AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

November 05, 2007 18:57 ET

AltaGas Utility Group Inc. Announces Third Quarter 2007 Results and Increases Quarterly Dividend 14 Percent to $0.04 Per Share

CALGARY, ALBERTA--(Marketwire - Nov. 5, 2007) - The Board of Directors of AltaGas Utility Group Inc. (Utility Group)(TSX:AUI) today announced a net loss of $1.2 million ($0.14 per share) for the third quarter of 2007 and net income of $2.1 million ($0.25 per share) for the nine months ended September 30, 2007 compared to a loss of $0.9 million ($0.11 per share) for the third quarter of 2006 and net income of $1.6 million ($0.20 per share) for the nine months ended September 30, 2006.

The 26 percent year-to-date increase in net income was primarily a result of new business growth and colder weather compared to 2006. Results are representative of a normal third quarter in which losses are usually reported as a result of the seasonal nature of the natural gas distribution business, resulting in declines in delivered volumes in the summer. A dividend of $0.04 per common share payable on January 15, 2008 to shareholders of record at the close of business on December 31, 2007 was also declared. This dividend is an increase of $0.005 per share, or 14 percent, from the dividend declared in each of the previous three quarters.

"Utility Group has had an exciting summer," said Patricia Newson, President and Chief Executive Officer. "The quarter reflects two months of operating results of a one-third interest in the Ikhil Joint Venture, an acquisition we closed on July 31, 2007. In September the Heritage Gas team began the 850 metre directional drill under the Halifax Harbour to service the Halifax peninsula, and AltaGas Utilities Inc. continues to experience above average growth in customers, keeping pace with the Alberta economy. We look forward to a strong fourth quarter with accelerated activity to connect services before winter."

Net revenue for the third quarter and first nine months of 2007 were $7.4 million and $29.2 million, respectively. Net revenue exceeded 2006 third quarter by $1.4 million and the first nine months by $4.9 million due to customer growth at both AltaGas Utilities Inc. and Heritage Gas Limited and colder weather in 2007 compared to 2006.

Operating income for the first nine months of 2007 was $6.3 million, which included a third quarter operating loss of $0.5 million, compared to a third quarter operating loss of $0.5 million and operating income of $4.6 million for the first nine months of 2006. Funds generated from operations were $7.6 million in the first nine months of 2007 compared to $6.7 million in the first nine months of 2006.

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 66,000 customers in three areas of Canada through an infrastructure of nearly 20,000 kilometres of pipelines. Utility Group also 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.

AltaGas Utility Group's 8.2 million common shares began trading on the Toronto Stock Exchange under the symbol AUI on November 17, 2005.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of financial condition and results of operations dated November 5, 2007 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 nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006. The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto for the three and nine months ended September 30, 2007 and the audited consolidated financial statements and MD&A contained in Utility Group's Annual Report for the year ended December 31, 2006.

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 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. on July 28, 2005.

Through a series of transactions which closed on November 17, 2005, Utility Group listed on the TSX 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 a 33.3335 percent interest in the Ikhil Joint Venture (Ikhil) through its wholly owned subsidiary Utility Group Facilities Inc. (Facilities). The investment in Ikhil is jointly controlled by Facilities, 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 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 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 infrastructure and related businesses in Canada. Utility Group's management team and Board of Directors have significant utility 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 nine months ended September 30, 2007 and September 30, 2006.



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Consolidated Financial Results Three Months Ended Nine Months Ended
($ millions, except per share September 30 September 30
amounts or as otherwise noted) 2007 2006 2007 2006
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Revenue 14.4 12.4 92.1 86.5
Net revenue(1) 7.4 6.0 29.2 24.3
EBITDA(1) 1.5 1.2 11.6 9.7
Operating income (loss)(1) (0.5) (0.5) 5.9 4.6
Net income (loss) (1.2) (0.9) 2.1 1.6
Funds generated from operations(1) 0.5 0.6 7.6 6.7
Total assets 185.5 158.8 185.5 158.8
Long-term liabilities 118.1 78.8 118.1 78.8
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Shares outstanding (thousands)
Basic 8,190 8,190 8,190 8,190
Diluted 8,190 8,190 8,199 8,212
Net income (loss) per share -
basic $ (0.14) $ (0.11) $ 0.25 $ 0.20
Net income (loss) per share -
diluted $ (0.14) $ (0.11) $ 0.25 $ 0.20
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(1) Non-GAAP financial measure: see discussion in "Non-GAAP Financial
Measures" section of this MD&A.


1. Discussion of Consolidated Financial Results for the Three Months Ended September 30, 2007

The net loss for the three months ended September 30, 2007 was $1.2 million or a loss of $0.14 per share, compared to a loss of $0.9 million, or a loss of $0.11 per share for the three months ended September 30, 2006. The net loss is largely reflective of the normal seasonality of the natural gas distribution business. The third quarter 2007 net loss was $0.3 million greater than that of 2006 due to $0.3 million higher interest costs in 2007 on higher average debt balances outstanding at higher interest rates and $0.1 million lower income tax recovery being partially offset by $0.1 million higher operating income generated from a larger customer base in 2007. The third quarter is not typically a period of high natural gas consumption so generally weather variances do not have a significant impact on third quarter results.

Utility Group's revenue for the three months ended September 30, 2007 was $14.4 million, compared to $12.4 million for the three months ended September 30, 2006. Revenue from AUI comprised 92 percent of consolidated revenue and was $1.6 million higher than in 2006. In third quarter 2007, Heritage Gas contributed an additional $0.4 million in revenue over 2006, an increase of 63 percent, and Ikhil contributed $0.2 million from August 1.

For the three months ended September 30, 2007 Utility Group reported net revenue of $7.4 million ($6.0 million - 2006), after natural gas costs of $7.0 million ($6.4 million - 2006). The increase from the previous year was due to increased volumes delivered to additional service sites, and a higher revenue requirement applied for in AUI's 2007 General Tariff Application (GTA) filing. AUI's revenue requirement has grown to support a 7.4 percent increase in 2007 mid-year rate base over 2006. In addition to the applied-for rate base, the completion of a gas line to an oil processing battery plant contributed to net revenue beginning in April 2007. Heritage Gas increased its sites served by 80 percent over the same quarter last year and commenced service to two new large commercial customers in 2007. Ikhil contributed $0.2 million to net revenue from August 1, 2007.

