Ugi Utilities 10-Q 2008 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, 2008

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	23-1174060
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ Smaller reporting companyo

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, 2008, 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 (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2008, September 30, 2007 and March 31, 2007	1
Condensed Consolidated Statements of Income for the three and six months ended March 31, 2008 and 2007	2
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2008 and 2007	3
Notes to Condensed Consolidated Financial Statements	4 - 19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	27
Item 4. Controls and Procedures	28
Part II Other Information
Item 1A. Risk Factors	29
Item 6. Exhibits	29
Signatures	30
Exhibit 10.2
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

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UGI UTILITIES, INC. AND SUBSIDIARIES

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

	March 31,			September 30,			March 31,
	2008			2007			2007
ASSETS
Current assets:
Cash and cash equivalents	$	15,555		$	16,207		$	10,062
Restricted cash		—			6,642			1,202
Accounts receivable (less allowances for doubtful accounts of $14,013, $10,824 and $14,841, respectively)		191,883			74,696			184,700
Accounts receivable — related parties		4,813			1,450			5,236
Accrued utility revenues		63,649			17,889			56,116
Regulatory assets		—			14,782			—
Inventories		31,160			162,259			34,500
Deferred income taxes		24,463			6,673			10,883
Derivative financial instruments		39,464			1,201			6,559
Prepaid expenses & other current assets		9,186			4,331			4,556
Total current assets		380,173			306,130			313,814
Property, plant and equipment, at cost (less accumulated depreciation and amortization of $544,424, $536,132, and $520,459, respectively)		1,089,078			1,083,897			1,059,256
Goodwill		162,309			162,309			162,633
Regulatory assets		91,179			88,990			82,455
Other assets		6,764			7,712			25,139
Total assets	$	1,729,503		$	1,649,038		$	1,643,297
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	—		$	20,000
Bank loans		96,000			190,000			146,000
Accounts payable		79,544			60,012			75,877
Accounts payable — related parties		8,113			15,871			8,938
Accrued income taxes		36,045			1,017			20,232
Deferred fuel refunds		68,202			—			12,695
Other current liabilities		65,502			76,535			57,353
Total current liabilities		353,406			343,435			341,095
Long-term debt		532,000			512,000			492,000
Deferred income taxes		187,688			175,012			168,543
Deferred investment tax credits		6,227			6,417			6,610
Other noncurrent liabilities		43,528			41,460			40,819
Total liabilities		1,122,849			1,078,324			1,049,067
Commitments and contingencies (note 5)
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		346,758			346,758			345,801
Retained earnings		215,041			179,014			191,966
Accumulated other comprehensive loss		(15,404	)		(15,317	)		(3,796	)
Total common stockholder’s equity		606,654			570,714			594,230
Total liabilities and stockholder’s equity	$	1,729,503		$	1,649,038		$	1,643,297

See accompanying notes to condensed consolidated financial statements.

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UGI UTILITIES, INC. AND SUBSIDIARIES

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

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Revenues	$	519,998		$	498,816		$	884,386		$	798,140
Costs and expenses:
Cost of sales — gas, fuel and purchased power		381,893			357,370			638,832			563,346
Operating and administrative expenses		40,631			40,261			76,135			73,471
Operating and administrative expenses — related parties		5,354			4,166			6,808			6,627
Taxes other than income taxes		4,784			5,165			9,253			9,728
Depreciation and amortization		10,349			10,424			20,580			20,658
Other income, net		(4,682	)		(3,571	)		(7,500	)		(5,132	)
		438,329			413,815			744,108			668,698
Operating income		81,669			85,001			140,278			129,442
Interest expense		10,101			11,074			21,001			22,496
Income before income taxes		71,568			73,927			119,277			106,946
Income taxes		28,482			29,219			47,558			42,479
Net income	$	43,086		$	44,708		$	71,719		$	64,467

See accompanying notes to condensed consolidated financial statements.

