses incurred to perform work for othersdecreased $3.0 million primarily as a result ofdecreased street lighting installations and thedeferral of construction projects during the fall 2004 strike.

These cost savings were offset mainly by:• current pension expense increase of $1.5 million,

as contribution rates to the Ontario MunicipalEmployees’ Retirement System (OMERS) were re-instituted after a contribution holiday; and

• compensation increases due to management merit increases, a new IBEW Local 636 unioncollective agreement and increased employment in the telecommunications business.

Expenses 2004(audited – in thousands of dollars)

a. Purchased power 489,495 b. Operating, maintenance and administration 62,580 c. Amortization of capital and intangible assets 27,165 d. Restructuring costs 3,332 e. Recovery of provision for regulatory assets write-down (165)

Total 582,407

a.

b.

c.

d.

e.

a. Purchased power 503,749 b. Operating, maintenance and administration 54,677c. Amortization of capital and intangible assets 29,760 d. Restructuring costs 851 e. Recovery of provision for regulatory assets write-down (7,928)

Total 581,109

a.

b.

c.

d.

e.

Expenses 2003(audited – in thousands of dollars)

The recovery of the provision for regulatory assetsincreased $7.8 million in accordance with the OEB’sapproval of a rate increase for recovery of these assets,which came into effect on April 1, 2004.

Amortization increased $2.6 million because of increasesin capital asset acquisitions and amortizable assetsacquired as a result of the acquisition of two companieslate in 2003, as well as completion of construction ofsignificant projects in progress at the end of 2003.

Other revenue and expenses. The decrease in otherrevenue and expenses is mainly due to an increase of$0.5 million in allowance for funds used during con-struction. Capitalized interest with respect to fibre-optic equipment offset increases in other costs related to the renegotiation of the existing credit facility.

Payment in lieu of taxes (PILs). The Corporation’seffective income tax rate was 9.1% in 2004 compared to 26.7% in 2003. Since we have loss carry forwards tooffset most earnings of the period, PILs consist of largecorporations and alternative minimum taxes that arenot based on income. In 2004, future PILs related toEnergy Ottawa’s gain on the sale of discontinuedoperations and temporary timing differences in excess of loss carry forwards were recorded.

Discontinued operations. Net earnings of Energy Ottawa’s water heater rental business, which was sold in November 2004, were $1.4 and $1.5 million for the yearsended December 31, 2004 and 2003 respectively, while thegain on disposal of the water heater operations (net oftax) was $2.3 million.

Net earnings. Net earnings from consolidated operationsincreased $17.1 million from $2.6 million to $19.7 million,primarily due to decreases in expenses discussed above,an increase in recovery of provisions for regulatoryassets, and the gain on sale of discontinued operations.

Total assets. Total assets increased by $40.7 million fromDecember 31, 2003 mainly due to a $40.9 million netincrease in capital assets. Other changes of note were:

• an increase in accounts receivable and unbilledrevenue of $3.2 and $4.0 million respectively, mainlydue to an increase in Hydro Ottawa’s electricitybillings. Purchased kWh were up 4.3% for themonth of December, while the spot market and fixed prices were up 10.7% and 16.3% respectively.As well, the number of customers increased 2.2% over the prior year;

• a decrease in inventory of $2.0 million. HydroOttawa’s focus on targeted inventory levels and just-in-time arrangements with suppliers resultedin a $2.3 million decrease, offset by a decision in2004 to increase Telecom Ottawa’s inventory levelsby $0.3 million in order to reduce installation anddelivery time;

• a decrease in assets held for resale in the amount of $5.7 million, as a result of the decision to disposeof Energy Ottawa’s water heater rental businesswhich was sold in November 2004; and

• net regulatory assets decreased minimally by $0.4 million. During the year Hydro Ottawarecovered regulatory assets through a charge built into its rates. A large portion of the assets’recovery was offset by the fact that many of theRetail Settlement Variance Accounts (RSVA) wereprovisioned. Regulatory assets have also decreasedas a result of the recovery of the under collection of deferred payments in lieu of taxes. The RSVAvariance accounts continue to fluctuate due to thetiming between the cost of purchased power and itsrecovery. Cost is based on meter consumption atcurrent market prices while the recovery throughsales is based on an average monthly price usingestimated consumptions. The fluctuations in severalof the RSVA variance accounts (power and whole-sale market) are provisioned on a consistent basis to mitigate the risk of not recovering these amounts.The collection of these assets is not assured untilthe OEB has approved the final recovery of theassets through our rates. The OEB permitsdistributors to capitalize interest as a carrying costof these regulatory assets. Hydro Ottawa takes aprovision on all interest costs due to the uncertaintyof future recovery, dependent on OEB approval. OnDecember 9, 2004, the OEB issued a Decision withReasons in the matter of “Review and Recovery ofRegulatory Assets – Phase 2”. In this decision, theOEB directs the applicants to apply interest to the balances of certain regulatory asset accounts.Consequently, Hydro Ottawa has amended itsregulatory assets to include carrying charges on the Pre-Market Opening Energy Variance Accountfor the year ended December 31, 2004. A provision is being recorded against this interest until suchtime as the interest is recovered through distribu-tion rates. As a result, 2004 net income has not been affected by this development.

27

The net capital asset increase of $40.9 million resultedmainly from capital asset acquisitions of $77.4 millionand an allowance for funds used during construction of $1.2 million net of contributions in aid of construction of $7.5 million and amortization of $29.8 million.

Total liabilities. Total liabilities decreased $16.9 million.Current liabilities (excluding the increase of $200.0 millionrelated to reclassifying notes payable to the City fromlong-term to short-term) increased by $22.9 million.Long-term customer deposits decreased by $6.0 million,net regulatory liabilities increased by $2.6 million, futurepayments in lieu of corporate income tax liabilityincreased $1.2 million and employee future benefitsincreased by $0.2 million.

The $22.9 million increase in current liabilities,ignoring the reclassification of notes payable, is duemainly to a $21.2 million increase in bank indebtednessand banker’s acceptances, and a $1.0 million increase in accounts payable. The change in accounts payableresults from the culmination of numerous factors, themain ones being:

• a $7.0 million increase in cost of power, related toincreased kWh purchased in December, generalincreases in the spot market and fixed price ofpower, and increase in number of customers;

• a $6.9 million increase in short-term customerdeposits mainly related to a reclassification of long-term customer deposits because of amendmentsmade to the Distribution System Code; and

• a $1.3 million increase in customer credit balancesreclassified from accounts receivable;

offset by:

• a $5.5 million decrease in other accounts payableand accrued liabilities related to reducedrestructuring accruals and timing of payments;

• a $4.3 million decrease in IMO rebates reimbursedduring the year due to higher commodity prices; and

• a $4.1 million decrease because interest on notespayable to the City, which would normally be paid in January 2005, was paid by December 31, 2004.

Long-term customer deposits decreased $6.0 million dueto a change in regulatory policy. On February 3, 2004,the OEB released amendments to the DistributionSystem Code (DSC) with respect to customer securitydeposits. The DSC now sets out the maximum consumersecurity deposits permitted, the length of time thatdeposits can be held, how consumers can seek exemptionfor part or all of the deposit and the interest that dis-tributors must pay. The new DSC requirements cameinto effect on August 3, 2004, however, distributors werenot required to return consumer security deposits underthese new rules until February 2005. It is anticipatedthat more than two thirds of the existing deposits will bereturned to customers in 2005.

The net regulatory liability increased $2.6 million due to the RSVA connection variance for which no provisionis made. The transmission connection variance repre-sents an over-collection of transformation and trans-mission line costs, currently being recovered as a fixedcharge in our rates. This balance is continually growingbecause the standard rates set by the OEB recover morerevenue than the costs incurred by Hydro Ottawa forthese services.

Liquidity and Capital Resources

Liquidity

The table below shows the debt and liquidity profile ofthe Corporation as of December 31, 2004 and 2003.

(In $millions)

Debt: 2004 2003

Promissory notes payable $200.0 $237.8

Bank indebtedness $29.9 8.7

Letters of credit $22.5 $22.5

Liquidity

Undrawn bank facilities $103.1 $93.3

During 2004, bank indebtedness increased by $21.2 million. Cash inflow from operations of $37.7 million, other financing of $7.1 million,and cash inflow from discontinued operations of $11.2 million mainly related to proceeds from the sale of the water heater business were offset by cashoutflows for capital expenditures of $77.2 million.

Sources of liquidity. The Corporation’s primary sources of liquidity and capital resources were derived from cashprovided by operating activities, banking facilities andpromissory notes held by the City. Available financingarrangements, as noted in “Unutilized sources offinancing,” are adequate to cover future operations.

Cash provided by operating activities. Net cash fromoperations for the year ended December 31, 2004 was $37.7 million. Net earnings from continuingoperations provided $16.0 million of this amount,while non-cash amortization and other items related to capital assets accounted for $28.8 million. A workingcapital increase of $7.1 million due mainly to thereclassification of customer deposits to accounts payable reduced cash flow from operations.

Cash provided by financing activities. Cash flow fromfinancing activities during the period was $28.3 million.A $21.2 million increase in bank indebtedness andbanker’s acceptances was used to cover cash require-ments due to the delay in cash receipts resulting fromthe implementation of the new customer informationsystem (CIS) and financing of capital expenditures.Contributions in aid of construction of $7.5 million,based on the timing for energizing residential projectsprovided the majority of the balance of cash flow fromfinancing activities. On December 31, 2004, the Cityconverted $37.8 million of the promissory notes it held into additional Class A common shares of HydroOttawa Holding at a conversion price of $1.00 per share. On January 6, 2005, we repaid the balance of thepromissory notes to the City with the proceeds of short-term borrowings under our Bank Credit Facility, whichwas subsequently refinanced through long-term debt onFebruary 9, 2005.

Cash used in investing activities. Total cash used in investing activities amounted to $77.4 million ofcapital asset additions. The major portion is related toHydro Ottawa’s capital acquisitions of $62.8 million fordistribution and general plant including several majorgeneral plant projects that were in progress during theperiod, such as the implementation of a new CIS and the development of a geographical information system.Other contributing factors included updated overheadcapitalization rates, an outage management system andrefurbishment of an operations centre.

Increases of $10.1 million in Telecom Ottawa’s capitalassets were primarily attributable to completing theconstruction and implementation of infrastructure tosupport the school board contracts; building of commercialfibre laterals; new accounting and network operatingsystems; and completing corporate office renovations.

Energy Ottawa’s capital acquisitions of $4.5 million were related primarily to the refurbishment of a secondgenerating station on the Ottawa River.

Cash provided by financing facilities. On January 6, 2005,we arranged a new credit facility in the amount of $350 million. The new facility consists of two elements:a $150 million, three year, extendible, revolving loanfacility and a $200 million 364-day bridge facility.

The bridge facility was fully drawn on January 6, 2005to repay $200 million of promissory notes held by theCity. The bridge loan was repaid with the proceeds of the February 9, 2005 offering of debentures in the debtcapital market and drawings under the $150 millionrevolving loan facility. The bridge facility is nowcancelled. Of the remaining $150 million revolving loanfacility, $25 million was used to repay outstanding loansunder the credit facility it replaced, which terminated on January 6, 2005.

The new credit facility contains customary covenantsand events of default for a facility of this nature andsize, including a financial covenant to maintain theCorporation’s debt to total capitalization ratio at notgreater than 75%.

We have also arranged an additional credit facility forapproximately $47 million to coincide with and facilitatethe termination of the previous $152 million creditfacility. This facility consists of three elements: a $24.8 million demand operating line; a $0.2 millioncorporate VISA facility and a $22.3 million letter ofcredit facility. The majority of this facility expires onMay 31, 2005 and its purpose is solely to assist theCorporation with cash management banking services in the transition from our current bank to the bankingsyndicate that has provided the new credit facility.

On December 31, 2004, $37.8 million of the promissorynotes held by the City were converted into commonshares of Hydro Ottawa Holding. There is no expecta-tion of any additional equity contributions from theShareholder as a future source of capital.

29

On February 9, 2005, the Corporation issued $200 millionof senior unsecured debentures, bearing interest at4.93%. These bonds were provisionally rated as follows:

Rating Agency Rating

Standard & Poor’s Rating Services Inc. A-

Dominion Bond Rating Service Inc. A (low)

These bonds have customary covenants normally associ-ated with this type of debt. Among other things, thecovenants limit our permissible debt as a percentage of our total capitalization to 75%, limit our ability to sell assets and impose a negative pledge provision,subject to customary exceptions. We are currently incompliance with all of these covenants and limitations.

