2006 Annual Report Materials Used in This Report Are Environmentally Friendly

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2006 Annual Report Materials Used in This Report Are Environmentally Friendly This annual report is also available in French on our Web site – ce rapport est également publié en français – at www.opg.com Generation Power Ontario Please recycle. The head office of Ontario Power Generation Inc. is located at 700 University Avenue, Toronto, Ontario M5G 1X6; telephone (416) 592-2555 or (877) 592-2555. Materials used in this report are environmentally friendly. Cover and text stocks are recycled and recyclable, with a minimum of 10% post-consumer waste. Vegetable-based inks have been used throughout. 2006 ANNUAL REPORT Pictured on the Front Cover Darlington planned outage, Spring 2006; Co-Op Student, Lambton Generating Station; Authorized Nuclear Operators, Pickering B; Employee, OPG’s Western Waste Management Facility; OPG employees, Cameron Falls hydroelectric generating station It’s All About Performance 2006 Annual Report 9881_OPG_cover_final.indd 1-2 5/30/07 1:20:09 PM Revenue, Net of Revenue Limit Electricity Production In-Service Generating Capacity Ontario Power Generation Facilities and Market Power Mitigation (TWh) December 31, 2006 Agreement Rebates 22,147 MW (millions of dollars) Regulated – Nuclear Regulated – Nuclear Regulated – Nuclear Regulated – Hydroelectric Regulated – Hydroelectric Regulated – Hydroelectric Unregulated – Hydroelectric Unregulated – Hydroelectric Unregulated – Hydroelectric Unregulated – Fossil-Fuelled Unregulated – Fossil-Fuelled Unregulated – Fossil-Fuelled Other Other 5,798 108.5 5,564 105.2 7 MW 2,447 45.0 2,665 46.9 6,606 MW 30% 8,578 MW 39% 792 18.5 685 18.3 3,332 MW 732 14.1 3,624 MW 736 15.0 15% 1,741 16% 30.9 1,313 25.0 Moosonee 165 86 06 05 06 05 Financial Highlights Kenora Years Ended December 31 Timmins Atikokan Thunder Bay (millions of dollars) 2006 2005 Earnings Revenue after revenue limit and Market Power Mitigation Agreement rebates 5,564 5,798 Fuel expense 1,098 1,297 Sault Ste. Marie North Bay Gross margin 4,466 4,501 Ottawa Operations, maintenance and administration 2,777 2,516 Other expenses 1,091 1,162 Impairment of long-lived assets 22 265 Kingston Income tax expense 86 118 Extraordinary item – 74 Net income 490 366 Toronto Cash flow Niagara Falls Cash flow provided by operating activities 397 1,201 Windsor 3 5 64 3 3 Nuclear Fossil-Fuelled Hydroelectric Wind Power New Generation Stations Stations Stations Stations* Projects *Includes a 50% interest in the Huron Wind joint venture 9881_OPG_cover_final.indd 3-4 5/30/07 1:20:14 PM Corporate Profile Select List of Ontario Power Generation is an Ontario-based electricity Accomplishments generation company whose principal business is the generation and sale of electricity in Ontario. Our focus is on the efficient OPG’s Darlington and Nanticoke stations are Ontario’s top production and sale of electricity from our generation electricity producers during the assets, while operating in a safe, open and environmentally mid-summer heat wave. responsible manner. OPG launches a Federal In 2006, OPG generated 105.2 terawatt hours (TWh) of electricity. Environmental Assessment on the potential refurbishment of OPG’s electricity generating portfolio as of December 31, 2006, had a total in-service its Pickering B nuclear station. capacity of 22,147 megawatts (MW), which consisted of: Niagara Tunnel excavation starts. 3 three nuclear generating stations with a capacity of 6,606 MW 3 five fossil-fuelled generating stations with a capacity of 8,578 MW OPG’s fossil-fuelled stations 3 64 hydroelectric generating stations with a capacity of 6,956 MW, and achieve their lowest recorded acid 3 three wind generating stations (which includes a 50% interest in the gas emissions and emission rates. Huron Wind joint venture) with a capacity of 7 MW. OPG files an application for a In addition, OPG, ATCO Power Canada Ltd. and ATCO Resources Ltd. co-own Site Preparation Licence for new the Brighton Beach gas-fired generating station. OPG also owns two other nuclear nuclear generating units at its generating stations, which are leased on a long-term basis to Bruce Power L.P. Darlington nuclear generating site. Electricity Terms Construction begins on the 550 MW Portlands Energy Centre One megawatt (MW) is one million watts. Megawatts are a measure of electricity supply capacity at a point in time. in downtown Toronto. One kilowatt (kW) is 1,000 watts; one gigawatt (GW) is one billion watts; and one terawatt (TW) is one trillion watts. One kilowatt hour (kWh) is a measure of electricity demand per hour by customers. One kilowatt hour is the energy expended by ten 100 watt lights burning for one hour. The average Ontario household uses approximately 1,000 kWh per month. One megawatt hour (MWh) is 1,000 kWh; one gigawatt hour (GWh) is one million kWh; and one terawatt hour (TWh) is one billion kWh. Contents Message from the Chairman 2 Notes to the Consolidated Financial Statements 78 Message from the President and CEO 3 Board of Directors 113 Report on Operations 