AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

August 08, 2008 17:24 ET

AltaGas Utility Group Inc. Announces Record First Half of 2008 Results and a Quarterly Dividend of $0.045 Per Share

CALGARY, ALBERTA--(Marketwire - Aug. 8, 2008) - The Board of Directors of AltaGas Utility Group Inc. (Utility Group) (TSX: AUI) today announced net income of $4.1 million ($0.51 per share) for the six months ended June 30, 2008, compared to net income of $3.2 million ($0.39 per share) for the six months ended June 30, 2007. A dividend of $0.045 per common share payable on October 15, 2008 to shareholders of record at the close of business on September 30, 2008 was also declared.

Net income for the six months ended June 30, 2008 increased by $0.9 million to $4.1 million (2007 - $3.2 million) from the same period last year. Growth in Utility Group's income is largely due to rate base growth which contributed $0.5 million to net income. Utility Group's interest in Ikhil, acquired in July 2007, contributed $0.4 million, while an increase of the allowed return on equity in Alberta to 8.75% contributed $0.1 million and the colder Alberta winter in the first quarter of 2008 contributed a further $0.2 million to net income for the six month period ended June 30, 2008. These increases were partially offset by an increase in administrative costs of $0.3 million.

For the second quarter of 2008, Utility Group realized a net loss of $0.3 million ($0.04 per share) compared to a net loss of $0.5 million ($0.07 per share) for the second quarter of 2007. Although the second quarter loss is representative of the normal seasonal nature of the gas distribution business, resulting in declines in delivered volumes in the spring, rate base growth contributed an additional $0.3 million, the increase in the allowed return on equity in Alberta to 8.75% contributed $0.1 million, and Ikhil contributed $0.1 million in the second quarter of 2008. These positive impacts to income were partially offset by higher administrative costs of $0.3 million.

"We are pleased with the continued growth in our franchise areas and the contribution our 2007 investment in Ikhil has made to our earnings," said Patricia Newson, President and Chief Executive Officer. "Utility Group looks forward to the continued growth and expansion opportunities in all our operating areas."

AltaGas Utility Group Inc. is a publicly traded company holding interests in AltaGas Utilities Inc., Heritage Gas Limited and Inuvik Gas Ltd. Combined, these regulated natural gas distribution businesses serve more than 69,000 customers in three areas of Canada through an infrastructure of nearly 22,000 kilometres of pipelines. Utility Group holds an interest in the Ikhil Joint Venture which produces and supplies natural gas in Inuvik, Northwest Territories. Utility Group pursues opportunities to invest in infrastructure-based utility and related businesses with long-term, stable returns.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of financial condition and results of operations dated August 8, 2008 is a review of the results of operations and the liquidity and capital resources of AltaGas Utility Group Inc. (Utility Group) for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007. The MD&A should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto for the three and six months ended June 30, 2008 and the audited consolidated financial statements and MD&A contained in Utility Group's Annual Report for the year ended December 31, 2007.

This MD&A contains forward-looking statements. When used in this MD&A the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect", and similar expressions, as they relate to Utility Group or an affiliate of Utility Group, are intended to identify forward-looking statements. In particular, this MD&A contains forward-looking statements with respect to, among other things, business objectives, expected growth, results of operations, performance, business projects and opportunities and financial results. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Such statements reflect Utility Group's current views with respect to future events based on certain material factors and assumptions and are subject to certain risks and uncertainties. Many factors could cause Utility Group's actual results, performance or achievements to vary from those described in this MD&A including, without limitation, changes in market, competition, governmental or regulatory developments, general economic conditions and other factors set out in Utility Group's public disclosure documents. These factors should not be construed as exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this MD&A as intended, planned, anticipated, believed, sought, proposed, estimated or expected, and accordingly such forward-looking statements included in, or incorporated by reference in this MD&A should not be unduly relied upon. Such statements speak only as of the date of this MD&A. Utility Group does not intend, and does not assume any obligation, to update these forward-looking statements except as required by law. The forward-looking statements contained in this MD&A are expressly qualified as cautionary statements.

Additional information regarding Utility Group can be found on its website at www.altagasutilitygroup.com. The continuous disclosure materials of Utility Group, including its prospectus, MD&A and audited financial statements, Annual Information Form, Information Circular and Proxy Statement, material change reports and press releases issued by Utility Group are available through Utility Group's website or directly through the SEDAR system at www.sedar.com.

I. ALTAGAS UTILITY GROUP INC.

Utility Group was incorporated under the Canada Business Corporations Act as 6414958 Canada Limited on July 6, 2005 and changed its name to AltaGas Utility Group Inc. on July 28, 2005.

Through a series of transactions which closed on November 17, 2005, Utility Group listed on the Toronto Stock Exchange and acquired all of the outstanding shares of AltaGas Utility Holdings Inc. (AUHI). AUHI owns 100 percent of AltaGas Utilities Inc. (AUI), an indirect 24.9 percent share in Heritage Gas Limited (Heritage Gas) and a one-third share in Inuvik Gas Ltd. (Inuvik Gas).

On July 31, 2007 Utility Group acquired, through its wholly owned subsidiary Utility Group Facilities Inc., a 33.3335 percent interest in the Ikhil Joint Venture (Ikhil). The investment in Ikhil is jointly controlled, along with the other joint venture partners.

II. OVERVIEW OF THE BUSINESS AND STRATEGY

The business of Utility Group is the ownership and operation of businesses that deliver and sell natural gas to end-users, including regulated natural gas transmission and distribution facilities in Alberta, Nova Scotia and the Northwest Territories, Canada and natural gas production and processing facilities in the Northwest Territories that deliver and sell natural gas to end- users. Utility Group's earnings are highly seasonal, as revenues are primarily based on the demand for space heating in the winter months, mainly from November to March. Costs, on the other hand, are generally incurred more uniformly over the year. This typically results in profitable first and fourth quarters and net losses in the second and third quarters. Earnings can be impacted by variations from normal weather resulting in delivered volumes being different than anticipated. Increases in the number of customers or changes in customer usage are examples of other factors that might typically affect volumes.

AUI and Heritage Gas operate in regulated marketplaces where, as franchise holders, they are allowed the opportunity to earn regulated rates of return that provide for recovery of costs and a return on capital from the franchise capital investment base. Return on rate base comprises regulatory allowed financing costs and a return on common equity. Inuvik Gas operates a natural gas distribution franchise in a "light-handed" regulatory environment where delivery service and natural gas pricing are market-based. Ikhil produces natural gas for sale under long-term contracts based on the price of diesel fuel. These contracts are with the Northwest Territories Power Corporation (NWTPC) and Inuvik Gas.

Utility Group's strategy is to grow its existing business through infill and expansion of services within current franchise areas or, in the case of Heritage Gas, to develop new systems in new market areas. In addition, Utility Group actively pursues the prudent acquisition of other utility-type infrastructure and related businesses in Canada. Utility Group's management team and Board of Directors have significant utility and infrastructure asset management, acquisition and capital markets experience. Management of Utility Group believes this experience will ensure prudent management and financing of existing capital commitments to support the expansion of AUI's systems, the build-out of the Heritage Gas system and new growth opportunities as they are identified.

III. FINANCIAL AND OPERATING RESULTS

Utility Group's financial information and the related discussion of financial results in the MD&A are for the three and six months ended June 30, 2008 and June 30, 2007.



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Consolidated Financial Results Three Months Six Months
Ended Ended
June 30 June 30
($ millions, except per share amounts or
as otherwise noted) 2008 2007 2008 2007
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Revenue 28.4 22.0 86.6 77.7
Net revenue(1) 9.6 8.1 25.3 21.8
EBITDA(1) 2.8 2.2 12.1 10.1
Operating income(1) 0.6 0.3 7.7 6.3
Net income (loss) (0.3) (0.5) 4.1 3.2
Funds generated from operations(1) 1.8 1.4 8.2 7.1
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Shares outstanding (thousands)
Basic 8,190 8,190 8,190 8,190
Diluted 8,190 8,190 8,191 8,195
Net income (loss) per share - basic $( 0.04) $ (0.07) $ 0.51 $ 0.39
Net income (loss) per share - diluted $( 0.04) $ (0.07) $ 0.51 $ 0.39
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(1) Non-GAAP financial measure: see discussion in "Non-GAAP
Financial Measures" section of this MD&A.


