AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

February 27, 2009 16:43 ET

AltaGas Utility Group Inc. Announces Record 2008 Results and a Quarterly Dividend of $0.05 Per Share

CALGARY, ALBERTA--(Marketwire - Feb. 27, 2009) - AltaGas Utility Group Inc. (Utility Group) (TSX:AUI) today announced net income of $5.9 million ($0.73 per share) for the year ended December 31, 2008 compared to $4.6 million ($0.56 per share) in 2007. A dividend was declared of $0.05 per common share payable on April 15, 2009 to shareholders of record at the close of business on March 31, 2009.

The 2008 net income was $1.3 million higher than 2007 primarily due to $0.7 million from rate base growth of 13.5 percent in 2008 and $0.7 million from a full year of income from the acquisition of Ikhil on July 31, 2007. Contributions from lower average interest rates on Utility Group's debt, and colder weather in 2008 compared to 2007 were offset by higher corporate operating and administrative costs. Gas volume consumption in 2007 was greater than expected when rates were set, resulting in 2007 net income being $0.4 million higher than normal. Gas volume consumption in 2008 was normal, and consequently the year did not benefit from the volume variance that contributed to 2007 earnings.

"Utility Group had a great year in 2008", said Patricia Newson, President and Chief Executive Officer of Utility Group. "Our record net income is a testament to the quality of Utility Group's investments, which will generate utility income for years to come. The Ikhil acquisition on July 31, 2007 is performing very well, and system growth to meet customer demand kept the Alberta team busy managing almost $24 million of investment projects. Heritage Gas also invested approximately $24 million, mainly in Dartmouth and on the Halifax Peninsula to service record numbers of new residential and commercial customers."

Net income for the three months ended December 31, 2008 was $2.8 million (2007 - $2.5 million) or $0.35 per share (2007 - $0.31 per share). The $0.3 million increase in net income for the fourth quarter comprised $0.2 million from rate base growth at AltaGas Utilities Inc. and Heritage Gas, $0.2 million from an increase in the price received for natural gas at Ikhil and $0.2 million from lower average interest rates on Utility Group's debt, partially offset by higher corporate operating and administrative costs of $0.3 million.

Utility Group's regulated businesses are allowed the opportunity to earn a return on invested rate base that is intended to provide shareholders with a fair return on investment and to cover the cost of debt. AltaGas Utilities Inc's net rate base increased to $113.1 million in 2008 from $105.2 million in 2007, or 7.5 percent. Heritage Gas' weighted average rate base increased 58.0 percent to $91.8 million (Utility Group's proportionate share - $22.9 million) for 2008 from $58.1 million (Utility Group's proportionate share - $14.5 million) in 2007.

Utility Group expects customer growth in 2009 at AUI to return to historic levels of approximately two percent. Utility Group has filed applications to grow consolidated rate base by approximately 13 percent with additional spending on system betterment and general plant at AltaGas Utilities Inc. along with Heritage Gas' continued development in its franchise areas. Subject to regulatory approvals, rate base growth should drive a similar growth in regulatory net income. Utility Group is well positioned in the marketplace to provide shareholders with consistent, reliable and accretive value during the coming year.



Financial and Operating Highlights

(unaudited, in millions of Canadian dollars except per share amounts or
otherwise indicated)

----------------------------------------------------------------------------
Q4 2008 Q4 2007 2008 2007
----------------------------------------------------------------------------
Revenue 48.3 41.1 154.6 134.0
Net revenue (1) 14.5 13.1 49.8 43.1
EBITDA (1) 6.9 6.6 21.2 18.2
Operating income (1) 4.6 4.5 12.2 10.4
Net income 2.8 2.5 5.9 4.6
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Total assets 240.6 212.8 240.6 212.8
Current liabilities 41.0 37.9 41.0 37.9
Long-term liabilities 126.0 105.2 126.0 105.2

Net income per share - basic $ 0.35 $ 0.31 $ 0.73 $ 0.56
Net income per share - diluted $ 0.35 $ 0.31 $ 0.73 $ 0.56

