AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

August 02, 2006 09:00 ET

AltaGas Utility Group Inc. Announces Second Quarter 2006 Earnings and a Quarterly Dividend of $0.03 Per Share

CALGARY, ALBERTA--(CCNMatthews - Aug. 2, 2006) - The Board of Directors of AltaGas Utility Group Inc. (Utility Group or the Corporation) (TSX:AUI) today announced a net loss of $0.7 million ($0.09 per share) for the second quarter of 2006 and net income of $2.5 million ($0.31 per share) for the six months ended June 30, 2006. Results are representative of a normal second quarter in which losses are usually reported as a result of the seasonal nature of the natural gas distribution business, resulting in declines in delivered volumes in the spring. A dividend of $0.03 per common share payable on October 16, 2006 to shareholders of record at the close of business on September 29, 2006 was also declared.

"Our second full quarter of operating results reflects the usual delivery declines after the end of the winter heating season and also a warmer than normal spring," said Patricia Newson, President and Chief Executive Officer. "The Alberta regulatory decision disallowing a portion of our debt costs was a disappointment and we are preparing a Review and Variance application asking the EUB to reconsider its decision."

Net revenue for the first six months of 2006 was $1.0 million lower than expected. Warmer than normal weather and net regulatory adjustments reduced Utility Group's net revenue below expectations by $0.7 million and $0.6 million, respectively, and were offset by a $0.3 million contribution from higher usage and customer growth. Regulatory adjustments include Alberta Energy and Utilities Board (EUB) decisions on debt and operating costs, partially offset by a change in the method of billing for the fixed charge component of AltaGas Utilities Inc.'s delivery rates.

For the first six months of 2006, operating income was $5.1 million, which includes a second quarter operating loss of $0.6 million. After interest expense of $1.6 million and income tax expense of $1.0 million, the resulting net income for the first half of the year was $2.5 million. Funds generated from operations were $6.1 million in the first half of 2006, including $1.0 million contributed in the second quarter.

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 63,000 customers in three areas of Canada through a delivery infrastructure of nearly 20,000 kilometers of pipe. Utility Group intends to pursue opportunities to invest in high quality utility companies with long-term, stable returns.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of financial condition and results of operations dated August 2, 2006 is a review of the results of operations and the liquidity and capital resources of AltaGas Utility Group Inc. (Utility Group or the Corporation) for the three and six months ended June 30, 2006. The MD&A should be read in conjunction with the accompanying unaudited Consolidated Financial Statements of Utility Group for the three and six months ended June 30, 2006 and the notes thereto and with the audited Consolidated Financial Statements and MD&A contained in the Corporation's annual report for the period ended December 31, 2005.

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 the Corporation or an affiliate of the Corporation, 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 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 MD&A, 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 MD&A as intended, planned, anticipated, believed, sought, proposed, estimated or expected, and 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. The Corporation does not intend, and does not assume any obligation, to update these forward-looking statements. The forward-looking statements contained in this MD&A 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 Corporation's website or directly through the SEDAR system at www.sedar.com.

ALTAGAS UTILITY GROUP INC. FINANCIAL RESULTS

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 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 interest in Heritage Gas Limited (Heritage Gas) and a one-third interest in Inuvik Gas Ltd. (Inuvik Gas). The businesses operated by Utility Group are natural gas distribution utilities that are highly seasonal, as revenues are primarily based on the demand for space heating in the winter months, mainly from November to March.

The natural gas distribution businesses owned by the Corporation deliver natural gas primarily for heating purposes, and therefore report higher delivery volumes, revenue and earnings in colder periods than in warmer periods. Higher revenues are received in the first and fourth quarters due to high physical volume of gas delivery during the winter heating season. Costs, on the other hand, are generally incurred more uniformly over the year. This typically results in profitable first and fourth quarters and net losses in the second and third quarters.

Earnings can be impacted during the winter months by warmer than normal weather and result in lower net revenue than anticipated. New customers and higher than normal usage are some of the factors that would typically offset the impact of warmer weather. At Heritage Gas, the revenue required in addition to billed revenue to result in net income that reflects the return on equity allowed by the regulator is offset by recording a revenue deficiency accrual.

Utility Group's financial information and the related discussion of financial results in this MD&A are for the three and six months ended June 30, 2006. Utility Group commenced business operations with the November 17, 2005 acquisition of AUHI, and the operating results of AUHI are consolidated from that date forward. The businesses owned by AUHI have operated for several years. Management has provided selected current and historical information for the business of AUHI in this MD&A for the three and six months ending June 30, 2006 and 2005. See discussion in "AltaGas Utility Holdings Inc. Results of Operations" section of this MD&A.



