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Committed to you FortisAlberta

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					                   2005 ANNUAL REPORT



Committed to you
                                                             Letter to Stakeholders     Page 2          Management Discussion
                                                                                                        and Analysis          Page 21
        Committed to you                                     Operations                 Page 6
                                                                                                        Financial Statements      Page 39

                                                             Two-Year Summary           Page 20         Auditors’ Report          Page 40




       Corporate Profile
                                                                                                  ar E a S of oP Er at Ion

       FortisAlberta Inc. owns and operates regulated electrical facilities
       that distribute electricity generated by other market participants to
       end-use customers in southern and central Alberta. FortisAlberta Inc.
       is an indirect, wholly-owned subsidiary of Fortis Inc. – a diversified,
       international electric utility holding company with assets exceeding
       $4.3 billion and annual revenues of more than $1.4 billion.

       To keep up with the growing demand for electricity in Alberta,
       FortisAlberta has steadily been increasing its investment in expanding,
       improving and maintaining its distribution network. In 2005, we
       invested approximately $131 million, net of customer contributions of
       $31 million, into our distribution infrastructure.

       Fortis Inc. (TSX:FTS) closed its purchase of Aquila Network’s business
       in Alberta and British Columbia for $1.4 billion on May 31, 2004.
       Fortis Inc., or the Fortis Group of Companies, based in St. John’s,
       Newfoundland, has holdings in seven companies, which are primarily
       regulated electric distribution utilities. Fortis Inc. is the only electricity
       company that operates in five provinces: Newfoundland and Labrador,
       Prince Edward Island, Ontario, Alberta and British Columbia. Fortis Inc.
                                                                                                     FortisAlberta Service Area
       also owns electrical utilities in Central America and the Caribbean and
       owns and operates several hydroelectric stations in upper New York
       State, Belize, Ontario and Newfoundland and Labrador.




FortisAlberta Inc.
• operates a largely rural, low-voltage distribution network in central and southern alberta.
• Serves 415,000 customers including residential, commercial, farm and industrial consumers of electricity
 through our distribution system of approximately 103,000 kilometres of power lines.
• represents approximately 56 per cent of the total distribution network in alberta as measured by kilometres of line.


Front Cover Shot: Glen Gordon, Area Foreman and Daryl Schmidt, Power Line Technician, Airdrie
      2005 Highlights




       Financial Highlights                                                               2005                   2004
       Revenue ($ thousands)                                                         $ 254,107            $ 230,153
       Net Income                                                                       31,069                 24,528
           Capital Expenditures (before contributions)                                 162,036                 127,786
           Customer Contributions                                                      (30,727)                (17,638)
           Total Capital Expenditures                                                $ 131,309            $ 110,148




       Operating Highlights                                                               2005                   2004
       Customers (#)                                                                   415,411             404,099
       Employees (#)                                                                       905                    858
       Total Operations Staff (#)                                                          595                    545
       Energy Sales (GWh)                                                               14,445                 13,908
       Peak Demand (MW)                                                                  2,495                  2,370
       Distribution Lines Operated (km)                                                103,070             101,712
       Capital Programs ($)                                                           $131,309            $110,148
       Customer Satisfaction Rating (%)                                                     76                     74
       Reliability – Number of Outages (SAIFI)*                                           1.19                    1.44
       Reliability – Duration of Outages (SAIDI)**                                        1.86                    2.47
       Recordable Injury Frequency Rate                                                   2.93                    2.90
       Gross Domestic Product (GDP) growth (%)                                             4.0                     3.7

      *SAIFI is defined as the System Average Interruption Frequency Index
      **SAIDI is defined as the System Average Interruption Duration Index




Committed to deliver results
• Our customer satisfaction rating has improved from last year.
• Our system reliability has demonstrated continual improvement despite challenges with extreme weather.
• Our efforts to improve our safety record are yielding results.
• Our operating costs continue to be low largely due to greater efficiencies in our workforce and resources.


                                                                             FORTISALBERTA 2005 ANNUAL REPORT             
         Letter to Stakeholders




                                                Our people make the difference through their


                                                            commitment                                  to understanding and


                                                delivering on the expectations of our customers.




FortisAlberta employees Tom Davidson, Cathy Cooper, and Petro-Canada employee at the Wildcat Hills Gas plant northwest of Cochrane
                                                                                             LETTER TO STAKEHOLDERS




COMMITTED to YOU




2005 can best be described as a year of significant progress. We completed
the separation of FortisAlberta and FortisBC and resolved some long-standing
issues related to the acquisition. At the same time, through the hard work and
commitment of our employees, we laid a solid foundation for the business. We have
seen performance improvements in reliability, operational efficiencies, community
stewardship and safety. At the heart of these results, is our desire to strengthen the
Company for the benefit of customers.

We managed our business prudently to deliver $31.1 million in earnings compared to
$24.5 million for the same period last year. These results were due to an increase in energy
delivered, a strong Alberta economy, record capital expenditures and operational efficiencies.
                                                                                                      Philip G. Hughes
Working closely with EPCOR, a regulated retailer, FortisAlberta settled all aspects of a              President and CEO

Statement of Claim related to the delivery of electrical load from prior periods. FortisAlberta
and the City of Airdrie signed a 10-year electric distribution franchise agreement, which grants
FortisAlberta the exclusive right to own, operate and maintain the electric distribution system
in Airdrie. With these legacy issues behind us, we are now better positioned to focus on our
priority of delivering safe, reliable electricity to our customers.

Partnering with EPCOR Energy Services, we also improved the accuracy and comprehension
of customers’ bills by implementing the Alberta Tariff Billing Code. Bills have been simplified
and are now easier for customers to understand.

In 2005, FortisAlberta negotiated a settlement with customers on our 2005 rates. Approved
by the Alberta Energy and Utilities Board, the settlement resulted in a 2.1 per cent increase
in base rates for 2005 allowing us to keep rates as low as possible. Closure on this regulatory
issue early in 2005 allowed us more time to dedicate to improving operational performance,
for the benefit of our customers.

Alberta continues to be a leader in economic growth in Canada. The prosperity of the
province, and the ever-increasing number of new business ventures, are growing the
demand for electricity at a rapid pace. It is FortisAlberta’s responsibility to not only meet this
increasing demand for reliable electricity, but to build relationships with existing and new
customers by listening to their needs and delivering on their expectations. In 2005, a diligent
focus on customer service resulted in a reduction in customer complaints by seven per cent
and an increase in our customer satisfaction rating to 76 per cent.

To keep up with the growing demand for electricity and to improve reliability, we are steadily
increasing our investments in our distribution facilities. In 2005, we invested approximately
$131 million, net of customer contributions of approximately $31 million, in our distribution


                                                                                           FORTISALBERTA 2005 ANNUAL REPORT   
    Letter to Stakeholders


    infrastructure. This level of investment is critical to meet future growth projections for the province and to replace our aging
    infrastructure to ensure reliablity of the system. Service interruptions, regardless of outage time, are becoming less acceptable
    with customers.

    In 2005, FortisAlberta delivered on its capital program on schedule despite a succession of extreme weather-related
    circumstances. We were challenged by events such as the Crowsnest Pass storm, a tornado in Empress and record flooding
    in southern Alberta. However, the expertise and tenacity of our team was demonstrated by our employees who worked
    around the clock to respond to outages and restore power to customers.

    While we must make investments to ensure excellent operations, FortisAlberta continuously looks for ways to provide service
    in the most efficient manner possible. In 2005, we reorganized our internal resources resulting in a more flexible workforce
    who could quickly respond to customer needs. Response time to trouble calls improved by seven per cent over 2004 and
    we were within our service level agreements 99 per cent of the time. Part of the restructuring included the hiring of 51 line
    staff, increasing our internal bench strength and building capacity for the future.

    The reliability of our business systems is as important as the reliability of our electrical distribution system when it comes to
    our ability to respond to customer needs. In 2005, we focused our efforts on developing a Disaster Recovery Centre as part
    of an enterprise-wide Business Continuity Program to support operational performance. Improved disaster recovery capability
    along with the Business Continuity Plan enables FortisAlberta to maintain critical business services in the event of a significant
    failure of its information technology systems, minimizing the risk for external stakeholders.

    FortisAlberta’s success is not limited to assets or finances. Our employees form the foundation of our business and are
    shaping an exciting future for the Company. Our goal is to foster an environment where people understand the business,
    are valued for their contributions and are able to achieve their professional goals. In Alberta’s competitive labour market,
    attracting and retaining the talent and skills to meet present and future business requirements is critical. FortisAlberta is
    committed to developing our employees in a way that grows our team and fosters leadership at all levels. In 2005, the
    launch of key initiatives such as mentoring and a leadership development program resulted in hundreds of employees
    engaged in learning opportunities to equip them with the skills required in their present roles and throughout their career.

    We believe the success and well-being of employees is not only influenced by a rewarding work place; it is also influenced
    to a large degree by a safe work environment. We remain committed to the highest standards of employee safety and
    work to ensure employees make safety their number one priority everyday. In 2005, we made progress with our safety
    performance. Launching programs like a defensive driving safety program led to the reduction of vehicle incidents on the job
    by 76 per cent.

    Public safety is a serious concern for our company. To help prevent the more than 400 public contacts with our lines in
    2005, FortisAlberta launched, “Your Safety is Looking Up,” a public safety advertising campaign to increase awareness about
    overhead electrical hazards. The Company worked with industries, like the oil and gas sector, to train their employees about
    safety hazards on the job. We also invested in the education of our youth, communicating our safety messages early by
    teaching grade five and six children about how to identify and avoid electrical safety hazards.



                                                                                            LETTER TO STAKEHOLDERS




COMMITTED to YOU




At FortisAlberta, we believe that being a good corporate citizen is a key responsibility of the business. The cornerstone of
our community investment program is our involvement with the Shock Trauma Air Rescue Society (STARS). Aligned with
our focus on safety, we helped purchase a mobile training unit equipped with a computerized mannequin to help train
on-the-ground medical personnel in rural towns located in our service territory.

FortisAlberta’s employees consistently demonstrate tremendous pride in the communities where they live and work through
their generous giving of time and money. We are proud of our employees’ involvement in the community to improve the
quality of life for all Albertans. In 2005, our employees supported causes like the United Way and CIBC’s Run for the Cure
for breast cancer research and participated in local initiatives such as festive lighting and tree chipping.

In 2005, FortisAlberta acted to minimize our impact on the environment through the continued implementation of our
environmental management system, partnerships with organizations and environmental initiatives. One particular initiative
included the continued commitment to the hiring of persons with disabilities through Chrysalis, a non-profit organization, to
recycle materials at our Acheson warehouse outside of Edmonton.

Our focus on financial integrity is evident in everything that we do. In 2005, as part of our corporate governance practices,
we enhanced our policies and implemented additional controls to maintain the highest standards of financial disclosure and
business ethics.

In 2005, we completed staffing at the executive level. Alan Skiffington joined FortisAlberta in May 2005 as Vice-President,
Information Technology and CIO. In September 2005, Gary Smith was promoted to Vice-President, Operations and
Engineering. These two appointments completed the recruiting related to the executive team and enables FortisAlberta to
move forward into 2006 with consistent leadership.

In closing, I would like to thank our Board of Directors for their support and guidance. Their expertise and input has helped
us achieve strong results in a transition year and to establish a platform for future growth and performance.

Most importantly, I would like to pay tribute to our employees whose teamwork, perseverance and commitment sets
FortisAlberta apart. 2006 is the time to build on our achievements, to stay the course and further enhance the Company’s
performance with a relentless focus on improving our service to customers.




(Signed)



Philip G. Hughes
President and CEO
FortisAlberta Inc.




                                                                                         FORTISALBERTA 2005 ANNUAL REPORT       5
         Reliability




                            In
                                 2005                         we focused our efforts on making the most


                                                of our people, knowledge, technology and equipment to meet


                            the needs of our existing and new customers.




Jim MacLeod, Power Line Technician, Sedgewick
                                                                                                                    OPER ATIONS




COMMITTED to DELIV ER POW ER R ELI ABLY




Since becoming FortisAlberta on June 1, 2004, the                  technicians to complete the work they are trained to
Company has invested $190 million in capital projects.             perform. This, in turn, reduced costs and provided the
FortisAlberta is operating in a province with a strong             Company with additional technical labour in a market
economy. High energy prices have stimulated growth in the          where it is becoming increasingly more challenging to
commercial and industrial sector and have also resulted in         recruit power line technicians.
increased housing starts. These
                                                                                          Despite a tight labour market, we
economic factors have increased
                                                                                          hired more than 65 new Operations
load growth on the electrical system.          i n d u stry ter m s
                                                                                          employees, including more than 50
To support this growth and respond
                                               High-load move escort – temporarily        line staff. This reduced our reliance
to customer needs, we will continue
                                               cutting power to raise the clearance       on outside contractors, better
to focus on increasing capacity
                                               height of distribution lines and allow     positioning us to meet our extensive
and improving reliability by making
                                               the passage of large objects beneath.      capital and operating commitments.
strategic investments in the
distribution system.                           Underground locate – staking the           Despite the extreme weather
                                               location of underground lines on a         conditions experienced in our service
In 2005, we were within service
                                               site to avoid public contact during        area in 2005, we improved overall
level requirements 99 per cent of
                                               deep excavation.                           service reliability with the duration
the time, completing scheduled
                                                                                          of the average outage declining to
maintenance work and a record                  Hot line work – working on power
                                                                                          1.86 hours from 2.47 hours in
number of high-load escorts and                lines while keeping the lines
                                                                                          2004. Overall, our response to
underground locates. Power line                energized so customers’ power is
                                                                                          trouble calls has improved seven per
technicians completed additional hot           not interupted.
                                                                                          cent from 2004.
line work as a result of increasing our
trained staff from 30 in 2004 to 90                                                       In June, we saw record flooding and
in 2005. This eliminated the need to take power outages,           a tornado in the southern part of the province damaging
which contributed to improved reliability for customers.           approximately 300 distribution poles owned by FortisAlberta
                                                                   and 125 transmission structures. Coordination with
We reorganized our Operations and Engineering
                                                                   AltaLink, the transmission service provider, and more than
department to a local service model with one area
                                                                   100 FortisAlberta employees from various service points,
supervisor responsible for all work in a particular geographic
                                                                   helped expedite the restoration efforts. In September, an
area. This resulted in more effective utilization of the
                                                                   unseasonable snowstorm in the Crowsnest Pass damaged
workforce to complete priority work.
                                                                   transmission and distribution lines and power poles
The Company also created new field customer service                and disrupted electricity service to approximately
positions in 2005 to free up qualified power line                  3,600 customers.




                                                                                        FORTISALBERTA 2005 ANNUAL REPORT          
           Reliability


           In 2005, FortisAlberta completed planned maintenance           system. Similarly, in our trouble switch program power line
           work and a record capital program. To meet the growing         technicians identify and make repairs to specific sections
           demand for reliable electricity                                                         of feeders with four or more outages
           service, we invested $77 million to                                                     in a year.
                                                     i n Cr eases Over 2004
           connect 11,000 new customers
                                                                                                   FortisAlberta plans to spend
           to our distribution system and            During the past year, FortisAlberta has
                                                                                                   $360 million in capital projects,
           constructed over 1,300 kilometres         experienced increased demand for
                                                                                                   net of customer contributions,
           of lines. We invested $54 million         construction in various rate classes,
                                                                                                   over the next two years.
           to maintain the distribution              including:
                                                                      Oil and Gas


                                                                      25%
           infrastructure and ensure adequate                                                      More than three-quarters of these
           capacity to serve new customers.                                                        investments will be directed towards
                                                                                                   improving and expanding our
           We also focused our efforts on
                                                     Commercial                                    distribution facilities to strengthen

                                                     22%
           upgrades and repairs to the 15
                                                                                                   the physical integrity of the existing
           worst performing feeders or
                                                                                                   electrical system, improve capacity
           sections of feeders where frequent
                                                                      Residential                  and enhance reliability.


                                                                    10%
           outages are the highest within the




                                                                                    HOt li n e tr ai n i ng i m p r Oves r eliab i lit y

                                                                                    FortisAlberta is committed to improve customer reliability,

                                                                                    operating efficiency and employee safety. One initiative that

                                                                                    will help us improve our performance in these areas is hot line

                                                                                    training. Hot line work requires training with specialized trucks,

                                                                                    equipment and work methods. We have increased our staff

                                                                                    trained in hot line work from 30 in 2004 to 90 in 2005. This

                                                                                    has resulted in a substantial reduction in the number of times

                                                                                    we interrupt customers’ power to work on the distribution

                                                                                    system. This, in turn, has contributed to improved reliability for

                                                                                    customers and has decreased the costs related to unnecessary

                                                                                    outages and travel time.


