AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

August 09, 2007 17:36 ET

AltaGas Utility Group Inc. Announces Second Quarter 2007 Results and a Quarterly Dividend of $0.035 Per Share

CALGARY, ALBERTA--(Marketwire - Aug. 9, 2007) - The Board of Directors of AltaGas Utility Group Inc. (Utility Group) (TSX:AUI) today announced a net loss of $0.5 million ($0.07 per share) for the second quarter of 2007 and net income of $3.2 million ($0.39 per share) for the six months ended June 30, 2007 compared to a 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. The increases were primarily a result of new business growth and colder weather compared to 2006. The second quarter loss is representative of the normal seasonal nature of the gas distribution business, resulting in declines in delivered volumes in the spring. A dividend of $0.035 per common share payable on October 15, 2007 to shareholders of record at the close of business on September 28, 2007 was also declared.

"We are very pleased to follow our strong first quarter performance with solid results in the second quarter," said Patricia Newson, President and Chief Executive Officer. "Our 2007 first half net income is 27 percent higher than last year's. The demand for natural gas service is driven by the strong Alberta economy and emerging gas distribution business in Nova Scotia which are continuing to build on our existing asset base."

"We are also pleased to have closed on July 31, 2007 the purchase of a one-third interest in the Ikhil Joint Venture. We will operate the Ikhil Joint Venture's two natural gas wells and field processing facility and deliver gas to the town of Inuvik. Ownership of the interest in the Ikhil Joint Venture is a natural opportunity to enhance Utility Group's return by investing in a non-rate-regulated business."

Net revenue for the second quarter and first six months of 2007 were $8.1 million and $21.8 million, respectively. Net revenue exceeded 2006 second quarter by $1.8 million and the first six months by $3.5 million due to customer growth at both AltaGas Utilities Inc. and Heritage Gas Limited and colder weather in both the first and second quarters of 2007 compared to 2006.

Operating income for the second quarter and first six months of 2007 was $0.3 million and $6.3 million respectively, compared to a second quarter operating loss of $0.6 million and operating income of $5.1 million for the first six months of 2006. Funds generated from operations were $7.1 million in the first six months of 2007 compared to $6.1 million in the first six months of 2006.

AltaGas Utility Group Inc. is a publicly traded company holding interests in AltaGas Utilities Inc., Heritage Gas Limited and Inuvik Gas Ltd. Combined, these regulated natural gas distribution businesses serve more than 65,000 customers in three areas of Canada through an infrastructure of nearly 20,000 kilometres of pipelines. Utility Group also holds an interest in the Ikhil Joint Venture which produces and supplies natural gas in Inuvik, Northwest Territories. Utility Group pursues opportunities to invest in infrastructure-based utility and related businesses with long-term, stable returns.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of financial condition and results of operations dated August 9, 2007 is a review of the results of operations and the liquidity and capital resources of AltaGas Utility Group Inc. (Utility Group) for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006. The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto for the three and six months ended June 30, 2007 and the audited consolidated financial statements and MD&A contained in Utility Group's Annual Report for the year ended December 31, 2006.

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

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

I. ALTAGAS UTILITY GROUP INC.

Utility Group was incorporated 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 TSX and acquired all of the outstanding shares of AltaGas Utility Holdings Inc. (AUHI). AUHI owns 100 percent of AltaGas Utilities Inc. (AUI), an indirect 24.9 percent share in Heritage Gas Limited (Heritage Gas) and a one-third share in Inuvik Gas Ltd. (Inuvik Gas).

II. OVERVIEW OF THE BUSINESS AND STRATEGY

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

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

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

III. FINANCIAL AND OPERATING RESULTS

Utility Group's financial information and the related discussion of financial results in the MD&A are for the three and six months ended June 30, 2007 and June 30, 2006.



Consolidated Financial Results Three Months Ended Six Months Ended
June 30 June 30
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($ millions, except per share
amounts or as otherwise noted) 2007 2006 2007 2006
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Revenue 22.0 15.7 77.7 74.1
Net revenue(1) 8.1 6.3 21.8 18.3
EBITDA(1) 2.2 1.1 10.1 8.5
Operating income (loss)(1) 0.3 (0.6) 6.3 5.1
Net income (loss) (0.5) (0.7) 3.2 2.5
Funds generated from operations(1) 1.4 1.0 7.1 6.1
Total assets 172.0 155.5 172.0 155.5
Long-term liabilities 86.2 76.1 86.2 76.1
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Shares outstanding (thousands)
Basic 8,190 8,190 8,190 8,190
Diluted 8,190 8,190 8,195 8,213
Net income (loss) per share
- basic $ (0.07) $ (0.09) $ 0.39 $ 0.31
Net income (loss) per share
- diluted $ (0.07) $ (0.09) $ 0.39 $ 0.31
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(1) Non-GAAP financial measure: see discussion in "Non-GAAP Financial
Measures" section of this MD&A.