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Consolidated Financial Position
($ millions) June 30, December 31,
2008 2007
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Total assets 208.1 212.1
Long-term liabilities 113.7 105.2
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1. Discussion of Consolidated Financial Results for the three months ended June 30, 2008

Net loss for the three months ended June 30, 2008 was $0.3 million (2007 - net loss of $0.5 million) or $0.04 per share (2007 - net loss of $0.07 per share). The $0.2 million reduction in the net loss in the current quarter compared to the same quarter in 2007 was a result of Utility Group's acquisition of Ikhil on July 31, 2007, which contributed $0.1 million net income to Utility Group's second quarter 2008, rate base growth at AUI and Heritage Gas that contributed $0.3 million, and an increase in the allowed return on equity in Alberta to 8.75% that contributed $0.1 million, offset by higher operating and administrative costs of $0.3 million. Weather was 1.2 percent warmer compared to last year, but had negligible impact for the current quarter comparisons.

Utility Group's revenue for the three months ended June 30, 2008 grew by $6.4 million or 29 percent to $28.4 million (2007 - $22.0 million). AUI's revenue of $25.9 million represents 91 percent of consolidated revenue. Heritage Gas contributed $1.7 million, Inuvik Gas contributed $0.4 million and Ikhil contributed revenue of $0.4 million.

For the three months ended June 30, 2008 Utility Group's net revenue grew by $1.5 million or 19 percent to $9.6 million (2007 - $8.1 million), after natural gas costs of $18.8 million (2007 - $13.9 million). AUI contributed $1.0 million of the increase from second quarter last year, $0.2 million was contributed by Heritage Gas, and $0.3 million was contributed by Ikhil and Inuvik Gas. AUI's higher net revenue was driven by a 10 percent growth in its 2008 mid-year rate base compared to 2007. Heritage Gas' net revenue grew as a result of a 60 percent increase in its rate base, mainly due to the Halifax Harbour crossing completed in late 2007.

Operating and administrative expenses increased 15 percent to $6.8 million for the second quarter of 2008 (2007 - $5.9 million), largely due to increased staffing to support business growth and general cost increases.

Depreciation, depletion and amortization expense increased 16 percent to $2.2 million in the three months ended June 30, 2008 (2007 - $1.9 million) as a result of higher investment in property, plant and equipment throughout 2007, including the Ikhil acquisition.

Interest expense for the three months ended June 30, 2008 was $1.1 million (2007 - $1.0 million). The 10 percent increase in interest expense is attributed to higher average outstanding debt, partially offset by lower average interest rates in the period. Average outstanding debt during the second quarter of 2008 was $108.6 million (2007 - $80.4 million). The increase during this period represents draws which funded the Ikhil acquisition and capital expansion projects throughout the period. The average interest rate for the second quarter of 2008 was 4.1 percent compared to 4.9 percent for the same period last year.

Utility Group's income tax recovery was $0.2 million for both the three months ended June 30, 2008 and 2007. Current income tax expense was incurred primarily by AUI, which, under utility board regulation, accounts for income tax expense using the taxes payable method and therefore reports only income tax due on current taxable earnings. During the second quarter of 2008, Utility Group's income tax was favourably impacted due to higher capital cost allowances and pension funding expenses for tax purposes compared to accounting basis. This increase was partially offset by higher regulatory costs and capitalized administration costs for accounting purposes compared to tax basis.

2. Discussion of Consolidated Financial Results for six months ended June 30, 2008

Net income for the six months ended June 30, 2008 was $4.1 million (2007 - $3.2 million) or $0.51 per share (2007 - $0.39 per share). The $0.9 million increase for net income in the six months ended June 30, 2008 compared to the same period in 2007 was a result of Utility Group's ownership of Ikhil, acquired on July 31, 2007, which contributed $0.4 million to Utility Group's 2008 net income, rate base growth at AUI and Heritage that contributed $0.5 million, increase of allowed return on equity in Alberta to 8.75% that contributed $0.1 million, and 3.7 percent colder weather than last year in Alberta that contributed $0.2 million. These increases were partially offset by $0.3 million higher operating and administrative costs.

Utility Group's revenue for the six months ended June 30, 2008 grew by $8.9 million or 11 percent to $86.6 million (2007 - $77.7 million). AUI's revenue of $80.6 million represents 93 percent of consolidated revenue. Heritage Gas contributed $4.0 million, Inuvik Gas contributed $1.2 million and Ikhil contributed revenue of $0.8 million.

For the six months ended June 30, 2008 Utility Group's net revenue grew by $3.5 million or 16 percent to $25.3 million (2007 - $21.8 million), after natural gas costs of $61.3 million (2007 - $55.9 million). AUI contributed $1.8 million of the increase from last year, $0.4 million was contributed by Heritage Gas, and $1.3 million was contributed by Ikhil. As noted above, AUI's higher net revenue was driven by a 10 percent growth in its 2008 mid-year rate base, and 3.7 percent colder weather, compared to last year. Heritage Gas' net revenue grew as a result of a 60 percent increase in its rate base, mainly due to the Halifax Harbour crossing completed in late 2007.

Operating and administrative expenses increased 13 percent to $13.2 million for the six months ended June 30, 2008 (2007 - $11.7 million), largely due to increased staffing to support business growth and general cost increases.

Depreciation, depletion and amortization expense increased 17 percent to $4.4 million in the six months ended June 30, 2008 (2007 - $3.8 million) as a result of higher investment in property, plant and equipment throughout 2007, including the Ikhil acquisition.

Interest expense for the six months ended June 30, 2008 was $2.5 million (2007 - $2.0 million). This 25 percent increase in interest expense is attributed to higher average outstanding debt, partially offset by lower average interest rates in the period. Average outstanding debt during the first six months of 2008 was $107.5 million (2007 - $79.8 million). The increase during this period represents draws which funded the Ikhil acquisition and capital expansion projects throughout the period. The average interest rate for the first six months of 2008 was 4.4 percent compared to an average interest rate of 4.9 percent for the same period last year.

Utility Group's income tax expense was $1.1 million for both the six months ended June 30, 2008 and 2007. Current income tax expense was incurred primarily by AUI, which, under utility board regulation, accounts for income tax expense using the taxes payable method and therefore reports only income tax due on current taxable earnings. During the first six months of 2008, Utility Group's income tax was favourably impacted by higher expenses for tax purposes compared to book purposes.

3. Business Operations



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Operating Information Three Months Six Months
Ended Ended
June 30 June 30
2008 2007 2008 2007
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Deliveries (PJ) (1)(2)
End-use 2.64 2.57 10.15 9.05
Transportation 1.87 1.84 3.70 3.94
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4.51 4.41 13.85 12.99
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Degree day variance (percent)(3) 10.8 12.0 4.6 0.9
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(1) A petajoule (PJ) is 1 million Gigajoules (GJ). In Canada, the GJ, a
metric measurement of heat energy, is considered the industry standard
measurement for natural gas distribution deliveries.
(2) Deliveries reflect Utility Group's 100 percent share in AUI and its
proportionate share of Heritage Gas (24.9 percent) and Inuvik Gas (one
third).
(3) Degree days relate to AUI's service area. A degree day is the
cumulative extent to which the daily mean temperature falls below 15
degrees Celsius. Normal degree days are based on a 20-year rolling
average. Positive variances from normal lead to increased delivery
volumes from normal expectations.


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Natural Gas Distribution
June 30, 2008 June 30, 2007
Service PJs Service PJs
Sites(1) (2)(3) Sites(1) (2)(3)
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Operating Business
AUI End-use 66,738 9.27 64,185 8.84
AUI
Transportation 7 3.70 7 3.94
Heritage Gas 1,410 0.81 912 0.14
Inuvik Gas 824 0.07 806 0.07
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68,979 13.85 65,910 12.99
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(1) Service sites reflect all of the service sites of AUI, Heritage Gas and
Inuvik Gas.
(2) A petajoule (PJ) is 1 million gigajoules.
(3) Deliveries reflect Utility Group's 100 percent share in AUI and its
proportionate share of Heritage Gas (24.9 percent) and Inuvik Gas
(one-third).


