Report to/Rapport à :

The Shareholder of Hydro Ottawa Holding Inc. /

L’Actionnaire de la Société de portefeuille d’Hydro Ottawa Inc.

12 May 2010/ le 12 mai 2010

Submitted by/Soumis par : Pierre Richard, Q.C., ICD.D., Chair, Hydro Ottawa Holding Inc. / c.r., IAS.A., Président du Conseil d’administration de la Société de portefeuille d’Hydro Ottawa Inc.

and / et

Rosemarie T. Leclair, President and Chief Executive Officer, Hydro Ottawa Holding Inc. / Présidente et chef de la direction de la société de portefeuille Hydro Ottawa Inc.

Contact Person/Personne ressource : Rosemarie T. Leclair, President and Chief Executive Officer, Hydro Ottawa Holding Inc. / Présidente et chef de la direction de la société de portefeuille Hydro Ottawa Inc.

(613) 738-5499 x 203, RosemarieLeclair@hydroottawa.com

City Wide/à l'échelle de la Ville

Ref N°: ACS2010-HOH-0001

SUBJECT:	HYDRO OTTAWA HOLDING INC. – 2009 ANNUAL REPORT
OBJET :	RAPPORT ANNUEL DE 2009 DE L’ACTIONNAIRE DE LA SOCIÉTÉ DE PORTEFEUILLE D’HYDRO OTTAWA INC.

REPORT RECOMMENDATIONS

That Council:

1. Receive the Audited Consolidated Financial Statements of Hydro Ottawa Holding Inc. for the Year 2009 as set out in the Annual Report at Document 1 (issued separately and held on file with the City Clerk);

2. Appoint Ernst & Young LLP as the auditor of Hydro Ottawa Holding Inc. for the Year 2010;
3. Approve the recommendations of the Nominating Committee of the Board of Directors of Hydro Ottawa Holding Inc., specifically, that Council:
1. Re-appoint the persons identified at Document 2 to serve as members of the Boards of Hydro Ottawa Holding Inc. and Hydro Ottawa Limited for the corresponding terms as specified; and
2. Request that the Board of Directors of Hydro Ottawa Holding Inc. elect Pierre Richard to serve as Chair of the Board of Hydro Ottawa Holding Inc. and of Hydro Ottawa Limited; and
4. Authorize the Mayor and the City Clerk to sign a written resolution on behalf of the City of Ottawa as shareholder of Hydro Ottawa Holding Inc. setting out the resolutions approved by the City Council.

RECOMMANDATIONS DU RAPPORT

Que le Conseil :

1. Reçoive les états financiers consolidés vérifiés de la Société de portefeuille d'Hydro Ottawa Inc. pour l'année 2009 tels que présentés dans le Rapport Annuel ci-joint au Document 1 (distribué séparément et tenu sur dossier par le greffier de la Ville) ;

2. Approuve que la société à responsabilité limitée Ernst and Young soit désignée vérificatrice de la Société de portefeuille d’Hydro Ottawa Inc. pour l’année 2010 ;

3. Approuve les recommandations du comité chargé des candidatures du conseil d’administration de la Société de portefeuille d’Hydro Ottawa Inc., en particulier, que le conseil :

a. Renouvelle le mandat des personnes dont il est question dans le document n° 2 pour qu’elles puissent faire fonction de membre des conseils d’administration de la Société de portefeuille d’Hydro Ottawa Inc. et d’Hydro Ottawa Limitée pour le mandat correspondant précisé ; et

2. Demande que le conseil d’administration de la Société de portefeuille d’Hydro Ottawa Inc. élise Pierre Richard comme président du conseil d’administration de la Société et d’Hydro Ottawa limitée ; et

4. Approuve que le maire et le greffier municipal soient autorisés à signer, au nom de la Ville d’Ottawa à titre d’actionnaire de la Société de portefeuille d’Hydro Ottawa Inc., une résolution écrite énonçant les résolutions approuvées par le Conseil municipal.

BACKGROUND / DISCUSSION

Recommendation 1

Financial Statements

Hydro Ottawa Holding Inc. was created as a result of the Electricity Act, 1998, which required all hydro utilities to operate as business corporations. Under this new structure, Hydro Ottawa Holding Inc. is a for-profit company that continues to be wholly owned by the City of Ottawa, and is governed by an independent Board of Directors appointed by its shareholder. Under the Ontario Business Corporations Act (“the Act”) and the terms of the Shareholder Declaration issued by the City of Ottawa, Hydro Ottawa Holding Inc. (“the corporation”) is required to place before its shareholder, the City of Ottawa, annual financial statements relating to the corporation.

