Docstoc

Annual Report FortisAlberta

Document Sample
Annual Report FortisAlberta Powered By Docstoc
					     2008 | Annual Report




Energy
  Your Way
                                                                   Power Line Technicians Sheldon Martin, Ray Kinsella and
                                                                   Don Manke relocate a power line for a pipeline customer



Financial Highlights
(thousands of Canadian dollars)                                                                   2008                                      2007
Revenue                                                                                     299,733                                   269,898
Net Income                                                                                      46,093                                     47,892
Capital Expenditures (after contributions)                                                  253,905                                    237,517
Customer Contributions                                                                          (42,113)                               (43,466)
Total Capital Expenditures                                                                  296,018                                   280,983
Rate Base                                                                                1,184,585                                  1,008,366


Operations Highlights
(thousands of Canadian dollars)                                                                   2008                                      2007
Customers                                                                                   460,700                                   448,100
Energy Deliveries                                                                   23,473 GWh                                    23,553 GWh
Safety – Injury Frequency Rate                                                                       1.55                                   2.45
Customer Satisfaction Rating                                                                    81.6%                                       79%
Reliability – Frequency of Outages                                                                   1.17                                    1.15
Reliability – Duration of Outages (hours)                                                            1.82                                    1.88
Operating Cost per Customer                                                                       $209                                      $216




         Operating Cost Per Customer*                                        Energy Deliveries (per cent)

                                                                                   Other             Other
                               $232                                                Industrial
                                                                                                                    Residential
                                       $225                                                            2
                                                                                                 8           16
                                               $216
                                                       $209
               2008 Dollars




                                                                                                                        23    Commercial

                                                                                       42
                                                                     Oil and Gas


                                                                                                             9
                               2005    2006    2007    2008
                                              Year
                                                                                                                 Farm and
                              *Regulated, controllable operating                                                 Irrigation
                              costs in 2008 dollars
Corporate Profile                                                                                               Table of Contents

                                                                                                                Letter to Stakeholders ..................... 2
As owner and operator of more than 60 per cent of Alberta’s
total electricity distribution network, FortisAlberta’s focus                                                   Your Way...
remains the safe and reliable delivery of electricity to                                                            Safety ......................................... 6
460,700 customers in 175 communities across southern and                                                            Customer Service ...................... 8
central Alberta.                                                                                                    Reliability ................................... 10
The Company invested more than $296 million in its electricity                                                      People......................................... 12
distribution system in 2008 to improve reliability of service                                                       Community ................................ 14
and meet the growing electricity needs of its customers.                                                            Environment .............................. 16
FortisAlberta is a wholly-owned, indirect subsidiary of Fortis                                                  Executive Team................................. 18
Inc., the largest investor-owned distribution utility in Canada,                                                Board of Directors ........................... 20
serving almost two million gas and electricity customers.                                                       Three-year Financial Summary ...... 22
Fortis Inc.’s regulated holdings include a natural gas utility                                                  Management’s Discussion
in British Columbia and electric utilities in five Canadian                                                     and Analysis ..................................... 23
provinces and three Caribbean countries. Fortis Inc. owns                                                       Management and
non-regulated hydroelectric generation assets across                                                            Auditors’ Reports ............................. 54
Canada, in Belize and in upper New York State. It also owns                                                     Financial Statements ....................... 56
hotels and commercial real estate in Canada.

Fortis Inc. shares are listed on the Toronto Stock Exchange                                                     Cover Photo: Clare Hagstrom, Strathmore
                                                                                                                Power Line Technician, and Grant Klaiber,
and trade under the symbol FTS. Additional information is
                                                                                                                Strathmore area customer
available at www.fortisinc.com or www.sedar.com.




                                                                               Lac La Biche
                                                        Athabasca



                                            Barrhead
                           Whitecourt

                                                         St. Albert

                                            Spruce Grove
                  Hinton                          Edmonton              Sherwood
                                                                        Park
                              Drayton Valley
                                                                Leduc
                                                                             Camrose
                                                                                               Wainwright

                                        Rocky Mountain
                                        House                                                       Provost

                                                        Red Deer


                                            Sundre
                                                         Olds

                                                Cochrane
                                    Banff                    Airdrie

                                        Canmore                           Strathmore
                                                                Calgary
                                                  Okotoks
                                                                                         Brooks

  FortisAlberta
                                                                High River


                                                                                                    Medicine
                                                                                                    Hat
     Service Area                                                                      Taber
                                                       Crowsnest
                                                       Pass               Lethbridge
                                                            Pincher
                                                            Creek




                                                                                                               2008 | FortisAlberta Annual Report - 1
                                Energy
Letter to Stakeholders
                         Energy your way
                         In 2008, FortisAlberta focused on delivering improved performance for our customers
                         and shareholder. This commitment resulted in record safety achievements, exceptional
                         customer service and enhanced system reliability.

                         Strong Financial Performance
                         In 2008, we continued to see the impact of customer growth on our service territory, with
                         a three per cent increase in our customer base and a 12 per cent increase in electricity
                         revenue. With a dedicated focus on operational improvements and cost management,
                         FortisAlberta delivered $46.1 million in earnings in 2008.

                         Despite upward pressure on costs in Alberta, we were able to reduce operating costs per
                         customer from $216 in 2007 to $209 in 2008. Better performance was achieved as a result
                         of revised work practices to improve the time to complete projects and enhance work
                         capacity. Efficiencies were also created through our ability to assign resources, bundle work
                         and reduce employee travel time.

                         We received regulatory approval for an unprecedented third consecutive negotiated
                         settlement with our customers, including the approval of 2008 and 2009 distribution rate
                         increases of 6.8 per cent and 8.6 per cent respectively. These increases are primarily
                         driven by the need to build facilities to serve new customers and complete necessary
                         maintenance to ensure continued reliability of the system. Reaching the negotiated
                         settlement without litigation allowed us to focus on meeting customer requirements during
                         a time of significant growth.




Andy Wong, Technical Services                   Dora L’Heureux, Stakeholder Relations        Sukhy LePrieur, Customer Interaction
Technologist, Acheson                           Manager, and Manny Albert, Manager of        Coordinator, and Keith LePrieur,
                                                Field Operations, meet with St. Albert       Apprentice Power Line Technician, with
                                                Mayor Nolin Crouse and General Manager       their son, Liam in Airdrie
                                                of Planning and Engineering Neil Jamieson


2 - Energy Your Way
your way Record Safety Performance
         In 2008, FortisAlberta achieved record safety performance and our employees were
         honoured with a Best Safety Performer Award from the Government of Alberta. We also
         recognized two Albertans with Safety Ambassador Awards for their quick response during
         an electrical emergency to help ensure public safety.

         Safety communications and training for employees, customers and the public remain a
         key part of our safety programs. More than 300 employees who work in high-risk areas
         upgraded their skills through hands-on training at our Employee Development Centre
         in areas such as enhanced work techniques and emergency response. As part of our
         continued focus on public safety, we delivered 80 electrical safety training sessions to
         companies, municipalities and emergency service agencies.

         Exceptional Customer Service
         In 2008, we achieved a record customer satisfaction rating of 81 per cent, a marked
         improvement from the average annual rating of 76 per cent over the past three years.

         Technology plays an increasingly important role in the service we deliver to customers.
         In 2008, we continued our investment in automated metering technology installing
         more than 70,000 new meters at customer sites in 2008. This technology, which
         replaces the manual meter-reading system, will help reduce operating costs and allow
         customers to better monitor and manage their energy usage on a monthly basis. In
         addition, new work management and call monitoring technology will enable the Contact
         Centre to provide enhanced responsiveness and quality of service to our customers.

         In April 2008, we opened the doors to a new 88,000 square foot office and operations
         building in the City of Airdrie at a cost of more than $26 million. Almost 300 employees
         relocated to this facility, enabling us to better serve customers within our service
         territory. We are proud to have earned the City of Airdrie’s 2008 Eco Edge Award for
         environmental leadership in the design and construction of the new facility.




Tracy Moti, Customer Relations               Bob Franks, Design Specialist, reviews          Front entrance of the Airdrie facility,
Coordinator, Airdrie                         electrical plans for a recreation park          which opened in April 2008
                                             with Larry Gayle, City of St. Albert
                                             Project Manager



                                                                                      2008 | FortisAlberta Annual Report - 3
         Investment for the Future
         FortisAlberta invested $296 million in capital assets in 2008. Over half of these capital expenditures
         were driven by growth in customer demand. We connected more than 12,000 new customers to the
         distribution system in 2008. As well, we worked closely with the transmission service provider and
         the Alberta Electric System Operator to add substation capacity to address customer load growth in
         Airdrie, Balzac, Tilley, Stavely, Bruderheim, Blackfalds and Burdett.

         Included in the $296 million was $50 million in projects to improve reliability, customer service and
         safety. These investments included the replacement of more than 4,000 deteriorated poles, the
         installation of distribution automation equipment in Airdrie and St. Albert to enable fast restoration
         of service after an outage, and the introduction of injection technology to extend the service life of
         underground cables.

         Our investment in the distribution system is at the core of our commitment to deliver reliable electricity
         to customers. Strategic investment in new infrastructure and the maintenance of the existing system
         contributed to another year of strong reliability performance. Although the province experienced
         periods of extreme weather, including an increase in lightning-related outages, customers saw a
         reduction in outage time from 1.88 hours in 2007 to 1.82 in 2008.

         Committed to Communities
         In 2008, through our Empowering Communities Program, we continued to invest in safety, education
         and environmental initiatives that directly affect the communities where we operate. Record numbers of
         FortisAlberta employees participated in and volunteered for corporate initiatives such as the United Way
         campaign, CIBC’s Run for the Cure and community parades. We supported more than 90 events and local
         causes including a new partnership with the Boys and Girls Club of Alberta to donate used computers
         throughout the province. We also partnered with the Airdrie Festival of Lights on an energy efficiency
         initiative to exchange more than 6,400 incandescent bulbs with new light emitting diode (LED) bulbs,
         which are 60 times more energy efficient.

         In 2008, our commitment to environmental stewardship led us to implement an environmental
         management system consistent with the international standard ISO 14001. The system and related
         training initiatives provide an effective tool to manage environmental issues and improve operational
         performance. As part of the implementation, all FortisAlberta employees completed online environment
         management system training.




Shane Mullin, Technical Services             Vicky Hartford, Customer Service              Kathleen Rondeau, Inventory Control
Work Leader, Acheson                         Representative, works with Willy Willner,     Analyst, Airdrie
                                             the owner of Chunk Motorsports in High
                                             River to expand his electrical service



4 - Energy Your Way
                                        Power of People
                                        In 2008, we made several changes to our executive team. We are pleased to
                                        welcome Phonse Delaney as Vice President, Operations and Engineering and
                                        Ian Lorimer as Vice President, Finance and Chief Financial Officer. We are also
                                        proud to have promoted two internal candidates to Vice President positions in
                                        2008. Nipa Chakravarti was promoted to Vice President, Customer Service and
                                        Annette Butt was promoted to Vice President, Human Resources and Corporate
                                        Communications. Cynthia Johnston assumed responsibility as Vice President,
                                        Regulatory and Legal. These changes serve to realign key accountabilities and
                                        provide a platform to position FortisAlberta for future success.

                                        I would like to recognize our Board of Directors for their support and guidance in
                                        helping FortisAlberta deliver on its business priorities over the past year. In February
                                        2008, Stan Marshall, President and Chief Executive Officer, Fortis Inc. resigned his
                                        position as Chair of the FortisAlberta Board of Directors. He remains on the Board in
                                        a Director role. Barry Perry, Vice President, Finance and Chief Financial Officer, Fortis
                                        Inc. and Donald Bacon also resigned their positions as Directors on FortisAlberta’s
                                        Board. We would like to extend a sincere thank you to Mr. Marshall, Mr. Perry and Mr.
   “The success                         Bacon for their strong leadership and significant contributions.

                                        We would like to congratulate Mr. Greg Conn, who was elected as new Chair of
 achieved in 2008                       FortisAlberta’s Board. We welcome Nora Duke, President and Chief Executive
                                        Officer, Fortis Properties and Judith Athaide as Directors.
 would not have
                                        The success achieved in 2008 would not have been possible without the hard
   been possible                        work and dedication of our employees. Achieving performance improvements in
                                        all aspects of our business is a significant accomplishment, particularly in light of
 without the hard                       strong growth and increasing customer expectations.

work and dedication                     I invite you to review the following sections for additional information about our
                                        performance in 2008.
of our employees.”

                                        Karl Smith
                                        President and CEO
                                        FortisAlberta




Chris Taylor, Customer Service Agent,    Calvin Kerr, Acting Lead Field                    Clare Hagstrom, Power Line Technician,
Airdrie                                  Operations, and Sukhy LePrieur,                   changes a streetlight in Strathmore
                                         Contribution Coordinator, volunteer at
                                         Airdrie’s RJ Hockey Elementary School
                                         for the United Way Days of Caring event


                                                                                   2008 | FortisAlberta Annual Report - 5
Your Way...
         Safety
          FortisAlberta achieved record safety performance in      power lines continues to be a challenge with an
          2008, and our employees were honoured with the           average of one person making contact with power
          Best Safety Performer Award from the Government          lines each day. The Company continues to lead the
          of Alberta. This award recognizes companies with         Joint Utility Safety Team consisting of major Alberta
          a lost-time incident rate that is at least 40 per cent   electrical utilities and the Government of Alberta.
          below the industry average. In addition, employees’      The team’s goal is to improve public safety through
          diligence around safe work practices resulted in         an education and awareness campaign called
          seven offices celebrating eight years without a lost-    Where’s The Line? To heighten electrical safety
          time injury.                                             awareness, FortisAlberta also delivered more than
                                                                   80 presentations to external companies, industry
          Each year, FortisAlberta continues to enhance its        organizations and emergency personnel.
          safety management program, including safety
          education. In 2008, more than 300 Power Line
          Technicians participated in courses at the Employee
          Development Centre in Red Deer to upgrade their                  Employee Injury Frequency Rate*
          skills in safety-related programs such as aerial
          rescue, confined space entry and gas detection. The                        2.77
          apprentice and new hire programs continue to be
          effective in providing the appropriate training and                                       2.45
          work experience for all new hires.
                                                                                            1.98
          FortisAlberta doubled the number of work site
          observations in 2008 compared to the previous                                                    1.55
          year, raising the visibility of management and
          work leaders in the field. This focus will continue
          throughout 2009 as the Company strives to achieve
          zero lost-time incidents.

          Safety on the job goes hand-in-hand with
          FortisAlberta’s commitment to public safety. The                           2005   2006 2007       2008
          number of electrical contacts with FortisAlberta                                     Year


                                                                              *Number of safety incidents that involve lost
                                                                              time from work or require medical aid




Doug Skippen, Health and Safety
Manager, presents 15-year old Matt
Strickland with a FortisAlberta Safety
Ambassador Award
                                          FortisAlberta honours Canmore teen with Safety Award
                                          FortisAlberta created the Safety Ambassador Award to recognize any member
                                          of the public who helps to ensure the safety of others around electrical
                                          equipment and hazards. In August, FortisAlberta recognized Matt Strickland, 15,
                                          of Canmore for his efforts in preventing a potentially dangerous situation when
                                          he came across a power line that was in contact with a tree. Matt called the
                                          fire department who then called FortisAlberta’s Contact Centre. He waited and
                                          secured the scene until FortisAlberta crews arrived.


6 - Energy Your Way
Dan Thayer, Health and Safety
Advisor, talks about electrical
safety with Sheldon Hanson,
owner of Diamond S Bobcat
Service in Wetaskiwin




           2008 | FortisAlberta Annual Report - 7
Your Way...
        Customer Service
         In 2008, an increased focus on customer service             In 2008, FortisAlberta installed more than 70,000
         resulted in FortisAlberta achieving a record customer       new automated meters as part of a three-year,
         satisfaction rating of 81 per cent, compared to the         $124 million program, which will be fully
         average annual rating of 76 per cent over the past          implemented across the Company’s service
         three years.                                                territory by 2010. This technology enables
                                                                     FortisAlberta to read customers’ meters remotely,
         The Company’s Contact Centre plays an essential role        eliminating the practice of estimated meter reads
         in providing customers with the quality of service they     and allowing the Company to provide up-to-date
         have come to expect from FortisAlberta. From inquiries      customer consumption information to retailers each
         about power outages and meter readings to requests          month. It will also help to reduce operating costs,
         for new service connections, the Contact Centre             carbon emissions and safety issues associated with
         handles 550 customer calls per day or approximately         manual meter reading.
         200,000 calls throughout the year. FortisAlberta’s
         Contact Centre Agents’ unwavering commitment to             The Company successfully reduced meter reader
         customers resulted in the Company achieving a key           turnover to 38 per cent from 67 per cent in 2007,
         customer service objective of responding to at least 70     while installing over twice the number of automated
         per cent of calls in 30 seconds or less.                    meters compared to the same period in 2007.
                                                                     Continued focus on meter reader performance and
         New work management software that matches the               meter route improvements resulted in an overall
         number of Contact Centre Agents with customer               meter reading performance of 96 per cent in 2008,
         call volumes allowed the Company to ensure the              exceeding FortisAlberta’s target of 94 per cent.
         right number of agents were available as needed,
         improving employee responsiveness to customers.             In response to the government’s recent focus on
         New call monitoring technology improved Contact             energy efficiency, FortisAlberta delivered on a micro-
         Centre coaching activities, supporting leaders to more      generation policy initiative that enables customers
         effectively develop the skill sets of their employees.      to connect renewable energy generation to
                                                                     FortisAlberta’s network at no cost to the customer.
         The Company also updated its independent customer           Beginning January 1, 2009, customers who generate
         satisfaction survey, which will better enable employees     their own electricity will be credited for any excess
         to focus on improvement initiatives that are important      electric energy sent to the distribution system.
         to customers. These include timely communication of
         outages, resolving issues on the first call and improving
         response times for new service connections.




Kirsten Lojek,
Lead Contact Centre Agent, Airdrie
                                           Bringing employees closer to customers
                                           To establish a larger presence in FortisAlberta’s service territory, move
                                           closer to customers and reduce costs associated with lease agreements
                                           in Calgary, more than 300 employees relocated to a new facility in Airdrie
                                           in 2008. This move has created employment opportunities for residents
                                           in FortisAlberta’s service territory, while bringing the engineering and
                                           operations group closer to customers.



8 - Energy Your Way
    Jill Routhier, St. Albert
    Customer Service
    Representative, shares
    information with farm
    customer Joan Dutton about
    her new automated meter




2008 | FortisAlberta Annual Report - 9
Your Way...
         Reliability
          The reliability of FortisAlberta’s electricity distribution   Of the $296 million in capital expenditures,
          system is essential to our commitment to customers.           approximately $50 million was invested in projects
                                                                        to improve reliability, customer service and safety.
          The Company’s strong reliability performance can be           Projects were completed to automate the distribution
          attributed to improvements in the distribution system         system in Airdrie and St. Albert, allowing distribution
          and an effective preventative maintenance program.            lines to be remotely controlled and enabling faster
          Despite periods of extreme weather, including an              restoration of service after an outage. As part of
          increase in lightning-related outages, the Company            FortisAlberta’s preventative maintenance program,
          was able to reduce customers’ average outage time. In         padmount transformers, underground cables,
          2008, a typical customer experienced only 1.82 hours          deteriorated poles and other equipment were replaced
          without electricity compared to 1.88 hours in 2007 .          or repaired.
          The condition of system assets is key to strong               Preventative maintenance sometimes requires a
          reliability performance and in 2008, the Company              pre-planned outage. However, in 2008, the Company
          continued to focus on upgrading its infrastructure            focused on reducing the number of outages taken for
          through the construction of new facilities and the            maintenance. Improved work methods and employee
          enhancement of its existing network. Since 2004, the          training during the year increased employees’ ability
          Company has invested almost $1 billion to build a safe        to carry out live line work. Rubber glove training was
          and reliable electricity system.                              delivered to 18 additional Power Line Technicians to
                                                                        allow them to work on energized lines without a power
          In 2008, FortisAlberta invested a record $296 million in
                                                                        interruption. These initiatives contributed to a 14 per
          capital assets. Over half of these capital expenditures
                                                                        cent reduction in the duration of planned outages.
          were driven by growth in customer demand. More
          than 12,000 new customers were connected to
          FortisAlberta’s distribution system. The Company
          worked closely with the transmission service provider
          and the Alberta Electric System Operator to add
          substation capacity to address customer load growth
          in Airdrie, Balzac, Tilley, Stavely, Bruderheim, Blackfalds
          and Burdett.




FortisAlberta’s portable diesel
generators provide temporary electricity
and create more flexibility when dealing
with outages
                                             Electricity on the go
                                             In early 2008, FortisAlberta purchased two, large portable diesel generators
                                             to provide temporary electricity and create more flexibility when dealing with
                                             planned and unplanned outages. The Company used one of the generators in
                                             October during a planned outage in Lake Louise, where employees completed
                                             maintenance to improve reliability. Thanks to the generator, and more importantly,
                                             to the team of FortisAlberta employees who worked tirelessly to keep it running,
                                             the Company was able to reduce the outage time by half for customers.


10 - Energy Your Way
             Ron Tomlinson, St. Albert
             Construction Foreman, mentors
             Kyle Baird, Apprentice Power Line
             Technician, near St. Albert




                                                                                                Jim Nanninga, Area Foreman, completes
                                                                                                hot line work near Canmore
Ready for any kind of weather
In a particularly difficult year of lightning and storms, responsive crews and a well-
maintained system limited the impact on customers. In mid-July a tornado knocked
down 100 poles and damaged distribution lines serving 10,000 customers from
Taber to Medicine Hat. In September, FortisAlberta employees travelled to the Turks
and Caicos to assist in the restoration of power after the devastation of Hurricane
Ike. A major windstorm throughout northern Alberta in October caused power
outages to more than 14,000 customers. FortisAlberta employees have consistently
demonstrated their commitment to restore electricity safely back to customers.

                                                                                         2008 | FortisAlberta Annual Report - 11
Your Way...
        People
         While FortisAlberta continuously invests in its          Succession planning is a priority for FortisAlberta.
         electricity system, it is employees who drive the        The Company will continue to identify critical roles
         business. The attraction, development and retention      and high potential employees to develop the right
         of a skilled and engaged workforce has been key to       successors to transition into key leadership roles.
         the success achieved in customer satisfaction and        In 2008, workforce needs were addressed through
         business performance.                                    corporate workforce planning, turnover analysis and
                                                                  strategic recruitment efforts.
         In recent years, the Company concentrated its efforts
         on recruiting employees in critical technical roles      The Company continues to implement attraction
         and trade areas to meet the demands of Alberta’s         and retention strategies to profile FortisAlberta as
         growing economy and to address Company-specific          an employer of choice. This includes participation in
         demographic issues. With these people in place, the      provincial campus recruitment and career fairs and
         Company’s focus in 2009 will shift to enhancing the      an employee referral program. Partnerships with the
         capability of the existing workforce.                    University of Alberta’s Faculty of Engineering and the
                                                                  Southern Alberta Institute of Technology’s Electrical
         Ongoing training and development is the foundation       Engineering Technology program support student
         of employees’ ability to deliver excellent service.      and faculty research and provide equipment for
         FortisAlberta’s focus on technical training continued    practical lab work. These opportunities have enabled
         in 2008 with its accredited Powerline Technician         current employees to receive relevant professional
         Apprentice Program and annual journeyman upgrade         development by working with faculty members and
         training. A focused mentoring program, executive         sitting on industry advisory boards.
         brown bag lunches and monthly group mentoring
         sessions with the Chief Executive Officer also           FortisAlberta continues to foster a strong
         helped enhance career development opportunities          relationship with its workforce and the United Utility
         and retain employees.                                    Workers Association. In 2008, Association members
                                                                  ratified a new three-year collective agreement with
         For the first time, senior leaders delivered             the Company. Ratification of the new agreement
         presentations to more than 900 employees about the       provides a solid platform to continue to deliver on
         Company’s 2008 business plan. In 2008, FortisAlberta     FortisAlberta’s commitment to customers.
         launched its first Annual Leadership Forum, where
         more than 120 leaders from across the Company
         received information about business plan priorities
         and corporate direction.




Orin Hilman and Kyle Baird,
Apprentice Power Line Technicians, and
John McGuire, Power Line Technician,
work on capital upgrades in St. Albert
                                         New employees hit the ground running
                                         Keeping up with capital work has driven the FortisAlberta’s Operations group to
                                         find creative ways to get new employees and apprentices up to speed quickly.
                                         FortisAlberta continuously identifies new opportunities to help its veteran
                                         employees transfer their knowledge and expertise to new colleagues.




12 - Energy Your Way
Brian Morgan, Technical Trainer, instructs
Malcolm Beckie, Apprentice Power Line
Technician, at FortisAlberta’s Employee
Development Centre




      2008 | FortisAlberta Annual Report - 13
Your Way...
          Community
           As part of FortisAlberta’s Empowering Communities                In 2008, FortisAlberta’s ZAP electricity safety
           sponsorship program, the Company invests in safety,              program educated more than 5,000 grade five
           education and environmental initiatives to improve               students in communities across Alberta about how
           the lives of Albertans in the communities it serves.             to live safely around electricity. The Company also
                                                                            sponsored on-site emergency medical services at 13
           Each year, employees invest their time, talent and               rodeos throughout its service territory.
           energy to support numerous community events and
           local causes. The Taber Cornfest, Airdrie Festival
           of Lights and Lakedell Community Library are
           just a few examples of initiatives that benefited
           from FortisAlberta’s in-kind donations, financial
           contributions and employee volunteerism in 2008.

           Employees achieved a record-setting year for
           participation, volunteer activities and fundraising.
           Teams in Calgary, Red Deer and Edmonton raised
           $25,000 for the Canadian Breast Cancer Foundation
           through participation in the CIBC Run for the
           Cure, almost doubling the donation from 2007. The
           Connecting Communities United Way campaign
           generated $150,000, which the Company donated to                                   FortisAlberta’s
           eight United Way chapters in its service territory.
                                                                                     Empowering Communities
           The Company entered its fifth year partnering
           with STARS, the Shock Trauma Air Rescue Society.                            sponsorship program is
           Investment in the organization’s Human Patient
           Simulator Program provides mobile emergency                                about creating long-term
           medical training for paramedics, firemen and other                        positive relationships with
           emergency medical staff across Alberta.
                                                                                     the communities it serves.




Roger Ferguson, Director of Operations,
and Jennifer Willdig, Administrative
Coordinator, add energy efficient LED
bulbs on an Airdrie Festival of Lights display
                                                 FortisAlberta LED the charge for energy efficiency
                                                 For years, the Airdrie Festival of Lights has helped the community get into the
                                                 spirit of the holiday season. In keeping with the increased focus on environmental
                                                 responsibility, FortisAlberta is proud to be leading the charge to help the festival
                                                 go green. Thirty employee volunteers exchanged more than 6,400 regular
                                                 incandescent bulbs with new light emitting diode (LED) bulbs. The LED bulbs are
                                                 60 times more energy efficient than the old ones and have the added benefit of
                                                 being more durable than traditional holiday lighting.


14 - Energy Your Way
                                                                                Children from the Diamond
                                                                                Valley and District Boys and
                                                                                Girls Club gather after school
                                                                                to learn and play on computers
                                                                                donated by FortisAlberta




                                                                                   Dave Skitch, Field Metering and
                                                                                   Equipment Technician, volunteers as a
                                                                                   coach for the Minor Hockey Association
Empowering employee volunteers in their communities
FortisAlberta is proud to support the efforts of employee volunteers and
recognizes their commitment to making a difference. The Company expanded
its program in 2008 to award 10 grants to organizations where employees
give their time and energy. Dave Skitch, Field Metering and Equipment
Technician in High River, was awarded a grant for the High River Minor
Hockey Association, where he has volunteered as a coach for five years.



                                                                           2008 | FortisAlberta Annual Report - 15
Your Way...
        Environment
         FortisAlberta is committed to minimizing the           Airdrie Eco Edge Award for its environmental
         impact of its business on the environment and          leadership in the construction of its new facility in
         promoting environmental awareness within the           Airdrie. The building features a rain water cistern,
         communities it serves.                                 energy efficient lighting and windows, and low-flow
                                                                water fixtures. Recycled materials were used where
         In 2008, the Company implemented an                    possible and landscaping with native plants has
         Environmental Management System (EMS)                  reduced the need for irrigation.
         consistent with the international standard
         ISO 14001 and conducted an audit to evaluate
         environmental performance. As part of the EMS
         implementation, FortisAlberta set targets to
         streamline waste management, improve fire
         and spill response systems, and eliminate PCB
         contaminated oil-filled electrical equipment. All                 FortisAlberta’s three
         employees participated in online EMS training,                environmental commitments
         which provided information to ensure compliance
         with environmental legislation and practices.              1. Prevention of pollution and
         The Company also launched a new environmental                 conservation of natural resources.
         intranet site in October to allow employees
         and contractors easy access to environmental               2. Compliance with legal and other
         documents, tools and updates. Customers                       requirements.
         and other interested parties can now submit
         environmental concerns on FortisAlberta’s website
                                                                    3. Continual improvement in
         at www.fortisalberta.com.
                                                                       environmental mitigation practices.
         The Company is always looking for ways to include
         environmental considerations as part of building
         standards. FortisAlberta was honoured with the




Dan Lapointe, Power Line Technician,
shares information about new
automated meters with Shane Seib,
First Impressions co-owner
                                       Automated meters and the environment
                                       FortisAlberta is eliminating more than 1,000 tonnes of vehicle carbon dioxide
                                       emissions annually by changing from manually read customer meters to
                                       new automated meters. In keeping with the Company’s environmental
                                       commitment, zero landfill waste will be created by the disposal of more than
                                       400,000 conventional meters.




