Hydro-Quebec's Results 2005, Perspectives 2006

Lisa A. Baiton, Vice-President, Government Relations, Environics Communications Inc., and Director, The Empire Club of Canada; Alicia Quintanilla Perez, Grade 12 Student, Oakwood Collegiate Institute; Father Jean-Martin Mabozi, Church of St. Michael the Archangel, Scarborough; Paul Bradley, Vice-President, Generation Development, Ontario Power Authority; Adam S. White, President, Association of Major Power Consumers in Ontario; James Gillis, Deputy Minister, Ontario Ministry of Energy; Jo-Ann McArthur, President and COO, Pigeon Branding + Design, and Director, The Empire Club of Canada; Jim Burpee, Executive Vice-President, Corporate Development, Ontario Power Generation; Shane Pospisil, President and CEO, Ontario Energy Association; and Marcel Côté, President, SECOR Consulting.

Introduction by William Whittaker

Thierry Vandel is the third speaker in our luncheon series entitled "Canadian Industry in a Global Economy" which focuses on the challenges Canadian businesses face in a rapidly changing world. The series sponsor is Secor Consulting, the largest independent strategy-consulting firm in Canada, which is celebrating its 30th anniversary this year.

When William Gladstone, the great nineteenth-century British statesman, asked Michael Faraday, the discoverer of electromagnetic induction and the inventor of the storage battery, about the usefulness of electricity, Faraday responded, "Why sir, there is every possibility that you will be able to tax it." And so electricity, like taxation, has been part of government policy and planning since the early years of the last century, at least in the province of Ontario.

Electricity deregulation has been a subject occupying the mindset of our North American governments for the past 15 years. It takes its genesis from the 1990 deregulation and privatization of the United Kingdom's electrical market by the Thatcher government and has paralleled the deregulation of the North American natural gas market. While the process followed by the British was used as a model or at least a catapult for electricity deregulation in many states and provinces, North American market deregulation occurred without the widespread privatization that characterized the U.K. example.

North American experience respecting the introduction of competition into the electricity market has been mixed. While the ongoing trend continues to be toward deregulation and the introduction of competition, the 2000/2001 major failures of the California electricity crisis and the Enron debacle has caused a slowdown in the pace of change.

If the challenge of deregulation and competition are not enough, our electrical utilities are now faced with the consumer-driven demand for renewable electrical energy or green power. Electrical utilities now have the task of educating their consumers that while green power can be part of the marketing plan, it can never replace the requirement for cheap base load power, such as water or nuclear generated power.

While we have had many speakers talk about our Ontario electricity industry over the years, we have never had an electricity industry speaker from another province or state. We remedy this omission with today's speaker who is the President and Chief Executive Officer of Hydro-Québec.

I quote from Konrad Yakabuski's April 13th column in the Globe and Mail Report on Business, which I hope does not embarrass Mr. Vandal unduly: "As chief executive of Hydro-Québec, the world's biggest hydroelectric utility, Thierry Vandal holds the fate of the provincial economy in his hands. Quebec's industrial development strategy is largely determined on the 20th floor of the Hydro-Québec tower in Montreal.

Running Hydro-Québec is mind-numbingly complex. The utility is monstrous, with about 35,000 megawatts of installed generating capacity--95 per cent of it from hydroelectric sources--and colossal dams that remain awesome feats of engineering prowess. It takes 33,000 kilometres of high-voltage transmission lines to ship all that electricity from James Bay or the North Shore to market and another 108,000 kilometres of inner-city power lines to get the juice into homes. Hydro-Québec has more than 3.5 million residential and industrial customers, most of whom consider risibly cheap electricity a God-given right. And it operates a lucrative energy trading operation that requires quick thinking to seize on hourly export opportunities."

And continuing my quotation from Mr. Yakabuski's column: "Since the nationalization of the electricity sector in 1962, Hydro-Québec has become a sort of state within the state. It is often derided and feared as an occult, secretive organization whose workings are impenetrable to the elected officials who are supposed to be its masters. Hydro-Québec informs them of its agenda and they usually follow along obediently."

I think I detect pangs of envy from our Ontario electricity industry representatives present today at our head table and in the audience.

Mr. Vandal has been involved in the North American energy sector for more than 20 years. Prior to joining Hydro-Québec in 1996, as Vice-President, Strategic Planning and Development, he worked in the oil, petrochemical and natural gas industries in production, marketing, business development and strategic planning. Mr. Vandal became President of Hydro-Québec Production, the generation side of the business in 2001 and was appointed President and Chief Executive Officer in April 2005. Mr. Vandal is a director of the Conference Board of Canada.