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Natural Gas Production Three Months Ended Three Months Ended
June 30, 2008 June 30, 2007 (3)
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GJs Mcf(1) GJs Mcf(1)
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Ikhil production(2) 44,843 42,425 43,245 40,913
Sold to Inuvik Gas (18,614) (17,610) (18,674) (17,667)
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Sold to NWTPC 26,229 24,815 24,571 23,246
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Natural Gas Production Six Months Ended Six Months Ended
June 30, 2008 June 30, 2007 (3)
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GJs Mcf(1) GJs Mcf(1)
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Ikhil production(2) 121,831 115,261 119,216 112,788
Sold to Inuvik Gas (65,865) (62,313) (65,385) (61,859)
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Sold to NWTPC 55,966 52,948 53,831 50,929
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(1) The imperial measure of natural gas volumes is the cubic foot
(Mcf=1,000 cubic feet), the measure most commonly used in the natural
gas production industry to report volumes of reserves and production.
(2) Natural gas production reflects Utility Group's proportionate share
(33.3335 percent) of Ikhil.
(3) Utility Group acquired Ikhil on July 31, 2007. June 30, 2007 figures
are provided for comparative purposes only.


AUI

AUI's operating income for the first six months of 2008 was $6.2 million (2007 - $5.7 million). As discussed in the consolidated financial results, the increase in operating income was mainly a result of the growth in rate base, increased allowed return on equity in Alberta and colder weather than the first six months of last year.

AUI's market consists primarily of residential and small commercial consumers located in smaller population centres or rural areas of Alberta. AUI completed the period with 66,738 active service sites (2007 - 64,185). In 2008, the growth of AUI's service sites and business was driven by economic growth in established franchises creating infill and expansion opportunities. Infill growth demand for space and water heating fuel within AUI's franchise service areas continues to be concentrated in town distribution systems and relates to servicing new homes and commercial developments with natural gas. AUI serves almost all of the potential market in its existing service areas.

The majority of AUI's service site additions occur in the last half of the year, when new customers become ready to take natural gas service prior to the winter season. Although AUI service site additions declined to 684 in the first six months of 2008 compared to 859 for the same period of 2007, the number of applications for new service in that period exceeded the number for the same period in any of the five previous years. The number of service site additions in the first six months of 2008 is surpassed only by the number added in 2007, which was an extraordinary year of building growth in AUI's service areas. Management expects service site additions for 2008 to remain above the long-term historical average level of growth in service sites.

Heritage Gas

For the six months ended June 30, 2008 Heritage Gas' operating income was $1.2 million (2007 - $0.8 million). The growth in operating income is a function of the increased rate base over the same period in 2007. Utility Group's proportion of rate base over the six months ended June 30, 2008 was $21.2 million (2007 - $13.3 million). At June 30, 2008, Heritage Gas had 1,410 (2007 - 912) activated customers.

In late 2007, Heritage Gas completed the Halifax Harbour crossing to provide natural gas service to the Halifax peninsula. During 2008, Heritage Gas is activating large commercial and government customers on the peninsula. A number of high rise office and apartment buildings and one of the two sites at the QEII hospital complex are scheduled to be activated by year end. The Government of Nova Scotia has announced that St. Mary's University is expected to be burning natural gas by the fall of 2008. The effect of these activations will result in increased customer billings.

Inuvik Gas and Ikhil

On July 31, 2007 Utility Group purchased Ikhil. Ikhil supplies Inuvik Gas and NWTPC with natural gas from two producing wells which had remaining recoverable gas of approximately 9 Bcf (3 Bcf net to Utility Group) at acquisition. The wells produce an average of approximately 2.5 Mmcf/d (0.83 Mmcf/d net to Utility Group) of sweet dry gas. Operating results for Ikhil are proportionately consolidated from August 1, 2007. Ikhil's operating income contributed $0.1 million to Utility Group's second quarter 2008 results, and $0.6 million to Utility Group's first six months of 2008, which met management's expectations for the investment. Inuvik Gas' operating income for the six months ended June 30, 2008 remained consistent at $0.3 million with the prior year, representative of the mature market it serves.

Inuvik gas is constructing a $0.3 million (Utility Group portion $0.1 million) extension of the system which is anticipated to add approximately 13 new industrial customers during the latter half of 2008. Although the project will not impact consolidated net income significantly, this represents an increase of 2% in customers in this mature market.

4. Regulatory Update

AltaGas Utilities Inc.

In December 2006 AUI filed Phase 2 of its 2005/2006 General Tariff Application. The Alberta Energy and Utilities Board (EUB) issued decision 2007-079 on October 16, 2007, approving the rates and terms and conditions of service as requested effective November 1, 2007.

On December 29, 2006 AUI filed Phase 1 of its 2007 GTA. AUI sought approval for a forecast rate base of $104.6 million, an increase of $7.4 million from its 2006 approved rate base of $97.2 million, and of a revenue requirement, net of gas costs, of $37.5 million, which would have been an increase of $4.4 million or 13.3 percent from the 2006 allowed net revenue requirement of $33.1 million. A public hearing was held in Edmonton, Alberta in August 2007 and the Alberta Utilities Commission (AUC) issued Decision 2007-094 on December 11, 2007. The decision approved AUI's 2007 rate base at $104.4 million, $0.2 million less than applied for, and a revenue requirement of $35.7 million, or $1.8 million less than applied for, primarily the result of the disallowance of certain operating expenses. AUI filed a Review and Variance application in March 2008 with respect to Decision 2007-094. AUI believes that a number of issues with respect to the exclusion of certain operating expenses provide sufficient justification for the AUC to reconsider the decision. The 2007 revenue reported reflects the results of Decision 2007-094.

On July 14, 2008 AUI filed Phase 1 of its 2008/2009 GTA. AUI sought approval for a forecast rate base for 2008 of $115.2 million, an increase of $10.8 million from its 2007 approved rate base of $104.4 million. AUI sought a revenue requirement, net of gas, for 2008 of $40.9 million, an increase of $5.2 million or 14.5 percent from the 2007 allowed net revenue requirement of $35.7 million.

Since December 31, 2007, generic proceedings initiated by AUC are:

- On February 21, 2008, the AUC asked for responses to the questions of whether or not the current cost of capital adjustment formula continues to yield a fair return on equity and if the capital structures of all utilities in Alberta should be addressed on a generic basis. On April 4, 2008 AUI provided a written submission followed by a reply submission on April 18, 2008. The AUC issued Decision 2008-051 that established the AUC would hold a generic proceeding to review ROE and capital structure. The AUC has issued for comment a preliminary scoping document and preliminary minimum filing requirement for the proceedings to address the generic cost of capital.

- The AUC has determined that there should be a generic hearing into returns on equity and capital structure for all regulated Alberta utilities. On July 25, 2008, the AUC issued a Notice of Application and invited comments on a scoping document for the proceeding before inviting expressions of interest in participation. The overall schedule of the proceeding is unknown at the present time. Changes that result would apply to 2009.

- On April 11, 2008 the AUC initiated a process to review the Annual Report of Operations to increase the thresholds of variances reported. AUI filed a submission on April 17, 2008 supporting the AUC's initiative. On April 29, 2008, the AUC issued Bulletin 2008-03 approving amendments to Rule 005 - Annual Reporting Requirements of Operational and Financial Results.

- On April 12, 2008 the AUC initiated a process to examine the implications of the Supreme Court of Canada's decision regarding Atco Gas' sale of its Calgary Stores Block, and whether the proceeds from the sale should be attributed to a company's shareholders or its customers. On April 24, 2008, AUI registered as an observer of the proceedings.

5. Non-GAAP Financial Measures

Utility Group provides financial measures in this MD&A that do not have a standardized meaning prescribed by Canadian Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures may not be comparable to similar measures presented by other corporations. The purpose of these financial measures and their reconciliation to GAAP financial measures is discussed below.



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Net revenue Three Months Ended Six Months Ended
June 30 June 30
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($ millions) 2008 2007 2008 2007
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Net revenue 9.6 8.1 25.3 21.8
Add: Cost of natural gas 18.8 13.9 61.3 55.9
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Revenue (GAAP financial measure) 28.4 22.0 86.6 77.7
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Management believes that net revenue better reflects operating performance than does revenue as changes in the market price of natural gas purchased for resale affect both revenue and the cost of natural gas.



