AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

May 11, 2009 09:00 ET

AltaGas Utility Group Inc. Announces Record First Quarter 2009 Results and a Quarterly Dividend Of $0.05 Per Share

CALGARY, ALBERTA--(Marketwire - May 11, 2009) - AltaGas Utility Group Inc. (Utility Group) (TSX:AUI) today announced that net income for the three months ended March 31, 2009 was $5.7 million (three months ended March 31, 2008 - $4.4 million) or $0.71 per share (three months ended March 31, 2008 - $0.54 per share), an increase of $1.3 million. A dividend of $0.05 per common share payable on July 15, 2009 to shareholders of record at the close of business on June 30, 2009 was also declared.

The $1.3 million increase in net income was primarily due to 7.7 percent colder weather in Alberta than the same period last year, the coldest period since the three months ended March 31, 1996; lower average interest rates on Utility Group's debt; rate base average growth of 20 percent at AltaGas Utilities Inc. and Heritage Gas Limited; and an increase in the price received for natural gas at Ikhil. Utility Group also benefited from the comparative temporary timing difference on the recovery of cash income taxes through rates charged to customers in the first quarter of 2008.

"Utility Group had an outstanding start to 2009 with colder than normal weather in all of our franchise areas along with solid rate base growth that is reflected in our record quarter results," said Patricia Newson, President and Chief Executive Officer. "The recent slowdown of the economy in Alberta has brought AltaGas Utilities Inc.'s infill growth through its established franchises back to the 2.5 percent level, typical of historical growth rates in Alberta. Heritage Gas Limited sold more gas in this quarter than in any quarter in its history and is expected to maintain this growth through activation of large commercial and government customers in the balance of 2009."

Utility Group 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 over 20,000 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of financial condition and results of operations dated May 8, 2009 is a review of the results of operations and the liquidity and capital resources of AltaGas Utility Group Inc. (Utility Group) for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The MD&A should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto for the three months ended March 31, 2009 and the audited consolidated financial statements and MD&A contained in Utility Group's Annual Report for the year ended December 31, 2008.

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 financial statements, Annual Information Form, Information Circular and Proxy Statement, material change reports and press releases issued by Utility Group are available through Utility Group's website or directly through the SEDAR system at www.sedar.com.

I. ALTAGAS UTILITY GROUP INC.

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

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

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

II. OVERVIEW OF THE BUSINESS AND STRATEGY

Utility Group owns and operates businesses that deliver and sell natural gas to end users, including regulated natural gas transmission and distribution facilities in Alberta, Nova Scotia and Northwest Territories, Canada and natural gas production and processing facilities in the Northwest Territories. Utility Group's earnings are highly seasonal, with revenues based primarily 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 throughout the year. As a result, Utility Group generates profits during the first and fourth quarters and net losses in the second and third quarters. Deviations in expected weather patterns can affect earnings as the actual volumes of natural gas delivered fluctuate accordingly. As well, volumes are affected by increases in the number of customers or changes in customer usage.

AUI and Heritage Gas operate in regulated marketplaces where they are allowed the opportunity to earn regulated rates of return that provide for recovery of costs and a return on capital from the capital investment base. Return on rate base comprises a recovery of financing costs and a return on common equity that are approved by regulatory authorities. 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 (NW TPC) and Inuvik Gas.

Utility Group's strategy is to grow its existing business through infill and expansion of services within current franchise areas or, in the case of Heritage Gas, to develop new systems in new market areas. In addition, Utility Group actively pursues the prudent acquisition of other utility-type infrastructure and related businesses in Canada. Utility Group's management team and Board of Directors have significant utility and infrastructure asset management, acquisition and capital markets experience. Utility Group believes this experience will ensure prudent management and financing of existing capital commitments to support the expansion of AUI's systems, the growth of the Heritage Gas system and new 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 months ended March 31, 2009 and March 31, 2008.



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Consolidated Financial Results Three months ended March 31
($ millions, except per share amounts or as
otherwise noted) 2009 2008
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Revenue 49.4 58.4
Net revenue (1) 16.0 15.9
Operating income (1) 6.4 7.1
Net income 5.7 4.4
Funds generated from operations (1) 8.2 6.2
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Shares outstanding (thousands)
Basic and diluted 8,114 8,190
Net income per share - basic and diluted $ 0.71 $ 0.54
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(1) Non-GAAP financial measure: see discussion in "Non-GAAP Financial
Measures" section of this MD&A.


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Consolidated Financial Position
($ millions) March 31 December 31
2009 2008
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Total assets 258.2 256.9
Long-term liabilities 151.7 142.3
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1. Discussion of Consolidated Financial Results for the three months ended March 31, 2009

Net income for the three months ended March 31, 2009 was $5.7 million (three months ended March 31, 2008 - $4.4 million) or $0.71 per share (three months ended March 31, 2008 - $0.54 per share), an increase of $1.3 million.

A significant portion of the increase in net income for the three months ended March 31, 2009 compared to the same period in 2008 is temporary and due to timing of the recovery of cash income tax through rates charged to customers in the prior year. Utility Group expects this year over year variance from timing differences to have reversed and be insignificant by the end of 2009. AUI will pay no cash income tax in 2009 compared to paying $1.3 million of tax in 2008.

The remaining portion of the increase in net income was due to 7.7 percent colder weather in Alberta than last year; lower average interest rates on Utility Group's debt; rate base average growth of 15 percent at AUI and Heritage Gas; and an increase in the price received for natural gas at Ikhil. These increases were partially offset by higher unrecovered corporate administrative costs and the change in natural gas volume consumption at AUI. Excluding weather impacts, 2009 natural gas volume consumption was normal while 2008 benefited from unusually high natural gas consumption levels resulting in 2008 net income being higher than expected.

The following table outlines significant net income impacts.