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UGI UTILITIES, INC. AND SUBSIDIARIES

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

	Six Months Ended
	March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	71,719		$	64,467
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		20,580			20,658
Deferred income taxes, net		(7,115	)		3,552
Provision for uncollectible accounts		9,707			10,172
Other, net		1,971			4,177
Net change in:
Accounts receivable and accrued utility revenues		(176,010	)		(175,771	)
Inventories		131,099			128,110
Deferred fuel costs, net of changes in unsettled derivatives		42,925			(3,402	)
Accounts payable		11,775			23,131
Other current assets and liabilities		21,848			23,956
Net cash provided by operating activities		128,499			99,050
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment		(26,104	)		(29,184	)
PG Energy Acquisition working capital settlement		—			23,670
Decrease in restricted cash		6,642			1,495
Other, net		(227	)		(577	)
Net cash used by investing activities		(19,689	)		(4,596	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends		(35,462	)		(17,334	)
Issuance of long-term debt		20,000			—
Decrease in bank loans		(94,000	)		(70,000	)
Net cash used by financing activities		(109,462	)		(87,334	)
Cash and cash equivalents (decrease) increase	$	(652	)	$	7,120
CASH AND CASH EQUIVALENTS:
End of period	$	15,555		$	10,062
Beginning of period		16,207			2,942
(Decrease) increase	$	(652	)	$	7,120

See accompanying notes to condensed consolidated financial statements.

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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) natural gas distribution utilities in eastern and northeastern Pennsylvania (“UGI Gas” and “PNG Gas,” respectively) and (2) an electric distribution utility in northeastern Pennsylvania (“Electric Utility”). UGI Gas and PNG Gas are collectively referred to as “Gas Utility.” Effective January 1, 2007, UGI Gas contributed its heating, ventilation and air conditioning services business to its wholly owned second-tier subsidiary, UGI HVAC Services, Inc. UGI HVAC Services, Inc. (“UGI HVAC”), and UGIPNG’s wholly owned subsidiary UGI Penn Natural Gas Services, Inc (collectively, the “HVAC Business”), operate principally within the Gas Utility service territory. Effective April 1, 2008, UGI Utilities transferred by dividend its ownership interest in UGI HVAC to UGI.

Gas Utility and Electric Utility are subject to regulation by the Pennsylvania Public Utility Commission (“PUC”). The term “UGI Utilities” is used sometimes as an abbreviated reference to UGI Utilities, Inc., or to UGI Utilities, Inc. and its subsidiaries, including UGIPNG. Our condensed consolidated financial statements include the accounts of UGI Utilities and its subsidiaries (collectively, “we” or “the Company”). We eliminate all significant intercompany accounts when we consolidate.

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, 2007 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, 2007 (“Company’s 2007 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.

Restricted Cash.Restricted cash represents cash balances in our natural gas futures brokerage accounts which are restricted from withdrawal.

Comprehensive Income.The following table presents the components of comprehensive income for the three and six months ended March 31, 2008 and 2007:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2008		2007		2008			2007
Net income	$	43,086	$	44,708	$	71,719		$	64,467
Other comprehensive income (loss)		191		390		(87	)		(2	)
Comprehensive income	$	43,277	$	45,098	$	71,632		$	64,465

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

Other comprehensive income (loss) principally comprises net changes in the fair value of an electricity price swap agreement through its expiration on December 31, 2007 and, in the three and six months ended March 31, 2007, changes in the fair value of interest rate protection agreements qualifying as hedges, net of reclassifications to net income in all periods presented.

Natural Gas Inventories.UGI Utilities has storage contract administrative agreements pursuant to which UGI Utilities has, among other things and subject to recall for operational purposes, released certain storage and transportation contracts for the term of the storage agreements. These agreements are currently scheduled to expire on October 31, 2008. UGI Utilities also transferred certain associated storage inventories upon commencement of the storage agreements, will receive a transfer of storage inventories at the end of the storage agreements, and makes payments associated with refilling storage inventories during the term of such agreements. UGI Utilities reflects the historical cost of natural gas storage inventories released under these agreements, which represent a portion of Gas Utility’s total natural gas storage inventories, and any exchange receivable (representing amounts of natural gas inventories used by the other parties to the agreements but not yet replenished) on its balance sheets under the caption “Inventories.” The carrying value of gas storage inventories released under these agreements at March 31, 2008, September 30, 2007 and March 31, 2007, comprising 2.3 billion cubic feet (“bcf”), 8.2 bcf, and 1.7 bcf of natural gas, was $17,868, $66,113 and $14,973, respectively.

