AltaGas Utility Group Inc.
TSX : AUI

AltaGas Utility Group Inc.

May 09, 2008 15:11 ET

AltaGas Utility Group Inc. Delivers Record First Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - May 9, 2008) - The Board of Directors of AltaGas Utility Group Inc. (Utility Group) (TSX:AUI) today announced net income of $4.4 million ($0.54 per share) for the first quarter of 2008, up from $3.8 million ($0.46 per share) for the first quarter of 2007. On April 16, 2008, Utility Group announced a 12.5 percent increase in its dividend to $0.045 per share, up from $0.04 per share. The dividend will be payable on July 15, 2008 to shareholders of record at the close of business on June 30, 2008.

Net income for the first quarter of 2008 increased by $0.6 million to $4.4 million (2007 - $3.8 million) reflecting a combination of business growth in franchise areas ($0.2 million increase), the acquisition of Ikhil in July 2007 ($0.3 million increase) and colder weather in Alberta ($0.2 million increase). These increases were offset by higher income tax expense of $0.1 million in 2008 due to higher income before taxes.

"Our first quarter results reflect our strongest seasonal operating period and are a solid start to 2008," said Patricia Newson, President and Chief Executive Officer. "We have delivered record net income driven by our continuous growth in all areas of our business over the past three years."

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis (MD&A) of financial condition and results of operations dated May 8, 2008 is a review of the results of operations and the liquidity and capital resources of AltaGas Utility Group Inc. (Utility Group) for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto for the three months ended March 31, 2008 and the audited consolidated financial statements and MD&A contained in Utility Group's Annual Report for the year ended December 31, 2007.

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).

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

II. OVERVIEW OF THE BUSINESS AND STRATEGY

The business of Utility Group is the ownership and operation of businesses that deliver and sell natural gas to end-users, including regulated natural gas transmission and distribution facilities in Alberta, Nova Scotia and the Northwest Territories, Canada and natural gas production and processing facilities in the Northwest Territories that deliver and sell natural gas to end-users. 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 other factors that might typically affect volumes.

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. Ikhil produces natural gas for sale under long-term contracts based on the price of diesel fuel. These contracts are with the Northwest Territories Power Corporation (NWTPC) and Inuvik Gas.

Utility Group's strategy is to grow its existing business through infill and expansion of services within current franchise areas or, in the case of Heritage Gas, to develop new systems in new market areas. In addition, Utility Group actively pursues the prudent acquisition of other utility-type infrastructure and related businesses in Canada. Utility Group's management team and Board of Directors have significant utility and infrastructure asset management, acquisition and capital markets experience. 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 months ended March 31, 2008 and March 31, 2007.



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Consolidated Financial Results
($ millions, except per share amounts or as Three Months Ended March 31
otherwise noted) 2008 2007
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Revenue 58.2 55.7
Net revenue(1) 15.7 13.7
EBITDA(1) 9.3 7.9
Operating income(1) 7.1 6.0
Net income 4.4 3.8
Funds generated from operations(1) 6.4 5.7
Total assets(2) 219.9 210.9
Long-term liabilities(2) 116.3 105.2
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Shares outstanding (thousands)
Basic 8,190 8,190
Diluted 8,190 8,193
Net income per share - basic $ 0.54 $ 0.46
Net income per share - diluted $ 0.54 $ 0.46
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(1) Non-GAAP financial measure: see discussion in "Non-GAAP Financial
Measures" section of this MD&A.
(2) Balances are as at December 31, 2007.


1. Discussion of Consolidated Financial Results for the three months ended March 31, 2008

Net income for the three months ended March 31, 2008 was $4.4 million (2007 - $3.8 million) or $0.54 per share (2007 - $0.46 per share). The $0.6 million improvement in net income in the current quarter compared to the same quarter in 2007 was a result of Utility Group's one-third interest in Ikhil acquired on July 31, 2007, which contributed $0.3 million to Utility Group's first quarter 2008 net income, rate base growth at AUI and Heritage that contributed $0.2 million and 5.2 percent colder than last year weather in Alberta that contributed $0.2 million. These increases were offset by $0.1 million higher income tax expense due to the increase in income before taxes.

Utility Group's revenue for the three months ended March 31, 2008 increased by 4 percent to $58.2 million (2007 - $55.7 million). AUI's revenue of $54.7 million represents 94 percent of total consolidated revenue. Heritage Gas contributed $2.3 million, Inuvik Gas contributed $0.9 million and Ikhil contributed revenue of $0.3 million.