16 - Energy Your Way
                                                                                    Phonse Delaney, Vice President,
                                                                                    Operations and Engineering,
                                                                                    releases a Short Eared Owl in the
                                                                                    Crowsnest Pass




                                                                                            Colin Weir, Alberta Birds of Prey
                                                                                            Executive Director, unveils plans for the
                                                                                            FortisAlberta Flying Field
FortisAlberta Flying Field keeps partnership soaring
What better place to learn about birds of prey than an outdoor theatre located
within a 70-acre wetland area? The Alberta Birds of Prey Centre in Coaldale built
a new bird demonstration theatre in 2008 thanks to FortisAlberta’s long-term
partnership. The Centre’s mandate is to support bird rescue and rehabilitation,
with the objective of sending birds back to the wild. The FortisAlberta Flying
Field includes an interpretive section with a power line display that highlights
the devices the Company builds into its electricity system to keep birds safe and
increase reliability for customers.

                                                                                    2008 | FortisAlberta Annual Report - 17
           FortisAlberta Executive Team
            Karl W. Smith
            President and Chief Executive Officer
                                                                                                                 .
            Mr. Smith was appointed as President and Chief Executive Officer of FortisAlberta on April 30, 2007 Prior to this
            appointment, Mr. Smith was the President and Chief Executive Officer of Newfoundland Power Inc., a position he
            held since 2004. From 1999 to 2003, Mr. Smith was Chief Financial Officer for Fortis Inc., the parent company of
            FortisAlberta. From 1995 to 1999, he held the position of Chief Financial Officer for Newfoundland Power Inc. From
            1993 to 1995, he was Vice President, Finance, for Fortis Properties Corporation, and from 1989 to 1995 he was
            Vice President, Finance, for Fortis Trust Corporation. Mr. Smith currently serves as Chair of the Canadian Electricity
            Association. He also serves on the Board of Directors of Belize Electricity Limited and Caribbean Utilities Company
            Ltd. Mr. Smith holds a Bachelor of Commerce degree (Honours) from Memorial University of Newfoundland and is a
            member of the Institute of Chartered Accountants of Alberta.

            Annette Butt
            Vice President, Human Resources and Corporate Communications
            Ms. Butt brings 15 years of senior leadership experience in human resources, including Director roles with
            FortisAlberta and Newfoundland Power. Previously, she held human resources roles in the hotel, retail and food
            wholesale industries. She holds Bachelor of Arts and Bachelor of Education degrees from Memorial University of
            Newfoundland and a Master’s degree in Education from the University of Ottawa.

            Nipa Chakravarti
            Vice President, Customer Service
            Ms. Chakravarti previously held the position of Director, Customer Operations and Automated Metering
            Infrastructure at FortisAlberta. Prior to this, she held the position of Director, Billing at AT&T Canada and Senior
            Manager at KPMG. Ms. Chakravarti holds a Bachelor of Commerce degree from Queen’s University and is a
            member of the Institute of Chartered Accountants of Alberta.

            Phonse Delaney
            Vice President, Operations and Engineering
            Mr. Delaney previously held several senior management positions at Newfoundland Power Inc., most recently as
            Vice President of Engineering and Operations. He holds a Bachelor of Electrical Engineering degree from Memorial
            University of Newfoundland and is a member of the Association of Professional Engineers, Geologists and
            Geophysicists of Alberta as well as the Canadian Electricity Association’s Distribution Council.

            Cynthia Johnston
            Vice President, Regulatory and Legal
            Ms. Johnston previously held the position of Vice President, Customer Service at FortisAlberta. Prior to this, she
            held the position of Vice President, Operations at TransAlta Corporation. With over 20 years in the Alberta electricity
            industry, Ms. Johnston has experience in sales and marketing, customer service, business development, operations
            and regulatory. Ms. Johnston holds a Master’s degree in Economics from the University of Victoria.

            Ian Lorimer
            Vice President, Finance and Chief Financial Officer
            Mr. Lorimer brings nine years of experience in regulated utility finance roles, including a Director role with FortisBC.
            Previously, he held various finance roles including Senior Manager at Smythe Ratcliffe Chartered Accountants in
            Vancouver. Mr. Lorimer holds a Bachelor of Commerce degree from the University of British Columbia and is a
            member of the Institutes of Chartered Accountants of Alberta and British Columbia.

            Alan Skiffington
            Vice President, Business Services and Chief Information Officer
            Mr. Skiffington previously held the position of Vice President, Corporate Services and Chief Information Officer at
            FortisAlberta. Prior to this, he held the position of Vice President, Information Technology and Facility Management
            at AltaLink. He has been involved in the field of information technology since 1992, performing various roles within
            SNC-Lavalin Inc. and completing his tenure as the Regional Director of Western Canada. Mr. Skiffington has also
            worked in the international thermal power sector in the areas of risk assessment and financial analysis and holds a
            Bachelor of Science degree in Economics from the University of Victoria.



18 - Energy Your Way
Front: Nipa Chakravarti and Ian Lorimer
Back: Annette Butt, Cynthia Johnston,
Karl Smith, Alan Skiffington and
Phonse Delaney




                                           2008 FortisAlberta Annual Report | 21
                                          2008 | FortisAlberta Annual Report - 19
FortisAlberta Board of Directors
Judith J. Athaide                                                 involvement in other aspects of the agriculture industry has
Calgary, Alberta                                                  included the Canadian Cattlemen’s Association, the Canadian
Ms. Athaide was appointed to the FortisAlberta Board of           Cattle Identification Agency and the Alberta Environmental
Directors in April 2008. She has over 21 years of experience      Sustainable Agriculture Council.
in the energy industry and is the founder of The Cogent
Group Inc., an independent consulting firm that provides          Al H. Duerr
assistance to organizations to transition and thrive within       Calgary, Alberta
competitive markets. Ms. Athaide serves on the Board of           Mr. Duerr was appointed to the FortisAlberta Board of
Directors of Cognera Corporation and has served on the            Directors in June 2006. He is a Founding Partner and
Board of Advisors for the Accenture Business Services for         Managing Director of General Magnetic Inc. with operations
Utilities and the Board of Decidedly Jazz Danceworks. She         in China, producing high-powered motors and generators. He
is also involved in a number of non-profit organizations,         is a member of a First Nations partnership focusing on energy
including the Business Advisory Council of the University         and infrastructure development on First Nations Reserve and
of Alberta’s School of Business and the United Way, and           Traditional Lands. Mr. Duerr was the CEO of the China and
has been involved with various professional and industry          International Projects group of a European finance company.
associations. Ms. Athaide has a Bachelor of Commerce              He also served extensively in the public sector as the Mayor
degree (Honours) from the University of Manitoba, along           of Calgary for 12 years and as an Alderman for the City of
with a Bachelor of Science degree in Mechanical Engineering       Calgary for six years. Prior to this, Mr. Duerr was involved
and a Master’s of Business Administration, Finance from the       in land development and environmental technologies, with
University of Alberta.                                            a special focus on Asia. Mr. Duerr holds a Bachelor of Arts
                                                                  degree (Honours) from the University of Saskatchewan
             .
Dr. Brian F Bietz                                                 and a Master’s of Business Administration degree from the
Calgary, Alberta                                                  Haskayne School, University of Calgary.
Dr. Bietz was appointed to the FortisAlberta Board of Directors
in March 2005. He is the principal of Bietz Resources Ltd.,       Nora M. Duke
providing regulatory consulting services since 2003. Dr. Bietz    President and CEO, Fortis Properties Corporation
is active in a number of environmental initiatives and has        St. John’s, Newfoundland and Labrador
served on the Board of the Energy Council of Canada, the          Ms. Duke was appointed to the FortisAlberta Board of
Alberta Energy and Utilities Board and as Chair of the Natural    Directors in February 2008. Ms. Duke has worked with the
Resources Conservation Board (Alberta). Dr. Bietz holds a         Fortis Group of Companies since 1983, where she began her
Bachelor of Science degree from the University of Calgary         career with Newfoundland Power Inc., working in several
and a PhD from the University of Western Ontario. In 2007,        progressively senior positions in human resources. Ms.
Dr. Bietz also became President of Bow City Power Ltd., a         Duke was appointed Vice President, Customer and Corporate
company proposing to construct a 1,000 MW coal-fired power        Services in 1999 and held that position until 2003, at which
plant in southern Alberta.                                        time she was appointed Vice President, Hospitality Services
                                                                  with Fortis Properties Corporation. In 2007, Ms. Duke
Gregory E. Conn                                                   assumed her current role of President and Chief Executive
Chair, FortisAlberta Board of Directors                           Officer of Fortis Properties Corporation. Ms. Duke serves
Innisfail, Alberta                                                on the Board of The Genesis Centre, a technology business
Mr. Conn was appointed as Chair of the FortisAlberta Board        incubation centre, and is a Director for the Brother T.I.
of Directors in February 2008 and has been a member of            Murphy Centre and the St. John’s Health Care Foundation.
the Board of Directors since September 2005. He is a Past         She is also involved with various professional and industry
Chairman of the Alberta Beef Producers, where he served for       associations. Ms. Duke has a Bachelor of Commerce degree
seven years. During his time there, Mr. Conn was involved         (Honours) and a Master’s of Business Administration from
in animal welfare and environmental issues, particularly          the Memorial University of Newfoundland.
water quality issues. He was also active in the international
marketing initiatives of the Canadian beef industry. Mr. Conn’s




Judith J. Athaide                    .
                          Dr. Brian F Bietz         Gregory E. Conn           Al H. Duerr               Nora M. Duke



20 - Energy Your Way
Joanne R. Lemke                                                   and a Bachelor of Arts degree in Economics from the
Airdrie, Alberta                                                  University of Montreal, a Master’s of Business Administration
Ms. Lemke was appointed to the FortisAlberta Board                from Queen’s University and a PhD in Finance from the
of Directors in June 2006. She is a communications                University of Toronto.
professional with over 25 years of experience in the
agriculture and food industries. Ms. Lemke established her        Karl W. Smith
own consulting company in 2003 after managing public              President and CEO, FortisAlberta Inc.
affairs and promotion at the Alberta Cattle Commission            Calgary, Alberta
from 1983 to 2002. She has implemented province wide              Mr. Smith was appointed as President and Chief Executive
communication and marketing initiatives over the past             Officer of FortisAlberta on April 30, 2007. Prior to this
several years, and participated in government industry trade      appointment, Mr. Smith was the President and Chief
missions to the United States and Asia. In 2004 and 2005,         Executive Officer of Newfoundland Power Inc., a position
she chaired the Global Marketing Advisory Committee of            he held since 2004. From 1999 to 2003, Mr. Smith was
the national Canadian Cattlemen’s Association. Ms. Lemke          Chief Financial Officer for Fortis Inc., the parent company of
is a graduate of the Mount Royal College public relations         FortisAlberta. From 1995 to 1999, he held the position of Chief
program and served on the advisory committee from                 Financial Officer for Newfoundland Power Inc. From 1993 to
1997 to 2005. She also attended the Faculty of Business           1995, he was Vice President, Finance, for Fortis Properties
Management Women as Leaders Executive Development                 Corporation, and from 1989 to 1995 he was Vice President,
Program at the University of Calgary, and has been involved       Finance, for Fortis Trust Corporation. Mr. Smith currently
with various professional and industry associations.              serves as Chair of the Canadian Electricity Association. He
                                                                  also serves on the Board of Directors of Belize Electricity
H. Stanley Marshall                                               Limited and Caribbean Utilities Company Ltd. Mr. Smith holds
President and CEO, Fortis Inc.                                    a Bachelor of Commerce degree (Honours) from Memorial
St. John’s, Newfoundland and Labrador                             University of Newfoundland and is a member of the Institute
Mr. Marshall was appointed to the FortisAlberta Board of          of Chartered Accountants of Alberta.
Directors upon the Corporation’s acquisition from Aquila, Inc.
in mid-2004, and served as its Chair until February 2008. He      John C. Walker
has served on the Fortis Inc. Board since 1995. Mr. Marshall      President and CEO, FortisBC Inc.
joined Newfoundland Power Inc. in 1979 and was appointed          Kelowna, British Columbia
President and CEO of Fortis Inc. in 1996. Mr. Marshall serves     Mr. Walker is President and Chief Executive Officer of
on the Boards of several Fortis companies and is a Director       FortisBC. He was appointed to the FortisAlberta Board of
of Toromont Industries. Mr. Marshall earned his Bachelor          Directors in March 2005. Mr. Walker has worked with the
of Law degree from Dalhousie University and obtained his          Fortis group of companies since 1983, where he began
Bachelor of Applied Science degree from the University of         his career with Newfoundland Power Inc., working in
Waterloo. Mr. Marshall is a member of the Law Society of          several progressively senior positions in finance and
Newfoundland and a Registered Professional Engineer in the        human resources. He held the position of Manager, Human
Province of Newfoundland.                                         Resources at the time of his move to Fortis Properties
                                                                  Corporation in 1989, where he held several positions prior
Dr. John S. McCallum                                              to serving as President and Chief Executive Officer from
Professor of Finance, University of Manitoba                      1996 to 2005. Mr. Walker is a member of several Boards
Winnipeg, Manitoba                                                within the Fortis group of companies, including FortisBC Inc.,
Dr. McCallum was appointed to the FortisAlberta Board of          FortisAlberta Inc., Newfoundland Power Inc., Terasen Gas Inc.,
Directors in March 2005. He joined the Fortis Inc. Board in       and Terasen Inc. Mr. Walker is a member of the Climate Action
July 2001. He was Chairman of Manitoba Hydro from 1991 to         team. He holds a Bachelor of Science degree and a Master’s
2000 and Policy Advisor to the Federal Minister of Finance        of Business Administration degree from Memorial University
from 1984 to 1991. Dr. McCallum serves as a Director of IGM       of Newfoundland.
Financial Inc., Toromont Industries Ltd., and Wawanesa. Dr.
McCallum holds a Bachelor of Science degree in Mathematics




Joanne R. Lemke           H. Stanley Marshall       Dr. John S. McCallum       Karl W. Smith             John C. Walker



                                                                                      2008 | FortisAlberta Annual Report - 21
THREE-YEAR FINANCIAL SUMMARY

 December 31
 Selected Balance Sheet Data                                  2008         2007         2006
 Current assets                                             82,933       78,792       98,891
 Long-term assets                                         1,507,179    1,232,143    1,077,602
 Goodwill                                                  189,309      189,309      189,309
 Total assets                                             1,779,421    1,500,244    1,365,802
 Current liabilities                                       139,026      159,954      123,992
 Long-term liabilities                                     275,225      263,074      264,919
 Long-term debt                                            823,770      623,909      595,976
 Shareholder’s equity                                      541,400      453,307      380,915
 Total liabilities and shareholder’s equity               1,779,421    1,500,244    1,365,802


 Selected Statement of Income and Deficit Data                2008         2007         2006
 Total revenue                                             299,733      269,898      250,776
 Expenses                                                  256,682      233,200       214,114
 Income tax recovery                                         (3,042)     (11,194)      (4,734)
 Net income                                                 46,093        47,892      41,396


 Selected Statement of Cash Flows Data                        2008         2007         2006
 Cash from operating activities                             46,747       177,533      59,069
 Cash used in investing activities                         (287,111)    (236,733)    (221,441)
 Cash from financing activities                            240,364       59,200      160,568
Note:
The amounts above are in thousands of Canadian dollars.




22 - Energy Your Way
                                                                  Management’s Discussion and Analysis
                                                                                          December 31, 2008


MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and 12 months ended December 31, 2008
February 5, 2009

The following discussion and analysis of financial condition and results of operations of
FortisAlberta Inc. (the “Corporation”) should be read in conjunction with the Corporation’s audited
financial statements for the 12 months ended December 31, 2008. The financial information
presented in this document has been prepared in accordance with Canadian Generally Accepted
Accounting Principles (“GAAP”) and is in Canadian dollars unless otherwise specified.

Forward-looking Statements
The Corporation includes forward-looking information in the MD&A within the meaning of
applicable securities laws in Canada (“forward-looking information”). The purpose of the forward-
looking information is to provide management’s expectations regarding the Corporation’s future
growth, results of operations, performance, business prospects and opportunities and may not
be appropriate for other purposes. All forward-looking information is given pursuant to the “safe
                                                                                         ,          ,
harbour” provisions of applicable Canadian securities legislation. The words “anticipates” “believes”
          ,       ,            ,         ,
“budgets” “could” “estimates” “expects” “forecasts” “intends” “may” “might” “plans” “projects”
                                                    ,         ,      ,       ,       ,          ,
            ,        ,     ,
“schedule” “should” “will” “would” and similar expressions are often intended to identify forward-
looking information, although not all forward-looking information contains these identifying words.
The forward-looking information reflects management’s current beliefs and is based on information
currently available to the Corporation’s management.

The forward-looking information in the MD&A includes, but is not limited to statements regarding:
the Corporation’s expectation to generate sufficient cash required to complete planned capital
programs from a combination of long-term debt and short-term borrowings, internally generated
funds and equity contributions; the Corporation’s belief that it does not anticipate any difficulties
in accessing the required capital on reasonable market terms; and the Corporation’s forecast
gross capital expenditures for 2009. The forecasts and projections that make up the forward-
looking information are based on assumptions that include, but are not limited to: the receipt of
applicable regulatory approvals and requested rate orders; no significant operational disruptions or
environmental liability due to a catastrophic event or environmental upset caused by severe weather,
other acts of nature or other major events; the Corporation’s ability to maintain its electricity systems
to ensure their continued performance; the commercial development of alternative sources of
energy; favourable economic conditions; the level of interest rates; access to capital; maintenance of
adequate insurance coverage; the ability to obtain licences and permits; retention of existing service
areas; favourable labour relations; and sufficient human resources to deliver service and execute the
capital program.

The forward-looking information is subject to risks, uncertainties and other factors that could cause
actual results to differ materially from historical results or results anticipated by the forward-looking
information. The factors that could cause results or events to differ from current expectations
include, but are not limited to: legislative and regulatory developments that could affect costs,
revenues and the speed and degree of competition entering the electricity distribution market, loss
of service areas, costs associated with environmental compliance and liabilities, costs associated
with labour disputes, adverse results from litigation, timing and extent of changes in prevailing
interest rates, inflation levels, weather and general economic conditions in geographic areas where
the Corporation operates, results of financing efforts, counterparty credit risk and the impact of
accounting policies issued by Canadian or provincial standard setters.




                                                                 2008 | FortisAlberta Annual Report - 23
All forward-looking information in the MD&A is qualified in its entirety by the above cautionary
statements and, except as required by law, the Corporation undertakes no obligation to revise or
update any forward-looking information as a result of new information, future events or otherwise
after the date hereof.

The Corporation
The Corporation is a regulated electricity distribution utility in the Province of Alberta. Its business
is the ownership and operation of regulated electricity distribution facilities that distribute
electricity generated by other market participants from high-voltage transmission substations
to end-use customers. The Corporation does not own or operate generation or transmission
assets and is not involved in the direct sale of electricity. The Corporation has limited exposure to
exchange rate fluctuations on foreign currency transactions. It is intended that the Corporation
remain a regulated electric utility for the foreseeable future, focusing on the delivery of safe,
reliable and cost-effective electricity services to its customers in Alberta.

The Corporation operates a largely rural, approximately 107,600 kilometre, low-voltage distribution
network in central and southern Alberta, which serves approximately 460,700 electricity customers
comprised of residential, commercial, farm, oil and gas and industrial consumers of electricity.

Prior to January 1, 2008, the Alberta Energy and Utilities Board (the “EUB”) was the chief provincial
regulator of the Alberta energy industry. Effective January 1, 2008, the Alberta Utilities Commission
Act (the “AUC Act”) separated the EUB into two separate regulatory bodies, the Energy Resources
and Conservation Board (the “ERCB”) and the Alberta Utilities Commission (the “AUC”).

The ERCB regulates the safe, responsible and efficient development of Alberta’s energy resources
including oil, natural gas and coal.

The AUC’s jurisdiction, pursuant to the Electric Utilities Act, the Public Utilities Act, the Hydro and
Electric Energy Act and the AUC Act, includes the approval of distribution tariffs for regulated
distribution utilities such as the Corporation, including the rates and terms and conditions on
which service is to be provided by those utilities. Hereafter, any use of the term AUC will refer to
the EUB prior to January 1, 2008, and the AUC subsequently.

The Corporation operates under cost-of-service regulation as prescribed by the AUC. Rate orders
issued by the AUC establish the Corporation’s revenue requirements, being those revenues
required to recover approved costs associated with the distribution business, and provide a rate
of return on a deemed capital structure applied to approved rate base assets. The approved rate
of return on equity (“ROE”) is 8.75% for 2008 (2007 - 8.51%). The Corporation applies for tariff
revenue based on estimated costs-of-service. Once the tariff is approved, it is not adjusted as
a result of actual costs-of-service being different from that which was estimated, other than for
certain prescribed costs that are eligible for deferral account treatment and are either collected
or refunded in future rates. When the AUC issues decisions affecting the financial statements, the
effects of the decision are recorded in the period in which the decision is received.

The Corporation is an indirect, wholly-owned subsidiary of Fortis Inc. (‘‘Fortis’’), a diversified,
international electricity and gas distribution utility holding company having investments in
distribution, transmission and generation utilities, real estate and hotel operations.

Regulatory Matters
2008/2009 Distribution Tariff Application
On November 1, 2007, the Corporation filed a Negotiated Settlement with the AUC of all Phase 1
matters related to 2008 and 2009 revenue requirements. On February 12, 2008, the AUC issued
Decision 2008-011, which approved the Negotiated Settlement Agreement (the “Decision”).


24 - Energy Your Way
                                                                                       Management’s Discussion and Analysis
                                                                                                                       December 31, 2008


The Decision approved a 2008 and 2009 revenue requirement of $256.2 and $280.8 million
respectively (excluding miscellaneous revenue and after adjustments). Also approved is a forecast
level of operating expense for 2008 and 2009 of $106.6 million and $104.5 million respectively,
with separate rate riders collecting $17.0 million in 2008 and $18.1 million in 2009. The Decision
also includes forecast 2008 and 2009 capital expenditures of $263.8 million and $295.5 million
respectively, and forecast customer contributions for 2008 and 2009 of $28.8 million and $29.6
million respectively. In addition, the Decision included a forecast to make contributions to the
Alberta Electric System Operator (the “AESO”) projects of approximately $22.3 million and $31.1
million in 2008 and 2009 respectively.

The 2008 revenue requirement included in the Decision was determined using the 2007 ROE of
8.51% calculated in accordance with the AUC formula from the Generic Cost of Capital Decision.
On November 30, 2007, the AUC issued Miscellaneous Order U2007-347, which set the 2008 ROE
at 8.75%. The impact of this change in ROE on the 2008 revenue requirement will be collected in
customer rates in 2009 as approved by the AUC in Decision 2008-131. With respect to the 2009
ROE, as noted in the Outlook section, the AUC is in the process of reviewing the ROE calculation.
The Corporation has been directed to continue to use the 2007 ROE of 8.51% and a deemed equity
of 37% as its placeholder for 2009 ROE pending the outcome of the AUC’s review.

The 2007 revenue requirement as approved by the AUC in Decision 2006-063 was determined
using the 2006 ROE of 8.93% calculated in accordance with the AUC formula from the Generic
Cost of Capital Decision. On November 27, 2006, the AUC issued Miscellaneous Order U2006-
292 which set the 2007 ROE at 8.51%. As a result of Order U2006-292, the Corporation refunded
approximately $1.3 million in revenue collected in 2007 base rates to customers in 2008.

The Corporation’s application for 2009 rates and riders, to be effective January 1, 2009, was
approved by the AUC on December 17, 2008 in AUC Decision 2008-131.

Results of Operations
Highlights
                                       Three Months Ended December 31                            12 Months Ended December 31
                                                                        Increase/                                            Increase/
                                          2008               2007      (Decrease)               2008              2007      (Decrease)
Energy deliveries
GigaWatt hours (“GWh”)(a)                4,068             4,002                 66           15,722            15,378               344
($ thousands)
Revenues                                77,832            68,202              9,630         299,733           269,898            29,835
Operating costs                         33,427            32,268              1,159         129,689           122,492               7,197
Depreciation                            22,003            19,413              2,590          84,748             75,078             9,670
Income before interest and
income taxes                            22,402            16,521              5,881          85,296             72,328            12,968
Interest expense                        12,061              9,216             2,845          42,245             35,630             6,615
Income before income
taxes                                   10,341              7,305             3,036          43,051             36,698             6,353
Income tax expense (recovery)              (616)            1,476            (2,092)          (3,042)          (11,194)            8,152
Net income                              10,957             5,829              5,128          46,093             47,892            (1,799)
    Notes:
    a.   Energy deliveries include adjustments to prior period deliveries, which have been reflected in the financial statements during the
         current period and exclude deliveries to those customers within the Corporation’s service area that are connected directly to the
         transmission grid.




                                                                                      2008 | FortisAlberta Annual Report - 25
The following table outlines the significant increases/(decreases) in the Results of Operations for
the three months ended December 31, 2008 as compared to December 31, 2007:

Item                      Increase/     Explanation
($ millions other than    (Decrease)
energy deliveries)
Energy Deliveries         66 GWh       The increase in energy deliveries for the three months ended December
                                       31, 2008 is due to an increase in delivery to residential, commercial, and
                                       oil and gas customers, which was mainly due to growth in the number of
                                       customer sites. As a significant portion of the Corporation’s distribution
                                       revenue is derived from fixed or largely fixed billing determinants,
                                       changes in energy deliveries are not directly correlated with changes in
                                       revenues. Revenues are a function of numerous variables, many of which
                                       are independent of the actual energy deliveries in the month.
Net Income                5.1          The higher net income for the three months ended December 31, 2008
                                       is primarily related to an increase in revenues and income tax recovery,
                                       partially offset by an increase in operating costs, depreciation and
                                       interest expense as described in further detail below.
Revenues                  9.6          Distribution revenue increased by a total of $8.1 million. Of this increase
                                       $5.7 million was attributable to distribution rate increases as a result of the
                                       Decision, and load growth, which was underpinned by customer growth.
                                       Revenue for 2008 was approximately $1.3 million higher than 2007
                                       revenue due to differences in the impact of various revenue deferrals.
                                       Lastly, 2008 revenue was approximately $1.1 million higher primarily due
                                       to an increase in franchise fee revenue and A-1 rider revenue.

                                       Other revenue increased by a total of $1.5 million. Transmission revenue
                                       increased by $0.8 million primarily due to rate increases and load and
                                       customer growth. Other revenue increased by $0.7 million primarily due to
                                       increases in miscellaneous revenue.
Operating Costs           1.2          Operating costs for the three months ended December 31, 2008 were
                                       higher primarily due to higher labour and benefit costs and general
                                       operating costs, partially offset by lower contracted manpower costs and
                                       increased charges to capital.

                                       Labour and benefit costs were higher as a result of an increase in
                                       salaries and employee headcount, partially offset by increased charges
                                       to capital as a result of the higher volumes of capital expenditures arising
                                       from the intensive capital expenditure programs.

                                       General operating costs were higher primarily due to increased
                                       telecommunication costs, intervener costs, franchise fees and linear taxes.

                                       Labour and benefit costs and contracted manpower costs comprised
                                       approximately 62% of total operating costs for the three months ended
                                       December 31, 2008.
Depreciation              2.6          The increase for the three months ended December 31, 2008 resulted
                                       from an increase in capital assets due primarily to system growth,
                                       upgrades and replacement of assets within the Corporation’s service
                                       territory, combined with higher overall depreciation rates as approved by
                                       the Decision.
Interest Expense          2.8          The increase for the three months ended December 31, 2008 was
                                       attributable to higher debt levels arising from the issuance of long-term
                                       debt Series 08-1 that took place in April 2008 and increased drawings
                                       under the syndicated credit facility to finance increased capital assets
                                       due primarily to system growth, upgrades and replacement of assets
                                       within the Corporation’s service territory, partially offset by a reduction in
                                       interest rates charged on the syndicated credit facility.


26 - Energy Your Way
                                                                      Management’s Discussion and Analysis
                                                                                                  December 31, 2008


Item                      Increase/     Explanation
($ millions other than    (Decrease)
energy deliveries)
Income Tax Recovery       2.1          The increase for the three months ended December 31, 2008 is primarily
                                       due to the Corporation adopting a revised tax strategy such that it will
                                       utilize the deductions arising from the AESO charges deferral that are
                                       incurred in the year to create a loss carryforward, resulting in a future tax
                                       asset and future tax recovery. In addition, a higher current income tax
                                       recovery in 2008 compared to the same period in 2007 contributed to
                                       this increase.