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Operating income Three Months Ended Six Months Ended
June 30 June 30
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($ millions) 2008 2007 2008 2007
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Operating income 0.6 0.3 7.7 6.3
Deduct: Interest expense 1.1 1.0 2.5 2.0
Income taxes (recovery)(1) (0.2) (0.2) 1.1 1.1
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Net income (GAAP financial measure) (0.3) (0.5) 4.1 3.2
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(1) Income taxes consist of current and future income taxes.


Operating income is used by management to measure operating performance without reference to financing decisions and income tax impacts, which are not controlled by the operating businesses.



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EBITDA Three Months Ended Six Months Ended
June 30 June 30
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($ millions) 2008 2007 2008 2007
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EBITDA 2.8 2.2 12.1 10.1
Deduct: Depreciation and
amortization 2.2 1.9 4.4 3.8
Interest expense 1.1 1.0 2.5 2.0
Income taxes (recovery)(1) (0.2) (0.2) 1.1 1.1
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Net income (GAAP financial measure) (0.3) (0.5) 4.1 3.2
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(1) Income taxes consist of current and future income taxes.


Earnings before interest, taxes, depreciation and amortization (EBITDA) are used by management to understand the ability of the business to generate cash and to cover interest payments, fund capital expenditures and pay cash income taxes.



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Funds generated from operations Three Months Ended Six Months Ended
June 30 June 30
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($ millions) 2008 2007 2008 2007
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Funds generated from operations 1.8 1.4 8.2 7.1
Net change in non-cash
working capital 4.5 2.0 (4.9) 1.1
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Cash from operations
(GAAP financial measure) 6.3 3.4 3.3 8.2
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Funds generated from operations are provided to assist in determining Utility Group's ability to generate cash from operations, after interest and taxes, without regard to changes in non-cash working capital in the period.

6. Summary of Eight Recently Completed Quarters

The table below sets forth selected data from Utility Group's consolidated financial statements for the eight recently completed quarters ended June 30, 2008. This information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2007 and related notes thereto as well as the MD&A for the year ended December 31, 2007.



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2008 2007 2006
($ millions) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
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Net revenue(1) 9.6 15.7 12.4 7.4 8.1 13.7 11.4 6.0
Operating income
(loss)(1) 0.6 7.1 4.5 (0.5) 0.3 6.0 4.2 (0.5)
Net income (loss) (0.3) 4.4 2.6 (1.2) (0.5) 3.8 2.6 (0.9)
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2008 2007 2006
($ per share) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
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Net income (loss)
Basic (0.04) 0.54 0.31 (0.14) (0.07) 0.46 0.32 (0.11)
Diluted (0.04) 0.54 0.31 (0.14) (0.07) 0.46 0.32 (0.11)
Dividends declared 0.045 0.040 0.040 0.035 0.035 0.035 0.030 0.030
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(1) Non-GAAP financial measure. See "Non-GAAP Financial Measures" section of
this MD&A.


Utility Group's earnings are highly seasonal, as distribution revenues are primarily based on the demand for space heating in the winter months, mainly from November to March. Costs, on the other hand, are generally incurred more uniformly over the year. This typically results in profitable first and fourth quarters and net losses in the second and third quarters. Earnings can be impacted by variations from normal weather resulting in delivered volumes being different than anticipated. Increases in the number of customers or changes in customer usage are examples of other factors that might typically affect volumes.

IV. UTILITY GROUP'S FINANCIAL POSITION

The following table outlines the significant changes in the consolidated balance sheet of Utility Group at June 30, 2008 compared to December 31, 2007.



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Balance Sheet Item Increase
($ millions) (decrease) Explanation
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Accounts receivable (11.3) Decreased due to lower sales revenue from
the seasonally lower volumes at the end of
Q2 2008. The lower volumes were partially
offset by higher gas prices and higher
revenue deficiency accrual, pending
approval of AUI's 2008/2009 GTA.

Property, plant and 3.3 Organic growth at both Heritage Gas and
equipment (net of AUI, partially offset by contributions
accumulated depreciation) in aid of construction and depreciation.

Inventory, prepaid 1.7 Increase due to natural gas that has been
expenses and deferred purchased in advance of receipt.
charges

Accounts payable and (15.7) Reduction reflects seasonally lower gas
accrued liabilities volumes purchased in June 2008 compared to
December 2007 and the timing of capital
expenditure and general trade payables. The
lower purchased volumes were partially
offset by higher prices.

Investments and other 1.4 Increase mainly due to Utility Group's
assets investment in an equity investment.
----------------------------------------------------------------------------
----------------------------------------------------------------------------


V. INVESTED CAPITAL

During the second quarter of 2008 Utility Group invested $4.2 million in property, plant and equipment (2007 - $5.1 million) and received contributions in aid of construction of $0.7 million (2007 - $2.2 million) for net capital invested of $3.5 million (2007-$2.9 million). This investment included $2.8 million (2007 - $2.4 million) at AUI which funded expansion primarily in the Leduc franchise area, and $0.7 million (2007 - $0.5 million) at Heritage Gas which funded expansion primarily in the Halifax area. Of the amount invested, $1.9 million or 54 percent (2007 - 1.2 million or 41 percent) was incurred to expand Utility Group's systems to service new sites, and $1.6 million or 46 percent (2007 - $1.7 million or 59 percent) was incurred for betterment of existing service areas and general plant expenditures.

For the six months ended June, 30, 2008, Utility Group invested $10.8 million in property, plant and equipment (2007 - $9.4 million) and received contributions in aid of construction of $2.3 million (2007 - $2.5 million) for net capital invested of $8.5 million (2007 - $6.9 million). The first six months investment included $7.5 million (2007 - $6.1 million) at AUI which funded expansion primarily in the Leduc franchise area, and $1.0 million (2007 - $0.8 million) at Heritage Gas which funded expansion primarily in the Halifax area. Of the amount invested, $4.8 million or 57 percent (2007 - $4.7 million or 68 percent) was incurred to expand Utility Group's systems to service new sites, and $3.7 million or 43 percent (2007 - $2.2 million or 32 percent) was incurred for betterment of existing service areas and general plant. Regulatory and investments and other assets increased to $2.1 million (2007 - $0.9 million) mainly due to an investment in an equity investment.



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Six Months
Net Capital Invested Ended June 30 Ended June 30
----------------------------------------------------------------------------
($ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Invested capital:
New business -
organic growth 1.9 1.2 4.8 4.7
System betterment and
gas supply 0.8 1.0 1.8 1.3
General plant 0.8 0.7 1.9 0.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3.5 2.9 8.5 6.9
Regulatory and other assets 0.5 0.8 2.1 0.9
----------------------------------------------------------------------------
4.0 3.7 10.6 7.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------


VI. LIQUIDITY AND CAPITAL RESOURCES

Utility Group expects that 2008 funds from operations will be sufficient to meet the majority of its budgeted maintenance and growth capital. The balance of its budgeted growth capital and a certain value of acquisitions will be financed through existing bank lines. Should larger acquisitions require financing beyond existing lines, management believes equity and debt capital markets could be accessed to provide additional financing. At this time, Utility Group does not reasonably expect any presently known trend or uncertainty to affect Utility Group's ability to access its anticipated sources of cash.



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Six Months
Cash Position Ended June 30 Ended June 30
----------------------------------------------------------------------------
($ millions) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash, beginning of period 0.8 0.7 0.8 0.3
Operating activities 6.3 3.4 3.3 8.2
Investing activities (4.0) (3.7) (10.6) (7.8)
Financing activities (2.5) 0.1 7.1 (0.2)
----------------------------------------------------------------------------
Cash, end of period 0.6 0.5 0.6 0.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash from Operations

Cash from operations increased from that generated in second quarter 2007 by $2.9 million to $6.3 million (2007 - $3.4 million). For the six months ended June 30, 2008, cash from operations is $4.9 million less than the comparative period in 2007, or $3.3 million (2007 - $8.2 million). The natural gas business is seasonal in nature, and as such, the Utility Group's operating cash flows may fluctuate significantly during the year due to working capital changes driven by weather, gas prices, and collections from customers. Significant working capital changes comprising the overall changes noted in the table above include the following:

Accounts Receivable

- June accounts receivable are lower than March accounts receivable due to normal, seasonally lower delivered volumes. In 2008, the reduction is partially offset by approximately 10 percent higher gas prices at the end of the second quarter compared to the beginning of the quarter. The net collection of accounts receivable over the second quarter of 2008 contributed $13.9 million (2007 - $15.1 million) to cash from operations.