Deliveries (PJs) (2) 7.7 7.4 24.4 23.9
Service sites at period end 71,034 68,225 71,034 68,225
Degree day variance (percent) 1.2 1.3 3.1 0.8
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(1) Net revenue, earnings before interest, taxes, and depreciation and
amortization (EBITDA) and operating income are not measures under
Canadian Generally Accepted Accounting Principles (GAAP) and may not be
comparable to similar measures presented by other companies. Management
believes that this presentation provides useful information to investors
and shareholders as it provides increased predictive value and
performance trends. A reconciliation of these non-GAAP measures is set
out below.
(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).


Non-GAAP Financial Measures

($ millions)

----------------------------------------------------------------------------
Q4 2008 Q4 2007 2008 2007
----------------------------------------------------------------------------
Net revenue 14.5 13.1 49.7 43.1
Add: Cost of natural gas 33.8 28.0 104.8 90.9
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Revenue (GAAP financial measure) 48.3 41.1 154.5 134.0
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EBITDA 6.9 6.6 21.1 18.2
Deduct: Depreciation and amortization 2.3 2.1 9.0 7.8
Interest expense 1.1 1.4 4.8 4.6
Income taxes (3) 0.7 0.6 1.5 1.2
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Net income (GAAP financial measure) 2.8 2.5 5.8 4.6
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----------------------------------------------------------------------------
Operating income 4.6 4.5 12.1 10.4
Deduct: Interest expense 1.1 1.4 4.8 4.6
Income taxes (3) 0.7 0.6 1.5 1.2
----------------------------------------------------------------------------
Net income (GAAP financial measure) 2.8 2.5 5.8 4.6
----------------------------------------------------------------------------
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(3) Income taxes consist of current and future income taxes.


FORWARD-LOOKING STATEMENTS

This news release contains forward-looking statements. When used in this news release, 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 the Corporation, are intended to identify forward-looking statements. In particular, this news release 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 the Corporation's current views with respect to future events based on certain material factors and assumptions and are subject to certain risks and uncertainties, including without limitation, changes in market, competition, governmental or regulatory developments, general economic conditions and other factors set out in the Corporation's public disclosure documents. Many factors could cause the Corporation's actual results, performance or achievements to vary from those described in this news release, including without limitation those listed above. 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 news release as intended, planned, anticipated, believed, sought, proposed, estimated or expected, and accordingly such forward-looking statements included in, or incorporated by reference in this news release, should not be unduly relied upon. Such statements speak only as of the date of this news release. The Corporation does not intend, and does not assume any obligation, to update these forward-looking statements. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

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 the Utility Group's website or directly through the SEDAR system at www.sedar.com.



ALTAGAS UTILITY GROUP INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)

($ thousands)
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December 31 December 31
As at 2008 2007
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ASSETS
Current assets
Cash $ 519 $ 747
Accounts receivable 36,359 28,932
Inventory 235 270
Regulatory assets (note 3) 535 1,722
Income and other taxes recoverable 1,049 -
Future income tax asset 14 15
Prepaid expenses and deferred charges 2,613 1,077
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41,324 32,763
Property, plant and equipment 157,718 141,220
Goodwill 31,575 31,575
Regulatory assets (note 3) 8,118 6,377
Future income tax asset 220 99
Investments and other assets 1,680 785
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$ 240,635 $ 212,819
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 1,055 $ 1,666
Accounts payable and accrued liabilities 38,508 35,116
Dividends payable 406 328
Income and other taxes payable 141 282
Future income tax liability 46 444
Regulatory liabilities (note 3) 889 61
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41,045 37,897
Long-term debt (note 5) 121,730 101,917
Asset retirement obligations (note 4) 222 -
Customer deposits and other liabilities 3,661 3,157
Future income tax liability 415 150
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167,073 143,121
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Shareholders' equity (note 6)
Share capital 60,713 61,278
Contributed surplus 933 490
Retained earnings 12,409 7,930
Accumulated other comprehensive loss (493) -
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73,562 69,698
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$ 240,635 $ 212,819
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See accompanying notes to the interim consolidated financial statements