The following table outlines the significant increases/(decreases) in the Results of Operations for
the 12 months ended December 31, 2008 as compared to December 31, 2007:

Item                      Increase/     Explanation
($ millions other than    (Decrease)
energy deliveries)
Energy Deliveries         344 GWh      The increase in energy deliveries for the 12 months ended December 31,
                                       2008 is due to an increase in delivery to residential, commercial, and oil
                                       and gas customers, which was mainly due to growth in the number of
                                       customer sites. As a significant portion of the Corporation’s distribution
                                       revenue is derived from fixed or largely fixed billing determinants,
                                       changes in energy deliveries are not directly correlated with changes in
                                       revenues. Revenues are a function of numerous variables, many of which
                                       are independent of the actual energy deliveries in the month.
Net Income                (1.8)        The lower net income for the 12 months ended December 31, 2008
                                       is primarily related to a lower income tax recovery and an increase in
                                       operating costs, depreciation and interest expense, partially offset by
                                       increased revenues as described in further detail below.

Revenues                  29.8         Distribution revenue increased by a total of $30.0 million. Of this increase,
                                       $24.4 million was attributable to distribution rate increases as a result
                                       of the Decision, and load growth, which was underpinned by customer
                                       growth. Revenue in 2008 was approximately $3.3 million higher than 2007
                                       revenue due to differences in the impact of various revenue deferrals.
                                       Lastly, 2008 revenue was approximately $2.3 million higher primarily due
                                       to an increase in franchise fee revenue and A-1 rider revenue.

                                       Other revenue decreased by a total of $0.2 million. Transmission revenue
                                       decreased by $0.4 million primarily due to a significant increase in
                                       the average pool price, partially offset by rate increases and load and
                                       customer growth. Other revenue increased by $0.2 million primarily due
                                       to increases in miscellaneous revenue, partially offset by decreases in
                                       the carrying costs earned on the AESO charges deferral.




                                                                    2008 | FortisAlberta Annual Report - 27
Item                       Increase/     Explanation
($ millions other than     (Decrease)
energy deliveries)
Operating Costs            7.2          Operating costs for the 12 months ended December 31, 2008 were
                                        higher primarily due to higher contracted manpower costs, labour and
                                        benefit costs, and increased general operating costs, partially offset by
                                        increased charges to capital.

                                        Contracted manpower costs were higher due to increased brushing
                                        activity and third party work. Labour and benefit costs were higher
                                        as a result of an increase in salaries and employee headcount,
                                        partially offset by increased charges to capital as a result of the higher
                                        volumes of capital expenditures arising from the intensive capital
                                        expenditure programs.

                                        General operating costs were higher due to increased vehicle expenses,
                                        telecommunications costs, intervener costs, franchise fees, and linear
                                        taxes, partially offset by lower recruitment costs, building lease costs and
                                        material costs.

                                        Labour and benefit costs and contracted manpower costs comprised
                                        approximately 65% of total operating costs for the 12 months ended
                                        December 31, 2008.
Depreciation               9.7          The increase for the 12 months ended December 31, 2008 resulted from
                                        an increase in capital assets due primarily to system growth, upgrades
                                        and replacement of assets within the Corporation’s service territory,
                                        combined with higher overall depreciation rates as approved by the
                                        Decision.
Interest Expense           6.6          The increase for the 12 months ended December 31, 2008 was
                                        attributable to higher debt levels arising from the issuance of long-term
                                        debt Series 08-1 that took place in April 2008 and increased drawings
                                        under the syndicated credit facility to finance increased capital assets
                                        due primarily to system growth, upgrades and replacement of assets
                                        within the Corporation’s service territory, partially offset by a reduction in
                                        interest rates charged on the syndicated credit facility.
Income Tax Recovery        (8.2)        The decrease for the 12 months ended December 31, 2008 is due
                                        primarily to a reduction in deductions taken for tax purposes in excess
                                        of amounts for accounting purposes in 2008 as compared to 2007        ,
                                        accounted for on the taxes payable method. Further, in 2008 the
                                        Corporation adopted a revised tax strategy such that it will utilize the
                                        deductions arising from the AESO charges deferral that are incurred in
                                        the year to create a loss carryforward, resulting in a future tax asset
                                        and future tax recovery that offsets the future tax liability and future
                                        tax expense created by the AESO charges deferral as it is incurred. In
                                        2007 the sale of the AESO charges deferral balances resulted in a future
                                        income tax recovery as the revised tax strategy was not in place. In
                                        addition, lower current income tax recoveries in 2008 compared to 2007
                                        and higher earnings before taxes contributed to the decrease.

Current Economic Conditions
Given the current economic conditions, there could be a reduction in new customers that could result
in lower revenue growth than previously expected. The Corporation’s rate base is still expected to
increase in 2009. As previously discussed, and as noted in the Outlook section, the AUC is in the process
of reviewing the 2009 ROE calculation. The Corporation has been directed to continue to use the 2007
ROE of 8.51% as its placeholder for 2009 ROE pending the outcome of the AUC’s review. However, the
remainder of the 2009 revenue requirement has been approved by the AUC, thereby minimizing the
impact of the current economic conditions upon the Corporation in 2009. As noted in the Outlook section,
the Corporation plans to file a comprehensive application for 2010 and 2011 in the second quarter of 2009.

28 - Energy Your Way
                                                                    Management’s Discussion and Analysis
                                                                                            December 31, 2008


The Corporation’s largest operating cost is labour, benefits, and contracted manpower. Of the
Corporation’s employees, 70% are members of the United Utility Workers’ Association (“UUWA”)
and there is a collective agreement in place that does not expire until December 31, 2010.
Therefore, the majority of the employees’ salary costs are governed by this agreement and will be
included in the Corporation’s distribution tariff applications.

Given the current economic environment, there could be an increase in the interest rates on new
long-term debt issuances compared to those included in the approved rates. If the Corporation
issues new long-term debt and the interest rates are higher than what was applied for in the
distribution tariff application, the additional interest costs incurred on long-term debt will not
be recovered from customers in rates during the period that is covered by the approved rates.
However, this may be partially offset by a reduction in the rates on drawings under the syndicated
credit facility. In addition, when the Corporation files its next distribution tariff application it will
include the actual interest cost of the long-term debt in its applied for rates with the expectation
that the approved distribution rates would allow for the recovery of the actual interest costs.

Summary of Quarterly Results
The following table sets forth certain quarterly information of the Corporation:

($ thousands)                                           Revenues                   Net Income
December 31, 2008                                      77,832                     10,957
September 30, 2008                                     74,603                      17,090
June 30, 2008                                          74,773                       7,429
March 31, 2008                                         72,525                     10,617
December 31, 2007                                      68,202                      5,829
September 30, 2007                                     69,646                     14,643
June 30, 2007                                          68,703                     15,523
March 31, 2007                                         63,347                     11,897

There is no significant seasonality in the Corporation’s operations.

Changes in revenues and net income from quarter to quarter are a result of many factors including
regulatory decisions, energy deliveries, number of customer sites, growth of the distribution
system, and changes in income tax expense due to fluctuations in future income tax expenses and
recoveries due to changes in deferral account balances, availability of tax recoveries and levels of
taxable income. Events included in the results that have significantly impacted revenues and net
income are as follows:

    •	   Revenues increased for the three months ended December 31, 2008 compared to the three
         months ended September 30, 2008 by $3.2 million. Net income decreased for the three
         months ended December 31, 2008 compared to the three months ended September 30,
         2008 by $6.1 million, primarily as a result of a decrease in the income tax recovery of $5.9
         million, and an increase in operating costs of $1.7 million, interest expense of $1.4 million,
         and depreciation of $0.3 million, partially offset by an increase in revenues.
    •	   Revenues decreased for the three months ended September 30, 2008 compared to the three
         months ended June 30, 2008 by $0.2 million. Net income increased for the three months
         ended September 30, 2008 compared to the three months ended June 30, 2008 by $9.7 million,
         primarily as a result of an income tax recovery of $11.0 million, partially offset by an increase in
         depreciation of $0.8 million and interest expense of $0.3 million, and a decrease in revenue.
    •	   Revenues increased for the three months ended June 30, 2008 compared to the three
         months ended March 31, 2008 by $2.2 million. Net income decreased for the three months


                                                                   2008 | FortisAlberta Annual Report - 29
               ended June 30, 2008 compared to the three months ended March 31, 2008 by $3.2 million,
               primarily as a result of an increase in income tax expense of $4.7 million and as a result of
               an increase in depreciation expense of $0.9 million, and interest expense of $1.1 million,
               partially offset by a decrease in operating costs of $1.3 million and an increase in revenue.
    •	         Revenues increased for the three months ended March 31, 2008 compared to the three
               months ended December 31, 2007 by $4.3 million. Net income increased for the three
               months ended March 31, 2008 compared to the three months ended December 31, 2007
               by $4.8 million, primarily as a result of a decrease in income tax expense of $1.8 million,
               and as a result of an increase in revenues, which is primarily attributable to an increase in
               rates, partially offset by an increase in operating costs of $0.7 million and an increase in
               depreciation expense of $0.6 million.
    •	         Revenues decreased for the three months ended December 31, 2007 compared to the
               three months ended September 30, 2007 by $1.4 million. Net income decreased for the
               three months ended December 31, 2007 compared to the three months ended September
               30, 2007 by $8.8 million, as a result of an increase in income tax expense of $5.4 million,
               operating costs of $1.4 million, depreciation expense of $0.4 million, interest expense of
               $0.2 million and a decrease in revenues.
    •	         Revenues increased for the three months ended September 30, 2007 compared to the three
               months ended June 30, 2007 by $0.9 million. Net income decreased for the three months
               ended September 30, 2007 compared to the three months ended June 30, 2007 by $0.9
               million, as a result of an increase in operating costs of $0.4 million, depreciation expense
               of $0.4 million, interest expense of $0.3 million, and income tax expenses of $0.7 million,
               partially offset by an increase in revenues.
    •	         Revenues increased for the three months ended June 30, 2007 compared to the three
               months ended March 31, 2007 by $5.4 million. Net income increased for the three months
               ended June 30, 2007 compared to the three months ended March 31, 2007 by $3.6 million,
               primarily as a result of a decrease in income tax expense of $0.6 million, and as a result
               of an increase in revenues, which is mainly attributable to an increase in the number of
               customer sites, and an increase in rates, partially offset by an increase in operating costs of
               $1.6 million, depreciation expense of $0.6 million, and interest expense of $0.2 million.

Summary of Selected Annual Financial Information
The following table sets forth audited financial information for the three years ended December 31,
2008, 2007, and 2006 of the Corporation:

($ thousands)                                                                                     2008              2007        2006
Revenues        (a)
                                                                                              299,733            269,898     250,776
Net income (a)                                                                                 46,093              47,892     41,396
Assets   (b)
                                                                                            1,779,421           1,500,244   1,365,802
Long-term debt        (b)
                                                                                              823,770            623,909     595,976
    Notes:
    a.   See Results of Operations for commentary on revenue and net income.
    b.   See Financial Position for a discussion of significant changes in asset and long-term debt balances.




30 - Energy Your Way
                                                                        Management’s Discussion and Analysis
                                                                                                    December 31, 2008


Financial Position
The following table outlines the significant changes in the Balance Sheets as at December 31, 2008
as compared to December 31, 2007:

Item                        Increase/    Explanation
($ millions)                (Decrease)
Assets
Regulatory assets           56.1         The increase was primarily due to the 2008 AESO charges deferral
                                         of $58.6 million, partially offset by a decrease in the commodity cost
                                         deferral of $2.1 million and a net decrease of $0.4 million in other cost
                                         deferrals.
Property, plant and          191.3       The increase to property, plant and equipment was comprised of net
equipment (net of                        additions (adjusted for cost of removal and proceeds on retired assets)
accumulated depreciation                 to property, plant and equipment of $262.8 million, an increase of
and the regulatory tax basis             $11.7 million in the provision for future removal and site restoration,
adjustment)                              and allowance for funds used during construction of $0.3 million, less
                                         depreciation of $83.5 million (which includes the amount for future
                                         removal and site restoration costs recovered through depreciation and
                                         is net of regulatory tax basis adjustment amortization of $4.3 million
                                         and does not include amortization of $1.3 million related to the AESO
                                         contributions).
Other long-term assets      29.3         The increase was primarily due to $31.0 million of AESO contributions,
                                         partially offset by amortization of $1.3 million taken on the AESO
                                         contributions and a $0.4 million decrease in long-term accounts
                                         receivables resulting primarily from a reclassification of certain
                                         amounts into current receivables partially offset by an increase in stock
                                         option loans.
Liabilities
Accounts payable, accrued   (16.1)       The decrease was primarily due to a payable to the AESO for November
and other liabilities                                                                                  ,
                                         transmission costs being outstanding at December 31, 2007 whereas no
                                         payable was owed at December 31, 2008 due to the timing of payments,
                                         partially offset by an increase in construction advances resulting from
                                         increased capital spending and an increase in other accruals.
Regulatory liabilities      9.6          The increase was primarily due to an increase in the provision for
                                         future removal and site restoration of $11.7 million, partially offset by a
                                         combined change of $2.1 million in other deferral balances.
Long-term debt              199.9        The increase was primarily due to the issuance of $99.5 million (net of a
                                         discount of $0.5 million) in public debt on April 15, 2008, which was used
                                         to repay drawings under the syndicated credit facility. The remaining
                                         difference was due to an increase in drawings during the year under
                                         the syndicated credit facility in the amount of $100.9 million, partially
                                         offset by an increase in deferred financing fees of $0.5 million (net of
                                         amortization of $0.3 million).
Shareholder’s Equity
Share capital               60.0         During the 12 months ended December 31, 2008, the Corporation
                                         received $60.0 million in equity contributions from FortisAlberta Holdings
                                         Inc. (the Corporation’s parent and an indirectly wholly-owned subsidiary
                                         of Fortis). No additional shares were issued in connection with these
                                         contributions.




                                                                      2008 | FortisAlberta Annual Report - 31
Sources and Uses of Liquidity and Capital Resources
The Corporation’s primary sources of liquidity and capital resources are the following:

•	          funds	generated	from	operations;	

•	          the	issuance	and	sale	of	debt	instruments;

•	          bank	financing	and	operating	lines	of	credit;	and	

•	          equity	contributions	from	the	Corporation’s	parent.	

Statement of Cash Flows
                                  Three Months Ended December 31            12 Months Ended December 31
($ thousands)                       2008          2007    Increase/        2008         2007     Increase/
                                                         (Decrease)                             (Decrease)
Cash, beginning of period              –           69            (69)         –            –           –
Cash provided from (used in)
     Operating activities          4,485        55,068     (50,583)      46,747      177,533     (130,786)
     Investing activities        (75,083)     (71,489)      (3,594)     (287,111)   (236,733)     (50,378)
     Financing activities         70,598        16,352      54,246      240,364      59,200       181,164
Cash, end of period                    –            –             –           –            –           –

Operating Activities
For the three months ended December 31, 2008, net cash provided from operating activities was
$4.5 million, which was $50.6 million lower than the same period in 2007. Cash receipts were $7.4
million lower in 2008 than in 2007 primarily due to an increase in transmission costs, which was
partially offset by rate increases as a result of the Decision and increases in customer sites. During
2008 the Corporation did not sell any AESO charges deferral accounts, as compared to 2007 when
the Corporation sold the 2007 AESO charges deferral accounts and received cash consideration
of approximately $38.1 million. Cash payments were $3.6 million higher in 2008 compared to the
same period in 2007 due to the timing of payments to vendors and higher labour and benefit costs.
Cash interest paid was $3.2 million higher in 2008 than in 2007 due to the payment of interest
of $2.9 million on the Series 08-1 senior unsecured debentures, which were issued in April 2008,
with the remaining increase due to higher debt levels arising from increased drawings under the
syndicated credit facility. This decrease was partially offset by an increase of $1.4 million in 2008
due to changes in other accounts receivable and accounts payable balances.

For the 12 months ended December 31, 2008, net cash provided from operating activities was
$46.7 million, which was $130.8 million lower than the same period in 2007. Cash receipts were
$38.3 million lower in 2008 than in 2007 primarily due to a November 2007 AESO invoice being
paid in January 2008, while the November 2008 AESO invoice was paid in December 2008, and
an increase in transmission costs, which was partially offset by rate increases as a result of the
Decision and an increase in customer sites. During 2008 the Corporation did not sell any AESO
charges deferral accounts, as compared to 2007 when the Corporation sold the 2006 and 2007
AESO charges deferral accounts and received cash consideration of approximately $26.8 million
and $38.1 million respectively. Cash interest paid was $6.6 million higher in 2008 than in 2007
due to the payment of interest of $2.7 million and $2.9 million on the Series 07-1 and 08-1 senior
unsecured debentures, which were issued in January 2007 and April 2008 respectively, with
the remaining increase due to higher debt levels arising from increased drawings under the
syndicated credit facility. Cash payments were $4.2 million higher in 2008 compared to the same
period in 2007 due to the timing of payments to vendors and higher labour and benefit costs.
In 2008 a tax refund of $0.9 million was received while in 2007 a tax refund of $12.4 million was

32 - Energy Your Way
                                                                      Management’s Discussion and Analysis
                                                                                             December 31, 2008


received resulting in an $11.5 million difference. The remaining decrease of $5.3 million in 2008 is
due to changes in other accounts receivable and accounts payable balances.

Management believes that the Corporation will continue to be a rate regulated entity allowing
for recovery of its prudently incurred regulated costs and a reasonable return on equity. In this
environment the Corporation should be able to pay all operating costs and interest expense out of
operating cash flows, with some residual available for dividend payments to the parent company
and/or capital expenditures. If the growth the Corporation has experienced in the last two years
continues, it will require additional financing in the form of debt and equity to fund all of its capital
expenditures. In addition, management expects that the Corporation will continue to provide these
distribution services to the customers in its service territory for the foreseeable future and, as such,
when the current debt instruments mature the Corporation would be required to issue new debt to
repay the principal obligations, as there would still be a requirement for that capital to support the
assets of the Corporation. There are no required long-term debt principal repayments in 2009.

Investing Activities
Statement of financial
highlights                       Three Months Ended December 31               12 Months Ended December 31
($ thousands)                      2008        2007      Increase/           2008        2007      Increase/
                                                        (Decrease)                                (Decrease)
Capital expenditures
New customers                    38,305      37,371           934         143,496      127,521       15,975
Capital upgrades and             25,754      23,456         2,298          82,434       74,692         7,742
replacements
Facilities, vehicles and other   15,572      22,513         (6,941)        45,987       59,113       (13,126)
Information technology            4,954       5,057           (103)        24,101      19,657         4,444
Gross capital expenditures       84,585      88,397         (3,812)       296,018     280,983        15,035
Customer contributions            (9,198)     (8,799)        (399)         (42,113)    (43,466)       1,353
Net capital expenditures         75,387      79,598         (4,211)       253,905      237,517       16,388

The Corporation’s utility operations are capital intensive. For the three months ended December
31, 2008, the Corporation had gross capital expenditures of approximately $84.6 million, compared
to $88.4 million for the same period in 2007. Capital expenditures related to new customers
increased by $0.9 million compared to the same period in 2007, primarily as a result of an increase
in new irrigation customers due in part to reduced required customer contributions in 2008,
partially offset by a decrease in the residential sector. Capital expenditures related to capital
upgrades and replacements increased by $2.3 million compared to the same period in 2007,
primarily as a result of an increase in line moves and the construction of new feeders. Capital
expenditures related to facilities, vehicles, and other decreased by $6.9 million compared to the
same period in 2007, primarily as a result of the construction of the Airdrie facility in 2007 that
caused capital expenditures to be $13.1 million higher in 2007 than 2008, as well as a decrease in
the transformer inventory from 2007 to 2008. This decrease was partially offset by an increase in
automated metering technology expenditures of $9.4 million compared to the same period in 2007
due to a limited Phase 1 deployment in the first quarter of 2007, whereas Phase 2 full deployment
began in the third quarter of 2008 and should continue into 2010. Capital expenditures related to
information technology decreased by $0.1 million primarily as a result of decreased spending on
software and hardware programs, partially offset by costs incurred for the implementation of the
Uniform System of Accounts and Minimum Filing Requirements.

For the 12 months ended December 31, 2008, the Corporation had gross capital expenditures of
approximately $296.0 million, compared to $281.0 million for the same period in 2007. Capital
expenditures related to new customers increased by $16.0 million compared to the same period
in 2007. These increases for the 12 months ended December 31, 2008 were primarily an increase


                                                                     2008 | FortisAlberta Annual Report - 33
in new irrigation customers due in part to reduced required customer contributions in 2008. In
addition the Corporation experienced increased new customer activity in the residential and
commercial sectors, partially offset by a decrease in the oil and gas sector. Capital expenditures
related to capital upgrades and replacements increased by $7.7 million compared to the same
period in 2007, primarily as a result of an increase in the pole replacement program in 2008. Capital
expenditures related to facilities, vehicles and other decreased by $13.1 million compared to the
same period in 2007, primarily as a result of the construction of the Airdrie facility in 2007 that
caused capital expenditures to be $13.5 million higher in 2007 than 2008, as well as a decrease
in the transformer inventory from 2007 to 2008. This decrease was partially offset by an increase
in automated metering technology expenditures of $10.0 million compared to the same period
in 2007 due to a limited Phase 1 deployment in the first quarter of 2007, whereas Phase 2 full
deployment began in the third quarter of 2008 and should continue into 2010. Capital expenditures
related to information technology increased by $4.4 million primarily as a result of costs incurred
for the implementation of the Uniform System of Accounts and Minimum Filing Requirements.

It is expected that ongoing capital expenditures will be financed from funds generated by
operating activities, drawings on the syndicated credit facility, proceeds from new indebtedness,
and equity contributions from Fortis Alberta Holdings Inc.

Cash used in investing activities was lower than net capital expenditures for the three months
ended December 31, 2008 and higher than net capital expenditures for the 12 months ended
December 31, 2008 as illustrated by the following table:

                                                        Three Months Ended           12 Months Ended
($ thousands)                                             December 31, 2008         December 31, 2008
Net capital expenditures                                              75,387                   253,905
Changes in:
   Non-cash working capital                                            (9,073)                   (6,258)
   Other long-term assets                                               7,476                    30,662
   Costs of removal, net of salvage proceeds, from
   the sale of property, plant and equipment and the
   allowance for funds used during construction                         4,410                     9,848
   Materials and supplies                                              (3,117)                   (1,046)
Cash used in investing activities                                     75,083                    287,111

Financing Activities
For the three months ended December 31, 2008, net cash provided from financing activities was $70.6
million, compared to $16.4 million provided from financing activities during the same period in 2007   .
This increase in cash was primarily due to net debt issuances of $55.1 million in 2008 as compared
                        ,
to $20.4 million in 2007 and an increase in equity contributions received of $20.0 million for the three
                                                                           .
months ended December 31, 2008 compared to the same period in 2007 This increase was partially
offset by declared and paid dividends to Fortis Alberta Holdings Inc. for the three months ended
December 31, 2008 totalling $4.5 million compared to $4.0 million for the same period in 2007    .

For the 12 months ended December 31, 2008, net cash provided from financing activities was
$240.4 million, compared to $59.2 million provided from financing activities during the same
period in 2007. This increase was primarily due to net debt issuances of $199.1 million in 2008 as
compared to $35.5 million in 2007 and an increase in equity contributions received of $20.0 million
for the 12 months ended December 31, 2008 compared to the same period in 2007. Further, in
2008 the Corporation declared and paid dividends to Fortis Alberta Holdings Inc. for the 12 months
ended December 31, 2008 totalling $18.0 million compared to $15.5 million for the same period in
2007. The remaining difference resulted from a decrease in additions to deferred financing fees in
2008 compared to the same period in 2007.


34 - Energy Your Way
                                                                                             Management’s Discussion and Analysis
                                                                                                                             December 31, 2008


The Corporation anticipates it will be able to meet interest payments on outstanding indebtedness
from internally generated funds but expects to rely upon the proceeds of new indebtedness to
meet the principal obligations when due.

Capital Expenditures
As an electric utility, the Corporation is obligated to provide service to customers within its service
territory. The Corporation has forecast gross capital expenditures for 2009 of approximately $291.8
million whereby $109.6 million is for new customers, $76.7 million is for capital replacements and
upgrades, $94.6 million is for general (including $75.8 million for metering including automated
metering technology), and $10.9 million is for information technology. In addition, the Corporation
expects to receive forecast customer contributions of approximately $29.6 million and make
contributions of $31.1 million to AESO projects. These estimates are based upon detailed forecasts,
which are based upon numerous assumptions such as customer demand, weather, cost of labour
and material, as well as other factors that could change and cause actual results to differ from
these forecasts.

The 2009 forecast gross capital expenditures are $3.7 million below what was approved in the
Decision. Given the current economic conditions, the 2009 forecast for new customers was
reduced. This reduction was partially offset by an increase in the forecast for automated metering
and other capital programs.

Commitments
Operating Leases and Other Contractual Obligations
The Corporation has operating leases for facilities, office premises and joint use agreements for
electric system assets. Future minimum annual lease payments and debt repayments are as follows:

($ thousands)                                                     Total              2009         2010 –11           2012–13        Thereafter
Debt   (a)
                                                              837,438                7,212                 –         120,866           709,360
Joint use agreements(b)                                         61,200              3,060             6,120             6,120            45,900
Shared services agreements           (c)
                                                                  1,229               737               492                  –                    –
Office leases                                                    2,003                646               922               435                     –
Total contractual obligations                                 901,870              11,655              7,534          127,421          755,260
    Notes:
    a.   The debt balance does not include deferred financing fees of $6.5 million.
    b.       The Corporation and an Alberta transmission service provider have entered into an agreement to allow for joint attachments
             of distribution facilities to the transmission system. The expiry terms of this agreement state that the agreement remains in
             effect until the Corporation no longer has attachments to the transmission facilities. Due to the unlimited term of this contract,
             the calculation of future payments after year 2013 includes payments to the end of 20 years. However, the payments under this
             agreement may continue for an indefinite period of time.
    c.       The Corporation and an Alberta transmission service provider have entered into a number of service agreements to ensure
             operational efficiencies are maintained through coordinated operations. The service agreements have minimum expiry terms of
             five years from September 1, 2005, and are subject to extension based on mutually agreeable terms.

Pension Contribution Obligations
The Corporation is obligated to make a minimum pension contribution into a defined benefit
component of the Corporation’s pension plan for certain employees, which according to the
Actuarial Valuation for Funding Purposes as at December 31, 2007 amounts to approximately $1.6
million in both 2009 and 2010. Future actuarial valuations will establish the funding obligations for
subsequent years, which could be materially different depending upon market conditions. The next
required funding valuation is expected to be completed as at December 31, 2010.




                                                                                          2008 | FortisAlberta Annual Report - 35
Capital Management
The Corporation’s objectives when managing capital are to ensure ongoing access to capital to
allow it to build and maintain the electrical distribution system within the Corporation’s service
territory. To ensure this access to capital, the Corporation targets a long-term capital structure
that includes approximately 60% long-term debt and 40% equity. This ratio is maintained by the
Corporation through the issuance from time to time of bonds or other evidences of indebtedness,
and/or equity contributions by Fortis Alberta Holdings Inc.

In the management of capital, the Corporation includes shareholder’s equity (excluding
accumulated other comprehensive income), short-term and long-term debt, and cash and cash
equivalents in the definition of capital.

Summary of Capital Structure
                                                                              December 31, 2008                  December 31, 2007
                                                                        ($ millions)               %       ($ millions)                %
Total long-term debt(a)                                                       830.2              60.5            629.9                58.2
Shareholder’s equity                                                          541.4              39.5            453.3                41.8
Total                                                                       1,371.6            100.0           1,083.2            100.0
    Notes:
    a.   The December 31, 2008 balance does not include deferred financing fees of $6.5 million (December 31, 2007 - $5.9 million).

As at December 31, 2008, the Corporation has externally imposed capital requirements by virtue of
the trust indenture and the syndicated credit facility to which it is subject that limit the amount of
debt that can be incurred relative to equity. The Corporation is in compliance with these externally
imposed capital requirements as at December 31, 2008.
As at December 31, 2008, the Corporation’s credit ratings were as follows:

Dominion Bond Rating Service Limited (“DBRS”)                       A (low), Stable Outlook
Moody’s Investors Service (“Moody’s”)                               Baa1, Stable Outlook
Standard and Poor’s (“S&P”)                                         A-, Stable Outlook

On April 8, 2008, the Corporation entered into an agreement with a syndicate of agents pursuant to
which the Corporation agreed to sell $100.0 million of senior unsecured debentures. The debentures
bear interest at a rate of 5.85%, to be paid semi-annually, and mature on April 15, 2038. The
transaction closed on April 15, 2008, with the proceeds of the issue being used to repay existing
indebtedness incurred under the syndicated credit facility, and for general corporate purposes.

As at December 31, 2008, the Corporation’s outstanding long-term debt of $830.2 million was
made up of public debt of $400.0 million issued October 25, 2004, $100.0 million issued April 21,
2006, $109.9 million (net of discount of $0.1 million) issued January 3, 2007, and $99.5 million (net
of discount of $0.5 million) issued April 15, 2008. In addition, the Corporation had $120.9 million
outstanding under its syndicated credit facility.

The Corporation has an unsecured syndicated credit facility with an amount available of $200.0 million,
and with the consent of the lenders, the amount can be increased to $250.0 million. The maturity date
of this facility is May 2012. Drawings under the syndicated credit facility are available by way of prime
loans, banker’s acceptances and letters of credit. Prime loans issued under the syndicated credit facility
bear an interest rate of prime. Banker’s acceptances issued under the syndicated credit facility are
issued at the applicable banker’s acceptance discount rate plus a stamping fee calculated at 0.375%.
The average interest rate for the year ended December 31, 2008 on the syndicated credit facility was
3.7% (December 31, 2007 – 5.0%). As at December 31, 2008, there was $120.9 million in drawings under
the facility for banker’s acceptances (December 31, 2007 - $20.0 million), and there was $42.3 million
drawn in letters of credit (December 31, 2007 - $44.3 million).