Reclassifications.We have reclassified certain prior-year period 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.

Adoption of FIN 48.Effective October 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which provides a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under FIN 48, a company can recognize the benefit of an income tax position only if it is more likely than not (likelihood greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Any cumulative effect from the adoption of FIN 48 is recorded as an adjustment to opening retained earnings. As a result of the adoption of FIN 48, effective October 1, 2007 we recorded a non-cash reduction to retained earnings of $230.

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

We classify interest on tax deficiencies and income tax penalties as income taxes. As of October 1, 2007, we have unrecognized income tax benefits totaling $694 including related accrued interest and penalties of $69. If these unrecognized tax benefits were subsequently recognized, $694 would be recorded as a benefit to income taxes on the consolidated statement of income and, therefore, would impact the reported effective tax rate.

We join with UGI and its subsidiaries in filing a consolidated federal income tax return. We are charged or credited for our share of current taxes resulting from the effects of our transactions in the UGI consolidated federal income tax return including giving effect to intercompany transactions. UGI’s federal income tax returns are effectively settled through the tax year 2004. UGI’s federal income tax returns for fiscal 2005 and fiscal 2006 are currently under audit. Although it is not possible to predict with certainty the timing of the conclusion of UGI’s pending federal tax audits, we anticipate that the aforementioned federal tax audits will likely be completed by the end of fiscal 2008. Although we cannot predict with certainty, we do not anticipate that our unrecognized federal income tax benefits will significantly increase or decrease during the next twelve months.

We file separate company income tax returns in a number of states but are subject to state income tax principally in Pennsylvania. Pennsylvania income tax returns are generally subject to examination for a period of three years after the filing of the respective returns. We do not expect that any unrecognized state income tax benefits will significantly increase or decrease during the next twelve months.

Recently Issued Accounting Pronouncements.In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures in the following areas: (1) qualitative disclosures about the overall objectives and strategies for using derivatives; (2) quantitative disclosures on the fair value of the derivative instruments and related gains and losses in a tabular format; and (3) credit-risk-related contingent features in derivative instruments. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact of the provisions of SFAS 161.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R applies to all transactions or other events in which an entity obtains control of one or more businesses. SFAS 141R establishes, among other things, principles and requirements for how the acquirer (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in a business combination or gain from a bargain purchase; and (3) determines what information with respect to a business combination should be disclosed. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. Among the more significant changes in accounting for acquisitions are (1) transaction costs will generally be expensed (rather than being included as costs of the acquisition); (2) contingencies, including contingent consideration, will generally be recorded at fair value with subsequent adjustments recognized in operations (rather than as adjustments to the purchase price); and (3) decreases in valuation allowances on acquired deferred tax assets will be recognized in operations (rather than decreases in goodwill). We are currently evaluating the impact of the provisions of SFAS 141R.

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

Also in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require, among other things, (1) ownership interests in subsidiaries held by parties other than the parent be presented within stockholder’s equity, but separate from the parent’s equity; (2) earnings attributable to minority interests will be included in net earnings, although such earnings will continue to be deducted to measure earnings per share; (3) changes in a parent’s ownership interest while retaining control be accounted for as equity transactions; and (4) any retained noncontrolling equity investments in a former subsidiary be initially measured at fair value. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating the impact of the provisions of SFAS 160.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued two final staff positions (“FSPs”) amending SFAS 157. FSP SFAS 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions. FSP SFAS 157-2 delays the effective date of SFAS 157 until fiscal years beginning after November 15, 2008 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The standard, as amended, applies prospectively to new fair value measurements for the Company as follows: on October 1, 2008 the standard will apply to our measurements of fair values of financial instruments and recurring fair value measurements of non-financial assets and liabilities; on October 1, 2009, the standard will apply to all remaining fair value measurements including nonrecurring measurements of non-financial assets and liabilities such as measurement of potential impairments of goodwill, other intangible assets and other long-lived assets. It will also apply to fair value measurements of non-financial assets acquired and liabilities assumed in business combinations. We are currently evaluating the impact of the provisions of SFAS 157.