   Les Knull, Power Line Technician, Wainwright
                                                                                                                         OPER ATIONS




       COMMITTED to DELIV ER POW ER R ELI ABLY




       Dave Morgan, Power Line Technician, Sherwood Park




tu r n i n g tH e l i gH t s O n 24 H O u r s a day, 7 days a week

FortisAlberta’s employees demonstrated a commitment to the provision of safe and reliable power to customers several times this year in

extreme weather circumstances. As an example, our employees worked tirelessly to get the lights back on in the unseasonable Crowsnest Pass

snowstorm in southwestern Alberta in September. The storm damaged transmission and distribution lines and power poles in the area, knocking

out power to almost 3,600 customers. We worked with the transmission service provider to connect four mobile generators to the distribution

system to provide power to affected customers while the transmission system was being repaired. This was the first time in the Company’s history

where on-site generators were used to supply power to the entire distribution system in the area.


                                                                                               FORTISALBERTA 2005 ANNUAL REPORT                    
         Customer Service




         In our industry, our mandate is clear; our customers want us to provide reliable,


                 cost-effective electricity and it’s our job to keep the lights on
                                                                                      2   hours a day,



           days a week. In 2005, we focused on improving our performance measures for


                 customer service and enhancing relationships with customers.




John Syme, Power Line Technician, Medicine Hat; Connie and Ethan Boutkan, Customers
                                                                                                             CUSTOMER SERVICE




COMMITTED to OUR CUSTOMERS




Our mandate is clear; our customers want us to provide                  Delivery of multiple projects on-time and within budget has
reliable, cost-effective distribution of electricity. Significant       greatly enhanced our business relationships with leading-
growth in all sectors, most notably oil and gas, has increased          edge coal bed methane producers in Alberta. For example,
overall customer-related transactions. FortisAlberta is focused         where coal bed methane production is developed in
on enhancing customer service, and ensuring the timely and              forested areas, we have co-ordinated the process to manage
cost-effective delivery of new service connections.                     vegetation and expedite construction. Approximately 180
                                                                        kilometres of a new three-phase line for a Fort Assiniboine
We are always looking at ways to improve service to our
                                                                        coal bed methane project is currently in the design stage for
customer base. In 2005, we remained focused on our
                                                                        delivery in 2006.
efforts to improve customer service, enhance relationships
with customers and work diligently to improve our                       In the Spring of 2005, we began providing meter services
communications with customers.                                          and compliance testing of meters to Newfoundland Power
                                                                        and Maritime Electric. With the increased volumes, the Meter
To support residential customers and comply with the
                                                                        Shop was able to operate more efficiently and reduce the
Regulated Default Supply regulation, we implemented a
                                                                        overall costs of processing meters for Alberta customers.
new billing system to simplify customers’ retail bills with one
consistent consumption value. We also continue to work                  In May, we reached a negotiated settlement with customers
with industrial customers, who drive system growth in the               on 2005 rates as part of our regulatory process through
province, to ensure the timely construction of new power                the Alberta Energy and Utilities Board. This settlement
lines to meet their own complex construction schedules.                 translated into a 2.1 per cent increase on base rates for
Efforts like these are shown by our increase in customer                2005, maintaining the stablility of customer rates. Achieving
satisfaction ratings by seven per cent over last year.                  a negotiated settlement further enhanced the Company’s
                                                                        ability to focus upon and improve operational performance.




                                         s i m p l i F i e d b i lli ng i m p r Oves Cu stO m er servi Ce

                                         In July, FortisAlberta implemented the Alberta Tariff Billing Code and, in partnership with EPCOR

                                         Energy Services, became the first distribution company to be fully compliant with the Regulated

                                         Default Supply regulation. As a result of these initiatives, bills have been simplified and are easier

                                         for customers to understand.


                                                                                             FORTISALBERTA 2005 ANNUAL REPORT                     
         Employee Development




         We are committed to providing employees with development


                   opportunities                                 and challenging work to


                      potential
         maximize their                                      and improve our performance.




Sessha Sivsammye, Engineering Co-op Student; Monique Soboren, Engineer; and Richard Bahry, Engineer, Calgary
                                                                                                    EMPLOYEE DEVELOPMENT




       COMMITTED to EMPLOYEE SUCCESS




       At FortisAlberta, our people have demonstrated time and           organization and in 2005 over 100 leaders participated
       time again that they are making a real difference for the         in our Leadership Development training program which
       company and our customers. As an employer, we are                 focuses on coaching, rewarding and developing employees
       committed to fostering an environment that supports our           to perform at their maximum potential.
       employees, enhancing their skills and
                                                                                                At FortisAlberta we also believe
       professional growth, while ensuring
                                                    m e ntOr i ng p r Ogr am                    that ongoing communication with
       they feel proud of what they do and
                                                                                                employees on business direction
       valued for their achievements.               FortisAlberta offers a formal
                                                                                                is critical. In 2005, hundreds of
       Our team of leaders and employees            mentoring program to employees
                                                                                                employees attended brown bag
       have tremendous depth and                    as part of our focus on employee
                                                                                                lunches, business acumen sessions
       expertise. Their extensive knowledge,        development. To date, more than
                                                                                                and Fortis employee presentations.
       innovative spirit and commitment             100 employees have participated
                                                                                                These initiatives not only helped
       to getting things done truly sets            in the program.
                                                                                                employees better understand business
       us apart.
                                                                                                priorities, but also enhanced their
       To further develop employee                                                              understanding about how they can
       potential in 2005, we launched a                                                         contribute to the Company’s success.
       mentoring program, which now
                                                                                                As part of our commitment to
       has more than 100 participants. It
                                                                                                recognizing the long-term commitment
       provides employees the opportunity
                                                                                                of our employees, in November 2005,
       for exposure to the business through
                                                                                                FortisAlberta hosted its first annual
       relationships with experienced
                                                                                                Service Awards dinner to honour 120
       leaders or technical experts.
                                                                                                award recipients with service ranging
       FortisAlberta recognizes the value           Ron Stefura and Dana Anderson,
                                                    Acheson Warehouse Operations                from 5 to 39 years, representing a
       of leadership at all levels of the
                                                                                                total 3,015 years of service.

Rob Litzenburger, Business Manager, Market Development; and Sheri DeBruijn, Employee Development Advisor, Calgary


                                                                                       estab li s H i ng partn er s H i p s wit H
                                                                                       pOst-seCOn dary i n stituti O n s

                                                                                       In the Fall of 2005, FortisAlberta participated in campus

                                                                                       recruitment events at the University of Alberta and the

                                                                                       Southern Alberta Institute of Technology. These events

                                                                                       were an excellent step in positioning FortisAlberta as

                                                                                       an employer of choice in the tight, electrical industry

                                                                                       job market. A focus for 2006 will be to establish new

                                                                                       relationships and partnerships with other post-secondary

                                                                                       institutions throughout Alberta.


                                                                                              FORTISALBERTA 2005 ANNUAL REPORT                     
          Safety




      Safety                 is an uncompromised priority


                 at FortisAlberta. That’s why it is our goal


      to ensure that every single day our employees return


                 safely to their family and loved ones.



Jay Anker, Power Line Technician; wife, Sandy; daughter, Taylor; and son, Blake
                                                                                                                                     SAFETY




      COMMITTED to DELIV ER POW ER SA FELY




      FortisAlberta is committed to the highest standards of             support the continuous improvement of our safety record
      employee and public safety in the communities it serves.           through improved methods of monitoring and reporting
      Our corporate policy on safety reinforces our primary goal         safety issues.
      is to ensure that each and every day our employees return
                                                                         Our Health and Safety team implemented a Safety Honour
      home safely to their families and loved ones. Despite
                                                                         Roll and Safety Recognition Program to recognize the
      an influx of new employees to Alberta and record levels
                                                                         accomplishments of employees who take responsibility for
      of construction, our focus on safety has resulted in our
                                                                         their own safety and for the safety of their peers.
      employees achieving our 2005 safety targets.
                                                                         Workplace safety goes hand-in-hand with public safety.
      During 2005, we took steps to ensure the safety of our
                                                                         Reducing the number of public contacts with our electrical
      employees. In addition to regular safety meetings, we
                                                                         facilities remains a top priority. During the past four years,
      held safety time-out sessions in the first and fourth quarters
                                                                         the number of public contacts has increased. This is largely
      to reinforce the principle that safety is the Company’s
                                                                         in part due to construction activity and an influx of new
      highest priority and the responsibility of every employee.
                                                                         workers. To help address this situation, FortisAlberta worked
      Our Employee Development Centre largely focused on                 with industry to educate and train employees about electrical
      safety training in 2005. Safety inspections and audits were        safety hazards on the job.
      also implemented to reinforce current best practices and
                                                                         In addition, we launched a Spring and Fall safety campaign
      highlight areas where improvement is needed. Thanks to
                                                                         featuring our employees and the theme, “Your Safety is
      a safe driving training program and increased employee
                                                                         Looking Up.” The intent of the campaign was to increase
      awareness, we saw a 76 per cent reduction in vehicle
                                                                         public and industry awareness about overhead electrical
      incidents over the previous year.
                                                                         hazards to prevent the growing number of electricity-related
      We also implemented some long-term programs to better              safety incidents. In 2006, FortisAlberta will further increase
      monitor, identify and correct safe work practices. For             public safety efforts through industry partnerships, a new
      example, we implemented a confined space entry program             safety advertising campaign and a greater emphasis on adult
      and a hazard assessment tool. In December, we also                 and youth safety education.
      launched a new loss and incident management database to




                                          yO u r s aF et y i s lOO ki ng u p

                                          Educating the public about the dangers of working or playing around power lines is key to reducing

                                          the more than 400 contacts each year with our lines. FortisAlberta educates the public through safety

                                          advertising campaigns that feature our employees who are nominated by their supervisors for safe

                                          work practices and excellent safety records.




Fall 2005 Safety Campaign ambassadors John Syme and Rick Boutkan                              FORTISALBERTA 2005 ANNUAL REPORT                    5
         Environment




         We support                     the hiring of persons with disabilities


                      through Chrysalis, a non-profit organization, to recycle materials


         at our Acheson warehouse outside of Edmonton.




Chrysalis employees, Acheson
                                                                                                                       ENVIRONMENT




       COMMITTED to THE ENVIRONMENT




       A vital part of doing business in Alberta is being a good         Partnerships with environmental organizations within
       environmental steward. We ensure this by committing               our communities assist the Company in supporting local
       to meet or exceed industry best practices in addition to          environmental issues.
       complying with both federal and provincial environmental
                                                                         In 2005, FortisAlberta worked with the Alberta Birds of Prey
       protection legislation.
                                                                         Centre to provide educational opportunities for employees
       Our goal is to deliver electricity to our customers in a          about the Federal Species at Risk legislation. The Centre’s
       responsible manner to protect the environment for future          focus is to provide rehabilitation for injured birds and
       generations. In 2005, FortisAlberta began the development         education for the public.
       and implementation of an Environmental Management
                                                                         Through our support of the Trees Canada Foundation,
       System (EMS) consistent with the ISO 14001 standard,
                                                                         FortisAlberta connected with 10 local schools in our service
       an international standard for environmental management
                                                                         area to fund the Greening Canada’s School Grounds
       systems. The EMS includes the continual evaluation, risk
                                                                         Program. The program offers schools the opportunity to
       assessment and implementation of improvements for
                                                                         create simple, safe, sustainable and educational landscapes
       programs dealing with environmental issues, training
                                                                         on their school grounds.
       and stewardship.




Airdrie employees


                                                                   COm m u n iti es get gr een er wit H tr ee CH i p p i ng

                                                                   In 2005, FortisAlberta continued with its annual holiday tradition of offering

                                                                   tree chipping services to several Alberta towns. The communities of Airdrie,

                                                                   Cochrane, Okotoks and Redwood Meadows each took advantage of

                                                                   FortisAlberta’s donation of equipment and employee time to shred Christmas

                                                                   trees. The service provides the communities with an environmentally friendly

                                                                   solution for tree disposal. Chippings are then available for use throughout

                                                                   the year as mulch for municipal landscaping.




                                                                   a lb erta b i r ds OF p r ey Centr e vi sits
                                                                   F Orti s a lb erta e m p lOyees

                                                                   FortisAlberta teamed up with the Alberta Birds of Prey Centre to deliver

                                                                   information sessions to employees about Canada’s Species at Risk Act and

                                                                   the preservation of endangered species. The session also highlighted some

                                                                   of Alberta’s endangered birds such as a Golden eagle, Great Horned owl

                                                                   and American Kestral.


Doug Johnson, Field Design Specialist, Red Deer                                                FORTISALBERTA 2005 ANNUAL REPORT                     
         Community Investment




                  A cornerstone of our community investment


                          program is our   partnership         with the

                  Shock Trauma Air Rescue Society Foundation (STARS).




STARS photos courtesy of Mark Mennie
                                                                                                    COMMUNITY INVESTMENT




       COMMITTED to OUR COMMUNITIES




       FortisAlberta’s commitment to our people and our                    Supporting our community investment strategy is a strong
       customers extends into the many communities we serve.               foundation of employees who volunteer their time and
       At FortisAlberta, community stewardship is a priority for           expertise to support corporate initiatives such as the
       the business. Our goal is to make a difference in the               United Way and CIBC Run for the Cure and more localized
       communities that our employees and customers call home.             initiatives such as Christmas tree lighting, tree chipping and
                                                                           promoting the electrical trades.
       Our approach has been to support community betterment
       through our values in safety, education and the environment         In 2005, FortisAlberta sponsored CAREERS: The Next
       as well as those initiatives that support the development           Generation, an Alberta-based non-profit organization, which
       of strong relationships with key customer groups in our             promotes the trades, particularly the power line trade, to
       service territory.                                                  youth in Alberta’s high schools. Our support of this program
                                                                           helped to address the shortage of skilled tradespeople
       A cornerstone of our community investment program is
                                                                           required to meet our industry’s technical needs.
       our partnership with the Shock Trauma Air Rescue Society
       Foundation (STARS). In 2005, as a part of our focus                 FortisAlberta also partnered with the University of Calgary’s
       on employee and public safety, we funded a retrofitted              Engineering faculty to sponsor a dinner for first and second
       motorhome to deliver on-the-ground training to rural                year Engineering students to enhance our profile as an
       emergency and medical personnel in our service area.                ‘employer of choice’ in a competitive labour market.



STARS mobile training unit


                                                w O r k i ng wit H star s tO p r Ovi de m O b i le em ergen Cy tr ai n i ng

                                                FortisAlberta’s involvement with STARS ensures that our employees and the public, especially
                                                in rural areas, have access to immediate expert mobile emergency care should there be an

                                                incident or contact with power lines. FortisAlberta funded a retrofitted motorhome to train rural

                                                emergency and medical personnel in our service area. A mannequin has been installed in the

                                                motorhome, which simulates a patient with rapidly changing symptoms in an emergency room

                                                atmosphere. This mobile training unit allows STARS to bring training to health care providers

                                                who might otherwise be faced with barriers of distance from teaching centres.


                                                F Ort i s alb erta edu C ates CH i ldr en ab O ut p Ower li n e sa F et y

                                                FortisAlberta partnered with the Stony Plain Multicultural Heritage Centre in 2005 to deliver an

                                                electrical safety program to approximately 5,000 grade 5 and 6 children throughout our service

                                                territory. The Multicultural Heritage Centre developed ‘ZAP’, an educational game to reinforce

                                                the message about electrical safety. By teaching children about the hazards of electricity at a

                                                young age, FortisAlberta hopes these lessons will stay with them and help prevent electrical

                                                accidents in the future.


Electrical safety education program                                                             FORTISALBERTA 2005 ANNUAL REPORT                    
     T W o -Y e a r S u m m a rY Ta b l e

     December 31, 2005

     Selected balance Sheet Data                                                                            December 31, 2005                         December 31, 2004
     Current assets                                                                                                  $ 74,580                                  $ 55,095
     Long-term assets                                                                                                 683,869                                   558,797
     Goodwill                                                                                                         189,309                                   189,309
     Total assets                                                                                                     947,758                                    803,201
     Current liabilities                                                                                              106,309                                    89,117
     Long-term liabilities                                                                                             61,107                                     9,634
     Long-term debt                                                                                                   456,823                                   400,000
     Shareholder’s equity                                                                                             323,519                                   304,450
     Total Liabilities and Shareholder’s Equity                                                                       947,758                                   803,201



     Selected Statement of Income and Deficit Data                                                          December 31, 2005                         December 31, 2004
     Total revenue                                                                                                    254,107                                   230,153
     Expenses                                                                                                         200,396                                   192,725
     Income tax expense                                                                                                22,642                                    12,900
     Net income                                                                                                        31,069                                    24,528



     Selected Statement of Cash Flows Data                                                                  December 31, 2005                         December 31, 2004
     Cash from operating activities                                                                                    87,384                                   105,497
     Cash used in investing activities                                                                               (132,696)                                 (107,452)
     Cash from (used in) financing activities                                                                          44,351                                   (41,864)



     reliability                                                                                                                    2005                          2004
     Number of outages (SAIFI)                                                                                                       1.19                          1.44
     Duration of outages (SAIDI)                                                                                                     1.86                          2.47

     Notes:
     a) Only disclosing 2004 and 2005 as FAB only became an issuer in 2004.
     b) The information is per the December 31, 2005 audited financial statements.
     c) The amounts below are in thousands of Canadian dollars.
     d) SAIFI is defined as the System Average Interruption Frequency Index and SAIDI is defined as the System Average Interruption Duration Index.




