Ugi Utilities 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 1-1398

UGI UTILITIES, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization) 23-1174060
(I.R.S. Employer
Identification No.)

UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filero Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

At April 30, 2007, there were 26,781,785 shares of UGI Utilities, Inc. Common Stock, par value $2.25 per share, outstanding, all of which were held, beneficially and of record, by UGI Corporation.

UGI UTILITIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			PAGES
Part I Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2007, September 30, 2006 and March 31, 2006		1
		Condensed Consolidated Statements of Income for the three and six months ended March 31, 2007 and 2006		2
		Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2007 and 2006		3
		Notes to Condensed Consolidated Financial Statements	4 - 15
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16 - 22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
	Item 4.	Controls and Procedures		24
Part II Other Information
	Item 1A.	Risk Factors		25
	Item 6.	Exhibits		26
	Signatures			27

-i-

UGI UTILITIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)

	March 31,			September 30,			March 31,
	2007			2006			2006
ASSETS
Current assets:
Cash and cash equivalents	$	10,062		$	2,942		$	3,582
Restricted cash		1,202			2,697			—
Accounts receivable (less allowances for doubtful accounts of $14,841, $12,389 and $8,909, respectively)		184,700			61,917			121,363
Accounts receivable — related parties		5,236			1,888			2,984
Accrued utility revenues		56,116			16,649			32,876
Inventories		34,500			162,610			28,254
Prepaid expenses		4,491			4,863			4,895
Other current assets		17,507			21,795			10,604
Total current assets		313,814			275,361			204,558
Property, plant and equipment, at cost (less accumulated depreciation and amortization of $520,459, $503,046 and $341,126, respectively)		1,059,256			1,050,824			665,213
Goodwill		162,633			182,851			—
Regulatory assets		82,455			72,919			61,956
Other assets		25,139			27,788			29,608
Total assets	$	1,643,297		$	1,609,743		$	961,335
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current maturities of long-term debt	$	20,000		$	20,000		$	—
Bank loans		146,000			216,000			123,300
Accounts payable		75,877			46,916			55,129
Accounts payable — related parties		8,938			14,768			5,259
Deferred fuel refunds		12,695			12,171			7,504
Other current liabilities		77,585			59,243			44,971
Total current liabilities		341,095			369,098			236,163
Long-term debt		492,000			492,000			237,000
Deferred income taxes		168,543			162,871			161,248
Deferred investment tax credits		6,610			6,803			6,998
Other noncurrent liabilities		40,819			31,872			16,077
Total liabilities		1,049,067			1,062,644			657,486
Commitments and contingencies (note 7)
Common stockholder’s equity:
Common Stock, $2.25 par value (authorized - 40,000,000 shares; issued and outstanding - 26,781,785 shares)		60,259			60,259			60,259
Additional paid-in capital		345,801			345,801			80,622
Retained earnings		191,966			144,833			161,467
Accumulated other comprehensive (loss) income		(3,796	)		(3,794	)		1,501
Total common stockholder’s equity		594,230			547,099			303,849
Total liabilities and stockholder’s equity	$	1,643,297		$	1,609,743		$	961,335

See accompanying notes to condensed consolidated financial statements.

- 1 -

UGI UTILITIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Revenues	$	498,816		$	321,645		$	798,140		$	565,318
Costs and expenses:
Cost of sales		357,370			238,193			563,346			409,439
Operating and administrative expenses		40,261			27,459			73,471			49,445
Operating and administrative expenses — related parties		4,166			3,992			6,627			4,718
Taxes other than income taxes		5,165			3,720			9,728			6,982
Depreciation and amortization		10,424			6,295			20,658			12,483
Other income, net		(3,571	)		(1,220	)		(5,132	)		(3,181	)
		413,815			278,439	��		668,698			479,886
Operating income		85,001			43,206			129,442			85,432
Interest expense		11,074			5,320			22,496			10,956
Income before income taxes		73,927			37,886			106,946			74,476
Income taxes		29,219			14,857			42,479			29,522
Net income	$	44,708		$	23,029		$	64,467		$	44,954

See accompanying notes to condensed consolidated financial statements.

- 2 -

UGI UTILITIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)

	Six Months Ended
	March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	64,467		$	44,954
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization		20,658			12,483
Deferred income taxes, net		3,552			2,351
Provision for uncollectible accounts		10,172			6,980
Other, net		4,177			780
Net change in:
Accounts receivable and accrued utility revenues		(175,771	)		(104,183	)
Inventories		128,110			43,330
Deferred fuel costs		(1,439	)		(9,866	)
Accounts payable		23,131			7,587
Other current assets and liabilities		21,993			(5,913	)
Net cash provided (used) by operating activities		99,050			(1,497	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment		(29,184	)		(21,878	)
Decrease in restricted cash		1,495			—
PG Energy Acquisition working capital settlement		23,670			—
Other, net		(577	)		(535	)
Net cash used by investing activities		(4,596	)		(22,413	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends		(17,334	)		(17,294	)
(Decrease) increase in bank loans with maturities of three months or less		(70,000	)		112,100
Repayments of debt including bank loans with maturities greater than three months		—			(120,000	)
Issuance of debt		—			50,000
Net cash (used) provided by financing activities		(87,334	)		24,806
Cash and cash equivalents increase	$	7,120		$	896
CASH AND CASH EQUIVALENTS:
End of period	$	10,062		$	3,582
Beginning of period		2,942			2,686
Increase	$	7,120		$	896

See accompanying notes to condensed consolidated financial statements.

- 3 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

1. Basis of Presentation

UGI Utilities, Inc., a wholly owned subsidiary of UGI Corporation (“UGI”), and its wholly owned subsidiary UGI Penn Natural Gas, Inc. (“UGIPNG”) own and operate (1) a natural gas distribution utility in parts of eastern Pennsylvania (“UGI Gas”), (2) a natural gas distribution utility in northeastern Pennsylvania (“PNG Gas”) and (3) an electricity distribution utility in northeastern Pennsylvania (“Electric Utility”). On August 24, 2006, UGIPNG acquired certain assets and assumed certain liabilities of Southern Union Company’s (“SU’s”) PG Energy Division and all the issued and outstanding stock of SU’s wholly owned subsidiary PG Energy Services, Inc. (collectively, the “PG Energy Acquisition”). Effective January 1, 2007, UGI Utilities, Inc. contributed its heating, ventilation and air conditioning services business to its wholly-owned second-tier subsidiary, UGI HVAC Services, Inc., separating it from its regulated business. UGI Utilities, Inc. and UGIPNG have wholly-owned subsidiaries that operate heating, ventilation and air-conditioning services businesses principally within their natural gas utilities’ service territories (collectively, the “HVAC business”).