2.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 2007 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.

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

As previously mentioned, effective January 1, 2007, 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. Effective April 1, 2008, UGI Utilities transferred by dividend its ownership interest in UGI HVAC to UGI.

Financial information by business segment follows:

Three Months Ended March 31, 2008:

	Reportable Segments
			Gas		Electric
	Total		Utility		Utility		Other
Revenues	$	519,998	$	476,803	$	38,597	$	4,598
Cost of sales		381,893		355,120		24,227		2,546
Depreciation and amortization		10,349		9,454		889		6
Operating income (loss)		81,669		75,582		6,413		(326	)
Interest expense		10,101		9,577		524		—
Income (loss) before income taxes		71,568		66,005		5,889		(326	)
Total assets at period end	$	1,729,503	$	1,603,593	$	120,409	$	5,501
Goodwill at period end	$	162,309	$	162,309	$	—	$	—

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	$	—	$	—

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

Six Months Ended March 31, 2008:

	Reportable Segments
			Gas		Electric
	Total		Utility		Utility		Other
Revenues	$	884,386	$	803,445	$	70,533	$	10,408
Cost of sales		638,832		591,901		41,897		5,034
Depreciation and amortization		20,580		18,802		1,769		9
Operating income		140,278		125,650		13,872		756
Interest expense		21,001		19,935		1,066		—
Income before income taxes		119,277		105,715		12,806		756
Total assets at period end	$	1,729,503	$	1,603,593	$	120,409	$	5,501
Goodwill at period end	$	162,309	$	162,309	$	—	$	—

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	$	—	$	—

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

3.Regulatory Assets and Liabilities and Regulatory Matters

The following regulatory assets and liabilities associated with Gas Utility and Electric Utility are included in our accompanying Condensed Consolidated Balance Sheets:

	March 31,		September 30,		March 31,
	2008		2007		2007
Regulatory assets:
Income taxes recoverable	$	73,059	$	72,040	$	65,776
Postretirement benefits		4,476		4,868		5,181
Environmental costs		9,009		8,255		8,255
Deferred fuel costs		—		14,782		—
Other		4,635		3,827		3,243
Total regulatory assets	$	91,179	$	103,772	$	82,455
Regulatory liabilities:
Postretirement benefits	$	8,093	$	7,502	$	4,507
Deferred fuel refunds		68,202		—		12,695
Total regulatory liabilities	$	76,295	$	7,502	$	17,202

Income taxes recoverable. This regulatory asset is the result of recording, as required by SFAS No. 109, “Accounting for Income Taxes,” deferred tax liabilities pertaining to temporary tax differences principally as a result of the pass through to ratepayers of accelerated tax depreciation for state income tax purposes, and the flow through of accelerated tax depreciation for federal income tax purposes for certain years prior to 1981. These deferred taxes have been reduced by deferred tax assets pertaining to utility deferred investment tax credits. The Company has recorded regulatory income tax assets related to these deferred tax liabilities representing future revenues expected to be recovered through the ratemaking process. Based upon current regulatory ratemaking and income tax laws, at March 31, 2008, the Company expects to recover deferred income taxes associated with these temporary differences over the average remaining lives of the associated property ranging from 1 to approximately 50 years.

Postretirement benefits. The PUC has authorized the Company to recover certain early retirement benefit costs as well as other postretirement benefit costs incurred subsequent to the adoption of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”), but prior to such amounts being reflected in tariff rates. These costs are reflected as regulatory assets in the table above. At March 31, 2008, the Company expects to recover these costs over periods ranging from 2 to 13 years.