20
Management Discussion and Analysis



maNaGemeNT’S DISCuSSIoN aND aNalYSIS oF FINaNCIal CoNDITIoN aND reSulTS oF oPeraTIoNS

For the three and twelve months ended December 31, 2005

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
twelve months ended December 31, 2005.


ForWarD-looKING STaTemeNTS

Certain statements contained in this Management Discussion & Analysis (“MD&A”) constitute forward-looking statements,
including statements regarding the business and anticipated financial performance or condition of the Corporation.
These statements involve known and unknown risks and relate to future events, future financial performance, business
strategy, plans and objectives of management for future operations and projected business results. In some cases,
forward-looking statements can be identified by terms such as “anticipate”, “believe”, “contemplate”, “continue”,
“enable”,”estimate”, “expect“, “intend”, ”may”, “potential”, “plan”, “should”, “will”, or other comparable terminology.
These forward-looking statements are subject to a number of uncertainties that may cause actual results to differ
materially from those contemplated in the forward-looking statements. Some of the factors that could cause such
differences include 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 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.

The Corporation is not obligated to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Because of these risks, uncertainties and assumptions, prospective investors
should not place undue reliance on these forward-looking statements.


THe ComPaNY

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 is not involved in generation, transmission
or the direct sale of electricity. It is intended that the Corporation remain a regulated electricity distribution 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 103,000 kilometre, low-voltage distribution network in central and
southern Alberta, which represents approximately 56 per cent of the total distribution network as measured by kilometres
of line in Alberta. The Corporation’s distribution network serves approximately 415,000 electricity customers, comprised of
residential, commercial, farm and industrial consumers of electricity. This represents approximately 31 per cent of Alberta’s
end-use customers.

The Corporation is regulated by the Alberta Energy and Utilities Board (“EUB”), pursuant to the Electric Utilities Act
(Alberta), the Public Utilities Board Act (Alberta), and the Hydro and Electric Energy Act (Alberta). The EUB 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 Canadian generally accepted accounting principles (“GAAP”) for entities not subject to rate regulation.

                                                                                   FORTISALBERTA 2005 ANNUAL REPORT                   21
     The Corporation operates under cost of service regulation as prescribed by the EUB. Rate orders issued by the EUB
     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 was 9.5 per cent for 2005 (9.5 per cent for 2004). 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.

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


     reGulaTorY maTTerS

     2005 Negotiated Settlement
     On April 13, 2005, the Corporation filed an application with the EUB to approve a Negotiated Settlement Agreement
     (“Settlement”) dealing with all aspects of the Corporation’s 2005 Distribution Tariff Application. The Settlement
     was approved May 24, 2005 per EUB Decision 2005-053. The Settlement resulted in a 2005 distribution revenue
     requirement of $215.4 million (excluding miscellaneous revenue and adjustment riders) which translates to a 2.1 per cent
     increase on base rates for 2005. In reaching this settlement, the approved revenue requirement reflected a forecast level
     of operating expense of $101.0 million included in base rates which excludes expenses recovered through separate riders.
     In addition, there was a forecast level of capital expenditures of $134.3 million before forecasted customer contributions of
     $13.5 million.

     The new rates took effect on August 1, 2005. The cumulative impact, from January 1, 2005 to June 30, 2005, of the
     Settlement was reflected in the June 30, 2005 quarter end financial statements as it was approved May 24, 2005. The
     Corporation billed customers on interim rates for the period of January 1, 2005 to July 31, 2005. The revenue shortfall for
     this period was collected through a distribution adjustment rider from August 1, 2005 to December 31, 2005.

     2006 – 2007 Distribution Tariff application
     The Corporation filed an application with the EUB for its 2006 and 2007 rates on December 12, 2005. The 2006 and
     2007 rate application includes a 2006 distribution revenue requirement of $221.2 million (excluding miscellaneous revenue
     and adjustment riders) and a rate of return on equity of 8.93 per cent. Although the base rates remain constant in 2006,
     revenue is forecast to be $5.8 million higher than the 2005 approved revenue due to forecasted increases in the number
     of customers and the associated increase in energy deliveries. The revenue requirement reflects a forecast level of operating
     expense of $103.6 million included in base rates and $13.0 million that will be collected by separate riders. There is also a
     forecast level of gross capital expenditures of $193.0 million and forecasted customer contributions expected to be received
     by the Corporation from its customers of $23.3 million. In addition, the Corporation also expects to contribute $10.7 million
     to Alberta Electric System Operator (“AESO”) projects. Until 2006 and 2007 rates are approved, the Corporation will be
     on interim rates starting January 1, 2006. These interim rates were approved by the EUB on December 20, 2005. The
     Corporation expects a decision from the EUB on rates for 2006 and 2007 in the latter part of 2006.




22
                                                                                                         M ANAGEMENT DISCUSSION AND ANALYSIS




reSulTS oF oPeraTIoNS

Highlights                                                                               Three months ended                                        Twelve months ended
                                                                                            December 31,                                              December 31,
                                                                                        2005            2004                                       2005           2004

Electricity deliveries GigaWatt Hours (“GWh”)(1) (2)                                    3,833                        3,537                      14,445          13,908

($ thousands)
Total revenues                                                                       58,667                        58,258                     254,107          230,153
Operating costs                                                                      29,986                        29,020                     114,800          112,748
Depreciation                                                                         15,789                        13,720                      61,396           52,711
Earnings from operations                                                             12,892                        15,518                      77,911           64,694
Interest expense and foreign exchange loss                                            6,326                         5,927                      24,200           27,266
Earnings before income taxes                                                          6,566                         9,591                      53,711           37,428
Income tax expense                                                                    2,396                         2,409                      22,642           12,900
Net earnings                                                                          4,170                         7,182                      31,069           24,528
Notes:
(1) Energy deliveries include adjustments to prior period deliveries which have been reflected in the financial statements during the current period.
(2) Energy deliveries exclude deliveries to those customers within the Corporation’s service area that are connected directly to the transmission grid.


Net earnings
The Corporation recorded net earnings of $4.2 million during the fourth quarter of 2005, compared to net earnings
of $7.2 million for the same period in 2004. The lower earnings were primarily due to deferrals of revenue and higher
depreciation resulting from the Settlement. In addition, interest expenses and income tax rates were higher in 2005
compared to 2004.

For the twelve months ended December 31, 2005 the Corporation recorded net earnings of $31.1, compared to net
earnings of $24.5 million in the twelve months ended December 31, 2004. The higher earnings in 2005 were primarily
related to increased revenues and lower interest costs, partially offset by increased operating expenses, depreciation costs
and income tax expense, as described in further detail below.

energy Deliveries
For the three months ended December 31, 2005 energy deliveries increased 296 GWh, or 8.4 per cent, to 3,833 GWh
compared to 3,537 GWh in the fourth quarter of 2004. For the twelve months ended December 31, 2005, energy
deliveries increased 537 GWh or 3.9 per cent to 14,445 GWh compared to 13,908 GWh for the same period in 2004.
These increases were mainly due to an increase in energy deliveries to residential, commercial and oil and gas customers
as customer counts and energy consumption have increased in these areas. This was partially offset by decreased energy
deliveries in farming and irrigation resulting from unusually high levels of precipitation in 2005.

revenue
Total revenue for the three months ended December 31, 2005 was $58.7 million, compared to $58.3 million for the
same period in 2004, resulting in an increase in revenue of $0.4 million. Billings and revenue accruals in 2005 were $2.3
million higher than in 2004 due in part to a 2.1 per cent rate increase as a result of the Settlement, as well as an increase
in energy deliveries in the residential, commercial and oil and gas sectors, as energy consumption and customer count
have increased in 2005 as a result of a strong provincial economy. In 2005 there were minimal impacts on revenue
related to prior period billing adjustments, while billing adjustments in 2004 reduced revenue by $1.0 million more than
in 2005. The Corporation also experienced gains related to transmission revenue and costs that were $1.1 million higher
in 2005 compared to 2004. These increases were partially offset by a deferral of revenue totaling $1.9 million primarily
related to future taxes collected in rates. Finally, miscellaneous revenue in 2005 was lower than 2004 by $2.1 million
primarily as a result of assistance provided to a sister company during the restoration efforts resulting from Hurricane Ivan
in the Caribbean in 2004.

Total revenue for the twelve months ended December 31, 2005 was $254.1 million, compared to $230.2 million for the
same period in 2004, resulting in an increase in revenue of $23.9 million. Of this increase, $13.6 million was primarily
due to the resolution of tax matters and the finalization of load settlement amounts. In 2005, there was a $9.0 million
increase in revenue primarily resulting from the 2.1 per cent approved rate increase, combined with increased energy
deliveries in the residential, commercial and oil and gas sectors, as energy consumption and customer count have


                                                                                                                     FORTISALBERTA 2005 ANNUAL REPORT                    23
     increased in 2005 as a result of a strong provincial economy. There was also an increase in franchise fee revenue of $1.7
     million in 2005 over 2004 due to the fact that several municipalities started charging franchise fees in 2005, as well as
     a number of other municipalities who have increased their rates. In 2005, there was an increase of $3.1 million in gains
     related to transmission revenue and costs. These revenue increases were primarily offset by a $3.5 million decrease in
     miscellaneous revenue compared to 2004, due to revenues earned in the prior year related to work performed to assist a
     sister company with restoration efforts resulting from Hurricane Ivan in the Caribbean.

     operating expense
     Operating costs for the three months ended December 31, 2005 were $30.0 million, and were $114.8 million for the
     twelve months ended December 31, 2005, compared to $29.0 million and $112.7 million respectively for the same
     periods in 2004. Expenses for both the three months and twelve months ended December 31, 2005 were higher than
     the same periods in 2004 due primarily to higher labour, overtime and material costs associated with increased line
     maintenance activities and an increase in linear tax.

     Depreciation expense
     Depreciation for the three months ended December 31, 2005 was $15.8 million and was $61.4 million for the twelve
     months ended December 31, 2005, compared to $13.7 million and $52.7 million respectively for the same periods in
     2004. The increase for both the three and twelve months ended December 31, 2005 resulted from higher depreciation
     rates included in the Settlement, combined with an increase in capital assets due primarily to load growth within the
     Corporation’s service territory.

     Interest expense
     Interest expense (including amortization of deferred financing fees) and foreign exchange losses for the three months
     ended December 31, 2005 was $6.3 million, as compared with $5.9 million for the same period in 2004. During this
     period in 2004, the Corporation replaced a short-term, bridge facility, put in place as a result of the acquisition of Aquila’s
     assets with long-term debt. This bridge facility had short-term rates which were lower than the rates on the long-term debt
     that was ultimately issued to refinance the bridge facility.

     Interest expense (including amortization of deferred financing fees) and foreign exchange losses for the twelve months
     ended December 31, 2005 was $24.2 million as compared to $27.3 million incurred during the same period in 2004.
     The overall decrease in 2005 is primarily due to the repayment of higher interest bearing US denominated bank debt and
     inter-company loans with the former parent company, which were initially replaced by a short-term bridge facility when
     the company was acquired on May 31, 2004. The bridge facilities were subsequently replaced by long-term debt with
     lower interest rates than the US denominated debt. In addition, foreign exchange losses were $0.8 million lower in 2005
     resulting from the replacement of US denominated debt during 2004.

     Income Tax expense
     Income tax expense for the three months ended December 31, 2005 was $2.4 million compared with $2.4 million for the
     same period in 2004. Compared to the same three month period in 2004, the effective income tax rate was higher primarily
     due to the impact of adjustments resulting from differences between income for accounting and income tax purposes.

     Income tax expense for the twelve months ended December 31, 2005 was $22.6 million compared with $12.9 million for
     the same period in 2004. The increase in income tax expense is primarily due to higher earnings before income taxes in
     2005 combined with an increase resulting from the impact of adjustments resulting from differences between income for
     accounting and income tax purposes.




24
                                                                                                           M ANAGEMENT DISCUSSION AND ANALYSIS




SummarY oF QuarTerlY reSulTS

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

($ thousands)                                                                                                  Total revenues                                   Net earnings
December 31, 2005                                                                                                      58,667                                         4,170
September 30, 2005                                                                                                     66,778                                         9,289
June 30, 2005                                                                                                          70,067                                         9,764
March 31, 2005                                                                                                         58,595                                         7,846
December 31, 2004                                                                                                      58,258                                          7,182
September 30, 2004                                                                                                     57,618                                          8,324
Note: The Corporation has disclosed the quarterly data for only the last two quarters of 2004 as per National Instrument 51-102 Continuous Disclosure Obligations, which requires the
Corporation to provide quarterly information for only those quarters since becoming a reporting issuer. The Corporation became a reporting issuer on October 18, 2004.


Events for 2005 that have significantly impacted net income are:

       • December 31, 2005 fourth quarter results included net earnings that were lower primarily due to deferrals of
         revenue and higher depreciation resulting from the Settlement. In addition, interest expenses and income tax rates
         were higher in 2005 compared to 2004.

       • September 30, 2005 third quarter results include higher revenues resulting from the finalization of load settlement
         amounts related to prior periods, favourable volume variances on transmission revenues, and the receipt of
         insurance proceeds that offset a portion of the settlement of the EPCOR litigation. The Corporation also experienced
         an increase in energy deliveries in the residential, commercial and oil and gas customer classes as energy
         consumption and customer count have increased in 2005 as a result of high commodity prices and a strong
         provincial economy. These increases were partially offset by lower energy consumption in the farms and irrigation
         customer class, as Alberta experienced heavy precipitation this past summer, and an increase in income tax expense.

       • June 30, 2005 second quarter results include an increase in revenues primarily related to the resolution of tax
         matters related to prior periods, the cumulative effects from January 1, 2005 to June 30, 2005 of the 2.1 per cent
         rate increase approved in rates by the EUB in Decision 2005-053 recognized in the quarter, and load growth in
         residential and industrial customer classes was partially offset by increased income tax expense.


SummarY oF SeleCTeD aNNual FINaNCIal INFormaTIoN

The following table sets forth audited financial information for the years ended December 31, 2005 and 2004 of the
Corporation:

(All amounts are in thousands of dollars)                                                                                   2005                                        2004
Total revenues(1)                                                                                                         254,107                                     230,153
Net earnings(1)                                                                                                            31,069                                      24,528
Total assets(2)                                                                                                           947,758                                     803,201
Long-term debt(2)                                                                                                         456,823                                     400,000
Notes:
(1) See Results of Operations for commentary on net earnings and total revenues.
(2) See Financial Position for a discussion of significant changes in asset and long-term debt balances.




                                                                                                                  FORTISALBERTA 2005 ANNUAL REPORT                                      25
     FINaNCIal PoSITIoN

     The following table outlines the significant changes in the Balance Sheets as at December 31, 2005 as compared to
     December 31, 2004:


      balance Sheet Item                    Increase                                    explanation
                                          (Decrease)
                                          ($ millions)
      Accounts Receivable                     16.7        This increase is comprised primarily of an accrued refund to
                                                          customers of $8.3 million in 2004 which reduced receivables from
                                                          customers relative to December 31, 2005 amounts. This refund
                                                          which reduced the December 31, 2004 revenue accrual, was
                                                          refunded subsequent to year end. Accounts receivable has also
                                                          increased due to the increase in distribution rates and an increase in
                                                          amounts receivable for customer contributions.
      Property, Plant and Equipment           72.4        The increase to property, plant and equipment was comprised of net
      (net of accumulated                                 additions to property, plant and equipment of $133.8 million, less
      depreciation and the regulatory                     depreciation of $61.4 million, (net of regulatory tax basis adjustment
      tax basis adjustment)                               amortization of $5.0 million).
      Future Income Taxes                     39.5        Future income taxes increased in 2005 primarily due to the
                                                          requirement to recognize additional federal future income taxes as a
                                                          result of the change to the regulatory tax methodology employed in
                                                          the Settlement.
      Regulatory Assets                       13.4        The increase in 2005 was mainly due to an increase in transmission
                                                          deferrals.
      Income Taxes Payable                    14.1        Due to larger 2004 installment payments, income taxes as at
                                                          December 31, 2004 were in a receivable position. Current year
                                                          income taxes payable have exceeded current year income tax
                                                          installment payments by $14.1 million.
      Regulatory Liabilities                  50.3        The increase primarily consists of a regulatory liability associated with
                                                          the future income tax asset.
      Long-term Debt                          56.8        In 2005, the Corporation has drawn an amount of $56.8 million on
                                                          its syndicated credit facility to fund capital expenditures required to
                                                          satisfy customer demand for new facilities.

     SourCeS aND uSeS lIQuIDITY aND CaPITal reSourCeS

     Sources 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.