For the three months ended March 31, 2008 Utility Group's net revenue grew by $2.0 million to $15.7 million (2007 - $13.7 million), after natural gas costs of $42.5 million (2007 - $42.0 million). AUI contributed $0.8 million of the increase from last year, $0.2 million was contributed by Heritage Gas, and $1.0 million was contributed by Ikhil and Inuvik Gas. AUI's higher net revenue was driven by an 8 percent growth in its 2008 mid-year rate base, and 5.2 percent colder weather, compared to last year. Heritage Gas' net revenue grew as a result of a 59 percent increase in its rate base as a result of the Halifax Harbour crossing completed in 2007.

Operating and administrative expenses increased to $6.4 million for the first quarter of 2008 (2007 - $5.8 million), due to increased staffing to support business growth and general cost increases, including salaries and benefits.

Depreciation, depletion and amortization expense increased to $2.2 million in the three months ended March 31, 2008 (2007 - $1.9 million) as a result of higher investment in property, plant and equipment in late 2007.

Interest expense for the three months ended March 31, 2008 was $1.4 million (2007 - $1.0 million). The increase in interest expense is attributed to higher average outstanding debt. Average outstanding debt during the first quarter of 2008 was $104.6 million (2007 - $78.6 million). The average interest rate for the first three months of this year was 4.5 percent compared to an average interest rate of 4.9 percent for the same period last year.

Utility Group's income tax expense for the three months ended March 31, 2008 was $1.3 million (2007 - $1.2 million). 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. During the first quarter of 2008, Utility Group's income tax expense only slightly increased despite higher net income for tax purposes due largely to the higher expenses for tax purposes than book purposes.



2. Business Operations

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Operating Information Three Months Ended March 31
2008 2007
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Deliveries (PJ) (1)(2)
End-use 6.8 6.5
Transportation 1.8 2.1
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8.6 8.6
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Degree day variance (percent)(3) 3.0 (1.5)
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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) 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 Distribution March 31, 2008 March 31, 2007
Service Service
Sites(1) PJs(2)(3) Sites(1) PJs(2)(3)
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Operating Business
AUI End-use 66,864 6.59 64,115 6.35
AUI Transportation - 1.80 - 2.10
Heritage Gas 1,312 0.13 865 0.08
Inuvik Gas 824 0.05 805 0.05
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69,000 8.57 65,785 8.58
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(1) Service sites reflect all of the service sites of AUI, Heritage Gas and
Inuvik Gas.
(2) A petajoule (PJ) is 1 million gigajoules.
(3) Deliveries reflect Utility Group's 100 percent share in AUI and its
proportionate share of Heritage Gas (24.9 percent) and Inuvik Gas (one-
third).


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Natural Gas Production Three Months Ended Three Months Ended
March 31, 2008 March 31, 2007
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GJs(1) Mcf(2) GJs(1)(4) Mcf(2)(4)
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Ikhil production(3) 76,988 72,153 75,876 71,110
Sold to Inuvik Gas (47,251) (44,284) (46,648) (43,718)
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Sold to NWTPC 29,737 27,869 29,228 27,392
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(1) In Canada, the GJ, a metric measurement of heat energy, is considered
the industry standard measurement for natural gas distribution
deliveries.
(2) The imperial measure of natural gas volumes is the cubic foot, the
measure most commonly used in the natural gas production industry to
report volumes of reserves and production.
(3) Natural gas production reflects Utility Group's proportionate share
(33.3335 percent) of Ikhil.
(4) Utility Group acquired Ikhil on July 31, 2007. March 31, 2007 figures
are provided for comparative purposes only.


AUI

AUI's operating income for the first quarter of 2008 was $6.0 million (2007 - $5.7 million) compared to the same period in 2007. The increase in operating income was a result of colder weather and a growth in rate base.

AUI's market consists primarily of residential and small commercial consumers located in smaller population centres or rural areas of Alberta. AUI completed the period with 66,864 active service sites (2007 - 64,115). In 2008, the growth of AUI's service sites and business was driven by economic growth in established franchises creating infill and expansion opportunities. Infill growth demand for space and water heating fuel within AUI's franchise service areas continues to be concentrated in town distribution systems and relates to servicing new homes and commercial developments with natural gas. AUI serves almost all of the potential market in its existing service areas. During the first quarter of 2008, AUI increased volumes delivered to end-users by 4 percent compared to the same period in 2007.

Heritage Gas

For the three months ended March 31, 2008 Heritage Gas' operating income was $0.6 million (2007 - $0.5 million). The growth in operating income is a function of the increased rate base over the same period in 2007. Utility Group's share of rate base over the quarter ended March 31, 2008 was $20.8 million (2007 - $13.0 million).

At March 31, 2008, Heritage Gas had installed service lines to 1,523 customers, of which 1,312 were activated by period-end.

In 2007, Heritage Gas completed the Halifax Harbour crossing to provide natural gas service to the Halifax peninsula. During 2008, Heritage Gas expects to activate large commercial and government customers on the peninsula, increasing both rate base and customer billings.