We refer to UGI Gas and PNG Gas collectively as “Gas Utility.” The term “UGI Utilities” is used sometimes as an abbreviated reference to UGI Utilities, Inc. or UGI Utilities, Inc. and its subsidiaries. We refer to Gas Utility, Electric Utility and the HVAC business collectively as “the Company” or “we.” Our Gas Utility and Electric Utility are subject to regulation by the Pennsylvania Public Utility Commission (“PUC”).

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). They include all adjustments which we consider necessary for a fair statement of the results for the interim periods presented. Such adjustments consisted only of normal recurring items unless otherwise disclosed. The September 30, 2006 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and the related notes included in our Annual Report on Form 10-K for the year ended September 30, 2006 (“Company’s 2006 Annual Report”). Due to the seasonal nature of our businesses, the results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

Comprehensive Income.The following table presents the components of comprehensive income for the three and six months ended March 31, 2007 and 2006:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2007		2006		2007			2006
Net income	$	44,708	$	23,029	$	64,467		$	44,954
Other comprehensive income (loss)		390		144		(2	)		1,258
Comprehensive income	$	45,098	$	23,173	$	64,465		$	46,212

- 4 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

Other comprehensive income (loss) comprises changes in the fair value of interest rate protection and electricity price swap agreements qualifying as hedges, net of reclassifications to net income.

Reclassifications.We have reclassified certain prior-year balances to conform to the current period presentation.

Use of Estimates.We make estimates and assumptions when preparing financial statements in conformity with accounting principles generally accepted in the United States of America. These estimates and assumptions affect the reported amounts of assets and liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

Revenue-Related Taxes.In June 2006, the Financial Accounting Standards Board (“FASB”) reached a consensus on Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 addresses accounting policies disclosure with respect to revenue-related taxes beginning with financial reports for interim or annual reporting periods beginning after December 15, 2006. The scope of EITF 06-3 includes any tax assessed by a governmental authority that is imposed concurrent with or subsequent to a revenue-producing transaction between a seller and a customer. EITF 06-3 provides that entities may adopt a policy of presenting such taxes in the income statement either on a gross basis within revenue or on a net basis. If such taxes are significant, and are presented on the income statement on a gross basis, the amounts of those taxes should also be disclosed. As a result of adopting this EITF, we are providing disclosure of our existing accounting policy and have not made any changes to that policy. We present revenue-related taxes within the scope of EITF 06-3 on a net basis.

Recently Issued Accounting Pronouncements.In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”) which permits entities to choose to measure certain financial instruments at fair value that are not currently required to be measured at fair value. Upon adoption, a cumulative adjustment will be made to beginning retained earnings for the initial fair value option remeasurement. Subsequent unrealized gains and losses for fair value option items will be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and should not be applied retrospectively, except as permitted for certain conditions for early adoption. We are currently reviewing the provisions of SFAS 159.

- 5 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

2. PG Energy Acquisition

On August 24, 2006, UGI Utilities acquired certain assets and assumed certain liabilities of Southern Union Company’s (“SU’s”) PG Energy Division, a natural gas distribution business located in northeastern Pennsylvania, and all of the issued and outstanding stock of SU’s wholly owned subsidiary, PG Energy Services, Inc., pursuant to a Purchase and Sale Agreement, as amended, between SU and UGI dated as of January 26, 2006 (the “Agreement”). UGI subsequently assigned its rights under the Agreement to UGI Utilities. On August 24, 2006 and in accordance with the terms of the Agreement, UGI Utilities paid SU $580,000 in cash. Pursuant to the terms of the Agreement, the purchase price was subject to a working capital adjustment equal to the difference between $68,100 and the actual working capital as of the closing date agreed to by both UGI Utilities and SU. In March 2007, UGI Utilities and SU reached an agreement on the working capital adjustment pursuant to which SU paid UGI Utilities approximately $23,700 in cash. In addition, in March 2007 UGI Utilities completed its review and determination of the fair value of the assets acquired and liabilities assumed.

The PG Energy Acquisition purchase price, including transaction fees and expenses of approximately $11,000, has been allocated to the assets acquired and liabilities assumed as follows:

Working capital	$	47,021
Property, plant and equipment		362,304
Goodwill		162,633
Regulatory assets		14,957
Other assets		4,033
Noncurrent liabilities		(23,619	)
Total	$	567,329

3. Segment Information

We have two reportable segments: (1) Gas Utility and (2) Electric Utility. The accounting policies of our two reportable segments are the same as those described in the Significant Accounting Policies note contained in the Company’s 2006 Annual Report. We evaluate each segment’s profitability principally based upon its income before income taxes. No single customer represents more than 10% of the total revenues of either Gas Utility or Electric Utility. There are no significant intersegment transactions. In addition, all of our reportable segments’ revenues are derived from sources within the United States.

Effective January 1, 2007, as previously approved by the PUC, UGI Utilities contributed its heating, ventilation and air conditioning services business to its wholly-owned second-tier subsidiary, UGI HVAC Services, Inc. The HVAC business does not meet the quantitative thresholds for separate segment reporting under the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” and has been included in “Other” effective January 1, 2007. Prior periods have not been restated.

- 6 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

Financial information by business segment follows:

Three Months Ended March 31, 2007:

			Reportable Segments
			Gas		Electric
	Total		Utility		Utility		Other
Revenues	$	498,816	$	458,999	$	34,877	$	4,940
Cost of sales		357,370		334,175		20,835		2,360
Depreciation and amortization		10,424		9,593		822		9
Operating income		85,001		77,946		6,728		327
Interest expense		11,074		10,407		667		—
Income before income taxes		73,927		67,539		6,061		327
Total assets at period end	$	1,643,297	$	1,522,516	$	113,817	$	6,964
Goodwill at period end	$	162,633	$	162,633	$	—	$	—

Three Months Ended March 31, 2006:

			Reportable Segments
			Gas		Electric
	Total		Utility		Utility		Other
Revenues	$	321,645	$	296,218	$	25,427	$	—
Cost of sales		238,193		222,989		15,204		—
Depreciation and amortization		6,295		5,468		827		—
Operating income		43,206		39,918		3,288		—
Interest expense		5,320		4,591		729		—
Income before income taxes		37,886		35,327		2,559		—
Total assets at period end	$	961,335	$	853,262	$	108,073	$	—
Goodwill at period end	$	—	$	—	$	—	$	—

- 7 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

Six Months Ended March 31, 2007:

			Reportable Segments
			Gas		Electric
	Total		Utility		Utility		Other
Revenues	$	798,140	$	733,428	$	59,772	$	4,940
Cost of sales		563,346		527,975		33,011		2,360
Depreciation and amortization		20,658		18,887		1,762		9
Operating income		129,442		116,177		12,938		327
Interest expense		22,496		21,178		1,318		—
Income before income taxes		106,946		94,999		11,620		327
Total assets at period end	$	1,643,297	$	1,522,516	$	113,817	$	6,964
Goodwill at period end	$	162,633	$	162,633	$	—	$	—

Six Months Ended March 31, 2006:

			Reportable Segments
			Gas		Electric
	Total		Utility		Utility		Other
Revenues	$	565,318	$	516,017	$	49,301	$	—
Cost of sales		409,439		382,909		26,530		—
Depreciation and amortization		12,483		10,843		1,640		—
Operating income		85,432		75,608		9,824		—
Interest expense		10,956		9,700		1,256		—
Income before income taxes		74,476		65,908		8,568		—
Total assets at period end	$	961,335	$	853,262	$	108,073	$	—
Goodwill at period end	$	—	$	—	$	—	$	—

- 8 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

4. Regulatory Matters

In an order entered on November 30, 2006, the PUC approved a settlement of the base rate proceeding of PG Energy (PNG Gas). The settlement provided for an increase in natural gas distribution base rates of $12,500 annually or approximately 4%, effective December 2, 2006.

In accordance with Provider of Last Resort (“POLR”) settlements approved by the PUC, Electric Utility may increase its POLR rates up to certain limits through December 31, 2009. In accordance with these settlements, Electric Utility increased its POLR rates by 4.5% on January 1, 2005 and 3% on January 1, 2006 (a total of 7.5% above the total rates in effect on December 31, 2004). Electric Utility also increased its POLR rates for all metered customers effective January 1, 2007 which is expected to increase the average cost to residential customers by approximately 35% over such costs in effect during calendar year 2006.

5. Revolving Credit Agreement

During the six months ended March 31, 2007, the termination date of UGI Utilities’ $350,000 Revolving Credit Agreement was automatically extended by UGI Utilities to August 2011.

6. Defined Benefit Pension and Other Postretirement Plans

We sponsor two defined benefit pension plans (“Pension Plan”) for employees of UGI Utilities, UGIPNG, UGI, and certain of UGI’s other wholly owned subsidiaries. In addition, we provide postretirement health care benefits to certain retirees and postretirement life insurance benefits to nearly all active and retired employees.

- 9 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

Net periodic pension expense and other postretirement benefit costs relating to our employees include the following components:

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Service cost	$	1,386		$	1,309		$	65		$	32
Interest cost		4,288			3,220			242			204
Expected return on assets		(5,469	)		(4,444	)		(152	)		(152	)
Amortization of:
Prior service cost (benefit)		61			196			(55	)		(55	)
Actuarial loss		217			427			37			48
Net benefit cost		483			708			137			77
Change in regulatory and other assets and liabilities		(64	)		(93	)		714			698
Net expense	$	419		$	615		$	851		$	775

	Pension Benefits						Other Postretirement Benefits
	Six Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Service cost	$	2,766		$	2,620		$	130		$	65
Interest cost		8,565			6,442			485			408
Expected return on assets		(10,925	)		(8,892	)		(303	)		(305	)
Amortization of:
Prior service cost (benefit)		121			392			(110	)		(110	)
Actuarial loss		433			854			74			96
Net benefit cost		960			1,416			276			154
Change in regulatory and other assets and liabilities		(121	)		(182	)		1,429			1,396
Net expense	$	839		$	1,234		$	1,705		$	1,550

Pension Plan assets are held in trust and consist principally of equity and fixed income mutual funds. The Company does not believe it will be required to make any contributions to the Pension Plan during the year ending September 30, 2007. Pursuant to orders previously issued by the PUC, UGI Utilities has established a Voluntary Employees’ Beneficiary Association (“VEBA”) trust to fund and pay UGI Utilities’ postretirement health care and life insurance benefits referred to above by depositing into the VEBA the annual amount of postretirement benefit costs determined under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The difference between the annual amount calculated and the amount included in UGI Gas’ and Electric Utility’s rates is deferred for future recovery from, or refund to, ratepayers. Amounts contributed to the VEBA by UGI Utilities were not material during the six months ended March 31, 2007, nor are they expected to be material for the year ending September 30, 2007.

- 10 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

We also sponsor an unfunded and non-qualified supplemental executive retirement income plan. We recorded pre-tax expense for this plan of $125 and $251 for the three and six months ended March 31, 2007, respectively, and $105 and $201 for the three and six months ended March 31, 2006, respectively.

7. Commitments and Contingencies

From the late 1800s through the mid-1900s, UGI Utilities and its former subsidiaries owned and operated a number of manufactured gas plants (“MGPs”) prior to the general availability of natural gas. Some constituents of coal tars and other residues of the manufactured gas process are today considered hazardous substances under the Superfund Law and may be present on the sites of former MGPs. Between 1882 and 1953, UGI Utilities owned the stock of subsidiary gas companies in Pennsylvania and elsewhere and also operated the businesses of some gas companies under agreement. Pursuant to the requirements of the Public Utility Holding Company Act of 1935, UGI Utilities divested all of its utility operations other than those which now constitute UGI Gas and Electric Utility. UGI Utilities does not expect its costs for investigation and remediation of hazardous substances at Pennsylvania MGP sites to be material to its results of operations because UGI Gas is currently permitted to include in rates, through future base rate proceedings, prudently incurred remediation costs associated with such sites.

As a result of the PG Energy Acquisition by our wholly-owned subsidiary, UGIPNG, UGIPNG became a party to a Multi-Site Remediation Consent Order and Agreement between PG Energy and the Pennsylvania Department of Environmental Protection dated March 31, 2004 (“Multi-Site Agreement”). The Multi-Site Agreement requires UGIPNG to perform a specified level of activities associated with environmental investigation and remediation work at eleven currently owned properties on which MGP-related facilities were operated (“Properties”). UGIPNG is not required to spend more than $1,100 in any calendar year for such expenditures, including costs to perform work on the Properties. Costs related to investigation and remediation of one property formerly owned by UGIPNG are also included in this cap. The Multi-Site Agreement terminates at the end of fifteen years but may be terminated by either party at the end of any two-year period beginning with the effective date.

UGI Utilities has been notified of several sites outside Pennsylvania on which private parties allege MGPs were formerly owned or operated by it or owned or operated by its former subsidiaries. Such parties are investigating the extent of environmental contamination or performing environmental remediation. UGI Utilities is currently litigating four claims against it relating to out-of-state sites. We accrue environmental investigation and cleanup costs when it is probable that a liability exists and the amount or range of amounts can be reasonably estimated.