1. Discussion of Consolidated Financial Results for the three months ended June 30, 2007

The net loss for the three months ended June 30, 2007 was $0.5 million or a loss of $0.07 per share, compared to a loss of $0.7 million, or a loss of $0.09 per share for the three months ended June 30, 2006. The significant contributing factor to the net income increase of $0.2 million quarter-over-quarter was improved operating income of $0.9 million as a result of a colder spring, new service sites and the effect of higher rates than 2006. Offsetting these favourable variances was an increase of $0.2 million in interest expense and a $0.5 million increase in income tax expense.

Utility Group's revenue for the three months ended June 30, 2007 was $22.0 million, compared to $15.7 million for the three months ended June 30, 2006. Revenue from AUI comprised 94 percent of consolidated revenue and was $5.9 million higher than in 2006. Heritage Gas contributed an additional $0.4 million in revenue.

For the three months ended June 30, 2007 Utility Group reported net revenue of $8.1 million ($6.3 million - 2006), after natural gas costs of $13.9 million ($9.4 million - 2006). The increase from last year was due to increased volumes due to colder weather, additional service sites, and a higher revenue requirement applied for in AUI's 2007 General Tariff Application (GTA) filing. AUI's revenue requirement has grown to support a 7.5 percent increase in 2007 mid-year rate base over 2006. In addition to the applied-for rate base, the completion of a gas line to an oil processing battery contributed to net revenue beginning in April 2007. Heritage Gas doubled its number of customers over the same quarter last year and commenced service to the Dartmouth General Hospital. The Hospital contributed 12 percent of Heritage Gas' distribution revenue in the quarter.

Operating and administrative expense was $5.9 million for the second quarter of 2007, compared to $5.2 million for the second quarter of 2006. The increase was due to higher staffing, contractor and material costs to support system maintenance and business growth.

Depreciation and amortization expense was $1.9 million in the three months ended June 30, 2007compared to $1.7 million for the three months ended June 30, 2006, all of which was related to higher investment in property, plant and equipment.

Interest expense for the three months ended June 30, 2007 was $1.0 million, compared to $0.8 million for the three months ended June 30, 2006. Average debt outstanding on the long-term credit facility for the period was $79.8 million and the average interest rate was 4.92 percent, compared to $70.0 million average borrowing in 2006 with an average interest rate of 4.70 percent.

Utility Group's income tax expense for the three months ended June 30, 2007 was a recovery of $0.2 million ($0.7 million recovery - 2006). Current income taxes relate primarily to AUI which, under utility board regulation, accounts for income tax expense using the taxes payable method and therefore reports only income tax due on current taxable earnings.

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

Net income for the six months ended June 30, 2007 was $3.2 million or $0.39 per share, compared to $2.5 million, or $0.31 per share for the six months ended June 30, 2006. The net income increase of $0.7 million was driven by improved operating income of $1.2 million as a result of a colder winter, new service sites and the effect of higher service rates. Offsetting the favourable operating performance was an increase of $0.4 million in interest expense as result of higher average debt balances and interest rates.

Utility Group's revenue for the six months ended June 30, 2007 was $77.7 million, compared to $74.1 million for the six months ended June 30, 2006. Revenues from AUI comprised 96 percent of consolidated revenue and were $2.2 million higher than in 2006, resulting from a combination of colder weather, new service sites, and higher rates. Heritage Gas improved revenue by $1.1 million over 2006 primarily by adding new service sites. Inuvik Gas improved revenue by $0.3 million over 2006 through a combination of increased rates and volumes.

For the six months ended June 30, 2007 Utility Group reported net revenue of $21.8 million ($18.3 million - 2006), after natural gas costs of $55.9 million ($55.8 million - 2006). The variance from last year was due to higher volumes resulting from colder weather, increased usage, additional service sites, and a higher revenue requirement applied for in AUI's 2007 GTA filing. The $3.5 million net revenue increase was contributed by Inuvik Gas ($0.1 million), Heritage Gas ($0.5 million), and AUI ($2.9 million). AUI experienced 11.2 percent colder weather and served 3.6 percent more service sites compared to 2006, contributing to 40 percent of the six-month increase.

Operating and administrative expense was $11.7 million for the first half of 2007, compared to $9.8 million for the first half of 2006. This increase was due to higher staffing, contractor and material costs to support system maintenance and business growth.

Depreciation and amortization expense was $3.8 million for the six months ended June 30, 2007 compared to $3.4 million for the six months ended June 30, 2006. The increase was related to higher investment in property, plant and equipment.

Interest expense for the six months ended June 30, 2007 was $2.0 million, compared to $1.6 million for the six months ended June 30, 2006. Average debt outstanding on the long-term credit facility for the period was $79.2 million and the average interest rate was 4.91 percent compared to $70.6 million average borrowing in 2006 with an average interest rate of 4.40 percent.