Inuvik Gas and Ikhil

On July 31, 2007 Utility Group purchased Ikhil. Ikhil supplies Inuvik Gas and NWTPC with natural gas from two producing wells which had remaining recoverable gas of approximately 9 Bcf (3 Bcf net to Utility Group) at acquisition. The wells produce an average of approximately 2.5 Mmcf/d (0.83 Mmcf/d net to Utility Group) of sweet dry gas. Operating results for Ikhil are proportionately consolidated from August 1, 2007. Inuvik Gas' operating income remained consistent at $0.2 million with the prior year representing the mature market it serves. Ikhil's operating income contributed $0.6 million to Utility Group's first quarter 2008 results, which met management's expectations for the investment.

3. Regulatory Update

AltaGas Utilities Inc.

In December 2006 AUI filed Phase 2 of its 2005/2006 General Tariff Application. The Alberta Energy and Utilities Board (EUB) issued decision 2007-079 on October 16, 2007, approving the rates and terms and conditions of service as requested effective November 1, 2007.

On December 29, 2006 AUI filed Phase 1 of its 2007 GTA. AUI sought approval for a forecast rate base of $104.6 million, an increase of $7.4 million from its 2006 approved rate base of $97.2 million, and of a revenue requirement, net of gas costs, of $37.5 million, which would have been an increase of $4.4 million or 13.3 percent from the 2006 allowed net revenue requirement of $33.1 million. A public hearing was held in Edmonton, Alberta in August 2007 and the Alberta Utilities Commission (AUC) issued Decision 2007-094 on December 11, 2007. The decision approved AUI's 2007 rate base at $104.4 million, $0.2 million less than applied for, and a revenue requirement of $35.7 million, or $1.8 million less than applied for, primarily the result of disallowed certain operating expenses. AUI has filed a Review and Variance application in March 2008 with respect to Decision 2007-094. AUI believes that a number of issues with respect to the exclusion of operating expenses provide sufficient justification for the AUC to reconsider the decision. The 2007 revenue reported reflects the results of Decision 2007-094.

Since December 31, 2007, AUC has initiated a number of generic proceedings:

- On February 21, 2008 AUI asked for opinions regarding if the current generic cost of capital adjustment formula continues to yield a fair return on equity and if the capital structures of all utilities in Alberta should be addressed on a generic basis. On April 4, 2008 AUI provided a written submission followed by a reply submission on April 18, 2008. The AUC has not established the timing or the form of any further proceedings to address the generic cost of capital.

- On March 20, 2008 AUC initiated a process to review the rules that apply to cost awards to applicants and interveners in regulatory proceedings. On April 15, 2008 AUI submitted its views regarding the funding of the Utility Consumer Advocate and the recovery of the current scale of costs.

- On April 11, 2008 the AUC initiated a process to review the Annual Report of Operations to increase the thresholds of variances reported. AUI filed a submission on April 17, 2008 supporting the AUC's initiative.

- On April 12, 2008 the AUC initiated a process to examine the implications of the Supreme Court of Canada's decision regarding Atco Gas' sale of its Calgary Stores Block. On April 24, 2008, AUI registered as an observer of the proceedings.

AUI expects to file a Phase I 2008/2009 General Tariff Application in the second quarter of 2008.

4. Non-GAAP Financial Measures

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



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Net revenue Three Months Ended March 31
($ millions) 2008 2007
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Net revenue 15.7 13.7
Add: Cost of natural gas 42.5 42.0
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Revenue (GAAP financial measure) 58.2 55.7
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Management believes that net revenue better reflects operating performance than does revenue as changes in the market price of natural gas purchased for resale affect both revenue and the cost of natural gas.



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Operating income Three Months Ended March 31
($ millions) 2008 2007
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Operating income 7.1 6.0
Deduct: Interest expense 1.4 1.0
Income taxes (1) 1.3 1.2
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Net income (GAAP financial measure) 4.4 3.8
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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 March 31
($ millions) 2008 2007
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EBITDA 9.3 7.9
Deduct: Depreciation and amortization 2.2 1.9
Interest expense 1.4 1.0
Income taxes(1) 1.3 1.2
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Net income (GAAP financial measure) 4.4 3.8
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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 March 31
($ millions) 2008 2007
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Funds generated from operations 6.4 5.7
Net change in non-cash working capital (9.4) (1.1)
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Cash from operations (GAAP financial measure) (3.0) 4.6
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Funds generated from operations are provided to assist in determining Utility Group's ability to generate cash from operations, after interest and taxes, without regard to changes in non-cash working capital in the period.

5. Summary of Eight Recently Completed Quarters

The table below sets forth selected data from Utility Group's consolidated financial statements for the eight recently completed quarters ended March 31, 2008. This information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2007 and related notes thereto.