Consolidated Financial Results Three months Six months
($ millions except per share ended ended
amounts or otherwise noted) June 30, 2006 June 30, 2006
------------------------------------------------------------------------
Revenue 15.7 74.1
Net revenue(1) 6.3 18.3
EBITDA(1) 1.4 9.1
Operating income (loss)(1) (0.6) 5.1
Net income (loss) (0.7) 2.5

Funds generated from operations(1) 1.0 6.1

Total assets 155.5 155.5
Current liabilities 14.7 14.7
Long-term liabilities 76.1 76.1

Weighted average number of shares
outstanding (thousands)
Basic 8,190 8,190
Diluted 8,215 8,213

Net income (loss) per share - Basic
and diluted $ (0.09) $ 0.31
------------------------------------------------------------------------

(1) Non-GAAP financial measure. See discussion in "Non-GAAP Financial
Measures" section of this MD&A.


Quarter Ended June 30, 2006

The Corporation reported a net loss for the three months ended June 30, 2006 of $0.7 million. The net loss comprised an operating loss of $0.6 million and $0.8 million of interest expense, offset by a $0.7 million income tax recovery. The net operating loss is largely reflective of the normal seasonality of the natural gas distribution business, but the bottom line loss was greater than anticipated by $0.1 million due to 19 percent warmer than normal weather in Alberta, and by $0.3 million due to a regulatory decision allowing a lower than requested recovery in rates of interest expense on a $30 million, five-year debenture. The net loss was partially offset by lower than anticipated operating and administrative expenses.

Utility Group's revenue for the quarter ended June 30, 2006 was $15.7 million. Revenues from AUI comprised approximately 94 percent of consolidated revenue for the quarter, while Heritage Gas contributed $0.6 million and Inuvik Gas contributed $0.3 million. Revenue was lower than anticipated largely due to warmer than normal weather in all three operating business service areas.

The Corporation reported net revenue, after natural gas costs of $9.4 million, of $6.3 million for the quarter ended June 30, 2006. AUI contributed net revenue of $5.7 million. Heritage Gas and Inuvik Gas contributed $0.4 million and $0.2 million, respectively, to net revenue in the quarter. Net revenue was lower than anticipated due to warmer than normal weather and the debt rate decision, partially offset by revenue growth from the Heritage Gas distribution system. Gas costs are charged through to customers.

Operating and administrative expenses for the three months ended June 30, 2006 were $4.8 million, lower than anticipated as the budgeted staff complement is not expected to be reached until the latter half of the year and since some operating expenses have been delayed.

Utility Group's interest expense for the three months ended June 30, 2006 was $0.8 million, reflecting average borrowing on the term credit facilities for the quarter of $70.0 million with an average interest rate of 4.7 percent.

Income tax recovery in second quarter 2006 of $0.7 million was impacted by higher deductions for tax purposes as a result of pension funding payments, higher deferred costs than were amortized and taxes on deferred cost of gas balances at AUI, which under utility board regulation accounts for income tax expense using the taxes payable method and so reports only income tax due on current earnings.

Year-to-date June 30, 2006

Net income for the six months ended June 30, 2006 was $2.5 million, comprising operating income of $5.1 million, offset by $1.6 million of interest expense and $1.0 million of income tax expense.

The net income for the first half of 2006 was $0.3 million lower than anticipated due to 9 percent warmer than normal weather and an additional $0.3 million lower due to the regulatory decision on the debenture. The shortfall from anticipated net income was partially offset by a one-time increase of $0.3 million due to the change in billing for fixed charges in the first quarter and by lower than anticipated operating and administrative expenses.

Utility Group's revenue for the six months ended June 30, 2006 was $74.1 million. Revenues from AUI comprised approximately 97 percent of consolidated revenue. For the six-month period, growth in delivered volumes due to new connections at AUI and Heritage Gas was more than offset by reductions due to the warmer than normal weather in Alberta and Nova Scotia.

The Corporation reported net revenue, after natural gas costs of $55.8 million, of $18.3 million for the six months ended June 30, 2006, lower than anticipated due to warmer than normal weather.

Operating and administrative expenses for the six months ended June 30, 2006 were $9.2 million, lower than anticipated as the budgeted staff complement is not expected to be reached until the latter half of the year and since some operating expenses have been delayed.

Utility Group's $4.0 million of depreciation and amortization expense for the six months was approximately 86 percent related to property, plant and equipment and the remainder was related to amortization of deferred charges.

Utility Group's interest expense for the six months ended June 30, 2006 was $1.6 million, reflecting average borrowing on the term credit facilities for the first half of the year of $70.6 million, with an average interest rate of 4.4 percent.

Income tax expense of $1.0 million during the first half of 2006 was recorded primarily by AUI, which under utility board regulation accounts for income tax expense using the taxes payable method and so reports only income tax due on current earnings.

Regulatory Update

On October 28, 2005, AUI filed an application for approval to issue a $30 million, five-year debenture to AUHI with an all-in interest rate of 7.05 percent. The debenture replaced a $30 million, five-year debenture to AUHI that bore interest at 7.42 percent and matured on October 4, 2005. On May 24, 2006 the EUB issued Decision 2006-049, allowing AUI to issue the $30 million debenture to AUHI, but disallowing the all-in rate of 7.05 percent, instead approving an interest rate of 5.44 percent. An adjustment of $0.5 million was recorded in second quarter 2006 to reverse the disallowed interest recovery booked in 2005 and for the first quarter of 2006. The net impact of the reversal was to reduce net income by $0.3 million. The 161 basis point disallowance reduces the revenue anticipated based on the 7.05 percent applied for by $0.5 million per year, and anticipated net income by $0.3 million. AUI is preparing a Review and Variance Application to request that the EUB reconsider its decision.