Management believes that under applicable law UGI Utilities should not be liable in those instances in which a former subsidiary owned or operated an MGP. There could be, however, significant future costs of an uncertain amount associated with environmental damage caused by MGPs outside Pennsylvania that UGI Utilities directly operated, or that were owned or operated by former subsidiaries of UGI Utilities, if a court were to conclude that (1) the subsidiary’s separate corporate form should be disregarded or (2) UGI Utilities should be considered to have been an operator because of its conduct with respect to its subsidiary’s MGP.

- 11 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

On September 22, 2006, South Carolina Electric & Gas Company (“SCE&G”), a subsidiary of SCANA Corporation, filed a lawsuit against UGI Utilities in the District Court of South Carolina seeking contribution from UGI Utilities for past and future remediation costs related to the operations of a former MGP located in Charleston, South Carolina. SCE&G asserts that the plant operated from 1855 to 1954 and alleges that UGI Utilities controlled operations of the plant from 1910 to 1926 and is liable for 47% of the costs associated with the site. SCE&G asserts that it has spent approximately $22,000 in remediation costs and $26,000 in third-party claims relating to the site and estimates that future remediation costs could be as high as $2,500. SCE&G further asserts that it has received a demand from the United States Justice Department for natural resource damages. UGI Utilities believes that it has good defenses to this claim and is defending the suit.

In April 2003, Citizens Communications Company (“Citizens”) served a complaint naming UGI Utilities as a third-party defendant in a civil action pending in the United States District for the District of Maine. In that action, the plaintiff, City of Bangor, Maine (“City”) sued Citizens to recover environmental response costs associated with MGP wastes generated at a plant allegedly operated by Citizens’ predecessors at a site on the Penobscot River. Citizens subsequently joined UGI Utilities and ten other third-party defendants alleging that the third-party defendants are responsible for an equitable share of costs Citizens may be required to pay to the City for cleaning up tar deposits in the Penobscot River. Citizens alleges that UGI Utilities and its predecessors owned and operated the plant from 1901 to 1928. Studies conducted by the City and Citizens suggest that it could cost up to $18,000 to clean up the river. Citizens’ third-party claims have been stayed pending a resolution of the City’s suit against Citizens, which was tried in September 2005. Maine’s Department of Environmental Protection (“DEP”) informed UGI Utilities in March 2005 that it considers UGI Utilities to be a potentially responsible party for costs incurred by the State of Maine related to gas plant contaminants at this site. On June 27, 2006, the court issued an order finding Citizens responsible for 60% of the cleanup costs. On February 14, 2007, Citizens and the City entered into a settlement agreement, subject to court approval, pursuant to which Citizens agreed to pay $7,625 in exchange for a release of its liabilities. UGI Utilities is evaluating what effect, if any, the settlement agreement would have on claims against it. UGI Utilities believes that it has good defenses to Citizens’ claim and to any claim that the DEP may bring to recover its costs, and is defending the Citizens’ suit.

By letter dated March 30, 1992, Atlanta Gas Light Company (“AGL”) informed UGI Utilities that it was investigating contamination that appeared to be related to MGP operations at a site owned by AGL in Savannah, Georgia. A former subsidiary of UGI Utilities operated the MGP in the early 1900s. AGL has informed UGI Utilities that it has begun remediation of MGP wastes at the site and believes that the total cost of remediation could be as high as $55,000. AGL has not filed suit against UGI Utilities for a share of these costs. UGI Utilities believes that it will have good defenses to any action that may arise out of this site.

- 12 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

On September 20, 2001, Consolidated Edison Company of New York (“ConEd”) filed suit against UGI Utilities in the United States District Court for the Southern District of New York, seeking contribution from UGI Utilities for an allocated share of response costs associated with investigating and assessing gas plant related contamination at former MGP sites in Westchester County, New York. The complaint alleges that UGI Utilities “owned and operated” the MGPs prior to 1904. The complaint also seeks a declaration that UGI Utilities is responsible for an allocated percentage of future investigative and remedial costs at the sites. ConEd believes that the cost of remediation for all of the sites could exceed $70,000.

The trial court granted UGI Utilities’ motion for summary judgment and dismissed ConEd’s complaint. The grant of summary judgment was entered April 1, 2004. ConEd appealed and on September 9, 2005 a panel of the Second Circuit Court of Appeals affirmed in part and reversed in part the decision of the trial court. The appellate panel affirmed the trial court’s decision dismissing claims that UGI Utilities was liable under CERCLA as an operator of MGPs owned and operated by its former subsidiaries. The appellate panel reversed the trial court’s decision that UGI Utilities was released from liability at three sites where UGI Utilities operated MGPs under lease. On October 7, 2005, UGI Utilities filed for reconsideration of the panel’s order which was denied by the Second Circuit Court of Appeals on January 17, 2006. On April 14, 2006, UGI Utilities filed a petition requesting that the United States Supreme Court review the decision of the Second Circuit Court of Appeals. The Court has not yet ruled on UGI Utilities’ petition. On April 23, 2007, the Supreme Court heard argument in another company's case raising substantially the same issues presented in UGI Utilities’ petition and has not yet ruled in that case.

By letter dated June 24, 2004, KeySpan Energy (“KeySpan”) informed UGI Utilities that KeySpan has spent $2,300 and expects to spend another $11,000 to clean up an MGP site it owns in Sag Harbor, New York. KeySpan believes that UGI Utilities is responsible for approximately 50% of these costs as a result of UGI Utilities’ alleged direct ownership and operation of the plant from 1885 to 1902. By letter dated June 6, 2006, KeySpan reported that the New York Department of Environmental Conservation has approved a remedy for the site that is estimated to cost approximately $10,000. KeySpan believes that the cost could be as high as $20,000. UGI Utilities is in the process of reviewing the information provided by KeySpan and is investigating this claim.

On September 11, 2006, UGI Utilities’ received a complaint filed by Yankee Gas Services Company and Connecticut Light and Power Company, subsidiaries of Northeast Utilities, (together the “Northeast Companies”) in the United States District Court for the District of Connecticut seeking contribution from UGI Utilities for past and future remediation costs related to MGP operations on thirteen sites owned by the Northeast Companies in nine cities in the State of Connecticut. The Northeast Companies allege that UGI Utilities controlled operations of the plants from 1883 to 1941. The Northeast Companies estimated that remediation costs for all of the sites would total approximately $215,000 and asserted that UGI Utilities is responsible for approximately $103,000 of this amount. Based on information supplied by the Northeast Companies and UGI Utilities’ own investigation, UGI Utilities believes that it may have operated one of the sites, Waterbury North, under lease for a portion of its operating history. UGI Utilities is reviewing the Northeast Companies’ estimate that remediation costs at Waterbury North could total $23,000. UGI Utilities believes that it has good defenses to this claim and is defending the suit.