The 2009 audited financial statements consolidate financial information relating to Hydro Ottawa Holding Inc. and its subsidiaries. These financial statements were approved by the Board of Directors of Hydro Ottawa Holding Inc. at its meeting on March 26, 2010. Ernst and Young (E&Y), the corporation’s independent, external auditors, have provided an unqualified opinion on the corporation’s statements. E&Y’s opinion states that the financial statements present fairly, in all material respects, the financial position of the company at December 31, 2009 and the results of its income, comprehensive income, and its cash flows for the period then ended in accordance with generally accepted accounting principles.

In 2009, the Hydro Ottawa Group of Companies (Hydro Ottawa or the Corporation) continued its trend of solid financial and operational performance. Consolidated net income from continuing operations for the year was $29.4 million.

Based on this financial performance, on May 7, 2010, Hydro Ottawa Holding Inc. paid dividends totalling $17.6 million to the City of Ottawa.

This represents Hydro Ottawa’s strongest financial performance to date, and demonstrates excellent progress in executing its five-year business strategy. The corporation was able to meet and exceed its financial targets while maintaining strong customer service and customer satisfaction, re-investing in infrastructure to maintain service reliability, and continuing to find efficiencies in its operations.

Key results and achievements for 2009 included:

• Net income of $29.4 million, representing a Return on Equity of 9.1%.
• Dividends of $17.6 million, representing 60% of net income. This brings the total of dividends paid since the establishment of a dividend policy in 2004 to $87.2 million, with growth in Shareholder’s Equity of $80.9 million over the same period.
• Growth in revenues (excluding the flow-through cost of power) of 8.6%, including growth of nearly 130% in revenues from commercial energy management services.
• The Dominion Bond Rating Service (DBRS) upgraded its rating on Hydro Ottawa’s Senior Unsecured Debt to “A” from “A (low)”, citing Hydro Ottawa’s strong financial profile, conservative financial policies, strong operational performance and low business risk. This followed a similar upgrade by Standard & Poor's Ratings Services in 2008.
• Production from renewable energy generation facilities was maintained near the record levels achieved in 2008.
• Customer satisfaction of 89% as measured by a third-party survey – an increase of 13% since tracking began in 2004.
• Service reliability among the best in the industry, with uninterrupted power 99.988% of the time for an average customer, excluding outages due to a loss of supply from the provincial electricity grid. Based on 2009 performance, an average Hydro Ottawa customer would experience one outage every 15 months.
• Adjustments to electricity distribution rates continued to be well below the rate of inflation, with an increase on the total bill of 0.3% in May 2009 and a decrease of 0.5% in May 2010.
• Hydro Ottawa continued to perform well above industry averages in terms of productivity and efficiency, ranking 12^th of eighty-one Ontario utilities in a recent Ontario Energy Board report comparing the unit operating costs of electrical utilities. Hydro Ottawa outperformed the average by 17.2%.
• $38.5 million was invested to maintain the reliability of existing electricity distribution infrastructure in Ottawa, and a further $14.9 million to deploy new infrastructure to meet the City’s growing needs. This is consistent with the levels of investment over the past several years.
• Hydro Ottawa was recognized for a second straight year as one of the National Capital Region’s Top 25 Employers.

Details on the financial results and business achievements of the Hydro Ottawa Group of Companies in 2009 are documented in the corporation’s Annual Report, which has been issued separately and is held on file with the City Clerk as Document 1 to this submission.

Recommendation 2

Auditor Selection

Pursuant to the Ontario Business Corporations Act, the shareholder is also required to appoint an auditor for the corporation. In 2007, Hydro Ottawa Holding issued a request for proposals (RFP) for external audit services for a three-year term (including two additional one-year options) commencing with the 2007 year-end audit. Ernst & Young was selected by the Board of Hydro Ottawa Holding Inc. on the basis of the three-year proposal that included two additional optional years. Last year, the City of Ottawa approved the appointment of Ernst & Young LLP as auditors for Hydro Ottawa Holding Inc. for the year 2009. Council is now being requested to approve the first additional optional year for Ernst & Young LLP as auditors for Hydro Ottawa Holding Inc. for the year 2010.