- June accounts receivable are lower than December accounts receivable due to the normal seasonally lower delivered volumes. In 2008 this reduction is significantly offset by approximately 55 percent higher gas prices reflected in June 2008 accounts receivable than in those at December 2007, and by a higher increase in the revenue deficiency accrual over the six month period in 2008 compared to 2007. The net collection of accounts receivable over the first half of 2008 contributed $11.3 million (2007 - $16.3 million) to cash from operations.

Inventory, Prepaid Expenses and Deferred Charges

- Inventory, prepaid expenses and deferred charges increased by $1.7 million for six months ended June 30, 2008, compared to $0.5 million in the same period in 2007. The majority of this increase is due to natural gas that has been purchased in advance of receipt.

Accounts Payable

- June accounts payable are lower than March accounts payable due to normal seasonally lower purchased volumes. In 2008, this reduction is partially offset by approximately 10 percent higher natural gas prices at the end of the second quarter compared to the beginning of the quarter. The net payment of accounts payable over the second quarter of 2008 reduced cash from operations by $8.3 million (2007 - $11.3 million).

- June accounts payable are lower than December accounts payable due to normal seasonally lower purchased volumes. In 2008 this reduction is significantly offset by approximately 55 percent higher natural gas prices reflected in June 2008 accounts payable balances than in those at December 2007. The net payment of accounts payable over the first half of 2008 reduced cash from operations by $16.9 million (2007 - $14.4 million).

Investing Activities

During the second quarter of 2008, cash used in investing activities was $4.0 million (2007 - $3.7 million). Of the total invested, $3.5 million (2007 - $2.9 million) related to additions of property, plant and equipment to support growth at AUI and Heritage Gas and system betterment balances at AUI, while the remaining $0.5 million (2007 - $0.8 million) was invested in regulatory and other assets.

For the six months ended June 30, 2008, cash used in investing activities was $10.6 million (2007 - $7.8 million). Of the total invested, $8.5 million (2007 - $6.9 million) related to additions of property, plant and equipment to support growth at AUI and Heritage Gas and system betterment balances at AUI, while the remaining $2.1 million (2007 - $0.9 million) was invested in regulatory and other assets.

Financing Activities

During the second quarter of 2008, Utility Group repaid $2.3 million of bank lines compared to a draw of $0.4 million in the second quarter of 2007.

During the first six months of 2008, Utility Group drew $7.5 million (2007 - $0.3 million) on bank lines to fund business growth. This increase in the draw from 2007 was a result of less cash generated from operations and an increase in cash used for investing activities in 2008. The dividend declared on April 16, 2008 and paid July 15, 2008 was $0.045 per share.

Capital Resources

Utility Group believes that its access to debt and equity markets, undrawn bank credit facilities and its funds generated from operations will provide it with sufficient capital resources and liquidity to fund existing operations and certain acquisition and expansion opportunities in 2008.

The use of debt or equity funding is based on Utility Group's capital structure, which is determined by considering the norms and risks associated with each of its businesses and capital structures deemed by the AUC and the NSUARB. Utility Group targets a debt-to-total capitalization ratio of approximately 60 percent. Utility Group's debt-to-total capitalization ratio as at June 30, 2008 was 60.3 percent (December 31, 2007 - 59.6 percent). In light of its continuing growth, Utility Group will be reviewing its target capital structure.

Utility Group funds its long and short-term borrowing requirements with credit facilities from a syndicate of Canadian chartered banks and from the Province of Nova Scotia.



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Drawn at Drawn at
Credit Facilities June 30, December 31,
($ millions) 2008 2007
----------------------------------------------------------------------------
Demand operating credit facility 1.0 1.7
Revolving, term credit facility 109.1 101.0
Loan from Province of Nova Scotia 1.0 0.9
----------------------------------------------------------------------------
111.1 103.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at June 30, 2008 Utility Group had banking arrangements as follows:

- An extendible revolving credit facility with a syndicate of Canadian chartered banks for $130.0 million under which prime rate loans, U.S. bank rate loans, letters of credit, bankers' acceptances or LIBOR loans may be drawn, repayable on November 17, 2010. The maturity date is extendible upon consent of each lender for further successive one-year periods. At June 30, 2008 bankers' acceptances with short-term maturities of $109.1 million (December 31, 2007 - $101.0 million) were outstanding.

- A demand operating credit facility with a Canadian chartered bank for $10.0 million under which prime rate loans, U.S. bank rate loans, letters of credit, bankers' acceptances and LIBOR loans may be drawn, repayable in full upon demand. Draws against this facility as of June 30, 2008 were $1.0 million (December 31, 2007 - $1.7 million), with letters of credit of $1.4 million (December 31, 2007 - $0.4 million) issued under the facility.

Utility Group has not been rated by any credit agencies, nor does Utility Group expect to be rated.

All of the borrowing facilities have financial tests and other covenants customary for these types of facilities, which must be met at each quarter-end. At June 30, 2008, as at each quarter end since the facilities were established, Utility Group was in compliance with these covenants.

VII. SHARE CAPITAL

Capital Stock and Stock Options

Utility Group had 8,189,905 common shares outstanding at June 30, 2008 (December 31, 2007 - 8,189,905 common shares). Utility Group has an employee stock option plan under which both employees and directors are eligible to receive grants. At June 30, 2008, 818,990 shares (December 31, 2007 - 818,990 shares) were reserved for issuance under the plan. To June 30, 2008 options granted under the plan had a term of 10 years to expiry and vested no longer than over a four-year period.



----------------------------------------------------------------------------
Stock Options
----------------------------------------------------------------------------
August 8, June 30, December
2008 2008 31, 2007
----------------------------------------------------------------------------
Common shares 8,189,905 8,189,905 8,189,905
----------------------------------------------------------------------------
Stock options outstanding 446,500 432,750 473,500
Stock options exercisable 155,250 160,125 157,625
----------------------------------------------------------------------------
----------------------------------------------------------------------------


VIII. OFF-BALANCE-SHEET ARRANGEMENTS

Utility Group is not party to any contractual arrangement under which an unconsolidated entity may have any obligation under certain guarantee contracts, a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets. Utility Group has no obligation under derivative instruments, or a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Utility Group, or engages in leasing, hedging or research and development services with Utility Group.

IX. DISCLOSURE CONTROLS AND PROCEDURES

Utility Group maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Act (Ontario) is accumulated and communicated to management, including the President and Chief Executive Officer and the Chief Financial Officer or Controller, as appropriate, to allow timely decisions regarding required disclosure.

X. INTERNAL CONTROLS OVER FINANCIAL REPORTING

Management of Utility Group is responsible for establishing and maintaining adequate internal controls over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be designed effectively can provide only reasonable assurance with respect to financial statement preparation and presentation.

Utility Group has used the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the design of internal controls over financial reporting.

As at June 30, 2008 management assessed the design of Utility Group's internal control over financial reporting and concluded that internal control over financial reporting is suitably designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and that there were no material weaknesses in the design of Utility Group's internal control over financial reporting that have been identified by management.

There have been no changes in the design of internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

XI. TRANSACTIONS WITH RELATED PARTIES

For the quarter ended June 30, 2008 Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $16.0 million (2007 - $13.2 million). Utility Group also incurred $0.1 million (2007 - $0.1 million) for operating services and office space provided by the Trust. The Trust purchased transportation for $0.1 million (2007 - $0.1 million) and administrative, management and other services of $1 thousand from Utility Group (2007 - $44 thousand).

For the six months ended June 30, 2008 Utility Group purchased natural gas from the Trust for $58.2 million (2007 - $51.5 million). Utility Group also incurred $0.3 million (2007 - $0.2 million) for operating services and office space provided by the Trust. The Trust purchased transportation for $0.2 million (2007 - $0.2 million) and administrative, management and other services of $2 thousand from Utility Group (2007 - $88 thousand).

The Trust provided certain administrative and support services to Utility Group under an Administrative Service Agreement that expired December 31, 2007. The Trust was paid $30 thousand for the full year of 2007 for the services provided. Utility Group and the Trust intend to negotiate a new Administrative Services Agreement under which Utility Group will receive limited administrative and support services and office space at a cost of $0.2 million on an annualized basis until June 30, 2009.