AUI will be filing an application for Phase 2 of its 2005/2006 General Rate Application (GRA) in August 2006. This application will update the delivery tariffs and will address the directives issued by the EUB in Decision 2005-029 (the 2003/2004 Phase 2 GRA). These directives relate to unbundling (or separating out) within rates certain customer care costs and modifying some allocations within the cost of service study. These directives will have no impact on total cost of service or on the Corporation's financial results.

AUI plans to file a Phase 1 GRA in the fourth quarter of 2006 for a 2007/2008 test period.

Heritage Gas expects to file a General Tariff Application this fall, targeting a hearing date for late October 2006.

Non-GAAP Financial Measures

Utility Group provides financial measures in this Management's Discussion and Analysis 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 shown below.

Non-GAAP information is also provided for AUHI for the three and six months ended June 30, 2005. The reader is cautioned that the AUHI results are provided as information only and may include transactions that may no longer be pertinent as a result of its ownership by Utility Group, and do not include transactions incurred by Utility Group directly.



Utility Group AUHI
------------------------------------------------------------------------
Three months Six months Three months Six months
ended ended ended ended
Net revenue June 30, June 30, June 30, June 30,
($ millions) 2006 2006 2005(1) 2005(1)
------------------------------------------------------------------------
Net revenue 6.3 18.3 6.8 18.5
Add: Cost of
natural gas 9.4 55.8 15.2 49.9
------------------------------------------------------------------------
Revenue
(GAAP financial
measure) 15.7 74.1 22.0 68.4
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) The selected AUHI financial information for the three and six months
ended June 30, 2005 was extracted from unaudited interim comparative
Consolidated Financial Statements of AUHI included in the
preliminary Prospectus filed by Utility Group on August 29, 2005.


Management believes that net revenue better reflects performance than does revenue. Since changes in the market price of natural gas purchased for resale affect both revenue and the cost of natural gas, net revenue better reflects growth in the business.



Utility Group AUHI
------------------------------------------------------------------------
Three months Six months Three months Six months
ended ended ended ended
Operating Income June 30, June 30, June 30, June 30,
($ millions) 2006 2006 2005(1) 2005(1)
------------------------------------------------------------------------
Operating income
(loss) (0.6) 5.1 0.2 5.5
Deduct:Interest --------------------------
expense 0.8 1.6 --------------------------
Income taxes (0.7) 1.0
----------------------------------------------
Net income (loss)
(GAAP financial
measure) (0.7) 2.5
----------------------------------------------
----------------------------------------------
(1) The selected AUHI financial information for the three and six months
ended June 30, 2005 was extracted from unaudited interim comparative
Consolidated Financial Statements of AUHI included in the
preliminary Prospectus filed by Utility Group on August 29, 2005.


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 subsidiaries.



Utility Group AUHI
------------------------------------------------------------------------
Three months Six months Three months Six months
ended ended ended ended
EBITDA June 30, June 30, June 30, June 30,
($ millions) 2006 2006 2005(1) 2005(1)
------------------------------------------------------------------------
EBITDA 1.4 9.1 2.4 9.8
Deduct:Depreciation --------------------------
and --------------------------
amortization 2.0 4.0
Interest
expense 0.8 1.6
Income taxes (0.7) 1.0
----------------------------------------------
Net income (loss)
(GAAP financial
measure) (0.7) 2.5
----------------------------------------------
----------------------------------------------
(1) The selected AUHI financial information for the three and six months
ended June 30, 2005 was extracted from unaudited interim comparative
Consolidated Financial Statements of AUHI included in the
preliminary Prospectus filed by Utility Group on August 29, 2005.


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



Utility Group
------------------------------------------------------------------------
Three months Six months
ended ended
Funds Generated from Operations June 30, June 30,
($ millions) 2006 2006
------------------------------------------------------------------------
Funds generated from operations 1.0 6.1
Add: Net change in non-cash working capital 2.2 4.6
------------------------------------------------------------------------
Cash from operations (GAAP financial measure) 3.2 10.7
------------------------------------------------------------------------
------------------------------------------------------------------------


Funds generated from operations are provided to assist in determining the Corporation's ability to generate cash from operations, after interest and taxes, without regard to changes in non-cash working capital in the period.

ALTAGAS UTILITY HOLDINGS INC. RESULTS OF OPERATIONS

The businesses acquired on the acquisition of AUHI by Utility Group on November 17, 2005 have operated for many years. Selected financial information is provided for AUHI, which owns 100 percent of AUI, an indirect 24.9 percent interest in Heritage Gas and a one-third interest in Inuvik Gas. Management believes that information regarding the results of operations of AUHI for the three and six months ended June 30, 2005 will be useful in helping the reader assess the operations of Utility Group. The reader is cautioned that the AUHI results are provided as information only and may include transactions that may no longer be pertinent as a result of its ownership by Utility Group, and do not include transactions incurred by Utility Group directly.