36 - Energy Your Way
                                                                          Management’s Discussion and Analysis
                                                                                                    December 31, 2008


In December 2008, the Corporation filed a short-form base shelf prospectus (“Shelf”) with the
security commissions or similar authorities in Canada. This Shelf contemplates the issuance of up to
$350.0 million medium term note debentures, which would be direct, senior unsecured obligations of
the Corporation.

An unsecured demand facility of $10.0 million was available to the Corporation. This facility bears an
interest rate on all drawings equal to prime minus 0.5%. There were drawings on this facility as at
December 31, 2008 of $1.5 million (December 31, 2007 - $6.6 million).

Outstanding Shares
Authorized - unlimited number of:

    •	   Common shares
    •	   Class A common shares
    •	   First Preferred non-voting shares, redeemable, cumulative dividend at 10% of the
         redemption price
Issued - 63 Class A common shares, with no par value

($ thousands)                                                     December 31, 2008             December 31, 2007
Class A common shares                                                         173,848                       173,848
Contributed surplus                                                           338,731                      278,731
Total share capital                                                           512,579                      452,579


Related Party Transactions
In the normal course of business, the Corporation transacts with its parent and other related
companies under common control. The amounts included in accounts receivable and other long-
term assets and accounts payable for related parties were measured at the exchange amount and
are as follows:

Related Party ($ thousands)                                 Included in Accounts          Included in Accounts
                                                            Receivable and Other          Payable
                                                            Long–term Assets
December 31                                                        2008            2007          2008            2007
                                                                      $              $               $             $
FortisBC Inc.                                                        23             22               2             1
Fortis                                                               13              1               5            174
Fortis Turks and Caicos Inc.                                        555               –              –              –
Maritime Electric Company, Limited                                    –              5               –             –
FortisOntario Inc.                                                    –              4               –             –
Newfoundland Power Inc.                                               –              –             53              –
Housing loans to officers of the Corporation   (a)
                                                                    750            625               –              –
Stock option loans to officers of the Corporation(b)                560            200               –              –
Employee share purchase plan loans to officers                       30             20               –              –
of the Corporation(c)
Employee computer loans to officers of the Corporation(d)             1              2               –              –
Total                                                             1,932            879             60            175




                                                                       2008 | FortisAlberta Annual Report - 37
    Notes:
    a.   In June 2007, a loan of $1,223 thousand was granted to an officer of the Corporation for housing and relocation of which $623
         thousand was subsequently repaid leaving a balance of $600 thousand outstanding as at December 31, 2008. The loan is
         interest-free for a period of three years from the loan grant date after which interest will accrue at the rate of prime plus 0.5%.
         The total amount of the loan must be repaid within 10 years of the loan grant date. The loan is secured by a mortgage on the
         residence purchased by the officer. This accounts receivable is recorded within other long-term assets in the balance sheet.

         In May 2008, a loan of $810 thousand was granted to an officer of the corporation for housing and relocation of which $660
         thousand was subsequently repaid leaving a balance of $150 thousand outstanding as at December 31, 2008. The loan is
         interest-free for a period of three years from the loan grant date after which interest will accrue at the rate of prime plus 0.5%.
         The total amount of the loan must be repaid within 10 years of the loan grant date. The loan is secured by a mortgage on the
         residence purchased by the officer. This accounts receivable is recorded within other long-term assets in the balance sheet.
    b.          ,
         In 2007 a loan of $200 thousand was granted to an officer of the Corporation for purposes of exercising their Fortis stock options. The
         loan interest is equal to the amount of the dividends received on the shares. The total amount of the loan must be repaid within 10
         years of the loan grant date. The stock option loan is secured by the share certificates held by the officer, which had a fair value as at
         December 31, 2008 of $261 thousand. This accounts receivable is recorded within other long-term assets in the balance sheet.

         In 2008, loans of $360 thousand were granted to officers of the Corporation for purposes of exercising their Fortis stock options.
         The interest on the loans is equal to the amount of the dividends received on the shares. The total amount of the loans must
         be repaid within 10 years of the grant date of the loans. The stock option loans are secured by the share certificates held by the
         officers, which had a fair value as at December 31, 2008 of $411 thousand. This accounts receivable is recorded within other long-
         term assets in the balance sheet.
    c.   The amounts receivable under the employee share purchase plan are for loans to officers of the Corporation under the employee
         share purchase plan. These loans are taken on an interest-free basis and must be repaid in full within one year of the share
         purchase date.
    d.   The amounts receivable under the computer loans are for loans to officers of the Corporation under the employee personal
         computer purchase program. These loans are taken on an interest-free basis and must be repaid in full within three years of the
         loan issue date.

The Corporation bills related parties on terms and conditions consistent with billings to third parties.
These require amounts to be paid on a net 30 day basis with interest on overdue amounts charged
at a rate of 1.5% per month (19.56% per annum). Terms and conditions on amounts billed to the
Corporation by related parties are net 30 days with interest being charged on any overdue amounts.

The amounts included in other revenue and operating expenses for related parties for the 12 months
ended December 31, 2008 and 2007 were measured at the exchange amount and are as follows:

Related Party
                                                                        Included in Other Revenue Included in Operating Costs
($ thousands)                                                            December 31, December 31, December 31, December 31,
                                                                               2008         2007         2008         2007
                                                                                        $                 $                  $                  $
Caribbean Utilities Company Ltd.                                                        –                13                  –                  –
FortisBC Inc.                                                                        278               246                  31                53
Fortis                                                                                85                 23             1,524             1,148
Fortis Pacific Holdings Inc.                                                            6                10                  –                  –
Fortis Properties Inc.                                                                  3                 –                  9                  –
Fortis Turks and Caicos Inc.                                                         555                  –                  –                  –
Maritime Electric Company, Limited                                                    15                 16                  –                  –
Newfoundland Power Inc.                                                                 –                13                174                17
FortisOntario Inc.                                                                      –                 4                  –                  –
Terasen Gas Inc.                                                                        –                 –                  6                  –
Total                                                                                942               325              1,744             1,218

FortisBC Inc. is a regulated electric utility that generates, transmits and distributes electricity
in the Province of British Columbia and is indirectly wholly-owned by Fortis. FortisBC Inc.
billed the Corporation in 2008 for charges consisting of material purchases in the amount of $1
thousand recorded in property, plant and equipment, as well as for employee services. In 2008 the
Corporation provided material sales, employee services and metering services to FortisBC Inc.


38 - Energy Your Way
                                                                    Management’s Discussion and Analysis
                                                                                             December 31, 2008


Fortis is a diversified, international electricity and gas distribution utility holding company having
investments in distribution, transmission and generation utilities, real estate and hotel operations,
and is the indirect parent of the Corporation. Fortis billed the Corporation in 2008 for charges relating
to corporate governance expenses, stock-based compensation costs and employee services. The
2008 billings to Fortis were largely due to employee services and material purchases.

Fortis Pacific Holdings Inc. (“Fortis Pacific”) is an indirectly wholly-owned subsidiary of Fortis.
Fortis Pacific is the parent company of FortisBC Inc. Fortis Pacific received metering services from
the Corporation in 2008.

Fortis Properties Inc. is a wholly-owned subsidiary of Fortis. Fortis Properties Inc. is a
diversified company with holdings in commercial real estate, hotels and hydroelectric generation.
Fortis Properties Inc. billed the Corporation for employee services in 2008. Fortis Properties Inc.
received employee services from the Corporation in 2008.

Fortis Turks and Caicos Inc. is an indirectly wholly-owned subsidiary of Fortis. Fortis Turks
and Caicos Inc. owns and operates a fully integrated system providing for the generation and
distribution of energy on the Turks and Caicos Islands. Fortis Turks and Caicos Inc. received
employee services from the Corporation in 2008.

Maritime Electric Company, Limited (“Maritime Electric”) common shares are owned by
Fortis Properties Corporation, which is a holding company of Fortis. Maritime Electric is a principal
distributor of electricity in the Province of Prince Edward Island. Maritime Electric received
metering services from the Corporation in 2008.

Newfoundland Power Inc. is an electric utility that is a wholly-owned subsidiary of Fortis and
owns and operates an integrated generation, transmission and distribution system throughout the
island portion of the Province of Newfoundland and Labrador. Newfoundland Power Inc. billed the
Corporation for employee services in 2008.

Terasen Gas Inc. delivers natural gas and piped propane to homes and businesses throughout
the Province of British Columbia and is a wholly-owned subsidiary of Fortis. Terasen Gas Inc. billed
the Corporation for employee services in 2008.

All services provided to or received from related parties were billed on a cost recovery basis.

Financial Instruments
Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3855, Financial Instruments
– Recognition and Measurement, requires an entity to designate its financial instruments into one of
the following five categories: 1) loans and receivables, 2) assets held-to-maturity, 3) assets available-
for-sale, 4) other financial liabilities, and 5) held-for-trading assets and liabilities. The Corporation did
not designate any of its financial assets as either held-to-maturity or available-for-sale.




                                                                   2008 | FortisAlberta Annual Report - 39
The Corporation has elected to designate its financial instruments as follows:

($ thousands)                                                                December 31, 2008                   December 31, 2007
                                                                         Carrying       Estimated            Carrying       Estimated
                                                                           Value        Fair Value             Value        Fair Value
Loans and receivables
 Accounts receivable(a),(b)                                                 71,833            71,833           70,362            70,362
  Long-term receivables    (a),(c)
                                                                             2,904             2,904             3,324            3,324
Other financial liabilities
 Accounts payable and accrued liabilities(a),(d)                           128,627          128,627           144,935          144,935
  Short-term debt(a)                                                          7,212            7,212             8,386            8,386
Long-term debt   (e)
                                                                          830,226           768,635           629,842          668,520
    Notes:
    a.   Due to the nature and/or short maturity of these financial instruments, carrying value approximated fair value.
    b.   Included within Accounts Receivable and other assets in the Balance Sheet.
    c.   Included within Other Long-term assets in the Balance Sheet.
    d.   Included within Accounts Payable, accrued and other liabilities in the Balance Sheet.
    e.   The December 31, 2008 balance does not include deferred financing fees of $6.5 million (December 31, 2007 - $5.9 million).

The fair value of the long-term debt is estimated based on the quoted market prices for the same
or similarly rated issues for debt of the same remaining maturities.

Derivatives
The Corporation currently does not have any stand alone derivative instruments as defined under Section
3855. The Corporation also conducted a review of contractual agreements for embedded derivatives.

Under Section 3855, a derivative must meet three specific criteria to be accounted for under the
Section. For contracts entered into by the Corporation, all potential embedded derivatives reviewed
by the Corporation were closely related with the economic characteristics and risks of the underlying
contract, had no notional amount that could be used to measure the instrument or had no value.

Counterparty Credit Risk
The Corporation defines counterparty credit risk as the financial risk associated with the non-
performance of contractual obligations by counterparties. The Corporation extends credit to select
counterparties in its role as an electrical system distribution provider.

The Corporation monitors its credit exposure in accordance with the Terms and Conditions of
Distribution Access Service as approved by the AUC. The following table provides information
on the counterparties that the Corporation extends credit to with respect to its distribution tariff
billings as at December 31, 2008.

Credit Rating                        Number of Counterparties                     Gross Exposure                            Exposure
                                                                                   ($ thousands)                       ($ thousands)
AAA to AA (low)                                                  1                             1,528                                  –
A (high) to A (low)                                              7                             3,124                                  –
BBB (high) to BBB (low)                                          8                             8,213                                  –
Not rated                                                       40                            73,711                              3,365
Total                                                           56                            86,576                              3,365

Gross exposure represents the projected value of retailer billings over a 60-day period. As outlined in
the Terms and Conditions of Distribution Access Service, the Corporation is required to minimize its
gross exposure to retailer billings by obtaining an acceptable form of prudential. These acceptable
forms of prudential include a cash deposit, bond, letter of credit, an investment grade credit rating from
a major rating agency, or a financial guarantee from an entity with an investment grade credit rating.

40 - Energy Your Way
                                                                      Management’s Discussion and Analysis
                                                                                             December 31, 2008


Retailers with investment grade credit ratings have the exposure shown as nil since the
rating serves to reduce the amount of prudential required under the Terms and Conditions of
Distribution Access Service. For retailers that do not have an investment grade credit rating, the
exposure is calculated as the projected value of billings over a 60-day period less the prudential
held by the Corporation.

The recent volatility in the global capital markets and a slow down in the Alberta economy could
cause the credit quality of some of the Corporation’s customers to decrease. In the event that the
prudential obtained by the Corporation under the Terms and Conditions of Distribution Access
Service is not sufficient to cover a loss due to non-payment from the Corporation’s counterparties,
the Corporation would review all other options available to collect the non-payment. However,
these options would not ensure that a loss could be avoided by the Corporation.

Interest Rate Risk
The Corporation defines interest rate risk as the financial risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes in market interest rates. The
Corporation’s debentures bear fixed interest rates, thereby minimizing cash flow variability due
to interest rate exposures. The fair value of the fixed rate debentures fluctuates as market interest
rates change. However, the Corporation plans to hold these debentures until maturity and applies
in its rate applications to recover the actual interest rates on the debentures, thereby mitigating
the risk of these fluctuations. The drawings under the Corporation’s syndicated credit facility are at
current market short-term interest rates, thereby minimizing any fluctuations in fair value.

A change in the Corporation’s interest rates results in interest rate exposure for drawings under
the syndicated credit facility. The Corporation has determined that a change in interest rates of
100 basis points represents a reasonably possible financial risk, and has prepared the following
sensitivity analysis to represent the impacts of a change on net income for the three and 12
months ended December 31, 2008:

($ thousands)                                              Three Months Ended             12 Months Ended
                                                            December 31, 2008            December 31, 2008
                                                          100 basis      100 basis    100 basis    100 basis
                                                              point           point       point         point
                                                          decrease        increase    decrease      increase
Increase (decrease) in net income                              257           (257)         616          (616)

Further, changes to the credit rating of the Corporation also represent a financial risk. The
Corporation has debt facilities, which have interest rate and fee components that are sensitive to
the credit rating of the Corporation. The Corporation is rated by Moody’s, DBRS and S&P and a
change in rating by any of these rating agencies could potentially increase or decrease the interest
expense of the Corporation.

As at December 31, 2008, the Corporation was rated by Moody’s at Baa1, by DBRS at A (low) and
by S&P at A-. A downward one notch change in the rating by any of DBRS, Moody’s or S&P on
January 1, 2008 could potentially have increased interest expense under these debt facilities by
approximately $34 thousand for the three months ended December 31, 2008, and $98 thousand for
the year ended December 31, 2008.

Liquidity Risk
The Corporation defines liquidity risk as the financial risk that the Corporation will encounter
challenges in meeting obligations associated with financial liabilities. The Corporation anticipates it will
be able to meet interest payments on outstanding indebtedness from internally generated funds but
expects to rely upon the proceeds of new indebtedness to meet the principal obligations when due.




                                                                  2008 | FortisAlberta Annual Report - 41
The recent volatility experienced in the global capital markets may increase the cost of issuance of
long-term capital by the Corporation. Capital market volatility may also impact the Corporation’s future
funding obligations and/or pension expense associated with its defined benefit pension plan. There are
a number of risks associated with the Corporation’s defined benefit pension plan including: 1) there is
no assurance that the Corporation’s defined benefit pension plan will earn the assumed rate of return,
2) market driven changes may result in changes in the discount rates and other variables, which would
result in the Corporation being required to make contributions in the future that differ significantly
from the estimates, and 3) there is measurement uncertainty incorporated into the actuarial valuation
process. These risks are expected to be mitigated as the Corporation makes application in rates to
collect from customers the actual cash payments into the Corporation’s defined benefit pension plan
and defined contribution pension plans. Therefore, an increase or decrease in the Corporation’s future
funding obligations and/or pension expense associated with either plan is expected to be collected or
refunded in future rates, subject to forecast risk.

The Corporation’s outstanding financial liabilities, as at December 31, 2008, include short-term
debt, accounts payable and accrued liabilities, and long-term debt. The Corporation expects to
settle its financial liabilities relating to short-term debt and accounts payable and accrued liabilities
in accordance with their contractual terms of repayment, which are generally within one year. The
following table summarizes the number of years to maturity of the principal outstanding and interest
payments on the Corporation’s long-term debt, which is composed of drawings on the unsecured
credit facility and senior unsecured debentures, as at December 31, 2008:

($ thousands)                                                              1–5 years       6–10 years          >10 years              Total
Drawings on the unsecured credit facility(a)                                 121,000                   –                 –         121,000
Senior unsecured debentures(b)
- Principal payments                                                                 –         200,000           510,000           710,000
- Interest payments                                                          199,195           156,555           564,051           919,801
Total                                                                        320,195           356,555         1,074,051         1,750,801
    Notes:
    a.   The Corporation’s syndicated credit facility has a maturity date of May 2012. The drawings under the syndicated credit facility as at
         December 31, 2008 are banker’s acceptances, which have their own contractual maturity dates. The amounts shown above reflect
         the principal and interest due when the current banker’s acceptances mature. This balance will fluctuate between December 31,
         2008 and the maturity date of the syndicated credit facility.
    b.   The December 31, 2008 balance does not include deferred financing fees of $6.5 million (December 31, 2007 – $5.9 million).


Significant Accounting Estimates
Certain estimates are necessary since the regulatory environment in which the Corporation
operates often requires amounts to be recorded at estimated values until finalization and
adjustments, if any, are determined pursuant to subsequent regulatory decisions or other
regulatory proceedings. Due to the inherent uncertainty in making such estimates, actual results
reported in future periods could differ materially from those estimated.

General Litigation
The Corporation is subject to various legal proceedings and claims that arise in the ordinary
course of business operations. The Corporation periodically reviews these claims to determine if
amounts should be accrued in the financial statements or if specific note disclosure is warranted.

Depreciation
Depreciation is an estimate based primarily on the service life of assets. The Corporation records
depreciation expense based on the depreciation rates approved by the AUC. These rates are
updated based on depreciation studies that are filed by the Corporation and are subject to change.




42 - Energy Your Way
                                                                         Management’s Discussion and Analysis
                                                                                                December 31, 2008


Employee Future Benefits
The Corporation’s defined benefit pension plan expense and other post-retirement benefit
expense are subject to judgments utilized in the actuarial determination of the expense. The
main assumptions utilized by management in determining this expense were the discount rate
for the accrued benefit obligation and the expected long-term rate of return on plan assets.
Other assumptions applied were average rate of compensation increase, average remaining
service life of the active employee group and employee and retiree mortality rates. The defined
benefit pension plan and other post-retirement plan assumptions are assessed and concluded in
consultation with the Corporation’s external actuarial advisor.

Discount rates, which are used to determine the accrued benefit obligation, reflect market interest
rates on high quality bonds with cash flows that match the timing and amount of expected pension
benefit payments. This methodology is consistent with that used to determine the discount rate in
the previous year. The increase in discount rates reflects the increased credit spreads and cost of
capital on investment grade corporate bonds.

As in previous years, our actuary provides the Company with a range of expected long-term
pension asset returns based on their internal modelling. The expected long-term return on pension
plan assets of 7% falls within the conservative to normal range as indicated by the actuary.

($ thousands)                                              Net Benefit       Accrued     Accrued       Accrued
                                                             Expense          Benefit     Benefit       Benefit
                                                                               Asset     Liability   Obligation
Impact of increasing rate of return on assets assumption         (204)           204            –            –
by 100 basis points
Impact of decreasing the rate of return on assets                 204           (204)           –            –
assumption by 100 basis points
Impact of increasing the discount rate assumption used           (588)           552          (36)       (2,977)
during 2008 by 100 basis points
Impact of decreasing the discount rate assumption used            530           (492)         38         3,576
during 2008 by 100 basis points

As described in Note 11b) of the Corporation’s audited financial statements for the 12 months
ended December 31, 2008, the Corporation recovered in rates other post-retirement benefits,
supplemental pension plan costs, defined benefit and defined contribution costs based on
the estimated cash payments included in the Decision. Any difference between the expense
recognized under GAAP for pension and other post-retirement plans and that recovered in
current rates, which is expected to be recovered or refunded in future rates, is subject to
deferral treatment.

Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net identifiable
assets of operations acquired. Goodwill is carried at initial cost less any previous amortization and
write-down for impairment. If the carrying value of the reporting unit exceeds its fair value, an
impairment loss is recognized to the extent that the carrying amount of the goodwill exceeds its
fair market value. During each fiscal year and as economic events dictate, management reviews
the valuation of the goodwill, taking into consideration any events or circumstances which might
have impaired the fair value.

Revenue Recognition
Revenues are recognized as earned, at AUC-approved rates where applicable, including amounts
recognized on an accrual basis for services rendered but not yet billed. The unbilled revenue
accrual at the end of each period is based on the difference between the forecast revenue and
the actual amounts billed. The development of the revenue forecast requires estimates of energy
deliveries, customer growth, economic activity and weather conditions.

                                                                        2008 | FortisAlberta Annual Report - 43
Expense Accruals
Costs and liabilities are recognized as incurred including amounts recognized on an accrual basis for
expenses or liabilities incurred but not yet invoiced. These accruals are made based upon estimates
of the value of services rendered or goods received that are not yet invoiced or for liabilities incurred.

Regulation
All amounts deferred as regulatory assets and liabilities are subject to AUC approval. As such,
the AUC could alter the amounts subject to deferral at which time the change would be reflected
in the financial statements. Based on previous, existing or expected regulatory decisions, the
Corporation records the amount expected to be recovered or refunded.

Changes in Accounting Policies and Presentation
As at January 1, 2008, the Corporation adopted CICA Handbook Section 3031, Inventories and
restated prior period comparative amounts in accordance with the transitional provisions.

As a result of adopting Section 3031, the Corporation reclassified all of its materials and supplies
balance at December 31, 2008 of $24.2 million (December 31, 2007 – $25.2 million) as property,
plant and equipment.

Future Changes in Accounting Policies
Rate-regulated Operations Project
In March 2002, the Accounting Standards Board (the “AcSB”) approved a project examining
the need to modify existing Canadian accounting standards to deal specifically with the unique
characteristics of rate-regulated operations, specifically under what circumstances rate regulation
may create assets and liabilities meeting the asset and liability definitions of the CICA Handbook
and how these items should be measured. In August 2007, the AcSB considered the comments
                                                                           ”
received on its March 2007 Exposure Draft, “Rate-Regulated Operations, and decided to:

    •	   remove the temporary exemption in CICA Handbook Section 1100, Generally Accepted
         Accounting Principles, pertaining to the application of that Section to the recognition and
         measurement	of	assets	and	liabilities	arising	from	rate	regulation;
    •	   amend CICA Handbook Section 3465, Income Taxes, to require the recognition of future
         income tax liabilities and assets as well as a separate regulatory asset or liability for the
         amount of future income taxes expected to be included in future rates and recovered from
         or	paid	to	future	customers;	and
    •	   make these changes applicable prospectively to fiscal years beginning on or after January 1, 2009.
The AcSB also decided not to withdraw:
    •	   the existing guidance relating specifically to rate-regulated operations in CICA Handbook
         Section 1600, Consolidated Financial Statements, CICA Handbook Section 3061, Property,
         Plant and Equipment, and CICA Handbook Section 3475, Disposal of Long-Lived Assets and
         Discontinued Operations;	and
    •	   CICA Handbook AcG-19, Disclosures by Entities Subject to Rate Regulation, but to make
         consequential amendments to the Guideline as a result of the above changes.
The AcSB also noted that:
    •	   respondents appeared focused on the current uncertainty about whether the accounting
         prescribed by FASB Statement of Financial Accounting Standards No. 71, Accounting
         for the Effects of Certain Types of Regulation (“FAS 71”), and Handbook Sections with
         recognition and measurement guidance relating specifically to rate-regulated operations, is
         compatible with International Financial Reporting Standards (“IFRSs”), and therefore, what
         will	transpire	upon	changeover	to	IFRSs;	and

44 - Energy Your Way
                                                                Management’s Discussion and Analysis
                                                                                       December 31, 2008


   •	   it has brought this issue to the attention of other national standard setters and the
        International Accounting Standards Board, and continues to follow up on it.
The AcSB decided that the final Background Information and Basis for Conclusions for this project
would not express any views of the AcSB regarding this issue or the status of FAS 71 as an “other
source of GAAP” within the Canadian GAAP hierarchy.

Effective January 1, 2009, with the removal of the temporary exemption in Section 1100, the
Corporation must now apply Section 1100 to the recognition of assets and liabilities arising
from rate regulation. Certain assets and liabilities arising from rate regulation continue to
have specific guidance under a primary source of GAAP that applies only to the particular
circumstances described therein, including those arising under Sections 1600, 3061, 3465, and
3475. All assets and liabilities arising from rate regulation, as described in Notes 6 a) and b) of
the Corporation’s audited financial statements for the 12 months ended December 31, 2008, do
not have specific guidance under a primary source of GAAP. Therefore, Section 1100 directs the
Corporation to adopt accounting policies that are developed through the exercise of professional
judgment and the application of concepts described in Section 1000, Financial Statement
Concepts. In developing these accounting policies the Corporation may consult other sources
including pronouncements issued by bodies authorized to issue accounting standards in other
jurisdictions. Therefore, in accordance with Section 1100, the Corporation has determined that
these assets and liabilities qualify for recognition under GAAP and this recognition is consistent
with FAS 71. Therefore, there would be no effect on the Corporation’s financial statements, with
the exception of the impact of the amendment to Section 3465, if it had adopted the removal of
the temporary exemption in Section 1100, for the year ended December 31, 2008.

Effective January 1, 2009, the impact on the Corporation of the amendment to Section 3465 will
be the recognition of future income tax assets and liabilities and related regulatory liabilities
and assets for the amount of future income taxes expected to be refunded to or recovered from
customers in future electricity rates. Currently, the Corporation uses the taxes payable method of
accounting for income taxes on regulated earnings where the future income taxes are expected
to be collected in future rates. The effect on the Corporation’s financial statements, if it had
adopted amended Section 3465, as at December 31, 2008, would have been an increase in future
tax assets of $24.2 million, and a corresponding increase in regulatory liabilities of $24.2 million.
Included in the amounts are the future income tax effects of the subsequent settlement of the
related regulatory assets and liabilities through customer rates.

The Corporation is continuing to assess and monitor any additional implications on its
financial statements related to accounting for rate-regulated operations, including the impacts,
if any, on accounting for the costs and revenues associated with the provision for future
removal and site restoration costs.

Goodwill and Intangible Assets
In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets. This Section,
which replaces CICA Handbook Section 3062, Goodwill and Other Intangible Assets, and CICA
Handbook Section 3450, Research and Development Costs, establishes standards for the
recognition, measurement and disclosure of goodwill and intangible assets.

This Section applies to interim and annual financial statements relating to fiscal years beginning
on or after October 1, 2008. Earlier adoption is encouraged.

Effective January 1, 2009, the impact on the Corporation of the adoption of Section 3064 will be
a reclassification of land rights and computer software from property, plant and equipment to
intangible assets. The effect on the Corporation’s financial statements, if it had adopted Section
3064, as at December 31, 2008, would have been an increase in intangible assets and a reduction
in property, plant and equipment for the reclassification of the net book values of land rights and
computer software of $5.9 million and $56.3 million respectively.


                                                              2008 | FortisAlberta Annual Report - 45
The Corporation is continuing to assess and monitor any additional implications on its financial
statements related to accounting for goodwill and intangible assets.

Transition to IFRSs in Canada
In February 2008, the AcSB confirmed that the use of IFRS will be required in 2011 for publicly
accountable enterprises in Canada. In April 2008, the AcSB issued an IFRS Omnibus Exposure
Draft proposing that publicly accountable enterprises be required to apply IFRS, in full and without
modification, on January 1, 2011.

On June 27, 2008 the Canadian Securities Administrators (“CSA”) issued Staff Notice 52-321,
Early Adoption of IFRS, which indicated that the CSA would be prepared to grant an exemption
to allow Canadian financial statement issuers to adopt IFRS early on a case-by-case basis,
provided that they could demonstrate that they met certain conditions. The Corporation is not
planning to adopt IFRS early.

The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of amounts
reported by the Corporation for its year ended December 31, 2010, and of the opening balance sheet as
at January 1, 2010. The AcSB proposes that CICA Handbook Section - Accounting Changes, paragraph
1506.30, which would require an entity to disclose information relating to a new primary source of GAAP
that has been issued but is not yet effective and that the entity has not applied, not be applied with
respect to the IFRS Omnibus Exposure Draft.

The Corporation is continuing to assess the financial reporting impacts of the adoption of IFRS and, at
this time, the impact on future financial position and results of operations is not reasonably determinable
or estimable. The Corporation does anticipate a significant increase in disclosure resulting from the
adoption of IFRS and is continuing to assess the level of disclosure required as well as systems changes
that may be necessary to gather and process the required information.

The Corporation commenced its IFRS conversion project in 2007 and in conjunction with Fortis
has established a formal project governance structure which includes the audit committees, senior
management and project teams from each of the Fortis subsidiaries. Overall project governance,
management and support is coordinated by Fortis. Regular reporting will occur to the Audit Committee of
the Board of Directors of Fortis and of the subsidiaries where appropriate. An external advisor has been
engaged to assist in the IFRS conversion project.