Utility Group's income tax expense for the six months ended June 30, 2007 was $1.1 million ($1.0 million - 2006). Current income tax expense was incurred primarily by AUI which, under utility board regulation, accounts for income tax expense using the taxes payable method and therefore reports only income tax due on current taxable earnings. The increase in income tax expense of $0.1 million in 2007 over 2006 was due to increased earnings, partially offset by a reduction in the effective tax rate.

3. Business Operations



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Operating Information Three Months Ended Six Months Ended
June 30 June 30
2007 2006 2007 2006
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Deliveries (PJ)(1)(2)
End-use 2.6 2.3 9.1 8.1
Transportation 1.8 2.5 3.9 4.9
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4.4 4.8 13.0 13.0
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Service sites at period end(3) 65,903 63,191 65,903 63,191
Degree day variance (percent)(4) 4.4 (18.8) 0.1 (9.4)
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(1) A petajoule (PJ) is 1 million gigajoules.
(2) Deliveries reflect Utility Group's 100 percent share in AUI and its
proportionate share of Heritage Gas (24.9 percent) and Inuvik Gas (one-
third).
(3) Service sites reflect all of the service sites of AUI, Heritage Gas and
Inuvik Gas.
(4) Degree days relate to AUI's service area. A degree day is the
cumulative extent to which the daily mean temperature falls below 18
degrees Celsius. Normal degree days are based on a 20-year rolling
average. Positive variances from normal lead to increased delivery
volumes from normal expectations.


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Natural Gas Deliveries June 30, 2007 June 30, 2006
Service
Service Sites(1) PJs(2)(3) Sites(1) PJs(2)(3)
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Operating Business
AUI 64,185 12.7 61,953 13.0
Heritage Gas 912 0.2 470 -
Inuvik Gas 806 0.1 768 -
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65,903 13.0 63,191 13.0
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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).


4. Regulatory Update

AltaGas Utilities Inc.

In December 2006 AUI filed a Phase 2 tariff application dealing with the 2005/2006 GTA cost of service, rate design and terms and conditions of service. A Phase 2 hearing was held in June 2007, with a decision expected from the Alberta Energy and Utilities Board (EUB) in the fourth quarter of 2007.

On December 29, 2006 AUI filed Phase 1 of its 2007 GTA and on April 26, 2007 AUI filed an update for known changes to the 2007 GTA as requested by the EUB. AUI is seeking approval of a forecast net rate base of $104.6 million, an increase of $7.4 million from its 2006 approved net rate base of $97.2 million. AUI is also seeking approval of a revenue requirement, net of gas costs of $37.5 million, which is an increase of $4.4 million from the 2006 allowed net revenue requirement of $33.1 million. As of June 30, 2007 AUI had accrued $2.0 million in revenue requirement associated with the 2007 GTA. A hearing is scheduled for August 2007 and a decision from the (EUB) is expected in the fourth quarter of 2007.

On October 28, 2005, AUI filed an application for approval to issue a $30 million, five-year debenture to AUHI with an all-in interest rate of 7.05 percent. On May 24, 2006 the EUB issued Decision 2006-049, allowing AUI to issue the $30 million debenture, but disallowing the all-in rate of 7.05 percent, instead approving 5.44 percent. AUI submitted a Review and Variance (R&V) Application requesting that the EUB reconsider its decision. On July 31, 2007 AUI received the EUB's determination denying AUI's application for a Review and Variance of Decision 2006-049. The EUB upheld its decision disallowing AUI's request for a 7.05 percent debenture rate. At this time AUI is considering its options in pursuing the matter further. As the current revenue requirement reflects the approved 5.44 percent debenture rate, there is no impact on reported financial results of the denial of the R&V application.

Inuvik Gas Ltd.

On August 21, 2006 Inuvik Gas notified the Northwest Territories Public Utilities Board (NWTPUB) of a natural gas rate increase effective October 22, 2006. In October 2006 the Town of Inuvik filed a complaint regarding the applied-for price increases. On June 20, 2007 the NWTPUB issued decision 10-2007 making final the October 22, 2006 rate increase, accepting the termination of the complaint by the Town of Inuvik, and putting into effect an agreement between the Town of Inuvik and Inuvik Gas regarding improved communication for all future rate increases.

5. Non-GAAP Financial Measures

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



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Net revenue Three Months Ended Six Months Ended
June 30 June 30
($ millions) 2007 2006 2007 2006
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Net revenue 8.1 6.3 21.8 18.3
Add: Cost of natural gas 13.9 9.4 55.9 55.8
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Revenue (GAAP financial measure) 22.0 15.7 77.7 74.1
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Management believes that net revenue better reflects operating performance
than does revenue as changes in the market price of natural gas purchased
for resale affect both revenue and the cost of natural gas.