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Net Income Variance Three months ended March 31
($ millions) 2009 2008
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Net income from the comparable prior year
period 4.4 3.8
Net income higher (lower) due to:
Timing of 2008 cash income tax expense and
recovery 0.8 (0.1)
Colder weather than previous period 0.3 0.2
Decrease in short-term borrowing rates 0.3 -
Rate base growth 0.3 0.2
Increase in natural gas price at Ikhil 0.1 -
Ikhil acquisition July 31, 2007 - 0.3
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6.2 4.4
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Net income lower due to:
Corporate and administrative costs and other (0.2) -
2009 natural gas volume consumption normal
while 2008 natural gas volume consumption
higher than expected (0.3) -
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(0.5) -
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Net income 5.7 4.4
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An analysis of Utility Group's revenue and expenses by income statement item follows. Generally, rate-regulated entities such as AUI and Heritage Gas collect operating and administrative, depreciation expenses, and income taxes paid in the rates charged to customers, and therefore, changes in these costs do not impact the net income of Utility Group.

Utility Group generally records income tax each period based on the expected annual cash income tax expense. In 2009, cash taxes at AUI are expected to be nil due to income tax deductions available at AUI from its significant investment to upgrade its billing system making it TBC software compliant as required by the Alberta Utilities Commission (AUC). Consequently as there is no cash income tax to be recovered from customers, revenue, net revenue and operating income will be lower than in 2008 when AUI included tax recoveries. For the three months ended March 31, 2009 Utility Group recorded no income tax (three months ended March 31, 2008 - $1.3 million).

Utility Group's revenue for the three months ended March 31, 2009 decreased by $9.0 million or 15 percent to $49.4 million (three months ended March 31, 2008 - $58.4 million) as a result of a 59 percent decrease in the cost of natural gas. AUI's revenue of $44.9 million comprised 91 percent of consolidated revenue (three months ended March 31, 2008 - $54.9 million or 94 percent). Heritage Gas' revenue of $3.1 million comprised six percent of consolidated revenue (three months ended March 31, 2008 - $2.3 million or four percent). Inuvik Gas and Ikhil revenues of $1.4 million comprised three percent of first quarter 2009 consolidated revenue (three months ended March 31, 2008 - $1.2 million or two percent).

For the three months ended March 31, 2009 Utility Group's net revenue grew by $0.1 million or one percent to $16.0 million (three months ended March 31, 2008 - $15.9 million), after natural gas costs of $33.4 million (three months ended March 31, 2008 - $42.5 million). Net revenue at AUI was $0.2 million lower in 2009 compared to 2008 driven by lower recoverable costs in 2009 and net revenue declines in 2009 from the consumption of natural gas in 2009 being normal while 2008 natural gas volume consumption was higher than expected, partially offset by contributions to net revenue from 7.7 percent colder weather in Alberta in 2009 and a 15 percent growth in AUI's 2009 mid-year rate base over 2008. In 2009, AUI is expecting to pay no current income tax, which reduces AUI's net revenue requirement when compared to 2008. Heritage Gas contributed $0.2 million of the increase largely due to 33 percent growth in its average rate base. Inuvik Gas and Ikhil contributed $0.1 million of the 2009 net revenue increase over 2008.

Operating and administrative expenses increased by nine percent to $7.4 million for the three months ended 2009 (three months ended March 31, 2008 - $6.8 million), primarily due to increased staff costs to support business growth and general cost increases.

Depreciation, depletion and amortization expense increased 10 percent to $2.2 million for the three months ended March 31, 2009 (three months ended March 31, 2008 - $2.0 million) as a result of higher investment in 2008 in property, plant and equipment at AUI and Heritage Gas.

Interest expense for the three months ended March 31, 2009 was $0.7 million (three months ended March 31, 2008 - $1.4 million), a period-over-period decrease of $0.7 million or 50 percent. W hile the average debt outstanding during the first quarter of 2009 increased to $117.5 million (three months ended March 31, 2008 - $104.6 million), average borrowing costs in the first quarter of 2.2 percent were significantly lower than the 4.5 percent incurred in the first quarter of 2008. The increase in average debt funded the capital expansion projects in AUI's and Heritage Gas' franchise areas.



2. Business Operations

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Natural Gas Distribution March 31, 2009 March 31, 2008
Service PJs Service PJs
Sites (1) (2)(3) Sites (1) (2)(3)
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Deliveries (PJ) (1) (2)
AUI End-use 68,507 6.7 66,864 6.6
AUI Transportation 7 1.8 7 1.8
Heritage Gas 2,005 0.2 1,312 0.1
Inuvik Gas 877 0.1 824 0.1
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71,396 8.8 69,007 8.6
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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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AUI Degree Day Variance Three months ended March 31
2009 2008
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Degree day variance from normal (percent) (1) 10.7 3.0
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Degree day variance from prior period (percent) (1) 7.7 5.2
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(1) Degree days relate to AUI's service area. A degree day is the cumulative
extent to which the daily mean temperature falls below 15 degrees
Celsius. Normal degree days are based on a 20-year rolling average.
Positive variances from normal lead to increased delivery volumes from
normal expectations.

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Natural Gas Production Three months ended Three months ended
March 31, 2009 March 31, 2008
GJs(1) Mcf (2) GJs(1) Mcf (2)
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Ikhil production (3) 72,471 68,562 76,988 72,837
Sold to Inuvik Gas (48,518) (45,901) (47,251) (44,703)
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Sold to NWTPC 23,953 22,661 29,737 28,134
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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. Mcf stands for thousand cubic
feet.
(3) Natural gas production reflects Utility Group's proportionate share
(33.3335 percent) of Ikhil.


AUI

AUI's operating income for the three months ended March 31, 2009 was $5.8 million (three months ended March 31, 2008 - $6.0 million). The decrease of $0.2 million in operating income was driven by lower recoverable costs in 2009, primarily income taxes, and net revenue declines in 2009 from the consumption of natural gas in 2009 being normal while 2008 natural gas volume consumption was higher than expected, partially offset by contributions to net revenue from 7.7 percent colder weather in Alberta in 2009 and a 15 percent growth in AUI's 2009 mid-year rate base over 2008.

AUI's market consists primarily of residential and small commercial consumers located in smaller population centres or rural areas of Alberta. AUI completed the period with 68,507 active service sites (three months ended March 31, 2008 - 66,864). In the three months ended March 31, 2009, the growth of AUI's service sites and business occurred through infill growth in established franchises. Infill growth demand for space and water heating fuel within AUI's franchise service areas continues to be concentrated in town distribution systems and relates to servicing new homes and commercial developments with natural gas. AUI serves almost all of the potential market in its existing service areas.