The natural gas distribution businesses owned by the Corporation deliver natural gas primarily for heating purposes, and therefore report higher delivery volumes, revenue and earnings in colder periods than in warmer periods. Higher revenues are received in the first and fourth quarters, due to high gas delivery during the winter heating season. Costs on the other hand, are generally incurred more uniformly over the year. This typically results in profitable first and fourth quarters and net losses in the second and third quarters. Factors which can offset the impact of the seasonality of the business are new customers and higher usage.



Selected Financial
and Operating
Information of
AltaGas Utility Three months Three months Six months Six months
Holdings Inc. ended ended ended ended
($ millions except June 30, June 30, June 30, June 30,
as otherwise noted) 2006 2005(1) 2006 2005(1)
------------------------------------------------------------------------

Revenue 15.7 22.0 74.1 68.4
Net revenue(2) 6.3 6.8 18.3 18.5
EBITDA(2) 1.7 2.4 9.4 9.8
Operating income
(loss)(2) (0.3) 0.2 5.4 5.5
------------------------------------------------------------------------

Deliveries (PJ):(3)
End-use 2.3 2.6 8.1 8.5
Transportation 2.5 2.2 4.9 4.7
------------------------------------------------------------------------
4.8 4.8 13.0 13.2
------------------------------------------------------------------------

Customers at quarter end 63,191 61,772 63,191 61,772
Degree Day variance
(percent)(4) (18.8) (4.2) (9.4) (2.4)
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) The financial information for the three and six months ended June
30, 2005 was extracted from the unaudited interim comparative
Consolidated Financial Statements of AUHI, except for non-GAAP
measures.
(2) Non-GAAP financial measure. See discussion in "Non-GAAP Financial
Measures" section of this MD&A.
(3) Reflects AUHI's 100 percent interest in AUI, and its proportionate
share of Heritage Gas (24.9 percent) and Inuvik Gas (one-third).
(4) Degree Day variance is a measure of how hot or cold the
climatological areas in which AUI operates were over the applicable
quarter expressed in relation to normal Degree Days in that period.
A Degree Day is the cumulative extent to which the daily mean
temperature falls below 18 degrees Celsius. Normal degree days are
based on a 20-year rolling average.


Quarter Ended June 30, 2006 Compared to Quarter Ended June 30, 2005

Revenue for the quarter ended June 30, 2006 was $15.7 million, a decrease of $6.3 million from the same period in 2005. Decreased revenue was mainly due to the reduction in the cost of natural gas, which flows through to customers, partially offset by higher end-use volumes delivered. AUI's revenue decreased $6.6 million in second quarter 2006 compared to the same period last year. The lower cost of natural gas contributed $5.8 million to the decrease and warmer than normal weather contributed $0.3 million to the drop. Revenue was also reduced by the AUI debt rate decision, partially offset by growth at Heritage Gas.

Cost of natural gas for the quarter ended June 30, 2006 was $9.4 million, a decrease of $5.8 million from the same quarter in 2005. The decline was primarily the result of lower gas prices and lower deliveries as a result of warmer weather than the same period last year, partially offset by customer growth at Heritage Gas.

Net revenue for the quarter ended June 30, 2006 was $6.3 million, a decrease of $0.5 million from the same quarter in 2005. Net revenue is unaffected by changes in natural gas prices as the cost of natural gas is recovered from customers. The decline in net revenue was due to 15 percent warmer weather in second quarter 2006 compared to the same quarter last year and to the adjustment required as a result of the debt rate decision, partially offset by growth in the Heritage Gas franchise areas.

Operating expenses for the quarter ended June 30, 2006 increased by $0.1 million compared to 2005 due to increased costs of materials and labour to support larger systems in a buoyant Canadian economy.

EBITDA for the quarter ended June 30, 2006 was $1.7 million, a decrease of $0.7 million from the second quarter in 2005, mainly due to lower net revenue in 2006.

Year-to-date June 30, 2006 Compared to Year-to-date June 30, 2005

Revenue for the six months ended June 30, 2006 was $74.1 million, an increase of $5.7 million from the same period in 2005. AUI's revenue increased $4.9 million year-over-year due to higher gas costs and a change in the billing of fixed charges, partially offset by the impact of warmer weather and the regulatory decision related to the debt application. The increased cost of natural gas and growth in the business at Heritage Gas contributed $0.6 million to the revenue increase and Inuvik Gas contributed $0.2 million to the increase in the year.

The cost of natural gas for the six months ended June 30, 2006 was $55.8 million, an increase of $5.9 million from the same period in 2005 due to higher natural gas prices and customer growth, partially offset by warmer weather compared to the same period last year.

Net revenue for the six months ended June 30, 2006 was lower by $0.2 million from the same period in 2005. Seven percent warmer weather in the AUI franchise areas and the negative adjustment related to the AUI approved interest rate recovery were partially offset by customer growth, primarily at Heritage Gas.

