AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

November 06, 2006 18:26 ET

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

CALGARY, ALBERTA--(CCNMatthews - Nov. 6, 2006) - The Board of Directors of AltaGas Utility Group Inc. (Utility Group or the Corporation) (TSX:AUI) today announced a net loss of $0.9 million ($(0.11) per share) for the third quarter of 2006 and net income of $1.6 million ($0.20 per share) for the nine months ended September 30, 2006. Results are representative of a normal third quarter in which losses are usually reported as a result of the seasonal nature of the natural gas distribution business, resulting in declines in delivered volumes in the summer. A dividend of $0.03 per common share payable on January 15, 2007 to shareholders of record at the close of business on December 29, 2006 was also declared.

"Our third full quarter of operating results reflects the usual delivery declines after the end of the winter heating season, further impacted by a warmer than normal spring and summer," said Patricia Newson, President and Chief Executive Officer. "The AltaGas Utilities Inc. staff is working diligently to keep pace with the rapid growth in Alberta, and in the first nine months they added 1,111 service sites compared to 823 in the same period last year. This will result in close to 5 percent growth in their rate base this year compared to average historical levels of 2 percent."

Net revenue for the third quarter and first nine months of 2006 was $6.0 million and $24.3 million, respectively. In both periods, warmer than normal weather and the impact of regulatory decisions reduced Utility Group's net revenue but were partially offset by customer growth at both AltaGas Utilities Inc. and Heritage Gas Limited. Regulatory adjustments included 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 which occurred in first quarter 2006. AltaGas Utilities Inc. filed a Review and Variance application on October 31, 2006 asking the EUB to reconsider its decision that disallowed the rate for which AltaGas Utilities Inc. applied and approved a lower rate.

Operating income in the first nine months was $4.6 million, which included a third quarter operating loss of $0.5 million. After interest expense of $2.6 million and income tax expense of $0.4 million, net income for the first nine months of the year was $1.6 million. Funds generated from operations were $6.7 million in the first nine months of 2006, including $0.6 million contributed in the third 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 delivery infrastructures 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 November 6, 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 nine months ended September 30, 2006. The MD&A should be read in conjunction with the accompanying unaudited Consolidated Financial Statements of Utility Group for the three and nine months ended September 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 nine months ended September 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 nine months ended September 30, 2006 and 2005. See discussion in the "AltaGas Utility Holdings Inc. Results of Operations" section of this MD&A.



Three months Nine months
Consolidated Financial Results ended ended
($ millions except per share September 30, September 30,
amounts or as otherwise noted) 2006 2006
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Revenue 12.4 86.5
Net revenue(1) 6.0 24.3
EBITDA(1) 1.2 9.7
Operating income (loss)(1) (0.5) 4.6
Net income (loss) (0.9) 1.6

Funds generated from operations(1) 0.6 6.7

Total assets 158.8 158.8
Current liabilities 16.4 16.4
Long-term liabilities 78.8 78.8

Weighted average number of shares
outstanding (thousands)
Basic 8,190 8,190
Diluted(2) 8,190 8,212

Net income (loss) per share
- basic and diluted(2) $ (0.11) $ 0.20
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(1) Non-GAAP financial measure. See discussion in "Non-GAAP Financial
Measures" section of this MD&A.
(2) No potential common shares are included in the computation of diluted
net income (loss) per share amount when a loss is reported.


Quarter Ended September 30, 2006

The Corporation reported a net loss for the three months ended September 30, 2006 of $0.9 million. The net loss comprised an operating loss of $0.5 million and $0.9 million of interest expense, offset by a $0.5 million income tax recovery. The net loss was largely reflective of the normal seasonality of the natural gas distribution business. A number of unanticipated offsetting items resulted in the loss netting approximately as anticipated. The net loss was higher by $0.2 million due to regulatory decisions allowing lower than requested recoveries of operating and interest expenses at AUI and by $0.1 million due to lower than expected customer usage for the quarter at AUI, offset by the impact of $0.2 million lower than anticipated operating and administrative expenses and higher deliveries as a result of customer growth at AUI and Heritage Gas. While weather in the AUI franchise area was 22.2 percent warmer than normal, the third quarter is not typically a period of high natural gas consumption and generally weather variances do not have a significant impact on third quarter results.