Recommendation 3

Nominating Committee Recommendation – Re-appointment of Directors

The Shareholder Declaration for Hydro Ottawa Holding Inc. approved by City Council requires that members of the Board of Directors for Hydro Ottawa Holding and its wholly-owned subsidiaries (including Hydro Ottawa Limited) be appointed by the City of Ottawa. On June 27, 2006, upon the restructuring of the Hydro Ottawa Board of Directors to comply with the Affiliate Relationships Code for Electricity Distributors and Transmitters issued by the Ontario Energy Board, City Council appointed a number of directors for terms ranging from two to four years. Profiles of these directors were previously presented to Council on June 27, 2006 and updated profiles are on file with the City Clerk.

The terms of two directors of Hydro Ottawa Holding Inc. and two directors of Hydro Ottawa Limited are expiring on June 30, 2010. These members have served effectively on the respective boards of directors and have contributed to the continued success of these companies. They have expressed an interest in continuing to serve on the boards of directors for another three-year term. The Nominating Committee of Hydro Ottawa Holding Inc. (the Chair of the Board, the Mayor, the two elected City Council members of the Board, and the President and Chief Executive Officer), is recommending to Council that these members be re-appointed for the terms set out at Document 2.

It should be noted that the Chair of the Board abstained from the Nominating Committee consideration of his own re-appointment to the two Boards.

Nominating Committee Recommendation – Nomination of Chair

The organizing by-law of Hydro Ottawa Holding Inc. as approved by the Shareholder provides for the election of the chair by the Board of Directors. The Nominating Committee of Hydro Ottawa Holding Inc. recommends the appointment to the Board of Directors, and given the leadership responsibilities of the chair, City Council has historically also indicated its preferences.

As noted above, Pierre Richard’s terms as director and Chair of Hydro Ottawa Holding Inc. and Hydro Ottawa Limited are expiring on June 30, 2010. The Nominating Committee is recommending that Pierre Richard be re-appointed for the positions of Chair of Hydro Ottawa Holding Inc. and Hydro Ottawa Limited. He has served as Chair of Hydro Ottawa Holding Inc. since November 2004, Chair of Hydro Ottawa Limited since July 2006, and was previously a member of the Advisory Board of the corporation from 2002 to 2004. He is knowledgeable in relation to the issues facing the companies. He has served on the boards of directors of a number of local, provincial and federal organizations and has chaired a number of these bodies including the Ottawa General Hospital and La Cité collégiale. He is currently a member of the Departmental Audit Committees of Transport & Infrastructure Canada and the RCMP, and the board of the Ontario Agency for Health Protection and Promotion. A counsel with the law firm of Lang Michener LLP, Pierre Richard is experienced in matters relating to business and regulatory issues as well as corporate governance.

During the Nominating Committee selection process, Pierre Richard abstained from the consideration of the nomination of the Chair.

Recommendation 4

Written Resolution

To satisfy the requirements of the Ontario Business Corporations Act and the terms of the Shareholder Declaration issued by the City of Ottawa, where an annual general meeting of the shareholder is not held, a written, signed resolution of the shareholder is necessary to approve all matters required to be dealt with at the annual general meeting.

SUPPORTING DOCUMENTATION

Document 1 – 2009 Annual Report (including Audited Consolidated Financial Statements) of Hydro Ottawa Holding Inc. – Issued separately and held on file with the City Clerk

Document 2 – Recommended Re-appointments to the Boards of Hydro Ottawa Holding Inc. and Hydro Ottawa Limited

Document 1

2009 Annual Report (including Audited Consolidated Financial Statements)

of Hydro Ottawa Holding Inc.

Issued separately and held on file with the City Clerk

Document 2

Recommended Re-appointments to the Boards of

Hydro Ottawa Holding Inc. and Hydro Ottawa Limited

Name	Board	Term	Effective Date
George Anderson	Hydro Ottawa Limited	3 years	July 1, 2010
Pierre Richard	Hydro Ottawa Holding Inc.	3 years	July 1, 2010
Pierre Richard	Hydro Ottawa Limited	3 years	July 1, 2010
Ken Wigglesworth	Hydro Ottawa Holding Inc.	3 years	July 1, 2010