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2008 2007 2006
($ millions) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
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Net revenue(1) 15.7 12.4 7.4 8.1 13.7 11.4 6.0 6.3
Operating income
(loss)(1) 7.1 4.5 (0.5) 0.3 6.0 4.2 (0.5) (0.6)
Net income (loss) 4.4 2.6 (1.2) (0.5) 3.8 2.6 (0.9) (0.7)
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2008 2007 2006
($ per share) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
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Net income (loss)
Basic 0.54 0.31 (0.14) (0.07) 0.46 0.32 (0.11) (0.09)
Diluted 0.54 0.31 (0.14) (0.07) 0.46 0.32 (0.11) (0.09)
Dividends
declared(2) 0.040 0.040 0.035 0.035 0.035 0.030 0.030 0.030
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(1) Non-GAAP financial measure. See "Non-GAAP Financial Measures" section of
this MD&A.
(2) On April 16, 2008 Utility Group declared a dividend of $0.045 per share
payable on July 15, 2008 to shareholders of record on the close of
business on June 30, 2008.


Utility Group's earnings are highly seasonal, as distribution revenues are primarily based on the demand for space heating in the winter months, mainly from November to March. Costs, 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 other factors that might typically affect volumes.

IV. UTILITY GROUP'S FINANCIAL POSITION

The following table outlines the significant changes in the consolidated balance sheets of Utility Group at March 31, 2008 compared to December 31, 2007.



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Balance Sheet Item Increase
($ millions) (decrease) Explanation
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Accounts receivable 3.7 Increased due to higher sales revenue
driven by higher gas prices and cold
weather, and an. increase in the revenue
deficiency accrual for 2008 business.

Property, plant and 1.8 Organic growth at both Heritage Gas and
equipment (net of AUI.
accumulated
depreciation)

Deferred cost of gas, 0.4 Gas costs are included in allowed rates
net of income taxes on 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 be an asset or a liability.

Accounts payable (6.4) Reduction reflects lower gas volumes
purchased in March 2008 compared
to December 2007; and payments related to
capital expenditures and general trade
payables.

Income and other taxes 0.8 Increased income taxes payable due to
higher tax installments paid by year-end
2007 compared to installments paid by the
end of the first quarter 2008.
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V. INVESTED CAPITAL

During the first quarter of 2008 Utility Group invested $6.5 million in property, plant and equipment and regulatory and other assets (2007 - $3.9 million). The first quarter 2008's investment in property, plant and equipment included $3.4 million at AUI and $0.4 million at Heritage Gas (Utility Group's proportionate share). Of the $5.0 million invested in 2008, $2.7 million (2007 - $3.1 million), or 54 percent (2007 - 82 percent), was spent to expand the systems to service new sites.



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Net Capital Invested Three months ended March 31
($ millions) 2008 2007
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Invested capital:
New business - organic growth 2.7 3.2
System betterment and gas supply 1.3 0.3
General plant 1.0 0.2
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5.0 3.7
Regulatory and other assets 1.5 0.2
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6.5 3.9
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VI. LIQUIDITY AND CAPITAL RESOURCES

Utility Group expects that 2008 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 March 31
($ millions) 2008 2007
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Cash, beginning of period 0.8 0.3
Operating activities (3.0) 4.6
Investing activities (6.5) (3.9)
Financing activities 9.5 (0.3)
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Cash, end of period 0.8 0.7
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Cash from Operations

The natural gas business is seasonal in nature. Operating cash flows may fluctuate significantly during the year due to working capital changes driven by weather, gas prices, and collections from customers. Warmer weather can lead to lower revenues from decreased volumes of natural gas sold. Net cash used in operations was $3.0 million in the first quarter of 2008 (2007 - $4.6 million). In the three months ended March 31, 2008, funds generated from operations was $6.4 million (2007 - $5.7 million), which reflects a $0.6 million increase in net income for the first quarter of 2008 compared to the first quarter last year, as well as changes in working capital. Significant working capital changes include the following:

- Accounts receivable increased by $3.7 million during the first quarter of 2008 due to higher sales revenue driven by higher gas prices and cold weather, and an increase in the revenue deficiency accrual for 2008 business. Over the first quarter of 2007, there was a decrease in accounts receivable as a result of a drop in gas prices and gas volumes in the later part of the quarter when compared to late 2006 deliveries.

- Inventory, prepaid expenses and deferred charges increased by $1.6 million since year-end 2007. The increase in the same quarter in 2007 was $0.9 million.

- Accounts payable and accrued liabilities decreased by $5.3 million due to lower volumes purchased in March 2008 compared to December 2007 as well as payments related to general trade payables. In the first quarter of 2007, the reduction in accounts payable and accrued liabilities was largely a result of lower gas volumes and gas prices for March 2007 compared to the December 2006 purchases.