Utility Group's revenue for the quarter ended September 30, 2006 was $12.4 million. Revenues from AUI comprised approximately 94 percent of consolidated revenue for the quarter, while Heritage Gas and Inuvik Gas each contributed $0.6 million and $0.1 million, respectively. Revenue was lower than anticipated largely due to lower gas prices and lower than expected customer usage.

The Corporation reported net revenue of $6.0 million after natural gas costs of $6.4 million for the quarter ended September 30, 2006. Gas costs are charged through to customers. AUI contributed net revenue of $5.4 million. Heritage Gas and Inuvik Gas contributed $0.5 million and $0.1 million, respectively, to net revenue in the quarter. Net revenue was lower than anticipated by $0.3 million due to regulatory decisions allowing lower than requested recoveries of operating and interest expenses, and by $0.2 million due to lower than expected customer usage at AUI.

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

Utility Group's interest expense for the three months ended September 30, 2006 was $0.9 million, reflecting average borrowing on the term credit facilities for the quarter of $73.6 million with an average interest rate of 4.9 percent.

The income tax recovery of $0.5 million in third quarter 2006 was recorded primarily 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 taxable earnings.

Year-to-date September 30, 2006

Net income for the nine months ended September 30, 2006 was $1.6 million, comprising operating income of $4.6 million, offset by $2.6 million of interest expense and $0.4 million of income tax expense.

Net income for the first nine months of 2006 was lower than anticipated. In the period, a number of unanticipated offsetting items resulted in this slight shortfall. Net income was $0.5 million lower than anticipated due to 10.9 percent warmer than normal weather and a further $1.0 million lower due to regulatory decisions allowing lower than requested recoveries of AUI's operating expenses and lower than requested interest expense on a $30 million, five-year AUI debenture. These shortfalls were partially offset by the first quarter, one-time benefit of $0.3 million due to the change in the method of billing for the fixed charge component of AUI's delivery rates, by $0.4 million due to lower than anticipated operating and administrative expenses, and by lower than anticipated depreciation and amortization and income taxes.

Utility Group's revenue for the nine months ended September 30, 2006 was $86.5 million. Revenues from AUI comprised approximately 96 percent of consolidated revenue and were $7.1 million lower than anticipated due to 10.9 percent warmer than normal weather in its franchise areas and $1.5 million lower as a result of regulatory decisions.

The Corporation reported net revenue of $24.3 million, after natural gas costs of $62.2 million, for the nine months ended September 30, 2006. Net revenue was lower than anticipated by $1.5 million due to regulatory decisions and $0.7 million due to warmer than normal weather, partially offset by $0.5 million due to the change in billing for fixed charges in first quarter 2006.

Operating and administrative expenses of $14.6 million for the nine months ended September 30, 2006 were approximately $0.6 million lower than anticipated as some budgeted operating expenses and the full staff complement are not expected to be reached until later this year, and because of increased capitalization of overhead due to high construction activity.

Depreciation and amortization expense for the nine months ended September 30, 2006 was $5.1 million. This expense was lower than anticipated due to lower regulator-approved depreciation rates at AUI, partially offset by increased depreciation at Heritage Gas due to higher capital employed to support its growth.

Utility Group's interest expense for the nine months ended September 30, 2006 was $2.6 million, reflecting average borrowing on the term credit facilities for the first nine months of the year of $71.6 million, with an average interest rate of 4.5 percent.

Income tax expense of $0.4 million during the first nine months of 2006 was recorded primarily by AUI, which under utility board direction accounts for income tax expense using the taxes payable method and so reports only income tax due on current taxable earnings. Income tax expense for the nine months ended September 30, 2006 was lower than anticipated as a result of higher expenses for tax purposes than for accounting purposes.