- 13 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

In addition to these environmental matters, there are other pending claims and legal actions arising in the normal course of our businesses. We cannot predict with certainty the final results of environmental and other matters. However, it is reasonably possible that some of them could be resolved unfavorably to us and result in losses in excess of recorded amounts. We are unable to estimate any such possible excess losses. Although we currently believe, after consultation with counsel, that damages or settlements, if any, recovered by the plaintiffs in such claims or actions will not have a material adverse effect on our financial position, damages or settlements could be material to our operating results or cash flows in future periods depending on the nature and timing of future developments with respect to these matters and the amounts of future operating results and cash flows.

8. Related Party Transactions

UGI provides certain financial and administrative services to UGI Utilities. UGI bills UGI Utilities monthly for all direct and for an allocated share of indirect corporate expenses incurred or paid on behalf of UGI Utilities. These billed expenses are classified as operating and administrative expenses — related parties in the Condensed Consolidated Statements of Income. In addition, UGI Utilities provides limited administrative services to UGI and certain of UGI’s subsidiaries, principally payroll related services. Amounts billed to these entities by UGI Utilities for all periods presented were not material.

UGI Utilities has entered into a Storage Contract Administrative Agreement (“Storage Agreement”) extending through October 31, 2008 with UGI Energy Services, Inc., a second-tier wholly owned subsidiary of UGI (“Energy Services”). Under the Storage Agreement UGI Utilities has, among other things, and subject to recall for operational purposes, released certain storage and transportation contracts to Energy Services for the term of the agreement. UGI Utilities also transferred certain associated storage inventories upon the commencement of the Storage Agreement, will receive a transfer of storage inventories at the end of the Storage Agreement, and makes payments associated with refilling storage inventories during the term of the Storage Agreement. Energy Services, in turn, provides a firm delivery service and makes certain payments to UGI Utilities for its various obligations under the Storage Agreement. UGI Utilities incurred costs associated with the Storage Agreement totaling $5,765 and $20,899, during the three and six months ended March 31, 2007, respectively, and $5,746 and $21,479 during the three and six months ended March 31, 2006, respectively.

UGI Utilities reflects the historical cost of the gas storage inventories and any exchange receivable from Energy Services (representing amounts of natural gas inventories used but not yet replenished by Energy Services) on its balance sheet under the caption “Inventories.” The carrying value of these gas storage inventories at March 31, 2007, comprising approximately 1.7 billion cubic feet of natural gas, was $14,973. The carrying value of these gas storage inventories at March 31, 2006, comprising approximately 2.8 billion cubic feet of natural gas, was $25,410.

- 14 -

UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)

UGI Utilities also has a Gas Supply and Delivery Service Agreement with Energy Services pursuant to which Energy Services provides certain gas supply and related delivery service to Gas Utility during the peak heating-season months of November to March. In addition, from time to time, Gas Utility purchases natural gas or pipeline capacity from Energy Services. The aggregate amount of these transactions (exclusive of Storage Agreement transactions) during the three and six months ended March 31, 2007 totaled $17,887 and $27,814, respectively, and during the three and six months ended March 31, 2006 totaled $5,664 and $8,935, respectively.

From time to time, the Company sells natural gas or pipeline capacity to Energy Services. During the three and six months ended March 31, 2007, revenues associated with sales to Energy Services totaled $13,936 and $21,655, respectively. During the three and six months ended March 31, 2006, revenues associated with sales to Energy Services totaled $4,722 and $6,221, respectively. These transactions did not have a material effect on the Company’s financial position, results of operations or cash flows.

- 15 -

UGI UTILITIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements use forward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,�� “expect,” “may,” “will,” or other similar words. These statements discuss plans, strategies, events or developments that we expect or anticipate will or may occur in the future.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that actual results almost always vary from assumed facts or bases, and the differences between actual results and assumed facts or bases can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the following important factors which could affect our future results and could cause those results to differ materially from those expressed in our forward-looking statements: (1) adverse weather conditions resulting in reduced demand; (2) price volatility and availability of oil, electricity and natural gas and the capacity to transport them to market areas; (3) changes in laws and regulations, including safety, tax and accounting matters; (4) the impact of pending and future legal proceedings; (5) competitive pressures from the same and alternative energy sources; (6) liability for environmental claims; (7) customer conservation measures due to high energy prices and improvements in energy efficiency and technology resulting in reduced demand; (8) adverse labor relations; (9) large customer, counterparty or supplier defaults; (10) increased uncollectible accounts expense; (11) liability in excess of insurance coverage for personal injury and property damage arising from explosions and other catastrophic events, including acts of terrorism, resulting from operating hazards and risks incidental to generating and distributing electricity and transporting, storing and distributing natural gas; (12) political, regulatory and economic conditions in the United States; and (13) reduced access to capital markets and interest rate fluctuations.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. We undertake no obligation to update publicly any forward-looking statement whether as a result of new information or future events except as required by the federal securities laws.

- 16 -

UGI UTILITIES, INC. AND SUBSIDIARIES

ANALYSIS OF RESULTS OF OPERATIONS

The following analyses compare our results of operations for the three months ended March 31, 2007 (“2007 three-month period”) with the three months ended March 31, 2006 (“2006 three-month period”) and the six months ended March 31, 2007 (“2007 six-month period”) with the six months ended March 31, 2006 (“2006 six-month period”). Our analyses of results of operations should be read in conjunction with the segment information included in Note 3 to the Condensed Consolidated Financial Statements. Our Gas Utility’s results of operations for the 2007 three- and six-month periods include the operations of PNG Gas, the natural gas utility business that we acquired in late August 2006 (the “PG Energy Acquisition”).

2007 three-month period compared with 2006 three-month period

Three Months Ended March 31,	2007			2006			Increase
(Millions of dollars)
Gas Utility:
Revenues	$	459.0		$	296.2		$	162.8	55.0	%
Total margin (a)	$	124.8		$	73.2		$	51.6	70.5	%
Operating income	$	77.9		$	39.9		$	38.0	95.2	%
Income before income taxes	$	67.5		$	35.3		$	32.2	91.2	%
System throughput — bcf		49.8			27.1			22.7	83.8	%
Heating degree days — % colder (warmer) thannormal (b)		1.4	%		(13.0	)%		—	—
Electric Utility:
Revenues	$	34.9		$	25.4		$	9.5	37.4	%
Total margin (a)	$	12.1		$	8.8		$	3.3	37.5	%
Operating income	$	6.7		$	3.3		$	3.4	103.0	%
Income before income taxes	$	6.1		$	2.6		$	3.5	134.6	%
Distribution sales — gwh		281.9			268.4			13.5	5.0	%

bcf — billions of cubic feet.       gwh — millions of kilowatt-hours.