Operating and administrative expense was $5.9 million for the third quarter of 2007, compared to $4.9 million for the third quarter of 2006. The increase was due to higher staffing, contractor and material costs to support system maintenance and business growth.

Depreciation and amortization expense was $2.0 million in the three months ended September 30, 2007 compared to $1.7 million for the three months ended September 30, 2006, an increase related to higher investment in property, plant and equipment.

Interest expense for the three months ended September 30, 2007 was $1.2 million, compared to $0.9 million for the three months ended September 30, 2006. Average debt outstanding on the long-term credit facility for the quarter was $88.9 million and the average interest rate was 5.21 percent, compared to $73.6 million average borrowing in 2006 at an average interest rate of 4.9 percent.

Utility Group's income tax expense for the three months ended September 30, 2007 was a recovery of $0.5 million ($0.6 million recovery - 2006). Current income taxes relate primarily to AUI which, under utility board regulation, accounts for income tax expense using the taxes payable method and therefore reports only income tax due on currently taxable earnings. The income tax recovery in 2006 was higher than anticipated largely as a result of adopting the effective income tax rate method in the third quarter.

2. Discussion of Consolidated Financial Results for Year-to-date September 30, 2007

Net income for the nine months ended September 30, 2007 was $2.1 million or $0.25 per share, compared to $1.6 million or $0.20 per share for the nine months ended September 30, 2006. Operating income increased $1.3 million over 2006 due to a colder winter and new service sites. Offsetting the growth in operating income was $0.7 million higher interest expense due to higher average debt balances and higher interest rates in the first three quarters of 2007 compared to 2006.

Utility Group's revenue for the nine months ended September 30, 2007 was $92.1 million, compared to $86.5 million for the nine months ended September 30, 2006. Revenues from AUI comprised 95 percent of consolidated revenue and were $4.1 million higher than in 2006. Heritage Gas' revenue grew by $1.5 million over 2006 primarily attributable to rate base growth. The acquisition of Ikhil on July 31, 2007 added $0.2 million to revenue.

For the nine months ended September 30, 2007 Utility Group reported net revenue of $29.2 million ($24.3 million - 2006), after natural gas costs of $62.9 million ($62.2 million - 2006). The $4.9 million net revenue increase was contributed by Inuvik Gas and Ikhil ($0.5 million), Heritage Gas ($0.7 million), and AUI ($4.3 million). AUI experienced 13.4 percent colder weather and served 3.5 percent more service sites compared to 2006, contributing 88 percent of the increase in the nine month net revenue compared to the same period in 2006.

Operating and administrative expense was $17.6 million for the first nine months of 2007, compared to $14.6 million for the first nine months of 2006. This increase was due to higher staffing, contractor and material costs to support system maintenance and business growth. The majority of these expenses are recoverable through rates charged to customers.

Depreciation and amortization expense was $5.7 million for the nine months ended September 30, 2007 compared to $5.1 million for the nine months ended September 30, 2006. The increase was related to higher investment in property, plant and equipment.

Interest expense for the nine months ended September 30, 2007 was $3.2 million, compared to $2.6 million for the nine months ended September 30, 2006. Average debt outstanding on the long-term credit facility for the period was $82.5 million and the average interest rate was 5.05 percent compared to $71.6 million average borrowing in the first three quarters of 2006 at an average interest rate of 4.51 percent.

Utility Group's income tax expense for the nine months ended September 30, 2007 was $0.6 million ($0.4 million - 2006). 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. The increase in income tax expense of $0.2 million in 2007 over 2006 was due to increased earnings in 2007, partially offset by lower than anticipated income tax expense in 2006 as a result of higher expenses for tax purposes than for accounting purposes.

3. Business Operations



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Three Months Ended Nine Months Ended
Operating Information September 30 September 30
2007 2006 2007 2006
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Deliveries (PJ)(1)(2)
End-use 1.8 1.6 10.9 9.8
Transportation 1.8 2.0 5.7 6.9
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3.6 3.6 16.6 16.7
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Service sites at period end(3) 66,627 63,959 66,627 63,959
Degree day variance (percent)(4) (0.6) (22.2) 1.4 (10.9)
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(1) A petajoule (PJ) is 1 million gigajoules.
(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) Service sites reflect all of the service sites of AUI, Heritage Gas and
Inuvik Gas.
(4) Degree days relate to AUI's service area. A degree day is the
cumulative extent to which the daily mean temperature falls below 18
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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PJs for the Nine
Service Sites as at Months Ended
September 30 September 30
Natural Gas Distribution 2007(1) 2006(1) 2007(2)(3) 2006(2)(3)
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AUI 64,795 62,597 16.3 16.6
Heritage Gas 1,018 566 .2 -
Inuvik 814 796 .1 .1
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66,627 63,959 16.6 16.7
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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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Three Months Ended Nine Months Ended
Natural Gas Production September 30, 2007 September 30, 2007
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GJs(1) Mcf(2) GJs(1) Mcf(2)
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Ikhil production(3) 59,410 55,745 59,410 55,745
Sold to Inuvik Gas (7,950) (7,460) (7,950) (7,460)
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Sold to NWTPC 51,460 48,286 51,460 48,286
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(1) In Canada, the GJ, a metric measurement of heat energy, is
considered the industry standard measurement for natural gas
distribution deliveries.
(2) The imperial measure of natural gas volumes is the cubic foot,
the measure most commonly used in the natural gas production
industry to report volumes of reserves and production.
(3) Natural gas production reflects Utility Group's proportionate
share (33.3335 percent) of Ikhil from August 1, 2007. The sales
revenue from the volumes sold to NWTPC are included in revenue
reported for the Inuvik segment.


AUI

AUI's net revenue for 2007 increased over 2006 by $1.0 million for the quarter ended and by $4.3 million for the nine months ended September 30. Growth in the third quarter is attributable $0.2 million to 33.6 percent colder weather than in 2006; $0.2 million to growth in service sites and $0.7 million to a higher revenue requirement to cover increased operating and administrative costs. Growth in net revenue for the nine month period ended September 30, 2007 over the same period in 2006 is attributable $0.9 million to 13.4 percent colder weather than in 2006; $0.7 million to growth in service sites; $0.4 million to net higher rates effective March 1, 2006 and $2.3 million to a higher revenue requirement to cover increased operating and administrative costs, as applied for in the 2007 GTA.