XII. CRITICAL ACCOUNTING ESTIMATES

Since a determination of the value of many assets, liabilities, revenues and expenses is dependent upon future events, the preparation of Utility Group's consolidated financial statements requires the use of estimates and assumptions which have been made using careful judgment by management. Management has discussed the development and selection of these critical accounting estimates with the Audit and Governance Committee of the Board of Directors, who have reviewed and approved Utility Group's disclosure relating to critical accounting estimates in this MD&A.

Utility Group's significant accounting policies are described in the Notes to the audited consolidated financial statements of Utility Group for the year ended December 31, 2007. With respect to estimates, the most critical of these policies are those related to rate regulation, determination of pension and other employee benefits, amortization and depreciation expense, goodwill impairment assessment and asset retirement obligations. Actual results may differ from these estimates.

XIII. FUTURE ACCOUNTING CHANGES Goodwill and Other Intangible Assets

Effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008, the new CICA Handbook Section 3064 will replace Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. This section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets including internally generated intangible assets. This new section is effective for Utility Group beginning January 1, 2009.

Rate-Regulated Entities

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

International Financial Reporting Standards (IFRS)

The CICA's Accounting Standards Board (AcSB) plans to converge Canadian GAAP for publicly accountable enterprises with international financial reporting standards (IFRS) over a transition period that will end effective January 1, 2011 with the adoption of IFRS. The AcSB announced on February 13, 2008 that IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Utility Group has initiated its scoping and planning process, but has not yet determined the impact of the transition to and adoption of IFRS on its financial statements.

XIV. CHANGES IN ACCOUNTING POLICIES

On January 1, 2008 Utility Group adopted four new sections of the Canadian Institute of Chartered Accountants (CICA) Handbook, namely Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments - Disclosures, Section 3863 - Financial Instruments - Presentation, and Section 3031 - Inventories.

Section 1535 requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and process for managing capital.

Sections 3862 and 3863 complement and enhance the current disclosure and presentation requirements related to financial instruments.

Section 3031 prescribes the measurement of inventories at the lower of cost and net realizable value, with guidance on the determination of cost including allocation of overheads and other costs to inventory. Reversals of previous write-downs to net realizable value are permitted when there is a subsequent increase in value of inventories. In accordance with the recommendations of the Section, Utility Group changed the basis of measurement used for inventories from the lower of average cost and replacement cost to the lower of average cost and net realizable value. This change had no effect on the financial position of Utility Group.

XV. RISKS AND UNCERTAINTIES

In the Canadian natural gas distribution business, where parties are subject to return on rate base regulation, rates are set to allow the regulated entity the opportunity to recover its costs and earn a reasonable return on a set capital structure. There is no guarantee that the entity will earn its allowed return because rates are set to cover future estimated costs and estimated demand is based on normal weather conditions. The entity's actual revenues may be more or less than forecast due to variations from normal weather, conservation and other factors which impact customer usage. Expenses and other revenues may also be higher or lower than forecast. Financial results for Utility Group are subject to a variety of risks including: regulation; franchise renewal; gas demand (including relating to weather, customer additions/mix, alternative energy sources and climate change); gas supply and production; environmental and safety; competition; physical; insurance; credit; contingencies; human resources; conflicts of interest; access to additional financing; and decommissioning, abandonment and reclamation costs.

XVI. OUTLOOK

Utility Group's management expects that during the remainder of 2008 the operating businesses will continue to generate strong earnings and solid growth compared to 2007. Management believes that the investments made in the latter half of 2007 have positioned Utility Group to successfully meet expectations for the full-year 2008, as reflected in the operational and financial results generated from the first six months of 2008.

AUI will continue to actively pursue growth opportunities and is well-positioned to capture such opportunities, particularly in service areas around Edmonton, Alberta that continue to experience growth related to the strong provincial economy. In addition to growth related to new business, AUI intends to invest the capital required to make needed enhancements to information systems, to upgrade its billing system and to build non-gas system facilities. This invested capital will add to AUI's rate base, as reflected in the General Tariff Application that AUI has filed with the AUC for the 2008 and 2009 test years.

Heritage Gas is also actively pursuing growth opportunities, particularly on the Halifax peninsula following the 2007 Harbour crossing. Heritage expects to connect a number of high load customers on the peninsula during the last six months of 2008 and in early 2009.

Management expects the investment in Ikhil to perform as anticipated in 2008.

Management will continue to evaluate acquisition opportunities on an ongoing basis, and will pursue opportunities that will provide accretive shareholder value.



ALTAGAS UTILITY GROUP INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)

($ thousands)
----------------------------------------------------------------------------
June 30 December 31
As at 2008 2007
----------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 621 $ 747
Accounts receivable (note 8) 17,584 28,931
Inventory 131 270
Future income tax asset 15 15
Prepaid expenses and deferred charges 3,593 1,736
----------------------------------------------------------------------------
21,944 31,699
Property, plant and equipment 144,488 141,220
Goodwill 31,575 31,575
Regulatory assets 7,727 6,717
Future income tax asset 131 99
Investments and other assets 2,207 785
----------------------------------------------------------------------------
$ 208,072 $ 212,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 1,034 $ 1,666
Accounts payable and accrued liabilities (note 8) 18,709 34,411
Dividends payable 369 328
Income and other taxes payable 583 748
Deferred cost of gas, net of income taxes 468 20
----------------------------------------------------------------------------
21,163 37,173
Long-term debt 110,082 101,917
Customer deposits and other liabilities 3,369 3,157
Future income tax liability 257 150
----------------------------------------------------------------------------
134,871 142,397
----------------------------------------------------------------------------
Shareholders' equity
Share capital (note 3) 61,278 61,278
Contributed surplus (note 3) 584 490
Retained earnings 11,374 7,930
Accumulated other comprehensive loss (35) -
----------------------------------------------------------------------------
73,201 69,698
----------------------------------------------------------------------------
$ 208,072 $ 212,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements


ALTAGAS UTILITY GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)

($ thousands)
----------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
Common shares $ 61,278 $ 61,278 $ 61,278 $ 61,278
----------------------------------------------------------------------------
Contributed surplus,
beginning of period 572 310 490 257
Stock-based compensation 12 52 94 105
----------------------------------------------------------------------------
Contributed surplus,
end of period 584 362 584 362
----------------------------------------------------------------------------
Retained earnings,
beginning of period 12,047 7,992 7,930 4,516
Net income (loss) (305) (540) 4,139 3,223
Dividends declared (368) (286) (695) (573)
----------------------------------------------------------------------------
Retained earnings,
end of period 11,374 7,166 11,374 7,166
----------------------------------------------------------------------------
Accumulated other
comprehensive loss,
beginning of period - - - -
Unrealized loss on
equity investment (35) - (35) -
----------------------------------------------------------------------------
Accumulated other
comprehensive loss,
end of period (35) - (35) -
----------------------------------------------------------------------------
Shareholders' equity $ 73,201 $ 68,806 $ 73,201 $ 68,806
----------------------------------------------------------------------------
----------------------------------------------------------------------------


ALTAGAS UTILITY GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

($ thousands except per share amounts)
----------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
REVENUE (note 8) $ 28,375 $ 21,971 $ 86,598 $ 77,721
----------------------------------------------------------------------------

EXPENSES (note 8)
Cost of natural gas 18,744 13,898 61,290 55,944
Operating and
administrative 6,786 5,874 13,192 11,714
Depreciation,
depletion and
amortization 2,205 1,889 4,388 3,748
----------------------------------------------------------------------------
27,735 21,661 78,870 71,406
----------------------------------------------------------------------------
Operating income 640 310 7,728 6,315
Interest expense 1,152 1,041 2,493 2,028
----------------------------------------------------------------------------
Income (loss) before
income taxes (512) (731) 5,235 4,287
----------------------------------------------------------------------------
Income taxes (recovery)
Current income taxes (199) (191) 1,006 1,074
Future income taxes (8) - 90 (10)
----------------------------------------------------------------------------
(207) (191) 1,096 1,064
----------------------------------------------------------------------------
Net income (loss) $ (305) $ (540) $ 4,139 $ 3,223
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income (loss)
per share
Basic $ (0.04) $ (0.07) $ 0.51 $ 0.39
Diluted $ (0.04) $ (0.07) $ 0.51 $ 0.39
Number of shares
outstanding
Basic 8,189,905 8,189,905 8,189,905 8,189,905
Diluted 8,189,905 8,189,905 8,190,604 8,194,773