Unutilized sources of financing. The Corporation had not used $103.1 million of the $153 million totalavailable credit facilities at December 31, 2004.

Under the new $150.0 million credit facility arrangedJanuary 6, 2005, the Corporation had $125.0 million ofunused credit facility available to the Corporation afterthe drawdown of $25 million banker’s acceptances. Underthe terms of this facility, we can incur unsecured new debtas long as we are in compliance with the debt to totalcapitalization ratio covenant and other provisions of the credit facility. In addition, the Corporation and itssubsidiaries can purchase money security interests andcapital leases up to a total of $5.0 million. As well, theCorporation’s subsidiaries can incur unsecured debt of upto a total of $5.0 million. The Corporation also had over$24.8 million of the $47 million credit facility available to it as a demand operating line.

Capital Expenditures and Other Cash Requirements

Hydro Ottawa

Hydro Ottawa has planned capital expenditures of $67.6 million in 2005. Net growth capital requirements are expected to remain fairly constant at $17.0 million.Reliability capital will see a planned increase of approxi-mately $11.0 million to meet anticipated regulatoryrequirements such as Polychlorinated Biphenyls (PCB)removal and a concerted focus on distribution andtransformer station rehabilitation programs. General plant will require an anticipated investment of approxi-mately $25 million dollars to complete the new geo-graphical information system project and to continue the strategic rationalization of facilities including a newcontrol centre and increased vehicle purchases as part of maintaining an appropriate fleet life cycle.

Energy Ottawa

Energy Ottawa’s significant capital projects, all withinthe Ottawa region, include a $5.5 million refurbishmentof a hydroelectric generating station on the Ottawa River,development of a $1.5 million grinder hydroelectric plant and development of a $10 to $12 million methanerecovery and electrical generation facility at the City’sTrail Road landfill site.

Energy Ottawa is a 28.33% shareholder in ChaudièreWater Power Inc. (CWPI), which acting as an agent forthe principals, operates and maintains the Chaudièredam on the Ottawa River. Current long term plans forCWPI forecast capital expenditures of some $20 millionover an eight-year period commencing in 2009 for therestoration of supporting piers. Energy Ottawa’s share of the expenditures would be approximately $5.7 million.

Telecom Ottawa

Due to the substantial completion of construction ofTelecom Ottawa’s fibre network in 2004, the company is expected to be self-funding with respect to projectedoperating and capital expenditures in 2005 andsubsequent years.

a. Distribution system 351,843 b. Generating plant equipment 25,705 c. Fibre-optic equipment 29,959 d. General plant 78,634 e. Contributions in aid of construction (46,000)

Total 440,141

a.

b.

c.

d.

e.

Capital Assets (2004)(audited – in thousands of dollars)

Other Cash RequirementsHydro Ottawa anticipates having cash outflows relatedto customer deposits of approximately $9.6 million in2005. These are primarily related to the revised OEBpolicies for all LDCs holding customer deposits.

Hydro Ottawa expects to utilize all tax loss-carryforwards by 2006 and consequently it expects a $12 million increase in its PILs payments in that year.

The Corporation’s interest expense in 2005 is expected to decline because of the conversion of $37.8 million of the City of Ottawa promissory notes to equity on December 31, 2004 and the replacement of theremaining debt with lower rate financing.

In August 2004, the City of Ottawa adopted a dividendpolicy with a targeted payout ratio equal to 60% of netincome. The first dividend payment is expected to occurin 2006, based on the audited 2005 results, subject tocompliance with the Corporation’s financial covenantsand the state of its financial condition.

Draft environmental regulatory requirements related to the destruction of PCBs in distribution transformersand other clean up related to PCBs could result inapproximately $7 to $8 million being spent over a 3 year period from 2005 to 2007.

The Minister of Energy issued a directive to the OEB to develop an implementation plan for smart meters byFebruary 15, 2005. This would require Hydro Ottawa,as well as other LDCs in Ontario to undertake a majorcapital project for this period. It is expected that thisinitiative would be funded through Hydro Ottawa’sfuture rate base. This development could involve HydroOttawa funding significant capital investment inadvance of rate recovery.

Telecom Ottawa and Energy Ottawa do not anticipateany future annual cash requirements related tooperations or financing activities beyond their capitalrequirements.

Cash management. The Corporation manages its cashflows mainly by controlling capital asset spending.Expenditures may be curtailed to ensure adequate cash resources exist to sustain operations. Specifically,Energy Ottawa could delay capital expenditures atChaudière Falls and Hydro Ottawa could reduce and/ordelay capital expenditures on certain general plant,reliability and demand projects.

Commitments and Contractual Obligations These are discussed in Note 23 to the Corporation’s 2004consolidated financial statements.

Payments (Receipts) for years ending December 31 (in $thousands)

Contractual Obligations Total 2005 2006 2007 2008 2009 2010

Note Payable 200,000 200,000

Current Purchased Service Commitments 7,300 7,300

Long Term Purchased Service Commitments 11,067 1,804 1,855 1,881 1,788 1,842 1,897

Operating Leases 1,500 326 294 274 241 197 168

Sales Commitments (10,500) – – – (3,500) (3,500) (3,500)

Total Contractual Obligations (1) 209,367 209,430 2,149 2,155 (1,471) (1,461) (1,435)

(1) Excludes long term liabilities presented on the balance sheet that have no fixed obligation for payment, including regulatory liability, employeefuture benefits and long-term customer deposits.

31

Enterprise Relationships The Corporation has a number of strategic relationships,primarily for the provisioning of certain value addedservices or sales leads. Value added service relationshipsinclude the following:

• IBM provides peak and off-hour call centre supportservices to Hydro Ottawa. They also operate andperform system development for our new CIS;

• Data Backup and Recovery services are provided byGridway Computing Corporation of Ottawa, whichallows Telecom Ottawa to provide clients withmanaged backup solutions, while limiting TelecomOttawa’s need for capital and expenses associatedwith these activities;

• One Connect Limited provides hosted Voice-over-Internet-Protocol service to clients, while limitingTelecom Ottawa’s financial and regulatory riskrelated to these transactions;

• Telecom Ottawa outsources detailed engineering of fibre-optic construction plans and field locates to Baycadd Solutions of Ottawa;

• Telecom Ottawa outsources the majority of its fibre-optic network construction to two firms:Premiere Cable (a division of Aecon Construction)and Greely Construction; and

• IBM and Stantive Solutions (Ottawa SunMicrosystems VAR) relationships involve thepassing on of sales leads between each company and Telecom Ottawa.

Off-Balance Sheet Arrangements The Company does not currently have any off-balancesheet arrangements.

Financial Outlook

2005 Financial Outlook

Hydro OttawaThe Ontario Government announced in late 2003 thatLDCs would be able to apply to the OEB for a rateincrease for the final increment of their Market AdjustedRevenue Requirements, in order to reach their MarketBased Rates of Return. The incremental revenuesattributable to this third and final increment is expectedto be $9.3 million for Hydro Ottawa and must be spent on conservation and demand side management initiatives.A rate increase resulting from the OEB’s interim approvalof Hydro Ottawa’s application for recovery of the first

25% of its regulatory asset balance as of December 31,2002, became effective April 1, 2004. A further rateadjustment is expected for April 2005 based on 33% of the December 31, 2003, balances less recoveries.

During 2005, the company’s costs related to its regulatoryassets recovery are expected to be reviewed by the OEB.Final approval could affect the company’s net recoverableregulatory assets.

In 2005, Hydro Ottawa will be subject to an audit of the refunds it claimed through the Electricity Consumer Price Protection Fund which were either provided as cashpayments or as reduced energy costs to eligible customers.

The company intends to continue pursuing the acquisitionof Hydro One’s electricity distribution facilities servingapproximately 37,000 customers in the balance of theCity. Because of the sizable gap between the price soughtby Hydro One, and an acceptable purchase price, thisacquisition is not likely to occur without a change ingovernment policy.

Energy OttawaEnergy Ottawa intends to focus on “green” generationand continues to seek premium pricing for this form of energy. The company intends to participate in anyappropriate Ontario Government requests for proposalsfor renewable generation. The company has embarked on a $5.5 million refurbishment of one of its hydro-electric generating plants on the Ottawa River and re-assembly and commissioning is planned for early2005 with production targeted for early March. Therefurbishment will boost the combined output from all of Energy Ottawa’s generating stations to approxi-mately 120,000 MWh per year of electricity, representing1.5% of Hydro Ottawa’s yearly requirements.

Energy Ottawa’s current generating capacity atChaudière Falls is EcoLogo certified, which qualified itfor a federal government Request for Proposal (RFP) in the fall of 2003. Energy Ottawa recently won thefederal contract valued at up to $8.3 million to provideup to 90,000 MWh annually of the “green attributes”from this power for a five-year period beginning May 7, 2004. The commodity output from this powergeneration continues to be sold into the wholesale spot market for the Ontario power grid.

A new 0.7 MW hydroelectric plant engineered to fit into a heritage “grinder pit” for a total estimated cost of $1.5 million is under development with completionexpected to be in 2005.

A new 12 MW (90 GWH) 90 million kWh hydroelectricplant at the former Generating Station #1 location atChaudière Falls at an estimated cost of $38 to $40 millionis under review with the preliminary engineering andenvironmental assessment process started. However,this plant cannot currently proceed without a long-termpremium contract for its green credits.

With the awarding in 2004 of a 20-year Government of Ontario contract to produce renewable “green” powerat the Trail Road landfill facility in the City of Ottawa,the company will begin construction of a new 6 MWmethane recovery and electrical generation facility. Theconstruction will be carried out pursuant to a turnkeycontract with an estimated cost of $10 – $12 million.The modular design of this facility allows for partialproduction to be brought online potentially earlier andallows for future expansion.

The Company sold its hot water heater rental businesseffective November 12, 2004 and approximately $0.5 million of the net after tax proceeds are expected to be recognized in 2005 upon the successful resolutionof certain contingencies. During 2004, revenue from this operation was approximately $2.9 million, whileexpenses were approximately $1.5 million. This willresult in an overall reduction to the company’s netearnings in 2005 of approximately $1.4 million.

Telecom Ottawa Telecom Ottawa’s operating margins are expected tocontinue to increase as the investments in systems andstaff can now be leveraged over a larger customer base.The company’s heartland product (Ethernet networkservices) has gained significant market acceptance andis expected to provide future revenue streams. In orderto maintain and grow market share, Telecom Ottawawill require significant effort and expense on sales andmarketing in future years. The significant investment inthe fibre-optic network has been completed in 2004,thereby reducing the amount of capital financingrequired for the business going forward.

Disclosures

Industry Specific Accounting Practices

The Corporation’s consolidated financial statements havebeen prepared in accordance with Canadian generallyaccepted accounting principles (GAAP) for commercialentities, including principles prescribed by the OEB in theAccounting Procedures Handbook and are presented in Canadian dollars as discussed in note 3 to theCorporation’s consolidated financial statements.

Changes in Accounting Policies

Effective January 1, 2004 the Corporation adoptedrecommendations of the Canadian Institute of Chartered Accountants (CICA) with respect to the disposal of long-lived assets and discontinuedoperations and the impairment of long-lived assets as discussed in note 20 and note 3, respectively, to the Corporation’s consolidated financial statements.

Effective January 1, 2004, the Corporation adoptedrecommendations of the CICA with respect to assetretirement obligations. This standard deals with thetiming of the recognition and measurement of liabilitiesfor obligations associated with the retirement of property,plant and equipment when those obligations result fromthe acquisition, construction, development or normaloperation of the assets.

Effective November 1, 2004 and retroactive to January 1,2004, the Corporation adopted recommendations of theCICA with respect to capitalization of interest on con-struction of fibre-optic equipment as discussed in note 7to the Corporation’s consolidated financial statements,since Telecom Ottawa commenced payment of interest in 2004 for the first time since its incorporation.

Critical Accounting Estimates

The preparation of consolidated financial statements inconformity with GAAP requires management to makeestimates and assumptions that affect the reportedamounts of revenues and expenses during the period,the reported amounts of assets and liabilities, and thedisclosure of commitments and contingencies at the dateof the consolidated financial statements. These estimatesare based on historical experience, current conditions and various other assumptions that we believe to bereasonable under the circumstances. Because theseestimates involve varying degrees of judgment anduncertainty, the amounts currently reported in theconsolidated financial statements could, in future, prove to be inaccurate.