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

($ thousands)
----------------------------------------------------------------------------
Three months ended Year ended
December 31 December 31
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
Common shares, beginning of period $ 61,278 $ 61,278 $ 61,278 $ 61,278
Common shares purchased and
cancelled (565) - (565) -
----------------------------------------------------------------------------
Common shares, end of period 60,713 61,278 60,713 61,278
----------------------------------------------------------------------------

Contributed surplus, beginning of
period 662 415 490 257
Contributed surplus on common shares
purchased 188 - 188 -
Stock-based compensation 83 75 255 233
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Contributed surplus, end of period 933 490 933 490
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Retained earnings, beginning of
period 10,013 5,711 7,930 4,516
Net income 2,801 2,547 5,949 4,602
Dividends declared (405) (328) (1,470) (1,188)
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Retained earnings, end of period 12,409 7,930 12,409 7,930
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Accumulated other comprehensive
loss, beginning of period (113) - - -
Unrealized loss on available for
sale investment (380) - (493) -
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Accumulated other comprehensive
loss, end of period (493) - (493) -
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Shareholders' equity $ 73,562 $ 69,698 $ 73,562 $ 69,698
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----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


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

($ thousands except per share amounts)
----------------------------------------------------------------------------
Three months ended Year ended
December 31 December 31
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
REVENUE (note 11) $ 48,345 $ 41,098 $ 154,633 $ 134,026
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EXPENSES
Cost of natural gas (note 11) 33,763 28,008 104,754 90,881
Operating and administrative
(note 11) 7,642 6,497 28,588 24,947
Depreciation, depletion and
amortization 2,295 2,078 9,036 7,787
----------------------------------------------------------------------------
43,700 36,583 142,378 123,615
----------------------------------------------------------------------------
Operating income 4,645 4,515 12,255 10,411
Interest expense 1,143 1,338 4,800 4,587
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Income before income taxes 3,502 3,177 7,455 5,824
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Income taxes (recovery)
Current income taxes 980 634 1,674 1,245
Future income taxes (279) (4) (168) (23)
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701 630 1,506 1,222
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Net income $ 2,801 $ 2,547 $ 5,949 $ 4,602
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Net income per share
Basic and diluted $ 0.35 $ 0.31 $ 0.73 $ 0.56

Number of shares outstanding
Basic 8,114,405 8,189,905 8,114,405 8,189,905
Diluted 8,114,405 8,189,905 8,114,754 8,199,387


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

($ thousands)
----------------------------------------------------------------------------
Three months ended Year ended
December 31 December 31
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
Net income $ 2,801 $ 2,547 $ 5,949 $ 4,602
Other comprehensive loss
Unrealized loss on available for sale
investment, net of tax of $0.1
million (380) - (493) -
----------------------------------------------------------------------------
Comprehensive income $ 2,421 $ 2,547 $ 5,456 $ 4,602
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----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


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

($ thousands)
----------------------------------------------------------------------------
Three months ended Year ended
December 31 December 31
For the 2008 2007 2008 2007
----------------------------------------------------------------------------
CASH FROM OPERATIONS
Net income $ 2,801 $ 2,547 $ 5,949 $ 4,602
Items not involving cash:
Revenue deficiency accrual (583) (339) (2,418) (1,707)
Allowance for funds used during
construction (57) (145) (313) (448)
Depreciation, depletion and
amortization 2,295 2,078 9,036 7,787
Operating and administrative
expense 496 171 1,537 1,525
Future income taxes (279) (4) (168) (23)
Other 82 76 255 233
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Funds generated from operations 4,755 4,384 13,878 11,969
Net change in non-cash working
capital (note 10) (688) (3,499) (3,206) (1,062)
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4,067 885 10,672 10,907
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INVESTING ACTIVITIES
Additions to property, plant and
equipment (12,136) (9,648) (28,257) (26,817)
Increase (decrease) in accounts
payable related to property, plant
and equipment (note 10) (925) 3,160 (1,748) 5,343
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(13,061) (6,488) (30,005) (21,474)
Business acquisition - - - (9,255)
Contributions in aid of
construction (net of
related accounts receivable) 296 (825) 3,406 4,135
Proceeds on disposition of
property, plant and equipment 37 130 88 167
Investment in regulatory assets and
investments and other assets 116 (961) (2,327) (1,998)
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(12,612) (8,144) (28,838) (28,425)
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FINANCING ACTIVITIES
Increase (decrease) in short-term
debt 511 1,069 (611) (555)
Increase in long-term debt 8,880 6,744 19,813 19,393
Increase in customer deposits and
other liabilities 142 87 505 237
Common shares purchased for
cancellation (377) - (377) -
Dividends paid (368) (287) (1,392) (1,106)
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8,788 7,613 17,938 17,969
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Change in cash 243 354 (228) 451
Cash, beginning of period 276 393 747 296
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Cash, end of period $ 519 $ 747 $ 519 $ 747
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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, 2008. 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.