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 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. On October 31, 2006 AUI filed a Review and Variance Application to request that the EUB reconsider its decision.

AUI expects to file an application for Phase 2 of its 2005/2006 General Rate Application (GRA) in November 2006. This application will update the delivery tariffs and address the directives issued by the EUB in Decision 2005-029 (the 2003/2004 Phase 2 GRA). These directives related 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. A decision is expected in third quarter 2007.

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

Heritage Gas filed a General Tariff Application on September 1, 2006. A hearing has been set to commence on November 7, 2006.

On August 21, 2006 Inuvik Gas notified the Northwest Territories Public Utilities Board (NWTPUB) of a natural gas rate increase effective October 22, 2006. Once notification is sent, there is a 60-day waiting period for any formal opposition or complaint to be filed with the NWTPUB. On October 13, 2006, Inuvik Gas was advised that the Town of Inuvik had filed a complaint regarding the applied-for price increases. Inuvik Gas responded to the NWTPUB on October 27, 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 discussed below.

Non-GAAP information (unaudited) is also provided for AUHI for the three and nine months ended September 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
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Three months Nine months Three months Nine months
ended ended ended ended
Net Revenue September 30, September 30, September 30, September 30,
($ millions) 2006 2006 2005 2005
---------------------------------------------------------------------------
Net revenue 6.0 24.3 6.0 24.5
Add: Cost of
natural gas 6.4 62.2 12.1 62.0
---------------------------------------------------------------------------
Revenue
(GAAP financial
measure) 12.4 86.5 18.1 86.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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.



Utility Group AUHI
---------------------------------------------------------------------------
Three months Nine months Three months Nine months
ended ended ended ended
Operating Income September 30, September 30, September 30, September 30,
($ millions) 2006 2006 2005 2005
---------------------------------------------------------------------------
Operating income
(loss) (0.5) 4.6 (0.4) 5.0
---------------------------
---------------------------
Deduct:
Interest expense 0.9 2.6
Income taxes (0.5) 0.4
-----------------------------------------------
Net income (loss)
(GAAP financial
measure) (0.9) 1.6
-----------------------------------------------
-----------------------------------------------


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 Nine months Three months Nine months
ended ended ended ended
EBITDA September 30, September 30, September 30, September 30,
($ millions) 2006 2006 2005 2005
---------------------------------------------------------------------------
EBITDA 1.2 9.7 1.5 10.9
---------------------------
---------------------------
Deduct:
Depreciation and
amortization 1.7 5.1
Interest expense 0.9 2.6
Income taxes (0.5) 0.4
-----------------------------------------------
Net income (loss)
(GAAP financial
measure) (0.9) 1.6
-----------------------------------------------
-----------------------------------------------


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 Nine months
ended ended
Funds Generated from Operations September 30, September 30,
($ millions) 2006 2006
---------------------------------------------------------------------------
Funds generated from operations 0.6 6.7
Add: Net change in non-cash working capital 0.6 5.2
---------------------------------------------------------------------------
Cash from operations (GAAP financial measure) 1.2 11.9
---------------------------------------------------------------------------
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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 nine months ended September 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.



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

Revenue 12.4 18.1 86.5 86.5
Net revenue(2) 6.0 6.0 24.3 24.5
EBITDA(2) 1.2 1.5 9.7 10.9
Operating income (loss)(2) (0.3) (0.4) 5.1 5.0
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Deliveries (PJ):(3)
End-use 1.6 1.7 9.8 10.2
Transportation 2.0 2.4 6.9 7.0
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3.6 4.1 16.7 17.2
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Customers at period end 63,959 61,996 63,959 61,996
Degree day variance
(percent)(4) (22.2) 18.1 (10.9) (0.1)
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(1) The financial information for the three and nine months ended
September 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 period 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 September 30, 2006 Compared to Quarter Ended September 30, 2005

Revenue for the quarter ended September 30, 2006 was $12.4 million, a decrease of $5.7 million from the same period in 2005. AUI's revenue decreased $6.0 million in third quarter 2006 compared to the same period last year. The decrease was mainly due to lower gas costs of $2.0 million, $1.6 million due to 22.2 percent warmer than normal weather compared to 18.1 percent colder than normal weather in the same period last year, approximately $1.0 million due to lower usage and $0.6 million due to regulatory decisions. This decline was partially offset by growth at AUI and Heritage Gas.