33

The following accounting estimates require manage-ment’s more significant judgments and estimation in the preparation of our consolidated financial statementsand as such, are considered to be critical.

Regulatory assets recovery. The regulatory assetsrecovery is discussed in note 6 to the Corporation’sconsolidated financial statements.

Employee future benefits. The employee future benefitsare discussed in note 12 to the Corporation’s consoli-dated financial statements.

The two most significant assumptions used to calculatethe net costs of our employee benefit plans are thediscount rate and expected long-term rate of return onplan assets. The discount rate is the interest rate used to determine the present value of the future expectedcash flows that will be needed to settle employee benefitobligations. It is based on the yield on long-term highquality corporate bonds, with maturities matching theestimated cash flows of the plan. A discount rate of 6.0% has been used to calculate the liabilities. Theexpected long-term rate of return on pension plan assetsis determined based on future estimates of long-terminvestment returns and the asset mix of the plan.

Allowance for doubtful accounts. The consolidatedfinancial statements contain an estimate of bad debtlosses arising from uncollectible accounts receivable. Theamount that is estimated as uncollectible is deductedfrom the accounts receivable balance. The allowance fordoubtful accounts is calculated based on a combinationof reviewing specific accounts and taking a specificpercentage of balances over 90 days. As a result, theallowance could materially change from period to periodbased on the composition of accounts receivable. Theallowance for doubtful accounts at December 31, 2004 is less than 0.5% (2003 – 1%) of annual revenues.

Depreciation. The estimated useful life for our majorasset categories are set out in note 3 to the Corporation’sconsolidated financial statements. To date, no materialadjustments to depreciation have been recognized.

Customer deposits. The customer deposits are discussedin notes 2 and 3 to the Corporation’s consolidated finan-cial statements.

Unbilled revenue. Management establishes periodending unbilled revenue balances based upon manage-ment’s estimate of customer electricity consumption up to the end of the period. Customer consumptionestimates include instances where meter reading is not scheduled to take place until the next period. Thisrequires management to make an estimate based onhistorical usage. In addition, consumption estimates are also necessary when meter readings are notavailable at the end of a financial reporting period end. Although unbilled revenue is based on currentpricing information, additional estimates are required by management to match power purchases with powersales from a pricing perspective.

Allocation of overhead costs. Management uses estimatesand its judgment in the allocation of overhead costs. TheCorporation uses a comprehensive cost allocation model.This model allocates actual indirect costs across all work types using various identifiable metrics based on historical experience and management’s judgment.

Inventory obsolescence. The inventory obsolescence is discussed in note 5 to the Corporation’s consolidatedfinancial statements.

Emerging Accounting Pronouncements

Accounting for Rate Regulated OperationsThe Accounting Standards Board (AcSB) of the CanadianInstitute of Chartered Accountants (CICA) has an activeproject to review GAAP applicable to enterprises withrate-regulated operations. Should the AcSB determinethat regulatory accounting treatments, which arecommonly applied throughout our industry, do not meet the definition of an asset or liability as defined by CICA Handbook Section 1000 “Financial StatementConcepts”, we would be required to discontinue theapplication of rate-regulated accounting. Specifically, wewould no longer be able to recognize our net regulatoryassets and liability, which amounted to $5.5 million and$9.6 million, respectively at December 31, 2004. The net effect of these changes would be charged to eitherretained earnings or the results of operations once thenew accounting standard became effective, dependent on the transition rules. As well, we may be required toaccount for PILs corporate income taxes related to our

regulated business on a liability basis. The AcSB expectsto issue an exposure draft in late 2005. At this time, it is uncertain what decision the AcSB will reach, howeverwe do not believe that the outcome of the CICA projectwill have a materially adverse financial impact on ourCorporation. In the interim, the AcSB has issued anexposure draft dealing with disclosures and presentationmatters only, to be effective in 2005. The guideline, ifimplemented would not result in significant changes in our disclosures.

Financial and Other Instruments

The financial instruments are discussed in note 3 to theCorporation’s consolidated financial statements.

Related Parties Transactions

The related party transactions are discussed in note 24to the Corporation’s consolidated financial statements.

Risk Management

We are implementing a process to update our enterpriserisk management program. This program is aimed atbalancing business risks and returns. An enterprise wideapproach enables regulatory, strategic, operational andfinancial risks to be managed and aligned with ourstrategic business objectives.

While our philosophy is that risk management is theresponsibility of all employees, the Corporation’s Boardof Directors annually reviews our Corporation’s risktolerances, our risk profile and the status of our internalcontrol framework. Our President and Chief ExecutiveOfficer has ultimate accountability for risk management.Our Chief Financial Officer is responsible for ensuringthat the risk management program is an integral part of our business strategy, planning and objective setting.Chief Operating Officers of our subsidiary companiesprovide senior management oversight of risk withintheir respective companies. Each company is required to complete a formal risk assessment and develop a riskmitigation strategy.

Risks and Uncertainties

The financial performance of the Corporation is subjectto the risks and uncertainties described below.

Regulatory uncertainty. The continuing restructuring of Ontario’s electricity industry and other regulatorydevelopments may affect the distribution rates thatHydro Ottawa may charge and the costs that HydroOttawa may recover. This may in turn have a materiallyadverse effect on the financial performance of theCorporation. While Hydro Ottawa is entering a normalcost of service based regulatory environment for 2005rates, the company’s rate base was last set in 1999. Thismay result in some costs being disallowed, which wouldhave a negative impact on the Company’s performance.In addition:

• additional costs to Hydro Ottawa associated withregulatory changes may not be recovered throughrate adjustments, either on a timely basis or at all. Hydro Ottawa will continue to seek approvalfrom the OEB for the recapture of expendituresdirectly incurred as a result of restructuring and/or new regulations; and

• potential new requirements for local distributioncompanies to support conservation and demandmanagement programs may not be accompanied byrate changes that allow for the recovery of costs andrevenue lost that may be incurred implementingsuch programs. Although our CDM program and itsfunding has received final approval from the OEB,there continues to be regulatory risk associated withthe Province’s proposed smart meter initiative untilfinal guidelines are established.

35

Credit risk. Hydro Ottawa is subject to credit risk withrespect to customer non-payment. Formerly, MunicipalElectric Utilities could recover credit losses from residentsthrough the municipal tax roll, provided that residentswere the owners of the property. This recovery mechanismis no longer available. Hydro Ottawa is responsible forcollecting the distribution, transmission, market servicesand energy portions of the electricity bill and is exposedto credit risk on these amounts. Hydro Ottawa ispermitted to mitigate the risk of customer non-paymentusing any means permitted by law, including requiringdeposits and other forms of security, charging interestand penalties on late payment and terminating serviceto delinquent customers. On February 3, 2004, the OEB released amendments to the Distribution SystemCode (DSC) with respect to consumer security deposits.Credit risk is discussed in note 3 to the Corporation’sconsolidated financial statements.

Commodity risk. Energy Ottawa is exposed to the spotmarket price for the electricity commodity in the Ontariowholesale market administered by the IESO. To mitigatethis risk, the Company obtains external pricing forecastsand may engage in hedging this commodity using fixedprice contracts. There have been no commodity hedgesentered to date. Federal and provincial contracts forpremiums for green energy and associated creditsmitigate some of the exposure to movement in spotmarket prices.

Weather. Severe weather, such as wind or ice storms,can increase Hydro Ottawa’s maintenance expenses as equipment must be repaired and overtime incurred to restore and ensure the continuing reliability of thedistribution system. As well, mild winters and coolsummers can have a direct impact on the company’sexpected distribution revenue.

Hydrology. The revenues generated by Energy Ottawaare proportional to the amount of electricity produced.The amount of electricity produced by Energy Ottawa is dependent upon available water flows. Accordingly,revenues and cash flows may be affected by low and high water flows on the Ottawa River. There can be noassurance that the long-term historical water availabilitywill remain unchanged or that no material hydrologicalevent will impact the hydrologic conditions that exist onthe Ottawa River. Annual deviations from the long-termaverage can be significant.

Labour relations and common employer. Approximately75 per cent of the workforce of Hydro Ottawa is union-ized. While a new three-year collective agreement hasrecently been reached with the IBEW Local 636 unionfollowing a seven-week strike, there can be no assurancethat there will not be work disruptions in the future, oradverse rulings in arbitrations that may affect salaryand benefits expense.

There also cannot be any assurance that the OntarioLabour Relations Board (OLRB) will not find HydroOttawa Holding to be a single employer with respect to Telecom Ottawa. This would have the effect ofextending the Hydro Ottawa collective agreement tocertain employees of Telecom Ottawa but would notsignificantly affect compensation levels.

Workforce productivity and efficiency. In order for Hydro Ottawa to achieve targeted levels of distributionand facilities, capital assets, workforce productivity and efficiency targets must be met. Lower productivityor unplanned workforce involvement in non-capitalprojects, like repairs due to a blackout or storm,can have a significant impact on the Company’s financial results.

Employee retention. As competitors upgrade theirnetwork infrastructures to a level equivalent to that of Telecom Ottawa, there is a risk of losing employees to competitors. Management is mitigating this risk by reviewing corporate compensation policies andimplementing an employee retention strategy. Forinstallation of customer premises fibre, Telecom Ottawauses contract labour and third party materials. Both ofthese activities have the potential for escalating costs.

Billing system. There continues to be some level of risk in the post-implementation phase of the CIS projectas Hydro Ottawa continues to refine business processesas an outcome of the successful launch of this newsystem. Hydro Ottawa will continue to rely on dataimported from its legacy system for any reportingrequirements relating prior to the implementation date of the new system.

Long term energy projects. Energy Ottawa is pursuing a number of new renewable energy projects, some or allof which may not materialize due to pricing, technologyor other industry dynamics. The risks associated withEnergy Ottawa’s Government of Canada contract aretwofold. First, Energy Ottawa may be prevented fromproducing the required minimum annual quantities ofelectrical energy (due to such events as unusually low orhigh water levels), thereby being compelled to purchaseelectrical energy from other sources, at spot marketprices which may or may not be equivalent to theEnergy Ottawa contract price from the Government of Canada, in order to satisfy any deficiencies.

The second area of risk is the premature termination of the contract by the Government of Canada under the“termination for convenience” provision of the contract.This provision allows the Government of Canada, forany reason other than default, to terminate the contractat any time, although it must reimburse Energy Ottawafor costs that have been reasonably and properly incurredfor purposes of performing the contract plus a fair andreasonable profit thereon.

The most significant risk associated with the OntarioRenewable Energy Contract is Energy Ottawa’s failureto achieve commercial operation of the Trail Roadfacility by January 31, 2007 (thereby incurringliquidated damages) or December 31, 2008 (whereuponthe contract may be terminated by OEFC). Liquidateddamages are calculated at $325.00 for each day afterJanuary 31, 2007 that commercial operation has notbeen achieved. The maximum total liquidated damagespayable by Energy Ottawa is $0.2 million. AlthoughEnergy Ottawa is not required to provide a minimumquantity of electrical energy, reductions in the quantityof energy produced could have an adverse effect on thisperformance incentive payment and, if serious enough,result in the termination of the contract.

Energy supply risk. Electricity is a commodity thatcannot be stored in significant quantities. All energy inOntario is exchanged through the IESO, and thereforeall of our energy requirements are met through pur-chases from the IESO. Energy supply risk exists as aresult of potential physical unavailability of electricalenergy. In the event demand outstrips supply, we couldbe subject to rotating load curtailments or in the worstcase a complete blackout of power.

General

This Management’s Discussion and Analysis containsforward-looking statements reflecting management’scurrent expectations regarding future operating results,economic performance, financial condition and achieve-ments of the Corporation. Forward-looking statements are subject to certain risks and uncertainties and actualresults may differ materially. These risks and uncer-tainties are described above under “RISKS ANDUNCERTAINTIES.” We undertake no obligation to update or revise any of these forward-lookingstatements, whether to reflect new information,future events or otherwise.

Materiality. This MD&A contains matters that theCorporation considers material. Quantitatively, mate-riality is determined based on 10% of net earnings fromcontinuing operations averaged over a two-year period.Management also took into consideration other quanti-tative factors that could effect the decision makingprocess for prospective investors. A review was made of financial statement items of the business units where critical accounting estimates were made.