AUI records revenue based on volumes delivered, while operating and administrative and depreciation expenses are incurred evenly throughout the year. Consequently, due to the seasonality of the natural gas distribution demand, the second and third quarters report losses. In the third quarter of 2007 the operating loss reported by AUI of $0.8 million was greater than the $0.5 million reported in 2006 due to the $1.3 million higher operating, administrative and depreciation costs in third quarter 2007 not being fully recovered in the rates charged for the period.

In 2007 and 2006, 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, serving almost all of the potential market in its existing service areas. This growth in services within the AUI franchise areas has averaged approximately 2 percent per year over the three years prior to 2006, with an increase to 3 percent growth in 2006. The annual infill growth rate for the twelve months ended September 30, 2007 is 3.5 percent.

AUI's market consists primarily of residential and small commercial consumers located in smaller population centres or rural areas of Alberta. AUI added 1,963 new service sites in 2006, an increase of 40 percent over the 1,403 additions in 2005. In 2007 year to date AUI added 1,811 sites compared to 1,111 for the same period last year. Approximately 90 percent of AUI's total 2007 new customer attachments were for residential service. The remaining 10 percent of new service attachments were primarily for varying levels of commercial service. The split between residential and commercial service follows the historical overall trend.

In 2007, 67 percent of AUI's new services and 46 percent of the 76 subdivision proposals accepted by developers were in AUI service territories in the Edmonton fringe. This area continues to benefit from strong economic growth in Alberta, particularly with respect to heavy oil and oil sands development in the northeast sector of the province. The Leduc operating district situated near the Edmonton International airport experienced 7.0 percent growth in service site additions in the three quarters ended September 30, 2007 (4.0 percent - 2006). Growth in this district represents 67 percent of AUI's 2007 sites growth (51 percent - 2006).

Typically, construction activity accelerates in the last quarter of the year given the urgency created by the impending colder weather and the demand for heat as new buildings are being constructed. Approximately 38 percent of total new services were installed and 50 percent of total subdivision work was completed in the fourth quarter of 2006, and 2007 is expected to follow this historical trend.

Heritage Gas

Heritage Gas' distribution system comprised 161.6 kilometres of pipeline infrastructure (137.5 kilometres at December 31, 2006), including the 24.1 kilometres of pipeline added in 2007. At September 30, 2007, Heritage Gas had installed service lines to 1,228 customers, of which 1,018 were activated by period-end, an increase of 39 percent over December 2006. Natural gas delivered in the three quarters ended September 30, 2007 totalled 687,213 GJ, an increase of 235 percent over the same period in 2006.

Heritage Gas continues to grow its customer base, ending the quarter with 1,018 sites serviced, an 80 percent increase from September 30, 2006. Heritage Gas has experienced 86 percent of its growth in the Dartmouth area. Heritage Gas has undertaken numerous development projects in 2007 in the Greater Dartmouth area. However a major focus in 2007 has been the development and construction activities to cross the Halifax Harbour to serve the Halifax peninsula market. The 850-metre directional drill under the harbour began on September 19, 2007, and the laying of distribution mains on the Halifax peninsula began in second quarter and continues. It is expected to have gas flowing to the peninsula by year end 2007.

For the three months ended September 30, 2007 Heritage Gas' operating income was $0.4 million compared to $0.3 million for the three months ended September 30, 2006. The net revenue increase of $0.2 million was the result of an increase in the number of sites serviced. Operating and administration and depreciation costs have increased $0.1 million over the third quarter 2006 resulting from the activity associated with system expansion.

For the nine months ended September 30, 2007 Heritage Gas' operating income was $1.3 million compared to $0.8 million for the nine months ended September 30, 2006. The increased operating income of $0.5 million is a function of the increased rate base over the past year. Utility Group's share of the weighted average rate base for September 2007 was $13.7 million. Net revenue increased $0.7 million, offset partially by increases in operating, administrative and depreciation costs of $0.2 million.

Inuvik Gas and Ikhil

Inuvik Gas added 18 service sites over the last 12 months, an increase of 2.2 percent. This growth rate is reflective of the mature end-use energy market penetration in Inuvik.

On July 31, 2007 Utility Group purchased Ikhil from the Trust. Ikhil supplies Inuvik Gas and NWTPC with natural gas from two producing wells. The Ikhil reservoir has remaining recoverable gas of approximately 9 Bcf (3 Bcf net to Utility Group). The wells produce an average of approximately 1.5 Mmcf/d (0.5 Mmcf/d net to Utility Group) of sweet dry gas. Operating results for Ikhil are proportionately consolidated from August 1, 2007.

For the three months ended September 30, 2007 Inuvik Gas' operating income was $133,000 compared to a loss of $53,000 for the three months ended September 30, 2006. For the nine months ended September 30, 2007 Inuvik Gas' operating income was $0.4 million compared to $0.2 million for the nine months ended September 30, 2006. The increase in operating income for the quarter and year to date was due to a price increase effective October 2006.

Ikhil contributed revenue of $0.2 million for the quarter and year-to-date. Ikhil's operating, administrative and depreciation costs were $0.2 million for the quarter and year-to-date.

4. Regulatory Update

AltaGas Utilities Inc.

In December 2006 AUI filed a Phase 2 tariff application dealing with the 2005/2006 General Tariff Application cost of service, rate design and terms and conditions of service. In response to the application the Alberta Energy and Utilities Board (EUB) issued decision 2007-079 on October 16, 2007. The decision approved the rates applied for, effective November 1, 2007. The new rates are not expected to impact 2007 earnings.

On December 29, 2006 AUI filed Phase 1 of its 2007 GTA. AUI is seeking approval of a forecast net rate base of $104.6 million, an increase of $7.4 million from its 2006 approved net rate base of $97.2 million. AUI is also seeking approval of a revenue requirement, net of gas costs of $37.6 million, which is an increase of $4.5 million from the 2006 allowed net revenue requirement of $33.1 million. The EUB conducted a GTA Phase 1 hearing August 8, 2007 through August 10, 2007. A decision is expected from the EUB before the end of December 2007. As of September 30, 2007 AUI had accrued $2.7 million in revenue requirement associated with the 2007 GTA.