Cost of natural gas for the quarter ended September 30, 2006 was $6.4 million, a decrease of $5.7 million from the same quarter in 2005. The decline was mainly due to lower gas prices and lower deliveries as a result of warmer weather and lower usage than the same period last year, partially offset by higher deliveries due to customer growth at AUI and Heritage Gas. Net revenue is unaffected by changes in natural gas prices as the cost of natural gas is recovered from customers.

Net revenue for the quarter ended September 30, 2006 was $6.0 million, the same as in third quarter 2005. Net revenue in third quarter 2006 decreased by $0.5 million due to regulatory decisions, offset by growth in the AUI and Heritage Gas franchise areas.

Operating and administrative expenses for the quarter ended September 30, 2006 increased by $0.3 million compared to 2005 due to increased costs of materials and labour primarily as a result of the strong Alberta economy, partially offset by high construction activity resulting in higher capitalization of employee costs.

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

Revenue for the nine months ended September 30, 2006 was $86.5 million, same as last year. AUI's revenue decreased approximately $1.0 million in the nine months ended September 30, 2006 compared to the same period last year. Revenue increased by approximately $6.0 million due to higher gas costs and $0.6 million due to the change in the billing of fixed charges at AUI in first quarter 2006 and customer growth at AUI and Heritage Gas. Revenue decreased by approximately $3.0 million due to 10.9 percent warmer than normal weather compared to relatively normal weather in the same period last year, by approximately $3.0 million due to lower customer usage and $1.0 million due to a regulatory decision.

The cost of natural gas for the nine months ended September 30, 2006 was $62.2 million, an increase of $0.2 million from the same period in 2005. Higher natural gas prices and customer growth were partially offset by the impact of warmer weather and lower customer usage compared to the same period last year.

Net revenue for the nine months ended September 30, 2006 was lower by $0.2 million from the same period in 2005. At AUI net revenue decreased by $0.9 million due to a regulatory decision and $0.5 million due to 10.9 percent warmer than normal weather compared to relatively normal weather last year. The decrease was offset by $0.6 million as a result of the change in billing for fixed charges in first quarter 2006 as well as customer growth at AUI and Heritage Gas.

Operating and administrative expenses for the nine months ended September 30, 2006 increased by $1.0 million from the same period in 2005 due to increased costs of materials and labour as a result of the strong Alberta economy.

UTILITY GROUP SUMMARY OF MOST RECENTLY COMPLETED QUARTERS

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



Utility Group
---------------------------------------------------------------------------
Three months Three months Three months Period
ended ended ended ended
September 30, June 30, March 31, December 31,
($ millions) 2006 2006 2006 2005
---------------------------------------------------------------------------
Net revenue 6.0 6.3 12.0 5.6
Operating income
(loss) (0.5) (0.5) 5.6 2.0
Net income (loss) (0.9) (0.7) 3.2 1.3
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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 nine months of 2006, cash from operations benefited from the collection of accounts receivable from the winter heating season. The nine-month funds generated from operations of $6.7 million were increased by the net change in non-cash working capital of $5.2 million, resulting in $11.9 million of cash from operations.

Investing Activities

Cash used for investing activities in the three and nine months ended September 30, 2006 was $3.7 million and $10.8 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. Construction activity was significantly higher than normal due to population growth in Alberta driving higher connections. In the nine months ended September 30, 2006 AUI completed 1,111 service installations compared to 823 in the same period last year and increased main extensions into subdivisions.