Operating expenses for the six months ended June 30, 2006 increased by $0.1 million from the same period in 2005 due to increased costs of materials and labour to support larger systems in a buoyant Canadian economy.

EBITDA for the first half of 2006 was $9.4 million, a decrease of $0.4 million from the first six months of 2005. This decrease was due to lower net revenue and higher operating expenses.

UTILITY GROUP SUMMARY OF MOST RECENTLY COMPLETED QUARTERS

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



($ millions) Utility Group
------------------------------------------------------------------------
Three months Three months Period ended
Ended ended December 31
June 30, 2006 March 31, 2006 2005
------------------------------------------------------------------------
Net revenue 6.3 12.0 5.6
Operating income (loss) (0.6) 5.7 2.0
Net income (loss) (0.7) 3.2 1.3
------------------------------------------------------------------------
------------------------------------------------------------------------


LIQUIDITY AND CAPITAL RESOURCES

Utility Group expects that 2006 funds from operations will be sufficient to meet the majority of its budgeted maintenance and growth capital. The balance of its budgeted growth capital and a certain value of acquisitions will be financed through existing bank lines. Should larger acquisitions require financing beyond existing lines, management believes equity and debt capital markets could be accessed to provide additional financing. At this time, Utility Group does not reasonably expect any presently known trend or uncertainty to affect the Corporation's ability to access its anticipated sources of cash.

Cash from Operations

During the first half of 2006, cash from operations benefited from the collection of accounts receivable from the winter heating season. The six month funds generated from operations of $6.1 million were increased by the net change in non-cash working capital of $4.6 million, resulting in $10.7 million of cash from operations.

Investing Activities

Cash used for investing activities in the three and six months ended June 30, 2006 was $3.0 million and $7.1 million, respectively. The majority of the investing activities were expenditures on property, plant and equipment for the natural gas distribution systems of AUHI, partially offset by contributions in aid of construction.

In second quarter 2006, capital expenditures at AUI, net of contributions in aid of construction, were $2.6 million (2005 - $1.1 million). In second quarter 2006 $0.7 million was related to new business from increased growth in AUI's service areas, $0.8 million was related to system betterment and $1.1 million was for general plant replacements (second quarter 2005 - $0.7 million for system betterment and $0.4 million for general plant).

AUHI's share of capital expenditures for delivery system expansion at Heritage Gas was $0.8 million in second quarter 2006 compared to $0.6 million in second quarter 2005.

Capital expenditures at AUI, net of contributions in aid of construction, were $4.7 million and $2.7 million for the six months ended June 30, 2006 and 2005, respectively. Year-to-date 2006, $2.1 million was related to new business, $1.6 million was related to system betterment and $1.0 million was for general plant replacements (year-to-date 2005 - $0.8 million for new business, $1.4 million for system betterment and $0.5 million for general plant). The increase in 2006 was primarily related to new business resulting from increased growth in AUI's service areas.

AUHI's share of capital expenditures for delivery system expansion at Heritage Gas was $1.3 million year-to-date 2006 compared to $0.8 million in the same period of 2005.

During the six months ended June 30, 2006 Utility Group advanced $1.8 million to Heritage Gas, purchasing 649,940 common shares at $1.00 per share, with the balance comprising an advance of $1.2 million under its long-term loan arrangement (second quarter 2006 - $1.1 million; 403,991 common shares; and $0.7 million, respectively). Contributions in proportion to their respective interests were also made by the other shareholders, resulting in no change to Utility Group's proportionate ownership interest in Heritage Gas.

Financing Activities

During second quarter 2006 Utility Group repaid $0.8 million of long-term debt, paid dividends of $0.2 million, received $0.2 million in customer deposits and borrowed $0.8 million under its short-term facility.

During the first six months of 2006 Utility Group repaid $4.4 million of long-term debt, paid dividends of $0.2 million, received $0.2 million in customer deposits and borrowed $0.8 million under its short-term facility.

Capital Resources

The Corporation believes that its access to debt and equity markets, unused bank credit facilities and its funds generated from operations will provide it with sufficient capital resources and liquidity to fund existing operations and certain acquisition and expansion opportunities in 2006.

The use of debt or equity funding is based on the Corporation's target capital structure, which is determined by considering the norms and risks associated with each of its businesses and capital structures deemed by the EUB and the Nova Scotia Utility and Review Board. Utility Group targets a debt-to-total capitalization ratio of between 50 and 60 percent. The Corporation's debt-to-total capitalization ratio as at June 30, 2006 was 53.0 percent. The Corporation's debt-to-total capitalization ratio as at December 31, 2005 was 55.3 percent.

Utility Group funds its long-term borrowing requirements with a credit facility from a syndicate of Canadian chartered banks, from shareholders of proportionately consolidated subsidiaries, and from the Province of Nova Scotia.

DISCLOSURE CONTROLS AND PROCEDURES

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

In accordance with Multilateral Instrument 52-109 (Certification of Disclosure in Issuers' Annual and Interim Filings), an evaluation was conducted under the supervision and with the participation of management, including the President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures as of the end of the quarter covered by this report. Based on that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2006 to provide reasonable assurance that information required to be disclosed is recorded, processed, summarized, and reported within the time periods specified in the Ontario Securities Commission's rules and forms.