HYDRO OTTAWA HOLDING INC. 2004 ANNUAL REPORT AUDITORS’ REPORT 37

Auditors’ Report

To the Shareholder of Hydro Ottawa Holding Inc.

We have audited the consolidated balance sheet of Hydro Ottawa Holding Inc. as at December 31, 2004 and theconsolidated statements of income and retained earnings (deficit) and of cash flows for the year then ended. Thesefinancial statements are the responsibility of the Corporation’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standardsrequire that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial positionof the Corporation as at December 31, 2004 and the results of its operations and its cash flows for the year thenended in accordance with Canadian generally accepted accounting principles.

Chartered AccountantsOttawa, OntarioMarch 4, 2005

Report of Management

Management is responsible for the integrity of the financial data reported by the Corporation. Fulfilling thisresponsibility requires the preparation and presentation of consolidated financial statements and other data using management’s best judgment, estimates and Canadian generally accepted accounting principles, applied on a basis consistent with the preceding year.

Management maintains appropriate systems of internal control and corporate-wide policies and procedures which provide reasonable assurance that the Corporation’s assets are safeguarded and that financial records are relevant and reliable.

The Board of Directors, through the Audit Committee, ensures that management fulfills its responsibility forfinancial reporting and internal control. The Audit Committee consists of outside directors which regularly reviews audit, internal control and financial reporting matters with management and external auditors. The Audit Committee has reviewed the financial statements and submitted its report to the Board of Directors.

On behalf of Management,

Ronald H. Stewart Shirley MearsPresident and Chief Executive Officer Senior Vice President and

Chief Financial Officer

Hydro Ottawa Holding Inc.Consolidated Statement of Income and Retained Earnings (Deficit)Year ended December 31, 2004

(tabular amounts are in thousands of dollars) 2004 2003 Revenue

Power recovery (Note 15) $ 507,838 $ 494,365 Distribution sales (Note 15) 85,689 89,680 Communication services and products 11,548 5,679 Other revenue 10,684 12,590

615,759 602,314

ExpensesPurchased power (Note 15) 503,749 489,495 Operating, maintenance and administration 54,677 62,580 Amortization of capital and intangible assets 29,760 27,165 Restructuring costs (Note 16) 851 3,332 Recovery of provision for regulatory assets write-down (Note 6) (7,928) (165)

581,109 582,407

Earnings from continuing operations before other (revenue) expenses and payments in lieu of corporate income taxes 34,650 19,907

Other (revenue) expensesInvestment revenue (46) (52)Financing costs (Note 17) 15,719 16,245 Payments in lieu of provincial capital tax 1,728 1,658

17,401 17,851

Earnings from continuing operations before payments in lieu of corporate income taxes 17,249 2,056

Payments in lieu of corporate income taxes (Note 18) 1,236 948

Net earnings from continuing operations 16,013 1,108

Net earnings from discontinued operations (Note 20) 1,410 1,491

Net gain on disposal of discontinued operations (Note 20) 2,277 –

Net earnings 19,700 2,599

Deficit beginning of year (16,896) (19,495)

Retained earnings (deficit), end of year $ 2,804 $ (16,896)

HYDRO OTTAWA HOLDING INC. 2004 ANNUAL REPORT FINANCIAL STATEMENTS 39

Hydro Ottawa Holding Inc.Consolidated Balance SheetAs at December 31, 2004

(tabular amounts are in thousands of dollars) 2004 2003 Current assets

Accounts receivable (Note 4) $ 49,793 $ 46,643 Unbilled revenue 80,960 76,966 Inventory (Note 5) 8,606 10,648 Assets held for sale (Note 20) 274 6,020 Prepaids 896 720

140,529 140,997 Non-current assets

Regulatory assets (Note 6) 34,863 39,025 Less: provision for doubtful recovery (29,394) (33,205)

5,469 5,820 Capital assets (Note 7) 440,141 399,203 Intangible assets (Notes 8, 19) 1,187 1,224 Other assets (Note 9) 583 –

Total assets $ 587,909 $ 547,244

Current liabilitiesBank indebtedness and banker’s acceptances (Note 10) $ 29,901 $ 8,706 Accounts payable and accrued liabilities (Notes 11, 16) 108,047 107,061 Liabilities related to discontinued operations (Note 20) 940 180 Notes payable (Note 13) 200,000 –

338,888 115,947 Non-current liabilities

Net regulatory liability (Note 6) 9,623 6,998 Employee future benefits (Note 12) 3,475 3,303 Customer deposits (Note 2) 3,459 9,439 Future payments in lieu of corporate income tax liability 1,207 – Notes payable (Note 13) – 237,825

17,764 257,565 Total liabilities 356,652 373,512Contingent liabilities (Note 22)Commitments (Note 23)Shareholder's equity

Share capital (Note 14) 228,453 190,628Retained earnings (deficit) 2,804 (16,896)

231,257 173,732 Total liabilities and shareholder's equity $ 587,909 $ 547,244

The accompanying notes are an integral part of these financial statements

On behalf of the board

Director Director

HYDRO OTTAWA HOLDING INC. 2004 ANNUAL REPORT FINANCIAL STATEMENTS 41

Hydro Ottawa Holding Inc.Consolidated Statement of Cash FlowsYear ended December 31, 2004

(tabular amounts are in thousands of dollars) 2004 2003 Net inflow (outflow) of cash related to the following activities:

OperatingNet earnings from continuing operations $ 16,013 $ 1,108 Adjustments for non-cash items

Amortization of capital and intangible assets 29,760 27,165 Gain on disposal of capital assets (95) (390)Allowance for funds used during construction (1,225) (708)Other 334 331

44,787 27,506

Changes in non-cash operating working capital items (Note 21) (7,133) 43,895

37,654 71,401

FinancingDeferred debt issue costs (121) – Bank indebtedness and banker’s acceptances 21,195 3,381 Contributions in aid of construction 7,536 8,784 Customer deposits received (repaid) (307) 818

28,303 12,983

InvestingProceeds from disposition of capital assets 203 469 Acquisition of capital assets (77,351) (84,377)Acquisition of businesses (Note 19) (28) (1,172)

(77,176) (85,080)

Net cash outflow from continuing operations (11,219) (696)

Net cash inflow from discontinued operations 11,219 696

Cash, beginning of year – –

Cash, end of year $ – $ –

Other information:Interest paid $ 21,091 $ 16,390 Payments in lieu of income taxes $ 2,671 $ 2,734

1. Description Of Business

Hydro Ottawa Holding Inc. (Hydro Ottawa Holding or the Corporation) was incorporated on October 3, 2000 pur-suant to the Business Corporations Act (Ontario) as mandated by the Ontario government’s Electricity Act, 1998.Hydro Ottawa Holding is wholly owned by the City of Ottawa (the Shareholder).

The principal business of the Corporation is the oversight of its wholly owned subsidiaries, which include:

Hydro Ottawa Limited (Hydro Ottawa) – A regulated electricity distribution company that owns and operates the electricity infrastructure and is responsible for the safe, reliable delivery of electricity to homes and businessesin the City of Ottawa and the Village of Casselman. In addition to billing for distribution services, it also invoicescustomers for amounts it is required to pay to other organizations in Ontario’s electricity system such as generationcompanies, the province-wide transmission grid, wholesale market services and for debt retirement.

Energy Ottawa Inc. (Energy Ottawa) – A power generation company that generates EcoLogo-certified green powerand markets it to commercial customers. Energy Ottawa also offers a range of expert energy management andprocurement services to large energy-consuming organizations and corporations.

Telecom Ottawa Holding Inc. (Telecom Ottawa) – A broadband data carrier and Internet service provider (ISP) based in Ottawa, with operations throughout Eastern Ontario. Telecom Ottawa owns and operates a metropolitan-wide network. This broadband infrastructure enables the provision of bandwidth capacity for data networking,high-speed internet access, ebusiness applications and multimedia services. In providing services to businesses and public-sector organizations, Telecom Ottawa also delivers an extensive portfolio of ISP capabilities such asemail, web hosting, wireless and remote internet access. Telecom Ottawa wholly owns the following subsidiaries;Telecom Ottawa Limited, 2038455 Ontario Inc. and Telecom Ottawa Regional Limited.

2. Regulatory Environment

The Ontario Energy Competition Act, 1998 was given Royal Assent on October 30, 1998. On May 1, 2002,the electricity commodity market was opened to competition for electricity generators, wholesalers and retailers.Transmission and distribution of electricity remains a monopoly within the province, subject to regulation by theOntario Energy Board. On December 9, 2002, The Electricity Pricing, Conservation and Supply Act, 2002 (Bill 210)was given Royal Assent. Bill 210 established a price cap of 4.3 cents per kilowatt-hour (kWh) for the electricitycommodity for low-volume and designated customers (Eligible Customers) retroactive to May 1, 2002. Bill 210therefore required that rebates be issued to Eligible Customers for any amounts paid in excess of the capped price.On an ongoing basis, distributors file each month for rebates to recover the difference between the spot market price billed by the Independent Market Operator (IMO) and the capped price billed to Eligible Customers. The IMO facilitates all rebates through funding from the Ontario Electricity Financial Corporation (OEFC).

Bill 210 also established that existing distribution rate orders that were in force on November 11, 2002 wouldremain in force until at least May 1, 2006, unless the Minister of Energy granted leave for a rate adjustment.This essentially froze distribution rates at approximately two-thirds of the maximum allowable return on equity set by the OEB.

On November 25, 2003, the provincial Minister of Energy announced changes to the pricing of electricity in Ontario.The Ontario Energy Board Amendment Act (Electricity Pricing), 2003 (Bill 4), which enables these changes to takeplace, received Royal Assent on December 18, 2003. As a result, on April 1, 2004, the capped commodity pricechanged to a new two-tier price structure at 4.7 cents for the first 750 kWh and 5.5 cents for all remaining kWh.

HYDRO OTTAWA HOLDING INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43

In December 2004, the Ontario government passed the Electricity Restructuring Act, 2004 (2004 Act), most of whichcame into force by February 5, 2005. Under the 2004 Act, several changes have been made to the structure of theelectricity market. The Independent Market Operator (IMO) became the Independent Electricity System Operator(IESO) and will be responsible for medium and short-term planning. A new organization called the Ontario PowerAuthority will oversee long range planning for electricity supply and conservation. In addition, the role of theOntario Energy Board (OEB) expands to include the setting of the commodity pricing plans that distributors will apply to customers on a pass-through basis. Electricity distributors will have an increased role in promotingconservation, managing electricity demand and promoting the use of alternative and renewable energy sources.

Regulatory Assets

Under Bill 210, certain costs and variance account balances are deemed to be “regulatory assets” and are reflected in the balance sheet until amounts are recovered through rates.

On December 19, 2003, Hydro Ottawa received approval from the Minister of Energy to proceed with an applicationto the OEB for new distribution rates that will start to recover regulatory assets. Regulatory asset costs that areapproved by the OEB are to be recovered over a four-year period.

Based on guidelines issued by the OEB, Hydro Ottawa sought approval for an April 1, 2004 rate increase to beginthe recovery of regulatory assets. The OEB granted approval on an interim basis until such time as the OEB hasreviewed the prudence of each distributor’s costs. The review of Hydro Ottawa’s costs is expected to occur in 2005.The OEB has issued further rate guidelines that will allow distributors to continue to recover regulatory assets onan interim basis in 2005.

The principal regulatory assets of the Company are comprised of transition costs, a pre-market opening electricityvariance and various retail settlement variances.

(i) Transition costs:Hydro Ottawa incurred transition costs in preparing the Company for requirements of the competitive electricitymarket in Ontario. Criteria set out in the OEB’s Distribution Rate Handbook and Accounting Procedures Handbook(AP Handbook) allow certain costs to be deferred that would be expensed when incurred under GAAP for an unregu-lated business. Hydro Ottawa has not recorded additional transition costs since 2002; however, interest on therecorded transition costs has been accrued as a regulatory asset.

(ii) Pre-market opening electricity variance:At December 31, 2002, Hydro Ottawa recognized the pre-market opening electricity variance for the period January 1, 2001 to April 30, 2002, the date of market opening, in accordance with the AP Handbook. The pre-market opening variance represents the difference between the utility’s cost of power purchased based upon time-of-use (TOU) rates and amounts billed for the cost of power to non-TOU customers at an average rate for the same period. Interest has been accrued for this account as at December 31, 2004 as current direction from the OEB indicates that an interest claim can be filed.