On October 28, 2005 AUI filed an application for approval to issue a $30 million, five-year debenture to AUHI with an all-in interest rate of 7.05 percent. On May 24, 2006 the EUB issued Decision 2006-049, allowing AUI to issue the $30 million debenture, but disallowing the all-in rate of 7.05 percent, instead approving 5.44 percent. AUI submitted a Review and Variance (R&V) Application requesting that the EUB reconsider its decision. On July 31, 2007 AUI received the EUB's determination denying AUI's application for a Review and Variance of Decision 2006-049. The EUB upheld its decision disallowing AUI's request for a 7.05 percent debenture rate. AUI has filed a Notice of Motion with The Court of Appeal of Alberta for leave to appeal certain determinations made by the EUB in Decision 2006-049, and in the EUB's decision to deny AUI's request for an R&V. A hearing to hear the Leave to Appeal is scheduled for January 10, 2008. As the current revenue requirement reflects the approved 5.44 percent debenture rate, there is no impact on reported financial results of the denial of the R&V application.

Heritage Gas Limited

On June 30, 2007 Heritage Gas submitted an update to its five-year financial forecast to the Nova Scotia Utility and Review Board (NSUARB).

Inuvik Gas Ltd.

On August 21, 2006 Inuvik Gas notified the Northwest Territories Public Utilities Board (NWTPUB) of a natural gas rate increase effective October 22, 2006. On June 20, 2007 the NWTPUB issued decision 10-2007 making final the October 22, 2006 rate increase.

On September 10, 2007 Inuvik Gas notified the NWTPUB of a natural gas rate decrease effective November 10, 2007.

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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Three Months Ended Nine Months Ended
Net revenue September 30 September 30
($ millions) 2007 2006 2007 2006
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Net revenue 7.4 6.0 29.2 24.3
Add: Cost of natural gas 7.0 6.4 62.9 62.2
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Revenue (GAAP financial measure) 14.4 12.4 92.1 86.5
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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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Three Months Ended Nine Months Ended
Operating income September 30 September 30
($ millions) 2007 2006 2007 2006
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Operating income (loss) (0.5) (0.5) 5.9 4.6
Deduct: Interest expense 1.2 1.0 3.2 2.6
Income taxes(1) (0.5) (0.6) 0.6 0.4
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Net income (loss) (GAAP financial
measure) (1.2) (0.9) 2.1 1.6
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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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Three Months Ended Nine Months Ended
EBITDA September 30 September 30
($ millions) 2007 2006 2007 2006
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EBITDA 1.5 1.2 11.6 9.7
Deduct: Depreciation and
amortization 2.0 1.7 5.7 5.1
Interest expense 1.2 1.0 3.2 2.6
Income taxes(1) (0.5) (0.6) 0.6 0.4
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Net income (loss) (GAAP financial
measure) (1.2) (0.9) 2.1 1.6
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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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Three Months Ended Nine Months Ended
Funds generated from operations September 30 September 30
($ millions) 2007 2006 2007 2006
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Funds generated from operations 0.5 0.6 7.6 6.7
Net change in non-cash working
capital 1.7 3.0 2.8 5.2
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Cash from operations (GAAP financial
measure) 2.2 3.6 10.4 11.9
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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

Utility Group began operations on November 17, 2005. Results for the first financial reporting period include results of operations from November 17 to December 31, 2005.



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2007 2006 2005
($ millions) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
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Net revenue(1) 7.4 8.1 13.7 11.4 6.0 6.3 12.0 5.6
Operating income
(loss)(1) (0.5) 0.3 6.0 4.2 (0.5) (0.6) 5.7 2.0
Net income (loss) (1.2) (0.5) 3.8 2.6 (0.9) (0.7) 3.2 1.3
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2007 2006 2005
($ per share) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
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Net income (loss)
Basic (0.14) (0.07) 0.46 0.32 (0.11) (0.09) 0.40 0.15
Diluted (0.14) (0.07) 0.46 0.32 (0.11) (0.09) 0.40 0.15
Dividends declared 0.035 0.035 0.035 0.03 0.03 0.03 0.03 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measures" section of
this MD&A.


IV. UTILITY GROUP'S FINANCIAL POSITION

The following table outlines the significant changes in the consolidated balance sheets of Utility Group from December 31, 2006 to September 30, 2007.



---------------------------------------------------------------------------
Balance Sheet Item Increase
($ millions) (decrease) Explanation
---------------------------------------------------------------------------
Accounts receivable (15.8) Reduction in accounts receivable due to
seasonally lower delivered volumes.

Property, plant and 15.7 Ikhil acquisition of $9.2 million plus
equipment (net of organic growth at both Heritage Gas and
accumulated AUI, partially offset by contributions in aid
depreciation) of construction.

Regulatory assets 1.1 Increase in the revenue deficiency account.

Accounts payable (10.1) Reduction in trade payables reflecting
seasonally lower gas volume purchased.

Long-term debt 12.0 Borrowings on credit facilities to fund the
acquisition of Ikhil and capital
programs at Heritage Gas and AUI.
---------------------------------------------------------------------------
---------------------------------------------------------------------------


V. INVESTED CAPITAL

On July 31, 2007 Utility Group purchased a 33.3335 percent interest in Ikhil from the Trust for approximately $9.2 million including costs of acquisition. Ikhil owns two natural gas wells and gathering and processing facilities including a pipeline from the Ikhil gas field to the town of Inuvik. The Ikhil gas field is located in the Caribou Hills, approximately 50 kilometres northwest of Inuvik in the Northwest Territories. It is the sole source of natural gas supply for Inuvik Gas.

In addition to the $9.2 million Ikhil acquisition, investment in property, plant and equipment included $4.5 million at AUI and $1.6 million at Heritage Gas for a total investment of $15.3 for the third quarter.