TRANSACTIONS WITH RELATED PARTIES

For the quarter ended June 30, 2006 Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $9.3 million. The Corporation also paid the Trust $0.2 million for operating services. The Trust purchased transportation services from Utility Group for $0.1 million. The Corporation also received $0.1 million from the Trust for administration, management and other services.

For the six months ended June 30, 2006 Utility Group purchased natural gas from the Trust for $47.2 million. The Corporation also paid the Trust $0.2 million for operating services. The Trust purchased transportation services from Utility Group for $0.3 million. The Corporation also received $0.2 million from the Trust for administration, management and other services.

For the quarter ended June 30, 2006 Utility Group purchased natural gas from the Ikhil Joint Venture for $0.2 million and the Joint Venture in turn paid Utility Group $0.1 million for administration, management and other services.

For the six months ended June 30, 2006 Utility Group purchased natural gas from the Ikhil Joint Venture for $0.6 million and the Joint Venture in turn paid Utility Group $0.2 million for administration, management and other services.

There is an Administrative Service Agreement between the Trust and Utility Group whereby the Trust provides certain administrative and support services in the normal course of business to Utility Group until December 31, 2007, and which may be extended by mutual agreement of the parties. The Trust receives $30,000 per annum in consideration for the services provided.

Included in accounts receivable at June 30, 2006 was $0.8 million due to Utility Group from the Trust, $0.5 million of which was funding receivable due to the assumption of an employee pension liability.

Included in accounts payable and accrued liabilities at June 30, 2006 was $2.3 million due from Utility Group to the Trust, primarily for natural gas purchases.

See Notes to the interim Consolidated Financial Statements.

CRITICAL ACCOUNTING ESTIMATES

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

Effective April 1, 2006 the Canadian Institute of Chartered Accountants (CICA) adopted an abstract pertaining to conditional asset retirement obligations. The Corporation evaluated the abstract and determined that no change was required to its asset retirement obligation policy. The policy is described in the audited Consolidated Financial Statements for the period ended December 31, 2005.

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, 2005. The most critical of these policies with respect to estimates are those related to rate regulation, determination of pension and other employee benefits, amortization and depreciation expense, asset impairment assessment and goodwill impairment assessment. Actual results may differ from these estimates.

OUTLOOK

In 2006 Utility Group will report its first full year as an operating business. Management expects results to be lower than would be anticipated by a rate-regulated utility in a normal heating year, for a number of reasons. Warmer than normal weather and unfavourable regulatory decisions will reduce net income below the anticipated level, and will be only partially offset by increased usage, lower than budgeted operating and administrative expense due to vacant positions, and the change in billing for fixed charges.

Utility Group continues to expect higher activity during the remainder of the year as a result of the strong Alberta economy, with increased customer connections resulting in a higher number of customers. Costs are also expected to increase as the operating businesses compete for labour and materials.

Utility Group has a corporate mandate to grow the business, both through existing businesses and acquisitions of infrastructure-based utility businesses. Management evaluates acquisition opportunities on an ongoing basis, and will pursue opportunities that will provide accretive shareholder value.

SUBSEQUENT EVENTS

On July 25, 2006 Utility Group purchased an additional 119,027 common shares of Heritage Gas for $0.2 million and advanced $0.3 million under its long-term loan agreement.

Contributions were also made by the other shareholders of Heritage Gas, resulting in no change to Utility Group's proportionate ownership interest in Heritage Gas.



ALTAGAS UTILITY GROUP INC.
CONSOLIDATED BALANCE SHEET
(unaudited)

($ thousands)
------------------------------------------------------------------------
June 30 December 31
As at 2006 2005
------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 615 $ 732
Accounts receivable (note 6) 7,050 30,089
Inventory 343 269
Deferred cost of gas, net of income taxes - 1,082
Future income tax asset 126 133
Prepaid expenses and deferred charges 1,705 1,292
------------------------------------------------------------------------
9,839 33,597
Property, plant and equipment 109,970 106,986
Goodwill 31,575 31,575
Regulatory assets 3,916 3,046
Other assets 200 166
------------------------------------------------------------------------
$ 155,500 $ 175,370
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 776 $ -
Accounts payable and accrued liabilities
(note 6) 12,244 32,752
Dividends payable 245 -
Income and other taxes payable 1,220 451
Deferred cost of gas, net of income taxes 219 -
------------------------------------------------------------------------
14,704 33,203
Long-term debt 73,101 77,515
Customer deposits and other liabilities 2,723 1,979
Future income tax liability 237 119
------------------------------------------------------------------------
90,765 112,816
------------------------------------------------------------------------
Shareholders' equity
Share capital 61,278 61,278
Contributed surplus 142 7
Retained earnings 3,315 1,269
------------------------------------------------------------------------
64,735 62,554
------------------------------------------------------------------------
$ 155,500 $ 175,370
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the Consolidated Financial Statements