The majority of AUI's service site additions generally occur in the last half of the year as new customers take natural gas service prior to the winter season. AUI service site additions were 227 in the first three months of 2009; down from 680 for the same period of 2008. The decline in the number of service site additions in the first three months of 2009 is due to the current economic slowdown in the Alberta economy resulting in fewer additions than 2008, which benefited from the carry over of 2007's exceptional growth. AUI expects 2009 service site additions to return to historical levels of approximately 2.5 percent.

Heritage Gas

For the three months ended March 31, 2009, Utility Group's share of Heritage Gas' operating income was $0.7 million (three months ended March 31, 2008 - $0.6 million). The growth in operating income is a function of the increased average rate base over the same period in 2008. Utility Group's proportion of Heritage Gas' average rate base for the three months ended March 31, 2009 was $27.5 million (three months ended March 31, 2008 - $20.6 million). In the three months ended March 31, 2009 there were 60 residential (three months ended March 31, 2008 - 58) and 60 commercial (three months ended March 31, 2008 - 41) customer activations. Due to the costs of winter construction in the Halifax area, construction activity generally resumes in May each year.

During 2009, Heritage Gas expects to activate large commercial and government customers on the peninsula, including a number of high-rise office and apartment buildings, the Victoria General Hospital and Oland Brewery. These activations will result in a larger proportion of the revenue requirement being provided by billings to customers.

Inuvik Gas and Ikhil

Inuvik Gas and Ikhil's operating income contributed $1.0 million to Utility Group's results for the three months ended March 31, 2009 (three months ended March 31, 2008 - $0.8 million). The increase is mainly due to a higher price received for natural gas sold to NWTPC. The price charged to NWTPC for natural gas is set on August 1 each year based on the price of diesel. On August 1, 2008, the price increased to $15.21 per GJ from $11.83 per GJ. In March 2009, Ikhil completed a work-over project on one of its two producing wells to optimize well and plant operations.

3. Regulatory Update

AltaGas Utilities Inc.

2007 General Tariff Application (GTA)

On June 6, 2008, AUI applied for a rate rider to recover the difference between the 2007 revenue requirement approved by the AUC and the 2007 revenue charged to customers. In the same application, AUI requested approval of interim 2007 rates based on the approved 2007 revenue requirement in lieu of filing a 2007 GTA Phase 2 application. On October 21, 2008 the AUC issued Decision 2008 -103 that approved the 2007 deficiency rider to collect the 2007 revenue shortfall over four months beginning in November 2008. The AUC also approved AUI's interim rates as proposed, effective November 1, 2008. The interim rates based on the 2007 revenue requirement were those billed to customers for deliveries from November 1, 2008 to February 28, 2009. AUI is accumulating a revenue deficiency accrual for the difference between rates billed to customers and the 2008/2009 revenue requirement submission.

2008/2009 GTA

On July 14, 2008, AUI filed Phase 1 of its 2008/2009 GTA, and updated it on October 10, 2008 and March 3, 2009. AUI is requesting AUC approval for a net rate base of $115.1 million for 2008 and $129.5 million for 2009. This increases AUI's 2007 approved net rate base of $104.4 million by $10.7 million in 2008 and by a total of $25.1 million in 2009. AUI is also requesting approval of a revenue requirement, net of natural gas costs and third-party transportation costs, of $41.1 million for 2008 and $45.2 million for 2009. These are increases of $5.4 million and $9.5 million in each of 2008 and 2009 respectively from AUI's 2007 approved revenue requirement of $35.7 million. The public hearing for the application occurred in April and May 2009. A decision is expected in fall 2009.

On February 11, 2009, the AUC approved interim rates whereby, effective March 1, 2009, AUI will collect through rates billed to customers, approximately 50 percent of the 2009 revenue requirement in excess of the 2008 requirement as applied for in the 2008/2009 GTA. Prior to this increase, AUI was billing its customers interim rates based on those approved in the 2007 GTA. AUI is accumulating a revenue deficiency accrual for the difference between rates billed to customers and the applied for revenue requirement. At March 31, 2009 AUI had a revenue deficiency accrual of $6.9 million (three months ended March 31, 2008 - $4.3 million).

On March 30, 2009, the AUC approved incremental interim rates whereby, effective May 1, 2009, AUI will collect through rates billed to customers, approximately 50 percent or $2.9 million of the 2008 forecast revenue deficiency as applied for in the 2008/2009 GTA. Prior to this increase, AUI was billing its customers interim rates based on those approved on February 11, 2009.

Generic Cost of Capital

Since 2004, the AUC has set the rate of return on equity for all AUC-regulated utilities through a formula based on the long-term Canada bond yields. On April 12, 2008, the AUC initiated a review of the continued use of a generic cost of capital formula in determining the allowed rate of return on equity (GCC Proceeding). AUI is a participant in the GCC Proceeding hearing scheduled to commence on May 19, 2009. Later in 2009, the AUC is expected to decide on the method to be used to determine utilities' allowed rate of return on equity. The AUC has determined an interim placeholder for return on equity for 2009 of 8.75 percent. As part of the GCC Proceeding, AUI has applied for an 11.00 percent return on equity, and a 54/46 debt to equity capital structure.

Heritage Gas

On September 12, 2008, Heritage Gas filed a GTA with the NSUARB requesting a series of natural gas rate increases from 2009 to 2011 to supersede the previous 2.5 percent annual increases. On February 12, 2009, the NSUARB issued its decision approving Heritage Gas' application for rate increases, and suspending recovery of depreciation expense for the period of 2009 to 2011. The suspension of depreciation expense in the determination of the revenue requirement will not impact net income for Heritage Gas, but will accelerate the recovery of Heritage Gas' Revenue Deficiency Account (RDA) balance. The suspended depreciation is expected to be recognized over the remaining life of the property, plant and equipment, beginning 2012. The following was confirmed by the NSUARB decision:

- Escalating tariffs and rates approved through December 31, 2011;

- Capital structure of 55 percent debt and 45 percent equity;

- Cost of debt of 8.75 percent;

- Rate of return on equity of 13.0 percent; and

- Indefinite use of the RDA with a forecast recovery in 2019.