Investing Activities

During the first quarter of 2008, cash used in investing activities was $5.4 million, with an additional $1.1 million invested using non-cash working capital. Of the total $6.5 million invested, $6.3 million related to additions to property, plant and equipment to support organic growth at both AUI and Heritage Gas and system betterment projects at AUI. $1.5 million was invested in regulatory and other assets. During first quarter of 2007, investing activities totalled $3.9 million, the majority of which was invested in property, plant and equipment.

Financing Activities

During first quarter 2008, financing activities provided $9.5 million compared to cash used of $0.3 million during the same 2007 quarter. In the first quarter 2008, bank lines were drawn by an additional $11.0 million to fund business growth, while the repayment of short-term borrowings and the payment of $0.3 million of dividends during the quarter used cash of $1.5 million (2007 - $0.3 million) to fund the shortfall from cash used in operations.

Capital Resources

Utility Group believes that its access to debt and equity markets, undrawn 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 2008.

The use of debt or equity funding is based on Utility Group's capital structure, which is determined by considering the norms and risks associated with each of its businesses and capital structures deemed by the AUC and the NSUARB. Utility Group targets a debt-to-total capitalization ratio of approximately 60 percent. Utility Group's debt-to-total capitalization ratio as at March 31, 2008 was 60.4 percent (December 31, 2007 - 59.6 percent). In light of its growth, Utility Group will be reviewing its target capital structure in the near future.

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.



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Drawn at Drawn at
Credit Facilities March 31, December 31,
($ millions) 2008 2007
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Demand operating credit facility 0.5 1.7
Revolving, term credit facility 111.9 101.0
Loan from Province of Nova Scotia(1) 1.0 0.9
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113.4 103.6
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(1) The Province of Nova Scotia loan is recorded at its fair value of $3.9
million as at March 31, 2008 (Utility Group's share - $1.0 million),
compared to $3.8 million (Utility Group's share - $0.9 million) as at
December 31, 2007.


As at March 31, 2008 Utility Group had banking arrangements as follows:

- An extendible revolving credit facility with a syndicate of Canadian chartered banks for $130.0 million under which prime rate loans, USBR loans, letters of credit, bankers' acceptances or LIBOR loans may be drawn, repayable on November 17, 2010. The maturity date is extendible upon consent of each lender for further successive one-year periods. At March 31, 2008 bankers' acceptances with short-term maturities of $111.9 million (December 31, 2007 - $101.0 million) were outstanding.

- 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 drawn, repayable in full upon demand. Draws against this facility as of March 31, 2008 were $0.5 million (December 31, 2007 - $1.7 million).

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 March 31, 2008, as at each quarter end since the facilities were established, Utility Group was in compliance with these covenants.

VII. SHARE CAPITAL

Capital Stock and Stock Options

Utility Group had 8,189,905 common shares outstanding at March 31, 2008 (December 31, 2007 - 8,189,905 common shares). Utility Group has an employee stock option plan under which both employees and directors are eligible to receive grants. At March 31, 2008, 818,990 shares (December 31, 2007 - 818,990 shares) were reserved for issuance under the plan. To March 31, 2008 options granted under the plan had a term of 10 years to expiry and vested no longer than over a four-year period.



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Stock Options
----------------------------------------------------------------------------
May 8, March 31, December 31,
2008 2008 2007
----------------------------------------------------------------------------
Stock options outstanding 481,000 473,500 473,500
Stock options exercisable 160,125 160,125 157,625
----------------------------------------------------------------------------
----------------------------------------------------------------------------


VIII. OFF-BALANCE-SHEET ARRANGEMENTS

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

IX. DISCLOSURE CONTROLS AND PROCEDURES

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 March 31, 2008 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 March 31, 2008 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 March 31, 2008 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 March 31, 2008 Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $42.2 million (2007 - $38.3 million). Utility Group also incurred $0.1 million (2007 - $0.07 million) for operating services provided by the Trust, and office rent. The Trust purchased transportation for $0.1 million (2007 - $0.1 million) and administrative, management and other services of $nil million from Utility Group (2007 - $0.04 million).

The Trust provided certain administrative and support services to Utility Group under an Administrative Service Agreement that expired December 31, 2007. The Trust was paid $30,000 in 2007 for the services provided. Utility Group and the Trust intend to negotiate a new Administrative Services Agreement under which Utility Group will receive limited administrative and support services and office space at cost to June 30, 2009. Utility Group accrued a liability of $0.08 million for these services during the first quarter of 2008 at rates anticipated in the new agreement.

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, 2007. With respect to estimates, the most critical of these policies are those related to rate regulation, determination of pension and other employee benefits, amortization and depreciation expense, goodwill impairment assessment and asset retirement obligations. Actual results may differ from these estimates.

XIII. CHANGES IN ACCOUNTING POLICIES

On January 1, 2008 Utility Group adopted four new sections of the Canadian Institute of Chartered Accountants (CICA) Handbook, namely Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments - Disclosures, and Section 3863 - Financial Instruments - Presentation, and Section 3031 - Inventories.