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Operating income Three Months Ended Six Months Ended
June 30 June 30
($ millions) 2007 2006 2007 2006
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Operating income (loss) 0.3 (0.6) 6.3 5.1
Deduct: Interest expense 1.0 0.8 2.0 1.6
Income taxes(1) (0.2) (0.7) 1.1 1.0
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Net income (loss) (GAAP financial
measure) (0.5) (0.7) 3.2 2.5
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(1) Income taxes consist of current and future income taxes.


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

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EBITDA Three Months Ended Six Months Ended
June 30 June 30
($ millions) 2007 2006 2007 2006
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EBITDA 2.2 1.1 10.1 8.5
Deduct: Depreciation and amortization 1.9 1.7 3.8 3.4
Interest expense 1.0 0.8 2.0 1.6
Income taxes(1) (0.2) (0.7) 1.1 1.0
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Net income (loss) (GAAP financial
measure) (0.5) (0.7) 3.2 2.5
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(1) Income taxes consist of current and future income taxes.


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

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Funds Generated from Operations Three Months Ended Six Months Ended
June 30 June 30
($ millions) 2007 2006 2007 2006
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Funds generated from operations 1.4 1.0 7.1 6.1
Net change in non-cash working
capital 2.0 2.2 1.1 4.6
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Cash from operations (GAAP financial
measure) 3.4 3.2 8.2 10.7
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Funds generated from operations are provided to assist in determining Utility Group's ability to generate cash from operations, after interest and taxes, without regard to changes in non-cash working capital in the period.

6. Summary of Most Recently Completed Quarters

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



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


IV. UTILITY GROUP'S FINANCIAL POSITION

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



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Balance Sheet Item Increase
($ millions) (decrease) Explanation
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Accounts receivable (16.3) Reduction in account receivable due to
lower gas cost recovery rate and seasonally
lower volumes.
Property, plant and 3.9 Organic growth at both Heritage Gas and
equipment (net of AUI, partially offset by contributions
accumulated in aid of construction.
depreciation)
Deferred cost of gas, (0.9) Gas costs are included in allowed rates on
net of income taxes a monthly forecast basis. Differences
between forecast and actual gas costs in
the month are held for collection or refund
in the following month. The deferral can
swing between assets and liabilities. At
December 31, 2006 the deferral was an
asset; at June 30, 2007 the deferred asset
was less.
Accounts payable (15.3) Reduction in trade payables reflecting
seasonally lower gas volumes purchased,
partially offset by higher unit gas prices.
Income and other taxes 0.7 Increased income taxes payable due to
payable timing differences between installment
payments and income tax expense
recognition.


V. INVESTED CAPITAL

During the second quarter of 2007 Utility Group invested $5.9 million in property, plant and equipment and regulatory and other assets, compared to $4.4 million in the second quarter of 2006. The second quarter 2007 investment in property, plant and equipment included $5.4 million at AUI and $0.5 million at Heritage Gas.

For the first six months of 2007 Utility Group invested $10.4 million in property, plant and equipment and regulatory and other assets, compared to $8.7 million in the second quarter of 2006. The 2007 year to date investment in property, plant and equipment included $9.5 million at AUI and $0.9 million at Heritage Gas.



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Net Capital Invested Three Months Ended Six Months Ended
June 30 June 30
($ millions) 2007 2006 2007 2006
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Invested capital:
New business 3.5 2.1 7.3 5.2
System betterment and gas supply 1.0 1.0 1.3 1.5
General plant 0.7 0.7 0.9 1.1
Regulatory and other assets 0.7 0.6 0.9 0.9
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5.9 4.4 10.4 8.7
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VI. LIQUIDITY AND CAPITAL RESOURCES

Utility Group expects that 2007 funds from operations will be sufficient to meet the majority of its budgeted maintenance and growth capital. The balance of its budgeted growth capital and a certain value of acquisitions will be financed through existing bank lines. Should larger acquisitions require financing beyond existing lines, management believes equity and debt capital markets could be accessed to provide additional financing. At this time, Utility Group does not reasonably expect any presently known trend or uncertainty to affect Utility Group's ability to access its anticipated sources of cash.



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Cash Position Three Months Ended Six Months Ended
June 30 June 30
($ millions) 2007 2006 2007 2006
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Cash, beginning of period 0.7 0.3 0.3 0.4
Operating activities 3.4 3.2 8.2 10.7
Investing activities (3.7) (3.4) (7.8) (7.2)
Financing activities 0.1 0.5 (0.2) (3.3)
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Cash, end of period 0.5 0.6 0.5 0.6
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Cash from Operations

Cash provided by operations of $3.4 million in the second quarter of 2007 increased from $3.2 million in the second quarter of 2006, primarily due to growth in the business in 2007. Cash provided by operations in the first six months of 2007 of $8.2 million was $2.5 million less than $10.7 million in the first six months of 2006. The variance is mainly attributable to changes to non-cash working capital items in 2006 being significantly greater than 2007. The seasonal business cycle contributes to cash through the collection of working capital during the first six months of the calendar year; however a higher cost of gas in late 2005 combined with a change in the deferred cost of gas increased the effect in 2006.