Please join me in welcoming Thierry Vandal, President and Chief Executive Officer of Hydro-Québec, to our podium today.

Thierry Vandal

Distinguished guests, ladies and gentlemen, good afternoon. Thank you all for being here today.

This is a very rare occasion and a great honour for a CEO of Hydro-Québec to speak here in Toronto at the Empire Club. I feel very privileged and I wish to thank the organizers for their kind invitation. An invitation which comes at an interesting time in our industry, and at Hydro-Québec as you'll see. So today, I'd like to share with you our strategy and plans for the coming years, including some of our thoughts on the Ontario electricity market.

But first, let me update you on Hydro-Québec.

Our 2005 Annual Report was released a few weeks ago. We had a good year in 2005. Income from continuing operations totalled $2.25 billion, an increase of $124 million over 2004. This increase came primarily from our commercial activities outside Québec, selling and trading power in the short-term markets.

These results we owe to our 22,000 employees. We operate through four major divisions: Generation (or production), Transƒnergie (our transmission division), Distribution (our retail operation) and Construction.

The first three show significant net income.

For Hydro-Québec Production, net income was $1.87 billion in 2005. Our generation assets total over $26 billion. Ninety-six per cent of our sales volume in 2005 at the wholesale level was at a fixed price of 2.79¢ per kWh; that's the heritage pool of electricity for Québec markets. That's a fixed price for a fixed volume under the Act, which restructured the wholesale markets in Québec. This attractive wholesale supply explains the low retail rates for Québec consumers. We make about $1.2-billion net income at the wholesale level on this supply. We had favourable market conditions for the rest of our sales in 2005; the other 4 per cent. We had a good year trading power across our markets, with a low-risk approach. We had revenue of $220 million in Ontario in 2005. We'd like to grow this over the coming years. I'll come back to this in a minute.

Hydro-Québec Transƒnergie, our transmission division, produced a net income of $370 million. This is generally in line with its regulated, authorized return on equity. No big surprise here. Transƒnergie has assets of about $15 billion.

For Hydro-Québec Distribution, the regulated distribution activities in Québec, 2005 showed a net income of $230 million. We have assets of about $8 billion in Distribution.

Finally, our Construction division does about $2-billion worth of project management and execution, essentially at cost for our other divisions.

The year 2005 was also one during which passed certain milestones. Total assets surpassed $60 billion, and the shareholders' equity reached $17.4 billion. Our long-term debt now stands at $31.3 billion. This represents a decrease of over $6 billion over the last four years. Cashflow from operations was $4.4 billion last year. This is financing a good portion of our capital expenditures, which stand at about $4 billion this year, an annual pace we expect to maintain for at least the next five or six years. That's a lot of numbers. But the bottom line is that Hydro-Québec is solid financially as we plan for the coming years. This is a time for growth and our strategy is very straightforward.

Our growth strategy is all about sustainable development. And it's all about good business. The two go hand-in-hand at Hydro-Québec as for many other corporations.

Sustainable development for Hydro-Québec means three things:

Greater energy efficiency;
A dedication to renewable energy, which for us means large hydroelectric and windpower development, complementary sources of power--leveraging our geography; our geography gives us our energy--water and wind.
Sustainable development for Hydro-Québec also means strong technological innovation across the organization--the bridge between economic growth and the prudent use of our natural resources.

Greater Energy efficiency is the starting point for us. At a time of steeply rising energy prices--$71 for oil--and global environmental challenges like climate change, greater energy efficiency is an obvious obligation for all of us. Hydro-Québec is doing its part; we're investing over $1 billion in this area up to 2010. And we're open to doing more.

Our context is challenging: we've had strong demand growth in Québec over the last five years, new supplies at market prices but electricity rates which reflect average costing, which is standard practice but obviously not a great enticement to save power.

But it makes so much sense environmentally. We live in a world where resources are limited. Being energy-wise helps reduce greenhouse gases and other emissions that contribute to climate change and have a direct impact on human health. And in Québec, optimizing energy management conserves hydraulic resources for future generations.

Our customers are reacting very positively to our Energy Efficiency Plan. We can see measurable results. For 2005 only, our customers have saved 470 million of kWh of energy.

So we've raised the bar on ourselves. We're now aiming for energy savings of 4.1 billion kWhs by 2010, an increase of 37 per cent. This collective effort offers the twofold advantage of limiting demand growth and reducing our supply costs.

To succeed, energy efficiency has to encompass all elements of society. Consumers, businesses and all levels of governments must join forces. The cumulative effects of countless little things we can do differently each day make a real difference.

We're very committed to this.