The RDA is based on the difference between Heritage Gas' actual revenue billed and the revenue required to earn the rates of return approved by the NSUARB. In Heritage Gas' current customer development stage, the actual revenue billed is less than the revenue required to earn the approved rates of return and therefore the RDA asset accumulates. As the distribution network matures, the actual revenue billed is expected to exceed the revenue required to earn the approved rates of return and the RDA will be drawn down. The NSUARB has granted permission to use the RDA until such time as it is drawn down to zero. Utility Group's proportionate share of the RDA balance at March 31, 2009 was $6.8 million (December 31, 2008 - $6.7 million).

4. Non-GAAP Financial Measures

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



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Net revenue Three months ended March 31
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($ millions) 2009 2008
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Net revenue 16.0 15.9
Add: Cost of natural gas 33.4 42.5
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Revenue (GAAP financial measure) 49.4 58.4
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Management believes that net revenue better reflects operating performance than does revenue as changes in the market price of natural gas purchased for resale affect both revenue and the cost of natural gas.



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Operating income Three months ended March 31
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($ millions) 2009 2008
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Operating income 6.4 7.1
Deduct: Interest expense 0.7 1.4
Income taxes (1) - 1.3
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Net income (GAAP financial measure) 5.7 4.4
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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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Funds generated from operations Three months ended March 31
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($ millions) 2009 2008
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Funds generated from operations 8.2 6.2
Net change in non-cash working capital (0.2) (9.2)
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Cash from operations (GAAP financial measure) 8.0 (3.0)
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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.

5. Critical Accounting Estimates

Since a determination of the value of many assets, liabilities, revenues and expenses depends 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, 2008. With respect to estimates, the most critical of these policies are those related to rate regulation, determination of pension and other employee benefits, amortization and depreciation expense, goodwill impairment assessment and asset retirement obligations. Actual results may differ from these estimates.

6. Changes in Accounting Policies

Effective January 1, 2009 Utility Group prospectively adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064 - Goodwill and Intangible Assets. This new section establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. As a result of adopting this section, Utility Group reclassified $8.1 million of land rights, franchise consents, and computer software previously included in property, plant and equipment to intangible assets on January 1, 2009. Prior year comparative balances were also reclassified to conform to current year presentation.

Effective January 1, 2009 Utility Group prospectively adopted the changes to CICA Handbook Section 1100 - GAAP, pertaining to the application of that Section to the recognition and measurement of assets and liabilities arising from rate regulation. As a result of adopting these changes, Utility Group reclassified $16.3 million of reserves for future removal and site restoration costs previously netted against property, plant and equipment to non-current regulatory liabilities on January 1, 2009. Prior year comparative balances were also reclassified to conform to current year presentation.

Effective January 1, 2009 Utility Group prospectively adopted the changes to CICA Handbook Section 3465 - Income Taxes, to require the recognition of future income tax liabilities and assets as well as corresponding regulatory assets or liabilities for the amount of future income taxes expected to be included in future rates and recovered from or paid to future customers. As a result of adopting these changes, Utility Group recognized $8.4 million of previously unrecognized future income tax liabilities and an offsetting regulatory asset, and $1.1 million of previously unrecognized future income tax assets and an offsetting regulatory liability. Prior year comparative balances were not affected as a result of the adoption of these changes.

7. Transactions with Related Parties

For the three months ended March 31, 2009 Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $29.9 million (three months ended March 31, 2008 - $42.2 million). Utility Group also incurred $0.1 million (three months ended March 31, 2008 - $0.1 million) for operating services and office space provided by the Trust. The Trust purchased transportation from Utility Group for $0.1 million (three months ended March 31, 2008 - $0.1 million).

8. Summary of Eight Recently Completed Quarters

The table below sets forth selected data from Utility Group's consolidated financial statements for the eight recently completed quarters ended March 31, 2009. This information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2008 and related notes thereto as well as the MD&A for the year ended December 31, 2008.



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2009 2008 2007
($ millions) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
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Net revenue (1) 16.0 14.5 9.0 10.4 15.9 13.1 7.6 8.1
Operating income (loss) (1) 6.4 4.6 (0.1) 0.6 7.1 4.5 (0.5) 0.3
Net income (loss) 5.7 2.8 (1.0) (0.3) 4.4 2.5 (1.2) (0.5)
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2009 2008 2007
($ per share) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
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Net income (loss)
Basic and diluted 0.71 0.35 (0.12) (0.04) 0.54 0.31 (0.14) (0.07)
Dividends declared 0.050 0.050 0.045 0.045 0.040 0.040 0.035 0.035
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(1) Non-GAAP financial measure. See "Non-GAAP Financial Measures" section of
this MD&A.


Utility Group's earnings are highly seasonal, as distribution revenues are primarily based on the demand for space heating in the winter months, mainly from November to March. Costs 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 that are different than anticipated as well as continued rate base growth and regulatory decisions. Increases in the number of customers or changes in customer usage are examples of other factors that might typically affect volumes.

IV. UTILITY GROUP'S FINANCIAL POSITION

The following table outlines the significant changes in the consolidated balance sheet of Utility Group at March 31, 2009 compared to December 31, 2008.



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Balance Sheet Item Increase
($ millions) (decrease) Explanation
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Accounts receivable (10.2) Reduction reflects seasonally lower
volumes of natural gas
delivered and lower natural gas prices
at the end of the first quarter
of 2009 compared to December 2008.

Intangible assets 1.6 Increase due to investment in Tariff
Billing Code software at AUI.

Regulatory assets 8.9 Increase mainly due to the regulatory
asset associated with the
recognition of future tax liability
previously not recorded by rate
regulated entities.

Accounts payable and (14.2) Reduction reflects seasonally lower
accrued liabilities natural gas volumes purchased
and lower natural gas prices at the end
of the first quarter of 2009
compared to December 2008.

Future income tax 8.5 Increase mainly due to the recognition
liability of future tax liabilities
previously not recorded by rate
regulated entities.
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V. INVESTED CAPITAL

Utility Group categorizes its invested capital into new business, system
betterment and natural gas supply and general plant. The invested capital
reflected in the following tables is the net cash invested.