Section 1535 requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and process for managing capital.

Sections 3862 and 3863 complement and enhance the current disclosure and presentation requirements related to financial instruments.

Section 3031 prescribes the measurement of inventories at the lower of cost and net realizable value, with guidance on the determination of cost including allocation of overheads and other costs to inventory. Reversals of previous write-downs to net realizable value are permitted when there is a subsequent increase in value of inventories. In accordance with the recommendations of the Section, Utility Group changed the basis of measurement used for inventories from the lower of average cost and replacement cost to the lower of average cost and net realizable value. This change had no effect on the financial position of Utility Group.

XIV. RISKS AND UNCERTAINTIES

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

Utility Group's management expects that during 2008 the operating businesses will continue to generate strong earnings and solid growth compared to 2007. As Utility Group enters into one of its seasonally slower periods of operations, management believes that the recent investments made in the latter half of 2007 have positioned Utility Group to successfully meet expectations for the full-year 2008, as reflected in the operational and financial results generated from the first quarter of 2008. AUI will continue to actively pursue growth opportunities in its existing franchise areas and is well-positioned to capture opportunities arising in the areas around Edmonton, Alberta. At Heritage Gas, the Halifax Harbour crossing will continue to facilitate customer growth on the Halifax peninsula by connecting high load customers during 2008. Management expects the investment in Ikhil to perform as anticipated in 2008.

Utility Group's objective is to grow the business, both through growth of its 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.



ALTAGAS UTILITY GROUP INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)

($ thousands)
----------------------------------------------------------------------------
March 31 December 31
As at 2008 2007
----------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 754 $ 747
Accounts receivable (note 8) 31,455 27,781
Inventory 219 270
Future income tax asset 15 15
Prepaid expenses and deferred charges 3,372 1,736
----------------------------------------------------------------------------
35,815 30,549
Property, plant and equipment 143,007 141,220
Goodwill 31,575 31,575
Regulatory assets 7,118 6,717
Future income tax asset 98 99
Investments and other assets 2,246 785
----------------------------------------------------------------------------
$ 219,859 $ 210,945
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 500 $ 1,666
Accounts payable and accrued liabilities
(note 8) 26,856 33,261
Dividends payable 328 328
Income and other taxes payable 1,528 748
Deferred cost of gas, net of income taxes 424 20
----------------------------------------------------------------------------
29,636 36,023
Long-term debt 112,873 101,917
Customer deposits and other liabilities 3,207 3,157
Future income tax liability 246 150
----------------------------------------------------------------------------
145,962 141,247
----------------------------------------------------------------------------
Shareholders' equity
Share capital 61,278 61,278
Contributed surplus 572 490
Retained earnings 12,047 7,930
----------------------------------------------------------------------------
73,897 69,698
----------------------------------------------------------------------------
$ 219,859 $ 210,945
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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 March 31
For the 2008 2007
----------------------------------------------------------------------------
REVENUE (note 8) $ 58,223 $ 55,750
----------------------------------------------------------------------------

EXPENSES (note 8)
Cost of natural gas 42,546 42,046
Operating and administrative 6,406 5,840
Depreciation, depletion and amortization 2,183 1,859
----------------------------------------------------------------------------
51,135 49,745
----------------------------------------------------------------------------
Operating income 7,088 6,005
Interest expense 1,341 987
----------------------------------------------------------------------------
Income before income taxes 5,747 5,018
----------------------------------------------------------------------------
Income taxes
Current income taxes 1,205 1,265
Future income taxes 98 (10)
----------------------------------------------------------------------------
1,303 1,255
----------------------------------------------------------------------------
Net income and comprehensive income 4,444 3,763
Retained earnings, beginning of period 7,930 4,516
Dividends declared (327) (287)
----------------------------------------------------------------------------
Retained earnings, end of period $ 12,047 $ 7,992
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income per share
Basic $ 0.54 $ 0.46
Diluted $ 0.54 $ 0.46

Number of shares outstanding
Basic 8,189,905 8,189,905
Diluted 8,190,307 8,193,224