(a)

Gas Utility’s total margin represents total revenues less cost of sales. Electric Utility’s total margin represents total revenues less total cost of sales and revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $2.0 million and $1.4 million during the three-month periods ended March 31, 2007 and 2006, respectively. For financial statement purposes, revenue-related taxes are included in “Taxes other than income taxes” on the Condensed Consolidated Statements of Income.

(b)

Deviation from average heating degree days based upon weather statistics provided by the National Oceanic and Atmospheric Administration (“NOAA”) at airports located within our service territory.

Gas Utility.Temperatures in Gas Utility’s service territory based upon heating degree days were 1.4% colder than normal during the 2007 three-month period compared to 13.0% warmer than normal in the prior-year three-month period. Total distribution system throughput increased 22.7 bcf reflecting an 18.7 bcf increase from PNG Gas and a 4.0 bcf increase in UGI Gas distribution system throughput due to the colder weather.

- 17 -

UGI UTILITIES, INC. AND SUBSIDIARIES

Gas Utility revenues increased $162.8 million during the 2007 three-month period principally reflecting $147.4 million in revenues attributable to PNG Gas, an $8.4 million increase in revenues from low-margin off-system sales, and greater revenues from sales to UGI Gas’ firm- residential, commercial and industrial (“retail core-market”) customers. Increases or decreases in retail core-market customer revenues and cost of sales principally result from changes in retail core-market volumes and the level of gas costs collected through the PGC recovery mechanism. Under this recovery mechanism, Gas Utility records the cost of gas associated with sales to retail core-market customers at amounts included in PGC rates. The difference between actual gas costs and the amount included in rates is deferred on the balance sheet as a regulatory asset or liability and represents amounts to be collected from or refunded to customers in a future period. As a result of this PGC recovery mechanism, increases or decreases in the cost of gas associated with retail core-market customers have no direct effect on retail core-market margin. Gas Utility’s cost of gas was $334.2 million in the 2007 three-month period compared to $223.0 million in the 2006 three-month period largely reflecting PNG Gas’ cost of gas and greater costs associated with the higher off-system sales.

Gas Utility total margin in the 2007 three-month period increased $51.6 million primarily reflecting margin from PNG Gas and a $10.5 million increase in UGI Gas margin due to the higher distribution system throughput.

Gas Utility operating income increased to $77.9 million in the 2007 three-month period from $39.9 million in the 2006 three-month period principally reflecting the $51.6 million increase in total margin and an increase in other income partially offset by an $11.8 million increase in operating and administrative expenses and $4.1 million of higher depreciation and amortization expense. The increase in total operating and administrative expenses reflects operating and administrative expenses attributable to PNG Gas and a decrease of $1.5 million in UGI Gas’ expenses. The increase in depreciation and amortization expense is largely attributable to PNG Gas and, to a lesser extent, capital expenditures associated with UGI Gas.

The increase in Gas Utility income before income taxes reflects the higher operating income partially offset by a $5.8 million increase in interest expense. The increase in interest expense is principally due to higher long- and short-term debt outstanding, primarily a result of the PG Energy Acquisition, and higher short-term interest rates.

Electric Utility.Electric Utility’s 2007 three-month period kilowatt-hour sales were 5.0% higher than in the prior-year period which is largely attributable to approximately 3% colder than normal temperatures compared to 9% warmer than normal temperatures in the 2006 prior-year period (based upon heating degree day statistics). Electric Utility revenues increased $9.5 million in the 2007 three-month period largely reflecting the effects of an increase in its Provider of Last Resort (“POLR”) rates effective January 1, 2007 and the significantly colder temperatures than in the prior year. Electric Utility’s cost of sales increased to $20.8 million in the 2007 three-month period from $15.2 million in the 2006 three-month period reflecting higher per unit purchased power costs and the higher kilowatt-hour sales.

- 18 -

UGI UTILITIES, INC. AND SUBSIDIARIES

Electric Utility total margin in the 2007 three-month period increased $3.3 million reflecting the effects of the higher POLR rates and the higher sales partially offset by the higher per unit purchased power costs.

The increase in Electric Utility operating income and income before income taxes in the 2007 three-month period principally reflects the increase in total margin.

2007 six-month period compared with 2006 six-month period

Six Months Ended March 31,	2007			2006			Increase
(Millions of dollars)
Gas Utility:
Revenues	$	733.4		$	516.0		$	217.4	42.1	%
Total margin	$	205.4		$	133.1		$	72.3	54.3	%
Operating income	$	116.2		$	75.6		$	40.6	53.7	%
Income before income taxes	$	95.0		$	65.9		$	29.1	44.2	%
System throughput — bcf		83.2			50.1			33.1	66.1	%
Heating degree days — % warmer than normal		5.4	%		8.2	%		—	—
Electric Utility:
Revenues	$	59.8		$	49.3		$	10.5	21.3	%
Total margin (a)	$	23.5		$	20.1		$	3.4	16.9	%
Operating income	$	12.9		$	9.8		$	3.1	31.6	%
Income before income taxes	$	11.6		$	8.6		$	3.0	34.9	%
Distribution sales — gwh		530.9			526.4			4.5	0.9	%

(a) Electric Utility’s total margin represents total revenues less total cost of sales and revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $3.3 million and $2.7 million during the six-month periods ended March 31, 2007 and 2006, respectively. For financial statement purposes, revenue-related taxes are included in “Taxes other than income taxes” on the Condensed Consolidated Statements of Income.

Gas Utility.Temperatures in Gas Utility’s service territory based upon heating degree days were 5.4% warmer than normal during the 2007 six-month period compared to 8.2% warmer than normal during the prior-year six-month period. Total distribution system throughput increased 33.1 bcf reflecting 30.9 bcf from PNG Gas and greater UGI Gas distribution system throughput. UGI Gas’ greater distribution system throughput reflects increased sales to both retail core-market and delivery service customers.