----------------------------------------------------------------------------
Net Capital Invested Three months ended March 31
----------------------------------------------------------------------------
($ millions) 2009 2008
----------------------------------------------------------------------------
Invested capital:
Property, plant and equipment 5.1 6.3
Intangible assets 1.3 -
Regulatory and other assets 0.4 1.5
----------------------------------------------------------------------------
6.8 7.8
----------------------------------------------------------------------------
Contributions and disposals:
Contributions in aid of construction (0.3) (1.3)
----------------------------------------------------------------------------
(0.3) (1.3)
----------------------------------------------------------------------------
Investing activities 6.5 6.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Net Capital Invested Three months ended March 31
----------------------------------------------------------------------------
($ millions) 2009 2008
----------------------------------------------------------------------------
Invested capital:
New business 4.4 4.0
System betterment and natural gas supply 0.7 1.3
General plant 1.3 1.0
Regulatory and other assets 0.4 1.5
----------------------------------------------------------------------------
6.8 7.8
----------------------------------------------------------------------------
Contributions in aid of construction:
New business (0.3) (1.0)
System betterment and natural gas supply - (0.3)
----------------------------------------------------------------------------
Investing activities 6.5 6.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the three months ended March 31, 2009, net capital invested by Utility Group is $6.5 million (three months ended March 31, 2008 - $6.5 million). The significant investments included:

- $5.9 million (three months ended March 31, 2008 - $6.0 million) at AUI which funded infill expansion primarily in the Leduc, Grand Cache and Athabasca franchise areas and a portion of the TBC software;

- $0.3 million (three months ended March 31, 2008 - $0.3 million) at Heritage Gas which funded expansion primarily in Dartmouth and on the Halifax peninsula;

- $0.2 million (three months ended March 31, 2008 - $nil) at Ikhil to fund operational optimization work-over costs.

VI. LIQUIDITY AND CAPITAL RESOURCES



----------------------------------------------------------------------------
Cash Position Three months ended March 31
----------------------------------------------------------------------------
($ millions) 2009 2008
----------------------------------------------------------------------------
Cash, beginning of period 0.5 0.8
Cash from operations 8.0 (3.0)
Investing activities (6.5) (6.5)
Financing activities (1.9) 9.5
----------------------------------------------------------------------------
Cash, end of period 0.1 0.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash from Operations

Cash provided from operations for the three months ended March 31, 2009 was $8.0 million (three months ended March 31, 2008 - used $3.0 million). Utility Group's operating cash flows may fluctuate significantly during the period due to working capital changes driven by seasonality, weather, natural gas prices, collections from customers and regulatory lag. Significant working capital changes impacting the overall changes to cash from operations include the following:

Accounts Receivable

March accounts receivable are usually lower than December accounts receivable due to normal, seasonally lower delivered volumes of natural gas. At March 2009, the effect of the seasonally lower volumes was compounded by a 29 percent lower purchase price for natural gas in March 2009 compared to December 2008. In March 2008, accounts receivable increased by $3.7 million from December 31, 2007 due to higher sales revenue driven by 31 percent higher natural gas prices, cold weather and an increase in the revenue deficiency accrual at AUI for 2008 business. The net collection of accounts receivable over the three months ended March 31, 2009 contributed $10.3 million (three months ended March 31, 2008 - reduced $3.7 million) to cash from operations.

Prepaid Expenses and Deferred Charges

At March 31, 2009, inventory, prepaid expenses and deferred charges decreased by $1.3 million from December 31, 2008 due to the receipt of gas that had been paid for in advance. In the same period in 2008, prepaid expenses and deferred charges increased by $1.4 million.

Accounts Payable

March accounts payable are usually lower than December accounts payable due to normal, seasonally lower purchased volumes of natural gas. At March 2009, the effect of the seasonally lower volumes was compounded by lower purchase price for natural gas in March 2009 compared to December 2008. The net payment of accounts payable over the three months ended March 31, 2009 reduced cash from operations by $13.4 million (three months ended March 31, 2008 - $5.3 million).

Investing Activities

During the three months ended March 31, 2009, cash used in investing activities was $6.5 million (three months ended March 31, 2008 - $6.5 million).

Cash invested in property, plant and equipment and intangible assets for the three months ended March 31, 2009 of $6.4 million (three months ended March 31, 2008 - $6.3 million) was partially offset by contributions in aid of construction of $0.3 million (three months ended March 31, 2008 - $1.3 million). Utility Group invested $0.4 million (three months ended March 31, 2008 - $1.5 million) in regulatory assets and investments and other assets.

Financing Activities

During the three months ended March 31, 2009, cash used in financing activities was $1.9 million (three months ended March 31, 2008 - provided $9.5 million). Utility Group repaid $1.6 million (three months ended March 31, 2008 - drew $9.8 million) under its bank lines. The $11.4 million quarter-over-quarter change in financing was mainly a result of increased funds from operations in 2009 and changes in non-cash working capital. Utility Group received $0.1 million (three months ended March 31, 2008 - $0.1 million) from customer deposits and other liabilities. Utility Group paid $0.4 million, or $0.05 per share, of dividends in the three months ended March 31, 2009 (three months ended March 31, 2008 - $0.3 million or $0.04 per share).

Capital Resources

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 capital requirements. Based on the timing of AUI's 2008/2009 GTA decision and the collection of the revenue deficiency accrual anticipated at AUI, existing bank lines may not be adequate to fund the balance of Utility Group's anticipated capital for 2009. If the 2008/2009 GTA decision is delayed into late 2009 or 2010, Utility Group may be required to both defer certain discretionary capital expenditures to later years and access financing beyond existing lines. Acquisitions that require financing beyond existing lines would require new debt and equity capital. At this time, given the generally low risk credit profile of its utility businesses and its established banking relationships with its current syndicate and other banks, Utility Group expects that it will continue to have access to its anticipated sources of liquidity. Utility Group also believes that, while costly, it will have access to both private and public equity markets to fund accretive organic or acquisition growth. Any acquisition will, as is Utility Group's normal practice, be evaluated as to its accretive value to current shareholders given then current capital market conditions, and will only be entered into if it meets Utility Group's targets.