In third quarter 2006, capital expenditures at AUI, net of contributions in aid of construction, were $1.8 million (2005 - $2.0 million). In third quarter 2006, $0.2 million was related to new business from increased growth in AUI's service areas, $0.5 million was related to system betterment and $1.1 million was for general plant replacements (third quarter 2005 - $0.5 million for new business, $0.7 million for system betterment and $0.8 million for general plant).

AUHI's share of capital expenditures for delivery system expansion at Heritage Gas was $1.4 million in third quarter 2006 compared to $1.9 million in third quarter 2005.

Capital expenditures at AUI, net of contributions in aid of construction, were $6.5 million and $4.7 million for the nine months ended September 30, 2006 and 2005, respectively. Year-to-date 2006, $2.3 million was related to new business, $2.1 million was related to system betterment and $2.1 million was for general plant replacements (year-to-date 2005 - $1.3 million for new business, $2.1 million for system betterment and $1.2 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 $2.7 million year-to-date 2006 compared to $2.6 million in the same period of 2005.

During the nine months ended September 30, 2006 Utility Group advanced $3.2 million to Heritage Gas, purchasing 1.2 million common shares at $1.00 per share, with the balance comprising an advance of $2.0 million under its long-term loan arrangement (third quarter 2006 - $1.4 million, 0.5 million common shares, and $0.9 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 third quarter 2006 Utility Group increased long-term debt by $2.7 million and decreased short-term debt by $0.6 million, paid dividends of $0.3 million and received $0.6 million in customer deposits.

During the first nine months of 2006 Utility Group repaid $1.4 million of long-term debt, paid dividends of $0.5 million, received $0.9 million in customer deposits and borrowed $0.2 million under its short-term facility.

On October 19, 2006, the lenders granted the Corporation a one-year extension to its $100.0 million unsecured extendible revolving credit facility. The maturity date of the credit facility is November 17, 2009.

Prior to second quarter 2006 Utility Group proportionately consolidated the debt of its jointly controlled investments resulting in an increase in the long-term debt and reported corresponding advances in Other Assets. Beginning in second quarter 2006 the Corporation nets these balances. Long-term debt has been reduced by $3.5 million and $3.8 million as at December 31, 2005 and March 31, 2006, respectively.

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 September 30, 2006 was 54.4 percent. The Corporation's debt-to-total capitalization ratio as at December 31, 2005 was 55.2 percent.

Utility Group funds its long-term borrowing requirements with a credit facility from a syndicate of Canadian chartered banks 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 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 quarter covered by this report. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 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 September 30, 2006, Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $4.6 million. The Corporation also paid the Trust $0.1 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 nine months ended September 30, 2006, Utility Group purchased natural gas from the Trust for $51.8 million. The Corporation also paid the Trust $0.3 million for operating services. The Trust purchased transportation services from Utility Group for $0.4 million. The Corporation also received $0.3 million from the Trust for administration, management and other services.

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

For the nine months ended September 30, 2006, Utility Group purchased natural gas from the Ikhil Joint Venture for $0.7 million and the Ikhil Joint Venture in turn paid Utility Group $0.3 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 September 30, 2006 was $0.5 million due to Utility Group from the Trust.