Investing Activities

Cash used in investing activities was $3.7 million and $7.8 million for the second quarter and six months ending June 30, 2007 respectively. Additions to property, plant and equipment of $5.1 million for the second quarter and $9.4 million for the first six months were partially offset by contributions in aid of construction in the amounts of $2.2 million for the second quarter and $2.5 million for the first six months. During second quarter 2006, Utility Group reported cash used in investing activities of $3.4 million, and $7.2 million used for the first six months of 2006, the majority of which was additions to property, plant and equipment.

Financing Activities

During second quarter 2007 cash provided by financing activities was $0.1 million, compared to $0.5 million during the second quarter of 2006. During the first six months of 2007 cash used in financing activities was $0.2 million compared to $3.3 million used in 2006.

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

Capital Resources

Utility Group believes that its access to debt and equity markets, unused bank credit facilities and its funds generated from operations will provide it with sufficient capital resources and liquidity to fund existing operations and certain acquisition and expansion opportunities in 2007.

The use of debt or equity funding is based on Utility Group's target capital structure, which is determined by considering the norms and risks associated with each of its businesses and capital structures deemed by the EUB and the NSUARB. Utility Group targets a debt-to-total capitalization ratio of between 50 and 60 percent. Utility Group's debt-to-total capitalization ratio as at June 30, 2007 was 55.3 percent (56.4 percent - December 31, 2006).

Utility Group funds its long and short-term borrowing requirements with credit facilities from a syndicate of Canadian chartered banks and from the Province of Nova Scotia. The Province of Nova Scotia loan has been recorded at fair value in accordance with Section 3855 of the CICA Handbook, resulting in a reduction to the reported debt amount of $0.5 million for a zero interest rate benefit. Utility Group's share of the loan is $1.4 million less the fair value adjustment of $0.5 million, or $0.9 million.



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Credit Facilities Drawn at Drawn at
($ millions) June 30, 2007 December 31, 2006
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Demand operating credit facility 1.9 2.2
Revolving term credit facility 82.3 81.8
Loan from Province of Nova Scotia 0.9 1.4
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85.1 85.4
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Effective June 30, 2007 Utility Group had banking arrangements as follows:

- An extendible revolving credit facility with a syndicate of Canadian chartered banks for $100.0 million under which prime rate loans, USBR loans, letters of credit, bankers' acceptances and LIBOR loans may be drawn, repayable on November 17, 2009. The maturity date is extendible upon consent of each lender for further successive one-year periods. At June 30, 2007 bankers' acceptances with short-term maturities of $82.3 million ($81.8 million - December 31, 2006) had been issued.

- A demand operating credit facility with a Canadian chartered bank for $10.0 million under which prime rate loans, USBR loans, letters of credit, bankers' acceptances and LIBOR loans may be obtained, repayable in full upon demand. Loans draws against this facility as of June 30, 2007 were $1.9 million ($2.2 million - December 31, 2006).

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

All of the borrowing facilities have financial tests and other covenants customary for these types of facilities, which must be met at each quarter-end. At June 30, 2007 Utility Group was in compliance with these covenants.

VII. SHARE CAPITAL

Authorized

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

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

Issued

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

- As at August 9, 2007 there had been no change from June 30, 2007 in the issued and outstanding shares.

VIII. OFF-BALANCE-SHEET ARRANGEMENTS

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

IX. DISCLOSURE CONTROLS AND PROCEDURES

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

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

X. INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

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

As at June 30, 2007 management assessed the design of Utility Group's internal control over financial reporting and concluded that internal control over financial reporting is suitably designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and that there were no material weaknesses in the design of Utility Group's internal control over financial reporting that have been identified by management.

There have been no changes in the design of internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

XI. TRANSACTIONS WITH RELATED PARTIES

For the quarter ended June 30, 2007 Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $13.2 million, compared to $9.3 million in the second quarter of 2006. Utility Group also paid the Trust $0.1 million ($0.2 million - 2006) for operating services. The Trust purchased transportation for $0.1 million ($0.1 million - 2006) and administrative, management and other services of $0.1 million from Utility Group ($0.1 million - 2006).

For the six months ended June 30, 2007 Utility Group purchased natural gas from the Trust for $51.5 million, compared to $47.2 million in the six months ending June 30, 2006. Utility Group also paid the Trust $0.1 million ($0.2 million - 2006) for operating services. The Trust purchased transportation for $0.2 million ($0.3 million - 2006) and administrative, management and other services of $0.1 million from Utility Group ($0.2 million - 2006).

For the quarter ended June 30, 2007 Utility Group purchased natural gas from Ikhil for $0.2 million ($0.2 million - 2006), and Ikhil in turn paid Utility Group $0.1 million ($0.1 million - 2006) for administration, management and other services.