The use of debt or equity funding is based on maintaining Utility Group's capital structure in an operating range which is determined by considering the norms and risks associated with each of its businesses, its bank covenant and the capital structures deemed by the AUC and NSUARB for AUI and Heritage Gas. Utility Group targets to operate at a debt to total capitalization ratio range centered on approximately 60 percent. Utility Group's debt to total capitalization ratio as at March 31, 2009 was 60.6 percent (December 31, 2008 - 62.4 percent). The ratio has decreased since December 31, 2008 mainly due to cash from operations reducing debt balances from Utility Group's seasonally high earnings.

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.



----------------------------------------------------------------------------
Credit Facilities Drawn at Drawn at
March 31, December 31,
($ millions) 2009 2008
----------------------------------------------------------------------------
Demand operating credit facility - 1.1
Revolving, term credit facility 120.2 120.7
Loan from Province of Nova Scotia 1.0 1.0
----------------------------------------------------------------------------
121.2 122.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The Province of Nova Scotia loan of $5.6 million (Utility Group's share
- $1.4 million) is recorded at its fair value of $3.9 million for the
three months ended March 31, 2009 (Utility Group's share - $1.0 million)
compared to $4.0 million (Utility Group's share - $1.0 million) as at
December 31, 2008.


As at March 31, 2009 Utility Group had banking arrangements as follows:

- A demand operating credit facility with a Canadian chartered bank for $10.0 million under which prime rate loans, U.S. bank rate loans, letters of credit, bankers' acceptances and LIBOR loans may be drawn, repayable in full upon demand. While there were no draws against this facility as of March 31, 2009 (December 31, 2008 - $1.1 million), letters of credit of $1.4 million (December 31, 2008 - $1.4 million) were issued under the facility.

- An extendible revolving credit facility with a syndicate of Canadian chartered banks for $130.0 million under which prime rate loans, U.S. bank rate loans, letters of credit, bankers' acceptances or LIBOR loans may be drawn, repayable on November 17, 2010. At March 31, 2009 bankers' acceptances with short-term maturities of $120.2 million (December 31, 2008 - $120.7 million) were outstanding.

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

All the borrowing facilities have financial tests and other covenants customary for these types of facilities, which must be met at each quarter-end. At March 31, 2009, as at each quarter end since the facilities were established, Utility Group was in compliance with these covenants.

VII. SHARE CAPITAL



----------------------------------------------------------------------------
Capital Stock and Stock Options
----------------------------------------------------------------------------
May 8, March 31, December 31,
2009 2009 2008
----------------------------------------------------------------------------
Common shares outstanding 8,113,905 8,113,905 8,114,405
Stock options outstanding 656,000 656,000 656,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


VIII. OFF-BALANCE-SHEET ARRANGEMENTS

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

IX. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

Utility Group maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under securities law is accumulated and communicated to management, including the President and Chief Executive Officer and the Vice President Controller and Corporate Secretary, as appropriate, to allow timely decisions regarding required disclosure.

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. During the quarter ended March 31, 2009 there were no material changes to Utility Group's internal controls over financial reporting.

X. FUTURE ACCOUNTING CHANGES

The Canadian Accounting Standards Board announced in 2008 that Canadian GAAP, as used by publicly accountable enterprises will fully converge with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Utility Group will be required to report using the converged standards effective for interim and annual financial statements relating to fiscal years beginning no later than on or after January 1, 2011. Utility Group has selected January 1, 2011 as its adoption date.

The IASB currently has projects underway that may result in new IFRS pronouncements which differ from their current form. Accordingly, uncertainty remains as to the ultimate impact of IFRS on Utility Group.

XI. RISKS AND UNCERTAINTIES

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

Utility Group's ability to recover the actual costs of providing service and to earn the approved rates of return depends on achieving the forecasts established in the rate-setting process. Utility Group manages its utility regulatory risk through a combination of skilled regulatory departments, relationships with regulators and proactive regulatory strategies. Utility Group reduces its other risks and uncertainties through a combination of insurance, internal controls and sound business practices.

XII. OUTLOOK

In 2009, Utility Group's management expects that the operating businesses will perform according to the business plans approved by its Boards and proposed to its regulators.

AUI will continue to pursue growth in its existing franchise areas and is well positioned to capture opportunities arising in its service areas around Edmonton, Alberta. AUI began 2009 with 322 applications for service carried forward from 2008. While this is down from 732 in the previous year, it represents a significant base of applications for service for 2009. New housing starts in the three months ended March 31, 2009 were 227 compared to 680 in the same period in 2008. The recent slowdown in the economy is expected to continue to depress new housing starts and subdivision development is expected to decline for the reminder of 2009 compared to 2008. As a result of the retraction in the new housing market, Utility Group expects customer growth of approximately 2.5 percent in 2009, which is more typical of historical growth rates than was the 4.1 percent customer growth rate in 2008.

AUI's 2008/2009 GTA forecasts 2009 rate base growth of approximately 15 percent, the highest in AUI's recent history. This is due to the full-year impact of capital investment from the prior year and anticipated 2009 capital spending on new business, system betterment and general plant. AUI has applied for capital approval to enhance information systems, including $8.9 million to complete the upgrade of AUI's billing system to make it TBC compliant as required by the AUC. This project represents the largest individual capital expenditure in AUI's history and is expected to be completed and in rate base in 2009. As well this year, capital expenditures on system betterment projects will upgrade and reinforce AUI's natural gas distribution infrastructure to ensure that it continues to deliver safe, dependable service to customers and value to shareholders in current and future periods.

For the first quarter of 2009, Heritage Gas connected 120 new customers, a 21 percent increase from 2008. W hile the economic slowdown is expected to temper Heritage Gas' growth forecasts for the remainder of 2009, the higher cost of heating oil compared to natural gas and customer awareness of the environmental benefits of natural gas are expected to continue to support customer activations in 2009, including a number of high-load customers on the Halifax Peninsula.

Management will continue to evaluate organic and acquisition opportunities on an ongoing basis, and will pursue capital spending that will provide accretive value to existing shareholders. This evaluation will include consideration of the rising cost of capital for both equity and debt instruments, and whether opportunities must be acted on immediately, or could be delayed to future periods, while still meeting customer demand and maintaining a safe and dependable system.