See accompanying notes to the interim consolidated financial statements


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

($ thousands)
----------------------------------------------------------------------------
Three months ended March 31
For the 2008 2007
----------------------------------------------------------------------------
CASH FROM (USED IN) OPERATIONS
Net income $ 4,444 $ 3,763
Items not involving cash:
Revenue deficiency accrual (425) (339)
Allowance for funds used during construction (55) (93)
Depreciation, depletion and amortization 2,183 1,859
Operating and administrative 103 468
Future income taxes 98 (10)
Other 82 53
----------------------------------------------------------------------------
Funds generated from operations 6,430 5,701
Net change in non-cash working capital (note 7) (9,393) (1,104)
----------------------------------------------------------------------------
(2,963) 4,597
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Additions to property, plant and equipment (5,203) (4,832)
Increase (decrease) in accounts payable
related to property, plant and equipment (note 7) (1,088) 729
----------------------------------------------------------------------------
(6,291) (4,103)
Contributions in aid of construction (CIAC) 1,288 334
Proceeds on disposition of property, plant and
equipment - 14
Investment in regulatory and other assets (1,540) (160)
----------------------------------------------------------------------------
(6,543) (3,915)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Decrease in short-term debt (1,166) (92)
Increase in long-term debt 10,956 33
Dividends paid (327) (246)
Increase in customer deposits and other
liabilities 50 22
----------------------------------------------------------------------------
9,513 (283)
----------------------------------------------------------------------------
Change in cash 7 399
Cash, beginning of period 747 296
----------------------------------------------------------------------------
Cash, end of period $ 754 $ 695
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements


AltaGas Utility Group Inc.

Selected Notes to the Consolidated Financial Statements

(Tabular amounts in thousands of dollars unless otherwise indicated)

1. STRUCTURE AND NATURE OF OPERATIONS

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

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

These consolidated financial statements are prepared by management in Canadian dollars in accordance with Canadian generally accepted accounting principles (GAAP), including accounting policies for which guidance has been provided by regulations and recommendations of the Alberta Utilities Commission (AUC) and of the Nova Scotia Utility and Review Board (NSUARB). These consolidated financial statements do not include all of the disclosures required in the annual financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2007. The accounting policies applied in these consolidated financial statements are consistent with those outlined in Utility Group's annual financial statements, except as described below.

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

Changes in Accounting Policies

On January 1, 2008 Utility Group adopted four new sections of the Canadian Institute of Chartered Accountants (CICA) Handbook, namely Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments - Disclosures, Section 3863 - Financial Instruments - Presentation, and Section 3031 - Inventories.

Section 1535 requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and process for managing capital.

Sections 3862 and 3863 complement and enhance the current disclosure and presentation requirements related to financial instruments.

Section 3031 prescribes the measurement of inventories at the lower of cost and net realizable value, with guidance on the determination of cost including allocation of overheads and other costs to inventory. Reversals of previous write-downs to net realizable value are permitted when there is a subsequent increase in value of inventories. In accordance with the recommendations of the Section, Utility Group changed the basis of measurement used for inventories from the lower of average cost and replacement cost to the lower of average cost and net realizable value. This change had no effect on the financial position of Utility Group.

Regulation

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

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

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

3. SHARE CAPITAL

Stock Option Plan

Utility Group has an employee share option plan under which employees and directors are eligible to receive grants. No options were granted during the three months ended March 31, 2008. To March 31, 2008 options granted under the plan had a term of 10 years to expiry and vested no longer than over a four-year period. Stock options outstanding have a weighted-average remaining term of 8.1 years (December 31, 2007 - 8.86 years).

Stock option compensation expense charged to operating and administrative expense for the period ended March 31, 2008 was $82,000 (2007 - $53,000), with a corresponding increase to contributed surplus.



Three months ended Three months ended
March 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
----------------------------------------------------------------------------
Stock options outstanding,
beginning of period 473,500 $ 7.12 310,500 $ 7.25
Granted - - 163,000 6.84
Cancelled - - - -
----------------------------------------------------------------------------
Stock options outstanding, end of
period 473,500 $ 7.12 473,500 $ 7.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at end of period 160,125 $ 7.39 157,625 $ 7.38
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. CAPITAL MANAGEMENT STRATEGY

Utility Group's objectives when managing capital are to efficiently manage the capital base to generate sustainable earnings to finance current operations while allowing for growth opportunities, and to maximize long term shareholder value. The use of debt or equity funding is determined giving consideration to the norms and risks associated with each of its businesses, capital structures deemed by the AUC and the NSUARB, and bank covenants.

Capital includes shareholders' equity, long-term debt, short-term debt, and cash and cash equivalents. It is expected that Utility Group's access to debt and equity markets, undrawn bank credit facilities and cash generated from operations will provide sufficient capital resources and liquidity to fund existing operations and certain acquisition and expansion opportunities in 2008.

Debt-to-total capitalization is calculated as net debt divided by total capitalization. Net debt is defined as total short- and long-term debt, less cash. Total capitalization is defined as the sum of net debt and shareholders' equity.