For the six months ended June 30, 2007 Utility Group purchased natural gas from the Ikhil Joint Venture for $0.8 million ($0.6 million - 2006), and Ikhil in turn paid Utility Group $0.2 million ($0.2 million - 2006) 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 to Utility Group until December 31, 2007. The Trust receives $30,000 per year for the services provided. The Trust has given Utility Group notice that the current agreement will not be renewed, and a replacement agreement is under negotiation.

See Notes to the interim consolidated financial statements, and section XVI. Subsequent Events.

XII. CRITICAL ACCOUNTING ESTIMATES

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

Utility Group's significant accounting policies are described in the Notes to the audited consolidated financial statements of Utility Group for the year ended December 31, 2006. The most critical of these policies with respect to estimates are those related to rate regulation, determination of pension and other employee benefits, amortization and depreciation expense, goodwill impairment assessment and asset retirement obligation. Actual results may differ from these estimates.

XIII. CHANGES IN ACCOUNTING POLICIES

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

XIV. RISKS AND UNCERTAINTIES

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

XV. OUTLOOK

1. Operations

For the remainder of 2007 Utility Group's management expects that the three operating businesses will continue to generate strong earnings and solid growth. AUI will continue to actively pursue opportunities in its existing franchise areas and is well-positioned to capture opportunities arising in the areas around Edmonton, Alberta. AUI completed the construction of a $1.3 million pipeline to deliver gas to an oil processing battery project. The pipeline started generating revenue in April 2007. At Heritage Gas, planned construction on the harbour crossing between Halifax and Dartmouth in Nova Scotia is currently anticipated to begin in early fall, with gas service commencement anticipated by the end of 2007. The project will be financed by the shareholders over the last quarter of 2007 and the first quarter of 2008.

Utility Group's objective is to grow the business, both through growth of its three operating businesses as outlined above, and through acquisitions of infrastructure-based utility and related businesses. Management evaluates acquisition opportunities on an ongoing basis, and will pursue opportunities that will provide accretive shareholder value. Please refer to section XVI. Subsequent Events for a discussion of the acquisition of an interest in the Ikhil Joint Venture which was closed on July 31, 2007.

2. Regulatory

In April 2007 the Alberta government announced that it will introduce legislation at the spring session of the Legislature which will split the Alberta Energy and Utilities Board into two agencies. The split organizations are expected to be in place by January 2008. The former Energy Resources Conservation Board (ERCB) will re-emerge to deal with oil and gas exploration and development applications and regulations. A second agency, the Alberta Utilities Commission (AUC), will be responsible primarily for regulating the distribution and sale of electricity and natural gas to consumers.

XVI. SUBSEQUENT EVENTS

On July 16, 2007 Utility Group purchased an additional 180,139 common shares of Heritage Gas for $0.2 million and advanced $0.3 million under its long-term loan agreement to fund capital expenditures. Contributions were also made by the other shareholders of Heritage Gas, resulting in no change to Utility Group's proportionate ownership share in Heritage Gas.

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

The purchase price is in the range of five to six times EBITDA, and will be financed by Utility Group's existing bank lines. Ikhil is expected to contribute to Utility Group's earnings beginning in August 2007. While Ikhil's earnings are somewhat seasonal, with the year-round load to supply the Northwest Territories Power Corporation augmented during the winter heating season with increased deliveries to Inuvik Gas, the acquisition is expected to be immediately accretive to net income per share.

The transaction was the result of AltaGas Income Trust's divestiture of its non-core oil and gas production assets. AltaGas Income Trust owns approximately 27 percent of Utility Group. While the transaction is an exempt related party transaction, the Board of Directors of Utility Group appointed a Special Committee of independent directors to evaluate the proposed acquisition and to ensure that it would be in the best interests of Utility Group. The Special Committee completed its review with the assistance of Utility Group senior management and its professional advisors, which included Clarus Securities Inc. (Clarus) and Stikeman Elliott LLP.

The Board of Directors approved the acquisition based on the report and recommendations of the Special Committee. The Special Committee based its recommendations on a number of factors including:

- The Ikhil business is complementary to Utility Group's one-third interest in Inuvik Gas;

- An opinion from Clarus that the proposed acquisition is fair from a financial point of view to the holders of Utility Group common shares; and

- The investment in Ikhil is consistent with Utility Group's strategy of investing in infrastructure-based utility and related businesses with long-term, stable returns.