ALTAGAS UTILITY GROUP INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)

($ thousands)
----------------------------------------------------------------------------
March 31 December 31
As at 2009 2008
----------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 76 $ 519
Accounts receivable 26,161 36,359
Inventory 228 235
Regulatory assets (note 3) 463 535
Income and other taxes recoverable 1,582 1,049
Future income tax asset 14 14
Prepaid expenses and deferred charges 1,228 2,613
----------------------------------------------------------------------------
29,752 41,324
Property, plant and equipment 167,321 165,835
Intangible assets (note 2) 9,722 8,107
Goodwill 31,575 31,575
Regulatory assets (note 3) 17,001 8,118
Future income tax asset 1,315 220
Investments and other assets 1,508 1,680
----------------------------------------------------------------------------
$ 258,194 $ 256,859
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ - $ 1,055
Accounts payable and accrued liabilities (note 8) 24,318 38,508
Dividends payable 406 406
Income and other taxes payable 1,220 141
Future income tax liability - 46
Regulatory liabilities (note 3) 1,773 889
----------------------------------------------------------------------------
27,717 41,045
Long-term debt 121,199 121,730
Asset retirement obligations 227 222
Customer deposits and other liabilities 3,695 3,619
Future income tax liability 8,910 415
Regulatory liabilities (note 3) 17,663 16,266
----------------------------------------------------------------------------
179,411 183,297
----------------------------------------------------------------------------
Shareholders' equity
Share capital (note 4) 60,709 60,713
Contributed surplus (note 4) 1,017 933
Retained earnings 17,740 12,409
Accumulated other comprehensive loss (683) (493)
----------------------------------------------------------------------------
78,783 73,562
----------------------------------------------------------------------------
$ 258,194 $ 256,859
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


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

($ thousands)
----------------------------------------------------------------------------
Three months ended March 31
For the 2009 2008
----------------------------------------------------------------------------
Common shares, beginning of period $ 60,713 $ 61,278
Common shares purchased and cancelled (note 4) (4) -
----------------------------------------------------------------------------
Common shares, end of period 60,709 61,278
----------------------------------------------------------------------------
Contributed surplus, beginning of period 933 490
Contributed surplus on common shares
purchased 2 -
Stock-based compensation (note 4) 82 82
----------------------------------------------------------------------------
Contributed surplus, end of period 1,017 572
----------------------------------------------------------------------------
Retained earnings, beginning of period 12,409 7,930
Net income 5,737 4,444
Dividends declared (406) (327)
----------------------------------------------------------------------------
Retained earnings, end of period 17,740 12,047
----------------------------------------------------------------------------
Accumulated other comprehensive loss,
beginning of period (493) -
Unrealized loss on available-for-sale
investment (190) (29)
----------------------------------------------------------------------------
Accumulated other comprehensive loss, end of
period (683) (29)
----------------------------------------------------------------------------
Shareholders' equity $ 78,783 $ 73,868
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 March 31
For the 2009 2008
----------------------------------------------------------------------------
REVENUE (note 8) $ 49,436 $ 58,428
----------------------------------------------------------------------------

EXPENSES
Cost of natural gas (note 8) 33,423 42,546
Operating and administrative (note 8) 7,433 6,842
Depreciation, depletion and amortization 2,163 1,952
----------------------------------------------------------------------------
43,019 51,340
----------------------------------------------------------------------------
Operating income 6,417 7,088
Interest expense 715 1,341
----------------------------------------------------------------------------
Income before income taxes 5,702 5,747
----------------------------------------------------------------------------
Income taxes (recovery)
Current income taxes 105 1,463
Future income taxes (140) (160)
----------------------------------------------------------------------------
(35) 1,303
----------------------------------------------------------------------------
Net income $ 5,737 $ 4,444
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income per share
Basic and diluted $ 0.71 $ 0.54

Number of shares outstanding
Basic 8,113,905 8,189,905
Diluted 8,113,905 8,190,307


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

($ thousands)
----------------------------------------------------------------------------
Three months ended March 31
For the 2009 2008
----------------------------------------------------------------------------
Net income $ 5,737 $ 4,444
Other comprehensive loss
Unrealized loss on available-for-sale
investment, net of tax (683) (29)
----------------------------------------------------------------------------
Comprehensive income $ 5,054 $ 4,415
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


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

($ thousands)
----------------------------------------------------------------------------
Three months ended March 31
For the 2009 2008
----------------------------------------------------------------------------
CASH FROM OPERATIONS
Net income $ 5,737 $ 4,444
Items not involving cash:
Revenue deficiency accrual (103) (425)
Allowance for funds used during construction (78) (55)
Depreciation, depletion and amortization 2,163 1,952
Operating and administrative expense 352 103
Future income taxes (140) (160)
Recovery of future removal and site
restoration costs 299 231
Other (72) 82
----------------------------------------------------------------------------
Funds generated from operations 8,158 6,172
Net change in non-cash working capital (note 7) (216) (9,135)
----------------------------------------------------------------------------
7,942 (2,963)
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (3,627) (5,201)
Investment in intangible assets (1,940) (2)
Decrease in accounts payable related to
property, plant and equipment and
intangible assets (note 7) (819) (1,088)
----------------------------------------------------------------------------
(6,386) (6,291)
Contributions in aid of construction (net of
related accounts receivable) (note 7) 308 1,288
Proceeds on disposition of property, plant
and equipment 11 -
Investment in regulatory assets and
investments and other assets (400) (1,540)
----------------------------------------------------------------------------
(6,467) (6,543)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Decrease in short-term debt (1,055) (1,166)
Increase (decrease) in long-term debt (531) 10,956
Increase in customer deposits and other
liabilties 76 50
Common shares purchased for cancellation (note 4) (2) -
Dividends paid (406) (327)
----------------------------------------------------------------------------
(1,918) 9,513
----------------------------------------------------------------------------
Change in cash (443) 7
Cash, beginning of period 519 747
----------------------------------------------------------------------------
Cash, end of period $ 76 $ 754
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


AltaGas Utility Group Inc.

Selected Notes to the Consolidated Financial Statements

(Tabular amounts in thousands of dollars unless otherwise indicated)

1. STRUCTURE AND NATURE OF OPERATIONS

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

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

Changes in Accounting Policies

Effective January 1, 2009 Utility Group prospectively adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064 - Goodwill and Intangible Assets. This new section establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. As a result of adopting this section, Utility Group reclassified $8.1 million of land rights, franchise consents, and computer software previously included in property, plant and equipment to intangible assets on January 1, 2009. Prior year comparative balances were also reclassified to conform to current year presentation.