Asset Retirement Obligations

Certain of Utility Group's long-lived tangible assets owned by its subsidiaries and operating affiliates will have future legal obligations on retirement but an asset retirement obligation has not been recorded for the transmission and distribution systems assets due to their indeterminate life, and corresponding indeterminable timing and scope of these asset retirement obligations.

For those long-lived tangible assets where the timing and scope of asset retirement obligations can be reasonably determined, Utility Group recognizes asset retirement obligations as a liability in the period in which a reasonable estimate of the timing and amount of the obligation can be determined. The related asset retirement obligation is capitalized as part of the carrying amount of the asset and is depreciated over the estimated useful life of the asset. The liability is increased due to the passage of time over the estimated period to the settlement of the obligation, with a corresponding charge to operating and administrative expense on the income statement.

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 processes 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. Intangible assets of $4.6 million as at December 31, 2008, currently presented as property, plant and equipment, are expected to be reclassified and separately presented as intangible assets on the balance sheet.

The CICA issued removed 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.

It is anticipated that adoption will impact Utility Group as follows:

- Reserves for future removal and site restoration costs for AUI, which are currently netted against property, plant and equipment, is expected to be reclassified to non-current liabilities, resulting in an increase to Utility Group's total assets and liabilities. The amount of such future removal and site restoration costs at December 31, 2008 was $15.9 million;

- Unrecorded future income tax assets and liabilities that exist upon adoption of the amendments to Section 3465 will be recorded in acordance with the amended Section. The amount of unrecorded future tax assets and liabilities at December 31, 2008 are $0.9 million and $6.3 million respectively.

- Utility Group is currently researching other impacts of the adoption of these standards.

In February 2008 the Canadian Accounting Standards Board (AcSB) announced that publicly accountable enterprises will be required to adopt International Financial Reporting Standards (IFRS) for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Utility Group expects that the adoption of IFRS will impact accounting policies, financial reporting, information systems, and business processes. Utility Group is in the process of determining 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. However, if in management's judgment a reasonable estimate can be made regarding the impact a pending decision will have on the current financial statements, an estimate will be recorded for the expected impact.



3. REGULATORY ASSETS AND LIABILITIES, NET OF INCOME TAXES

December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Regulatory assets - current
Deferred CEO/CFO certification costs $ 314 $ 340
Deferred cost of gas 221 1,235
Deferred property taxes - 147
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535 1,722
----------------------------------------------------------------------------
Regulatory assets - non current
Deferred CEO/CFO certification costs - 340
Deferred charges 134 69
Future recovery of other retirement benefits 1,291 1,693
Revenue deficiency account 6,693 4,275
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$ 8,118 $ 6,377
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Regulatory liabilities - current
Deferred property taxes $ 63 $ -
Deferred cost of gas 32 (27)
Deferred regulatory costs 794 88
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$ 889 $ 61
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4. ASSET RETIREMENT OBLIGATIONS

December 31, 2008
----------------------------------------------------------------------------
Balance, beginning of period $ -
Present value of estimated cash flow 218
Accretion 4
----------------------------------------------------------------------------
Balance, end of period $ 222
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----------------------------------------------------------------------------


Effective September 30, 2008, Utility Group determined its portion of the estimate of undiscounted future cash required to settle the asset retirement obligations at Ikhil to be $1.0 million. The asset retirement obligations are expected to be incurred in 2028 and have been recorded in the financial statements at estimated values discounted at a rate of eight percent and an inflation rate of two percent. No assets have been legally restricted for settlement of the estimated liability.