(iii) Post-market opening variances:Hydro Ottawa has recognized retail settlement variances (RSVA) for the period May 1, 2002 to December 31, 2004 in accordance with criteria set out in the AP Handbook. The retail settlement variances relate to the charges Hydro Ottawa incurred for transmission services, generation (the commodity) and wholesale market operations from the IESO and Hydro One Networks that were not recovered from customers during the period. The nature of the settlement variances is such that the balance can fluctuate between assets and liabilities over time and arereported at period-end dates in accordance with rules prescribed by the OEB. Hydro Ottawa has also recognized the net cost of providing retailer billing services and service transaction request services as a variance amount.Interest on all recorded post-market opening variances has been accrued as a regulatory asset as per the AP Handbook.

Conservation and Demand Management

By letter dated December 19, 2003, the Minister of Energy advised all distributors that they would be permitted to apply to the OEB for the final distribution rate installment to achieve the maximum allowable return on equity of 9.88%. Approval of the rate submission is contingent on making a commitment to reinvest the incremental fundson conservation and demand management (CDM) programs.

On October 5, 2004, the OEB issued a Procedural Order that provided distributors with the details on openingdeferral accounts for CDM expenditures, and addressed the filing requirements that would demonstrate a distribu-tor’s commitment to investing in CDM. On November 4, 2004, Hydro Ottawa filed with the OEB for approval of its CDM plan. Following an oral public hearing, Hydro Ottawa was granted final approval of its CDM plan onDecember 10, 2004. Final approval provides greater regulatory certainty that a distributor is satisfying the required CDM commitment, provided that it spends in accordance with its approved CDM plan.

Payments in lieu of Corporate Income Taxes

Hydro Ottawa is considered to be a municipal electric utility (MEU) for purposes of the payments in lieu of taxes(PILs) regime contained in the Electricity Act, 1998. The Electricity Act, 1998 provides that a MEU that is exemptfrom tax under the Income Tax Act (ITA) Canada and the Corporations Tax Act (CTA) of Ontario is required to make,for each taxation year, a PILs amount to the OEFC in an amount approximating the tax that it would be liable topay under the ITA and the CTA if it were not exempt from tax.

The AP Handbook provides for the recovery of PILs by Hydro Ottawa through annual distribution rate adjustmentsas permitted by the OEB. As a result of Bill 210, the PILs recovery for 2004 remained at the 2002 level included inthe March 2002 rate order issued by the OEB.

The Company has adopted the taxes payable method to account for PILs as outlined in the AP Handbook.

The Company is generally exempt from tax under the ITA, as not less than 90% of its capital is owned by the City ofOttawa and not more than 10% of its income is derived from activities carried on outside the municipal boundariesof the City of Ottawa. A corporation exempt under the ITA is also generally exempt from tax under the CTA.

Change in OEB Policy Regarding Customer Deposits

On February 3, 2004, the OEB released amendments to the Distribution System Code (DSC) with respect to consumersecurity deposits. The DSC now sets out the maximum consumer security deposits permitted, the length of time thatdeposits can be held, how consumers can seek exemption for part or all of the deposit and the interest that distribu-tors must pay. The new DSC requirements came into effect on August 3, 2004, however distributors were not requiredto return consumer security deposits under the new rules until February 2005. Approximately $7.0 million of previouslong-term customer deposits have been reclassified to accounts payable to reflect this policy.


3. Significant Accounting Policies

The consolidated financial statements of Hydro Ottawa Holding have been prepared in accordance with Canadiangenerally accepted accounting principles (GAAP) for commercial entities, including principles prescribed by the OEB in the AP Handbook. In the opinion of management, all adjustments necessary for fair presentation arereflected in the consolidated financial statements. The consolidated financial statements reflect the significantaccounting policies summarized below.

Basis of Consolidation

The consolidated financial statements include the accounts of Hydro Ottawa Holding and its subsidiaries:Hydro Ottawa, Energy Ottawa, Telecom Ottawa, which includes the accounts of Telecom Ottawa Limited,Telecom Ottawa Regional Limited and 2038455 Ontario Inc. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

Measurement Uncertainty

The preparation of consolidated financial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of revenue, expenses, assets, liabilities and thedisclosure of contingent assets and liabilities at the financial statement date. Accounts receivable, unbilled revenue and regulatory assets are reported net of an appropriate allowance for unrecoverable amounts. Inventory is recorded net of provisions for obsolescence.

Due to the inherent uncertainty involved in making such estimates, actual results could differ from estimatesrecorded in preparing these financial statements, including changes as a result of future decisions made by the OEB or the Minister of Energy. The financial statements have, in management’s opinion, been properly preparedusing careful judgment within reasonable limits of materiality and within the framework of the accounting policies.

Financial Instruments

The Corporation’s financial instruments consist of accounts receivable, unbilled revenue, bank indebtedness andbanker’s acceptances, accounts payable and accrued liabilities, customer deposits and notes payable. Unlessotherwise noted, it is management’s opinion that the Corporation is not exposed to significant currency or creditrisks arising from these financial instruments. The carrying values of the Corporation’s financial instrumentsapproximate their fair values unless otherwise noted.

Concentration of credit risk in accounts receivable and unbilled revenue is limited, due to the large number ofcustomers the Corporation services. The Corporation performs ongoing credit evaluations on its customers andrequires collateral to support customer accounts receivable on specific accounts to mitigate significant losses.The Corporation establishes an allowance for doubtful accounts based on the credit risk applicable to particularcustomers, historical and other information.

Inventory

Inventory consists primarily of parts and supplies acquired for internal construction or consumption and are stated at the lower of cost and replacement cost, with cost determined on a weighted moving average basis.

Contributions in Aid of Construction

Capital contributions are required contributions received from outside sources used to finance additions to capitalassets. Capital contributions received are treated as a contra account and are included in capital assets. The amountis amortized by a charge to accumulated amortization and a credit to amortization expense at an equivalent rate tothat used for the depreciation of the related asset.

Allowance for Funds used during Construction

Commencing January 1, 2000, an allowance for the cost of funds used during the construction period of major capital anddevelopment projects has been applied to the related capital assets. The rate applied for the current fiscal period is equalto the rate allowed by the OEB in respect of long-term borrowings, being 6.9% at December 31, 2004 (2003 – 6.9%).

Spare Transformers and Meters

Spare transformers and meters are items that are expected to be substituted for original distribution plant trans-formers and meters when these original plant assets are being repaired and are held and dedicated for the specificpurpose of backing-up plant-in-service as opposed to assets available for other uses. Spare transformers and metersare treated as capital assets.

Capital Assets

Capital assets include generation plants, distribution equipment and facilities, fibre-optic equipment and buildings,as well as construction and operating equipment. Costs are considered capital provided there is reasonable assur-ance that these costs will be recovered through future earnings.

Capital assets are recorded at cost and include contracted services, materials, labour, engineering costs, overheads,an allowance for the cost of funds used during construction and interest on funds used to finance construction of fibre-optic equipment. Certain assets may be acquired or constructed with financial assistance in the form ofcontributions from customers.

Significant renewals and enhancements to existing assets are capitalized only if the service life of the asset isincreased, reliability is improved above original design standards, or if operating costs are reduced by a substantialand quantifiable amount.

Maintenance and repair costs are expensed as incurred.

Amortization is recorded on a straight-line basis over the estimated service life of the related asset.

Estimated service lives for capital asset classes are as follows:

Distribution system 25 to 40 yearsGenerating plant equipment 4 to 60 yearsGeneral plant 4 to 50 yearsFibre-optic equipment 15 to 20 years

The Corporation reviews long-lived assets for impairment whenever events or changes in circumstances indicatethat the carrying value of an asset may not be recoverable. If events or changes in circumstances indicate that thecarrying amount of such assets may not be recoverable, the Corporation will estimate the future cash flows expectedto result from the use of the asset group and their eventual disposition, and record an impairment loss if required.


Intangible Assets

Intangible assets are recorded at cost less accumulated amortization and are amortized as follows:

Customer lists 10 years

Goodwill represents the excess of the purchase price of business acquisitions over the fair value of the identifiablenet assets acquired in such acquisitions. Goodwill is not amortized.

The Corporation regularly evaluates the carrying value of goodwill for potential impairment. The carrying value ofgoodwill is considered impaired when the fair value of the goodwill of a reporting unit is less than its carrying value,and the difference is recognized as a loss.

Employee Future Benefits

i. Pension planThe Corporation provides pension benefits for most of its employees through the Ontario Municipal Employees’Retirement System (OMERS). OMERS is a multi-employer pension plan which operates as the Ontario MunicipalEmployees’ Retirement Fund (the Fund), and provides pensions for employees of Ontario municipalities, localboards, public utilities and school boards. The Fund is a contributory defined benefit pension plan, which isfinanced by equal contributions from participating employers and employees and by the investment earnings of the Fund. The Corporation recognizes the expense related to this plan as contributions are made.

Effective July 1, 2004, Telecom Ottawa ceased being a part of OMERS. Telecom Ottawa has set up a definedcontribution plan whereby the Company matches employee contributions. The Company recognizes the expenserelated to this plan as contributions are made.

ii. Employee future benefits other than pension planEmployee future benefits other than pensions provided by the Corporation include medical and life insurancebenefits, supplemental pensions and accumulated sick leave credits. These plans provide benefits to certainemployees when they are no longer providing active service.

Employee future benefit expense is recognized in the period in which the employees render services.

Employee future benefits are recorded on an accrual basis. The accrued benefit obligation and current service costs arecalculated using the projected benefit method pro rated on service and based on assumptions that reflect management’sbest estimate. The current service cost for a period is equal to the actuarial present value of benefits attributed toemployees’ services rendered in the period. Actuarial gains and losses resulting from experience different from thatassumed or from changes in actuarial assumptions are amortized based on the excess of unamortized net actuarialgains and losses over the 10% corridor calculated in the aggregate for all groups. The expected average remainingservice life as at December 31, 2004 is 16 years.

Customer Deposits

Customer deposits are cash collections from customers to guarantee the payment of energy bills and fulfillment ofconstruction obligations. Deposits estimated to be refundable to customers within the next fiscal year are classifiedas a current liability.

Revenue Recognition

Electricity distribution revenue is recorded on the basis of regular meter readings and estimates of current usagefrom the last meter reading to the end of the fiscal period. The distribution revenue, along with accrued revenuefrom electricity consumed by customers since the date of each customer’s last meter reading that has not yet beenbilled is represented as unbilled revenue in the financial statements.

Other revenue related to sales of other services is recognized as services are rendered. Contract revenue is accountedfor under the percentage of completion method, with revenue recognized proportionately with the degree of comple-tion of the services under contract. Losses on contracts are fully recognized when they become evident.

Telecommunication revenue is recognized on a straight-line basis over the term of the customer contract. In someinstances, customers will choose to make a lump-sum payment at the beginning of the lease term. This lump-sumpayment is deferred and recognized as revenue on a straight-line basis over the term of the contract.

Indefeasible right of use contracts (IRU) are treated as sales-type or direct financing leases. For IRU contractsmeeting the criteria as a sales-type lease, revenues are recognized at the time of the transaction, net of cost of sales and any unearned finance revenue is deferred and taken into income over the term of the contract.

Payment in lieu of Corporate Income Taxes

Under the taxes payable method, no provisions are made for future income taxes as a result of temporary differencesbetween the tax basis of assets and liabilities and their carrying amounts for accounting purposes. When unrecordedfuture income taxes become payable, it is expected that they will be included in the rates approved by the OEB andrecovered from the regulated business at that time.

Under the liability method, future income tax assets and liabilities are recognized on the differences between thefinancial statement carrying amount values and the tax basis of assets and liabilities, known as temporary differ-ences. Future income tax assets and liabilities are measured using substantively enacted rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. The effect onfuture income tax assets and liabilities of a change in tax rates is recognized in income in the period in which thechange is substantively enacted. Future income tax assets are recognized only to the extent that it is more likelythan not that these assets will be realized.

Deferred Debt Issue Costs

Deferred debt issue costs represent the unamortized amounts of debt costs arising from the issuance of debt, andother related costs. Deferred debt issue costs will be amortized over the period to maturity of the debt on a straight-line basis, commencing on the debt issuance date.

Deferred Contract Costs

The Corporation accumulates costs directly associated with securing long-term energy contracts where the recoveryof such costs is probable. Deferred costs include legal, professional and engineering fees that are external, direct andincremental in nature. Deferred costs are amortized on a straight-line basis over the term of the underlying contract.