Gas Utility and Electric Utility are also recovering ongoing SFAS 106 costs at amounts permitted by the PUC in prior base rate proceedings. With respect to UGI Gas and Electric Utility, the difference between the amounts recovered through rates and the actual costs incurred in accordance with SFAS 106 are being deferred for future refund to or recovery from ratepayers. Such amounts are reflected in regulatory liabilities in the table above. In addition, upon the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”) on September 30, 2007, UGI Utilities’ postretirement regulatory liability was increased by $2,298 representing the recognition of the funded status of UGI Gas’ and Electric Utility’s postretirement benefit plan.

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

Environmental costs. Environmental costs represent the portion of estimated probable environmental remediation and investigation costs that the Company expects to incur in conjunction with the UGIPNG Multi-State Remediation Consent Order and Agreement with the Pennsylvania Department of Environmental Protection (see note 5). The Company is currently recovering and expects to continue to recover these costs in rates. At March 31, 2008, the Company expects to recover these costs over a period of 12 years.

Deferred fuel costs and refunds.Gas Utility’s tariffs contain clauses which permit recovery of certain purchased gas costs through the application of purchased gas costs (“PGC”) rates. The clauses provide for periodic adjustments to PGC rates for differences between the total amount of purchased gas costs collected from customers and recoverable costs incurred. Net undercollected gas costs are classified as a regulatory asset and net overcollections are classified as a regulatory liability. Gas Utility uses derivative financial instruments to reduce volatility in the cost of gas it purchases for firm- residential, commercial and industrial (“retail core-market”) customers. Realized and unrealized gains or losses on derivative financial instruments are included in deferred fuel refunds or costs. Unrealized gains and (losses) on such contracts at March 31, 2008, September 31, 2007, and March 31, 2007 were $39,464, ($596) and $1,702, respectively. The Company expects to recover or refund deferred fuel costs generally over a period of 1 to 2 years.

Other. Other regulatory assets comprise a number of items including, among others, deferred asset retirement costs, deferred rate case expenses, customer choice implementation costs and deferred software development costs. At March 31, 2008, the Company expects to recover these costs over periods of 1 to 5 years.

The Company’s regulatory liabilities relating to postretirement benefits are included in “other noncurrent liabilities” on the Condensed Consolidated Balance Sheets. The Company does not recover a rate of return on its regulatory assets.

Other Regulatory Matters

In an order entered on November 30, 2006, the PUC approved a settlement of a PNG Gas base rate proceeding. The settlement authorized PNG Gas to increase base rates $12,500 annually, or approximately 4%, effective December 2, 2006.

As a result of Pennsylvania’s Electricity Generation Customer Choice and Competition Act that became effective January 1, 1997, all of Electric Utility’s customers are permitted to acquire their electricity from entities other than Electric Utility. Electric Utility remains the provider of last resort (“POLR”) for its customers that are not served by an alternate electric generation provider. The terms and conditions under which Electric Utility provides POLR service, and rules governing the rates that may be charged for such service, have been established in a series of PUC approved settlements, the latest of which became effective June 23, 2006 (collectively, the “POLR Settlement”).

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

In accordance with the POLR Settlement, Electric Utility may increase its POLR rates up to certain limits through December 31, 2009. Consistent with the terms of the POLR Settlement, Electric Utility increased its POLR rates effective January 1, 2008 which increased the average cost to a residential heating customer by approximately 5.5% over such costs in effect during calendar 2007. Electric Utility also increased its POLR rates effective January 1, 2007 which increased the average cost to a residential heating customer by approximately 35% over such costs in effect during calendar year 2006. New PUC default service regulations became effective on September 15, 2007, but do not disturb Electric Utility’s POLR Settlement through 2009. Under the default service regulations, Electric Utility will be required to file a default service plan with the PUC in 2008 that will establish the terms and conditions under which it will offer POLR service commencing 2010.