The Corporation’s IFRS conversion project consists of three phases: Scoping and Diagnostics, Analysis
and Development, and Implementation and Review.

Phase One: Scoping and Diagnostics, which involved project planning and staffing and identification
of differences between current Canadian GAAP and IFRS, has been completed. The resulting identified
areas of accounting difference of highest potential impact to the Corporation, based on existing IFRS, are
rate-regulated accounting, property plant and equipment, provisions and contingent liabilities, employee
benefits, impairment of assets, income taxes, business combinations, and initial adoption of IFRS under
the provisions of IFRS 1 First-Time Adoption of IFRS.

Phase Two: Analysis and Development is nearing completion, and involves detailed
diagnostics and evaluation of the financial impacts of various options and alternative
methodologies	provided	for	under	IFRS;	identification	and	design	of	operational	and	financial	
business	processes;	initial	staff	and	audit	committee	training;	analysis	of	IFRS	1	optional	
exemptions and mandatory exceptions to the general requirement for full retrospective application
upon	transition	to	IFRS;	summarization	of	2011	IFRS	disclosure	requirements;	and	development	of	
required solutions to address identified issues.

It is anticipated that the adoption of IFRS will have an impact on information systems
requirements. The Corporation is assessing the need for system upgrades or modifications
to ensure an efficient conversion to IFRS. As part of Phase Two, information systems plans are


46 - Energy Your Way
                                                                    Management’s Discussion and Analysis
                                                                                             December 31, 2008


being prepared for implementation in Phase Three. The extent of the impact on the Corporation’s
information systems is not reasonably determinable at this time.

The	Corporation	has	completed	a	preliminary	assessment	of	the	impacts	of	adopting	IFRS;	however,	
a final assessment cannot be completed at this time pending the outcome of the project on rate-
regulated activities that was recently added to the International Accounting Standards Board’s
(“IASB’s”) technical agenda.

In May 2008 the AUC solicited input on the process to examine issues surrounding the decision by the
AcSB that would require all Canadian reporting entities, including the utilities that the AUC regulates, to
adopt and apply IFRS after January 1, 2011. In September 2008 the Corporation participated in the first
collaborative process meeting held by the AUC to review the issues created by the adoption of IFRS.
Subsequent to this meeting the AUC requested, from the utilities it regulates, the priority areas that the
AUC should address where IFRS treatment of revenues and expenses differs from that currently utilized
for rate setting purposes. The Corporation has responded to that request and has attended meetings held
by the AUC throughout the fourth quarter of 2008 to assist in the development of both a set of guiding
principles and draft positions on the elements of IFRS that will be adopted for rate-making purposes. It is
expected that the AUC will issue a final determination on this in the first quarter of 2009.

Phase Three: Implementation and Review, expected to commence mid-year 2009, will involve the
execution	of	changes	to	information	systems	and	business	processes;	completion	of	formal	authorization	
processes	to	approve	recommended	accounting	policy	changes;	and	further	training	programs	across	the	
Corporation’s finance and other affected areas, as necessary. It will culminate in the collection of financial
information	necessary	to	compile	IFRS-compliant	financial	statements	and	reconciliations;	embedding	of	
IFRS	in	business	processes;	and,	audit	committee	approval	of	IFRS	compliant	financial	statements.

The Corporation will continue to review all proposed and continuing projects of the IASB, particularly the
project on rate-regulated activities that was recently added to the IASB’s technical agenda, and proposed
amendments to IFRS 1 for entities with operations subject to rate regulation, and will participate in any
related processes as appropriate.

Business Risk
Legal Proceedings
The Corporation is subject to various legal proceedings and claims that arise in the ordinary course of
business operations. The Corporation believes that the amount of liability, if any, from these actions
would not have a material effect on the Corporation’s financial position or results of operations.

A Statement of Claim was filed on December 18, 2007 in which the Plaintiff, a minor, claims damages
in excess of $4.5 million against the numerous defendants, including the Corporation. The Plaintiff’s
claim arises from personal injuries he suffered in August, 2006 as a result of a motorcycle accident.
The Plaintiff alleges that the defendants or any of them, including the Corporation, negligently erected
or failed to remove a wire that was strung between a sign and a power pole of the Corporation. While
riding his motorcycle, the Plaintiff is alleged to have struck the wire causing his injuries. On August 27  ,
2008 the parents of the Plaintiff issued a Statement of Claim in the Court of Queen’s Bench of Alberta,
Judicial District of Edmonton claiming that they suffered damages arising from the mental distress
they are alleged to have suffered as a result of witnessing the aftermath of their son’s injuries. The
combined value of the damages claimed in the action by the two parents is approximately $350,000.
The Corporation’s insurer has agreed to extend coverage for the Plaintiff’s claim as well as the claim of
his parents. Based on a preliminary investigation of the claims, management believes that the accident
was not caused by the Corporation’s facilities and that the Corporation has no liability for either the
Plaintiff’s claim or that of his parents. However, it is too early in the proceedings to provide a definitive
assessment of the Corporation’s exposure.




                                                                   2008 | FortisAlberta Annual Report - 47
Pursuant to a settlement agreement between the Corporation and Her Majesty the Queen in Right of
Alberta (the “Crown”), a Discontinuance of Action was filed on September 10, 2008 in the Court of
Queen’s Bench of Alberta in the Judicial District of Edmonton in relation to a March 24, 2006 Statement
of Claim wherein the Crown claimed that the Corporation was responsible for a fire that occurred in
October of 2003 in an area of the Province of Alberta commonly referred to as “Poll Haven Community
        .
Pasture” Payment of the settlement funds was covered by the terms of an insurance contract between
the Corporation and its insurer. All other aspects of the settlement are confidential.

Regulatory Approval and Rate Orders
The regulated operations of the Corporation are subject to the normal uncertainties faced by
regulated companies. These uncertainties include approval by the AUC of customer rates that
permit a reasonable opportunity to recover on a timely basis the estimated costs of providing
services, including a fair return on rate base. The ability of the Corporation to recover the actual
costs of providing services and to earn the approved rates of return depends on achieving the
forecasts established in the rate-setting process. The cost of upgrades to existing facilities and the
addition of new facilities require the approval of the AUC for inclusion in rate base. There is no
assurance that capital projects perceived as required by the management of the Corporation will
be approved or that conditions to such approval will not be imposed. Capital cost overruns might
not be recoverable in rates.

Rate applications that establish revenue requirements may be subject to negotiated settlement
procedures in Alberta. Failing a negotiated settlement, rate applications may be pursued through
public hearing processes. There can be no assurance that the rate orders issued or negotiated
settlements approved by the AUC will permit the Corporation to recover all costs actually incurred
and to earn the expected rate of return. A failure to obtain acceptable rate orders may adversely
affect the business carried on by the Corporation, the undertaking or timing of proposed expansion
projects, the issue and sale of securities, ratings assigned by rating agencies and other matters
which may, in turn, negatively impact the Corporation’s results of operations or financial position.
In addition, there is no assurance that the Corporation will receive regulatory decisions in a timely
manner and therefore may incur costs prior to having an approved revenue requirement.

If the Corporation’s actual costs exceed allowed costs and such excess costs are not
recoverable through the rate-setting process, the Corporation’s financial performance
could be adversely affected. Actual costs could exceed allowed costs if, for example, the
Corporation incurs operational, maintenance or administrative costs above those included in
the Corporation’s approved revenue requirement, higher expenses due to capital expenditures
being at levels above those provided for in the rate orders, additional financing charges
because of increased debt balances, or interest rates being higher than those included in the
approved revenue requirement.

The restructuring of the power industry in Alberta continues to create uncertainty for the
Corporation and its business. While restructuring of the power industry in Alberta officially
commenced on January 1, 1996, the underlying legislation and regulations pursuant to which
such restructuring was implemented continue to evolve. Changes in such legislation may have
a retroactive effect. The extent to which the Government of Alberta may participate in, and make
adjustments to, the market cannot be foreseen. The regulations and market rules that govern the
competitive wholesale and retail electricity markets in Alberta continue to evolve and there may be
significant changes in these regulations and market rules that could adversely affect the ability of
the Corporation to recover its costs or to earn a reasonable return on its capital.

As an owner of an electricity distribution network under the EUA, the Corporation is required
to act, or to authorize a substitute party to act, as a provider of electricity services, including
the sale of electricity, to eligible customers under a regulated rate and to appoint a retailer as
default supplier to provide electricity services to customers otherwise unable to obtain electricity
services. In order to remain solely a distribution utility, the Corporation appointed EPCOR Energy


48 - Energy Your Way
                                                                Management’s Discussion and Analysis
                                                                                      December 31, 2008


Services (Alberta) Inc. (“EPCOR”) as its regulated rate provider. As a result of this appointment,
EPCOR assumed all of the Corporation’s rights and obligations in respect of these services. In the
unlikely event that EPCOR is unable or unwilling to act as regulated rate provider or as default
supplier, and no other party is willing to act as regulated rate provider or as default supplier, the
Corporation would be required under the EUA to act as a provider of electricity services to eligible
customers under a regulated rate or to provide electricity services to customers otherwise unable
to obtain electricity services. If the Corporation could not secure outsourcing for these functions,
the Corporation would need to administer these retail responsibilities by adding necessary staff,
facilities and/or equipment.

Loss of Service Areas
The Corporation serves customers that reside within various municipalities throughout its service
areas. From time to time, municipal governments in Alberta give consideration to municipalities
creating their own electric distribution utility by purchasing the assets of the Corporation that are
located within their municipal boundaries. Upon the termination of its franchise agreement, a
municipality has the right, subject to AUC approval, to purchase the Corporation’s assets within
its municipal boundaries pursuant to the Municipal Government Act with the price therefore to be
agreed or failing an agreement, set by the AUC.

Additionally, under the Hydro and Electric Energy Act, if a municipality that owns an electric
distribution system expands its boundaries the municipality can acquire the Corporation’s assets in
the annexed area. In such circumstances, the Hydro and Electric Energy Act provides that the AUC
may determine that the municipality should pay compensation to the Corporation for any facilities
transferred on the basis of “reproduction cost new less depreciation” .

The consequence to the Corporation of a municipality purchasing its distribution assets would be
an erosion of its rate base. This would reduce the capital upon which the Corporation could earn a
regulated return. There are currently no transactions ongoing with municipalities pursuant to the
Municipal Government Act that relate to the Corporation. However, upon expiration of franchise
agreements, there is a risk that municipalities will opt to purchase the distribution assets existing
within the boundaries of the municipality, the loss of which could have a material adverse effect on
the financial position or results of operations of the Corporation. With respect to transactions under
the Hydro and Electric Energy Act, given the historical growth of Alberta and its municipalities, the
Corporation is affected by transactions of this type from time to time.

Environmental Matters
The Corporation is subject to numerous laws, regulations and guidelines governing the
generation, management, storage, transportation, recycling and disposal of hazardous substances
and other waste materials and otherwise relating to the protection of the environment. The
costs arising from compliance with such laws, regulations and guidelines may be material to
the Corporation. The process of obtaining environmental regulatory approvals can be lengthy,
contentious and expensive. Environmental damages and other costs could potentially arise due to
a variety of events, including severe weather impacts to the Corporation’s facilities, human error
or misconduct, or equipment failure. However, there can be no assurance that such costs will be
recoverable through rates and, if substantial, unrecovered costs may have a material effect on the
business, results of operations, financial condition and prospects of the Corporation.

The Corporation is exposed to environmental risks as a property owner in Alberta. These risks
include the responsibility of any property owner for the remediation of contaminated properties,
whether or not such contamination was actually caused by the owner. In addition, environmental
laws make owners, operators and persons in management and control of facilities and substances
subject to prosecution or administrative action for breaches of environmental laws including the
failure to obtain regulatory approvals. The Corporation has not been notified of any such regulatory
action in regard to the occupation of its properties or the management and control of its facilities
and substances.


                                                              2008 | FortisAlberta Annual Report - 49
These same laws governing lands owned by the Corporation apply to lands utilized by the
Corporation through dispositions for its facilities or in the course of its business. Contamination
of such property typically occurs through the accidental release of transformer oils either through
human error or equipment failure. Environmental laws make owners, operators and persons in
management and control of facilities and substances subject to prosecution or administrative
action for breaches of environmental laws. Changes in environmental laws governing
contamination could also lead to significant increases in costs to the Corporation.

The trend in environmental regulation has been to impose more restrictions and limitations
on activities that may impact the environment, including the generation and disposal of
wastes, the use and handling of chemical substances, and the requirement for environmental
impact assessments and remediation work. It is possible that other developments may lead
to increasingly strict environmental laws and enforcement policies and claims for damages to
property or persons resulting from the Corporation’s operations, any one of which could result in
substantial costs or liabilities to the Corporation.

Scientists and public health experts in Canada, the United States and other countries are
studying the possibility that exposure to electric and magnetic fields from power lines, household
appliances and other electricity sources may cause health problems. If it were to be concluded that
electric and magnetic fields present a health hazard, litigation could result and the Corporation
could be required to pay damages and take mitigation measures on its facilities. The costs of
litigation, damages awarded and mitigation measures could have a material adverse effect on the
Corporation’s business, results of operations, financial condition and prospects.

Electricity distribution facilities have the potential to cause fires mainly as a result of equipment
failure, falling trees and lightning strikes to distribution lines or equipment and other causes.
Risks associated with fire damage are related to the extent of forestation and grassland cover,
habitation, and third-party facilities located on or near the land on which the facilities are situated.
The Corporation may be liable for fire suppression costs, regeneration and timber value costs
and third-party claims in connection with fires on lands on which its facilities are located and such
claims, if successful, could have a material adverse effect on the business, results of operations
and prospects of the Corporation. The Corporation has a new wildfire agreement in place with the
Government of Alberta for Crown lands in the forest protection area that limits the Corporation’s
liability for the Crown’s forest fire suppression costs to 50% of the total cost to suppress the fire to
a maximum of $100 thousand. The Agreement allows the Corporation to reduce its liability to 25%
of the fire suppression costs to a maximum of $50 thousand following the approval by the Crown
of the Corporation’s vegetation management plan for wildfire prevention, which was submitted to
the Crown in the third quarter of 2008 and is awaiting their approval.

While the Corporation maintains insurance for fires, the insurance is subject to coverage limits as
well as time-sensitive claims discovery and reporting provisions and there can be no assurance
that the possible types of liabilities that may be incurred by the Corporation will be covered by its
insurance. See “Underinsured and Uninsured Losses” below.

Electricity distribution has inherent potential risks and there can be no assurance that substantial
costs and liabilities will not be incurred. Potential environmental damage and costs could
materialize due to some type of severe weather event or major equipment failure and there can
be no assurance that such costs would be recoverable. Unrecovered costs could have a material
adverse effect on the Corporation’s business, results of operations and prospects.

Capital Resources
The Corporation’s financial position could be adversely affected if it fails to arrange sufficient and
cost-effective financing to fund, among other things, capital expenditures and the repayment of
maturing debt. Funds generated from operations after payment of expected expenses (including
interest payments on any outstanding debt) will not be sufficient to fund the repayment of all


50 - Energy Your Way
                                                               Management’s Discussion and Analysis
                                                                                      December 31, 2008


outstanding liabilities when due and anticipated capital expenditures. The ability to arrange
sufficient and cost-effective financing is subject to numerous factors, including regulatory approval
or exemption, the regulatory environment in Alberta, the results of operations and financial
position of the Corporation and Fortis, conditions in the capital and bank credit markets and the
ratings assigned by rating agencies and general economic conditions. There can be no assurance
that sufficient capital will be available on acceptable terms to fund such capital expenditures and to
repay existing debt.

Labour Relations
Approximately 70% of the employees of the Corporation are members of the UUWA. The
Collective Agreement with the UUWA expired on December 31, 2007. On December 13, 2007, the
Company reached a three-year collective agreement with the UUWA, which was ratified by 80%
of its membership. The Corporation considers its relationships with the UUWA to be satisfactory
but there can be no assurance that current relations will continue in future negotiations or that
the terms under the present collective bargaining agreements will be renewed. The inability
to maintain or renew the collective bargaining agreements on acceptable terms could result in
increased labour costs or service interruptions arising from labour disputes for the Corporation
that are not provided for in approved rate orders and which could have a material adverse effect
on the results of operations, cash flow and net income of the Corporation.

Operating and Maintenance Risk
The Corporation’s distribution assets require maintenance, improvement and replacement.
Accordingly, to ensure the continued performance of the Corporation’s physical distribution assets,
the Corporation determines expenditures that must be made to maintain and replace assets. The
Corporation could experience service disruptions and increased costs if it is unable to maintain its
asset base. The inability to obtain AUC approval to include in rates the capital expenditures which
the Corporation believes are necessary to maintain, improve and replace its distribution assets,
the failure by the Corporation to properly implement or complete approved capital expenditure
programs or the occurrence of significant unforeseen equipment failures despite the maintenance
program could have a material adverse effect on the Corporation.

The Corporation continually develops capital expenditure programs and assesses current and
future operating and maintenance expenses that will be incurred in the ongoing operation of its
distribution business. Management’s analysis is based on assumptions as to costs of services and
equipment, regulatory requirements, revenue requirement approvals and other matters, which are
uncertain. If actual costs exceed AUC-approved capital expenditures, it is uncertain as to whether
any additional costs will be approved by the AUC and recovered through rates. The inability to
recover these additional costs could have a material adverse effect on the financial condition and
results of operations of the Corporation.

Permits
The acquisition, ownership and operation of electricity businesses and assets require numerous
permits, approvals and certificates from federal, provincial and municipal government agencies.
The Corporation may not be able to obtain or maintain all required regulatory approvals. If there
is a delay in obtaining any required regulatory approval or if the Corporation fails to maintain or
obtain any required approval or fails to comply with any applicable law, regulation or condition of
an approval, the operation of its assets and the sale of electricity could be prevented or become
subject to additional costs, any of which could have a material adverse effect on the Corporation.

Certain of the Corporation’s distribution assets may be located on land that is not known to be
deeded and for which it has not acquired appropriate rights. In addition, the Corporation has
distribution assets on First Nations’ lands, which access permits are held by TransAlta Utilities
Corporation (“TransAlta”). In order for the Corporation to acquire these access permits, both
the Ministry of Indian and Northern Affairs Canada and the individual Band Council must grant
approval. The Corporation may not be able to acquire the access permits from TransAlta and


                                                              2008 | FortisAlberta Annual Report - 51
may be unable to negotiate land usage agreements with property owners or, if negotiated, such
agreements may be on terms that are less than favourable to the Corporation. The failure to
acquire access permits or negotiate land usage agreements may disrupt the Corporation’s ability
to reliably distribute electricity, which could have a material adverse effect on the Corporation.

Weather and Other Natural Disasters
The facilities of the Corporation are exposed to the effects of severe weather conditions and
other acts of nature. Although the Corporation’s facilities have been constructed, operated and
maintained to withstand a certain level of severe weather, there is no assurance that they will
successfully do so in all circumstances. In addition, many of these facilities are located in remote
areas, which make it more difficult to perform maintenance and repairs if they are damaged
by weather conditions or other acts of nature. In the event of a large uninsured loss caused by
severe weather conditions or other natural disasters, application will likely be made to the AUC
for the recovery of these costs through rates. However, there can be no assurance that the AUC
will approve any such application. Losses resulting from repair costs and lost revenues could
substantially exceed insurance coverage and any increased rates. Furthermore, the Corporation
could be subject to claims from its customers for damages caused by the failure to transmit
or distribute electricity to them in accordance with the Corporation’s contractual obligations.
The Terms and Conditions of Distribution Access Service of the Corporation include protection
from damages or losses of an indirect or consequential nature, and specifically from liability of
any kind arising from reasonable curtailment or interruption of distribution service. However,
any major damage to the Corporation’s facilities could result in lost revenues, repair costs and
customer claims that are substantial in amount, which could have a material adverse effect on
the Corporation.

Underinsured and Uninsured Losses
The Corporation maintains insurance coverage at all times in respect of certain potential liabilities
and the accidental loss of value of certain of its assets, in amounts and with such insurers as it
considers appropriate, taking into account all relevant factors, including the practices of owners
of similar assets and operations. It is anticipated that such insurance coverage will be maintained.
However, there can be no assurance that the Corporation will be able to obtain or maintain
adequate insurance in the future at rates it considers reasonable or that insurance will continue
to be available on terms as favourable as the Corporation’s existing arrangements. Further, there
can be no assurance that available insurance will cover all losses or liabilities that might arise in
the conduct of the Corporation’s business. The occurrence of a significant uninsured claim, a claim
in excess of the insurance coverage limits maintained by the Corporation, or a claim that falls
within a significant self-insured retention could have a material adverse effect on the Corporation’s
business, results of operations, financial position and prospects.

In the event of an underinsured or uninsured loss or liability, the Corporation would likely apply
to the AUC to recover the loss or liability through increased rates. However, there can be no
assurance that the AUC would approve any such application in whole or in part. Any major damage
to the Corporation’s facilities could result in repair costs and customer claims that are substantial
in amount and that could have a material adverse effect on the Corporation’s business, results of
operations, financial position and prospects.

Information Technology Infrastructure
The Corporation’s ability to operate effectively in the Alberta electricity market is highly dependent
upon it developing, managing and maintaining complex information systems and infrastructure
that are employed to support the operation of its distribution facilities, provide the electricity
market with billing and load settlement information and support the financials and general
operating of the business. System failures could have a material adverse effect on the Corporation.




52 - Energy Your Way
                                                               Management’s Discussion and Analysis
                                                                                      December 31, 2008


Workforce Demographics
The Corporation is exposed to some risk surrounding upcoming retirements and employee
turnover. Given the demographics of the Corporation, there will likely be an increase in retirement
from the critical workforce segments in future years. In addition, it is expected that the skilled
labour market for the industry will remain competitive in the future. Meeting the capital program
and customer expectations will be a challenge if the Corporation is unable to continue to attract
and retain qualified personnel.

Outlook
Regulatory Proceedings
On February 21, 2008, the AUC initiated a Generic Cost of Capital Preliminary Questions
Proceeding to address whether the adjustment formula continues to yield a fair return on equity
and whether capital structures for all applicable utilities should be addressed on a generic basis.

On June 18, 2008, the AUC issued its decision, ruling that there is sufficient evidence that a review
of the ROE level, the adjustment mechanism, and utility capital structures in a generic proceeding
would be appropriate. On July 25, 2008, the Commission issued its notice of application,
preliminary scoping document and minimum filing requirements for the 2009 Generic Cost
of Capital Proceeding. The Corporation submitted its evidence with respect to the proceeding
on November 20, 2008. The Proceeding applies to all gas, electric and pipeline utilities that are
regulated by the AUC. A hearing is scheduled for the second quarter of 2009.

The Corporation plans to file a comprehensive application dealing with 2010 and 2011 revenue
requirements, cost allocation, rate design and terms and conditions of service in the second
quarter of 2009.

Uniform System of Accounts and Minimum Filing Requirements
On March 6, 2007, the AUC issued Decision 2007-017 approving the implementation of a Uniform
System of Accounts and Minimum Filing Requirements. It was a significant undertaking for the
Corporation to make the necessary systems and process changes to comply with this initiative
effective January 1, 2009. The capital costs associated with the Uniform System of Accounts
and Minimum Filing Requirements are included in the 2008 capital expenditures approved in the
Decision. The operating costs incurred will be included in a deferral account to be dealt with by the
AUC in the Corporation’s next distribution tariff application.

Note: Additional information concerning FortisAlberta Inc., including the Annual Information Form,
(AIF) is available on SEDAR at www.sedar.com.




                                                              2008 | FortisAlberta Annual Report - 53
Financial Statements
December 31, 2008


MANAGEMENT’S REPORT

The accompanying financial statements of FortisAlberta Inc. (the “Corporation”) have been
prepared by management, who are responsible for the integrity of the information presented.
These financial statements have been prepared by management in accordance with Canadian
Generally Accepted Accounting Principles (“GAAP”). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Management has
determined such amounts on a reasonable basis in order to ensure that the financial statements
are presented fairly, in all material respects.

In meeting its responsibility for the reliability and integrity of the financial statements,
management has developed and maintains a system of accounting and reporting, which provides
for the necessary internal controls to provide reasonable assurance that transactions are properly
authorized and recorded, assets are safeguarded and liabilities are recognized. The systems of
the Corporation focus on the need for training of qualified and professional staff and the effective
communication of management guidelines and policies. The internal control system also includes
an internal audit function and an established code of business conduct. The effectiveness of the
internal controls of the Corporation is evaluated on an ongoing basis.

The Board of Directors oversees management’s responsibilities for financial reporting through
an Audit, Risk & Environment Committee (the “Audit Committee”), which is composed of four
members, a majority of which are independent. The Audit Committee oversees the external
audit of the Corporation’s annual financial statements and the accounting, financial reporting
and disclosure processes and policies of the Corporation. The Audit Committee meets with
management, the shareholder’s auditors and the internal auditor to discuss the results of the
audit, the adequacy of the internal accounting controls and the quality and integrity of financial
reporting. The Corporation’s annual financial statements are reviewed by the Audit Committee with
each of management and the shareholder’s auditors before the statements are recommended to
the Board of Directors for approval. The shareholder’s auditors have full and free access to the
Audit Committee.

The Audit Committee has the duty to review the adoption of, and changes in, accounting principles
and practices, which have a material effect on the Corporation’s financial statements and to review
and report to the Board of Directors on policies relating to the accounting, financial reporting
and disclosure processes. The Audit Committee has the duty to review financial reports requiring
the Board of Directors approval prior to the submission to securities commissions or other
regulatory authorities to assess and review management judgments material to reported financial
information and to review shareholder’s auditors’ independence and auditors’ fees.

The December 31, 2008 financial statements were reviewed by the Audit Committee and, on their
recommendation, were approved by the Board of Directors of FortisAlberta Inc. Ernst & Young LLP  ,
independent auditors appointed by the shareholder of FortisAlberta Inc. upon recommendation of the
Audit Committee, have performed an audit of the 2008 financial statements and their report follows.



(signed)                                                      (signed)
Ian Lorimer                                                   Karl Smith
Vice President, Finance and Chief Financial Officer           President and Chief Executive Officer

February 5, 2009




54 - Energy Your Way
                                                                                 Financial Statements
                                                                                     December 31, 2008


AUDITORS’ REPORT

To the Shareholder of FortisAlberta Inc.,

We have audited the balance sheets of FortisAlberta Inc. as at December 31, 2008 and 2007, the
statements of income, retained earnings (deficit) and comprehensive income and the statements
of cash flows for the years then ended. These financial statements are the responsibility of
the Corporation’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require 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 and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial
position of the Corporation as at December 31, 2008 and 2007 and the results of its operations
and its cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.