For the first nine months of 2007 in addition to the Ikhil acquisition, Utility Group invested $16.4 million in property, plant and equipment and regulatory and other assets, compared to $14.6 million in the first nine months of 2006. The 2007 year-to-date investment in property, plant and equipment included $9.5 million at AUI and $0.9 million at Heritage Gas. AUI is currently experiencing exceptional growth within its franchise territories due to the growth in the Alberta economy.

During 2007 Heritage Gas has continued to build infrastructure in the Greater Dartmouth area, and began incurring costs related to the Halifax Harbour crossing and distribution lines on the Halifax peninsula.



----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Net Capital Invested September 30 September 30
($ millions) 2007 2006 2007 2006
----------------------------------------------------------------------------
Invested capital:
New business - organic growth 3.6 3.8 10.8 9.0
New business - acquisition of assets 9.2 - 9.2 -
System betterment and gas supply 1.1 0.5 2.4 2.0
General plant 0.9 1.1 1.8 2.2
Regulatory and other assets 0.5 0.5 1.4 1.4
----------------------------------------------------------------------------
15.3 5.6 25.6 14.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------


VI. LIQUIDITY AND CAPITAL RESOURCES

Utility Group expects that 2007 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 Ended Nine Months Ended
Cash Position September 30 September 30
($ millions) 2007 2006 2007 2006
----------------------------------------------------------------------------
Cash, beginning of period 0.5 0.6 0.3 0.4
Operating activities 2.2 1.2 10.4 11.9
Investing activities (12.8) (3.7) (20.7) (10.9)
Financing activities 10.5 2.5 10.4 (0.8)
----------------------------------------------------------------------------
Cash, end of period 0.4 0.6 0.4 0.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash from Operations

Cash provided by operations of $2.2 million in the third quarter of 2007 increased from $1.2 million in the third quarter of 2006, primarily due to growth in the business in 2007. Cash provided by operations in the first nine months of 2007 of $10.4 million was $1.5 million less than $11.9 million in the first nine months of 2006. The variance is mainly attributable to changes to non-cash working capital items in 2006 being significantly greater than 2007. The seasonal business cycle contributes to cash through the collection of working capital during the first nine months of the calendar year; however a higher cost of gas in late 2005 combined with a change in the deferred cost of gas increased the effect in 2006.

Investing Activities

Cash used in investing activities was $12.8 million and $20.7 million for the third quarter and nine months ending September 30, 2007 respectively. Additions to property, plant and equipment of $14.8 million for the third quarter and $24.2 million for the first nine months were partially offset by contributions in aid of construction in the amounts of $2.4 million for the third quarter and $5.0 million for the first nine months. The Ikhil acquisition used 44 percent of the year-to-date cash spent on investing activities, with the majority of the remaining funds used for system growth in AUI and Heritage Gas.

Financing Activities

During third quarter 2007 cash provided by financing activities was $10.5 million, compared to $2.5 million during the third quarter of 2006. During the first nine months of 2007 cash provided by financing activities was $10.4 million compared to $0.8 million of cash used in 2006. Draws on bank credit facilities funded the acquisition of Ikhil and the growth at AUI and Heritage Gas.

In 2006 Utility Group began paying quarterly dividends to common shareholders. The first dividend was declared at $0.03 per common share payable on April 17, 2006 to shareholders of record on March 31, 2006. The dividend was increased to $0.035 per common share for the shareholders of record March 30, 2007 payable April 16, 2007. Dividend payments for the third quarter 2007 were $0.3 million (2006 - $0.2 million). Dividend payments for the first nine months of 2007 were $0.8 million (2006 - $0.5 million). This dividend is an eligible dividend for Canadian income tax purposes.

Capital Resources

Utility Group believes that its access to debt and equity markets, unused 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 2007.

The use of debt or equity funding is based on Utility Group's target capital structure, which is determined by considering the risks associated with each of its businesses and capital structures deemed by the EUB and the NSUARB. Utility Group targets a debt-to-total capitalization ratio of between 50 and 60 percent. Utility Group's debt-to-total capitalization ratio as at September 30, 2007 was 58.7 percent (56.4 percent - December 31, 2006).

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. The Province of Nova Scotia loan has been recorded at fair value in accordance with Section 3855 of the CICA Handbook, resulting in a reduction to the reported debt amount of $0.5 million for a zero interest rate benefit. Utility Group's share of the loan is $1.4 million, less the fair value adjustment of $0.5 million, or $0.9 million.



----------------------------------------------------------------------------
Credit Facilities Drawn
($ millions) September 30, 2007 December 31, 2006
----------------------------------------------------------------------------
Demand operating credit facility 0.6 2.2
Revolving term credit facility 94.3 81.8
Loan from Province of Nova Scotia 0.9 1.4
----------------------------------------------------------------------------
95.8 85.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Effective September 30, 2007 Utility Group had banking arrangements as follows:

- An extendible revolving credit facility with a syndicate of Canadian chartered banks for $100.0 million under which prime rate loans, USBR loans, letters of credit, bankers' acceptances and LIBOR loans may be drawn, repayable on November 17, 2009. The maturity date is extendible upon consent of each lender for further successive one-year periods. At September 30, 2007 bankers' acceptances with short-term maturities of $94.3 million ($81.8 million -December 31, 2006) had been issued.

- A demand operating credit facility with a Canadian chartered bank for $10.0 million under which prime rate loans, USBR loans, letters of credit, bankers' acceptances and LIBOR loans may be obtained, repayable in full upon demand.
Draws against this facility as of September 30, 2007 were $0.6 million ($2.2 million - December 31, 2006).

- Letters of Credit of $0.4 million have been issued as of September 30, 2007 in conjunction with operating the Ikhil business.

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 September 30, 2007, as at each quarter end since the facilities were established, Utility Group was in compliance with these covenants.

VII. SHARE CAPITAL

Authorized

- An unlimited number of common shares without nominal or par value; and

- An unlimited number of preferred shares without nominal or par value, issuable in series, to which the directors may fix before issuance the designation, rights, privileges, restrictions and conditions to attach to the preferred shares of each series.

Issued

- The issued and outstanding shares as at September 30, 2007 were 8,189,905.

- As at November 5th, 2007 there had been no change from September 30, 2007 in the issued and outstanding shares.

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 material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to 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, as appropriate, to allow timely decisions regarding required disclosure.