- 19 -

UGI UTILITIES, INC. AND SUBSIDIARIES

Gas Utility revenues increased $217.4 million during the 2007 six-month period principally reflecting revenues attributable to PNG Gas and an $18.1 million increase in revenues from low-margin off-system sales. These increases were partially offset by lower revenues from UGI Gas retail core-market customers as a result of lower average PGC rates. Gas Utility’s cost of gas was $528.0 million in the 2007 six-month period compared to $382.9 million in the 2006 six-month period largely reflecting the effects of the PG Energy Acquisition and greater costs associated with the higher off-system sales partially offset by the lower retail core-market purchased gas costs.

Gas Utility total margin in the 2007 six-month period increased $72.3 million primarily reflecting margin resulting from the PG Energy Acquisition and a $6.4 million increase in UGI Gas margin.

Gas Utility operating income increased to $116.2 million in the 2007 six-month period from $75.6 million in the 2006 six-month period principally reflecting the $72.3 million increase in total margin and slightly higher other income partially offset by a $25.7 million increase in operating and administrative expenses and $8.0 million higher depreciation and amortization expense. The increase in total operating and administrative expenses principally reflects $23.5 million of incremental operating and administrative expenses attributable to PNG Gas and, to a much lesser extent, higher UGI Gas operating and administrative expenses. The higher depreciation and amortization expense primarily reflects depreciation expense associated with PNG Gas.

The increase in Gas Utility income before income taxes reflects the higher operating income partially offset by an increase of approximately $11.5 million in interest expense. The increase in interest expense is principally due to higher long- and short-term debt outstanding, primarily as a result of the PG Energy Acquisition, and higher short-term interest rates.

Electric Utility.Electric Utility’s 2007 six-month period kilowatt-hour sales increased approximately 1% compared to the 2006 six-month period. Electric Utility revenues increased $10.5 million in the 2007 six-month period largely reflecting the effects of the increased POLR rates effective January 1, 2007 and, to a lesser extent, the increased sales. Electric Utility’s cost of sales increased to $33.0 million in the 2007 six-month period from $26.5 million in the 2006 six-month period reflecting higher per unit purchased power costs.

Electric Utility total margin increased $3.4 million during the 2007 six-month period reflecting the effects of the higher POLR rates and, to a lesser extent, the increased sales partially offset by the higher per unit purchased power costs.

Electric Utility operating income and income before income taxes increased in the 2007 six-month period principally reflecting the increase in total margin partially offset by a slight increase in operating and administrative expenses.

- 20 -

UGI UTILITIES, INC. AND SUBSIDIARIES

FINANCIAL CONDITION AND LIQUIDITY

Financial Condition

The Company’s total debt outstanding at March 31, 2007 was $658.0 million (including $146.0 million in bank loans) compared with $728.0 million (including $216.0 million in bank loans) at September 30, 2006.

UGI Utilities has a $350 million Revolving Credit Agreement which expires in August 2011. At March 31, 2007, UGI Utilities had $146.0 million in borrowings outstanding under its Revolving Credit Agreement. From time to time, UGI Utilities has entered into short-term borrowings under uncommitted arrangements with major banks in order to meet liquidity needs. Short-term borrowings, including borrowings under its Revolving Credit Agreement, are classified as bank loans on the Condensed Consolidated Balance Sheets. During the 2007 and 2006 six-month periods, average daily bank loan borrowings were $214.6 million and $119.8 million, respectively, and peak bank loan borrowings totaled $259.0 million and $175.9 million, respectively. Peak borrowings typically occur during the peak heating season months of December and January. The increase in average and peak bank loan borrowings during the 2007 six-month period principally reflects borrowings to fund the working capital of PNG Gas. UGI Utilities also has an effective shelf registration statement with the SEC under which it may issue up to an additional $75 million of Medium-Term Notes or other debt securities. Medium-Term Notes of $20 million maturing in June 2007 are expected to be refinanced through the issuance of debt under this shelf registration.

Cash Flows

Operating activities.Due to the seasonal nature of UGI Utilities’ businesses, cash flows from operating activities are generally strongest during the second and third fiscal quarters when customers pay for gas and electricity consumed during the peak heating season months. Conversely, operating cash flows are generally at their lowest levels during the first and fourth fiscal quarters when the Company’s investment in working capital, principally accounts receivable and inventories, is generally greatest. UGI Utilities uses short-term borrowings, primarily borrowings under its Revolving Credit Agreement and has used borrowings under uncommitted arrangements to manage these seasonal cash flow needs.

Cash flow provided by operating activities was $99.1 million during the 2007 six-month period compared with cash flow used of $1.5 million in the prior-year six-month period. Cash flow from operating activities before changes in operating working capital was $103.0 million in the 2007 six-month period compared to $67.5 million in the prior-year six-month period largely reflecting the impact of PNG Gas on our operating results. Changes in operating working capital used approximately $3.9 million of operating cash flow during the 2007 six-month period compared with $69.0 million used during the prior-year six-month period reflecting, in large part, cash flow from changes in PNG Gas’ working capital, greater cash flow provided by UGI Gas’ changes in working capital and, to a lesser extent, lower cash flow used as a result of changes in deferred fuel costs.

- 21 -

UGI UTILITIES, INC. AND SUBSIDIARIES

Investing activities.Cash used by investing activities was $4.6 million in the 2007 six-month period compared to $22.4 million in the 2006 six-month period. Cash flow provided by investing activities in the 2007 six-month period reflects the payment of $23.7 million by SU to UGI Utilities associated with the PG Energy Acquisition working capital adjustment partially offset by greater Gas Utility capital expenditures. The increase in Gas Utility capital expenditures principally reflects capital expenditures of PNG Gas.

Financing activities.Cash used by financing activities was $87.3 million in the 2007 six-month period compared with cash flow provided of $24.8 million in the 2006 six-month period. Financing activity cash flows are primarily the result of issuances and repayments of long-term debt, net short-term borrowings including borrowings under our Revolving Credit Agreement and from time to time uncommitted arrangements, cash dividends to UGI, and capital contributions from UGI. During each of the 2007 and 2006 six-month periods, we paid dividends to UGI totaling $17.3 million. During the 2007 six-month period, net bank loan repayments totaled $70.0 million compared with net bank loan borrowings of $42.1 million in the prior-year six-month period.