5. DEBT

On November 17, 2005 Utility Group entered into an unsecured extendible revolving credit facility with a syndicate of Canadian chartered banks for $100.0 million with a term to November 17, 2008. The maturity date was extendible upon consent of each lender for further successive one-year periods. On October 19, 2006 the lenders granted Utility Group a one-year extension to November 17, 2009. On November 29, 2007 the agreement was amended to increase the facility to $130.0 million and extend the maturity date to November 17, 2010. On September 17, 2008 Utility Group notified the lenders that it would not extend the current November 17, 2010 maturity date.



6. SHARE CAPITAL

Issued and Outstanding

Number Amount
----------------------------------------------------------------------------
Common shares - September 30, 2008 8,189,905 $ 61,278
Shares purchased by Utility Group
and cancelled (75,500) (565)
----------------------------------------------------------------------------
Common shares - December 31, 2008 8,114,405 $ 60,713
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock Option Plan

Utility Group has an employee share option plan under which employees and directors are eligible to receive grants. To December 31, 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 8.61 years (December 31, 2007 - 8.86 years).

Stock option compensation expense charged to operating and administrative expense for the three month period ended December 31, 2008 was $0.1 million (2007 - $nil million), and for the year ended December 31, 2008 was $0.3 million (2007 - $0.2 million), with a corresponding increase to contributed surplus.



Year ended Year ended
December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
----------------------------------------------------------------------------
Stock options outstanding,
beginning of period 473,500 $ 7.12 310,500 $ 7.25
Granted 268,500 5.77 163,000 6.84
Expired (18,750) 7.15 - -
Forfeited (67,250) 6.95 - -
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Stock options outstanding, end of
period 656,000 $ 6.57 473,500 $ 7.12
----------------------------------------------------------------------------
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Exercisable at end of period 235,750 $ 7.29 157,625 $ 7.38
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7. CAPITAL MANAGEMENT STRATEGY

Utility Group's objectives when managing capital are to efficiently manage its 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. It is expected that Utility Group's funds from operations and undrawn capacity on existing bank lines will provide sufficient liquidity and capital resources to fund existing operations in 2009 and the majority of its anticipated capital requirements. Should financing beyond existing lines be required, Utility Group reasonably expects it will have access to both debt and equity markets.

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 December 31, 2008 and December
31, 2007 were as follows:

December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Debt $ 122,785 $ 103,583
Less: cash (519) (747)
----------------------------------------------------------------------------
Net debt 122,266 102,836
Shareholders' equity 73,562 69,698
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Total capitalization $ 195,828 $ 172,534
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Debt-to-total capitalization ratio
(percent) 62.4 59.6
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8. FINANCIAL INSTRUMENTS

The carrying value of the current financial assets and liabilities of Utility Group approximates their fair value due to their short period to maturity. The carrying amount of long-term debt approximates fair value as the interest rate is based upon market interest rates. The carrying value of long-term debt payable to the Province of Nova Scotia approximates its fair value.

Utility Group manages risk and risk exposures through a combination of internal and disclosure controls and sound business practices.

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 for 2009 funds from operations and undrawn capacity on existing bank lines will be sufficient to fund its existing operations and meet the majority of its anticipated capital requirements. At this time, Utility Group reasonably expects it will have access to its anticipated sources of cash. Should financing beyond existing lines be required, Utility Group reasonably expects it will have access to both debt and equity markets.