In accordance with Multilateral Instrument 52-109 (Certification of Disclosure in Issuers' Annual and Interim Filings), an evaluation was conducted under the supervision and with the participation of management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2007 to provide reasonable assurance that information required to be disclosed is recorded, processed, summarized, and reported within the time periods specified in the Ontario Securities Commission's rules and forms.

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 September 30, 2007 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 September 30, 2007 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 September 30, 2007 Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $5.3 million, compared to $4.6 million in the third quarter of 2006. Utility Group also paid the Trust $0.2 million ($0.1 million - 2006) for operating services. The Trust purchased transportation services for $0.1 million ($0.1 million - 2006) and administrative, management and other services of $42,000 from Utility Group ($0.1 million - 2006).

For the nine months ended September 30, 2007 Utility Group purchased natural gas from the Trust for $56.8 million, compared to $51.8 million in the six months ending September 30, 2006. Utility Group also paid the Trust $0.3 million ($0.3 million - 2006) for operating services. The Trust purchased transportation for $0.4 million ($0.4 million - 2006) and administrative, management and other services of $0.1 million from Utility Group ($0.3 million - 2006).

Prior to the acquisition of Ikhil by Utility Group on July 31, 2007, Utility Group purchased natural gas from Ikhil. Purchases reflected in the third quarter 2007 were $25,000 ($0.1 million - 2006), and were $0.8 million in the nine months ended September 30, 2007 ($0.7 million - 2006). In turn, Ikhil paid Utility Group $0.1 million ($0.1 million - 2006) for administration, management and other services during the third quarter 2007 and $0.3 million during the nine months ending September 30, 2007 ($0.3 million - nine months ending September 30, 2006).

There is an Administrative Service Agreement between the Trust and Utility Group whereby the Trust provides certain administrative and support services to Utility Group until December 31, 2007. The Trust receives $30,000 per year for the services provided. The Trust has given Utility Group notice that the current agreement will not be renewed, and a replacement agreement is under negotiation.

On July 31, 2007 Utility Group purchased Ikhil from the Trust for $9.2 million including costs of the acquisition.

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 and its independent auditors, 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, 2006. The most critical of these policies with respect to estimates are those related to rate regulation, determination of pension and other employee benefits, amortization and depreciation expense, goodwill impairment assessment and asset retirement obligation. Actual results may differ from these estimates.

XIII. CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2007 Utility Group adopted the Canadian Institute of Chartered Accountants Handbook Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; Section 3865, Hedges; and Section 1530, Comprehensive Income, retroactively without restatement. As at January 1, 2007 no transitional adjustments had been made to the opening balance of retained earnings or to the opening balance of accumulated other comprehensive income arising from the adoption of sections 1530, 3855, and 3865.

XIV. RISKS AND UNCERTAINTIES

In the 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; environmental and safety; competition; physical; insurance; credit; contingencies; human resources; conflicts of interest; access to additional financing; and decommissioning, abandonment and reclamation costs.

On closing the acquisition of Ikhil on July 31, 2007, Utility Group became an owner and operator of natural gas reserves. The development and production of natural gas involves a wide range of business and financial risks, some of which are beyond Utility Group's control. Included in these risks are the uncertainty of fluctuations of commodity prices, possible changes to geopolitical risk associated with changing governmental policies, royalty, tax, and environmental regulations. There are also operating hazards and other difficulties inherent in the production and sales of natural gas. Despite best practice analysis there are numerous uncertainties inherent in estimating quantities of natural gas reserves including future natural gas prices, engineering data, projected future rates of production and the timing of future expenditures. The process of estimating natural gas reserves requires substantial judgment, resulting in imprecise determinations. Utility Group relied on an independent engineering firm's evaluation of the Ikhil property to determine an estimate of reserves.

XV. OUTLOOK

1. Operations

For the remainder of 2007 Utility Group's management expects that the operating businesses will continue to generate strong earnings and solid growth. AUI will continue to actively pursue opportunities in its existing franchise areas and is well-positioned to capture opportunities arising in the areas around Edmonton, Alberta. The busy Alberta economy continues to drive unprecedented activity at AUI. The normal urgency created by impending cold weather is expected to result in new services installed in 2007 exceeding the 2,000 anticipated in the 2007 GTA. At Heritage Gas in Nova Scotia, construction of the harbour crossing between Halifax and Dartmouth began in September 2007, with commencement of gas service to the Halifax peninsula anticipated by the end of 2007. The project will be financed by the shareholders of Heritage Gas over the last quarter of 2007 through to the second quarter of 2008.

Utility Group's objective is to grow the business, both through growth of its operating businesses as outlined above, and through acquisitions of infrastructure-based utility and related businesses. Management evaluates 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)
----------------------------------------------------------------------------
September 30 December 31
As at 2007 2006
----------------------------------------------------------------------------

ASSETS
Current assets
Cash $ 393 $ 296
Accounts receivable (note 8) 10,710 26,487
Inventory 408 231
Deferred cost of gas, net of income taxes 858 1,057
Future income tax asset 15 16
Prepaid expenses and deferred charges 1,592 1,434
----------------------------------------------------------------------------
13,976 29,521
Property, plant and equipment (note 4) 133,413 117,723
Goodwill 31,575 31,575
Regulatory assets 6,075 4,983
Future income tax asset 105 87
Other assets 363 142
----------------------------------------------------------------------------
$185,507 $184,031
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities

Short-term debt $ 597 $ 2,221
Accounts payable and accrued liabilities
(note 8) 18,831 28,955
Dividends payable 287 246
Income and other taxes payable 50 382
----------------------------------------------------------------------------
19,765 31,804
Long-term debt 95,170 83,157
Customer deposits and other liabilities 3,070 2,920
Future income tax liability 98 99
----------------------------------------------------------------------------
118,103 117,980
----------------------------------------------------------------------------
Shareholders' equity
Share capital 61,278 61,278
Contributed surplus 415 257
Retained earnings 5,711 4,516
----------------------------------------------------------------------------
67,404 66,051
----------------------------------------------------------------------------
$185,507 $184,031
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements


ALTAGAS UTILITY GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOMEAND RETAINED EARNINGS
(unaudited)