PG Energy Acquisition

On August 24, 2006, UGI Utilities acquired certain assets and assumed certain liabilities of Southern Union Company’s (“SU’s”) PG Energy Division, a natural gas distribution business located in northeastern Pennsylvania, and all of the issued and outstanding stock of SU’s wholly-owned subsidiary, PG Energy Services, Inc., pursuant to a Purchase and Sale Agreement, as amended, between SU and UGI (who later assigned the rights under the agreement to UGI Utilities) dated January 26, 2006 (the “Agreement”). On August 24, 2006 and in accordance with the terms of the Agreement, UGI Utilities paid SU $580 million in cash. Pursuant to the terms of the Agreement, the purchase price was subject to a working capital adjustment equal to the difference between $68.1 million and the actual working capital as of the closing date agreed to by both UGI Utilities and SU. In March 2007, UGI Utilities and SU reached an agreement on the working capital adjustment pursuant to which SU paid UGI Utilities $23.7 million in cash. See Note 2 to Condensed Consolidated Financial Statements.

Regulatory Matters

In an order entered on November 30, 2006, the PUC approved a settlement of a base rate proceeding of PG Energy (PNG Gas). The settlement provided for an increase in natural gas distribution base rates of $12.5 million annually or approximately 4%, effective December 2, 2006.

In accordance with POLR settlements approved by the PUC, Electric Utility may increase its POLR rates up to certain limits through December 31, 2009. In accordance with these settlements, Electric Utility increased its POLR rates by 4.5% on January 1, 2005 and 3% on January 1, 2006 (a total of 7.5% above the total rates in effect on December 31, 2004). Electric Utility also increased its POLR rates for all metered customers effective January 1, 2007 which is expected to increase the average cost to residential customers by approximately 35% over such costs in effect during calendar year 2006.

- 22 -

UGI UTILITIES, INC. AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Gas Utility’s tariffs contain clauses that permit recovery of substantially all of the prudently incurred costs of natural gas it sells to its customers. The recovery clauses provide for a periodic adjustment for the difference between the total amounts actually collected from customers through PGC rates and the recoverable costs incurred. Because of this ratemaking mechanism, there is limited commodity price risk associated with Gas Utility. Gas Utility uses exchange-traded natural gas call option and futures contracts to reduce volatility in the cost of gas it purchases for its retail core-market customers. The cost of these call option and futures contracts, net of any associated gains or losses, is included in Gas Utility’s PGC recovery mechanism.

Electric Utility purchases power from wholesale electricity suppliers under fixed-price energy and capacity contracts and, to a much lesser extent, on the spot market. Prices for electricity can be volatile especially during periods of high demand or tight supply. Currently, Electric Utility’s fixed-price contracts with electricity suppliers mitigate most risks associated with the POLR service rate limits in effect through December 31, 2009. With respect to its existing fixed-price power and capacity contracts, should any of the counterparties fail to provide electric power or capacity under the terms of such contracts, any increases in the cost of replacement power or capacity could negatively impact Electric Utility results. In order to reduce this nonperformance risk, Electric Utility has diversified its purchases across several suppliers and entered into bilateral collateral arrangements with certain of them. From time to time, Electric Utility enters into electric price swap agreements to reduce the volatility in the cost of a portion of its anticipated electricity requirements.

Our variable-rate debt comprises short-term borrowings, principally borrowings under our Revolving Credit Agreement. This agreement provides for interest rates on borrowings that are indexed to short-term market interest rates. Our long-term debt is typically issued at fixed rates of interest based upon market rates for debt having similar terms and credit ratings. As these long-term debt issues mature, we expect to refinance such debt with new debt having interest rates reflecting then-current market conditions. In order to reduce interest rate risk associated with near- to medium-term issuances of fixed-rate debt, we may enter into interest rate protection agreements.

The fair values of our unsettled market risk sensitive derivative instruments reflect the estimated amount that we would expect to receive or pay to terminate the contract based upon quoted market prices of comparable contracts at March 31, 2007. At March 31, 2007, the fair value of our electricity price swap was a gain of $4.5 million. An adverse change in electricity prices of ten percent would result in a $1.0 million decrease in the fair value of the swap. At March 31, 2007, the fair value of our unsettled interest rate protection agreement, which has been designated and qualifies as a cash flow hedge, was a gain of $0.4 million. An adverse change in interest rates on ten-year U.S. treasury notes of ten percent would result in a $0.4 million decrease in the fair value of this interest rate protection agreement.

- 23 -

UGI UTILITIES, INC. AND SUBSIDIARIES

ITEM 4. CONTROLS AND PROCEDURES

(a)	Evaluation of Disclosure Controls and Procedures
	The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
(b)	Change in Internal Control over Financial Reporting
	Except as discussed below, during the quarter ended March 31, 2007, there has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
	As previously disclosed in Item 9A, Controls and Procedures, of our 2006 Annual Report on Form 10-K, for an interim period Southern Union Company was providing certain information technology services to UGI Penn Natural Gas, Inc. (“UGIPNG”), a wholly owned subsidiary of the Company, and assisting us in migrating certain transaction-based processes and historical UGIPNG data to the Company’s systems. The migration plan is substantially complete. During October 2006, the Company implemented certain financial components of a new information system (the “UGI System”) that supports our human resource, accounting, purchasing and payroll transaction processing functions. Pursuant to the migration plan, UGIPNG began using certain financial components of the UGI System as of January 1, 2007. We have extended internal control procedures over quarterly financial reporting to include UGIPNG.

- 24 -

UGI UTILITIES, INC. AND SUBSIDIARIES

PART II OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Other unknown or unpredictable factors could also have material adverse effects on future results.

- 25 -

UGI UTILITIES, INC. AND SUBSIDIARIES

ITEM 6. EXHIBITS

The exhibits filed as part of this report are as follows (exhibits incorporated by reference are set forth with the name of the registrant, the type of report and registration number or last date of the period for which it was filed, and the exhibit number in such filing):

Exhibit No.		Exhibit	Registrant	Filing	Exhibit
	10.1	Amendment dated March 20, 2007 to the Firm Transportation Service Agreement (Rate Schedule FT) dated October 1, 1996 between UGI Utilities and Transcontinental Gas Pipe Line Corporation, as modified pursuant to various orders of the Federal Energy Regulatory Commission	UGI Utilities, Inc.	Form 8-K (3/20/07)		10.1
	12.1	Computation of ratio of earnings to fixed charges.
	31.1	Certification by the Chief Executive Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2007, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification by the Chief Financial Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2007, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification by the Chief Executive Officer and the Chief Financial Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2007, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

- 26 -

UGI UTILITIES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	UGI Utilities, Inc. (Registrant)
Date:May 10, 2007	By:	/s/ John C. Barney
		John C. Barney
		Senior Vice President - Finance (Principal Financial Officer)

- 27 -

UGI UTILITIES, INC.

EXHIBIT INDEX

12.1	Computation of ratio of earnings to fixed charges.
31.1	Certification by the Chief Executive Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2007, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by the Chief Financial Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2007, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification by the Chief Executive Officer and the Chief Financial Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2007, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.