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

Maturity December 31, 2008
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Accounts payable and accrued liabilities,
dividends payable and income and other
taxes payable Within 1 year $ 39,055
Demand credit facilities Within 1 year 1,055
Customer deposits Varied 2,695
Revolving term credit facility November 2010 120,732
Loan from Province of Nova Scotia July 2014 998
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$ 164,535
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Market Risk

Interest rate risk

Utility Group is exposed to changes in market interest rates on borrowings under its bank credit facilities. Utility Group borrows at Bankers Acceptance rates, plus a fee structure which is in place through November 2010 on its $140.0 million of bank facilities. Borrowing costs change with changes in Bankers Acceptance rates, and are anticipated to change to reflect market fee structures in 2010 on renewal of its current facilities.

Other price risk

Utility Group holds a publicly listed equity investment that is classified as a non-current available-for-sale financial asset. The investment is recorded at fair value with changes in fair value, net of income taxes, recorded in other comprehensive income.

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



Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
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Interest rate (+/- 25 basis points) $ 72 $ 56 $ 205 $ 155
Market price of equity instrument
(+/- 20%) $ 334 $ 75 $ 334 $ 75
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9. 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 Year ended
December 31 December 31
2008 2007 2008 2007
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Defined benefit plan - AUI $ 271 $ 228 $ 1,098 $ 931
Defined benefit plan - SERP 47 41 179 164
Defined contribution plan 7 10 42 40
Other benefit plans 89 81 226 226
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$ 414 $ 360 $ 1,545 $ 1,361
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10. 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 Year ended
December 31 December 31
2008 2007 2008 2007
----------------------------------------------------------------------------
Accounts receivable $ (19,382) $(18,222) $ (7,427) $ (2,444)
Inventory, prepaid expenses
and deferred charges (1,150) 652 (1,501) 317
Accounts payable and accrued
liabilities 14,972 16,285 3,392 6,161
Regulatory assets and
liabilities 3,505 46 2,015 (626)
Income taxes recoverable 412 - (1,049) -
Income and other taxes payable 377 294 (141) 429
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(1,266) (945) (4,711) 3,837

Adjusted for:
Decrease (increase) from
accounts receivable related to
contributions in aid of
construction (347) 606 (243) 444
Increase (decrease) from
accounts payable related to
property, plant and
equipment 925 (3,160) 1,748 (5,343)

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Net change in non-cash working
capital related to operations $ (688) $ (3,499) $(3,206) $ (1,062)
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Interest and Income Taxes Paid
The following cash payments have been made by Utility Group:

Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
----------------------------------------------------------------------------
Interest paid $ 966 $ 1,254 $ 4,534 $ 4,293
Income taxes paid $ 341 $ 241 $ 2,291 $ 1,344
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11. 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 Year ended
December 31 December 31
2008 2007 2008 2007
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Fees for administration, management,
rent and other services paid by:
Utility Group to AltaGas Income
Trust (the Trust) $ 71 $ 7 $ 219 $ 30
The Trust to Utility Group $ - $ 48 $ - $ 174
The Trust to AUI $ 1 $ 2 $ 4 $ 9
Ikhil to Inuvik Gas (1) $ - $ - $ - $ 262
Fees for operating services paid by
AUI to the Trust $ 229 $ 34 $ 427 $ 341
Gas purchases for resale by Inuvik
Gas from Ikhil (1) $ - $ - $ - $ 843
Transportation services provided by
AUI to the Trust $ 124 $ 117 $ 491 $ 478
Gas purchases for resale by AUI from
the Trust $ 29,215 $ 25,718 $ 96,457 $ 82,527
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(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 December 31, 2007 is $0.1 million due to Utility Group from the Trust.

Included in accounts payable and accrued liabilities at December 31, 2008 are:

- $16.9 million ($13.5 million at December 31, 2007) due from AUI to the Trust; and

- $34 thousand ($20 thousand at December 31, 2007) due from Utility Group to the Trust.

On July 31, 2007 Utility Group acquired a 33.3335 percent interest in Ikhil for $9.0 million from the Trust.

12. 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 71,000 customers in three areas of Canada through an infrastructure of nearly 22,000 kilometres of pipeline. 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.

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