26
                                                                       M ANAGEMENT DISCUSSION AND ANALYSIS




STaTemeNT oF CaSH FloWS

                                        Three months ended December 31               Twelve months ended December 31
                                             2005      2004     Increase                   2005      2004     Increase
($ thousands)                                                 (Decrease)                                    (Decrease)
Cash, beginning of period                       –      9,474      (9,474)                 2,765     46,584     (43,819)
Cash provided from (used in)
    Operating activities                    20,827        24,243        (3,416)           87,384       105,497       (18,113)
    Investing activities                   (45,395)      (31,329)      (14,066)         (132,696)     (107,452)      (25,244)
    Financing activities                    26,372           377        25,995            44,351       (41,864)       86,215
Cash, end of period                          1,804         2,765          (961)            1,804         2,765          (961)

operating activities
For the three months ended December 31, 2005, net cash from operating activities was $20.8 million, which was
$3.4 million lower than the same period in 2004. Net income was $3.0 million lower than 2004 net income, and the
addition of items not involving cash were $0.9 million higher in 2005 due primarily to future income tax expense and
higher depreciation rates resulting from the 2005 Settlement. Changes in non-cash working capital and other non-cash
items decreased cash by $1.3 million in 2005. This decrease was primarily due to increases in 2005 Alberta Electric System
Operator (“AESO”) transmission deferral balances, combined with the reduction in 2005 of liabilities relating to the resolution
of tax matters from prior periods. This increase is partially offset by a reduction in 2005 in affiliate receivable balances.

For the twelve months ended December 31, 2005, net cash from operating activities was $87.4 million, which is $18.1 million
lower than the same period in 2004. Net income was $6.6 million higher than 2004 net income. The addition of items
not involving cash were $9.2 million higher in 2005 due primarily to future income tax expense and higher depreciation
rates resulting from the 2005 Settlement. Changes in non-cash working capital and other non-cash items decreased cash
by $33.9 million primarily as a result of funds on deposit with the AESO being replaced with letters of credit in 2004.

The Corporation expects that it will be able to generate sufficient cash flows from operations to pay for operating costs,
interest on debt, distributions to the Corporation’s parent and to have surplus available for investment in capital assets.
However, the Corporation will not generate sufficient funds from operations to meet all forecasted capital expenditures
and to repay all principal amounts of debt when due, and plans to rely upon the proceeds of indebtedness and equity
from the parent company to meet these obligations. There are no required long-term debt principal repayments in 2006.

Investing activities

Statement of Financial Highlights                            Three months ended                   Twelve months ended
                                                                December 31                            December 31
($ thousands)                                              2005             2004                   2005           2004
Capital expenditures (before contributions)               54,171           34,836               162,036         127,786
Customer contributions                                    (9,215)          (4,344)              (30,727)        (17,638)
Total capital expenditures                                44,956           30,492               131,309         110,148

The Corporation’s utility operations are capital intensive. For the three months ended December 31, 2005, the Corporation
had capital expenditures of approximately $45.0 million, compared to $30.5 million for the same period in 2004. This
increase in capital expenditures was largely driven by customer growth in the oil and gas and commercial customer
classes as a result of a strong provincial economy. These increases were partially offset by higher customer contributions in
the fourth quarter of 2005. Computer hardware and software expenditures, primarily due to the Tariff Bill Code, Regulated
Default Supplier, and Disaster Response projects also contributed to the increase.

For the twelve months ended December 31, 2005, the Corporation had capital expenditures of $131.3 million compared
to $110.1 million for the same period in 2004. This increase in capital expenditures was partially driven by customer
growth in the oil and gas and commercial customer classes, combined with increases in system upgrade and replacement
programs in an effort to improve reliability on the system and replace facilities approaching the end of their useful lives.
These increases were partially offset by higher customer contributions in 2005 and lower investment in residential
customer activity. In addition, 2005 expenditures for general plant assets increased over 2004 levels primarily due to an




                                                                               FORTISALBERTA 2005 ANNUAL REPORT                   27
     increase in vehicles capital expenditures. Lastly, computer hardware and software were significantly higher than 2004
     levels primarily due to the Tariff Bill Code (Regulated Default Supplier) and Disaster Response projects.

     It is expected that ongoing capital expenditures will be financed by drawing on the syndicated credit facility, utilizing the
     proceeds from indebtedness, equity from the parent company and from funds generated by operating activities.

     Cash used in investing activities for the twelve months ended December 31, 2005 was $132.7 million which was $1.4 million
     higher than capital expenditures due to changes in non-cash working capital and purchases of materials and supplies.

     Financing activities
     For the three months ended December 31, 2005, net cash from financing activities was $26.4 million, compared to
     $0.4 million provided from financing activities during the same period in 2004. This increase was primarily due to drawings
     on the credit facility in 2005 to fund capital expenditures. In addition, cash outflows relating to finance fees were
     $4.0 million higher in 2004 as a result of the long-term debt issuance.

     For the twelve months ended December 21, 2005, cash provided by financing activities increased by $86.2 million. This
     increase was a result of the fact that during the twelve months ended December 31, 2004, the Corporation repaid debt
     of approximately $414.9 million as a condition of the sale of the Corporation to Fortis on May 31, 2004. This debt was
     replaced by a short-term bank loan of $393.0 million which in turn was replaced by $400.0 million in long-term public
     debt issued October 25, 2004. During the same period in 2005 the Corporation had an increase in debt of $56.8 million
     which was used to fund capital expenditures. During the twelve months ended December 31, 2004, the Corporation paid
     dividends and a return of capital totaling $21.0 million. During the same period in 2005, the Corporation used available
     funds to pay dividends of $12.0 million to Fortis Alberta Holdings Inc. (“FAHI”), the Corporation’s parent and an indirectly
     wholly-owned subsidiary of Fortis.

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


     CaPITal reSourCeS

     The Corporation’s business requires ongoing access to capital in order to allow it to build and maintain the electrical
     distribution system within the Corporation’s service territory. In order to ensure this access to capital, the Corporation
     intends to maintain its current credit ratings and targets a long-term capital structure that includes approximately 60 per
     cent debt and 40 per cent equity.

     Summary of Capital Structure                                 December 31, 2005                       December 31, 2004
                                                            $ (millions)      Per cent              $ (millions)       Per cent
     Total Debt                                                 456.8             58.5                  400.0              56.8
     Shareholder Equity                                         323.5             41.5                  304.5              43.2
     Total                                                      780.3           100.0                   704.5            100.0

     As at December 31, 2005, 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

     As at December 31, 2005, the Corporation’s outstanding debt of $456.8 million was made up of long-term public debt of
     $400.0 million issued October 25, 2004 and $56.8 million outstanding on the syndicated credit facility.

     On May 17, 2005, the Corporation replaced the $100.0 million syndicated credit facility with a $150.0 million syndicated
     credit facility, which matures on May 17, 2008. Drawings are available by way of prime loans, banker’s acceptances and
     letters of credit. As at December 31, 2005, there was $56.8 million drawn in banker’s acceptances and $43.9 million
     drawn in letters of credit. On January 3, 2006 a letter of credit in the amount of $27.6 million was cancelled. As at
     December 31, 2004, there was no amount drawn in loans and $51.5 million drawn in letters of credit.




28
                                                                                                        M ANAGEMENT DISCUSSION AND ANALYSIS




CoNTraCTual oblIGaTIoNS

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

($ thousands)                                                    Total                      2006                2007–08                      2009–10                    Thereafter
Debt                                                          456,823                           –                 56,823                            –                     400,000
Joint use agreements(1)                                        60,506                       3,025                  6,050                        6,050                      45,381
Shared services agreements(2)                                   3,271                         701                  1,402                        1,168                            –
Office leases                                                   7,023                       1,517                  2,811                        2,545                         150
Total contractual obligations                                 527,623                       5,243                 67,086                        9,763                     445,531
Notes:
(1) 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 year 2010 includes payments to the end of 20 years. However, the payments under this agreement may
    continue for an indefinite period of time.
(2) 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.



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 accounts payable for related parties were measured at the
exchange amount and are as follows:

related Party                                                            Included in accounts receivable                               Included in accounts Payable
($ thousands as of December 31)                                                  2005              2004                                      2005             2004
Belize Electricity Limited                                                            6                –                                         –                –
FortisBC Inc.                                                                      646            1,115                                          2                –
Fortis Inc.                                                                          22                –                                      108              182
Fortis Pacific Holdings Inc.                                                          7                –                                         –                –
Fortis Properties Corporation                                                        19                –                                         –                –
Newfoundland Power Inc.                                                               9             500                                        24                 –
Officer of the Corporation                                                         150              150                                          –                –
Employee share purchase plan loans
  to officers of the Corporation                                                          18                           9                             –                             –
Total                                                                                    877                       1,774                           134                           182

The amount receivable from an officer of the Corporation is a housing and relocation loan that is interest free for a period
of 3 years after which interest will accrue at the rate of prime plus ½ per cent. The total amount of the loan must be
repaid within 10 years. The loan is secured by a mortgage on the residence purchased by the officer.

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 share purchase date.

An officer of the Corporation has an outstanding housing loan from Fortis in the amount of $512 thousand. The loan is
secured by a mortgage on the residence purchased by the officer. In addition, the officer of the Corporation has a loan
from Fortis in the amount of $159 thousand relating to the purchase of stock options. If the underlying shares held as
security are sold, the loan must be repaid in full.

The Corporation bills related parties on terms and conditions consistent with billings to third parties which are that
amounts are due on a net 30 days basis with interest on overdue amounts charged at a rate of 1.5 per cent per month
(19.56 per cent 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.




                                                                                                                    FORTISALBERTA 2005 ANNUAL REPORT                                    29
     The amounts included in other revenue and operating expenses for related parties for the twelve months ended
     December 31, 2005 were measured at the exchange amount and are as follows:

     related Party                                                Included in      Included in expenses                  Included in
     ($ thousands)                                             other revenue              as recoveries                    expenses
     Belize Electricity Limited                                             5                         –                            –
     FortisBC Inc.                                                      2,750                      698                             2
     Fortis Inc.                                                           28                         –                         719
     FortisOntario                                                          3                         –                            –
     Fortis Pacific Holdings Inc.                                           7                         –                            –
     Fortis Properties Corporation.                                        23                         –                          85
     Maritime Electric Company, Limited                                    11                         –                            –
     Newfoundland Power Inc.                                               73                         –                         177
     Total                                                              2,900                      698                          983

     The amounts included in other revenue and operating expenses for related parties for the twelve months ended
     December 31, 2004 were measured at the exchange amount and are as follows:

     ($ thousands)                                                                   Twelve months ended December 31, 2004
     Included in other revenue                                                                                       5,556
     Included in operating expenses as recoveries                                                                    2,262
     Included in operating expenses                                                                                  2,343

     Belize Electricity Limited (“BEL”) is the primary distributor of electricity in Belize, Central America. BEL, which is 67 per cent
     owned by Fortis, serves approximately 66,000 customers and is a regulated utility. The 2005 charges to BEL are for shared
     labour costs billed on a cost recovery basis. There are no ongoing contractual commitments resulting from these transactions.

     FortisBC Inc. is a regulated electric utility that generates, transmits and distributes electricity in the Province of British
     Columbia and is wholly-owned by Fortis. A contractual agreement exists between FortisBC Inc. and the Corporation through
     which goods and services are provided to and received from FortisBC Inc. on a cost recovery basis. Services provided
     included administrative services, materials procurement, shared facilities, information technology, metering services and call
     centre services. In addition, during 2005 the Corporation purchased $9.0 thousand of materials from FortisBC Inc.

     Fortis Inc. is a diversified, international electric utility holding company and the indirect parent of the Corporation. The
     majority of Fortis’ subsidiaries are engaged in the regulated distribution of electricity. The 2005 charges from Fortis were
     for corporate governance expenses and stock based compensation costs billed on a cost recovery basis. There are no
     ongoing contractual commitments resulting from these transactions.

     FortisOntario is an electric utility that is a wholly-owned subsidiary of Fortis and owns and operates an integrated electricity
     distribution, transmission and generation system in the Province of Ontario. In 2005, charges to FortisOntario were for
     shared labour costs and were billed on a cost recovery basis. There are no ongoing contractual commitments resulting
     from these transactions.

     Fortis Pacific Holdings Inc. (“Fortis Pacific”) is an indirectly wholly-owned subsidiary of Fortis. Fortis Pacific is the parent
     company of FortisBC Inc. and Princeton Light and Power Company. The 2005 charges were for the provision of metering
     services. There are no ongoing contractual commitments resulting from these transactions.

     Fortis Properties Corporation (“Fortis Properties”) is a holding company of Fortis which owns all the common shares
     of Maritime Electric Company, Limited (“Maritime Electric”), a principal distributor of electricity in the Province of Prince
     Edward Island, and FortisUS Energy Corporation, which operates four hydroelectric generating stations in the State of New
     York. In 2005, services provided to Fortis Properties related to executive labour charges billed on a cost recovery basis. In
     2005, services provided to Maritime Electric related to the provision of metering services on a cost recovery basis. There
     are no ongoing contractual commitments resulting from these transactions.

     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. In 2005, services provided by the Corporation were in the form of staff assistance and labour to a sister

30
                                                                          M ANAGEMENT DISCUSSION AND ANALYSIS




Fortis company, Caribbean Utilities Company, Ltd., which were charged through Newfoundland Power Inc. on a cost
recovery basis. In addition, metering services were provided to Newfoundland Power Inc. on a cost recovery basis. In
addition, during 2005 the Corporation purchased $45.0 thousand of emergency materials from Newfoundland Power Inc.
There are no ongoing contractual commitments resulting from these transactions.


SIGNIFICaNT aCCouNTING eSTImaTeS

Certain estimates are necessary since the regulatory environment the Corporation operates within often requires amounts
to be recorded at estimated values until these amounts are finalized pursuant to regulatory decisions, or other regulatory
proceedings. Due to inherent uncertainty involved in making estimates, actual results reported in future periods could
differ significantly from those estimates.

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 EUB. These rates are updated based on depreciation studies that are
filed by the Corporation and are subject to change.

employee Future benefits
The Corporation’s defined benefit pension plan expense is subject to judgments utilized in the actuarial determination of
the expense. The main assumptions utilized by management in determining pension 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.

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 EUB approved rates, including amounts recognized on an accrual basis for services
rendered, but not yet billed. The Corporation reports revenues and expenses related to transmission services on a net
basis in other revenue.


SIGNIFICaNT aCCouNTING PolICIeS

regulation
The Corporation is regulated by the EUB, pursuant to the Electric Utilities Act (Alberta), the Public Utilities Board Act
(Alberta), and the Hydro and Electric Energy Act (Alberta). The EUB 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 EUB. Rate orders issued by the EUB
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 was 9.5 per cent for 2005 (9.5 per cent for 2004). 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


                                                                                   FORTISALBERTA 2005 ANNUAL REPORT                  31
     costs of service being different from that which was estimated, other than for certain prescribed costs that are eligible for
     deferral account treatment.

     Income Taxes
     As prescribed in the 2005 rates approved by the EUB, provincial income tax expenses are recovered through customer
     rates based on the taxes payable method, and federal income tax expenses are recovered through customer rates based
     on a modified liability method. Under the modified liability method, current customer rates include the recovery of future
     federal income taxes related to specified temporary differences between the tax basis of assets and liabilities and their
     carrying amounts for regulatory purposes. As a result of collecting a portion of future federal income taxes within current
     customer rates, the Corporation has now recognized all future federal income taxes within the financial statements.
     The Corporation has set up a regulatory liability equal to the amount of future federal income taxes recognized in these
     financial statements that have not yet been reflected in customer rates. These amounts will be reflected in future rates to
     customers as timing differences reverse.

     In 2004, the Corporation followed the taxes payable method of accounting for federal and provincial income taxes. The
     Corporation continues to recognize future income taxes for certain deferral amounts where the future income taxes will
     not be collected in future customer rates.

     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 1.4 per cent to 21.9 per cent as approved
     by the EUB, 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 EUB are
     accounted for on a prospective basis. The EUB approved rates are applied to the original historical capital costs reflected
     for regulatory rate setting purposes. The amounts relating to future removal and site restoration costs are included in
     accumulated depreciation.

     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 which is charged to accumulated depreciation will be reflected in future depreciation
     expense when it is refunded or collected in rates.

     regulatory Tax basis adjustments
     The regulatory tax basis adjustment represents 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
     that arose as part of the purchase price allocation in 2000 in connection with the Corporation’s acquisition of the business
     from TransAlta Utilities Corporation.

     The regulatory tax basis adjustment is being amortized over the estimated service life of the Corporation’s property, plant
     and equipment by an offset against the provision for depreciation and amortization.

     asset retirement obligations
     As of January 1, 2004, the Corporation retroactively adopted the recommendations of the CICA on accounting for asset
     retirement obligations. The recommendations require total retirement costs to be recorded as a liability at fair value, with
     a corresponding increase to property, plant and equipment. The Corporation recognizes asset retirement obligations in the
     period in which they are incurred if a reasonable estimate of fair value can be determined. An asset retirement obligation
     and offsetting capital asset will be recognized when the timing and amount can be reasonably estimated.

     revenue recognition
     Revenues are recognized as earned, at EUB approved rates, including amounts recognized on an accrual basis for services
     rendered, but not yet billed. The Corporation reports revenues and expenses related to transmission services on a net
     basis in other revenue.