ALTAGAS UTILITY GROUP INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(unaudited)

($ thousands)
------------------------------------------------------------------------
Three months Six months
ended ended
For the June 30, 2006 June 30, 2006
------------------------------------------------------------------------

REVENUE (note 6) $ 15,703 $ 74,152
------------------------------------------------------------------------

EXPENSES (note 6)
Cost of natural gas 9,448 55,829
Operating and administrative 4,799 9,195
Depreciation and amortization 2,018 3,978
------------------------------------------------------------------------
16,265 69,002
------------------------------------------------------------------------
Operating income (loss) (562) 5,150
Interest expense 815 1,620
------------------------------------------------------------------------
Income before income taxes (1,377) 3,530
------------------------------------------------------------------------
Income taxes
Current income taxes (672) 867
Future income taxes 9 126
------------------------------------------------------------------------
(663) 993
------------------------------------------------------------------------
Net income (loss) (714) 2,537
Retained earnings, beginning of period 4,274 1,269
Dividends declared (245) (491)
------------------------------------------------------------------------
Retained earnings, end of period $ 3,315 $ 3,315
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income (loss) per share
Basic and diluted $ (0.09) $ 0.31

Number of shares outstanding
Basic 8,189,905 8,189,905
Diluted 8,214,735 8,212,563

See accompanying notes to the Consolidated Financial Statements


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

($ thousands)
------------------------------------------------------------------------
Three months Six months
ended ended
For the June 30, 2006 June 30, 2006
------------------------------------------------------------------------

CASH FROM OPERATIONS
Net income (loss) $ (714) $ 2,537
Items not involving cash:
Revenue deficiency accrual (331) (573)
Allowance for funds used during
construction (76) (141)
Depreciation and amortization 2,018 3,978
Amortization of deferred bank charges (22) (16)
Future income taxes 9 126
Compensation expense 104 135
------------------------------------------------------------------------
Funds generated from operations 988 6,046
Net change in non-cash working capital
(note 4) 2,183 4,619
------------------------------------------------------------------------
3,171 10,665
------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (3,826) (7,832)
Contributions in aid of construction 959 1,462
Proceeds on disposition of property, plant
and equipment 43 110
Investment in regulatory and other assets (245) (873)
------------------------------------------------------------------------
(3,069) (7,133)
------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term debt 776 776
Increase (decrease) in long-term debt (812) (4,414)
Dividends paid (246) (246)
Increase in customer deposits and other
liabilities 165 235
------------------------------------------------------------------------
(117) (3,649)
------------------------------------------------------------------------
Change in cash (15) (117)
Cash, beginning of period 630 732
------------------------------------------------------------------------
Cash, end of period $ 615 $ 615
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to the Consolidated Financial Statements


ALTAGAS UTILITY GROUP INC.

SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, 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 or the Corporation) 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's subsidiaries, AltaGas Utilities Inc. (AUI), AltaGas Utility Holdings (Nova Scotia) Inc. (AUH(NS)) and Inuvik Gas Ltd. (Inuvik Gas) hold 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements include the accounts of Utility Group and all of its wholly owned subsidiaries and its proportionate interests in Heritage Gas and Inuvik Gas from date of acquisition of AUHI on November 17, 2005. Transactions between Utility Group, wholly owned subsidiaries and the proportionately consolidated entities are eliminated on consolidation. All amounts are stated in Canadian dollars.

Generally Accepted Accounting Principles

These consolidated financial statements of the Corporation are prepared by management in accordance with Canadian generally accepted accounting principles (GAAP), including accounting policies for which guidance has been provided by regulations and recommendations of the Alberta Energy and Utilities Board (EUB) and of the Nova Scotia Utility and Review Board (NSUARB). These consolidated financial statements do not include all of the disclosures required in the annual financial statements and should be read in conjunction with the audited Consolidated Financial Statements for the period ended December 31, 2005. The accounting policies applied in these Consolidated Financial Statements are consistent with those outlined in the Corporation's annual financial statements.

The Corporation records the impact of regulatory decisions in the period in which decisions are rendered. On October 28, 2005, AUI filed an application for approval to issue a $30 million, five-year debenture to AUHI with an all-in interest rate of 7.05 percent. The debenture replaced a $30 million, five-year debenture to AUHI that bore interest at 7.42 percent and matured on October 4, 2005. On May 24, 2006 the EUB issued Decision 2006-049, allowing AUI to issue the $30 million debenture to AUHI, but disallowing the all-in rate of 7.05 percent, instead approving an interest rate of 5.44 percent. An adjustment of $0.5 million was recorded in second quarter 2006 to reverse the disallowed interest recovery booked in 2005 and for the first quarter of 2006. The net impact of the reversal was to reduce net income by $0.3 million.

3. SHARE CAPITAL

Stock Option Plan

The Corporation has an employee share option plan under which both employees and directors are eligible to receive grants. At June 30, 2006 818,990 shares were reserved for issuance under the plan. To June 30, 2006 options granted under the plan had a term of 10 years to expiry and vested no longer than over a four-year period. Stock option compensation expense charged to operating and administrative expense for both the quarter and six months ended June 30, 2006 was $0.1 million, with a corresponding increase to contributed surplus.