($ thousands except per share amounts)
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
For the 2007 2006 2007 2006
----------------------------------------------------------------------------

REVENUE (note 8) $ 14,357 $ 12,375 $ 92,078 $ 86,527

EXPENSES (note 8)
Cost of natural gas 6,929 6,389 62,873 62,218
Operating and administrative 5,886 4,855 17,600 14,608
Depreciation and amortization 1,961 1,662 5,709 5,082
----------------------------------------------------------------------------
14,776 12,906 86,182 81,908
----------------------------------------------------------------------------

Operating income (loss) (419) (531) 5,896 4,619
Interest expense 1,221 947 3,249 2,567
----------------------------------------------------------------------------
Income (loss) before income taxes (1,640) (1,478) 2,647 2,052
----------------------------------------------------------------------------
Income taxes
Current income taxes (463) (537) 611 330
Future income taxes (9) (29) (19) 97
----------------------------------------------------------------------------
(472) (566) 592 427
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income (loss) (1,168) (912) 2,055 1,625
Retained earnings, beginning
of period 7,166 3,315 4,516 1,269
Dividends declared (287) (246) (860) (737)
----------------------------------------------------------------------------

Retained earnings, end of period $ 5,711 $ 2,157 $ 5,711 $ 2,157
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income (loss) per share
(note 5)
Basic $ (0.14) $ (0.11) $ 0.25 $ 0.20
Diluted $ (0.14) $ (0.11) $ 0.25 $ 0.20

Number of shares outstanding
(note 5)
Basic 8,189,905 8,189,905 8,189,905 8,189,905
Diluted 8,189,905 8,189,905 8,199,387 8,211,894

See accompanying notes to the interim consolidated financial statements


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

($ thousands)
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
For the 2007 2006 2007 2006
----------------------------------------------------------------------------

CASH FROM OPERATIONS
Net income (loss) $ (1,168) $ (912) $ 2,055 $ 1,625
Items not involving cash:
Revenue deficiency accrual (566) (367) (1,368) (940)
Allowance for funds used during
construction (110) (62) (303) (203)
Depreciation and amortization 1,961 1,662 5,709 5,082
Operating and administrative 341 262 1,354 820
Future income taxes (9) (29) (19) 97
Other 52 67 157 214
----------------------------------------------------------------------------
Funds generated from operations 501 621 7,585 6,695
Net change in non-cash working
capital (note 7) 1,718 599 2,842 5,218
----------------------------------------------------------------------------

2,219 1,220 10,427 11,913
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Additions to property, plant and
equipment (14,810) (5,250) (24,241) (13,082)
Contributions in aid of
construction 2,446 2,062 4,960 3,524
Proceeds on disposition of
property, plant and equipment 17 17 37 127
Investment in regulatory and
other assets (498) (513) (1,442) (1,414)
----------------------------------------------------------------------------

(12,845) (3,684) (20,686) (10,845)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Decrease in short-term debt (1,323) (585) (1,624) 206
Increase (decrease) in long-term
debt 12,011 2,688 12,649 (1,375)
Dividends paid (287) (245) (819) (491)
Increase in customer deposits
and other liabilities 107 616 150 851
----------------------------------------------------------------------------

10,508 2,474 10,356 (809)
----------------------------------------------------------------------------
Change in cash (118) 10 97 259
Cash, beginning of period 511 630 296 381
----------------------------------------------------------------------------
Cash, end of period $ 393 $ 640 $ 393 $ 640
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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). The investment in Ikhil is jointly controlled by Facilities, along with 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 Heritage Gas and Inuvik Gas from date of acquisition of AUHI on November 17, 2005 and its proportionate interest in Ikhil from August 1, 2007. Transactions between Utility Group, its wholly owned subsidiaries and the proportionately consolidated entities are eliminated on consolidation.

These consolidated financial statements are prepared by management 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 Energy and Utilities Board (EUB) 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, 2006. 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 Policy

Effective January 1, 2007 Utility Group adopted the Canadian Institute of Chartered Accountants Handbook Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; Section 3865, Hedges; and Section 1530, Comprehensive Income, retroactively without restatement. The adoption of these new financial instrument standards resulted in changes in the accounting for financial instruments.

Financial Assets and Financial Liabilities

Under the new standards, financial assets and financial liabilities are initially recognized at fair value as at the adoption date of January 1, 2007, and must be classified into one of the following five categories: held-for trading; held-to maturity; loans and receivables; available-for-sale financial assets; or other financial liabilities. The classification
depends on the purpose for which the financial instruments were acquired and their characteristics.

Utility Group adopted the following three classifications:

- Cash is classified as held for trading. Measurement made subsequent to the adoption date of this new standard is at fair value;

- Accounts receivable are classified as loans and receivables. Measurements made subsequent to the adoption date of this new standard are recorded at amortized cost using the effective interest rate method. For Utility Group, this measurement generally corresponds to cost; and

- Bank loans, accounts payable, accrued liabilities, income taxes payable and long-term debt are classified under other financial liabilities. Measurements made subsequent to the adoption date of this new standard are recorded at amortized cost using the effective interest method. For Utility Group, this measurement generally corresponds to cost.

Derivatives and Hedge Accounting

Derivatives may be embedded in other financial instruments (the "host instrument"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standards, embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host instrument, the terms of the embedded derivative are the same as those of the stand-alone derivative, and the combined contract is not held for trading or designated at fair value. A review of Utility Group's financial contracts determined that there were no embedded derivatives. In the event that Utility Group enters into a contract that contains an embedded derivative, the embedded derivative will be measured at fair value with subsequent changes recognized in income.

Comprehensive Income

Comprehensive income is the change in shareholders' equity during a period from transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive income, if applicable, is included in the shareholders' equity section of the balance sheet. The components of the new category will include unrealized gains and losses on financial instruments classified as available-for-sale and the effective portion of cash flow hedges. Utility Group had no "other comprehensive income/loss" transactions during the nine months ended September 30, 2007.

As at January 1, 2007 no transitional adjustments had been made to the opening balance of retained earnings or to the opening balance of accumulated other comprehensive income arising from the adoption of sections 1530, 3855, and 3865.