32
                                                                       M ANAGEMENT DISCUSSION AND ANALYSIS




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 per cent of the greater of the benefit obligation or
fair value of the plan assets at the beginning of the fiscal year and unamortized past service costs are amortized over the
expected average remaining service period of the active employees receiving benefits under the plan. The Corporation
uses quoted market values 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.


CHaNGeS IN aCCouNTING PolICIeS

accounting for rate regulation
The Accounting Standards Board (“AcSB”) of the Canadian Institute of Chartered Accountants issued an Accounting
Guideline AcG-19 that addressed disclosure for entities subject to rate regulation. The guideline requires disclosure
regarding the nature and effects of rate regulation, as well as additional information on how rate regulation has affected
the entity’s financial statements. The Corporation has adopted this section for the fiscal year ending December 31, 2005,
and the required disclosure has been reported within the financial statements.


FuTure aCCouNTING ProNouNCemeNTS

Conditional asset retirement obligations
On December 6, 2005, the AcSB issued an Emerging Issue Committee Abstract EIC-159 which addresses the recognition
of conditional asset retirement obligations. The abstract requires entities to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This standard should be
applied retroactively, with restatement of prior periods, to all financial statements for interim and annual reporting periods
ending after March 31, 2006. Currently the Corporation is in the process of determining the information necessary to
comply with this standard and any relevant implications will be reported as required, in the June 30, 2006, Management
Discussion and Analysis and Financial Statements.

Financial Instruments
New accounting standards for financial instruments (recognition and measurement) have been issued which for the
Corporation will be effective for interim and annual financial statements relating to fiscal years beginning on or after
October 1, 2006. The standards address the criteria for recognition of financial instruments on the balance sheet and the
measurement of financial instruments for related gains and losses. The standards are intended to harmonize Canadian
accounting principles for these items with international accounting standards, including those in the United States.
Currently the Corporation is in the process of determining the information necessary to comply with this standard and
any relevant implications will be reported as required, in the March 31, 2007, Management Discussion and Analysis and
Financial Statements.

rate-regulated operations Project
In March 2002, 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. Planned project activities include: the analysis of stakeholder input received in response to the
Invitation to Submit Fact Patterns; and the issuance of an exposure draft (currently anticipated in the latter half of 2006)
and, following that, a final standard (timing to be determined). The Corporation is in the process of determining any
implications this may have, as this project proceeds.




                                                                                FORTISALBERTA 2005 ANNUAL REPORT                  33
     buSINeSS rISK maNaGemeNT

     legal Proceedings
     On August 8, 2005, the Corporation announced that an agreement was reached with EPCOR Energy Services to settle all
     aspects of the Statement of Claim filed on August 18, 2003 in the Court of Queen’s Bench of Alberta. All amounts related
     to the Settlement were reflected in the Corporation’s financial results for the second quarter ended June 30, 2005. On
     October 3, 2005, the Corporation signed an agreement with Aquila Inc. and its insurers, which partitioned an insurance
     policy intended to cover legal expenses incurred to defend the lawsuit, as well as any amounts rendered against the
     Corporation by way of a legal ruling, or agreed to in a settlement. The proceeds received under this policy have partially
     offset the settlement of the EPCOR litigation and were reflected in financial results during the three months ended
     September 30, 2005. Under the terms of the agreements, all aspects of the EPCOR settlement and the terms of the
     insurance agreement are confidential.

     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.

     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 EUB 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 requires
     the approval of the EUB 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 EUB 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.

     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 administration 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 deregulation of the power industry in Alberta continues to create uncertainty for the Corporation and its business.
     While deregulation of the power industry in Alberta officially commenced on January 1, 2001, the underlying legislation
     and regulations pursuant to which such deregulation 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 deregulated market cannot be foreseen. The regulations and market rules that govern the competitive wholesale
     and retail electricity markets in Alberta are relatively new 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 Electric Utilities Act (Alberta) (the “EUA”), the Corporation was
     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 as its regulated rate provider until June 30, 2006 and as its default supplier until December 31, 2010.
     As a result of this appointment, EPCOR assumed all of the Corporation’s rights and obligations in respect of these services.

34
                                                                        M ANAGEMENT DISCUSSION AND ANALYSIS




In the unlikely event that EPCOR is unable or unwilling to act as regulated rate provider or as default supplier, and no other
person 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 a number of direct customers that reside within various municipalities throughout its service areas.
From time to time, municipal governments in Alberta give consideration to 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 EUB approval, to purchase the Corporation’s assets within
its municipal boundaries pursuant to the Municipal Act. Under the Hydro Act, if a municipality that owns an electric utility
expands its boundaries, such municipality can acquire the Corporation’s assets in the annexed area. In such circumstances,
the Hydro Act provides for compensation, including payment for the Corporation’s assets on the basis of “reproduction
cost new less depreciation”. Given the historical growth of Alberta and its municipalities, the Corporation may be affected
by transactions of this type.

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 pursuant to the Municipal Act at present. 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 condition and results of operations of the Corporation.

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 and health and safety. The costs arising from compliance with such laws, regulations and
guidelines may be material to the Corporation. The process of obtaining environmental, health and safety regulatory
approvals, including any necessary environmental assessment, can be lengthy, contentious and expensive. Environmental
damages and other costs could potentially arise due to a variety of events, including severe weather, 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, health and safety laws make owners, operators and persons in management and
control of facilities and substances subject to prosecution or administrative action for breaches of environmental, health and
safety 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. However,
it is not possible to predict with absolute certainty the position that regulatory authorities will take regarding matters of
non-compliance with environmental, health and safety laws. Changes in environmental, health and safety laws could also
lead to significant increases in costs to the Corporation.

The trend in environmental, health and safety regulation has been to impose more restrictions and limitations on activities
that may impact the environment, health and safety, including the generation and disposal of wastes, the use and
handling of chemical substances, and conducting environmental impact assessments and remediations. It is possible that
other developments may lead to increasingly strict environmental, health and safety 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.

                                                                                FORTISALBERTA 2005 ANNUAL REPORT                  35
     Electricity distribution facilities have the potential to cause fires 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 weather, 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 effect on the business, results of operations and prospects of the Corporation. The Corporation has a
     wildfire agreement in place with the government of Alberta for Crown lands in the forest protection area that limits the
     liability for forest fire suppression costs to 50 per cent of the cost to suppress the fire to a maximum of $50,000, unless
     the Corporation is proven negligent or not in compliance with its obligations under the agreement.

     While the Corporation maintains insurance, 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 outstanding liabilities when due and anticipated capital expenditures. The ability to arrange sufficient
     and cost-effective financing is subject to numerous factors, including the regulatory environment in Alberta, the results
     of operations and financial position of the Corporation, 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 73 per cent of the employees of the Corporation are members of a labour association which has entered
     into collective bargaining agreements with the Corporation. The provisions of such collective bargaining agreements affect
     the flexibility and efficiency of the business carried on by the Corporation. The Corporation considers its relationships
     with its labour association 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 to 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 an adverse effect on the results of operations, cash flow and net income of the Corporation.

     annual Impairment Test
     GAAP requires that the Corporation undertake an annual impairment test of goodwill and other intangible assets
     to determine whether a write-down of such assets is required. A write-down of asset value as a result of an annual
     impairment test would result in a non-cash charge that would reduce reported earnings of the Corporation. Further, a
     reduction of the Corporation’s asset value could have a material adverse effect on the Corporation’s compliance with total
     debt to capitalization tests under its credit facilities and, as a result, cause a default under its credit facilities and limit its
     ability to access further debt capital.

     operating and maintenance risk
     The Corporation’s distribution assets require maintenance, improvement and replacement. Accordingly, in order 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 EUB 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.




36
                                                                        M ANAGEMENT DISCUSSION AND ANALYSIS




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 EUB approved capital expenditures, it is uncertain as to whether
any additional costs will be approved by the EUB 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. In order for the Corporation to acquire these access permits, approval must be
granted by both the Ministry of Indian and Northern Affairs Canada and the individual Band council. The Corporation may
not be able to acquire the access permits from TransAlta and may be unable to negotiate land usage agreements with
property owners or, if negotiated, such agreements may be on terms which 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 makes it more difficult to perform maintenance and repairs if such assets are damaged by
weather conditions or other acts of nature. The Corporation has limited insurance against storm damage and other natural
disasters. In the event of a large uninsured loss caused by severe weather conditions or other natural disasters, application
will be made to the EUB for the recovery of these costs through higher rates. However, there can be no assurance that
the EUB 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. Thus, any major damage to the Corporation’s facilities could result in lost revenues, repair costs and
customer claims that are substantial in amount, which amount 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 is considered 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 or 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 uninsured or underinsured loss or liability, the Corporation would apply to the EUB to recover the
loss (or liability) through increased rates. However, there can be no assurance that the EUB 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 which could have an adverse effect on the Corporation’s business, results of
operations, financial position and prospects.




                                                                                FORTISALBERTA 2005 ANNUAL REPORT                  37
     DISCloSure CoNTrolS

     In compliance with the requirements of Multilateral Instrument 52-109 - Certification of Disclosure in Issuers’ Annual
     and Interim Filings, the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, have
     evaluated the effectiveness of its disclosure controls and procedures as at the end of the annual reporting period. Based
     on this evaluation of such controls and procedures, the Corporation has concluded, with reasonable assurance, that the
     disclosure controls and procedures of the Corporation are effective as of December 31, 2005.


     ouTlooK

     The EUB issued their Generic Cost of Capital Decision 2004-052 on July 2, 2004. This decision established the regulated
     capital structure for the Corporation at 63 per cent debt and 37 per cent equity on approved rate base assets. This
     decision also set a generic rate of return on common equity (“ROE”) at 9.60 per cent for 2004 based on a long-term
     Canada bond yield forecast of 5.68 per cent for 2004. There was also an automatic adjustment mechanism or formula for
     the purpose of establishing the generic ROE for subsequent years. This formula yielded a 9.50 per cent ROE for 2005 and
     an 8.93 per cent ROE for 2006. This reduction in ROE is primarily attributable to a reduction in forecast long-term Canada
     bond yields in 2006.

     The outlook for the Corporation is that it will continue to be regulated by the EUB under a cost-of-service methodology
     where all prudent cost components are recovered and the return as determined by the Generic Cost of Capital formula
     is achieved. The Corporation is expecting the Alberta economy to continue to grow. This expected growth will result in an
     increase in rate base assets which should result in a trend of continuously increasing regulated earnings.

     The Corporation filed a Distribution Tariff Application for 2006 and 2007 on December 12, 2005. This Application
     is requesting no change to base rates in 2006 with a 3 per cent increase in 2007. There will be a formal regulatory
     proceeding in the spring of 2006 with a decision on 2006 and 2007 rates expected late in the third quarter.

     The Corporation has applied for and received approval from the EUB for an interim Distribution Tariff for 2006 to be in
     place until such time as the decision on 2006 rates in rendered. The approved interim tariff allows the Corporation to
     recover increased transmission costs that the Corporation is required to pay to AESO. These transmission costs paid to
     AESO are subject to deferral account treatment by the EUB and, as a result, do not impact corporate earnings.

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




38
Financial Statements



m aN aG e m e N T ’ S r e P o rT

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 amount 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 ensure 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 members, a majority of which are independent. The Audit
Committee oversees the external audit of the Corporation’s annual financial statements and the accounting and 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 on policies relating
to the accounting and financial reporting and disclosure processes. The Audit Committee has the duty to review financial
reports requiring Board 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, 2005 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 2005
financial statements and their report follows.




(Signed)                                                                     (Signed)



JAMES HARBILAS                                                               PHILIP HUGHES
V.P. Finance, and Chief Financial Officer                                    President and CEO




                                                                             FORTISALBERTA 2005 ANNUAL REPORT                  39
     a u D I To r S ’ r ePo rT

     To the Shareholder of FortisAlberta Inc.,

     We have audited the balance sheet of Fortisalberta Inc. as at December 31, 2005 and the statements of income and
     deficit and cash flows for the year 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 audit.

     We conducted our audit 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, 2005 and the results of its operations and its cash flows for the year then ended in accordance with
     Canadian generally accepted accounting principles.

     The financial statements as at December 31, 2004 and for the year then ended, prior to any amounts reclassified to
     conform to the current period’s presentation, were audited by KPMG LLP. Those auditors expressed an opinion without
     reservation on those financial statements in their report dated February 2, 2005.




     Chartered Accountants

     Calgary, Canada
     January 27, 2006




40
                                                                                               FINANCIAL STATEMENTS


Fortisalberta Inc.
balaNCe SHeeT
as at December 31                                                                       2005             2004
(All amounts in thousands of Canadian dollars)

aSSeTS
CURRENT ASSETS
  Cash and cash equivalents                                                          1,804               2,765
  Accounts receivable and other assets (Notes 3, 12 and 15)                         55,778              40,869
  Income taxes receivable                                                                _               1,405
  Future income taxes (Note 13)                                                          _               6,515
  Regulatory assets (Note 5)                                                        16,998               3,541
                                                                                    74,580              55,095

MATERIALS AND SUPPLIES                                                             13,419                8,785
PROPERTY, PLANT AND EQUIPMENT (Note 4)                                            609,162              536,724
DEFERRED FINANCING FEES                                                             4,213                4,373
REGULATORY ASSETS (Note 5)                                                          1,311                1,396
FUTURE INCOME TAXES (Note 13)                                                      50,699                    –
ACCRUED PENSION ASSET (Notes 10 and 17)                                             5,065                7,519
GOODWILL                                                                          189,309              189,309
                                                                                  947,758              803,201

lIabIlITIeS aND SHareHolDer’S eQuITY
CURRENT LIABILITIES
  Accounts payable, accrued and other liabilities (Notes 7 and 12)                 85,364               85,736
  Regulatory liabilities (Note 5)                                                   2,200                3,381
  Income taxes payable                                                             14,063                    –
  Future income taxes (Note 13)                                                     4,682                    –
                                                                                  106,309               89,117

OTHER LIABILITIES (Notes 7, 10 and 17)                                              2,087                2,115
REGULATORY LIABILITIES (Note 5)                                                    59,060                7,519
LONG-TERM DEBT (Note 6)                                                           456,823              400,000
                                                                                  624,239              498,751

SHAREHOLDER’S EQUITY
  Share capital (Note 8)                                                          382,579              382,579
  Deficit                                                                         (59,060)             (78,129)
                                                                                  323,519              304,450
                                                                                  947,758              803,201

COMMITMENTS AND CONTINGENCIES (Note 14)




Approved on behalf of the Board:




(Signed)                                                                     (Signed)



H. STANLEY MARSHALL                                                          JOHN S. MCCALLUM
Director                                                                     Director



The accompanying notes are an integral part of these financial statements.


                                                                             FORTISALBERTA 2005 ANNUAL REPORT     41
FINANCIAL STATEMENTS


       Fortisalberta Inc.
       STaTemeNT oF INCome aND DeFICIT
       Years ended December 31                                                        2005       2004
       (All amounts in thousands of Canadian dollars)

       reVeNueS
         Electric rate revenue (Notes 5 and 9)                                      239,875    212,876
         Other revenue (Notes 5 and 12)                                              14,232     17,277
                                                                                    254,107    230,153

       eXPeNSeS
         Operating costs (Notes 5 and 12)                                           114,800    112,748
         Depreciation (Note 5)                                                       61,396     52,711
                                                                                    176,196    165,459

       earNINGS From oPeraTIoNS                                                      77,911     64,694

       INTereST oN SHorT-Term DebT aND ForeIGN eXCHaNGe loSS                             83     14,349
       INTereST oN loNG-Term DebT                                                    24,117     12,917
                                                                                     24,200     27,266

       INCome beFore INCome TaXeS                                                    53,711     37,428

       INCome TaX eXPeNSe (Notes 5 and 13)                                           22,642     12,900

       NeT INCome                                                                    31,069     24,528

       DeFICIT, beGINNING oF Year                                                   (78,129)   (96,657)
       DIVIDeNDS (Note 8)                                                           (12,000)    (6,000)
       DeFICIT, eND oF Year                                                         (59,060)   (78,129)




       The accompanying notes are an integral part of these financial statements.