------------------------------------------------------------------------
At June 30, 2006
------------------------------------------------------------------------
Weighted average
remaining contractual Number of Exercise
Expiry date life/years options price
------------------------------------------------------------------------
2015 9.38 160,000 $ 7.50
2016 9.71 10,000 $ 8.04
------------------------------------------------------------------------
9.39 170,000 $ 7.53
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Weighted
average
Number of exercise
options price
------------------------------------------------------------------------
Stock options outstanding December 31, 2005 170,000 $ 7.50
Granted 10,000 8.04
Cancelled (10,000) 7.50
------------------------------------------------------------------------
Stock options outstanding June 30, 2006 170,000 $ 7.53
------------------------------------------------------------------------
Exercisable at June 30, 2006 - -
------------------------------------------------------------------------
------------------------------------------------------------------------


4. NET CHANGE IN NON-CASH WORKING CAPITAL

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


------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------
Accounts receivable $ 16,263 $ 23,039
Inventory, prepaid expenses and deferred
charges (884) (487)
Short-term debt 776 776
Accounts payable and accrued liabilities (9,935) (20,508)
Deferred cost of gas, net of income taxes (1,009) 1,301
Income and other taxes payable (1,320) 769
------------------------------------------------------------------------
3,891 4,890
Items not related to operations:
Increase in accounts receivable related to -
pension liability assumed 508
Increase in short-term debt (776) (776)
Decrease in capital costs payable (881) 319
Increase in capital costs receivable (51) (322)
------------------------------------------------------------------------
Net change in non-cash working capital
related to operations $ 2,183 $ 4,619
------------------------------------------------------------------------
------------------------------------------------------------------------


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

------------------------------------------------------------------------
Three months Six months
ended ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------
Interest paid $ 589 $ 1,393
Income taxes paid $ 166 $ 719
------------------------------------------------------------------------
------------------------------------------------------------------------


5. PENSION AND OTHER RETIREMENT BENEFIT PLANS

Effective January 1, 2006 the Corporation established a non-registered, unfunded, defined benefit retirement plan that provides pension benefits to eligible executives based on average earnings, years of service and age at retirement. There is currently one executive eligible for benefits under this plan.

As part of the spin-out of the Corporation from AltaGas Income Trust (the Trust), effective January 1, 2006 the Corporation assumed the Trust's liability to the CEO of Utility Group for the CEO's pension benefits under the Trust's supplemental executive retirement plan. The Trust will pay the Corporation $0.5 million, representing the total estimated liability for service related to the CEO's period of employment with the Trust.

At June 30, 2006 the $0.5 million due from the Trust related to the assumption of this pension obligation was recorded as a current account receivable and a long-term liability disclosed in customer deposits and other liabilities. The portion of the liability due for service credited to January 1, 2006 is $0.3 million, with the balance representing the anticipated liability for additional past service yet to be credited.

6. 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 Six months
ended ended
June 30, 2006 June 30, 2006
------------------------------------------------------------------------
Fees for administration, management and
other services paid by:
Utility Group to the Trust $ 7 $ 15
The Trust to Utility Group $ 69 $ 165
The Trust to AUI $ 14 $ 28
Ikhil Joint Venture to Inuvik Gas $ 74 $ 141
Fees for operating services paid by AUI $ $
to the Trust 148 194
Gas purchases for resale by Inuvik Gas $ $
from the Ikhil Joint Venture 200 625
Transportation services provided by AUI $ $
to the Trust 141 284
Gas purchases from the Trust $ 9,293 $ 47,174
------------------------------------------------------------------------
------------------------------------------------------------------------


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

Included in accounts receivable at June 30, 2006 is $0.8 million due to Utility Group from the Trust, $0.5 million of which is related to Utility Group's assumption of the Trust's liability to the CEO of Utility Group for pension benefits earned under the Trust's supplemental executive retirement plan.

Included in accounts payable and accrued liabilities at June 30, 2006 is $2.3 million due from Utility Group to the Trust for natural gas purchases.

7. COMPARATIVE FIGURES

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

8. 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.

9. SUBSEQUENT EVENTS

On July 25, 2006 Utility Group purchased an additional 119,027 common shares of Heritage Gas for $0.2 million and advanced $0.3 million under its long-term loan agreement.

Contributions were also made by the other shareholders of Heritage Gas, resulting in no change to Utility Group's proportionate ownership interest in Heritage Gas.

ABOUT ALTAGAS UTILITY GROUP INC.

AltaGas Utility Group Inc. is a publicly traded company holding interests in AltaGas Utilities Inc., Heritage Gas Limited and Inuvik Gas Ltd. Combined, these regulated natural gas distribution businesses serve more than 63,000 customers in three areas of Canada through a delivery infrastructure of nearly 20,000 kilometers of pipe. Utility Group intends to pursue opportunities to invest in high quality utility companies with long-term, stable returns.

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

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