Regulation

AUI and Heritage Gas engage in the delivery and sale of natural gas and are regulated by the EUB and the NSUARB, respectively. The EUB 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 EUB 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. UPDATE TO SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For the gas processing facilities and natural gas properties, net additions to property, plant and equipment are depreciated upon being brought into active service. Depletion of natural gas properties is provided using the unit of production method based upon estimated proven reserves before royalties. Depreciation of gathering and processing equipment is provided on a straight-line basis over the assets' 20-year estimated useful life.

4. PROPERTY, PLANT AND EQUIPMENT



As at September 30, 2007 As at December 31, 2006
Accumu- Accumu-
lated lated
amorti- Net book amorti- Net book
Cost zation value Cost zation value
----------------------------------------------------------------------------
Transmission and
distribution
systems $ 173,364 $ 66,682 $ 106,682 $ 162,895 $ 61,173 $ 101,722

Buildings,
equipment and
administrative 28,565 11,045 17,520 26,619 10,925 15,694

Gas processing
facilities 5,621 46 5,575 - - -
Natural gas
properties 3,594 41 3,553 - - -
Other 618 535 83 916 609 307

----------------------------------------------------------------------------
$ 211,762 $ 78,349 $ 133,413 $ 190,430 $ 72,707 $ 117,723

----------------------------------------------------------------------------
----------------------------------------------------------------------------


On July 31, 2007 Utility Group acquired a 33.3335 percent interest in Ikhil for $9.2 million including costs of acquisition from AltaGas Income Trust (the Trust). 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. Ikhil is proportionately consolidated, with operating results included in these Consolidated Financial Statements from the date of acquisition.



Net Assets Acquired

----------------------------------------------------------------------------
Gas processing facilities $ 5,621
Natural gas properties 3,594
----------------------------------------------------------------------------
$ 9,215
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. SHARE CAPITAL

Net Income (Loss) Per Share

The options outstanding for the three months ended September 30, 2007 and September 30, 2006 are not included in the computation of diluted common shares outstanding as Utility Group realized a net loss during this period and the effect would be anti-dilutive.

Stock Option Plan

Utility Group has an employee share option plan under which both employees and directors are eligible to receive grants. At September 30, 2007, 818,990 shares were reserved for issuance under the plan. To September 30, 2007 options granted under the plan had a term of 10 years to expiry and vested no longer than over a four-year period.

Options outstanding under the plan have a weighted average exercise price of $7.26 and a weighted average remaining term of 8.6 years. Stock option compensation expense charged to operating and administrative expense for the quarter ended September 30, 2007 was $52,000 (2006 - $59,000), and for the nine months ended September 30, 2007 was $0.2 million (2006 - $0.2 million), with a corresponding increase to contributed surplus.



Nine months ended Year ended
September 30, 2007 December 31, 2006
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Weighted Weighted
Number of average Number of average
options exercise price options exercise price
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Stock options
outstanding,
beginning
of period 310,500 $ 7.25 170,000 $ 7.50

Granted 4,000 7.78 150,500 6.98

Cancelled - - (10,000) 7.50

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Stock options
outstanding,
end of period 314,500 $ 7.26 310,500 $ 7.25

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Exercisable at end
of period 83,875 $ 7.51 80,000 $ 7.50

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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. The expense recognized for these plans is as follows:



Three months ended Nine months ended
September 30 September 30

2007 2006 2007 2006
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Defined benefit plans $ 234 $ 280 $ 703 $ 843
Defined contribution plan 41 26 123 78
Other post-employment benefit
plans 48 50 145 151
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$ 323 $ 356 $ 971 $ 1,072
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7. 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 Nine months ended
September 30 September 30

2007 2006 2007 2006

----------------------------------------------------------------------------
Accounts receivable $ (546) $ (8) $ 15,778 $ 23,031

Inventory, prepaid expenses and
deferred charges 159 332 (335) (155)

Accounts payable and accrued
liabilities 5,133 3,290 (10,124) (17,218)

Deferred cost of gas, net of
income taxes (694) (211) 199 1,090

Income and other taxes payable (1,023) (821) (331) (52)

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3,029 2,582 5,187 6,696

Increase in capital costs
receivable (16) (517) (162) (331)

Decrease (increase) in capital
costs payable (1,295) (1,466) (2,183) (1,147)

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Net change in non-cash working
capital related to operations $ 1,718 $ 599 $ 2,842 $ 5,218

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The following cash payments have been included in the determination of net
income:

Three months ended Nine months ended
September 30 September 30

2007 2006 2007 2006

----------------------------------------------------------------------------
Interest paid $ 931 $ 589 $ 2,699 $ 1,393

Income taxes paid $ 189 $ 166 $ 1,103 $ 719

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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 Nine months ended
September 30 September 30

2007 2006 2007 2006

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Fees for administration, management
and other services paid by:

Utility Group to the Trust $ 8 $ 8 $ 23 $ 23

The Trust to Utility Group $ 42 $ 90 $ 126 $ 255

The Trust to AUI $ 3 $ 3 $ 7 $ 31

Ikhil to Inuvik Gas (1) $ 85 $ 147 $ 262 $ 288

Fees for operating services paid
by AUI to the Trust $ 164 $ 149 $ 307 $ 343

Gas purchases for resale by
Inuvik Gas from Ikhil (1) $ 25 $ 106 $ 843 $ 731

Transportation services provided
by AUI to the Trust $ 118 $ 137 $ 361 $ 421

Gas purchases for resale by AUI
from the Trust $ 5,283 $ 4,586 $ 56,810 $ 51,760

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(1) Transactions occuring prior to July 31, 2007.


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 September 30, 2007 is $0.1 million ($0.7 million at December 31, 2006) due to Utility Group from the Trust.

Included in accounts payable and accrued liabilities at September 30, 2007 is $2.3 million ($21.0 million at December 31, 2006) due from Utility Group to the Trust.

On July 31, 2007 Utility Group acquired a 33.3335 percent interest in Ikhil for $9.2 million, including costs of acquisition from 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.

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 66,000 customers in three areas of Canada through an infrastructure of nearly 20,000 kilometres of pipelines. Utility Group also 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.

Utility Group's 8.2 million common shares began trading on the Toronto Stock Exchange under the symbol AUI on November 17, 2005.

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