Chartered Accountants




Calgary, Canada
February 2, 2009




                                                             2008 | FortisAlberta Annual Report - 55
Financial Statements
December 31, 2008


Balance Sheets

 As at December 31                                                                        2008        2007
 Assets
 Current assets
   Accounts receivable and other assets (notes 3, 13 and 16)                           74,972       73,051
   Income taxes receivable                                                                 737           –
   Future income taxes (note 14)                                                              –        538
   Regulatory assets (note 6)                                                             7,224      5,203
                                                                                      82,933        78,792
 Property, plant and equipment (notes 5 and 13)                                     1,385,987     1,194,737
 Other long-term assets (notes 4, 13 and 16)                                           51,099       21,821
 Regulatory assets (note 6)                                                           65,826         11,779
 Future income taxes (note 14)                                                             272           –
 Accrued pension asset (note 11)                                                          3,995      3,806
 Goodwill                                                                            189,309       189,309
                                                                                    1,779,421     1,500,244
 Liabilities and Shareholder’s Equity
 Current liabilities
   Accounts payable, accrued and other liabilities (notes 8, 13 and 16)              129,056       145,144
   Short-term debt (notes 7 and 16)                                                       7,212      8,386
   Regulatory liabilities (note 6)                                                         654        5,512
   Income taxes payable                                                                       –        912
   Future income taxes (note 14)                                                          2,104          –
                                                                                      139,026      159,954
 Other liabilities (notes 8 and 11)                                                       4,220      3,620
 Future income taxes (note 14)                                                                –      2,936
 Regulatory liabilities (note 6)                                                      271,005      256,518
 Long-term debt (notes 7 and 16)                                                     823,770       623,909
                                                                                    1,238,021     1,046,937
 Shareholder’s Equity
   Share capital (note 9)                                                             512,579      452,579
   Retained earnings                                                                   28,821          728
                                                                                     541,400       453,307
                                                                                    1,779,421     1,500,244
Commitments and Contingencies (note 15)




Approved on behalf of the Board:



(signed)                                                                  (signed)
GREG CONN                                                                 JOHN McCALLUM
Director                                                                  Director




56 - Energy Your Way
                                                                                      Financial Statements
                                                                                          December 31, 2008


Statements of Income, Retained Earnings (Deficit), and Comprehensive Income

Years Ended December 31 (All amounts in thousands of Canadian dollars)                2008          2007
Revenues
  Electric rate revenue (note 6)                                                    280,969      250,955
  Other revenue (notes 6 and 13)                                                     18,764       18,943
                                                                                    299,733      269,898
Expenses
  Operating costs (notes 6, 11 and 13)                                              129,689      122,492
  Depreciation (notes 5 and 6)                                                       84,748       75,078
                                                                                    214,437      197,570


Income before interest and income taxes                                              85,296       72,328


Interest on short-term debt                                                           1,247          266
Interest on long-term debt (note 7)                                                  40,998       35,364
                                                                                     42,245       35,630


Income before income taxes                                                           43,051       36,698


Current income tax recovery (notes 6 and 14)                                         (2,476)       (2,611)
Future income tax recovery (notes 6 and 14)                                            (566)      (8,583)
                                                                                     (3,042)      (11,194)


Net Income                                                                           46,093       47,892
Other comprehensive income                                                                –             –
Net income and other comprehensive income                                            46,093       47,822


Retained earnings (deficit), beginning of period                                        728      (31,664)
Dividends (note 9)                                                                  (18,000)     (15,500)
Retained earnings, end of period                                                     28,821          728
Accumulated other comprehensive income                                                    –             –
Retained earnings and accumulated other comprehensive income, end of period          28,821          728




                                                                   2008 | FortisAlberta Annual Report - 57
Financial Statements
December 31, 2008


Statements of Cash Flows

Years Ended December 31 (All amounts in thousands of Canadian dollars)       2008       2007


Operating Activities
   Net income                                                             46,093       47,892
   Add (deduct) items not involving cash:
     Depreciation and amortization                                        85,053      75,363
     Future income taxes                                                     (566)     (8,583)
     Allowance for funds used during construction                            (306)          –
   Changes in other non-cash items related to operations (note 17)        (50,352)    16,265
                                                                          79,922     130,937
Changes in non-cash working capital related to operations (note 17)       (33,175)    46,596


Cash from operating activities                                            46,747      177,533


Investing Activities
   Additions to property, plant and equipment                            (302,127)   (284,236)
   Additions to other long-term assets                                    (30,662)     (1,955)
   Customer contributions for property, plant and equipment               42,479      45,994
   Proceeds from the sale of property, plant and equipment                  3,199       3,464


Cash used in investing activities                                        (287,111)   (236,733)


Financing Activities
   Increase in debt                                                      329,698     239,875
   Repayment of debt                                                     (130,599)   (204,361)
   Dividends paid                                                         (18,000)    (15,500)
   Equity contributions                                                   60,000      40,000
   Additions to deferred financing fees                                      (735)       (814)


Cash from financing activities                                           240,364      59,200


Net increase in cash and cash equivalents                                      –            –
Cash and cash equivalents, beginning of period                                 –            –


Cash and cash equivalents, end of period                                       –            –


Cash flows include the following elements:
   Interest paid                                                          39,706      33,133
   Income taxes received                                                     (927)    (12,353)




58 - Energy Your Way
                                                                             Notes to the Financial Statements
                                                                            For the years ended December 31, 2008 and 2007
                                                        (All amounts in thousands of Canadian dollars unless otherwise noted)



Notes to the Financial Statements
1. ENTITY DEFINITION AND NATURE OF OPERATIONS
FortisAlberta Inc. (the “Corporation”) is a regulated electricity distribution utility in the Province of
Alberta. Its business is the ownership and operation of regulated electricity distribution facilities
that distribute electricity generated by other market participants from high voltage transmission
substations to end-use customers. The Corporation does not own or operate generation or
transmission assets, is not involved in the direct sale of electricity, and has limited exposure to
exchange rate fluctuations on foreign currency transactions. It is intended that the Corporation
remain a regulated electric utility for the foreseeable future, focusing on the delivery of safe,
reliable and cost-effective electricity services to its customers in Alberta.

Prior to January 1, 2008, the Alberta Energy and Utilities Board (the “EUB”) was the chief
provincial regulator of the Alberta energy industry. Effective January 1, 2008, the Alberta Utilities
Commission Act (the “AUC Act”) separated the EUB into two regulatory bodies, the Energy
Resources and Conservation Board (the “ERCB”) and the Alberta Utilities Commission (the “AUC”).

The ERCB regulates the safe, responsible and efficient development of Alberta’s energy resources
including oil, natural gas and coal.

The AUC’s jurisdiction, pursuant to the Electric Utilities Act (the “EUA”), the Public Utilities Act,
the Hydro and Electric Energy Act and the AUC Act, includes the approval of distribution tariffs
for regulated distribution utilities such as the Corporation including the rates and terms and
conditions on which service is to be provided by those utilities. Hereafter, any use of the term AUC
will refer to the EUB prior to January 1, 2008 and the AUC subsequently.

The Corporation is an indirect, wholly-owned subsidiary of Fortis Inc. (‘‘Fortis’’), a diversified,
international electricity and gas distribution utility holding company having investments in
distribution, transmission and generation utilities, real estate and hotel operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The financial statements of the Corporation have been prepared by management in accordance
with Canadian Generally Accepted Accounting Principles (“GAAP”). The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying notes. Certain
estimates are necessary since the regulatory environment in which the Corporation operates often
requires amounts to be recorded at estimated values until finalization and adjustments, if any, are
determined pursuant to subsequent regulatory decisions or other regulatory proceedings. Due to
the inherent uncertainty in making such estimates, actual results reported in future periods could
differ materially from those estimated.

b) Regulation
The Corporation is regulated by the AUC, pursuant to the EUA, the Public Utilities Act, and the
Hydro and Electric Energy Act. The AUC administers these acts and regulations covering such
matters as tariffs, rates, construction, operations and financing. The timing of recognition of
certain assets, liabilities, revenues and expenses as a result of regulation may differ from that
otherwise expected using GAAP for entities not subject to rate regulation.

The Corporation operates under cost-of-service regulation as prescribed by the AUC. Rate orders
issued by the AUC establish the Corporation’s revenue requirements, being those revenues
required to recover approved costs associated with the distribution business, and provide a rate
of return on a deemed capital structure applied to approved rate base assets. The Corporation’s


                                                                   2008 | FortisAlberta Annual Report - 59
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


current regulated capital structure is set at 63% debt and 37% equity by the AUC. The approved
rate of return on equity is 8.75% for 2008 (2007 – 8.51%). The Corporation applies for tariff
revenue based on estimated costs-of-service. Once the tariff is approved, it is not adjusted as
a result of actual costs-of-service being different from that which was estimated, other than for
certain prescribed costs that are eligible for deferral account treatment and are either collected
or refunded in future rates. When the AUC issues decisions affecting the financial statements, the
effects of the decision are recorded in the period in which the decision is received.

c) Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments with original
maturities of three months or less.

d) Income Taxes
The Corporation is following the taxes payable method of accounting for income taxes, except
as noted below. As prescribed by the AUC Decision 2008-011 (the “Decision”) issued on February
12, 2008, which approved the Negotiated Settlement Agreement for 2008 and 2009, income tax
expenses are recovered through customer rates based only on income taxes that are currently
payable for regulatory purposes. Therefore, current customer rates do not include the recovery of
future income taxes related to certain temporary differences between the tax basis of assets and
liabilities and their carrying amounts for regulatory purposes, as these taxes are expected to be
collected in rates when they become payable. Accordingly, the Corporation does not recognize
income taxes deferred to future years as a result of the specified temporary differences. The
Corporation only recognizes future income taxes for certain deferral amounts where the future
income taxes will not be collected in future customer rates.

e) Property, Plant and Equipment
Property, plant and equipment are carried at cost, which includes internal labour and allocated
overhead, less depreciation. Certain assets may be acquired or constructed with financial
assistance in the form of contributions from customers. These contributions are recorded as a
reduction of the net cost of property.

Depreciation is provided on a straight-line basis at various rates ranging from 1.97% to 24.59% as
approved by the AUC, based on depreciation studies prepared by the Corporation. Depreciation
rates include an amount allowed for regulatory purposes for future removal and site restoration
costs. Changes to depreciation rates approved by the AUC are accounted for on a prospective
basis. The AUC approved rates are applied to the original historical capital costs reflected for
regulatory rate setting purposes.

Generally, when a regulated asset is retired or disposed of, there is no gain or loss recorded
in income. Any difference between the cost and accumulated depreciation of the asset, net of
salvage proceeds, is charged to accumulated depreciation. It is expected that any gain or loss that
is charged to accumulated depreciation will be reflected in future depreciation expense when it is
refunded or collected in rates.

The Corporation capitalizes an Allowance for Funds Used During Construction (“AFUDC”), which
represents the cost of debt and equity financing incurred during construction. The Corporation has
included the AFUDC as part of the capital cost of the assets. The AFUDC is recovered in rates from
customers over the life of the assets through depreciation expense. Pursuant to the Decision, the
Corporation is calculating an AFUDC according to the methodology employed by the AUC.

f) Impairment of Long-lived Assets
The Corporation reviews the valuation of long-lived assets subject to amortization when events or
changes in circumstances may indicate or cause its carrying value to exceed the total undiscounted
cash flows expected from its use and eventual disposition. An impairment loss, if any, would be
recorded as the excess of the carrying value of the asset over its fair value.

60 - Energy Your Way
                                                                            Notes to the Financial Statements
                                                                           For the years ended December 31, 2008 and 2007
                                                       (All amounts in thousands of Canadian dollars unless otherwise noted)


g) Asset Retirement Obligations
The Corporation recognizes asset retirement obligations related to its distribution assets at
fair value in the period in which they are incurred, unless the fair value cannot be reasonably
determined or it is not material. When the liability is recognized, a corresponding asset retirement
cost is added to the carrying amount of the related long-lived asset, and is depreciated over the
estimated useful life of the related asset. Accretion of the liability due to the passage of time is
an operating expense, and is recorded over the estimated time period until settlement of the
legal obligation. The asset retirement obligations that are not yet reasonably estimable are those
associated with the removal of the distribution system from rights-of-way at the end of the life of
the system. These are unable to be estimated as it is management’s view that the system will be in
service indefinitely and as such an estimate of the fair value of these costs cannot be made.

h) Goodwill
Goodwill represents the excess, at the date of acquisition, of the purchase price over the fair value
of the net amounts assigned to individual assets acquired and liabilities assumed relating to the
business acquisition. Goodwill is carried at initial cost less any previous amortization and any
write-down for impairment.

The Corporation is required to perform an annual impairment test and any impairment provision
is charged to net income. In addition to the annual impairment test, the Corporation also performs
an impairment test if any event occurs or if circumstances change that would indicate that the
fair value of a reporting unit was below its carrying value. A goodwill impairment provision is not
required for the year ended December 31, 2008 (2007 – nil).

i) Revenue Recognition
Revenues are recognized in the period services are provided, at AUC approved rates, where
applicable, and when collectability is reasonably assured.

Per the EUA the Corporation is required to arrange and pay for transmission service with
the Alberta Electric System Operator (the “AESO”) and collect transmission revenue from its
customers, which is done through invoicing the customers’ retailers through the Corporation’s
transmission component of its AUC approved rates. As the Corporation is solely a distribution
company, and as such does not own or operate any transmission facilities, it is largely a conduit
for the pass through of transmission costs to the end-use customers as the transmission facility
owner does not have the direct relationship with the customers. The rates collected are based
on forecast transmission expenses, and for certain elements of the transmission costs, the
Corporation is subject to the risk of actual expenses being different from the forecast revenue
relating to transmission services. All other differences are subject to deferral treatment and are
either collected or refunded in future rate riders. As a result, the Corporation reports revenues and
expenses related to transmission services on a net basis in other revenue.

j) Employee Future Benefits
All accrued obligations for employee future benefit plans, post-employment and post-retirement
benefits are determined using the projected benefits method prorated on services. In valuing the cost
of post-retirement benefits as well as the cost of pension benefits, the Corporation uses management’s
best estimate assumptions, except for the liability discount rate where the Corporation uses the
long-term market rate of high quality debt instruments at the measurement date. Cumulative net
unamortized actuarial gains and losses in excess of 10% of the greater of the benefit obligation or fair
value of the plan assets at the beginning of the fiscal year are amortized over the expected average
remaining service period of the active employees receiving benefits under the plan. For the year ended
December 31, 2008, the expected average remaining service period for the non-pension benefits plan
                                                                                 .4
is 15 years (2007 – 15 years) and for the retirement plan is five years (2007 – 7 years). Unamortized
past service costs are amortized over the expected average remaining service period of the active
employees receiving benefits as at the date of amendment. The Corporation uses quoted market values

                                                                  2008 | FortisAlberta Annual Report - 61
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


to value pension assets. Any difference between the expense recognized under GAAP for pension and
other post-retirement plans and that recovered in current rates, which is expected to be recovered or
refunded in future rates, is subject to deferral treatment.

k) Stock-based Compensation
The Corporation calculates compensation expense upon the issuance of stock options to its
employees under Fortis stock option plans using the fair value method. The compensation
expense is amortized over the vesting period of the options.

l) Other Comprehensive Income, Financial Instruments and Hedging
The Corporation has classified all financial instruments into one of the following five categories:
1) loans and receivables, 2) assets held-to-maturity, 3) assets available-for-sale, 4) other financial
liabilities, and 5) held-for-trading assets and liabilities.

Financial instruments that are classified as held-for-trading or available-for-sale are re-measured
each reporting period at fair value with the resulting gain or loss recognized immediately in net
income and other comprehensive income, respectively. All other financial instruments are initially
accounted for at fair value and subsequently at amortized cost using the effective interest method
with foreign exchange gains and losses recognized immediately in net income.

The Corporation currently does not utilize hedges or other derivative financial instruments in its
operations, and as a result Canadian Institute of Chartered Accountants (“CICA”) Handbook Section
3865, Hedges currently has no material impact on the financial statements of the Corporation.

It is the Corporation’s policy to add transaction costs that are directly attributable to the acquisition or
issuance of a financial asset or liability to its fair value. These transaction costs are taken into income
using the effective interest method over the life of the related senior unsecured debentures.

m) Changes in Accounting Policies and Presentation
As at January 1, 2008, the Corporation adopted Section 3031, Inventories and restated prior period
comparative amounts in accordance with the transitional provisions. Materials and supplies generally
consist of items used in the construction or maintenance of property, plant and equipment.

As a result of adopting CICA Handbook Section 3031, the Corporation reclassified all of its materials
and supplies balance at December 31, 2008 of $24.2 million (December 31, 2007 – $25.2 million) as
property, plant and equipment.

n) Future Changes in Accounting Policies
Rate-regulated Operations Project
In March 2002, the Accounting Standards Board (the “AcSB”) approved a project examining
the need to modify existing Canadian accounting standards to deal specifically with the unique
characteristics of rate-regulated operations, specifically under what circumstances rate regulation
may create assets and liabilities meeting the asset and liability definitions of the CICA Handbook
and how these items should be measured. In August 2007, the AcSB considered the comments
                                                                           ”
received on its March 2007 Exposure Draft, “Rate-Regulated Operations, and decided to:

     •	    remove the temporary exemption in CICA Handbook Section 1100, Generally Accepted
           Accounting Principles, pertaining to the application of that Section to the recognition and
           measurement	of	assets	and	liabilities	arising	from	rate	regulation;
     •	    amend CICA Handbook Section 3465, Income Taxes, to require the recognition of future
           income tax liabilities and assets as well as a separate regulatory asset or liability for the
           amount of future income taxes expected to be included in future rates and recovered
           from	or	paid	to	future	customers;	and
     •	    make these changes applicable prospectively to fiscal years beginning on or after January 1, 2009.

62 - Energy Your Way
                                                                           Notes to the Financial Statements
                                                                          For the years ended December 31, 2008 and 2007
                                                      (All amounts in thousands of Canadian dollars unless otherwise noted)


The AcSB also decided not to withdraw:

   •	   the existing guidance relating specifically to rate-regulated operations in CICA Handbook
        Section 1600, Consolidated Financial Statements, CICA Handbook Section 3061, Property,
        Plant and Equipment, and CICA Handbook Section 3475, Disposal of Long-Lived Assets and
        Discontinued Operations;	and
   •	   CICA Handbook AcG-19, Disclosures by Entities Subject to Rate Regulation, but to make
        consequential amendments to the Guideline as a result of the above changes.
The AcSB also noted that:

   •	   respondents appeared focused on the current uncertainty about whether the accounting
        prescribed by FASB Statement of Financial Accounting Standards No. 71, Accounting
        for the Effects of Certain Types of Regulation (“FAS 71”), and Handbook Sections with
        recognition and measurement guidance relating specifically to rate-regulated operations, is
        compatible with International Financial Reporting Standards (“IFRSs”), and therefore, what
        will	transpire	upon	changeover	to	IFRSs;	and
   •	   it has brought this issue to the attention of other national standard setters and the
        International Accounting Standards Board, and continues to follow up on it.
The AcSB decided that the final Background Information and Basis for Conclusions for this project
would not express any views of the AcSB regarding this issue or the status of FAS 71 as an “other
source of GAAP” within the Canadian GAAP hierarchy.

Effective January 1, 2009, with the removal of the temporary exemption in Section 1100, the
Corporation must now apply Section 1100 to the recognition of assets and liabilities arising from
rate regulation. Certain assets and liabilities arising from rate regulation continue to have specific
guidance under a primary source of GAAP that applies only to the particular circumstances
described therein, including those arising under Sections 1600, 3061, 3465, and 3475. All assets
and liabilities arising from rate regulation described in Notes 6 a) and b) do not have specific
                                             .
guidance under a primary source of GAAP Therefore, Section 1100 directs the Corporation to
adopt accounting policies that are developed through the exercise of professional judgment and
the application of concepts described in Section 1000, Financial Statement Concepts. In developing
these accounting policies the Corporation may consult other sources, including pronouncements
issued by bodies authorized to issue accounting standards in other jurisdictions. Therefore, in
accordance with Section 1100, the Corporation has determined that these assets and liabilities
qualify for recognition under GAAP and this recognition is consistent with FAS 71. Therefore, there
would be no effect on the Corporation’s financial statements, with the exception of the change
discussed below in relation to the impact of the amendment to Section 3465, if it had adopted the
removal of the temporary exemption in Section 1100, for the year ended December 31, 2008.

Effective January 1, 2009, the impact on the Corporation of the amendment to Section 3465 will
be the recognition of future income tax assets and liabilities and related regulatory liabilities
and assets for the amount of future income taxes expected to be refunded to or recovered from
customers in future electricity rates. Currently, the Corporation uses the taxes payable method of
accounting for income taxes on regulated earnings where the future income taxes are expected to
be collected in future rates. The effect on the Corporation’s financial statements, if it had adopted
amended Section 3465, as at December 31, 2008, would have been an increase in future tax assets
of $24.2 million, and a corresponding increase in regulatory liabilities of $24.2 million. Included
in the amounts are the future income tax effects of the subsequent settlement of the related
regulatory assets and liabilities through customer rates.

The Corporation is continuing to assess and monitor any additional implications on its financial
statements related to accounting for rate-regulated operations, including the impacts, if any, on
accounting for the costs and revenues associated with the provision for future removal and site
restoration costs.

                                                                 2008 | FortisAlberta Annual Report - 63
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


Goodwill and Intangible Assets
In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets. This Section,
which replaces CICA Handbook Section 3062, Goodwill and Other Intangible Assets, and CICA
Handbook Section 3450, Research and Development Costs, establishes standards for the
recognition, measurement and disclosure of goodwill and intangible assets.

This Section applies to interim and annual financial statements relating to fiscal years beginning
on or after October 1, 2008. Earlier adoption is encouraged.

Effective January 1, 2009, the impact on the Corporation of the adoption of Section 3064 will be
a reclassification of land rights and computer software from property, plant and equipment to
intangible assets. The effect on the Corporation’s financial statements, if it had adopted Section
3064, as at December 31, 2008, would have been an increase in intangible assets and a reduction
in property, plant and equipment for the reclassification of the net book values of land rights and
computer software of $5.9 million and $56.3 million respectively.

The Corporation is continuing to assess and monitor any additional implications on its financial
statements related to accounting for goodwill and intangible assets.

Transition to IFRSs in Canada
In February 2008, the AcSB confirmed that the use of IFRS will be required in 2011 for publicly
accountable enterprises. In April 2008, the AcSB issued an IFRS Omnibus Exposure Draft
proposing that publicly accountable enterprises be required to apply IFRS, in full and without
modification, on January 1, 2011. The transition date of January 1, 2011 will require the
restatement, for comparative purposes, of amounts reported by the Corporation for its year
ended December 31, 2010, and of the opening balance sheet as at January 1, 2010. The AcSB
proposes that CICA Handbook Section - Accounting Changes, paragraph 1506.30, which would
require an entity to disclose information relating to a new primary source of GAAP that has been
issued but is not yet effective and that the entity has not applied, not be applied with respect
to this Exposure Draft. The Corporation is continuing to assess the financial reporting impacts
of the adoption of IFRS and, at this time, the impact on future financial position and results of
operations is not reasonably determinable or estimable. Further, the Corporation anticipates a
significant increase in disclosure resulting from the adoption of IFRS and is continuing to assess
the level of this disclosure required and any necessary systems changes to gather and process
the information.

3. ACCOUNTS RECEIVABLE AND OTHER ASSETS
Accounts receivable and other assets consist of the following:

December 31                                                              2008                   2007
Accounts receivable                                                     71,833                70,362
Prepaids and deposits                                                    3,139                 2,689
                                                                        74,972                73,051




64 - Energy Your Way
                                                                        Notes to the Financial Statements
                                                                       For the years ended December 31, 2008 and 2007
                                                   (All amounts in thousands of Canadian dollars unless otherwise noted)


4. OTHER LONG-TERM ASSETS
Other long-term assets consist of the following:

                                                       December 31, 2008                     December 31, 2007
AESO contributions                                                      48,195                               18,497
Other receivables                                                         2,904                                3,324
                                                                        51,099                               21,821

The AESO contributions are payments made to the AESO for investment in transmission facilities
that are needed for reliability or contingency planning in accordance with the AESO Terms and
Conditions of Service. These assets are recovered from customers in rates through depreciation
based on an AUC-approved depreciation rate of 3.84%. The Corporation earns a regulated
return on the net book value. The accumulated depreciation as at December 31, 2008 was $2,180
(December 31, 2007 - $924).

Other receivables are made up of housing, stock option and computer loans to employees with
a combined outstanding balance of $1,349 and a receivable due from The Bank of Nova Scotia
(“BNS”) in the amount of $1,555 (December 31, 2007 - $2,701) as a result of the sale of the
majority of the 2007 AESO charges deferral account. The receivable from BNS of $1,555 bears
interest at prime minus 2% per year with a maturity date of February 2010.

5. PROPERTY, PLANT AND EQUIPMENT
                                                                                  Accumulated            Net Book
December 31, 2008                                                        Cost     Depreciation              Value
Distribution system                                                1,996,143          (458,194)          1,537,949
Land and land rights                                                   20,158             (1,804)            18,354
Vehicles                                                              58,570              (8,601)           49,969
Buildings and furniture                                                81,159           (10,475)             70,684
Tools and instruments                                                  13,551             (4,769)             8,782
Computer hardware and software                                       112,672            (36,484)             76,188
Materials and supplies                                                 24,166                   –            24,166
Construction in progress                                              29,620                    –            29,620
Customer contributions                                              (482,331)          139,811            (342,520)
                                                                  1,853,708           (380,516)          1,473,192
Regulatory tax basis adjustment                                     (135,109)            47,904             (87,205)
                                                                   1,718,599          (332,612)         1,385,987




                                                              2008 | FortisAlberta Annual Report - 65
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)



                                                                                                    Accumulated     Net Book
December 31, 2007                                                                           Cost    Depreciation       Value
Distribution system                                                                    1,775,911       (416,861)    1,359,050
Land and land rights                                                                      17,715          (1,533)     16,182
Vehicles                                                                                 51,394           (8,449)     42,945
Buildings and furniture                                                                  48,342           (6,447)     41,895
Tools and instruments                                                                     11,687          (3,504)       8,183
Computer hardware and software                                                            97,538         (27,724)     69,814
Materials and supplies                                                                   25,212                –      25,212
Construction in progress                                                                 45,791                –      45,791
Customer contributions                                                                  (440,218)        117,436     (322,782)
                                                                                       1,633,372        (347,082)   1,286,290
Regulatory tax basis adjustment                                                         (135,109)        43,556       (91,553)
                                                                                       1,498,263       (303,526)    1,194,737



The depreciation rates below are a composite rate based upon the weighted average of the
individual rates for each class of asset within the group, and are as follows:

                                                                              December 31, 2008            December 31, 2007
                                                                          Regulated     Effective   Regulated     Effective
                                                                        Depreciation Depreciation Depreciation Depreciation
                                                                           Rates (%)    Rates (%)    Rates (%)   Rates (%)
Distribution system                                                             3.41         4.36           3.58          4.70
Land rights                                                                     2.78         3.62           3.44          4.58
Vehicles                                                                        7.62         8.09            7.06         7.37
Buildings and furniture                                                         3.55         6.58           2.42          5.55
Tools and instruments                                                          11.07        10.02          12.26         11.51
Computer hardware and software                                                 16.14        16.95          14.20        16.50
Customer contributions                                                          3.69         4.85           4.04          5.45
Regulatory tax basis adjustment                                                    –         4.75               –         4.75

Distribution system assets are those used to distribute electricity at lower voltages (generally
below 25 kilovolts). These assets include poles, towers and fixtures, low-voltage wires,
transformers, underground conductors, street lighting, meters, metering equipment and other
related equipment.

The regulated depreciation rates are applied to the original historical costs reflected for regulatory
rate setting purposes, which overall are greater than those reflected in these financial statements.
As such, the effective depreciation rates under GAAP are usually higher. The reason that the
original historical costs for regulatory rate setting purposes is higher than those reflected in these
financial statements results from recording the property, plant and equipment acquired from
TransAlta Utilities Corporation (“TransAlta”) at its fair value at the time of acquisition, which
would not necessarily be the same as the original historical cost. There is no depreciation expense
recognized on assets under construction and land.

When the business was acquired from TransAlta on August 31, 2000, the property, plant and
equipment acquired had a deemed tax basis for regulatory purposes that was higher than that
available to the Corporation for legal entity tax filing purposes. As such the corresponding tax


66 - Energy Your Way
                                                                           Notes to the Financial Statements
                                                                          For the years ended December 31, 2008 and 2007
                                                      (All amounts in thousands of Canadian dollars unless otherwise noted)


deductions available for regulatory purposes exceeds that available for legal entity tax filing
purposes and over time, the tax expense for the Corporation will exceed that which is expected
to be included in rates for regulatory purposes, although in any one year the opposite situation
could take place due to the timing of certain deductions. For all assets acquired or constructed
subsequent to August 31, 2000, the initial tax basis has been the same for regulatory and
legal entity tax filing purposes. Given the difference in the tax basis for the property, plant and
equipment initially acquired from TransAlta, the timing of the deductions taken for legal entity tax
filing purposes may differ from that utilized for rate making purposes and as such the tax basis of
assets acquired subsequently may also differ over time.

The regulatory tax basis adjustment represents an adjustment to the fair value of the
Corporation’s property, plant and equipment reflected in the application of push down
accounting when the business was acquired from TransAlta. This adjustment results from
the excess of the deemed tax basis of the Corporation’s property, plant and equipment for
regulatory rate making purposes as compared to the Corporation’s tax basis for income tax
purposes. The regulatory tax basis adjustment is being amortized on a declining balance basis
over the estimated service lives of the Corporation’s property, plant and equipment by an offset
against the provision for depreciation and amortization. For the year ended December 31, 2008,
depreciation and amortization expense was reduced by $4.3 million (2007 - $4.6 million) for the
amortization of the regulatory tax basis adjustment.

As indicated in Note 2 e), generally, when a regulated asset is retired or disposed of there is no
gain or loss recorded in income as this amount is charged to accumulated depreciation. The net
loss for the year ended December 31, 2008 that would have been recognized in the absence of rate
regulation is $6.2 million (2007 - $4.9 million).

In the absence of rate regulation, the equity portion of the AFUDC would not be recognized as
a capital cost of constructing an asset. The cumulative impact on the financial statements is
currently not determinable. In 2008, the equity portion of the AFUDC recorded by the Corporation
was $0.1 million (2007 - nil).




                                                                 2008 | FortisAlberta Annual Report - 67
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


6. REGULATORY ASSETS AND LIABILITIES
All amounts deferred as regulatory assets and liabilities are subject to AUC approval. As such,
the AUC could alter the amounts subject to deferral at which time the change would be reflected
in the financial statements. Based on previous, existing or expected regulatory decisions, the
Corporation records the amount expected to be recovered or refunded. The remaining recovery
and settlement periods are those expected and the actual recovery or settlement period could
differ based on AUC decisions. For information regarding the effects of rate regulation on property,
plant and equipment and income taxes see Notes 5 and 14 respectively.

a) Regulatory Assets
                                                                                          Remaining
                                                                                           Recovery
                                                                         2008     2007       Period
                                                                            $        $        Years
Commodity cost deferral                                                   160     2,296             2
Hearing cost reserve                                                         –    1,016             –
Self insurance reserve                                                    264      762            >2
AESO charges deferral                                                   63,953    7,362         1–2
Regulatory other post-retirement benefits asset                          4,220    3,418           15
Uniform system of accounts cost deferral                                 2,672     751         2–12
AESO contributions deferral                                                  –     700              –
A1 rider deferral                                                            –     677              –
United Utility Workers’ Association (“UUWA”) deferral                     781         –             1
2008 return on equity true-up                                            1,000        –             1
                                                                        73,050   16,982
Less: current portion                                                    7,224    5,203
Long-term portion                                                       65,826   11,779

Commodity Cost Deferral
This balance represents the remaining balance of the commodity costs incurred in 2000 by the
Corporation’s former retail operations in excess of amounts recovered from customers (the
“deferred costs”).