Energy efficiency is the start, but we're also a strong producer of electricity, and our focus for the coming years will be fully on renewable energy, which for us means large hydro and large wind farms.

Hydro is the foundation, and wind attached to a reservoir-based hydro system--which is our name brand--is the complement. This is a solid foundation from an environmental perspective. It's also a solid business proposition when you're looking at two very capital-intensive sources of power at a time of historically low long interest rates. In my business we pray for high rainfall and low interest rates. We're doing pretty well with our prayers over the last few years.

Hydroelectric development made steady progress in 2005. We have $4-billion worth of projects under construction as we speak.

Our Toulnustouc power project, a $1-billion project, was commissioned five months ahead of schedule last year.

In the James Bay region, we'll be commissioning the Eastmain-1 development later this year; that's a $2.2-billion project started in 2002. We're also a little ahead of schedule on that one.

The Péribonka project, a $1.2-billion project, is progressing well. That will be a 2008 commissioning.

We broke ground last year also on the Chute-Allard and Rapide-des-Coeurs hydroelectric developments (a $700-million project).

Over the next two years, 1,000 MW of installed capacity will be added, representing over six billion of kWh of clean renewable energy every year.

All these projects mean energy security for Québec and a more proactive Hydro-Québec on export markets. And we certainly have Ontario in mind when we look to the future. It's a natural fit--Ontario's summer peaking needs and large baseload generation, and Hydro-Québec's flexibility, summer capacity, off-peak purchasing ability and supply reliability. We hope to be able to grow our business here in a positive and mutually beneficial way.

For this we're also counting on our next major project, the Eastmain-1-A-Sarcelle-Rupert hydro project. It is a $4-billion project in the James Bay territory, which we should have under construction by the end of the year.

It is a very sound project, economically and environmentally. We've spent $325 million so far through all the feasibility and environmental review phases. Public hearings got under way last month.

This is "the hydropower project of the decade" in Québec, a project for which a specific partnership agreement was signed with the Crees, the Boumhounan Agreement.

And beyond that we're advancing on the studies for the Romaine project, a $6-7 billion undertaking.

As you can see, hydroelectric development in Québec is still strong, with some very solid projects.

Wind power is now joining alongside hydropower in Québec. We view this as our renewable tandem. Wind power will expand quickly in Québec.

In 2005, Hydro-Québec Distribution signed contracts for an initial block of 990 MW of wind power. That power was sourced at about 7¢/kWh, a reasonable price. And we issued last year a call for tenders for an additional 2,000 MW. Tenders are expected by April 2007. Deliveries are to begin in 2009.

Water and wind are two beautiful sources of energy. We see them taking us very far into the future.

Our third main area of focus is technological innovation. In today's world, sustainable development needs strong technological innovation.

To improve our performance, we are counting on innovation and the potential of new electric technologies. We spend about $100 million a year in this field in areas like digital technology for the transmission grid--where Hydro-Québec is fully committed to remaining a world leader. We're investing about $1 billion a year on the grid, and we aim to stay ahead of the pack on the technological curve.

We are also advancing technology to improve the efficiency of our hydro turbines through leading-edge flow analysis and robotized interventions on turbine blades; the equivalent of having your hip-replacement surgery fully executed by a machine.

There's so much potential when you get talented women and men focused on these things.

We are also active in the automobile sector. Our subsidiary TM4 has developed a very efficient drive train for the "plug-in hybrid" niche of electric vehicles. An electric motor with a 250 km range.

In 2005, the Dassault Group, a major French industrial conglomerate, bought an 18-per-cent holding in TM4.

This electric motor will be in use as soon as this summer in France. You'll see it on French roads if you're visiting France this summer, always a pleasant idea by the way. It will power demonstration vehicles operated by the French postal service--La Poste as they say in France.

Over the last few minutes I've given you I hope a sense of all the great things going on at Hydro-Québec. We have our challenges obviously, that's what we're paid for--and by the way I'd like to thank the Globe and Mail for their very gallant effort to get me a pay raise last week in an article you may have seen. It was a very generous article. You know, being the CEO of Hydro-Québec in Québec is like coaching the Montréal Canadiens; it's not a job you do for the money. As a Quebecois, it's a job you take on with passion when given the chance.

I share that passion with 22,000 other women and men--the people of Hydro-Québec, people with energy. We're having a great time. Hydro-Québec is growing, profitably. And now we plan to accelerate things a bit.

Merci. Thank you again for being here today.

The appreciation of the meeting was expressed by Jo-Ann McArthur, President and Chief Operating Officer, Pigeon Branding + Design, and Director, The Empire Club of Canada.