42
                                                                                            FINANCIAL STATEMENTS


Fortisalberta Inc.
STaTemeNT oF CaSH FloWS
Years ended December 31                                                            2005                 2004
(All amounts in thousands of Canadian dollars)

oPeraTING aCTIVITIeS
 Net income                                                                      31,069               24,528
 Add items not involving cash:
   Depreciation and amortization                                                 61,773               55,919
   Future income taxes                                                           11,099                7,729
 Changes in other non-cash items (Note 16)                                        3,184                  719
                                                                                107,125               88,895
   Changes in non-cash working capital (Note 16)                                (19,741)              16,602

   Cash from operating activities                                                87,384              105,497

INVeSTING aCTIVITIeS
  Additions to property, plant and equipment                                    (133,571)            (108,113)
  Proceeds from the sale of property, plant and equipment                            875                  661

   Cash used in investing activities                                            (132,696)            (107,452)

FINaNCING aCTIVITIeS
  Increase in debt                                                                56,709              792,862
  Repayment of debt                                                                    –             (807,924)
  Dividends paid                                                                 (12,000)              (6,000)
  Redemption of stated share capital                                                   –              (15,000)
  Additions to deferred financing fees                                              (358)              (5,802)

   Cash from (used in) financing activities                                      44,351               (41,864)

NET DECREASE IN CASH AND CASH EQUIVALENTS                                           (961)             (43,819)
CASH AND CASH EQUIVALENTS, beginning of year                                       2,765               46,584

CASH AND CASH EQUIVALENTS, end of year                                             1,804                2,765

Cash flows include the following elements:
Interest paid                                                                    24,064               20,457
Income taxes paid (refunded)                                                     (3,615)              17,802




The accompanying notes are an integral part of these financial statements.


                                                                             FORTISALBERTA 2005 ANNUAL REPORT    43
NOTES to the FINANCIAL STATEMENTS
        (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)



        1. eNTITY DeFINITIoN aND NaTure oF oPeraTIoNS

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

        Effective January 1, 2001, the Corporation disposed of its retail operations and related assets and began operating
        solely as an owner and operator of distribution assets. As a distribution company, the Corporation invoices retail energy
        companies for the distribution and transmission portions of electricity rates. In turn, the Corporation is invoiced by the
        transmission administrator for the transmission services.

        On May 31, 2004, all of the issued and outstanding shares of the Corporation were acquired by an indirectly wholly-
        owned subsidiary of Fortis Inc. (“Fortis”), a Canadian public company. On June 1, 2004, the name of the Corporation was
        changed to FortisAlberta Inc.


        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”). All amounts are in Canadian dollars unless otherwise stated. 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 the Corporation operates within often requires amounts to be recorded at estimated values until
        these amounts are finalized pursuant to regulatory decisions, or other regulatory proceedings. Due to inherent uncertainty
        involved in making estimates, actual results reported in future periods could differ significantly from those estimates.

        b) regulation
        The Corporation is regulated by the Alberta Energy and Utilities Board (“EUB”), pursuant to the Electric Utilities Act
        (Alberta), the Public Utilities Board Act (Alberta), and the Hydro and Electric Energy Act (Alberta). The EUB 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 EUB. Rate orders issued by the EUB
        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 was 9.5 per cent for 2005 (9.5 per cent - 2004). 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.

        When the EUB 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) materials and supplies
        Materials and supplies represent spare parts held for day-to-day operations and material held for construction and
        maintenance of property, plant and equipment. Materials and supplies held for construction of property, plant and
        equipment are classified as long-term assets. Materials and supplies are valued at the lower of cost and estimated net
        realizable value.



44
                                                                               NOTES to the FINANCIAL STATEMENTS




e) Income taxes
As prescribed in the 2005 rates approved by the EUB, provincial income tax expenses are recovered through customer
rates based on the taxes payable method, and federal income tax expenses are recovered through customer rates based
on a modified liability method. Under the modified liability method, current customer rates include the recovery of future
federal income taxes related to specified temporary differences between the tax basis of assets and liabilities and their
carrying amounts for regulatory purposes. As a result of collecting a portion of federal future income taxes within current
customer rates, the Corporation has now recognized all federal future income taxes within the financial statements.
The Corporation has set up a regulatory liability equal to the amount of federal future income taxes recognized in these
financial statements that have not yet been reflected in customer rates. These amounts will be reflected in future rates to
customers as timing differences reverse.

In 2004, the Corporation followed the taxes payable method of accounting for federal and provincial income taxes. The
Corporation continues to recognize future income taxes for certain deferral amounts where the future income taxes will
not be collected in future customer rates.

f) 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 1.4 per cent to 21.9 per cent as approved
by the EUB, 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 EUB are
accounted for on a prospective basis. The EUB approved rates are applied to the original historical capital costs reflected
for regulatory rate setting purposes. The amounts relating to future removal and site restoration costs are included in
accumulated depreciation.

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 which is charged to accumulated depreciation will be reflected in future depreciation
expense when it is refunded or collected in rates.

g) Impairment of long-lived assets
An impairment loss is recognized when the carrying value of a long-lived asset is not recoverable and exceeds its fair
value. Testing for recoverability uses the undiscounted cash flows expected from the asset’s use and disposition. The
amount of impairment recognized is equal to the difference between the fair value of the asset and its carrying amount.

h) asset retirement obligations
As of January 1, 2004, the Corporation retroactively adopted the recommendations of the CICA on accounting for asset
retirement obligations. The recommendations require total retirement costs to be recorded as a liability at fair value, with
a corresponding increase to property, plant and equipment. The Corporation recognizes asset retirement obligations in the
period in which they are incurred if a reasonable estimate of fair value can be determined. An asset retirement obligation
and offsetting capital asset will be recognized when the timing and amount can be reasonably estimated.

i) Deferred financing fees
Costs incurred to arrange debt financing are capitalized as deferred financing costs and are amortized to interest expense
on a straight-line basis over the term of the related debt.

j) 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.




                                                                                FORTISALBERTA 2005 ANNUAL REPORT                  45
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     k) revenue recognition
     Revenues are recognized as earned, at EUB approved rates, including amounts recognized on an accrual basis for services
     rendered, but not yet billed. The Corporation reports revenues and expenses related to transmission services on a net
     basis in other revenue.

     l) 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 per cent of the greater of the benefit obligation or
     fair value of the plan assets at the beginning of the fiscal year and unamortized past service costs are amortized over the
     expected average remaining service period of the active employees receiving benefits under the plan. The Corporation
     uses quoted market values 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.

     m) Stock based compensation
     The Corporation calculates compensation expense upon the issuance of stock options under Fortis stock option plans,
     using the fair value method. The compensation expense is amortized over the vesting period of the options.


     3. aCCouNTS reCeIVable aND oTHer aSSeTS

     Accounts receivable and other assets consist of the following:

     (Thousands of Canadian dollars)                                                     December 31, 2005       December 31, 2004
     Accounts receivable                                                                            52,118                  35,409
     Materials and supplies                                                                          1,491                   4,392
     Prepaids and deposits                                                                           2,169                   1,068
                                                                                                    55,778                  40,869

     4. ProPerTY, PlaNT aND eQuIPmeNT

     December 31, 2005 – Net book Value                                                           accumulated
     (Thousands of Canadian dollars)                                                Cost          Depreciation      Net book Value
     Distribution system                                                       1,121,695             (284,434)             837,261
     Land and land rights                                                         12,930                 (914)              12,016
     Vehicles                                                                     34,150               (7,652)              26,498
     Buildings and furniture                                                      38,062               (2,409)              35,653
     Tools and instruments                                                         6,652               (1,869)               4,783
     Computer hardware and software                                               88,528              (21,466)              67,062
     Construction in progress                                                     12,711                     –              12,711
     Customer contributions                                                     (359,537)              73,628             (285,909)
                                                                                 955,191             (245,116)             710,075
     Regulatory tax basis adjustment                                            (135,109)              34,196             (100,913)
                                                                                 820,082             (210,920)             609,162




46
                                                                             NOTES to the FINANCIAL STATEMENTS




December 31, 2004 – Net book Value                                                  accumulated
(Thousands of Canadian dollars)                                   Cost              Depreciation           Net book Value
Distribution system                                            997,942                 (228,750)                  769,192
Land and land rights                                            16,814                     (700)                   16,114
Vehicles                                                        25,638                   (7,207)                   18,431
Buildings and furniture                                         37,050                     (862)                   36,188
Tools and instruments                                            5,226                   (1,253)                    3,973
Computer hardware and software                                  94,064                  (26,265)                   67,799
Construction in progress                                         5,423                         _                    5,423
Customer contributions                                        (328,810)                  54,355                  (274,455)
                                                               853,347                 (210,682)                  642,665
Regulatory tax basis adjustment                               (135,109)                  29,168                  (105,941)
                                                               718,238                 (181,514)                  536,724

The depreciation rates are as follows:

(Thousands of Canadian dollars)                           December 31, 2005                      December 31, 2004
                                                     regulated         effective            regulated         effective
                                                   Depreciation   Depreciation            Depreciation   Depreciation
                                                         rates            rates                 rates            rates
                                                             %                %                     %                %
Distribution system                                        3.53            6.23                   3.06            5.71
Land and land rights                                       3.54            3.43                   1.53            1.48
Vehicles                                                   6.93            8.27                 11.44            14.33
Buildings and furniture                                    3.16            5.80                   3.15            6.03
Tools and instruments                                    11.64            11.15                   9.64            9.21
Computer hardware and software                           14.28            15.21                 11.01            11.79
Customer contributions                                     3.93            5.60                   2.83            4.13
Regulatory tax basis adjustment                               –            4.75                      –            4.75

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 regulatory tax basis adjustment represents the 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 in August
2000. The 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 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, 2005, depreciation
and amortization expense was reduced by $5.0 million (2004 - $5.3 million) for the amortization of the regulatory tax
basis adjustment.

Included in accumulated depreciation is the amount collected in rates for removal and site restoration costs that are
expected to be incurred in the future. This balance was $229.1 million as at December 31, 2005 (December 31, 2004 –
$209.1 million). 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. 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 $13.4 million. Actual 2005 site restoration costs for the year were $6.3 million. Therefore, in the absence
of rate regulation, depreciation expense would have been $13.4 million lower and operating expenses would have been
$6.3 million higher in 2005. In the absence of rate regulation, the provision for future removal and site restoration would
not be recognized thus increasing capital assets and retained earnings by $229.1 million.

As indicated in Note 2 (f), 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 2005 that would have been recognized in the
absence of rate regulation is $9.5 million.

                                                                               FORTISALBERTA 2005 ANNUAL REPORT                 47
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     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 asset. The AFUDC is recovered in rates from customers over the life of the assets through depreciation expense. 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 2005 the Corporation did not
     record any AFUDC.


     5. reGulaTorY aSSeTS aND lIabIlITIeS

     All amounts deferred as regulatory assets and liabilities are subject to EUB approval. As such, the EUB could alter the
     amounts subject to deferral at which time the change would be reflected in the financial statements. Based on previous
     or existing 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
     EUB approval. For information regarding the effects of rate regulation on capital assets and income taxes see notes 4 and
     13 respectively.

     regulatory assets                                                                                                remaining
                                                                                         2005       2004          recovery Period
     (Thousands of Canadian dollars, unless noted)                                                                             (Years)
     Commodity cost deferral                                                         2,225         2,152                          1
     Hearing cost reserve                                                              626         1,389                          1
     Self insurance reserve                                                          1,868             –                          1
     Deferral of lease costs                                                           273             –                          1
     Alberta Electric System Operator (“AESO”) charges deferral                     11,778             –                          1
     Regulatory other post-retirement benefits asset                                 1,311         1,396                         12
     Regulatory future income tax asset                                                228             _                          1
                                                                                    18,309         4,937
     Less: current portion                                                          16,998         3,541
     Long-term portion                                                               1,311         1,396

     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 August 2002, the remaining
     balance of deferred costs at that time was securitized for proceeds of $255 million. This transaction was recorded as
     securitization financing. The securitization financing was repaid on March 31, 2004 and the security interest in the assets
     was subsequently released. In 2004, the EUB approved the collection of additional recoverable costs from customers, as a
     result of a review and variance of EUB Decision 2004-027.

     As directed by the EUB, the Corporation will be submitting a true-up filing in 2006 to collect the remaining balance of the
     deferred costs from customers. 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.

     Hearing Cost reserve
     The EUB has the ability to allow costs of a proceeding to be borne by customers through a utility’s hearing cost reserve
     account. The EUB 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 costs are incurred. In the absence of rate regulation, operating costs would have been
     $763 lower in 2005.

48
                                                                              NOTES to the FINANCIAL STATEMENTS




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 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 costs are incurred. In the absence of rate regulation, the Corporation would have recognized additional
operating costs of $1,868 and $74 less electric rate revenue. In 2004, the balance was in a liability position of $74.

Deferral of lease Costs
The Corporation incurred costs associated with the leasing of one of its buildings that are to be collected from customers
in future rates. These deferred costs will be recognized when collected in rates. In the absence of rate regulation, the
Corporation would have recognized additional operating costs of $273. This balance is not subject to a regulatory return.

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, certain riders, and other miscellaneous charges related to the period of 2003 to 2005. 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 costs are incurred. The filing for the 2004 deferral was made
September 22, 2005. The filing for the 2005 AESO charges deferral will not be made until 2006. Once approved, these
amounts are expected to be collected in rates through a transmission adjustment rider, at which time these deferred
costs will be recognized. In the absence of rate regulation, the Corporation would have recognized $13,421 less in other
revenue during 2005. In 2004 the balance in the AESO Charges Deferral was in a liability position of $1,643.

regulatory other Post-retirement benefits asset
This 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 2005, rates included amounts for costs which had previously been deferred, and in the
absence of rate regulation operating costs would be $85 lower. This balance is not subject to a regulatory return.

regulatory Future Income Tax asset
In 2005, the Corporation began collecting federal income taxes in rates, calculated on a modified liability basis. As such,
certain amounts of future income taxes are collected in current rates thus requiring the Corporation to recognize its future
income tax balances. This regulatory asset represents a deferral of future income tax expense which is expected to be
recognized in future rates. The Corporation has applied for the taxes payable method in its filing to set the 2006 and 2007
rates and if approved, this balance would be removed. This balance is not subject to a regulatory return.

regulatory liabilities                                                                                           remaining
                                                                   2005                       2004        Settlement Period
(Thousands of Canadian dollars, unless noted)                                                                           (Years)
Regulatory pension deferral                                       5,589                      9,183                          8
Income tax deferral                                                 900                          –                          1
A1 rider deferral                                                   156                          –                          2
Revenue deferral for software costs                                 776                          –                          1
Self insurance reserve                                                –                         74
AESO charges deferral                                                 –                      1,643
Regulatory future income tax liability                           53,799                          –                          2
                                                                 61,220                     10,900
Less: current portion                                             2,200                      3,381
Long-term portion                                                59,020                      7,519




                                                                               FORTISALBERTA 2005 ANNUAL REPORT                   49
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     regulatory Pension Deferral
     This balance consists of two components. One component represents a liability of $524 resulting from the collection
     of pension expense in rates that has not yet been contributed into the pension plan. This portion of the balance will be
     settled within a year.

     The other component 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. This balance is $5,065 and will be settled over 7.4 years and is not subject to a regulatory
     return. In the absence of rate regulation, the Corporation would have recognized additional operating costs of $3,594.

     Income Tax Deferral
     This balance represents a liability to customers relating to the difference in the actual amounts of certain deductions
     which are expected to be claimed for income tax purposes versus those that were included in 2005 rates. The EUB
     Decision 2005-053 requires the Corporation to refund or collect the amount of tax arising as a result of these differences.
     In the absence of rate regulation, the electric rate revenue would have been $900 higher. This balance is not subject to
     regulatory return.

     a1 rider Deferral
     The Corporation pays linear taxes and collects these linear taxes from the customers (“A1 rider”) within the specific
     municipalities on a community specific basis. This EUB ordered regulatory deferral represents the difference between the
     A1 rider revenue and the linear tax expense. 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 costs are incurred. To the extent that actual
     costs incurred exceed the amount collected in revenue, these excess costs will be deferred and will be recognized when
     collected in future rates. In the absence of rate regulation, electric rate revenue would have been $156 higher.

     revenue Deferral for Software Costs
     In 2005, the Corporation collected in rates an amount for software maintenance costs that will not be incurred until
     2006. Therefore, the Corporation has deferred this amount and will refund it to customers in 2006 through lower rates.
     In the absence of rate regulation, the electric rate revenue would have been $776 higher. This balance is not subject to
     regulatory return.

     regulatory Future Income Tax liability
     As a result of collecting a portion of federal future income taxes within current rates, the Corporation has now recognized
     all federal future income taxes within the financial statements. The Corporation has set up a regulatory liability equal to the
     amount of federal future income taxes recognized in these financial statements that have not yet been reflected in rates.
     These amounts will be reflected in future rates to customers as timing differences reverse. The Corporation has applied
     for the taxes payable method in its filing to set the 2006 and 2007 rates and if approved, this balance would be removed.
     This portion of the regulatory liability ($50,699) is not subject to a regulatory return.

     During 2005, the Corporation collected in its approved rates $3,100 relating to future income tax expense which was
     recognized for rate making purposes. This balance is also included in this regulatory future income tax liability. For financial
     statement purposes, only $130 of the $3,100 was recognized as a future income tax expense. As such, the remaining $2,970
     of revenue was deferred. In the absence of rate regulation, electric rate revenue would have been $2,970 higher in 2005.