Effective January 1, 2009 Utility Group prospectively adopted the changes to CICA Handbook Section 1100 GAAP pertaining to the application of that Section to the recognition and measurement of assets and liabilities arising from rate regulation. As a result of adopting these changes, Utility Group reclassified $16.3 million of reserves for future removal and site restoration costs previously netted against property, plant and equipment to non-current regulatory liabilities on January 1, 2009. Prior year comparative balances were also reclassified to conform to current year presentation.

Effective January 1, 2009 Utility Group prospectively adopted the changes to CICA Handbook Section 3465 - Income Taxes, to require the recognition of future income tax liabilities and assets as well as a separate regulatory asset or liability for the amount of future income taxes expected to be included in future rates and recovered from or paid to future customers. As a result of adopting these changes, Utility Group recognized $8.4 million of previously unrecognized future income tax liabilities and an offsetting regulatory asset, and $1.1 million of previously unrecognized future income tax assets and an offsetting regulatory liability. Prior year comparative balances were not affected as a result of the adoption of these changes.

Future Accounting Changes

In February 2008 the Canadian Accounting Standards Board 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 (NW TPUB), 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 judgement 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



December 31,
March 31, 2009 2008
----------------------------------------------------------------------------
Regulatory assets - current
Deferred CEO/CFO certification costs $ 235 $ 314
Deferred cost of gas 228 221
----------------------------------------------------------------------------
$ 463 $ 535
----------------------------------------------------------------------------
Regulatory assets - non current
Deferred depreciation $ 159 $ -
Deferred charges 147 134
Future recovery of other retirement benefits 1,314 1,291
Future recovery of income tax 8,585 -
Revenue deficiency account 6,796 6,693
----------------------------------------------------------------------------
$ 17,001 $ 8,118
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Regulatory liabilities - current
Deferred property taxes $ 638 $ 63
Deferred regulatory tax 209 -
Deferred cost of gas - 32
Deferred regulatory costs 926 794
----------------------------------------------------------------------------
$ 1,773 $ 889
----------------------------------------------------------------------------
Regulatory liabilities - non current
Future payment of income tax $ 758 $ -
Future removal and site restoration costs 16,565 16,266
----------------------------------------------------------------------------
$ 17,323 $ 16,266
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. SHARE CAPITAL

Issued and Outstanding
Number Amount
----------------------------------------------------------------------------
Common shares - December 31, 2008 8,114,405 $ 60,713
Shares purchased by Utility Group and cancelled (500) (4)
----------------------------------------------------------------------------
Common shares - March 31, 2009 8,113,905 $ 60,709
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock Option Plan

Utility Group has an employee share option plan under which employees and directors are eligible to receive grants. To March 31, 2009 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 8.37 years (December 31, 2008 - 8.61 years).

Stock option compensation expense charged to operating and administrative expense for the three month period ended March 31, 2009 was $0.1 million (2008 - $0.1 million), with a corresponding increase to contributed surplus.



Three months ended Year ended
March 31, 2009 December 31, 2008
----------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
----------------------------------------------------------------------------
Stock options outstanding,
beginning
of period 656,000 $ 6.57 473,500 $ 7.12
Granted - - 268,500 5.77
Expired - - (18,750) 7.15
Forfeited - - (67,250) 6.95
----------------------------------------------------------------------------
Stock options outstanding, end of
period 656,000 $ 6.57 656,000 $ 6.57
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at end of period 238,250 $ 7.30 235,750 $ 7.29
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. 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 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 March 31, 2009 and December 31, 2008 were as follows:



March 31, December 31,
2009 2008
----------------------------------------------------------------------------
Debt $ 121,199 $ 122,785
Less: cash (76) (519)
----------------------------------------------------------------------------
Net debt 121,123 122,266
Shareholders' equity 78,783 73,562
----------------------------------------------------------------------------
Total capitalization $ 199,906 $ 195,828
----------------------------------------------------------------------------
Debt-to-total capitalization ratio (percent) 60.6 62.4
----------------------------------------------------------------------------
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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. 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 March 31
2009 2008
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Defined benefit plan - AUI $ 386 $ 273
Defined benefit plan - SERP 29 39
Defined contribution plan 12 12
Other benefit plans 45 46
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$ 472 $ 370
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7. SUPPLEMENTAL CASH FLOW INFORMATION

Net Change in Non-Cash Working Capital

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



Three months ended March 31
2009 2008
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Accounts receivable $ 10,198 $ (3,674)
Inventory, prepaid expenses and deferred
charges 1,392 (1,585)
Accounts payable and accrued liabilities (14,190) (6,406)
Regulatory assets and liabilities 956 404
Income and other taxes recoverable (533) -
Income and other taxes payable 1,079 1,038
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(1,098) (10,223)
Adjusted for:
Change from accounts receivable and accounts
payable related to contributions in aid of
construction 63 -
Change from accounts payable related to
property, plant and equipment and intangible
assets 819 1,088
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Net change in non-cash working capital
related to operations $ (216) $ (9,135)
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Interest and Income Taxes Paid
The following cash payments were made during the period:

Three months ended March 31
2009 2008
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Interest paid $ 803 $1,278
Income taxes paid $ 471 $ 752
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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 March 31
2009 2008
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Fees for administration, management, rent and
other services paid by:
Utility Group to AltaGas Income Trust (the
Trust) $ 57 $ 46
The Trust to AUI $ 1 $ 1
Fees for operating services paid by AUI to
the Trust $ 78 $ 68
Transportation services provided by AUI to
the Trust $ 117 $ 120
Gas purchases for resale by AUI from the
Trust $ 29,911 $ 42,172
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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 payable and accrued liabilities at March 31, 2009 are:

- $6.9 million ($16.9 million at December 31, 2008) due from AUI to the Trust; and

- $58 thousand ($34 thousand at December 31, 2008) due from Utility Group to the Trust.

9. SEASONALITY

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

ABOUT ALTAGAS UTILITY GROUP INC.

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

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