ALTAGAS UTILITY GROUP INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)

($ thousands)
----------------------------------------------------------------------------
June 30 December 31
As at 2007 2006
----------------------------------------------------------------------------

ASSETS
Current assets
Cash $ 511 $ 296
Accounts receivable (note 6) 10,163 26,487
Inventory 199 231
Deferred cost of gas, net of income taxes 164 1,057
Future income tax asset 15 16
Prepaid expenses and deferred charges 1,960 1,434
----------------------------------------------------------------------------

13,012 29,521
Property, plant and equipment 121,596 117,723
Goodwill 31,575 31,575
Regulatory assets 5,555 4,983
Future income tax asset 96 87
Other assets 185 142
----------------------------------------------------------------------------

$ 172,019 $ 184,031
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 1,920 $ 2,221
Accounts payable and accrued liabilities (note 6) 13,698 28,955
Dividends payable 287 246
Income and other taxes payable 1,074 382
----------------------------------------------------------------------------

16,979 31,804
Long-term debt 83,173 83,157
Customer deposits and other liabilities 2,963 2,920
Future income tax liability 98 99
----------------------------------------------------------------------------

103,213 117,980
----------------------------------------------------------------------------
Shareholders' equity
Share capital 61,278 61,278
Contributed surplus 362 257
Retained earnings 7,166 4,516
----------------------------------------------------------------------------

68,806 66,051
----------------------------------------------------------------------------

$ 172,019 $ 184,031
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements


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

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

REVENUE (note 6) $ 21,971 $ 15,703 $ 77,721 $ 74,152

EXPENSES (note 6)
Cost of natural gas 13,898 9,448 55,944 55,829
Operating and administrative 5,874 5,108 11,714 9,741
Depreciation and amortization 1,889 1,697 3,748 3,420
----------------------------------------------------------------------------

21,661 16,253 71,406 68,990
----------------------------------------------------------------------------

Operating income (loss) 310 (550) 6,315 5,162
Interest expense 1,041 827 2,028 1,632
----------------------------------------------------------------------------

Income (loss) before income
taxes (731) (1,377) 4,287 3,530
----------------------------------------------------------------------------
Income taxes (recovery)
Current income taxes (191) (672) 1,074 867
Future income taxes - 9 (10) 126
----------------------------------------------------------------------------

(191) (663) 1,064 993
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income (loss) (540) (714) 3,223 2,537
Retained earnings, beginning of
period 7,992 4,274 4,516 1,269
Dividends declared (286) (245) (573) (491)
----------------------------------------------------------------------------

Retained earnings, end of period $ 7,166 $ 3,315 $ 7,166 $ 3,315
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income (loss) per share
(note 3)
Basic $ (0.07) $ (0.09) $ 0.39 $ 0.31
Diluted $ (0.07) $ (0.09) $ 0.39 $ 0.31

Number of shares outstanding
(note 3)
Basic 8,189,905 8,189,905 8,189,905 8,189,905
Diluted 8,189,905 8,189,905 8,194,773 8,212,563


See accompanying notes to the interim consolidated financial statements


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

($ thousands)
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
For the 2007 2006 2007 2006
----------------------------------------------------------------------------

CASH FROM OPERATIONS
Net income (loss) $ (540) $ (714) $ 3,223 $ 2,537
Items not involving cash:
Revenue deficiency accrual (463) (331) (802) (573)
Allowance for funds used during
construction (100) (76) (193) (141)
Depreciation and amortization 1,889 1,697 3,748 3,420
Operating and administrative 545 315 1,013 558
Future income taxes - 9 (10) 126
Other 52 116 105 147
----------------------------------------------------------------------------

Funds generated from operations 1,383 1,016 7,084 6,074
Net change in non-cash working
capital (note 5) 2,048 2,183 1,124 4,619
----------------------------------------------------------------------------

3,431 3,199 8,208 10,693
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Additions to property, plant and
equipment (5,140) (3,826) (9,431) (7,832)
Contributions in aid of
construction 2,172 959 2,514 1,462
Proceeds on disposition of
property, plant and equipment 6 43 20 110
Investment in regulatory and
other assets (784) (612) (944) (901)
----------------------------------------------------------------------------

(3,746) (3,436) (7,841) (7,161)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Decrease in short-term debt (209) 791 (301) 791
Increase (decrease) in long-term
debt 605 (122) 638 (4,063)
Dividends paid (286) (246) (532) (246)
Increase in customer deposits
and other liabilities 21 165 43 235
----------------------------------------------------------------------------

131 588 (152) (3,283)
----------------------------------------------------------------------------

Change in cash (184) 351 215 249
Cash, beginning of period 695 279 296 381
----------------------------------------------------------------------------

Cash, end of period $ 511 $ 630 $ 511 $ 630
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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.

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.

These consolidated financial statements are prepared by management in accordance with Canadian generally accepted accounting principles (GAAP), including accounting policies for which guidance has been provided by regulations and recommendations of the Alberta Energy and Utilities Board (EUB) and of the Nova Scotia Utility and Review Board (NSUARB). These consolidated financial statements do not include all of the disclosures required in the annual financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2006. The accounting policies applied in these consolidated financial statements are consistent with those outlined in Utility Group's annual financial statements, except as described below.