50
                                                                            NOTES to the FINANCIAL STATEMENTS




6. DebT

                                                                             December 31                   December 31
(Thousands of Canadian dollars)                                                    2005                          2004
Senior unsecured debentures, 5.33%, due 2014                                     200,000                       200,000
Senior unsecured debentures, 6.22%, due 2034                                     200,000                       200,000
Drawing on the unsecured syndicated credit facility, due 2008                     56,823                             –
                                                                                 456,823                       400,000

On May 17, 2005, the Corporation replaced the $100 million syndicated credit facility with a $150 million syndicated credit
facility, which matures on May 17, 2008. Drawings are available by way of prime loans, banker’s acceptances and letters of
credit. The average interest rate for the year on the syndicated credit facility was 4.12 per cent. As at December 31, 2005,
there was $56.8 million drawn in banker’s acceptances and $43.9 million drawn in letters of credit. On January 3, 2006,
a letter of credit in the amount of $27.6 million was cancelled. As at December 31, 2004, there was no amount drawn in
loans and $51.5 million drawn in letters of credit.

The Corporation has available a $10 million unsecured demand credit facility by way of current account overdrafts and
standby letters of credit. There were no drawings on this facility as at December 31, 2005 or December 31, 2004.

On October 25, 2004, the Corporation issued $200 million in senior unsecured debentures bearing interest at 5.33 per
cent to be paid semi-annually, maturing on October 31, 2014, and $200 million in senior unsecured debentures bearing
interest at 6.22 per cent to be paid semi-annually, maturing on October 31, 2034. These debentures are a direct
obligation of the Corporation as to payment of principal and interest.

Included in interest expense on short-term debt was nil of amortization of deferred financing fees (2004 – $3,108).

Included in interest expense on long-term debt was $377 of amortization of deferred financing fees (2004 – $100).

In prior years, the Corporation used forward foreign exchange contracts to reduce its exposure to fluctuations in foreign
currency exchange rates on U.S. dollar denominated debt. The contracts obliged the Corporation to buy U.S. dollars in the
future at predetermined exchange rates. On August 1, 2003, the Corporation had entered into a contract to buy US$215
million on May 28, 2004 at an exchange rate of 1.4209. The Corporation entered into the foreign exchange contract on
its own behalf and at the request and on behalf of Aquila Networks Canada Corp. (“ANCC”). A proportionate amount
(115/215) of the benefit, obligations and liabilities under the foreign exchange contract was assigned to ANCC.

These contracts were carried at fair value with gains and losses recognized in income. For the year ended December 31,
2004, the Corporation incurred net foreign exchange losses of $0.8 million on the forward contract and the debt. There
was no foreign exchange gain or loss recorded in 2005.

Scheduled principal repayments are as follows:

(Thousands of Canadian dollars)
2006                                                                                                                   –
2007                                                                                                                   –
2008                                                                                                              56,823
2009                                                                                                                   –
2010 and thereafter                                                                                              400,000
                                                                                                                 456,823




                                                                             FORTISALBERTA 2005 ANNUAL REPORT                  51
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     7. oTHer lIabIlITIeS

     Other liabilities consist of the following:

                                                                                         December 31                  December 31
     (Thousands of Canadian dollars)                                                           2005                         2004
     Other post-retirement benefits and supplemental pension plan (Note 10)                    1,691                        1,396
     Deferred lease inducement                                                                   493                          860
                                                                                               2,184                        2,256
     Less: Current portion of deferred lease inducement
           included in accounts payable, accrued and other liabilities                           (97)                           (141)
     Long-term other liabilities                                                               2,087                           2,115


     8. SHare CaPITal

     Authorized – unlimited number of:
              Common shares
              Class A Common shares
              First Preferred non-voting shares, redeemable, cumulative dividend at 10 per cent of the redemption price

     Issued – 63 Class A Common shares, with no par value

                                                                                         December 31                  December 31
     (Thousands of Canadian dollars)                                                           2005                         2004
     Class A Common shares                                                                   173,848                      173,848
     Contributed surplus                                                                     208,731                      208,731
     Total share capital                                                                     382,579                      382,579


     During 2005, the Corporation declared and paid dividends totaling $12,000 (2004 - $6,000) to Fortis Alberta Holdings
     Inc. (the Corporation’s parent and an indirectly wholly-owned subsidiary of Fortis).

     Contributed surplus relates to the push-down of the purchase price premium paid by the Corporation’s former parent on
     acquisition of TransAlta’s retail and distribution assets.


     9. reGulaTorY maTTerS

     electrical load based billing
     The Corporation bills regulated transmission and distribution revenues based on regulated tariffs approved by the EUB.
     For the period January 1, 2001 to July 31, 2003, hourly electrical load data was determined through a metering and load
     settlement function performed by the Corporation. The methodology used to determine the hourly electrical load by
     end-use customers was governed by regulation and included an initial load determination on a monthly basis, used to
     calculate an initial distribution tariff invoice for the retailers and self-retailers. This preliminary load information was then
     subject to further adjustment by the Corporation upon receipt of additional metering information in accordance with the
     AESO settlement code, and a final “true-up” bill was generated. At this time, the Corporation was to prepare final invoices
     to retailers for distribution and transmission services. These true-ups and related adjustments resulted in a net increase
     in revenue of $1.4 million for the year ended December 31, 2005, and a net increase in revenue of $2.4 million for the
     year ended December 31, 2004. The majority of adjustments related to the true-ups for this period are now complete.
     However, the Corporation will continue to render an adjusted bill, where required under regulation for certain customers,
     for the period from January 1, 2001 to July 31, 2003 and beyond, for any amounts that are subsequently found to be in
     error. These adjustments are made without interest.

     Effective August 1, 2003, FortisAlberta reverted to a cycle-based billing methodology based on actual meter readings and
     other applicable data and as a result no true-up billing is required except in the case of an incorrect read or estimation.



52
                                                                            NOTES to the FINANCIAL STATEMENTS




10. 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
benefit component of the plan is based on final average earnings and the defined contribution component of the plan is
based on a percentage of earnings. The Corporation also provides certain other post-retirement benefits including certain
health and dental coverage provided to retired employees and a supplemental pension plan, which plans are unfunded.

The Corporation uses a measurement date that is three months prior to the reporting date for the actuarial valuation done for
expense calculation purposes. The most recent actuarial valuation of the plans for funding purposes was done for the period
end December 31, 2004. Information from the funding valuation was used in the actuarial valuation done for expense
calculation purposes. The next actuarial valuation for funding purposes is to be completed as at December 31, 2007.

Effective May 31, 2004, the Corporation was purchased by Fortis. The assets and the accrued benefit obligations
were remeasured as at the sale date. Therefore, the net periodic cost for the five-month period ended May 31, 2004
was determined based on the financial position of the plans at December 31, 2003 (using a measurement date of
September 30, 2003) and the net periodic cost for the seven-month period ended December 31, 2004 was determined
based on the financial position of the plans at May 31, 2004 (using a measurement date of February 28, 2004). The
net periodic cost for the year ended December 31, 2005 was determined based on the financial position of the plans at
December 31, 2004 (using a measurement date of September 30, 2004).

(b) Costs recognized
In 2005, the Corporation recovered in rates other post-retirement benefits and supplemental pension plan costs based
on the accrual method of accounting. The Corporation recovered in rates the defined benefit and defined contribution
costs of the pension plan based on the employer cash contributions made for defined benefit plan and based on the
filed amount of the funding requirements for the defined contribution plan, less $1.6 million which reduced the regulatory
pension deferral. From January 1, 2005 to June 30, 2005 the required contributions for the defined contribution
component of the plan were funded from the surplus of the pension plan, and therefore no amounts were included in
rates for the defined contribution component of the plan for this time period.

In 2004, the Corporation deferred the costs of employee future benefits to the extent that these were greater than the
employer contributions made, as these costs were recoverable in rates from customers at the time that the Corporation
was required to fund its obligations. The EUB ordered the Corporation to fund its contributions to the defined benefit and
defined contribution plans from the surplus of the pension plan and as such, the Corporation did not collect any amounts
for these costs in rates and the Corporation deferred any pension expense.




                                                                              FORTISALBERTA 2005 ANNUAL REPORT                  53
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     annual expense – December 31, 2005                   retirement                     Supplemental   Non-pension    all covered
     (Thousands of Canadian dollars)                             plan                            plan       benefits       benefits
     Current service cost                                         391                            158             58            607
     Interest cost on accrued benefit obligation                  899                              12            87            998
     Actual return on assets                                   (2,456)                              –              –        (2,456)
     Actuarial gains/losses on accrued benefit obligations      3,680                               –         2,575          6,255
     Difference between actual and expected
        return on assets                                        1,238                              –              –         1,238
     Other adjustments to allocate costs:
        Past service costs                                         83                              –              –            83
        Actuarial unamortized gains/losses                     (3,335)                             –         (2,575)       (5,910)
     Net benefit cost                                             500                            170            145           815
     Regulatory adjustment to net benefit cost                    (40)                            30             55            45
     Net benefit cost recognized in financial statements          460                            200            200           860
     Defined contribution plan net benefit cost                 3,707                              –              –         3,707
     Regulatory adjustment to net benefit cost                 (3,554)                             –              –        (3,554)
     Defined contribution net benefit cost recognized in
        financial statements                                      153                              –              –           153
     Total recognized in financial statements                     613                            200            200         1,013


     annual expense – December 31, 2004                   retirement                     Supplemental   Non-pension    all covered
     (Thousands of Canadian dollars)                              plan                           plan       benefits       benefits
     Current service cost                                         387                              82            58            527
     Interest cost on accrued benefit obligation                  831                               2            79            912
     Actual return on assets                                   (1,804)                              –              –        (1,804)
     Actuarial gains/losses on accrued benefit obligations          32                              –            (6)            26
     Difference between actual and expected
        return on assets                                          401                              –              –           401
     Other adjustments to allocate costs:
        Past service costs                                          83                             –              –            83
        Actuarial unamortized gains/losses                        228                              –              6           234
     Net benefit cost                                             158                             84            137           379
     Regulatory adjustment to net benefit cost                   (158)                           (84)          (134)         (376)
     Net benefit cost recognized in financial statements             –                             –              3             3
     Defined contribution plan net benefit cost                 3,716                              –              –         3,716
     Regulatory adjustment to net benefit cost                 (3,716)                             –              –        (3,716)
     Defined contribution net benefit cost recognized in
        financial statements                                         –                             –              –             –
     Total recognized in financial statements                        –                             –              3             3




54
                                                                 NOTES to the FINANCIAL STATEMENTS




Composition of accrued benefit asset –
December 31, 2005                           retirement     Supplemental    Non-pension    all covered
(Thousands of Canadian dollars)                    plan            plan        benefits       benefits
Fair value of assets                            17,285                –               –        17,285
Accrued benefit obligation                     (19,815)           (254)         (4,126)       (24,195)
Resulting plan deficit                           (2,530)          (254)         (4,126)        (6,910)
Unamortized amounts:
  Net actuarial losses                           6,926               –           2,684         9,610
  Past service costs                               669               –               –           669
Contributions after the measurement date             –               –               5             5
Total recognized in financial statements         5,065            (254)         (1,437)        3,374


Composition of accrued benefit asset –
December 31, 2004                           retirement     Supplemental    Non-pension    all covered
(Thousands of Canadian dollars)                    plan            plan        benefits       benefits
Fair value of assets                            17,650                –               –        17,650
Accrued benefit obligation                     (14,876)             (84)        (1,421)       (16,381)
Resulting plan surplus/(deficit)                  2,774             (84)        (1,421)         1,269
Unamortized amounts:
  Net actuarial losses                           4,867                –            109         4,976
  Past service costs                               752                –              –           752
Contributions after the measurement date          (874)               –              –          (874)
Total recognized in financial statements         7,519              (84)        (1,312)        6,123


Plan assets – December 31, 2005             retirement     Supplemental    Non-pension    all covered
(Thousands of Canadian dollars)                     plan           plan        benefits       benefits
Fair value of assets at beginning of year       17,650                –               –        17,650
Allocations to defined contribution plan         (2,790)              –               –        (2,790)
Employer contributions                                 –              –             15             15
Member contributions                                  80              –               –            80
Benefits paid                                      (111)              –            (15)          (126)
Actual return on plan assets                      2,456               –               –         2,456
Fair value of assets at end of year             17,285                –               –        17,285


Plan assets – December 31, 2004             retirement     Supplemental    Non-pension    all covered
(Thousands of Canadian dollars)                    plan            plan        benefits       benefits
Fair value of assets at beginning of year       19,450                –               –        19,450
Allocations to defined contribution plan         (3,674)              –               –        (3,674)
Member contributions                                 94               –               –            94
Benefits paid                                       (24)              –               –           (24)
Actual return on assets                           1,804               –               –         1,804
Fair value of assets at end of year             17,650                –               –        17,650




                                                                  FORTISALBERTA 2005 ANNUAL REPORT       55
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     reconciliation of accrued benefit obligation –
     December 31, 2005                                               retirement          Supplemental      Non-pension     all covered
     (Thousands of Canadian dollars)                                         plan                plan          benefits        benefits
     Benefit obligations at beginning of year                            14,876                    84            1,421          16,381
     Current service cost                                                    391                 158                58             607
     Interest cost on accrued benefit obligation                             899                   12               87             998
     Member contributions                                                      80                   –                 –             80
     Benefits paid                                                          (111)                   –              (15)           (126)
     Actuarial loss                                                        3,680                    –            2,575           6,255
     Benefit obligations at end of year                                  19,815                  254             4,126          24,195


     reconciliation of accrued benefit obligation –
     December 31, 2004                                               retirement          Supplemental      Non-pension     all covered
     (Thousands of Canadian dollars)                                       plan                  plan          benefits        benefits
     Benefit obligations at beginning of year                            13,556                     –            1,293          14,849
     Current service cost                                                   387                    82               58             527
     Interest cost on accrued benefit obligation                            831                     2               79             912
     Member contributions                                                    94                     –                 –             94
     Benefits paid                                                          (24)                    –               (3)            (27)
     Actuarial loss (gain)                                                   32                     –               (6)             26
     Benefit obligations at end of year                                  14,876                    84            1,421          16,381


     reconciliation of accrued benefit asset (liability) –
     December 31, 2005                                   retirement                      Supplemental      Non-pension     all covered
     (Thousands of Canadian dollars)                             plan                            plan          benefits        benefits
     Accrued benefit asset (liability) at
        beginning of year                                      7,519                             (84)            (1,312)        6,123
     Net periodic cost                                          (500)                           (170)              (145)         (815)
     Allocations to defined contribution plan                 (1,954)                              –                  –        (1,954)
     Funding contribution                                           –                              –                 20            20
     Accrued benefit asset (liability) at end of year          5,065                            (254)            (1,437)        3,374


     reconciliation of accrued benefit asset (liability) –
     December 31, 2004                                   retirement                      Supplemental      Non-pension     all covered
     (Thousands of Canadian dollars)                             plan                            plan          benefits        benefits
     Accrued benefit asset (liability) at
        beginning of year                                    11,393                                –             (1,178)       10,215
     Net periodic cost                                          (158)                            (84)              (137)         (379)
     Allocations to defined contribution plan                 (3,716)                              –                  –        (3,716)
     Funding contribution                                           –                              –                  3             3
     Accrued benefit asset (liability) at end of year          7,519                             (84)            (1,312)        6,123


     As at September 30, the assets of the defined benefit plan were invested as follows:

                                                                                                          2005                  2004
     Equity securities                                                                                   61.8%                 58.6%
     Debt securities                                                                                     37.5%                 41.0%
     Cash                                                                                                 0.7%                  0.4%
                                                                                                        100.0%                100.0%




56
                                                                                                            NOTES to the FINANCIAL STATEMENTS




Plan assumptions – the significant actuarial assumptions utilized in measuring the Corporation’s accrued benefit
obligations were as follows:

Year ended December 31                                                                                                      2005                                       2004
Accrued benefit obligations
   Liability discount rate                                                                                                5.00%                                      6.00%
   Rate of compensation increase                                                                                          3.50%                                      3.50%
Net benefit cost during the period
   Liability discount rate(1)                                                                                             6.00%                                      5.85%
   Rate of compensation increase                                                                                          3.50%                                      3.50%
   Expected long-term rate of return on assets                                                                            7.50%                                      7.50%
Health care trend rate:
 Initial rate during first year                                                                                       10.00%                                      10.00%
 Ultimate rate to which the trend rate is assumed to decline                                                           5.00%                                       6.00%
 Year in which ultimate rate is reached                                                                                  2010                                       2008
 Expected average remaining service life for the retirement plan                                                     7.4 years                                     9 years
 Expected average remaining service life for non-pension benefits                                                   12.0 years                                    11 years
(1) Due to the sale of the Corporation, FortisAlberta was required to remeasure the assets and the accrued benefit obligation as of May 31, 2004. The net periodic costs for 2004
were determined with the following discount rates: 6.0% for the five-month period ended May 31, 2004 and 5.75% for the seven-month period ended December 31, 2004. A simple
weighted average has been calculated to represent the average discount rate for the year.