Deferred Development Costs

The Corporation accumulates costs associated with development activities. These costs are external, direct andincremental in nature and are incurred for the completion of a potential construction project. Development costs areincluded in operating expenses until the construction of a plant is likely to occur, there is a reasonable expectation ofcommercial success and recovery of these costs is probable. Costs associated with successful projects are reclassifiedfrom long-term assets to capital assets and amortized over the useful life of the related asset. Costs of unsuccessfulprojects are written off in the year projects are abandoned.

4. Accounts Receivable

2004 2003

Trade receivables net of allowance for doubtful accounts of $3,170,000 (2003 – $3,436,000) $ 40,922 $ 38,589

Other receivables, including work performed for others 8,871 8,054

$ 49,793 $ 46,643

5. Inventory

The Corporation maintains a stock of materials and supplies needed to service its capital assets. Over time, stockitems become obsolete. A comprehensive review of the utilization of inventory is conducted each year to identifyitems with an impaired value. During 2004, obsolete stock items that had been previously written-down wereremoved from inventory (cost $1,474,000). There is no provision for obsolescence in the current year as all obsoleteinventories have been written off (2003 – $1,490,000).

6. Regulatory Assets and Liability

In accordance with the AP Handbook, the Corporation has accounted for regulatory variances during the year.Pre-market opening cost of power variances and post-market opening variances have been recorded as regulatoryassets, with the exception of the variance related to the transmission connection costs that has been recorded as a regulatory liability. Other regulatory assets recorded include expenses incurred issuing 2002 customer rebates,deferred PILs and the net costs for retailer billing and service transaction requests. The OEB has approved anamount to cover the PILs that the Corporation pays to the provincial government; this amount is included in theCorporation’s distribution rates. Any differences between the amount approved by the OEB for PILs and the amountactually collected from customers is recorded in the deferred PILs regulatory asset account for future disposition.Interest has been accrued on the regulatory assets and regulatory liability as per the AP Handbook. Transition costshave been recorded as capital assets; however, the interest accrued is treated as a regulatory asset.

In the absence of final approval of the amounts filed with the OEB, the Corporation has recorded a net provision of$29,394,000 (2003 – $33,205,000) against regulatory assets and a provision of $1,073,000 (2003 – $177,000) againstthe interest accrued and included in the regulatory liability. The Corporation continues to assess the likelihood offull recovery of regulatory assets. If future recovery becomes assured, the Corporation would recognize the recoveryin the results of operations in the period such a decision is made. The Corporation has recorded a provision forregulatory assets write-down of $459,000 in 2004 (2003 – ($165,000)) and a recovery of provision for regulatoryassets write-down and disposition of provision for regulatory liability of $8,387,000 (2003 – nil).

Information about the Corporation’s regulatory assets and liability is as follows:

2004 2003

Transition costsCapital assets $ 6,431 $ 6,431Interest on transition costs 1,032 753Provision for doubtful recovery (421) (753)Recovery of regulatory assets through rate approval (611) –

Total transition costs 6,431 6,431

Pre-market opening electricity varianceRegulatory assets 21,696 21,696Interest on pre-market opening electricity variance 4,230 –Provision for doubtful recovery (23,633) (21,696)Recovery of regulatory assets through rate approval (2,293) –

Total pre-market opening electricity variance – –

Post-market opening variancesRegulatory assets 17,302 16,576Provision for doubtful recovery (5,340) (10,756)Recovery of regulatory assets through rate approval (6,493) –

5,469 5,820

Regulatory liability (12,973) (7,175)Provision for doubtful recovery 1,073 177Disposition of regulatory liability through rate approval 2,277 –

(9,623) (6,998)

Total post-market opening variances (4,154) (1,178)

Total regulatory assets and liability $ 2,277 $ 5,253

Regulatory assets and liability comprise:Net regulatory assets $ 5,469 $ 5,820Net regulatory liability (9,623) (6,998)Capital assets (Note 7) 6,431 6,431

$ 2,277 $ 5,253


Information about the Corporation’s recovery of regulatory assets and disposition of regulatory liability through rateapproval, and provision for regulatory assets write-down is as follows:

2004 2003

(Recapture) (Recapture)Regulatory of Provision Regulatory of Provision Assets and for Doubtful Assets and for Doubtful

Liability Recovery Liability Recovery

Recovery of regulatory assets through rate approval $ (9,397) $ (8,388) $ – $ –

Disposition of regulatory liability through rate approval 2,277 1 – –

Regulatory assets write-down – 459 – (165)

$ (7,120) $ (7,928) $ – $ (165)

7. Capital Assets

2004 2003

Accumulated Net book Net bookCost amortization value value

Distribution system $ 680,192 $ 328,349 $ 351,843 $ 339,532

Generating plant equipment 31,717 6,012 25,705 21,000

Fibre-optic equipment 35,557 5,598 29,959 25,526

General plant 127,339 48,705 78,634 55,054

874,805 388,664 486,141 441,112

Contributions in aid of construction (54,457) (8,457) (46,000) (41,909)

$ 820,348 $ 380,207 $ 440,141 $ 339,203

Included in capital assets is $23,888,000 (2003 – $45,188,000) of assets under construction not subject toamortization.

Included in general plant cost is $6,431,000 (2003 – $6,431,000) of capital assets that have been designated asregulatory assets, consistent with OEB guidelines. These capital assets may be recoverable (Note 6).

During the year, the Corporation capitalized interest of approximately $138,000 (2003 – nil) and recorded anallowance for funds used during construction of $1,225,000 (2003 – $708,000).

Included in the cost of generating plant and equipment is $547,000 (2003 – $193,000) related to Energy Ottawa’sinterest in the Chaudière dam.

8. Intangible Assets

The Corporation recorded intangible assets in connection with the acquisitions of Trytel Internet Inc.,1457844 Ontario Inc. and Cornwall’s Connection Inc. The Corporation has not amortized the resulting goodwill.Intangible assets are comprised as follows:

2004 2003

Accumulated Net book Net bookCost amortization value value

Customer lists $ 647 $ 72 $ 575 $ 640

Goodwill 612 – 612 584

$ 1,259 $ 72 $ 1,187 $ 1,224

9. Other Assets

2004 2003

Deferred debt issue costs $ 121 $ –

Deferred contract costs 71 –

Other assets 391 –

$ 583 $ –

During the year, Hydro Ottawa sold a server valued at $541,000. Consideration for the server consisted of credits tobe applied against fees payable under the maintenance agreement with $150,000 applied in 2004 and the remainingto be applied as follows:

2008 $ 130,000

2009 130,000

2010 131,000

$ 391,000

10. Bank Indebtedness And Banker’s Acceptances

2004 2003

Bank indebtedness and banker’s acceptances $ 29,901 $ 8,706

The Corporation had available to it a credit facility consisting of a revolving operating credit facility up to$70,000,000, a letter of credit facility up to $32,000,000 and a convertible revolving term facility up to $50,000,000 to assist with financing general operating requirements and capital expenditures. The facility was to expire on May 30, 2005. A new credit facility was arranged January 6, 2005 (see Note 25).

The revolving operating credit facility was subject to certain banking covenants and bore interest at prime less 0.35% per annum, with interest payable monthly. Advances under the convertible revolving term facility boreinterest at prime less 0.25% per annum.


The letters of credit are issued for periods not to exceed one year from the date of issuance. $30,000,000 of the letterof credit facility is to provide prudential support to the IMO as required by regulation and $2,000,000 is to securesundry obligations. The Corporation also has available to it a $150,000 corporate Visa card facility.

11. Accounts Payable And Accrued Liabilities

2004 2003

Purchased power payable $ 49,083 $ 41,921

Rebates payable to eligible customers 2,433 6,694

Customer credit balances 11,115 9,796

Collateral funds held 20,149 13,189

Deferred revenue 1,288 832

Other accounts payable and accrued liabilities 23,979 30,493

Accrued interest on notes payable (Note 13) – 4,136

$ 108,047 $ 107,061

12. Employee Future Benefits

(i) Pension PlanThe Corporation’s participating employer contributions for the year ended December 31, 2004 were approximately$2,240,000 (2003 – $740,000). A contribution holiday was in effect for amalgamated OMERS members from August 1998 to December 2002. Contributions recommenced in January 2003 and returned to full contribution rates in 2004.

Effective July 1, 2004, Telecom Ottawa ceased being a part of OMERS. Telecom Ottawa has set up a definedcontribution plan whereby the company matches employee contributions. The company recognizes the expenserelated to this plan as contributions are made.

(ii) Employee future benefits other than pension planEmployee future benefits are calculated using an annual compensation rate increase of 2.5% to 3.0%, an inflationrate of 1.75%, and a discount rate of 6.0% to calculate the liabilities. Information about the Corporation’s definedbenefits plans is as follows:

2004

Accumulated Expense for Benefitsliability the year paid

Life insuranceRetired employees $ 1,578 $ 331 $ 331Current employees 2,166 171 –

Supplemental pensions 28 3 3

Sick leave 16 (42) –

$ 3,788 $ 463 $ 334

Projected benefit obligation $ 6,700

Actuarial deficit $ (2,912)

2003

Accumulated Expense for Benefitsliability the year paid

Life insuranceRetired employees $ 1,578 $ 219 $ 299Current employees 1,995 163 –

Supplemental pensions 28 3 3

Sick leave 58 – –

$ 3,659 $ 385 $ 302

Projected benefit obligation $ 6,274

Actuarial deficit $ (2,615)

The last actuarial valuation was performed January 1, 2004. The actuary has updated the assumptions andestimates at December 31, 2004. As a result of this exercise, the Corporation increased the projected benefit obligation by $426,000. This amount is reflected in the projected benefit obligation and the excess over the 10% corridor will be charged to earnings over the average remaining service life of current employees of 16 years,beginning January 1, 2005.

At December 31, 2004, the current liability portion of the accrued employee future benefits included in otheraccounts payable is $313,000 (2003 – $356,000) and the non-current portion of $3,475,000 (2003 – $3,303,000) isincluded in long-term liabilities.


13. Notes Payable

Effective November 1, 2000, Hydro Ottawa and Energy Ottawa issued promissory notes due on demand, payable to the City of Ottawa, in the amount of $232,185,000 and $5,640,000 respectively, as consideration for the transfer of the assets of the municipalities of Ottawa, Nepean, Gloucester, Kanata and Goulbourn and their respective hydro-electric commissions. The notes bear interest at an annual rate of 6.9% and are secured by all present and futurepersonal and real property of Hydro Ottawa and Energy Ottawa. These notes are subordinated to seniorindebtedness greater than $5,000,000.

Effective December 31, 2004, Hydro Ottawa and Energy Ottawa issued promissory notes due to Hydro OttawaHolding Inc. in the amount of $232,185,000 and $5,640,000 respectively, bearing interest at 6.9%. As considerationfor the promissory notes, these companies assigned the promissory notes due on demand, payable to the City ofOttawa, to Hydro Ottawa Holding Inc.

The Hydro Ottawa and Energy Ottawa notes are convertible into fully paid and non-assessable Class A common shares ata conversion rate equal to 1 Class A common share for each $1 of the principal amount converted.

On December 31, 2004, by Resolution approved by City Council dated August 25, 2004, $37,825,000 of the $237,825,000promissory note issued by Hydro Ottawa Holding Inc. was converted into 37,825,000 Class A common shares of HydroOttawa Holding Inc. At the same time as the shares were converted, the Corporation reissued a promissory note to theCity in the amount of $200,000,000. The City also approved recalling the balance of $200,000,000 with proceeds to bedelivered to the City in January 2005 (see Note 25).

As of December 31, 2004, the note has been reclassified from long-term to short-term liabilities on the balance sheet.Included in financing costs is $16,410,000 (2003 – $16,410,000) of interest on this debt.

The fair value for December 31, 2003 of $285,000,000 was determined based on discounting future payments ofinterest at the estimated interest rate that would be available to the Corporation at December 31, 2003.

14. Share Capital

AuthorizedUnlimited voting first preferred shares, redeemable at $1 per shareUnlimited non voting second preferred shares, redeemable at $10 per shareUnlimited non voting third preferred shares, redeemable at $100 per shareUnlimited voting (10 votes per share) fourth preferred shares, redeemable at $100 per shareUnlimited voting Class A common sharesUnlimited non voting Class B common sharesUnlimited non voting Class C common shares

The above shares are without nominal or par value.

The Corporation may, at any time, purchase for cancellation the whole or part of the Class C common shares at theprice at which such shares were issued.