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

($ thousands)
----------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
Net income (loss) $ (305) $ (540) $ 4,139 $ 3,223
Other comprehensive
loss
Unrealized loss on
equity investment (35) - (35) -
----------------------------------------------------------------------------
Comprehensive income
(loss) $ (340) $ (540) $ 4,104 $ 3,223
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements


ALTAGAS UTILITY GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

($ thousands)
----------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
CASH FROM OPERATIONS
Net income (loss) $ (305) $ (540) $ 4,139 $ 3,223
Items not involving
cash:
Revenue deficiency
accrual (639) (463) (1,064) (802)
Allowance for funds
used during
construction (54) (100) (109) (193)
Depreciation,
depletion and
amortization 2,205 1,889 4,388 3,748
Operating and
administrative 590 545 693 1,013
Future income taxes (8) - 90 (10)
Other 12 52 94 105
----------------------------------------------------------------------------
Funds generated from
operations 1,801 1,383 8,231 7,084
Net change in non-cash
working capital (note 7) 4,500 2,048 (4,893) 1,124
----------------------------------------------------------------------------
6,301 3,431 3,338 8,208
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Additions to property,
plant and equipment (4,081) (5,555) (9,608) (10,319)
Increase (decrease) in
accounts payable
related to property,
plant and equipment
(note 7) (132) 415 (1,220) 888
----------------------------------------------------------------------------
(4,213) (5,140) (10,828) (9,431)
Contributions in aid
of construction 732 2,172 2,344 2,514
Proceeds on disposition
of property, plant and
equipment 40 6 40 20
Investment in regulatory
and investments and other
assets (570) (784) (2,110) (944)
----------------------------------------------------------------------------
(4,011) (3,746) (10,554) (7,841)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase (decrease) in
short-term debt 534 (209) (632) (301)
Increase (decrease) in
long-term debt (2,791) 605 8,165 638
Dividends paid (328) (286) (655) (532)
Increase in customer
deposits and other
liabilities 162 21 212 43
----------------------------------------------------------------------------
(2,423) 131 7,090 (152)
----------------------------------------------------------------------------
Change in cash (133) (184) (126) 215
Cash, beginning of
period 754 695 747 296
----------------------------------------------------------------------------
Cash, end of period $ 621 $ 511 $ 621 $ 511
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements


AltaGas Utility Group Inc.

Selected Notes to the Consolidated Financial Statements

(Tabular amounts in thousands of dollars unless otherwise indicated)

1. STRUCTURE AND NATURE OF OPERATIONS

AltaGas Utility Group Inc. was incorporated with nominal capital under the Canada Business Corporations Act as 6414958 Canada Limited on July 6, 2005 and filed a certificate of amendment to change its name to AltaGas Utility Group Inc. (Utility Group) on July 28, 2005. Utility Group began active operations with the acquisition of all the issued and outstanding common shares of AltaGas Utility Holdings Inc. (AUHI) on November 17, 2005.

AUHI, through its ownership interests in AltaGas Utilities Inc. (AUI), AltaGas Utility Holdings (Nova Scotia) Inc. (AUH(NS)) and Inuvik Gas Ltd. (Inuvik Gas), holds interests in regulated natural gas distribution utility businesses operating in Alberta, Nova Scotia and the Northwest Territories, respectively. AUI and AUH(NS) are wholly owned subsidiaries of AUHI, while Inuvik Gas is one-third owned by AUHI. AUH(NS) owns a 24.9 percent interest in Heritage Gas Limited (Heritage Gas). The investments in Inuvik Gas and Heritage Gas are each jointly controlled by AUHI, along with their other shareholders.

On July 31, 2007 Utility Group acquired a 33.3335 percent interest in the Ikhil Joint Venture (Ikhil) through its wholly owned subsidiary Utility Group Facilities Inc. (Facilities). Ikhil is jointly controlled by Facilities and the other joint venture partners. Ikhil owns and operates two natural gas wells and gathering and processing facilities including a pipeline from the Ikhil gas field to the town of Inuvik, supplying Inuvik Gas and the Northwest Territories Power Corporation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements include the accounts of Utility Group and all of its wholly owned subsidiaries and its proportionate interests in the jointly controlled investments in Heritage Gas, Inuvik Gas and Ikhil. Transactions amongst Utility Group, its wholly-owned subsidiaries and the proportionately consolidated entities are eliminated on consolidation.

These consolidated financial statements are prepared by management in Canadian dollars in accordance with Canadian generally accepted accounting principles (GAAP), including accounting policies for which guidance has been provided
by regulations and recommendations of the Alberta Utilities Commission (AUC) and of the Nova Scotia Utility and Review Board (NSUARB). These consolidated financial statements do not include all of the disclosures required in the annual financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2007. The accounting policies applied in these consolidated financial statements are consistent with those outlined in Utility Group's annual financial statements, except as described below.

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

Changes in Accounting Policies

On January 1, 2008 Utility Group adopted four new sections of the Canadian Institute of Chartered Accountants (CICA) Handbook, namely Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments - Disclosures, Section 3863 - Financial Instruments - Presentation, and Section 3031 - Inventories.

Section 1535 requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and process for managing capital.

Sections 3862 and 3863 complement and enhance the current disclosure and presentation requirements related to financial instruments.

Section 3031 prescribes the measurement of inventories at the lower of cost and net realizable value, with guidance on the determination of cost including allocation of overheads and other costs to inventory. Reversals of previous write- downs to net realizable value are permitted when there is a subsequent increase in the value of inventories. In accordance with the recommendations of the Section, Utility Group changed the basis of measurement used for inventories from the lower of average cost and replacement cost to the lower of average cost and net realizable value. This change had no effect on the financial position of Utility Group.

Future Accounting Changes

Effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008, the new CICA Handbook Section 3064 will replace Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. This section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets including internally generated intangible assets. This new section is effective for Utility Group beginning January 1, 2009.

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

The CICA Accounting Standards Board (AcSB) plans to converge Canadian GAAP for publicly accountable enterprises with International Financial Reporting Standards (IFRS) over a transition period that will end effective January 1, 2011 with the adoption of IFRS. The AcSB announced on February 13, 2008 that IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Utility Group has initiated its scoping and planning process, but has not yet determined the impact of the transition to and adoption of IFRS on its financial statements.

Regulation

AUI and Heritage Gas engage in the delivery and sale of natural gas and are regulated by the AUC and the NSUARB, respectively. The AUC and NSUARB exercise statutory authority over matters such as tariffs, rates, construction, operations, financing, returns, accounting and certain contracts with customers. In order to recognize the economic effects of the actions and decisions of the AUC and NSUARB, the timing of recognition of certain assets, liabilities, revenues and expenses as a result of regulation may differ from that otherwise expected using Canadian GAAP for entities not subject to rate regulation.

Inuvik Gas is subject to light-handed regulation by the Northwest Territories Public Utilities Board (NWTPUB), whereby rates are set by Inuvik Gas based on a competitive market place. The NWTPUB is satisfied that competition for alternative fuel exists in Inuvik and that competition is sufficient to negate the need for full regulation. Inuvik Gas is required to file its rates, terms and conditions of service with the NWTPUB when they are revised. The NWTPUB can take action should any complaints be received and may review the affairs, earnings and accounts of Inuvik Gas as it deems necessary.

Utility Group records the impact of regulatory decisions in the period in which decisions are rendered.

3. SHARE CAPITAL

Stock Option Plan

Utility Group has an employee share option plan under which employees and directors are eligible to receive grants. To June 30, 2008 options granted under the plan had a term of 10 years to expiry and vested no longer than over a four- year period. Stock options outstanding have a weighted-average remaining term of 8.4 years (December 31, 2007 - 8.86 years).

Stock option compensation expense charged to operating and administrative expense for the three month period ended June 30, 2008 was $12 thousand (2007 - $52 thousand), and for the six months ended June 30, 2008 was $0.1 million (2007 - $0.1 million), with a corresponding increase to contributed surplus.