Included in accounts payable and accrued liabilities at September 30, 2006 is $2.0 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 in the first half of the year and unfavourable regulatory decisions will reduce net income below the anticipated level, and will be partially offset by lower than budgeted operating and administrative expense due to vacant positions and increased capitalization of employee costs as a result of increased construction, 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. Rate base growth in Alberta is double the historical pace, and should drive higher earnings next year. On a consolidated basis, 2007 rate base growth is currently expected to exceed 10 percent. 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 October 13, 2006, Utility Group purchased an additional 387,205 common shares of Heritage Gas for $0.4 million and advanced $0.5 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
($ thousands)
---------------------------------------------------------------------------
September 30 December 31
2006 2005
As at (unaudited) (audited)
---------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 640 $ 381
Accounts receivable (note 6) 7,064 30,089
Inventory 344 269
Deferred cost of gas, net of income taxes - 1,082
Future income tax asset 122 133
Prepaid expenses and deferred charges 1,372 1,292
---------------------------------------------------------------------------
9,542 33,246
Property, plant and equipment 113,014 106,986
Goodwill 31,575 31,575
Regulatory assets 4,551 3,046
Other assets 174 166
---------------------------------------------------------------------------
$ 158,856 $ 175,019
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 206 $ -
Accounts payable and accrued liabilities (note 6) 15,534 32,752
Dividends payable 246 -
Income and other taxes payable 404 451
Deferred cost of gas, net of income taxes 8 -
---------------------------------------------------------------------------
16,398 33,203
Long-term debt 75,789 77,164
Customer deposits and other liabilities 2,830 1,979
Future income tax liability 204 119
---------------------------------------------------------------------------
95,221 112,465
---------------------------------------------------------------------------
Shareholders' equity
Share capital 61,278 61,278
Contributed surplus 200 7
Retained earnings 2,157 1,269
---------------------------------------------------------------------------
63,635 62,554
---------------------------------------------------------------------------
$ 158,856 $ 175,019
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the interim Consolidated Financial Statements


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

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

REVENUE (note 6) $ 12,375 $ 86,527
---------------------------------------------------------------------------

EXPENSES (note 6)
Cost of natural gas 6,389 62,218
Operating and administrative 4,855 14,608
Depreciation and amortization 1,662 5,082
---------------------------------------------------------------------------
12,906 81,908
---------------------------------------------------------------------------
Operating income (loss) (531) 4,619
Interest expense 947 2,567
---------------------------------------------------------------------------
Income (loss) before income taxes (1,478) 2,052
---------------------------------------------------------------------------
Income taxes
Current income taxes (537) 330
Future income taxes (29) 97
---------------------------------------------------------------------------
(566) 427
---------------------------------------------------------------------------
Net income (loss) (912) 1,625
Retained earnings, beginning of period 3,315 1,269
Dividends declared (246) (737)
---------------------------------------------------------------------------
Retained earnings, end of period $ 2,157 $ 2,157
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net income (loss) per share (note 3)
Basic and diluted $ (0.11) $ 0.20

Number of shares outstanding (note 3)
Basic 8,189,905 8,189,905
Diluted 8,189,905 8,211,894

See accompanying notes to the interim Consolidated Financial Statements


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

($ thousands)
---------------------------------------------------------------------------
Three months Nine months
ended ended
September 30 September 30
For the 2006 2006
---------------------------------------------------------------------------
CASH FROM OPERATIONS
Net income (loss) $ (912) $ 1,625
Items not involving cash:
Revenue deficiency accrual (367) (940)
Allowance for funds used during construction (62) (203)
Depreciation and amortization 1,662 5,082
Operating and administrative 262 820
Future income taxes (29) 97
Other 67 214
---------------------------------------------------------------------------
Funds generated from operations 621 6,695
Net change in non-cash working capital (note 4) 599 5,218
---------------------------------------------------------------------------
1,220 11,913
---------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (5,250) (13,082)
Contributions in aid of construction 2,062 3,524
Proceeds on disposition of property, plant and
equipment 17 127
Investment in regulatory and other assets (513) (1,414)
---------------------------------------------------------------------------
(3,684) (10,845)
---------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (585) 206
Increase (decrease) in long-term debt 2,688 (1,375)
Dividends paid (245) (491)
Increase in customer deposits and other
liabilities 616 851
---------------------------------------------------------------------------
2,474 (809)
---------------------------------------------------------------------------
Change in cash 10 259
Cash, beginning of period 630 381
---------------------------------------------------------------------------
Cash, end of period $ 640 $ 640
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to the interim 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. As such, comparative statements of net income and of cash flows are not reflected.

AUHI's subsidiaries, AltaGas Utilities Inc. (AUI), AltaGas Utility Holdings (Nova Scotia) Inc. (AUHI(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 AUHI(NS) are wholly owned subsidiaries of AUHI, while Inuvik Gas is one-third owned by AUHI. AUHI(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 first quarter 2006. The net impact of the reversal was to reduce net income by $0.3 million.