The deferred costs were collected from customers during the period from 2001 to 2003. In 2004,
the AUC approved the collection of additional recoverable costs from customers as a result of a
review and variance of AUC Decision 2004-027.

On December 12, 2007, the Corporation submitted its PPDA/OMA Compliance True-up Application,
which received final approval from the AUC in Decision 2008-044 on June 5, 2008. This decision
approved the collection of the deferral through a rider from July 1, 2008 to December 31, 2008.
In the absence of rate regulation, the Corporation would have recognized these costs in the year
incurred and there would be no amount recorded on the balance sheet. These remaining deferred
costs will be recognized when they are collected in rates. In the absence of rate regulation, other
revenue would be $2,136 higher in 2008 (2007 - $2 higher).

Self Insurance Reserve (“SIR”)
The Corporation utilizes a combination of commercial insurance and a SIR to mitigate the risk
inherent in the operation of its distribution network. The SIR is designed to provide coverage
for perils where commercial insurance coverage is not readily available or not economically
practical, and to provide the Corporation with the flexibility of accepting higher deductibles on
its commercial insurance policies. To the extent that actual costs incurred exceeded the amount

68 - Energy Your Way
                                                                             Notes to the Financial Statements
                                                                            For the years ended December 31, 2008 and 2007
                                                        (All amounts in thousands of Canadian dollars unless otherwise noted)


collected in revenue, the excess costs have been deferred and will be recognized when collected
in future rates. In the event that the amount of revenue collected in rates for these costs exceeds
actual costs incurred, the excess revenue is deferred as a regulatory liability. This liability will
either be refunded to customers through a reduction in future rates or will be recognized when
additional costs are incurred. In the absence of rate regulation, operating costs would have been
$498 lower in 2008 (2007 - $762 higher) and electric rate revenue would have been unchanged in
2008 (2007 - $28 lower).

AESO Charges Deferral
This balance represents expenses incurred in excess of revenues collected for various items such
as transmission costs incurred and billed through to customers, that are subject to deferral. It also
includes deferrals for contributions paid to the AESO up to December 31, 2005, certain riders, and
other miscellaneous charges related to the period of 2005 to 2008. To the extent that actual costs
incurred exceeded the amount collected in revenue, the excess costs have been deferred and will
be recognized when collected in future rates. In the event that the amount of revenue collected in
rates for these items exceeds actual costs incurred, the excess is deferred as a regulatory liability.
This liability will either be refunded to customers through a reduction in future rates or will be
recognized when additional costs are incurred. The over recovery of the 2005 AESO charges
deferral of approximately $0.4 million was included in the 2007 AESO charges deferral filing. The
filing for the 2006 AESO charges deferral was made in November 2007 in the amount of $29.5
million. During 2008, $29.6 million of the 2006 AESO charges deferral was collected in rates
through a transmission adjustment rider resulting in an over collection of $0.1 million, which will
be carried forward and included in the 2008 AESO charges deferral filing. The filing for the 2007
AESO charges deferral was approved through AUC order U2008-386 in December 2008, in the
amount of approximately $47.1 million, including 2009 carrying costs of $4.0 million, and will be
collected in rates through a transmission adjustment rider in 2009. In 2007, the Corporation sold
$38.1 million of the 2007 AESO charges deferral balance. The 2008 AESO charges deferral had a
balance of $58.6 million as at December 31, 2008. In the absence of rate regulation, other revenue
would have been $56.6 million lower in 2008 (2007 - $32.2 million higher).

Regulatory Other Post-retirement Benefits Asset
This balance represents the deferred portion of the expense relating to the other post-employment
benefits and the supplemental pension plan that is expected to be recovered from customers
in future rates. Once recovered in rates, these deferred expenses will be recognized. In 2008, as
prescribed by the Decision, pension was recovered in rates based on the cash payment method.
Therefore, the Corporation’s pension expense for other post-retirement benefits represents the
cash payments made. In the absence of rate regulation, operating costs would be $802 higher in
2008 (2007 - $898 higher). This balance is not subject to regulatory return.

Uniform System of Accounts Costs Deferral
The Corporation has deferred costs relating to the uniform system of accounts initiative, which is
an initiative to provide uniformity to regulatory filings and regulatory reporting for electric utilities
in Alberta. This deferral represents costs incurred that are to be recovered from customers in
future rates. In the absence of rate regulation, operating expenses would have been $1,921 higher
in 2008 (2007 - $35 higher).

UUWA Deferral
This balance represents the deferral of the difference between certain operating expense approved
in the Decision and the actual amount of operating expenses due to ratification of the 2008–2010
UUWA Collective Agreement on February 1, 2008. As a result of the ratification of the Collective
Agreement, actual operating expenses include adjustments for wages and employee-related
expenses in excess of the placeholder amount for operating costs embedded in the Decision. In
the absence of rate regulation, operating costs would have been $781 higher in 2008 (2007 – nil).


                                                                   2008 | FortisAlberta Annual Report - 69
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


2008 Return on Equity True-up
In 2008 the Corporation was receiving revenue based on the 2007 rate of return of 8.51%, which
was a placeholder as the 2008 rate of return of 8.75% was not approved until December 2008. Per
the Decision the impact on the Corporation’s 2008 revenue requirement caused by the difference
between the placeholder and the 2008 rate of return was captured in a deferral account. This will
be collected in rates in 2009. In the absence of rate regulation, electric rate revenue would have
been $1,000 lower.

b) Regulatory Liabilities
                                                                                            Remaining
                                                                                            Settlement
                                                                          2008      2007         Period
                                                                             $         $          Years
Regulatory pension deferral                                               3,995     3,806              5
Income tax deferral                                                           –     3,700              –
A1 rider deferral                                                         1,001         –           1–2
Reporting requirements costs deferral                                         –      188               –
                                                                                             Life of the
Provision for future removal and site restoration                       264,441   252,711        assets
Change in amortization of financing fees                                      –      325               –
Revenue deferral for 2007 return on equity reduction                          –     1,300              –
AESO contributions deferral                                               1,900         –              2
Hearing cost reserve                                                       322          –              1
                                                                        271,659   262,030
Less: current portion                                                      654      5,512
Long-term portion                                                       271,005   256,518

Regulatory Pension Deferral
This balance represents pension surplus that has not been reflected in rates and will result in a
reduction of future rates when recognized. When future rates are reduced, this liability balance will
be drawn down and reflected as a reduction of pension expense. In the absence of rate regulation,
the operating costs would have been $189 lower in 2008 (2007 - $623 higher). This balance is not
subject to regulatory return.

Income Tax Deferral
This balance represented a liability to customers relating to the difference in the actual amounts
of certain deductions claimed for income tax purposes versus those that were included in 2005 to
2007 rates. This was refunded to customers in 2008. In the absence of rate regulation, electric rate
revenue would have been $3,700 lower in 2008 (2007 - $1,800 higher). This balance was not subject
to regulatory return.

A1 Rider Deferral
The Corporation pays linear taxes and collects these linear taxes from the customers within
the specific municipalities on a community specific basis. This AUC-ordered regulatory deferral
represents the difference between the A1 rider revenue and the linear tax expense. To the extent
that actual costs incurred exceeded the amount collected in revenue, these excess costs have
been deferred and will be recognized when collected in future rates. In the event that the amount
of revenue collected in rates for these costs exceeds actual costs incurred, the excess revenue
is deferred as a regulatory liability. This liability will either be refunded to customers through a
reduction in future rates or will be recognized when additional costs are incurred. In the absence
of rate regulation, operating costs would have been $677 lower in 2008 (2007 - $677 higher) and


70 - Energy Your Way
                                                                          Notes to the Financial Statements
                                                                         For the years ended December 31, 2008 and 2007
                                                     (All amounts in thousands of Canadian dollars unless otherwise noted)


electric rate revenue would have been $1,001 higher in 2008 (2007 -$149 lower). This balance is not
subject to regulatory return.

Reporting Requirements Costs Deferral
As prescribed by Decision 2006-063 the Corporation had recorded a deferral for the difference
between actual costs incurred versus those included in rates to comply with reporting
requirements related to NI 52-109, MI 52-111 and CSA Notice 52-313 of the Canadian Securities
Administrators. As a result, the Corporation deferred $188 in revenue in 2006 which was refunded
to customers in 2008. In the absence of rate regulation, electric rate revenue would have been $188
lower in 2008 (2007 - nil). This balance was not subject to regulatory return.

Provision for Future Removal and Site Restoration
Consistent with the Corporation’s depreciation study, this balance represents the amounts
collected in rates over the life of certain assets attributable to removal and site restoration costs
that are expected to be incurred in the future. Depreciation expense includes an amount allowed
for regulatory purposes for these future removal and site restoration costs. Actual costs of removal
and restoration incurred are recorded against this balance. This balance represents the amount
of expected future removal and site restoration expense associated with assets in service as at
the balance sheet date, calculated using the current rates approved by the AUC. Any difference
between actual costs incurred and those assumed in the collected amounts and any cumulative
adjustments resulting from changes to the AUC-approved rates at which these costs are collected,
are reflected in this balance with the offset being recorded as adjustments to accumulated
depreciation. In the absence of regulation, removal costs would have been recognized as incurred
rather than over the life of the asset through depreciation expense. The amount for future removal
and site restoration costs included in the depreciation expense was $17.7 million in 2008 (2007
- $17.7 million). Actual site restoration costs were $15.4 million in 2008 (2007 - $16.6 million).
Therefore for 2008, in the absence of rate regulation, depreciation expense would have been $17.7
million lower (2007 - $17.7 million) and operating expenses would have been $15.4 million higher
(2007 - $16.6 million). In the absence of rate regulation, the provision for future removal and site
restoration would not be recognized, thus decreasing regulatory liabilities and increasing retained
earnings by $264.4 million in 2008 (2007 - $252.7 million).

Change in Amortization of Financing Fees
This balance represented the difference between the amortization method of financing fees used
for GAAP purposes and that used for regulatory purposes. Effective January 1, 2007 per Section
3855, financing fees were to be amortized using the effective interest method and a cumulative
adjustment was recorded to calculate the impact on the accumulated amortization had the effective
interest method been utilized from the date the financing fees were incurred. For regulatory
purposes the straight line method had been used. Therefore, this balance was the cumulative
adjustment and difference between amortization for GAAP and regulatory up to December 31,
2007. This balance was refunded to customers in 2008. In the absence of rate regulation, electric
rate revenue would have been $325 lower in 2008 (2007 - $110 higher).

Revenue Deferral for 2007 Return on Equity Reduction
This balance represented the change in the 2007 return on equity from the estimated rate of 8.93%
in Decision 2006-063 compared to the actual rate of 8.51%, which was subsequently approved by
the AUC in Miscellaneous Order U2006-292 on November 27, 2006. This balance was refunded to
customers in 2008. In the absence of rate regulation, electric rate revenue would have been $1,300
lower in 2008 (2007 - $1,300 higher).

AESO Contributions Deferral
As prescribed by the Decision, a deferral account for the difference in the depreciation and return
arising from any variance between the forecast and actual AESO contributions has been recorded.


                                                                2008 | FortisAlberta Annual Report - 71
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


To the extent that current rates are based on a lower forecast AESO contributions balance, the
difference in depreciation and return is deferred and will be recognized when collected in future
rates. In the event that current rates are based on a higher forecast AESO contributions balance,
the difference in depreciation and return is deferred as a regulatory liability. This liability will either
be refunded to customers through a reduction in future rates or will be recognized when additional
costs are incurred. In the absence of rate regulation, electric rate revenue would have been $2,600
higher in 2008 (2007 - $300 lower).

Hearing Cost Reserve
The AUC has the ability to allow costs of a proceeding to be borne by customers through a
utility’s hearing cost reserve account. The AUC will award participants in a utility proceeding
the reasonable costs associated with their involvement and will allow the Corporation to collect
these from customers. The amount of the hearing cost reserve account is applied for under the
Corporation’s tariff application as a component of the revenue requirement. This balance also
includes the deferral of costs associated with the tariff billing code initiative. To the extent that
actual costs incurred exceeded the amount collected in revenue, the excess costs have been
deferred and will be recognized when collected in future rates. In the event that the amount of
revenue collected in rates for these costs exceeds actual costs incurred, the excess revenue is
deferred as a regulatory liability. This liability will either be refunded to customers through a
reduction in future rates or will be recognized when additional costs are incurred. In the absence
of rate regulation, operating costs would have been $1,016 lower in 2008 (2007 - $61 higher) and
electric rate revenue would have been $322 higher in 2008 (2007 - nil).

7. DEBT
                                            Coupon           Payment        Maturity         2008 December 31, December 31,
                                               Rate             Terms          Date Effective Rate      2008         2007
Senior unsecured debentures                        %                                          %            $            $
 Series 04-1                                    5.33 Semi–annual               2014         5.47     200,000      200,000
 Series 04-2                                    6.22 Semi–annual               2034         6.31     200,000      200,000
 Series 06-1                                    5.40 Semi–annual               2036         5.48     100,000      100,000
 Series 07-1                                    4.99 Semi–annual               2047         5.04     109,889      109,888
 Series 08-1                                    5.85 Semi–annual               2038         5.94      99,471             –
Drawing on the syndicated
credit facility                             variable          variable         2012         3.73     120,866       19,954
Cash balances in overdraft
position                                         N/A               N/A         2009            –        7,212       8,386
Deferred financing fees                             –                   –         –            –      (6,456)       (5,933)
                                                                                                     830,982      632,295
Less: short-term debt                                                                                   7,212       8,386
Long-term debt                                                                                       823,770      623,909

On April 8, 2008, the Corporation entered into an agreement with a syndicate of agents
pursuant to which the Corporation agreed to sell $100.0 million of senior unsecured
debentures. The debentures bear interest at a rate of 5.85%, to be paid semi-annually, and
mature on April 15, 2038. The transaction closed on April 15, 2008, with the proceeds of the
issue being used to repay existing indebtedness incurred under the syndicated credit facility,
and for general corporate purposes.

The Corporation has an unsecured syndicated credit facility with an amount available of $200.0
million, and with the consent of the lenders, the amount can be increased to $250.0 million.
The maturity date of this facility is May 2012. Drawings under the syndicated credit facility are


72 - Energy Your Way
                                                                                     Notes to the Financial Statements
                                                                                    For the years ended December 31, 2008 and 2007
                                                                (All amounts in thousands of Canadian dollars unless otherwise noted)


available by way of prime loans, bankers’ acceptances and letters of credit. Prime loans issued
under the syndicated credit facility bear an interest rate of prime. Banker’s acceptances issued
under the syndicated credit facility are issued at the applicable banker’s acceptance discount rate
plus a stamping fee calculated at 0.375%. The average interest rate for the year ended December
31, 2008 on the syndicated credit facility was 3.7% (year ended December 31, 2007 – 5.0%).
As at December 31, 2008, there were $120.9 million in drawings under the facility for banker’s
acceptances (December 31, 2007 - $20.0 million), and there was $42.3 million drawn in letters of
credit (December 31, 2007 - $44.3 million).

In December 2008, the Corporation filed a short-form base shelf prospectus (“Shelf”) with the
security commissions or similar authorities in Canada. This Shelf contemplates the issuance of
up to $350.0 million medium term note debentures, which would be direct, senior unsecured
obligations of the Corporation.

An unsecured demand facility of $10.0 million was available to the Corporation as at December 31,
2008. This facility bears an interest rate on all drawings equal to prime minus 0.5%. There were
drawings on this facility as at December 31, 2008 of $1.5 million (December 31, 2007 – $6.6 million).

As indicated in Note 2 l), deferred financing fees are taken into income using the effective interest
method over the life of the related senior unsecured debentures. Included in interest expense on
long-term debt was $304 of amortization of deferred financing fees in 2008 (2007 - $285).

Scheduled principal repayments are as follows:

                                                                                                                                  $
2009                                                                                                                         7,212
2010                                                                                                                             –
2011                                                                                                                             –
2012                                                                                                                     120,866
2013                                                                                                                             –
Thereafter                                                                                                               709,360
                                                                                                                          837,438

8. OTHER LIABILITIES
Other liabilities consist of the following:

December 31                                                                                                2008              2007
Other post-retirement benefits and supplemental pension plan (Note 11)                                   4,220              3,418
Deferred lease inducement                                                                                      –              299
Deferred revenue                                                                                            429                112
                                                                                                         4,649              3,829
Less: current portion included in accounts payable, accrued and other liabilities                           429               209
Long-term other liabilities                                                                              4,220              3,620




                                                                           2008 | FortisAlberta Annual Report - 73
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


9. SHARE CAPITAL
Authorized - unlimited number of:
     •	    Common shares
     •	    Class A common shares
First Preferred non-voting shares, redeemable, cumulative dividend at 10% of the redemption price.

Issued - 63 Class A common shares, with no par value

December 31                                                                                                         2008                 2007
Class A common shares                                                                                           173,848           173,848
Contributed surplus                                                                                             338,731           278,731
Total share capital                                                                                             512,579           452,579

The Corporation was incorporated under the laws of Alberta for the initial purpose of
acquiring the distribution and retail operations of TransAlta, pursuant to an asset transfer
agreement, which had an effective closing date of August 31, 2000. The Corporation was
acquired by an indirectly wholly-owned subsidiary of Aquila, a U.S. public company, on
August 31, 2000. The consideration paid for this acquisition has been recorded in these
financial statements using push down accounting, the final adjustment of which occurred on
March 15, 2002.

Contributed surplus relates to the pushdown of the purchase price premium paid by the
Corporation’s former parent on acquisition of the Corporation and equity contributions
from Fortis Alberta Holdings Inc. (the Corporation’s parent and an indirectly wholly-owned
subsidiary of Fortis) for which no additional shares were issued.

During the year ended December 31, 2008, the Corporation received equity contributions from
Fortis Alberta Holdings Inc. in the amount of $60.0 million (December 31, 2007 - $40.0 million).

During 2008, the Corporation declared and paid dividends totalling $18.0 million (2007 - $15.5
million) to Fortis Alberta Holdings Inc.

10. CAPITAL MANAGEMENT
The Corporation’s objectives when managing capital are to ensure ongoing access to capital to
allow it to build and maintain the electrical distribution system within the Corporation’s service
territory. To ensure this access to capital, the Corporation targets a long-term capital structure
that includes approximately 60% long-term debt and 40% equity. This ratio is maintained by the
Corporation through the issuance from time to time of bonds or other evidences of indebtedness,
and/or equity contributions by Fortis Alberta Holdings Inc.

Summary of Capital Structure
December 31                                                                                       2008                               2007
                                                                        ($ millions)                 %       ($ millions)                  %
Total long-term debt     (a)
                                                                               830.2              60.5             629.9                 58.2
Shareholder’s equity                                                            541.4             39.5             453.3                 41.8
Total                                                                        1,371.6             100.0           1,083.2             100.0
     Note:
     a.    The December 31, 2008, balance does not include deferred financing fees of $6.5 million (December 31, 2007 - $5.9 million).




74 - Energy Your Way
                                                                           Notes to the Financial Statements
                                                                          For the years ended December 31, 2008 and 2007
                                                      (All amounts in thousands of Canadian dollars unless otherwise noted)


In the management of capital, the Corporation includes shareholder’s equity (excluding
accumulated other comprehensive income), short-term and long-term debt, and cash and cash
equivalents in the definition of capital.

As at December 31, 2008, the Corporation has externally imposed capital requirements by virtue
of the trust indenture and the syndicated credit facility to which it is subject that limit the amount
of debt that can be incurred relative to equity. The Corporation is in compliance with these
externally imposed capital requirements as at December 31, 2008.

11. EMPLOYEE FUTURE BENEFITS
a) Description
The Corporation sponsors a pension plan with a defined contribution component for the majority
of its employees. Certain other long-service employees accrue benefits under a defined benefit
component of the pension plan. The defined contribution component of the plan is based on a
percentage of pensionable earnings and the defined benefit component of the plan is based on
final average pensionable earnings. Pensionable earnings include base pay and eligible bonuses.
The Corporation also provides certain other post-retirement benefits including certain health and
dental coverage provided to retired employees and a supplemental pension plan, both of which
are unfunded.

The Corporation uses a measurement date that is three months prior to the reporting date for
the actuarial valuation undertaken for expense calculation purposes. The most recent actuarial
valuation of the plans for funding purposes was completed for the period ended December 31,
2007. Information from the funding valuation was used in the actuarial valuation completed for
expense calculation purposes. The next actuarial valuation for funding purposes is required to be
completed as of a date no later than December 31, 2010, which would be filed in 2011.

The net periodic cost for the year ended December 31, 2008 was determined based on the financial
position of the plans at December 31, 2007 (using a measurement date of September 30, 2007).
The net periodic cost for the year ended December 31, 2007 was determined based on the financial
position of the plans at December 31, 2006 (using a measurement date of September 30, 2006).

b) Costs Recognized
In 2007 and 2008, the Corporation recovered in rates other post-retirement benefits, supplemental
pension plan costs, defined benefit and defined contribution costs based on the estimated cash
payments included in the Decisions. Any difference between the expense recognized under GAAP
for pension and other post-retirement plans and that recovered in current rates, which is expected
to be recovered or refunded in future rates, is subject to deferral treatment.

c) Plan Amendments
In 2007, the Corporation recorded an amendment of $1,045 to its non-pension post-retirement
benefit plan, with respect to grandfathering the current arrangement to retirees prior to January 1,
2015 and the implementation of a health spending account effective January 1, 2015.




                                                                 2008 | FortisAlberta Annual Report - 75
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


Components of Net Periodic Costs
                                                                        Retirement    Supplemental    Non–Pension    All Benefits
December 31, 2008                                                             Plan            Plan        Benefits       Covered
Current service cost (employer portion)                                       791            157             327          1,275
Interest cost                                                               1,302              43            305          1,650
Actual return on plan assets                                                2,247               –               –         2,247
Actuarial (gains) losses                                                    (2,237)            22            885          (1,330)
Costs arising in the period                                                 2,103            222            1,517         3,842
Differences between costs arising in the period and
costs recognized in the period in respect of:
- Return on plan assets                                                     (3,674)             –               –         (3,674)
- Actuarial loss (gain)                                                     2,986               –            (818)        2,168
- Plan amendments                                                              80               –              75           155
Net periodic pension cost recognized                                        1,495            222             774          2,491
Regulatory adjustment to net benefit cost                                     189            (191)           (610)          (612)
Net benefit cost recognized in financial statements                         1,684              31            164          1,879
Defined contribution net benefit cost recognized in
financial statements                                                        5,507               –               –         5,507
Total recognized in financial statements                                     7,191             31            164          7,386


Components of Net Periodic Costs
                                                                        Retirement Supplemental       Non–Pension    All Benefits
December 31, 2007                                                             Plan         Plan           Benefits       Covered
Current service cost (employer portion)                                        783            225             338          1,346
Interest cost                                                                1,125             33             271          1,429
Actual return on plan assets                                                (1,704)             –               –         (1,704)
Actuarial losses (gains)                                                       451              (1)          (514)           (64)
Plan amendments                                                                  –              –           1,045          1,045
Costs arising in the period                                                    655            257           1,140          2,052
Differences between costs arising in the period and costs
recognized in the period in respect of:
- Return on plan assets                                                        404              –               –            404
- Actuarial loss (gain)                                                        131              –             625            756
- Plan amendments                                                               80              –            (989)          (909)
Net periodic pension cost recognized                                         1,270            257             776          2,303
Regulatory adjustment to net benefit cost                                     (623)          (240)           (658)        (1,521)
Net benefit cost recognized in financial statements                            647             17             118            782
Defined contribution net benefit cost recognized in
financial statements                                                         4,692              –               –          4,692
Total recognized in financial statements                                     5,339             17             118          5,474




76 - Energy Your Way
                                                                    Notes to the Financial Statements
                                                                   For the years ended December 31, 2008 and 2007
                                               (All amounts in thousands of Canadian dollars unless otherwise noted)


Composition of Accrued Benefit Asset (Liability)
                                             Retirement Supplemental Non–Pension                   All Benefits
December 31, 2008                                  Plan         Plan     Benefits                      Covered
Fair value of assets                               18,122                 –                  –          18,122
Accrued benefit obligation                      (21,907)              (948)           (6,567)          (29,422)
Resulting plan deficit                             (3,785)            (948)           (6,567)          (11,300)
Unamortized amounts:
- Net actuarial losses                             6,895                  –            2,348             9,243
- Past service costs                                 429                  –                  –              429
- Plan amendments                                       –                 –               914               914
Contributions after the measurement date             456                  –                34               490
Total recognized in financial statements           3,995              (948)           (3,271)              (224)



Composition of Accrued Benefit Asset (Liability)
                                             Retirement       Supplemental Non–Pension             All Benefits
December 31, 2007                                  Plan               Plan     Benefits                Covered
Fair value of assets                               20,131                 –                  –          20,131
Accrued benefit obligation                      (23,037)               (757)           (5,216)          (29,010)
Resulting plan deficit                             (2,906)             (757)           (5,216)           (8,879)
Unamortized amounts:
- Net actuarial losses                              6,048                 –            1,530              7,578
- Past service costs                                 509                  –                  –              509
- Plan amendments                                       –                 –               989               989
Contributions after the measurement date             155                  –                36               191
Total recognized in financial statements            3,806              (757)           (2,661)              388



Plan Assets
                                            Retirement       Supplemental      Non–Pension         All Benefits
December 31, 2008                                 Plan               Plan          Benefits            Covered
Fair value of assets at beginning of year          20,131                 –                  –          20,131
Net transfer in                                      127                  –                  –              127
Employer contributions                             1,383                31                166            1,580
Member contributions                                  59                  –                  –               59
Benefits paid                                       (842)               (31)             (166)           (1,039)
Actual return on plan assets                       (2,247)                –                  –           (2,247)
Actual plan expenses                                (489)                 –                  –             (489)
Fair value of assets at end of year                18,122                 –                  –          18,122




                                                            2008 | FortisAlberta Annual Report - 77
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


Plan Assets
                                                                        Retirement   Supplemental Non–Pension    All Benefits
December 31, 2007                                                             Plan           Plan     Benefits       Covered
Fair value of assets at beginning of year                                  18,560              –            –        18,560
Net transfer in                                                                44              –            –            44
Employer contributions                                                        613            17           118           748
Member contributions                                                           71              –            –            71
Benefits paid                                                                (472)           (17)        (118)         (607)
Actual return on plan assets                                                1,704              –            –         1,704
Actual plan expenses                                                         (389)             –            –          (389)
Fair value of assets at end of year                                        20,131              –            –        20,131


Reconciliation of Accrued Benefit Obligation
                                                                        Retirement   Supplemental Non–Pension    All Benefits
December 31, 2008                                                             Plan           Plan     Benefits       Covered
Benefit obligations at beginning of year                                   23,037           757         5,216        29,010
Current service cost                                                          461           157           327           945
Interest cost on accrued benefit obligation                                 1,302            43           305         1,650
Member contributions                                                           59              –            –            59
Benefits paid                                                                (842)          (31)         (166)       (1,039)
Net transfer in                                                               127              –            –           127
Actuarial (gain) loss                                                      (2,237)           22           885        (1,330)
Benefit obligations at end of year                                         21,907           948         6,567        29,422


Reconciliation of Accrued Benefit Obligation
                                                                        Retirement Supplemental Non–Pension      All Benefits
December 31, 2007                                                             Plan         Plan     Benefits         Covered
Benefit obligations at beginning of year                                   21,275           517         4,178        25,970
Current service cost                                                          543           225           338         1,106
Interest cost on accrued benefit obligation                                 1,125            33           271         1,429
Member contributions                                                           71              –            –            71
Plan amendments                                                                 –              –        1,045         1,045
Benefits paid                                                                (472)           (17)        (102)         (591)
Net transfer in                                                                44              –            –            44
Actuarial loss (gain)                                                         451             (1)        (514)           (64)
Benefit obligations at end of year                                         23,037           757         5,216        29,010




78 - Energy Your Way
                                                                                     Notes to the Financial Statements
                                                                                    For the years ended December 31, 2008 and 2007
                                                                (All amounts in thousands of Canadian dollars unless otherwise noted)


Reconciliation of Accrued Benefit Asset (Liability)
                                                              Retirement Supplemental Non–Pension                   All Benefits
December 31, 2008                                                   Plan         Plan     Benefits                      Covered
Accrued benefit asset (liability) at beginning of year             3,806               (757)            (2,661)              388
Net periodic cost                                                 (1,495)              (222)              (774)           (2,491)
Employer contributions/ benefits paid                              1,684                  31               164             1,879
Accrued benefit asset (liability) at end of year                   3,995               (948)            (3,271)             (224)


Reconciliation of Accrued Benefit Asset (Liability)
                                                              Retirement Supplemental           Non–Pension         All Benefits
December 31, 2007                                                   Plan         Plan               Benefits            Covered
Accrued benefit asset (liability) at beginning of year              4,429               (517)          (2,003)             1,909
Net periodic cost                                                  (1,270)              (257)             (776)           (2,303)
Employer contributions/ benefits paid                                 647                 17               118               782
Accrued benefit asset (liability) at end of year                    3,806               (757)           (2,661)              388



As at September 30, the assets of the defined benefit plan were invested as follows:                      2008               2007
                                                                                                              %                 %
Equity securities                                                                                          55.4               62.6
Debt securities                                                                                            42.0               37.4
Cash and cash equivalents                                                                                    2.6               0.0
                                                                                                          100.0             100.0



                                                                                                Year Ending Year Ending
Plan assumptions - the significant actuarial assumptions utilized in measuring the               December     December
Corporation’s accrued benefit obligations were as follows:                                         31, 2008    31, 2007
                                                                                                              %                 %
Accrued benefit obligations
- Liability discount rate retirement plan                                                                  6.70               5.60
- Liability discount rate non-pension benefits                                                             6.40               5.60
- Rate of compensation increase                                                                            5.00              5.00
Net benefit cost during the period
- Liability discount rate                                                                                  5.60               5.20
- Rate of compensation increase                                                                            5.00               4.25
- Expected long-term rate of return on assets                                                              7.00               7.00
Health care trend rate:
Weighted average rates                                                                                     7.50               7.80
Ultimate rate to which the trend rate is assumed to decline                                                5.00              5.00
Year in which ultimate rate is reached                                                                    2024               2010




                                                                            2008 | FortisAlberta Annual Report - 79
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


The effects of changing the health care trend rate by a 1% increase and a 1% decrease are as follows:

                                                                                               1% Increase 1% Decrease
                                                                                                    in Rate    in Rate
Increase (decrease) in accrued benefit obligation                                                      486          (441)
Increase (decrease) in combined interest cost plus current service costs                                76            (65)

12. STOCK OPTIONS
Fortis is authorized to grant certain key employees and directors of Fortis and its subsidiaries
options to purchase common shares of Fortis. The options are issued at the five-day average
trading price immediately preceding the date of grant. Options vest evenly over a four-year period
on each anniversary of the date of grant. The options expire 7 to 10 years after the date of grant. At
December 31, 2008, Fortis had approximately 169.2 million common shares in the reserve for issue
under the terms of the stock-based compensation and share purchase plans. The following tables
outline the options granted to employees of the Corporation.