Holders of second preferred shares, fourth preferred shares and common shares are entitled to receive dividends asand when declared by the board of directors at their discretion.

2004 2003

Issued214,901,003 (2003 – 177,076,003) Class A common shares $ 228,453 $ 190,628

On August 25, 2004, the Shareholder passed a resolution approving a target dividend policy for Hydro OttawaHolding Inc. of 60% of any annual net income. No dividends were declared in 2004. In 2003, no dividends werepermitted pursuant to a resolution approved by the Shareholder.

On December 31, 2004, by Resolution approved by City Council dated August 25, 2004, $37,825,000 of the$237,825,000 promissory notes issued by Hydro Ottawa Holding Inc. were converted into 37,825,000 Class Acommon shares of Hydro Ottawa Holding Inc.

Any invitation to the public to subscribe for shares of the Corporation is prohibited by shareholder resolution.

15. Electricity Sales And Cost Of Power

The opening of the restructured electricity market on May 1, 2002 separated the purchase of power into severalcomponents such as the cost of the commodity, transmission connection and network costs, and wholesale marketservice costs. These costs are to be passed on to the consumer. Variances between actual costs and revenue are to be accounted for as assets or liabilities, with final disposition subject to OEB approval.

Bill 210 established a capped price of 4.3 cents for the electricity commodity for low-volume and designated customers(Eligible Customers), commencing December 1, 2002. As a result of Bill 4, effective April 1, 2004, the capped price waschanged to a two-tier structure, with the first tier at 4.7 cents for the first 750 kWh and the second tier at 5.5 centsfor all remaining kWh. The IESO has, and continues to facilitate this price cap through funding from the OEFC, andaccordingly power recovery revenue and purchased power expense have been reduced by the difference between thespot market rate and the capped price billed to Eligible Customers.


16. Restructuring

On November 23, 2004, Hydro Ottawa announced a restructuring plan to reorganize the Company’s Customer Caredepartment as a result of the implementation of the new customer information and billing system. The company hasrecorded a provision for these restructuring costs of $851,000. This amount has been recorded as a separate provision,in its entirety, within expenses on the Corporation’s Statement of Income and Retained Earnings (Deficit). The restruc-turing costs are for voluntary and involuntary employee separations relating to the elimination of approximately 28 positions within Hydro Ottawa. The employee separations impacted all levels of the organization and included both management and unionized employees. Employee separation payments are expected to be completed in 2005.

On December 16, 2003, the Corporation announced a restructuring plan directed at reducing costs by aligning its coststructure and operations to the prevailing economic and regulatory environments. The company recorded a provisionfor these restructuring costs of $3,332,000. All employee separation payments took place during fiscal 2004.

The following table summarizes the activity in the restructuring costs during the year ended December 31, 2004:

2004 2003

Balance, beginning of year $ 3,332 $ –

Restructuring provision 851 3,332

Cash payments during the year (4,031) –

Balance, end of year $ 152 $ 3,332

17. Financing Costs

2004 2003

Short-term interest $ 649 $ 692

Interest on notes payable 16,410 16,410

Other 171 –

Less: Allowance for funds used during construction (1,225) (708)Interest included in discontinued operations (148) (149)Interest capitalized on construction of fibre-optic equipment (138) –

$ 15,719 $ 16,245

18. Payments In Lieu Of Corporate Income Taxes

The provision for PILs differs from the amount that would have been recorded using the combined Canadian federal and Ontario statutory income tax rates. A reconciliation between the statutory and effective tax rates isprovided as follows:

2004 2003

Federal and Ontario statutory income tax rate 36.12% 36.62%

Income before provision for PILs $ 21,685 $ 3,547

Provision for PILs at statutory rate 7,833 1,299

Increase (decrease) resulting from:Permanent differences (391) 27Tax effect of non-capital losses for which no benefit has been recorded (6,522) (1,328)Large corporations tax (LCT) 885 990Corporate minimum tax 180 132Acquisition of Future Tax Asset – (172)Provision for PILs $ 1,985 $ 948

Consists of:Current PILs corporate income tax expense $ 1,049 $ 1,120Future PILs corporate income tax expense 936 (172)

$ 1,985 $ 948

Effective income tax rate 9.10% 26.73%

Reported as:Payments in lieu of corporate income taxes $ 1,236 $ 948Net of gain on disposal of discontinued operations 749 –

$ 1,985 $ 948

Hydro Ottawa, as a rate regulated utility, does not recognize future income taxes to the extent they are expected to beincluded in future approved rates charged to customers and recovered from them. Hydro Ottawa has unused tax lossesof approximately $16,131,000 (2003 – $25,906,000) which expire in 2009. Hydro Ottawa has deductible temporarydifferences between the tax basis of assets and their carrying amount for accounting purposes of approximately$78,928,000 (2003 – $85,782,000). These amounts translate into an unrecognized future tax asset of approximately$34,191,000 (2003 – $40,342,000) that can be used to reduce payments in lieu of taxes of Hydro Ottawa calculated infuture periods.

Hydro Ottawa Holding Inc., 2038455 Ontario Inc., Telecom Ottawa Holding Inc., and Telecom Ottawa Limited,have unused tax losses that have not been reflected on the financial statements of approximately $5,542,000 (2003 – $8,602,000) of which $847,000 expire in 2009, $2,716,000 in 2010, and $1,979,000 thereafter. Thesecompanies have taxable temporary differences between the tax basis of assets and their carrying amount foraccounting purposes of approximately $2,600,000 (2003 – $6,913,000). These amounts translate into an unrec-ognized future tax asset of approximately $1,056,000 (2003 – $773,000) which can be used to reduce payments inlieu of taxes calculated in future periods.


At December 31, 2004, Energy Ottawa had $7,100,000 of loss carry forwards which have been used to reduce thefuture PILs liability. These losses begin to expire in 2008.

These losses are available to offset taxable income in future years for purposes of the PILs regime. The Companies are subject to PILs as long as they are exempt from federal taxation under paragraph 149(1)(d.6) of the ITA. Thesetax losses will not be available to offset taxable income of the Companies if the Companies are no longer exempt forfederal tax purposes.

19. Acquisitions

Effective October 31, 2003, the Corporation acquired 100% of the outstanding common shares of Trytel Internet Inc.and 1457844 Ontario Inc. The results of Trytel’s Ottawa and Peterborough operations since October 31, 2003 havebeen included in the consolidated financial statements.

On November 28, 2003, the Corporation acquired 100% of the outstanding common shares of Cornwall’s ConnectionInc. (CCI). The results of CCI’s operations since November 28, 2003 have been included in the consolidated financialstatements. In a related transaction, CCI acquired approximately 70 kilometers of fibre optic cable installed in andaround Cornwall, Ontario, including a long-haul connection to Kingston, Ontario. These network assets had beenoperated under a long-term lease by CCI but were owned by Cornwall Street Railway Light and Power CompanyLimited, Cornwall’s local electricity distribution utility.

The following table summarizes the estimated fair value of the assets and liabilities assumed:

Assets purchasedFibre optic assets $ 488Furniture and equipment 288Customer lists 647Goodwill 612Non-cash working capital assets 204

2,239

Liabilities assumedFuture income tax liability (172)Non-cash working capital liabilities (867)

Net non-cash assets acquired 1,200

Cash acquired 6Net assets acquired $ 1,206

Cash Consideration $ 1,206

Goodwill is comprised of the excess of the purchase price of the acquisitions over the value of the identifiabletangible and intangible net assets acquired.

On January 1, 2004, Trytel Internet Inc. was amalgamated with the operations of Telecom Ottawa Limited. On January 1, 2004, 1457844 Ontario Inc. and CCI were amalgamated under the name Telecom Ottawa Regional Limited.

20. Discontinued Operations

2004 2003

Assets related to Discontinued Operations

Unbilled revenue $ 3 $ 533

Allowance for doubtful accounts – (84)

3 449

Inventory – 194

Net book value of water heaters – 5,377

Future payments in lieu of corporate tax assets 271 –

Assets held for sale $ 274 $ 6,020

Liabilities related to Discontinued Operations

Accounts payable and accrued liabilities $ 940 $ 180

On November 12, 2004, Energy Ottawa completed the sale of its water heater rental assets for $11,250,000 in cash,subject to contingent post closing adjustments of up to $750,000. The contingent adjustments relate to the number ofinstalled water heaters falling below a threshold of 35,000 units and bad debt expense in excess of 3% of sales for aperiod of up to twelve months after the close of the transaction.

The net cash proceeds from the sale was $10,750,000, most of which will be used to repay the notes payable to theCity of Ottawa and to re-invest in Energy Ottawa’s green power projects.

The sale resulted in an after-tax gain of $2,270,000. An additional after-tax gain of up to $480,000 may be recognizedin 2005, subject to the finalization of the contingent post closing adjustments. The contingent post closing adjustmentof $750,000 is recorded as a current liability and the related future income tax asset of $271,000 is recorded as acurrent asset as at December 31, 2004.

The discontinued operations generated sales of approximately $2,900,000 and $3,200,000 and operating income ofapproximately $1,400,000 and $1,500,000 for the years ended December 31, 2004 and 2003 respectively. The netearnings from discontinued operations have been disclosed separately on the statement of Income and RetainedEarnings (Deficit) after net earnings from continuing operations.

21. Net Changes In Non-Cash Operating Working Capital Items

2004 2003

(Increase) decrease in accounts receivable $ (3,150) $ (1,967)

(Increase) decrease in unbilled revenue (3,994) 17,639

Increase (decrease) in accounts payable and accrued liabilities 986 21,804

(Increase) decrease in regulatory assets and liability 2,976 2,679

(Increase) decrease in other (3,951) 3,740

(Increase) decrease in non-cash operating working capital items $ (7,133) $ 43,895

These amounts are exclusive of amounts acquired through acquisitions (Note 19).


22. Contingent Liabilities

(i) A class action claiming $500,000,000 in restitutionary payments plus interest was served on the former TorontoHydro-Electric Commission on November 18, 1998. The action was initiated against the former Toronto Hydro-Electric Commission as the representative of the Defendant Class consisting of all municipal electric utilities inOntario, which have charged late payment charges on overdue utility bills at any time after April 1, 1981.

The claim is that late payment penalties result in electric utilities receiving interest at effective rates in excess ofwhat is allowed under Section 347(1)(b) of the Criminal Code. The action has not yet been certified as a plaintiffs’ ordefendants’ class action. At this time, it is not possible to quantify the effect, if any, on these financial statements.

(ii) Purchasers of electricity in Ontario, through the IESO, are required to provide security to mitigate the risk of theirdefault based on their expected activity in the market. The IESO could draw on these guarantees if the Corporationfails to make a payment required by a default notice issued by the IESO. A prudential support obligation is calculatedbased upon a default protection amount and the distributor’s trading limit less a reduction for the distributor’s creditrating. At December 31, 2004 and December 31, 2003, the Corporation provided bank letters of credit of $22,000,000 tocover its prudential support obligation. In addition, the Corporation provided bank letters of credit of $284,782 to the City of Ottawa as security for construction projects.

(iii) In July 2004, Hydro Ottawa was charged with eight charges under the Occupational Health and Safety Act inrespect of an incident occurring on August 7, 2003, relating to an employee of a third party contractor. No charges havebeen or can be brought against directors, officers or employees arising from this incident. The maximum fine for eachcount is $500,000. The Corporation, through external counsel, is defending the charges. At this time, it is not possible toquantify the effect, if any, of these charges on these financial statements.

(iv) Various lawsuits have been filed against the Corporation for incidents that arose in the ordinary course ofbusiness. In the opinion of management, the outcomes of the lawsuits, now pending, are neither determinable normaterial. Should any loss result from the resolution of these claims, such loss will be charged to operations in theyear of resolution.

(v) The Corporation participates with other electrical utilities in Ontario in an agreement to exchange reciprocalcontracts of indemnity through the Municipal Electrical Association Reciprocal Insurance Exchange. TheCorporation is liable for additional assessments to the extent premiums collected and reserves established are notsufficient to cover the cost of claims and costs incurred. If any additional assessments were required in the future,their cost would be charged to operations in the year in which they occur.

(vi) The Corporation has posted a performance guarantee to the Ottawa-Carleton District School Board related to awide area network service agreement between Telecom Ottawa and the Board. The guarantee is limited to anamount not to exceed $1,500,000 and expires on August 17, 2008.