5 Officers 114 Management’s Discussion and Analysis 18 Ontario Power Generation Facilities 115 Consolidated Financial Statements 74 2006 Annual Report 1 “Throughout 2006, OPG continued to demonstrate to our Shareholder our ability to improve performance and deliver on our commitments.” JAKE EPP Chairman Chairman’s Message OPG’s Board of Directors continued its The Board also reviewed and approved revisions to focus in 2006 on supporting and advising OPG’s Dam Safety Policy and reviewed OPG’s Health management to ensure accountability and Safety Policy. for the sound and successful operation of In addition, the Board received three directives in 2006 from the Company. The Board also focused on OPG’s shareholder, the Government of Ontario, instructing continuing to improve the policies and OPG to take certain actions with respect to our business. These included a directive instructing OPG to proceed to procedures used to direct and manage OPG, the definition stage for replacing and expanding its four enhance shareholder value, and ensure hydroelectric stations on the Lower Mattagami River system; financial viability. a directive to cancel the gas conversion of OPG’s coal-fired generating station in Thunder Bay; and a directive instructing Throughout 2006, OPG continued to demonstrate to our OPG to begin feasibility studies on refurbishing its existing Shareholder our ability to improve performance and deliver nuclear units and to begin a federal approvals process, on our commitments. This has led to increased confidence in including an environmental assessment, for new nuclear the Company and its operations. units at an existing site. This latter directive effectively Policies approved by the Board in support of these objectives broadens OPG’s mandate to include exploring options for the included the following: building of new nuclear facilities. Accordingly, the Board created a new committee to provide oversight and guidance 3 An updated Environmental Policy, replacing the to management as it implements this directive. In keeping company’s Sustainable Development policy; with OPG’s commitment to being an open and accountable 3 A new Disclosure Policy to ensure that all public company, the Board posts these directives on the company communications by the Company are disclosed in website, opg.com. accordance with legal and regulatory requirements where applicable; and On behalf of the Board, I want to thank OPG management 3 An updated Code of Business Conduct Policy and employees for their efforts and achievements in 2006. affirming OPG’s business values of integrity, excellence, We look forward to similar successes in 2007. and citizenship. Jake Epp Chairman 2 Ontario Power Generation Inc. “OPG’s performance has improved in many areas over the past few years…We are committed to maintaining this momentum.” JIM HANKINSON President and CEO President’s Message The year 2006 saw OPG continue to progress This confidence was further reflected in several other new as a performance driven company and to generation projects and studies. These include the Niagara deliver on the key strategic goals consistent Tunnel, the Lac Seul hydroelectric project in Northwestern Ontario, and the Portlands Energy Centre in downtown with our mandate: reliable, efficient generation; Toronto. These initiatives are in keeping with our mandate’s asset improvement; capacity expansion; focus on supply expansion to help meet Ontario’s energy financial sustainability; and responsible needs. We are also exploring the development potential of corporate governance, environmental a number of hydroelectric sites in northern Ontario and stewardship and corporate citizenship. are building commercial partnerships with First Nations. It was a year that saw our nuclear production at its highest At the management level, OPG strengthened its management structure with the appointment of OPG’s former Chief level in five years; our fossil reliability at its best level in six Nuclear Officer, Pierre Charlebois, as Chief Operating Officer. years; our acid-gas emissions and emission rates at their Pierre’s appointment reflects the high priority we place on the lowest recorded levels; and our hydroelectric availability at operations side of our business and our commitment to meet 93 per cent – three per cent better than the industry’s the many expectations of our Shareholder. five year average. Financial performance also improved. Net income for the year It was also a year in which OPG continued to build credibility ended December 31, 2006 was $490 million compared to with our Shareholder and the public. This confidence is seen $366 million in 2005, an increase of $124 million. In addition, in the number of generation projects we have been asked to OPG’s short-term credit rating was upgraded by a major assess or undertake by the Ontario Government. rating agency. We also continued to improve the quality and efficiency of our assets through prudent investment in upgrades, new While net income in 2006 was higher than 2005, it is important equipment and processes.
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