3. SHARE CAPITAL

Net Income (Loss) Per Share

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

Stock Option Plan

The Corporation has an employee share option plan under which both employees and directors are eligible to receive grants. At September 30, 2006, 818,990 shares were reserved for issuance under the plan. To September 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. At September 30, 2006, outstanding options were exercisable to the year 2016. Options outstanding under the plan had a weighted average exercise price of $7.51 per share and a weighted average remaining term of 9.17 years. Stock option compensation expense charged to operating and administrative expense for the quarter was $0.1 million and for the nine months ended September 30, 2006 was $0.2 million, with a corresponding increase to contributed surplus.



---------------------------------------------------------------------------
At September 30, 2006
---------------------------------------------------------------------------
Weighted
average
remaining Number of
contractual options
Expiry date life/years outstanding Exercise price
---------------------------------------------------------------------------
2015 9.13 160,000 $ 7.50
2016 9.46 10,000 8.06
2016 9.83 5,500 6.92
---------------------------------------------------------------------------
9.17 175,500 $ 7.51
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Number of Weighted
options average
outstanding exercise price
---------------------------------------------------------------------------
Stock options outstanding December 31, 2005 170,000 $ 7.50
Granted 15,500 7.68
Cancelled (10,000) 7.50
---------------------------------------------------------------------------
Stock options outstanding September 30, 2006 175,500 $ 7.51
---------------------------------------------------------------------------
Exercisable at September 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 Nine months
ended ended
September 30, September 30,
2006 2006
---------------------------------------------------------------------------
Accounts receivable $ (8) $ 23,031
Inventory, prepaid expenses and deferred
charges 332 (155)
Accounts payable and accrued liabilities 3,290 (17,218)
Deferred cost of gas, net of income taxes (211) 1,090
Income and other taxes payable (821) (52)
---------------------------------------------------------------------------
2,582 6,696

Items not related to operations:
Decrease in accounts receivable related to
pension liability assumed (508) -
Increase in capital costs payable (1,466) (1,147)
Decrease in capital costs receivable (9) (331)
---------------------------------------------------------------------------
Net change in non-cash working capital
related to operations $ 599 $ 5,218
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

Three months Nine months
ended ended
September 30, September 30,
2006 2006
---------------------------------------------------------------------------
Interest paid $ 368 $ 1,761
Income taxes paid $ 187 $ 906
---------------------------------------------------------------------------
---------------------------------------------------------------------------


5. PENSION AND OTHER RETIREMENT BENEFIT PLANS

For the three months ended September 30, 2006, net expense of $0.3 million was recognized for all pension benefit plans and net expense of $0.1 million was recognized for other retirement benefit plans. In the nine months ended September 30, 2006, net expense of $0.9 million was recognized for all pension benefit plans and net expense of $0.2 million was recognized for other retirement benefit plans.

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 Nine months
ended ended
September 30, September 30,
2006 2006
---------------------------------------------------------------------------
Fees for administration, management and other
services paid by:
Utility Group to the Trust $ 8 $ 23
The Trust to Utility Group $ 90 $ 255
The Trust to AUI $ 3 $ 31
Ikhil Joint Venture to Inuvik Gas $ 147 $ 288
Fees for operating services paid by AUI to
the Trust $ 149 $ 343
Gas purchases for resale by Inuvik Gas from
the Ikhil Joint Venture $ 106 $ 731
Transportation services provided by AUI to
the Trust $ 137 $ 421
Gas purchases from the Trust $ 4,586 $ 51,760
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

Included in accounts receivable at September 30, 2006 is $0.5 million due to Utility Group from AltaGas Income Trust (the Trust).

Included in accounts payable and accrued liabilities at September 30, 2006 is $2.0 million due from Utility Group to the Trust, of which $1.9 million is 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 October 13, 2006, Utility Group purchased an additional 387,205 common shares of Heritage Gas for $0.4 million and advanced $0.5 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 delivery infrastructures 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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