(vii) The Corporation may be subject to environmental regulatory requirements related to the destruction of PCBs in distribution transformers and other clean up related to PCBs if a draft federal regulation in its current form isultimately passed. This could result in approximately $7,000,000 to $8,000,000 being spent over the 3-year periodfrom 2005 to 2007. No amount has been recorded in these financial statements.

23. Commitments

(i) Hydro Ottawa has $7,300,000 in open commitments for 2005. This includes $467,000 for a one-year extension oftree trimming services. In addition, the Company entered into an application services agreement, for its customerinformation system. The minimum billable value of the agreement over its term is $11,307,000 and is set to expireDecember 31, 2010.

(ii) Hydro Ottawa has committed to provide support for a community park in the Village of Casselman. The totalamount of the commitment remaining is $54,000, which will be paid annually in the amount of $27,000 until 2006.

(iii) Energy Ottawa and Telecom Ottawa have future minimum annual lease payments related to property andcomputer hardware operating leases with remaining lease terms between 3 to 5 years as follows:

Minimum Lease Payments

2005 $ 3262006 2942007 2742008 2412009 197Thereafter 168Total minimum lease payments $ 1,500

(iv) Energy Ottawa was awarded a $70,000,000, 20-year contract to supply the Government of Ontario with renew-able energy. The Company will construct a $10,000,000 – $12,000,000 generating plant and gas collection system atthe Trail Road Landfill site, in Ottawa, Ontario, over the next two years to fulfill its contractual obligations underthis contract. The Company has an outstanding standby letter of credit related to this contract, in the amount of$165,000 expiring on November 15, 2005.

24. Related Party Transactions

The Corporation and its subsidiaries provide certain services to the City of Ottawa in the normal course of businessat commercial rates.

For the year ended December 31, 2004, the Corporation earned revenues related to sale of electricity and broadbandwidth, the provision of streetlighting services, and energy management consulting in the amount of $30,757,000(2003 – $28,609,000) from the City of Ottawa.

For the year ended December 31, 2004, the Corporation purchased certain services from the City of Ottawa in thenormal course of business at commercial rates:

• services mainly related to water and sewer charges and permits from the City of Ottawa in the amount of $852,000 (2003 – $699,000); and

• property taxes payable in the amount of $1,644,000 (2003 – $1,597,000).

For the year ended December 31, 2004, the Corporation purchased certain professional services from Directors and Advisory Board Members of the Corporation, and their spouses and related companies in the amount of$187,000 (2003 – $350,000). Under a City Shareholder Declaration, no amount over and above the fees set out in the declaration may be paid to the Chair, directors of the Corporation, members of their immediate families or entities in which they have a substantial ownership interest over and above set director fees. This restrictionbecame effective as of August 25, 2004. The Advisory Board was dissolved effective October 31, 2004.


As of December 31, 2004, the promissory note payable in the amount of $200,000,000 (December 31, 2003 –$237,825,000) was payable to the City of Ottawa (Note 13). For the year ended December 31, 2004, interest expense of $16,410,000 (year ended December 31, 2003 – $16,410,000) on the promissory note payable had been paid to the City of Ottawa (Note 13). These notes were issued as part consideration for the transfer of netassets (asset, liabilities and employees) associated with the generation, distribution, transmission and retailing of electricity and associated business activities to Hydro Ottawa and Energy Ottawa on November 1, 2000 in theamount of $428,453,000 after the dissolution of the Ottawa Transition Board. Proceeds for this transfer consisted of $237,825,000 promissory notes and 177,076,003 Class A common shares totalling $190,628,000.

The Corporation owns 28.33% of Chaudière Water Power Inc. (CWPI), a company incorporated to act as an agent for the principals of CWPI, with the mandate to control, operate and maintain the Chaudière dam. By agreement,all expenditures incurred by CWPI, including those of a capital nature, are recovered from shareholders based ontheir pro-rata interest in CWPI. The Corporation’s share of these costs included in operating, maintenance andadministration and capital assets are as follows:

2004 2003

Operating expenses $ 321 $ 322

Capital assets $ 547 $ 193

25. Subsequent Events

On January 6, 2005, Hydro Ottawa Holding Inc. repaid the City of Ottawa promissory note outstanding at the valueof $200,000,000. The repayment was accomplished through a new credit facility in the amount of $350,000,000. Thefacility consisted of two elements: a $150,000,000, 3 year, extendible, revolving facility; and a $200,000,000 bridgefacility. The credit facility contains customary covenants and events of default as well as a financial covenant tomaintain the company’s debt to total capital ratio at not greater than 75%.

On February 9, 2005, the Corporation issued 4.93% Senior Unsecured Debentures, Series 2005-1 due February 9, 2015.Net proceeds from a $200,000,000 debenture issuance in the debt capital markets were used (together with a drawingfrom the credit facility) to repay the $200,000,000 bridge loan and the bridge facility has been cancelled. Of the remaining$150,000,000 revolving facility available, $25,000,000 was used to repay outstanding loans under the existing creditfacility that terminated on January 6, 2005. A new credit facility for approximately $47,000,000 was arranged by theCorporation to coincide with the termination of the $152,000,000 credit facility. This facility consists of three elements:a $24,850,000 demand operating line; a $150,000 corporate VISA facility and a $22,284,782 letter of credit facility.

This facility expires on May 31, 2005, except for the letters of credit that expire by their maturity date, and is solelyto assist the Corporation with cash management banking services in the transition from the current bankingsyndicate to the banking syndicate that has provided the $350,000,000 credit facility.

26. Comparative Figures

In certain instances, prior years information presented for comparative purposes has been reclassified to conform tothe financial statement presentation adopted for the current period.

Corporate GovernanceThe Board of Directors of Hydro Ottawa Holding Inc. hasmade a commitment to identifying and implementing goodgovernance practices consistent with the sound manage-ment and successful development of the Corporation and its subsidiaries. In 2003, the Board of Directors institutedbest governance practices recommended by the ConferenceBoard of Canada pursuant to a review commissioned by the Corporation. In 2004, the Council of the City of Ottawa,as Shareholder, commissioned an external review of itsrelationship with Hydro Ottawa Holding and the corporategovernance practices. The Corporation worked co-operativelywith this review and has taken action to implement its recommendations.

The Board of Directors undertakes an annual strategicplanning process for the Hydro Ottawa group of companiesand has expressly assumed responsibility for the oversightof risk management. In 2004, the size of the Board ofDirectors was increased from five to 11 directors to increasethe insight and range of perspectives available on the Board and the Advisory Board was disbanded. Eight of the directors are unrelated to any of the Hydro Ottawagroup of companies and three directors are members of the Council of the City of Ottawa (including the Mayor).The Board of Directors met 15 times in 2004.

Committee Descriptions

Audit. The Audit Committee reviews financial statements,accounting practices and policies; evaluates the results ofexternal audits and related matters; oversees financial riskmanagement and assesses internal controls. The Committeemet six times in 2004. Manon Harvey is the Chair of the Audit Committee. Members: J. Michael Grass,Pierre Richard and Carole Workman.

Compensation. The Compensation Committee reviewsoverall compensation strategy, objectives and policies;reviews the CEO’s performance against objectives and theperformance of the senior executive group against assess-ments. The Committee’s mandate also includes successionplanning for executive positions with the respectivecompanies. The Committee met four times in 2004.John Kelly is the Chair of the Compensation Committee.Members: Dale Craig, Peter Liebel, Pierre Richard and Lisa Stilborn.

Governance. The Governance Committee oversees therelationships between Hydro Ottawa Holding and itsoperating companies; reviews the information disclosureobligations between their managements, board of directors,the shareholder and other stakeholders to ensure theCorporation can meet its objectives. The Committee reviews

codes and guidelines relating to the conduct of directors,officers and employees. The committee also has the respon-sibility to review the allocation of roles and responsibilitiesand the accountability for carrying out organizationalresponsibilities and implementation of risk and compliancemanagement. The Committee has also assumed respon-sibility for succession planning which includes selecting the Corporation’s Senior Executives. The Committee met four times in 2004. Pierre Richard is the Chair of theGovernance Committee. Members: Robert Chiarelli,J. Michael Grass, Manon Harvey and John Kelly.

LDC. The Local Distribution Company (LDC) Committeereviews strategic directions, business plans, management,financial performance and legal compliance matters relatingto Hydro Ottawa Limited. The Committee met five times in2004. Carole Workman is the Chair of the LDC Committee.Members: Dale Craig, J. Michael Grass, Manon Harvey,Peter Hume, Peter Liebel, Pierre Richard and Ron Stewart.

Energy and Telecommunications. Until November, thiscommittee was responsible to review strategic directions,business plans, management, financial performance andlegal compliance matters relating to Energy Ottawa Inc.and Telecom Ottawa Holding Inc. (and its operatingsubsidiaries). The Committee met five times in 2004.

In November, the Board of Directors recognized that Energy Ottawa Inc. and the Telecom Ottawa group ofcompanies operate in distinct industry sectors and face different business challenges. The Board of Directors decided to terminate the Committee and create two committees: the Energy Committee and theTelecommunications Committee, each having similarresponsibilities to the predecessor committee but relating to Energy Ottawa Inc. and the Telecom Ottawagroup of companies respectively.

Dale Craig is the Chair of the Energy Committee. Members:Jan Harder, Pierre Richard, Lisa Stilborn and Ron Stewart.

Peter Liebel is the Chair of the TelecommunicationsCommittee. Members: Jan Harder, Peter Hume, John Kelly,Pierre Richard, Lisa Stilborn and Ron Stewart.

Nominating. In September, in light of the increase in thesize of the Board of Directors approved by the shareholderand the up-coming completion of the terms of certaindirectors, the Board of Directors created the NominatingCommittee. The Committee developed and undertook aprocess for the identification, evaluation and selection ofcandidates for appointment to the Board of Directors.The Committee met five times in 2004. Robert Chiarellichaired the committee. Members: Jan Harder, Peter Hume,Timothy Page and Ron Stewart.

Paul Hughes —Corporate Secretaryand General Counsel

Left to Right:

Bob ChiarelliMayor of Ottawa

John KellyChairman, NexInnovations Inc.

Manon HarveyVice President (Corporate Services),Canada Foundation for Innovation

Peter HumeCouncillor, City of Ottawa

Pierre Richard, Q.C.Chair of the Board of Directors and Senior Partner,Lang Michener LLP

Dale Craig, P. EngChairman, J.L. Richards &Associates Ltd.

Carole WorkmanPast Vice-Rector Resources(Vice-President, Finance and Administration),University of Ottawa

J. Michael GrassBusiness Consultant and a former Senior Executive with Morgan Stanley and Barclays Bank

Peter LiebelManaging DirectorEquinoxe Investment Banking Advisors

Lisa StilbornSenior Vice President,Temple Scott Associates Inc.

Jan HarderCouncillor, City of Ottawa

Board of Directors

Hydro Ottawa Holding Inc.3025 Albion Road NorthPO Box 8700Ottawa Ontario K1G 3S4Tel. (613) 738 5499Fax (613) 738 6402www.hydroottawaholding.com

Hydro Ottawa Limited3025 Albion Road NorthPO Box 8700Ottawa Ontario K1G 3S4Tel. (613) 738 5499Fax (613) 738 6403Media Inquiries(613) 221 0063Customer Inquiries(613) 738 6400www.hydroottawa.com

AuditorsDeloitte & Touche LLP

Investor RelationsMark FisherDirector, Investor andStakeholder RelationsTel.(613) 738 5499 ext. 510

Version françaiseCe rapport est égalementpublié en français. Pourrecevoir une copie, veuillezcontacter Hydro Ottawa au:Tél. (613) 738 6400Télec. (613) 738 6403

Energy Ottawa Inc.1145 Hunt Club RoadSuite 220Ottawa Ontario K1V 0Y3Tel. (613) 225 0418Fax (613) 225 0644Media Inquiries(613) 225 0418 ext. 7211Customer Inquiries(613) 738 2300www.energyottawa.com

Telecom Ottawa Holding Inc.100 Maple Grove RoadOttawa Ontario K2V 1B8Tel. (613) 225 4631Fax (613) 225 0636Media Inquiries(613) 225 4631 ext. 7422Customer Inquiries(613) 225 4631www.telecomottawa.com

Design: Hewson Bridge + Smith Ltd. Writing: inmedia Public Relations Inc. Photography: Dwayne Brown

three ways to make one powerful connection · hydro ottawa holding inc. president and chief ......

Documents