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

(Thousands of Canadian dollars)                                                                     1% increase in rates                       1% decrease in rates
Increase (decrease) in accrued benefit obligation                                                                   450                                       (395)
Increase (decrease) in combined interest cost plus
   current service costs                                                                                                        20                                       (15)


11. 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 5-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 10 years after the date of
grant. At December 31, 2005, Fortis had 3,795,280 common shares in the reserve for issue under the terms of the stock-
based compensation and share purchase plans. The amounts in the tables below reflect the impact of the October 2005
stock split whereby all stock options were split 4-for-1 with the exercise price at one quarter of the pre-split exercise price.

                                                                                                                  Number of                        Weighted average
                                                                                                               stock options                          exercise price
Outstanding at December 31, 2004                                                                                     76,467                                  $14.77
Exercised                                                                                                             (4,640)                                 14.55
Granted                                                                                                             116,204                                   18.56
Outstanding at December 31, 2005                                                                                    188,301                                  $16.70


Number outstanding as at                                      exercise price                          Number vested at                                       expiry Date
    December 31, 2005                                                                                December 31, 2005
                 22,859                                                 $15.28                                   5,715                                                 2014
                 48,968                                                  14.55                                  12,242                                                 2014
               108,520                                                   18.40                                       _                                                 2015
                  7,684                                                  20.82                                       _                                                 2015
               188,031                                                                                          17,957




                                                                                                               FORTISALBERTA 2005 ANNUAL REPORT                                     57
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




                         Grant date                          Number of                     exercise price            Fair market value
                                                        options granted                                                    per option
                   March 1, 2005                               108,520                              $18.40                       $2.75
                  August 16, 2005                                 7,684                              20.82                        2.82
                                                               116,204

     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:

                                                                                          march 1, 2005              august 16, 2005
     Dividend yield (%)                                                                             3.44                         3.44
     Expected volatility (%)                                                                        15.3                         14.9
     Risk-free interest rate (%)                                                                    4.28                         3.93
     Weighted-average expected life (years)                                                          7.5                          7.5

     Compensation expense was $128 for the year ended December 31, 2005 (2004 – $40).

     An officer of the Corporation has an additional 225,954 Fortis stock options outstanding as at December 31, 2005. These
     stock options are not included in the above disclosure nor was there an associated expense relating to these stock options
     in the Corporation’s financial statements, as they were granted to the officer while the officer was employed at other
     Fortis companies.


     12. 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 accounts payable for related parties were measured at the
     exchange amount and are as follows:

                                                                  Included in accounts receivable       Included in accounts payable
                                                                  December 31      December 31        December 31      December 31
     (Thousands of Canadian dollars)                                      2005              2004              2005             2004
     Belize Electricity Limited                                               6                 –                 –                –
     FortisBC Inc.                                                         646             1,115                  2                –
     Fortis Inc.                                                             22                 –              108              182
     Fortis Pacific Holdings Inc.                                             7                 –                 –                –
     Fortis Properties Corporation.                                          19                 –                 –                –
     Newfoundland Power Inc.                                                  9              500                24                 –
     Officer of the Corporation                                            150               150                  –                –
     Employee share purchase plan loans
       to officers of the Corporation                                           18             9                 –                  –
     Total                                                                     877         1,774               134                182

     The amount receivable from an officer of the Corporation is a housing and relocation loan that is interest free for a period
     of 3 years after which interest will accrue at the rate of prime plus ½ per cent. The total amount of the loan must be
     repaid within 10 years. The loan is secured by a mortgage on the residence purchased by the officer.

     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 share purchase date.

     An officer of the Corporation has an outstanding housing loan from Fortis in the amount of $512. The loan is secured by a
     mortgage on the residence purchased by the officer. In addition, the officer of the Corporation has a loan from Fortis in the
     amount of $159 relating to the purchase of stock options. If the underlying shares held as security are sold, the loan must
     be repaid in full.




58
                                                                                NOTES to the FINANCIAL STATEMENTS




The Corporation bills related parties on terms and conditions consistent with billings to third parties which are that
amounts are due on a net 30 days basis with interest on overdue amounts charged at a rate of 1.5 per cent per month
(19.56 per cent 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 twelve months ended
December 31, 2005 were measured at the exchange amount and are as follows:

                                                              Included in                Included in     Included in expenses
(Thousands of Canadian dollars)                            other revenue                   expenses             as recoveries
Belize Electricity Limited                                              5                          –                        –
FortisBC Inc.                                                       2,750                       698                         2
Fortis Inc.                                                            28                          –                     719
FortisOntario                                                           3                          –                        –
Fortis Pacific Holdings Inc.                                            7                          –                        –
Fortis Properties Corporation.                                         23                          –                       85
Maritime Electric Company, Limited                                     11                          –                        –
Newfoundland Power Inc.                                                73                          –                     177
Total                                                               2,900                       698                      983

The amounts included in other revenue and operating expenses for related parties for the twelve months ended
December 31, 2004 were measured at the exchange amount and are as follows:

(Thousands of Canadian dollars)                                                 Twelve months ended December 31, 2004
Included in other revenue                                                                                       5,556
Included in operating expenses as recoveries                                                                    2,262
Included in operating expenses                                                                                  2,343

Belize Electricity Limited (“BEL”) is the primary distributor of electricity in Belize, Central America. BEL, which is 67 per
cent owned by Fortis, serves approximately 66,000 customers and is a regulated utility. The 2005 charges to BEL are for
shared labour costs billed on a cost recovery basis. There are no ongoing contractual commitments resulting from these
transactions.

FortisBC Inc. is a regulated electric utility that generates, transmits and distributes electricity in the Province of British
Columbia and is wholly-owned by Fortis. A contractual agreement exists between FortisBC Inc. and the Corporation
through which goods and services are provided to and received from FortisBC Inc. on a cost recovery basis. Services
provided included administrative services, materials procurement, shared facilities, information technology, metering
services and call centre services. In addition, during 2005 the Corporation purchased $9 of materials from FortisBC Inc.

Fortis Inc. is a diversified, international electric utility holding company and the indirect parent of the Corporation. The
majority of Fortis’ subsidiaries are engaged in the regulated distribution of electricity. The 2005 charges from Fortis were
for corporate governance expenses and stock based compensation costs billed on a cost recovery basis. There are no
ongoing contractual commitments resulting from these transactions.

FortisOntario is an electric utility that is a wholly-owned subsidiary of Fortis and owns and operates an integrated electricity
distribution, transmission and generation system in the Province of Ontario. In 2005, charges to FortisOntario were for
shared labour costs and were billed on a cost recovery basis. There are no ongoing contractual commitments resulting
from these transactions.

Fortis Pacific Holdings Inc. (“Fortis Pacific”) is an indirectly wholly-owned subsidiary of Fortis. Fortis Pacific is the parent
company of FortisBC Inc. and Princeton Light and Power Company. The 2005 charges were for the provision of metering
services. There are no ongoing contractual commitments resulting from these transactions.

Fortis Properties Corporation (“Fortis Properties”) is a holding company of Fortis which owns all the common shares
of Maritime Electric Company, Limited (“Maritime Electric”), a principal distributor of electricity in the Province of Prince
Edward Island, and FortisUS Energy Corporation, which operates four hydroelectric generating stations in the State of New
York. In 2005, services provided to Fortis Properties related to executive labour charges billed on a cost recovery basis. In


                                                                                 FORTISALBERTA 2005 ANNUAL REPORT                  59
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     2005, services provided to Maritime Electric related to the provision of metering services on a cost recovery basis. There
     are no ongoing contractual commitments resulting from these transactions.

     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. In 2005, services provided by the Corporation were in the form of staff assistance and labour to a sister
     Fortis company, Caribbean Utilities Company, Ltd., which were charged through Newfoundland Power Inc. on a cost
     recovery basis. In addition, metering services were provided to Newfoundland Power Inc. on a cost recovery basis. In
     addition, during 2005 the Corporation purchased $45 of emergency materials from Newfoundland Power Inc. There are
     no ongoing contractual commitments resulting from these transactions.


     13. 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            December 31    December 31      December 31
                                                                        2005                   2005           2004             2004
     (Thousands of Canadian dollars)                                        $                     %               $               %
     Net income before income taxes                                    53,711                                37,428

     Expected provision for income taxes                                   18,047               33.6           12,676           33.9
     Adjustments resulting from differences
       between income for accounting and
       income tax purposes relate to:
       Capital assets                                                       2,912                5.4           (2,548)          (6.8)
       Other expenses                                                         294                0.6              796            2.1
     Large corporations tax                                                 1,268                2.4            1,256            3.4
     Future income tax – rate changes and other                               121                0.2              720            1.9
     Provision for income taxes                                            22,642               42.2           12,900           34.5

     Income tax expense is comprised of:
                                                                                                Year ended               Year ended
     (Thousands of Canadian dollars)                                                      December 31, 2005        December 31, 2004
     Current income tax provision                                                                    11,543                    5,171
     Future income tax provision                                                                     11,099                    7,729
                                                                                                     22,642                   12,900

     Future income tax asset (liability) is comprised of:

     (Thousands of Canadian dollars)                                                      December 31, 2005        December 31, 2004
     Regulatory assets and liabilities                                                               (3,826)                   6,515
     Capital assets                                                                                  49,843                        –
                                                                                                     46,017                    6,515
     Less: current portion                                                                           (4,682)                   6,515
     Long-term portion                                                                               50,699                        –

     As described in Note 2 (e), in 2004 the Corporation followed 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 $77.0 million at December 31, 2004. As
     described in Note 2 (e), in 2005 the Corporation followed the taxes payable method of accounting for 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 $29.0 million at December 31, 2005 and would have recognized
     a reduction in future income tax expense of approximately $3.0 million in 2005.




60
                                                                               NOTES to the FINANCIAL STATEMENTS




14. CommITmeNTS aND CoNTINGeNCIeS

(a) operating leases and other contractual obligations
The Corporation has operating leases for facilities and office premises. 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 2010 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:

(Thousands of Canadian dollars)
2006                                                                                                                     5,243
2007                                                                                                                     5,163
2008                                                                                                                     5,100
2009                                                                                                                     5,009
2010                                                                                                                     4,754
Thereafter                                                                                                              45,531
                                                                                                                        70,800

(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.

On August 8, 2005 the Corporation announced that an agreement was reached with EPCOR Energy Services to settle all
aspects of the Statement of Claim filed on August 18, 2003 in the Court of Queen’s Bench of Alberta. All amounts related
to the settlement were reflected in the Corporation’s financial results for the second quarter ended June 30, 2005. On
October 3, 2005, the Corporation signed an agreement with Aquila Inc. and its insurers, which partitioned an insurance
policy intended to cover legal expenses incurred to defend the lawsuit, as well as any amounts rendered against the
Corporation by way of a legal ruling, or agreed to in a settlement. The proceeds received under this policy have partially
offset the settlement of the EPCOR litigation and were reflected in financial results during the three months ended
September 30, 2005. Under the terms of the agreements, all aspects of the EPCOR settlement and the terms of the
insurance agreement are confidential.

(c) Capital expenditures
As an electric utility, the Corporation is obligated to provide service to customers within its service territory. The Corporation
has forecast capital expenditures for 2006 of $193 million, which are largely driven by customer requests or are specifically
identified large capital projects.




                                                                                 FORTISALBERTA 2005 ANNUAL REPORT                    61
     (All dollar amounts are in thousands of Canadian dollars, unless otherwise noted)




     15. FINaNCIal INSTrumeNTS

     (a) Fair values
     The fair values of the Corporation’s cash and cash equivalents, accounts receivable, short-term debt and accounts payable
     approximate their carrying value. The fair values of other financial instruments are as follows:

                                                      Carrying Value                        Fair Value   Carrying Value      Fair Value
                                                       December 31                       December 31      December 31     December 31
     (Thousands of Canadian dollars)                           2005                              2005             2004            2004
     Senior unsecured debentures, 5.33%                     200,000                          212,514           200,000        204,932
     Senior unsecured debentures, 6.22%                     200,000                          237,558           200,000        208,680
     Drawing on the syndicated credit facility, due 2008     56,823                            56,823                 –               –
                                                            456,823                          506,895           400,000        413,612

     (b) Concentration of credit risk
     Substantially all of the customer accounts receivable relate to electricity retailers located in the Province of Alberta. One
     customer comprised 25 per cent of accounts receivable as at December 31, 2005 (2004 – 29 per cent).


     16. SuPPlemeNTal CaSH FloW INFormaTIoN

     Changes in other non-cash items related to operations:

     (Thousands of Canadian dollars)                                                      December 31, 2005         December 31, 2004
     Decrease (increase) in non-current regulatory assets                                                85                    (1,396)
     Decrease (increase) in accrued pension asset                                                     2,454                    (7,519)
     (Decrease) increase in long-term other liabilities                                                 (28)                    2,115
     Increase in long-term regulatory liabilities                                                       673                     7,519
                                                                                                      3,184                       719

     Changes in non-cash working capital related to operations:

     (Thousands of Canadian dollars)                                                      December 31, 2005         December 31, 2004
     (Increase) decrease in accounts receivable and other assets                                    (12,581)                   64,526
     Decrease (increase) in income taxes receivable                                                   1,405                    (1,405)
     (Increase) decrease in regulatory assets                                                       (13,229)                      530
     Decrease in unamortized bankers acceptance discount                                                114                       138
     Decrease in accounts payable, accrued and other liabilities                                     (8,332)                   (4,714)
     Increase (decrease) in income taxes payable                                                     14,063                   (11,225)
     Decrease in regulatory liabilities                                                              (1,181)                  (37,648)
     Increase in realized foreign exchange loss                                                           –                     6,400
                                                                                                    (19,741)                   16,602


     17. CHaNGe IN PreSeNTaTIoN

     Prior to January 1, 2005, the Corporation recorded the costs of employee future benefits as employer contributions were
     made, as these costs are recoverable in rates from customers at the time that the Corporation is required to fund its
     obligation. The accounting standard “Generally Accepted Accounting Principles” indicates that an entity may choose to not
     apply the standard when recognizing and measuring assets or liabilities arising from rate regulation. When the Corporation
     adopted this standard in 2004, it chose to record the effect of regulation for accrued employee benefits, and recognized
     equal and offsetting regulatory amounts against the accrued benefit asset and employee post-retirement benefit
     obligation. Effective January 1, 2005, the Corporation has chosen to no longer record the regulatory impact as offsetting
     amounts against the accrued pension asset and employee post-retirement benefits obligation. This change in presentation
     is being applied retroactively to transactions and to outstanding balances, effective January 1, 2004 when the Corporation
     adopted the new change in accounting standard for “Generally Accepted Accounting Principles”. The effect of this change
     in presentation was to increase accrued pension asset by $7,519 and increase long-term regulatory liabilities by $7,519 as

62
                                                                            NOTES to the FINANCIAL STATEMENTS




at January 1, 2005. As well, other long-term liabilities increased by the amount of the employee post-retirement benefit
obligation of $1,396, and non current regulatory assets increased by $1,396 as at January 1, 2005. Under regulatory
accounting principles, the expense ultimately recognized in these financial statements is that which is recognized for rate
setting purposes, which was nil in 2004. There was therefore no impact on net earnings or shareholders equity as a result
of this change in presentation.


18. ComParaTIVe FIGureS

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




                                                                             FORTISALBERTA 2005 ANNUAL REPORT                 63
     Board of Directors




                   H. Stanley Marshall                   Brian F. Bietz
                   President & CEO                       President
                   Fortis Inc.                           Bietz Resources Ltd.
                   St. John’s, Newfoundland & Labrador   Calgary, Alberta




                   Philip G. Hughes                      Gregory E. Conn
                   President & CEO                       Rancher
                   FortisAlberta Inc.                    Innisfail, Alberta
                   Calgary, Alberta




                   Barry V. Perry                        John S. McCallum
                   Vice President, Finance & CFO         Professor of Finance
                   Fortis Inc.                           University of Manitoba
                   St. John’s, Newfoundland & Labrador   Winnipeg, Manitoba




                   Donald G. Bacon                       John C. Walker
                   Independent Consultant                President & CEO
                   Calgary, Alberta                      FortisBC Inc.
                                                         Kelowna, British Columbia




64
Executive Team




                 Left to right:


                 Alan Skiffington
                 Vice President, Information Technology and CIO

                 D. James Harbilas
                 Vice President, Finance and CFO

                 Karin Gashus
                 Vice President, Customer Service

                 Philip G. Hughes
                 President and CEO

                 Cynthia Johnston
                 Vice President, Corporate Services and Regulatory

                 Gary Smith
                 Vice President, Operations and Engineering
Co n taCt I n f o r m atI o n

Head Office:
fortisalberta
320 – 17th Avenue SW
Calgary, Alberta T2S 2V1
Phone: (403) 514-4000

for power outages:
contact 310-WIRE (310-9473)
Website: fortisalberta.com


for investor inquiries:
investors@fortisalberta.com




all paper used in the annual report is
recycled-post consumer, acid free and
elemental chlorine free.




Photography: Ned Pratt, St. John’s, Newfoundland; Marnie Burkhart, Calgary, Alberta   Design and Production: Shift Strategies   Printing: Sundog Printing
Printed in Canada

				
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