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

Changes in Accounting Policy

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

Financial Assets and Financial Liabilities

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

Utility Group adopted the following three classifications:

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

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

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

Derivatives and Hedge Accounting

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

Comprehensive Income

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

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

Regulation

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

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

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

3. SHARE CAPITAL

Net Income (Loss) Per Share

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

Stock Option Plan

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

At June 30, 2007 outstanding options are exercisable to the year 2016. Options outstanding under the plan have a weighted average exercise price of $7.25 and a weighted average remaining term of 8.80 years. Stock option compensation expense charged to operating and administrative expense for the quarter ended June 30, 2007 was $52,000 (2006 - $0.1 million), and for the six months ended June 30, 2007 was $0.1 million (2006 - $0.1 million), with a corresponding increase to contributed surplus.



Six months ended Year ended
June 30, 2007 December 31, 2006
----------------------------------------------------------------------------
Weighted Weighted
Number of average Number of average
options exercise price options exercise price
----------------------------------------------------------------------------
Stock options
outstanding,
beginning of period 310,500 $ 7.25 170,000 $ 7.50
Granted - - 150,500 6.98
Cancelled - - (10,000) 7.50
----------------------------------------------------------------------------
Stock options
outstanding, end of
period 310,500 $ 7.25 310,500 $ 7.25
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at end
of period 82,500 $ 7.52 80,000 $ 7.50
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. PENSION AND OTHER RETIREMENT BENEFIT PLANS

Utility Group has pension plans which provide either defined benefit or defined contribution pension benefits for qualified employees. These pension plans are fully funded, partially funded, or unfunded. Utility Group also provides post-employment benefits other than pensions for qualifying retired employees which are unfunded. The expense recognized for these plans is as follows:



Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Defined benefit plans $ 235 $ 283 $ 469 $ 563
Defined contribution plan 41 52 82 52
Other post-employment benefit
plans 49 51 97 101
----------------------------------------------------------------------------
$ 325 $ 386 $ 648 $ 716
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. NET CHANGE IN NON-CASH WORKING CAPITAL

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


Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Accounts receivable $ 15,120 $ 16,263 $ 16,324 $ 23,547
Inventory, prepaid expenses and
deferred charges
366 (884) (494) (487)
Accounts payable and accrued
liabilities (11,700) (9,935) (15,257) (20,508)
Deferred cost of gas, net of
income taxes (424) (1,009) 893 1,301
Income and other taxes payable (829) (1,320) 692 769
----------------------------------------------------------------------------
2,533 3,115 2,158 4,622
Increase in capital costs
receivable (70) (51) (146) (322)
Decrease (increase) in capital
costs payable (415) (881) (888) 319
----------------------------------------------------------------------------
Net change in non-cash working
capital related to operations $ 2,048 $ 2,183 $ 1,124 $ 4,619
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following cash payments were made:

Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Interest paid $ 833 $ 589 $ 1,768 $ 1,393
Income taxes paid $ 402 $ 166 $ 914 $ 719
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 ended Six months ended
June 30 June 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Fees for administration,
management and other services
paid by:
Utility Group to AltaGas Income
Trust (the Trust) $ 7 $ 7 $ 15 $ 15
The Trust to Utility Group $ 42 $ 69 $ 84 $ 165
The Trust to AUI $ 2 $ 14 $ 4 $ 28
Ikhil Joint Venture to Inuvik
Gas $ 83 $ 74 $ 177 $ 141
Fees for operating services paid
by AUI to the Trust $ 77 $ 148 $ 143 $ 194
Gas purchases for resale by
Inuvik Gas from the Ikhil Joint
Venture $ 234 $ 200 $ 818 $ 625
Transportation services provided
by AUI to the Trust $ 119 $ 141 $ 243 $ 284
Gas purchases for resale by AUI
from the Trust $ 13,195 $ 9,293 $ 51,527 $ 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, 2007 is $0.1 million ($0.7 million at December 31, 2006) due to Utility Group from the Trust.

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

7. 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.

8. CONTINGENT LIABILITY

An action has been brought against AUI by a former employee claiming damages in the aggregate amount of $300,000 for alleged wrongful dismissal. AUI has accrued $15,000 in accounts payable and accrued liabilities for this claim.

9. SUBSEQUENT EVENTS

On July 16, 2007 Utility Group purchased an additional 180,139 common shares of Heritage Gas for $0.2 million and advanced $0.3 million under its long-term loan agreement to fund capital expenditures. Contributions were also made by the other shareholders of Heritage Gas, resulting in no change to Utility Group's proportionate ownership share in Heritage Gas.

On July 31, 2007 Utility Group purchased the Trust's 33.3335% interest in the assets of the Ikhil Joint Venture for approximately $9.2 million including costs of acquisition. The acquisition was financed by Utility Group's existing bank lines. The Ikhil Joint Venture is expected to contribute to Utility Group's earnings beginning in August 2007.



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 65,000 customers in three areas of Canada through an infrastructure of nearly 20,000 kilometres of pipelines. Utility Group also holds an interest in the Ikhil Joint Venture which produces and supplies natural gas in Inuvik, Northwest Territories. Utility Group pursues opportunities to invest in infrastructure-based utility and related businesses with long-term, stable returns.

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

Contact Information