Six months ended June 30, 2008 Year ended December 31, 2007
----------------------------------------------------------------------------
Number of Weighted average Number of Weighted average
options exercise price options exercise price
----------------------------------------------------------------------------
Stock options
outstanding,
beginning of
period 473,500 $ 7.12 310,500 $ 7.25
Granted 26,500 6.73 163,000 6.84
Forfeited (67,250) 6.95 - -
----------------------------------------------------------------------------
Stock options
outstanding,
end of period 432,750 $ 7.10 473,500 $ 7.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at
end of period 160,125 $ 7.39 157,625 $ 7.38
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. CAPITAL MANAGEMENT STRATEGY

Utility Group's objectives when managing capital are to efficiently manage the capital base to generate sustainable earnings to finance current operations while allowing for growth opportunities, and to maximize long term shareholder value. The use of debt or equity funding is determined giving consideration to the norms and risks associated with each of its businesses, capital structures deemed by the AUC and the NSUARB, and bank covenants.

Capital includes shareholders' equity, long-term debt, short-term debt, and cash and cash equivalents. It is expected that Utility Group's access to debt and equity markets, undrawn bank credit facilities and cash generated from operations will provide sufficient capital resources and liquidity to fund existing operations and certain acquisition and expansion opportunities in 2008.

Debt-to-total capitalization is calculated as net debt divided by total capitalization. Net debt is defined as total short- and long-term debt, less cash. Total capitalization is defined as the sum of net debt and shareholders' equity.



The debt-to-total capitalization ratios at June 30, 2008 and December 31,
2007 were as follows:

June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Debt $ 111,116 $ 103,583
Less: cash (621) (747)
----------------------------------------------------------------------------
Net debt $ 110,495 $ 102,836
Shareholders' equity 73,201 69,698
----------------------------------------------------------------------------
Total capitalization $ 183,696 $ 172,534
----------------------------------------------------------------------------
Debt-to-total capitalization
ratio (percent) 60.2 59.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. FINANCIAL INSTRUMENTS

Credit Risk

Utility Group has no significant concentrations of credit risk. Financial instruments that subject Utility Group to credit risk consist primarily of accounts receivable. Accounts receivable credit risk is reduced due to a large and diversified customer base, customer deposits for at-risk customers and the ability to recover the majority of uncollectible accounts through customer rates.

Liquidity Risk

Utility Group expects that 2008 funds generated from operations will be sufficient to meet the majority of its budgeted maintenance and growth capital requirements. The balance of its budgeted growth capital and a certain value of potential acquisitions undertaken would be financed through existing bank lines. Should larger acquisitions require financing beyond existing lines, management believes equity and debt capital markets could be accessed to provide additional financing. At this time, Utility Group does not reasonably expect any presently known trend or uncertainty to affect Utility Group's ability to access its anticipated sources of cash.

The remaining contractual maturities for Utility Group's financial liabilities are as follows:



Maturity June 30, 2008
----------------------------------------------------------------------------
Accounts payable and accrued liabilities Within 1 year $ 18,709
Demand credit facilities Within 1 year 1,034
Revolving term credit facility November 2010 109,111
Loan from Province of Nova Scotia July 2014 971
----------------------------------------------------------------------------
$ 129,825
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Market Risk

Interest rate risk

Utility Group's exposure to risk for changes in market interest rates relates to draws on Utility Group's bank credit facilities.

Other price risk

Utility Group holds a publicly listed equity investment that is classified as a non-current available-for-sale financial asset and was initially measured at fair value with changes in fair value recorded net of income taxes through other comprehensive income. No investment was held by Utility Group for the 2007 comparable periods.

Utility Group estimates the impact on income before income tax of changes to market risk factors for applicable financial instruments are as follows:



Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Interest rate (+/- 25 basis points) $ 68 $ 50 $ 134 $ 100
Market price of equity instruments
(+/- 10%) $ 220 - $ 220 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. PENSION AND OTHER RETIREMENT BENEFIT PLANS

Utility Group has pension plans which provide either defined benefit or defined contribution pension benefits for qualified employees. These pension plans are fully funded, partially funded, or unfunded. Utility Group also provides post- employment benefits other than pensions for qualifying retired employees which are unfunded. Utility Group established a non-registered, defined benefit plan that provides pension benefits to eligible executives based on average earnings, years of service and age at retirement (supplemental executive retirement plan (SERP)). The expense recognized for these plans is as follows:



Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Defined benefit plan - AUI $ 272 $ 235 $ 545 $ 469
Defined benefit plan - SERP 47 41 86 82
Defined contribution plan 12 10 24 20
Other benefit plans 46 49 92 97
----------------------------------------------------------------------------
$ 377 $ 335 $ 747 $ 668
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. SUPPLEMENTAL CASH FLOW INFORMATION

Net Change in Non-Cash Working Capital

The net change in the following non-cash working capital items increased/(reduced) cash flows from operations as follows:



Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Accounts receivable $ 13,872 $ 15,120 $ 11,347 $ 16,324
Inventory, prepaid expenses and
deferred charges (133) 366 (1,718) (494)
Accounts payable and accrued
liabilities (8,146) (11,700) (15,701) (15,257)
Deferred cost of gas, net of income
taxes 44 (424) 448 893
Income and other taxes payable (945) (829) (165) 692
----------------------------------------------------------------------------
4,692 2,533 (5,789) 2,158
Decrease in accounts receivable
related to contributions in aid of
construction (324) (70) (324) (146)
Decrease (increase) in accounts
payable related to property, plant
and equipment 132 (415) 1,220 (888)
----------------------------------------------------------------------------
Net change in non-cash working
capital related to operations $ 4,500 $ 2,048 $ (4,893) $ 1,124
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Interest and Income Taxes Paid

The following cash payments have been made by Utility Group:



Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Interest paid $ 1,367 $ 940 $ 2,645 $ 1,994
Income taxes paid $ 671 $ 402 $ 1,508 $ 914
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. RELATED PARTY TRANSACTIONS

In the normal course of business, Utility Group and its affiliates transact with related parties. The following related party transactions were measured at their exchange amount:



Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Fees for administration, management,
rent and other services paid by:
Utility Group to AltaGas Income
Trust (the Trust) $ 51 $ 7 $ 97 $ 15
The Trust to Utility Group - $ 42 - $ 84
The Trust to AUI $ 1 $ 2 $ 2 $ 4
Ikhil to Inuvik Gas (1) - $ 83 - $ 177
Fees for operating services paid by
AUI to the Trust $ 86 $ 77 $ 154 $ 143
Gas purchases for resale by Inuvik
Gas from Ikhil (1) - $ 234 - $ 818
Transportation services provided by
AUI to the Trust $ 122 $ 119 $ 242 $ 243
Gas purchases for resale by AUI from
the Trust $16,034 $13,195 $58,206 $51,527
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Transactions occurring prior to the July 31, 2007 purchase of Ikhil by
Utility Group.


The resulting amounts due from and to related parties are non-interest bearing and are related to transactions in the normal course of business.

Included in accounts receivable at June 30, 2008 is $nil million ($0.1 million at December 31, 2007) due to Utility Group from the Trust.

Included in accounts payable and accrued liabilities at June 30, 2008 is $2.6 million ($13.5 million at December 31, 2007) due from AUI to the Trust.

Included in accounts payable and accrued liabilities at June 30, 2008 is $51 thousand ($20 thousand at December 31, 2007) due from Utility Group to the Trust.

9. SEASONALITY

The natural gas distribution business is highly seasonal, with the majority of natural gas deliveries occurring during the winter heating season. Gas sales during the winter typically account for approximately two-thirds of annual revenue, resulting in strong first and fourth quarter results and losses in the second and third quarters.

10. SUBSEQUENT EVENTS

On July 14, 2008 Utility Group purchased an additional 202,251 common shares of Heritage Gas for $0.2 million and advanced $0.4 million under its long-term loan agreement. Contributions were also made by the other shareholders of Heritage Gas, resulting in no change to Utility Group's proportionate ownership interest in Heritage Gas.

ABOUT ALTAGAS UTILITY GROUP INC.

AltaGas Utility Group Inc. is a publicly traded company holding interests in AltaGas Utilities Inc., Heritage Gas Limited and Inuvik Gas Ltd. Combined, these regulated natural gas distribution businesses serve more than 69,000 customers in three areas of Canada through an infrastructure of nearly 22,000 kilometres of pipelines. Utility Group intends to pursue opportunities to invest in infrastructure-based utility and related businesses with long-term, stable returns.

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