                                                                         Number of Stock              Weighted Average
                                                                                Options                 Exercise Price $
Outstanding at December 31, 2007                                                   232,646                          22.88
Exercised                                                                          (56,022)                         20.27
Cancelled                                                                          (12,152)                         28.27
Granted                                                                            107,328                          28.27
Outstanding at December 31, 2008                                                   271,800                          25.31


   Number Outstanding as                                                  Number Vested at
     at December 31, 2008                             Exercise Price     December 31, 2008                   Expiry Date
                            9,454                                15.28                9,454                          2014
                           11,916                                14.55               11,916                          2014
                          26,304                                 18.40                6,815                          2015
                            1,921                                20.82                     –                         2015
                           44,701                                22.94                2,484                          2016
                          82,328                                 28.19               20,582                          2014
                           95,176                                28.27                     –                         2015
                         271,800                                                     51,251


Grant Date                           Number of Options Granted              Exercise Price $ Fair MarketValue per Option $
February 26, 2008                                              107,328                28.27                          4.76

The fair values of the options granted were estimated on the date of grant using the Black-Scholes
fair value option-pricing model and the following assumptions:

Dividend yield (%)                                                                                                   2.90
Expected volatility (%)                                                                                             20.70
Risk-free interest rate (%)                                                                                          3.92
Weighted - average expected life (years)                                                                              4.5

Compensation expense was $429 for the year ended December 31, 2008 (2007 - $350).




80 - Energy Your Way
                                                                                                 Notes to the Financial Statements
                                                                                                For the years ended December 31, 2008 and 2007
                                                                            (All amounts in thousands of Canadian dollars unless otherwise noted)


13. RELATED PARTY TRANSACTIONS
In the normal course of business, the Corporation transacts with its parent and other related
companies under common control. The amounts included in accounts receivable and other long-
term assets and accounts payable for related parties were measured at the exchange amount and
are as follows:

                                                                               Included in Accounts
                                                                                Receivable or Other                 Included in Accounts
                                                                                  Long–term Assets                               Payable
December 31                                                                      2008               2007               2008              2007
FortisBC Inc.                                                                        23                 22                  2                 1
Fortis                                                                               13                  1                  5              174
Fortis Turks and Caicos Inc.                                                       555                   –                  –                 –
Maritime Electric Company, Limited                                                     –                 5                  –                 –
FortisOntario Inc.                                                                     –                 4                  –                 –
Newfoundland Power Inc.                                                                –                 –                53                  –
Housing loans to officers of the Corporation(a)                                    750                625                   –                 –
Stock option loans to officers of the Corporation        (b)
                                                                                   560                200                   –                 –
Employee share purchase plan loans to officers of the
Corporation(c)                                                                       30                 20                  –                 –
Employee computer loans to officers of the Corporation(d)                             1                  2                  –                 –
Total                                                                            1,932                879                 60               175
    Notes:
    a.   In June 2007, a loan of $1,223 was granted to an officer of the Corporation for housing and relocation of which $623 was
         subsequently repaid leaving a balance of $600 outstanding as at December 31, 2008. The loan is interest-free for a period of three
         years from the loan grant date after which interest will accrue at the rate of prime plus 0.5%. The total amount of the loan must
         be repaid within 10 years of the loan grant date. The loan is secured by a mortgage on the residence purchased by the officer. This
         accounts receivable is recorded within other long-term assets in the balance sheet.

         In May 2008, a loan of $810 was granted to an officer of the corporation for housing and relocation of which $660 was
         subsequently repaid leaving a balance payable of $150 at of December 31, 2008. The loan is interest-free for a period of three years
         from the loan grant date after which interest will accrue at the rate of prime plus 0.5%. The total amount of the loan must be repaid
         within 10 years of the loan grant date. The loan is secured by a mortgage on the residence purchased by the officer. This accounts
         receivable is recorded within other long-term assets in the balance sheet.
    b.   In 2007, a loan of $200 was granted to an officer of the Corporation for purposes of exercising their Fortis stock options. The loan
         interest is equal to the amount of the dividends received on the shares. The total amount of the loan must be repaid within 10
         years of the loan grant date. The stock option loan is secured by the share certificates held by the officer, which had a fair value as
         at December 31, 2008 of $261. This accounts receivable is recorded within other long-term assets in the balance sheet.

         In 2008, loans of $360 were granted to officers of the Corporation for purposes of exercising their Fortis stock options. The interest
         on the loans is equal to the amount of the dividends received on the shares. The total amount of the loans must be repaid within
         10 years of the grant date of the loans. The stock option loans are secured by the share certificates held by the officers, which had a
         fair value as at December 31, 2008 of $411. This accounts receivable is recorded within other long-term assets in the balance sheet.
    c.   The amounts receivable under the employee share purchase plan are for loans to officers of the Corporation under the employee
         share purchase plan. These loans are taken on an interest-free basis and must be repaid in full within one year of the share
         purchase date.
    d.   The amounts receivable under the computer loans are for loans to officers of the Corporation under the employee personal
         computer purchase program. These loans are taken on an interest-free basis and must be repaid in full within three years of the
         loan issue date.

The Corporation bills related parties on terms and conditions consistent with billings to third
parties. These require amounts to be paid on a net 30 day basis with interest on overdue
amounts charged at a rate of 1.5% per month (19.56% per annum). Terms and conditions on
amounts billed to the Corporation by related parties are net 30 days with interest being charged
on any overdue amounts.




                                                                                       2008 | FortisAlberta Annual Report - 81
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


The amounts included in other revenue and operating expenses for related parties for the years
ended December 31, 2008 and 2007 were measured at the exchange amount and are as follows:

                                                                        Included in Other Revenue   Included in Expenses
December 31                                                                   2008          2007      2008         2007
                                                                                  $            $          $           $
Caribbean Utilities Company Ltd.                                                  –           13          –            –
FortisBC Inc.                                                                   278          246        31           53
Fortis                                                                           85           23      1,524        1,148
Fortis Pacific Holdings Inc.                                                      6           10          –            –
Fortis Properties Inc.                                                            3            –          9            –
Fortis Turks and Caicos Inc.                                                    555            –          –            –
Maritime Electric Company, Limited                                               15           16          –            –
Newfoundland Power Inc.                                                           –           13       174           17
FortisOntario Inc.                                                                –            4          –            –
Terasen Gas Inc.                                                                  –            –          6            –
Total                                                                           942          325      1,744        1,218

FortisBC Inc. is a regulated electric utility that generates, transmits and distributes electricity in
the Province of British Columbia and is indirectly wholly owned by Fortis. FortisBC Inc. billed the
Corporation in 2008 for charges consisting of material purchases in the amount of $1 recorded in
property, plant and equipment, as well as for employee services. In 2008 the Corporation provided
material sales, employee services and metering services to FortisBC Inc.

Fortis is a diversified, international electricity and gas distribution utility holding company having
investments in distribution, transmission and generation utilities, real estate and hotel operations,
and is the indirect parent of the Corporation. Fortis billed the Corporation in 2008 for charges relating
to corporate governance expenses, stock-based compensation costs and employee services. The
2008 billings to Fortis were largely due to employee services and material purchases.

Fortis Pacific Holdings Inc. (“Fortis Pacific”) is an indirectly wholly-owned subsidiary of
Fortis. Fortis Pacific is the parent company of FortisBC Inc. Fortis Pacific received metering services
from the Corporation in 2008.

Fortis Properties Inc. is a wholly-owned subsidiary of Fortis. Fortis Properties Inc. is a
diversified company with holdings in commercial real estate, hotels and hydroelectric generation.
Fortis Properties Inc. billed the Corporation for employee services in 2008. Fortis Properties Inc.
received employee services from the Corporation in 2008.

Fortis Turks and Caicos Inc. is an indirectly wholly-owned subsidiary of Fortis. Fortis Turks
and Caicos Inc. owns and operates a fully integrated system providing for the generation and
distribution of energy on the Turks and Caicos Islands. Fortis Turks and Caicos Inc. received
employee services from the Corporation in 2008.

Maritime Electric Company, Limited (“Maritime Electric”) common shares are owned by
Fortis Properties Corporation, which is a holding company of Fortis. Maritime Electric is a principal
distributor of electricity in the Province of Prince Edward Island. Maritime Electric received
metering services from the Corporation in 2008.

Newfoundland Power Inc. is an electric utility that is a wholly-owned subsidiary of Fortis and
owns and operates an integrated generation, transmission and distribution system throughout the
island portion of the Province of Newfoundland and Labrador. Newfoundland Power Inc. billed the
Corporation for employee services in 2008.

82 - Energy Your Way
                                                                             Notes to the Financial Statements
                                                                            For the years ended December 31, 2008 and 2007
                                                        (All amounts in thousands of Canadian dollars unless otherwise noted)


Terasen Gas Inc. delivers natural gas and piped propane to homes and businesses throughout
the Province of British Columbia and is a wholly-owned subsidiary of Fortis. Terasen Gas Inc. billed
the Corporation for employee services in 2008.

All services provided to or received from related parties were billed on a cost recovery basis.

14. PROVISION FOR INCOME TAXES
The provision for income taxes varies from the amount that would be expected if computed by
applying the enacted Canadian federal and provincial statutory income tax rates to the income
before income taxes as shown in the following table:

December 31                                                 2008              2008               2007              2007
                                                                 $                %                   $                %
Income before income taxes                                43,051                              36,698


Expected provision for income taxes                       12,700                29.5           11,787               32.1
Adjustments resulting from differences between income
for accounting and income tax purposes:
 Capital assets                                          (13,826)              (32.1)         (20,076)              (54.7)
 Other expenses                                              (405)               (0.9)         (1,849)               (5.0)
Future income tax rate changes and other                   (1,511)               (3.5)         (1,056)               (2.9)
Provision for income taxes                                (3,042)                (7.1)        (11,194)              (30.5)

Future income tax asset (liability) is comprised of:

December 31                                                                    2008                                 2007
                                                                                    $                                    $
Regulatory assets and liabilities                                            (1,832)                              (2,398)
Less: current portion                                                        (2,104)                                 538
Long-term portion                                                               272                               (2,936)

The Corporation follows the taxes payable method of accounting for federal and provincial income
taxes. Had the Corporation accounted for its regulated operations using the liability method, the
Corporation would have had additional future income tax assets of approximately $18.1 million for
the year ended December 31, 2008 (December 31, 2007 - $29.2 million) and would have recognized
an additional future income tax expense of approximately $11.3 million for the year ended
December 31, 2008 (December 31, 2007 - $27.1 million).

During the year, the Corporation adopted a revised tax strategy such that it will utilize the
deductions arising from the AESO charges deferral that will be incurred in the year to create a loss
carry forward. This resulted in the creation of a future income tax asset resulting from the loss
carry forward on the 2008 AESO charges deferral of approximately $17.0 million, which is expected
to be utilized when the 2008 AESO charges deferral is collected in a subsequent period. The impact
of this transaction on the financial statements was a future income tax recovery and future income
tax asset of approximately $17.0 million. The future income tax asset has been offset against the
Corporation’s long-term future income tax liability as the amounts relate to the same taxable entity
and the same taxation authority.




                                                                     2008 | FortisAlberta Annual Report - 83
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


15. COMMITMENTS AND CONTINGENCIES
a) Operating Leases and Other Contractual Obligations
The Corporation has operating leases for facilities and office premises. Also, the Corporation
and an Alberta transmission service provider have entered into an agreement in consideration
for joint attachments of distribution facilities to the transmission system. The expiry terms of
this agreement state that the agreement remains in effect until the Corporation no longer has
attachments to the transmission facilities. Due to the unlimited term of this contract, the calculation
of future payments after 2013 includes payments to the end of 20 years. However, the payments
under this agreement may continue for an indefinite period of time. In addition, the Corporation
and an Alberta transmission service provider have entered into a number of service agreements
to ensure operational efficiencies are maintained through coordinated operations. The service
agreements have minimum expiry terms of five years from September 1, 2005, and are subject to
extension based on mutually agreeable terms.

Future minimum payments are as follows:

                                                                                                        $
2009                                                                                                4,443
2010                                                                                                 4,130
2011                                                                                                3,404
2012                                                                                                3,279
2013                                                                                                 3,276
Thereafter                                                                                         45,900
                                                                                                   64,432

b) Legal Proceedings
The Corporation is subject to various legal proceedings and claims that arise in the ordinary
course of business operations. The Corporation believes that the amount of liability, if any, from
these actions would not have a material effect on the Corporation’s financial position or results
of operations.

A Statement of Claim was filed on December 18, 2007 in which the Plaintiff, a minor, claims
damages in excess of $4.5 million against the numerous defendants, including the Corporation.
The Plaintiff’s claim arises from personal injuries he suffered in August, 2006 as a result of a
motorcycle accident. The Plaintiff alleges that the defendants or any of them, including the
Corporation, negligently erected or failed to remove a wire that was strung between a sign and a
power pole of the Corporation. While riding his motorcycle, the Plaintiff is alleged to have struck
the wire causing his injuries. On August 27, 2008 the parents of the Plaintiff issued a Statement of
Claim in the Court of Queen’s Bench of Alberta, Judicial District of Edmonton claiming that they
suffered damages arising from the mental distress they are alleged to have suffered as a result
of witnessing the aftermath of their son’s injuries. The combined value of the damages claimed in
the action by the two parents is approximately $350,000. The Corporation’s insurer has agreed to
extend coverage for the Plaintiff’s claim as well as the claim of his parents. Based on a preliminary
investigation of the claims, management believes that the accident was not caused by the
Corporation’s facilities and that the Corporation has no liability for either the Plaintiff’s claim or that
of his parents. However, it is too early in the proceedings to provide a definitive assessment of the
Corporation’s exposure.

Pursuant to a settlement agreement between the Corporation and Her Majesty the Queen in
Right of Alberta (the “Crown”), a Discontinuance of Action was filed on September 10, 2008 in
the Court of Queen’s Bench of Alberta in the Judicial District of Edmonton in relation to a March
24, 2006 Statement of Claim wherein the Crown claimed that the Corporation was responsible


84 - Energy Your Way
                                                                                              Notes to the Financial Statements
                                                                                             For the years ended December 31, 2008 and 2007
                                                                         (All amounts in thousands of Canadian dollars unless otherwise noted)


for a fire that occurred in October of 2003 in an area of the Province of Alberta commonly
                                                 .
referred to as “Poll Haven Community Pasture” Payment of the settlement funds was covered by
the terms of an insurance contract between the Corporation and its insurer. All other aspects of
the settlement are confidential.

c) Capital Expenditures
As an electric utility, the Corporation is obligated to provide service to customers within its service
territory. As such, the Corporation may be required to expend capital in excess of that which it has
forecast in its distribution tariff application.

d) Pension Contribution Obligations
The Corporation is obligated to make a minimum pension contribution into a defined benefit
component of the Corporation’s pension plan for certain employees, which according to the
Actuarial Valuation for Funding Purposes as at December 31, 2007 amounts to approximately $1.6
million in both 2009 and 2010. Future actuarial valuations will establish the funding obligations
for subsequent years, which could be materially different depending upon market conditions. The
next required funding valuation is expected to be completed as at December 31, 2010.

16. FINANCIAL INSTRUMENTS
a) Designation and Valuation of Financial Instruments
CICA Handbook Section 3855, Financial Instruments – Recognition and Measurement, requires
an entity to designate its financial instruments into one of the following five categories: 1) loans
and receivables, 2) assets held-to-maturity, 3) assets available-for-sale, 4) other financial liabilities,
and 5) held-for-trading assets and liabilities. The Corporation did not designate any of its financial
assets as either held-to-maturity or available-for-sale.

The Corporation has elected to designate its financial instruments as follows:

Year Ended December 31                                                                           2008                                 2007
                                                                         Carrying        Estimated            Carrying        Estimated
                                                                           Value         Fair Value             Value         Fair Value
Loans and receivables
 Accounts receivable(a),(b)                                                 71,833            71,833             70,362            70,362
 Long-term receivable(a),(c)                                                  2,904             2,904             3,324              3,324
Other financial liabilities
 Accounts payable and accrued liabilities(a),(d)                           128,627           128,627           144,935            144,935
 Short-term debt   (a)
                                                                              7,212             7,212             8,386              8,386
 Long-term debt   (e)
                                                                          830,226            768,635           629,842            668,520
    Notes:
    a.   Due to the nature and/or short maturity of these financial instruments, carrying value approximated fair value.
    b.   Included within Accounts Receivable and other assets in the Balance Sheet.
    c.   Included within Other Long-term Assets in the Balance Sheet.
    d.   Included within Accounts Payable, Accrued and Other Liabilities in the Balance Sheet.
    e.   The December 31, 2008 balance does not include deferred financing fees of $6.5 million (December 31, 2007 - $5.9 million).


The fair value of the long-term debt is estimated based on the quoted market prices for the same
or similarly rated issues for debt of the same remaining maturities.

b) Derivatives
The Corporation currently does not have any stand alone derivative instruments as defined
under Section 3855. The Corporation conducted a review of contractual agreements for
embedded derivatives.


                                                                                    2008 | FortisAlberta Annual Report - 85
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


Under Section 3855, a derivative must meet three specific criteria to be accounted for under the
Section. For contracts entered into by the Corporation, all potential embedded derivatives reviewed
by the Corporation were closely related with the economic characteristics and risks of the underlying
contract, had no notional amount that could be used to measure the instrument, or had no value.

c) Risk Management
Exposure to counterparty credit risk, interest rate risk and liquidity risk arises in the normal course
of the Corporation’s business. The Corporation currently does not enter into derivative financial
instruments to reduce exposure to fluctuations in any of the risks impacting the Corporation’s
operations. The Corporation enters into financial instruments to finance the Corporation’s
operations in the normal course of business.

     i) Counterparty Credit Risk
     The Corporation defines counterparty credit risk as the financial risk associated with the non-
     performance of contractual obligations by counterparties. The Corporation extends credit to
     select counterparties in its role as an electrical system distribution provider.

     The Corporation monitors its credit exposure in accordance with the Terms and Conditions of
     Distribution Access Service as approved by the AUC. The following table provides information
     on the counterparties that the Corporation extends credit to with respect to its distribution tariff
     billings as at December 31, 2008.

                                                             Number of
     Credit Rating                                        Counterparties     Gross Exposure     Exposure
     AAA to AA (low)                                                     1            1,528                –
     A (high) to A (low)                                                 7            3,124                –
     BBB (high) to BBB (low)                                             8            8,213                –
     Not rated                                                          40           73,711         3,365
     Total                                                              56           86,576         3,365

     Gross exposure represents the projected value of retailer billings over a 60-day period.
     As outlined in the Terms and Conditions of Distribution Access Service, the Corporation is
     required to minimize its gross exposure to retailer billings by obtaining an acceptable form of
     prudential. These acceptable forms of prudential include a cash deposit, bond, letter of credit,
     an investment grade credit rating from a major rating agency, or a financial guarantee from an
     entity with an investment grade credit rating.

     Retailers with investment grade credit ratings have the exposure shown as nil since the
     rating serves to reduce the amount of prudential required under the Terms and Conditions of
     Distribution Access Service. For retailers that do not have an investment grade credit rating,
     the exposure is calculated as the projected value of billings over a 60-day period less the
     prudential held by the Corporation.

     The recent volatility in the global capital markets and a slow down in the Alberta economy could
     cause the credit quality of some of the Corporation’s customers to decrease. In the event that the
     prudential obtained by the Corporation under the Terms and Conditions of Distribution Access
     Service is not sufficient to cover a loss due to non-payment from the Corporation’s counterparties,
     the Corporation would review all other options available to collect the non-payment. However,
     these options would not ensure that a loss could be avoided by the Corporation.

     ii) Interest Rate Risk
     The Corporation defines interest rate risk as the financial risk that the fair value or future cash
     flows of a financial instrument will fluctuate because of changes in market interest rates. The
     Corporation’s debentures bear fixed interest rates, thereby minimizing cash flow variability

86 - Energy Your Way
                                                                       Notes to the Financial Statements
                                                                      For the years ended December 31, 2008 and 2007
                                                  (All amounts in thousands of Canadian dollars unless otherwise noted)


due to interest rate exposures. The fair value of the fixed rate debentures fluctuates as market
interest rates change. However, the Corporation plans to hold these debentures until maturity
and applies in its rate applications to recover the actual interest rates on the debentures,
thereby mitigating the risk of these fluctuations. The drawings under the Corporation’s
syndicated credit facility are at current market short-term interest rates, thereby minimizing any
fluctuations in fair value.

A change in the Corporation’s interest rates results in interest rate exposure for drawings under
the syndicated credit facility. The Corporation has determined that a change in interest rates of
100 basis points represents a reasonably possible financial risk, and has prepared the following
sensitivity analysis to represent the impacts of a change on net income for the year ended
December 31, 2008:

                                                        12 Months Ended December 31, 2008
                                                            100 basis point                     100 basis point
                                                                  decrease                            increase
Increase (decrease) in net income                                           616                                (616)

Further, changes to the credit rating of the Corporation also represent a financial risk. The
Corporation has debt facilities, which have interest rate and fee components that are sensitive
to the credit rating of the Corporation. The Corporation is rated by Moody’s Investors Service
(“Moody’s”), Dominion Bond Rating Service Limited (“DBRS”) and Standard and Poor’s
(“S&P”) and a change in rating by any of these rating agencies could potentially increase or
decrease the interest expense of the Corporation.

As at December 31, 2008, the Corporation was rated by Moody’s at Baa1, by S&P at A-, and
by DBRS at A (low). A downward one notch change in the rating by any of DBRS, Moody’s or
S&P on January 1, 2008 could potentially have increased interest expense under these debt
facilities by approximately $98 for the year ended December 31, 2008.

iii) Liquidity Risk
The Corporation defines liquidity risk as the financial risk that the Corporation will encounter
challenges in meeting obligations associated with financial liabilities. The Corporation
anticipates it will be able to meet interest payments on outstanding indebtedness from
internally generated funds but expects to rely upon the proceeds of new indebtedness to meet
the principal obligations when due.

The recent volatility experienced in the global capital markets may increase the cost of
issuance of long-term capital by the Corporation. Capital market volatility may also impact the
Corporation’s future funding obligations and/or pension expense associated with its defined
benefit pension plan. There are a number of risks associated with the Corporation’s defined
benefit pension plan including: 1) there is no assurance that the Corporation’s defined benefit
pension plan will earn the assumed rate of return, 2) market driven changes may result in
changes in the discount rates and other variables, which would result in the Corporation being
required to make contributions in the future that differ significantly from the estimates, and
3) there is measurement uncertainty incorporated into the actuarial valuation process. These
risks are expected to be mitigated as the Corporation makes application in rates to collect from
customers the actual cash payments into the Corporation’s defined benefit pension plan and
defined contribution pension plans. Therefore, an increase or decrease in the Corporation’s
future funding obligations and/or pension expense associated with either plan is expected to
be collected or refunded in future rates, subject to forecast risk.

The Corporation’s outstanding financial liabilities, as at December 31, 2008, include short-
term debt, accounts payable and accrued liabilities, and long-term debt. The Corporation
expects to settle its financial liabilities relating to short-term debt and accounts payable

                                                             2008 | FortisAlberta Annual Report - 87
Notes to the Financial Statements
For the years ended December 31, 2008 and 2007
(All amounts in thousands of Canadian dollars unless otherwise noted)


     and accrued liabilities in accordance with their contractual terms of repayment, which are
     generally within one year. The following table summarizes the number of years to maturity of
     the principal outstanding and interest payments on the Corporation’s long-term debt, which
     is composed of drawings on the syndicated credit facility and senior unsecured debentures,
     as at December 31, 2008:

                                                                            1–5 years        6–10 years         >10 years              Total
     Drawings on the syndicated credit facility          (a)
                                                                              121,000                    –                   –      121,000
     Senior unsecured debentures          (b)


      - Principal payments                                                             –        200,000           510,000           710,000
      - Interest payments                                                     199,195           156,555           564,051           919,801
     Total                                                                    320,195           356,555         1,074,051         1,750,801
     Notes:
     a.   The Corporation’s syndicated credit facility has a maturity date of May 2012. The drawings under the syndicated credit facility as at
          December 31, 2008 are banker’s acceptances, which have their own contractual maturity dates. The amounts shown above reflect
          the principle and interest due when the current banker’s acceptances mature. This balance will fluctuate between December 31,
          2008 and the maturity date of the syndicated credit facility.
     b.    The December 31, 2008 balance does not include deferred financing fees of $6.5 million (December 31, 2007 – $5.9 million).

17. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in Other Non-cash Items Related to Operations
December 31                                                                                                         2008              2007
                                                                                                                         $                 $
Decrease (increase) in other long-term assets                                                                         420            (3,324)
(Increase) decrease in non-current regulatory assets                                                             (54,047)            21,199
(Increase) decrease in accrued pension assets                                                                        (189)              623
Increase in long-term other liabilities                                                                               600               801
Increase (decrease) in long-term regulatory liabilities                                                             2,757            (2,707)
Increase (decrease) in unamortized bankers acceptance discount                                                        107               (112)
Change in method of amortization of financing fees                                                                       –              (215)
                                                                                                                 (50,352)            16,265

Changes in Non-cash Working Capital Related to Operations
December 31                                                                                                         2008              2007
                                                                                                                         $                 $
(Increase) decrease in accounts receivable and other assets                                                        (2,287)            1,519
(Increase) decrease in income taxes receivable                                                                       (737)            8,313
(Increase) decrease in regulatory assets                                                                           (2,021)            8,276
(Decrease) increase in accounts payable, accrued and other liabilities                                           (22,360)           29,545
(Decrease) increase in income taxes payable                                                                          (912)              912
Decrease in regulatory liabilities                                                                                 (4,858)           (1,969)
                                                                                                                 (33,175)           46,596




88 - Energy Your Way
                                                                                              Notes to the Financial Statements
                                                                                             For the years ended December 31, 2008 and 2007
                                                                         (All amounts in thousands of Canadian dollars unless otherwise noted)


18. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current period’s presentation.



                                                  FortisAlberta Inc.
                                          Supplementary Financial Information
                                                  Coverage Ratios
                                                    (unaudited)

The following financial ratio is provided as additional supplementary information.

For the 12 months ended December 31                                                                                                   2008
Earnings coverage (times)    (a)
                                                                                                                                     2.019
    Note:
    a.    Net income before interest expense and taxes divided by interest expense.




                                                                                      2008 | FortisAlberta Annual Report - 89
Contact Information


Head Office:
FortisAlberta
320 - 17th Avenue SW
Calgary, Alberta, Canada T2S 2V1
Phone: 403.514.4000

For Power Outages:
310-WIRE (9473)
www.fortisalberta.com

For Investor Inquiries:
investors@fortisalberta.com
www.fortisinc.com




Belize Electricity Limited                                                www.bel.com.bz
Caribbean Utilities Company, Limited                                      www.cuc-cayman.com
FortisAlberta Inc.                                                        www.fortisalberta.com
FortisBC Inc.                                                             www.fortisbc.com
Fortis Inc.                                                               www.fortisinc.com
FortisOntario Inc.                                                        www.fortisontario.com
Fortis Properties Inc.                                                    www.fortisproperties.com
Fortis Turks and Caicos Inc.                                              www.fortisinc.com
Newfoundland Power Inc.                                                   www.newfoundlandpower.com
Maritime Electric Company, Limited                                        www.maritimeelectric.com
Terasen Gas Inc.                                                          www.terasengas.com




Photography: Dan Bannister, James Baron, Marnie Burkhart, Lynne Gore, Ned Pratt | Design: Sean Rice | Printing: Sundog | Printed in Canada


90 - Energy Your Way
     320 - 17th Avenue SW
Calgary, Alberta, Canada T2S 2V1
     www.fortisalberta.com
        310 - WIRE (9473)

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:13
posted:8/15/2012
language:English
pages:94