The debt-to-total capitalization ratios at March 31, 2008 and December 31,
2007 were as follows:

March 31, December 31,
2008 2007
----------------------------------------------------------------------------
Total debt $ 113,373 $ 103,583
Less: cash (754) (747)
----------------------------------------------------------------------------
Net debt $ 112,619 $ 102,836
Total shareholders' equity 73,897 69,698
----------------------------------------------------------------------------
Total capitalization $ 186,516 $ 172,534
----------------------------------------------------------------------------
Debt-to-total capitalization ratio (percent) 60.4 59.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. FINANCIAL INSTRUMENTS

Credit Risk

Utility Group has no significant concentrations of credit risk. Financial instruments that subject Utility Group to credit risk consist primarily of accounts receivable. Accounts receivable credit risk is reduced due to a large and diversified customer base, customer deposits for at-risk customers and the ability to recover the majority of uncollectible accounts through customer rates.

Liquidity Risk

Utility Group expects that 2008 funds from operations will be sufficient to meet the majority of its budgeted maintenance and growth capital requirements. The balance of its budgeted growth capital and a certain value of potential acquisitions undertaken would 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.



The remaining contractual maturities for Utility Group's financial
liabilities are as follows:
March 31,
Maturity 2008
----------------------------------------------------------------------------
Accounts payable and accrued liabilities Within 1 year $ 26,856
Demand credit facilities Within 1 year 500
Revolving term credit facility November 2010 111,916
Loan from Province of Nova Scotia July 2014 957
----------------------------------------------------------------------------
$ 140,229
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Market Risk

Interest rate risk

Utility Group's exposure to risk for changes in market interest rates relates to draws on Utility Group's bank credit facilities.

As at March 31, 2008 Utility Group estimates the sensitivity of a 25 basis point movement in interest rates would impact 2008 net income by $0.2 million.

Other price risk

Utility Group holds a publicly listed equity investment that is classified as a non-current available-for-sale financial asset and was initially measured at fair value with changes in fair value recorded net of income taxes through other comprehensive income. As at March 31, 2008, the fair value of the long-term investment approximated cost.

6. PENSION AND OTHER RETIREMENT BENEFIT PLANS

Utility Group has pension plans which provide either defined benefit or defined contribution pension benefits for qualified employees. These pension plans may be fully funded, partially funded, or unfunded. Utility Group also provides post-employment benefits other than pensions for qualifying retired employees which are unfunded. Utility Group established a non-registered, defined benefit plan that provides pension benefits to eligible executives based on average earnings, years of service and age at retirement (supplemental executive retirement plan (SERP)). The expense recognized for these plans is as follows:



Three months ended March 31
2008 2007
----------------------------------------------------------------------------
Defined benefit plan - AUI $ 273 $ 234
Defined benefit plan - SERP 39 41
Defined contribution plan 12 10
Other benefit plans 46 48
----------------------------------------------------------------------------
$ 370 $ 333
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. SUPPLEMENTAL CASH FLOW INFORMATION

Net Change in Non-Cash Working Capital

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



Three months ended March 31
2008 2007
----------------------------------------------------------------------------
Accounts receivable $ (3,674) $ 1,204
Inventory, prepaid expenses and deferred
charges (1,585) (860)
Accounts payable and accrued liabilities (6,406) (3,481)
Deferred cost of gas, net of income taxes 404 1,317
Income and other taxes payable 780 1,521
----------------------------------------------------------------------------
(10,481) (299)
Decrease in accounts receivable related to CIAC - (76)
Decrease (increase) in accounts payable related
to property, plant and equipment 1,088 (729)
----------------------------------------------------------------------------
Net change in non-cash working capital related to
operations $ (9,393) $ (1,104)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash Interest and Income Taxes Paid

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



Three months ended March 31
2008 2007
----------------------------------------------------------------------------
Interest paid $ 1,278 $ 1,054
Income taxes paid $ 752 $ 512
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. RELATED PARTY TRANSACTIONS

In the normal course of business, Utility Group and its affiliates transact with related parties. The following related party transactions were measured at their exchange amount:



Three months ended March 31
2008 2007
----------------------------------------------------------------------------
Fees for administration, management, rent and
other services paid by:
Utility Group to the Trust $ 46 $ 8
The Trust to Utility Group $ $ 42
The Trust to AUI $ 1 $ 2
Ikhil to Inuvik Gas $ $ 94
Fees for operating services paid by AUI to the
Trust $ 68 $ 66
Gas purchases for resale by Inuvik Gas from
Ikhil $ $ 584
Transportation services provided by AUI to the
Trust $ 120 $ 124
Gas purchases for resale by AUI from the Trust $ 42,172 $ 38,332
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 March 31, 2008 is $nil million ($0.1 million at December 31, 2007) due to Utility Group from the Trust.

Included in accounts payable and accrued liabilities at March 31, 2008 is $12.4 million ($13.5 million at December 31, 2007) due from AUI to the Trust.

Included in accounts payable and accrued liabilities at March 31, 2008 is $0.05 million ($0.02 million at December 31, 2007) due from Utility Group to the Trust.

9. SEASONALITY

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

ABOUT ALTAGAS UTILITY GROUP INC.

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

Contact Information