4.Defined Benefit Pension and Other Postretirement Plans

We sponsor two defined benefit pension plans (“Pension Plans”) 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.

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

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

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Service cost	$	1,270		$	1,386		$	67		$	65
Interest cost		4,453			4,288			212			242
Expected return on assets		(5,693	)		(5,469	)		(159	)		(152	)
Amortization of:
Prior service cost (benefit)		8			61			(97	)		(55	)
Actuarial loss		—			217			17			37
Net benefit cost		38			483			40			137
Change in regulatory assets and liabilities		—			—			818			714
Net expense	$	38		$	483		$	858		$	851

	Pension Benefits						Other Postretirement Benefits
	Six Months Ended						Six Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Service cost	$	2,541		$	2,766		$	134		$	130
Interest cost		8,906			8,565			424			485
Expected return on assets		(11,386	)		(10,925	)		(318	)		(303	)
Amortization of:
Prior service cost (benefit)		15			121			(194	)		(110	)
Actuarial loss		—			433			34			74
Net benefit cost		76			960			80			276
Change in regulatory assets and liabilities		—			—			1,635			1,429
Net expense	$	76		$	960		$	1,715		$	1,705

Pension Plans 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 Plans during the year ending September 30, 2008. Pursuant to orders previously issued by the PUC, UGI Utilities has established a Voluntary Employees’ Beneficiary Association (“VEBA”) trust to fund and pay UGI Gas and Electric Utility’s 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, 2008, nor are they expected to be material for the year ending September 30, 2008.

We also sponsor an unfunded and non-qualified supplemental executive retirement income plan. Net benefit costs associated with this plan for all periods presented was not material.

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

5.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 by the early 1950s. At March 31, 2008, neither the Company’s undiscounted amount nor its accrued liability for environmental investigation and cleanup costs was material.

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, a five-year average of such prudently incurred remediation costs. In accordance with the terms of the PNG Gas base rate case order which became effective December 2, 2006, site-specific environmental investigation and remediation costs associated with PNG Gas incurred prior to December 2, 2006 are amortized as removal costs over five-year periods. Such costs incurred after December 1, 2006 are expensed as incurred.

As a result of the PG Energy Acquisition, 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 11 currently owned properties on which MGP-related facilities were operated (“Properties”). Under the Multi-Site Agreement, environmental expenditures, including costs to perform work on the Properties, are capped at $1,100 in any calendar year. Costs related to investigation and remediation of one property formerly owned by UGIPNG are also included in this cap. The Multi-Site Agreement terminates in 2019 but may be terminated by either party effective at the end of any two-year period beginning with the original 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.

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

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.

South Carolina Electric & Gas Company v. UGI Utilities, Inc.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 is defending the suit.

City of Bangor, Maine v. Citizens Communications Company.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 Court 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 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 any claim that the DEP may bring to recover its costs, and is defending the Citizens’ suit.

Consolidated Edison Company of New York v. UGI Utilities, Inc.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.

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

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. ConEd claims that the cost of remediation for the three sites would be approximately $14,000. 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. On June 18, 2007, the United States Supreme Court denied UGI Utilities’ petition. The case has now been remanded back to the trial court. UGI Utilities is defending the suit.

Sag Harbor, New York Matter.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.

Yankee Gas Services Company and Connecticut Light and Power Company v. UGI Utilities, Inc. 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 is defending the suit.

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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 possible losses in excess of recorded amounts. 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.

6.Related Party Transactions

UGI provides certain financial and administrative services to UGI Utilities. UGI bills UGI Utilities monthly for all direct expenses incurred by UGI on behalf of UGI Utilities, and an allocated share of indirect corporate expenses incurred or paid with respect to services provided to UGI Utilities. The allocation of indirect UGI corporate expenses to UGI Utilities utilizes a weighted, three-component formula comprising revenues, operating expenses and net assets employed and considers UGI Utilities’ relative percentage of such items to the total of such items for UGI’s other operating subsidiaries for which general and administrative services are provided. Management believes that this allocation method is reasonable and equitable to 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 Administration 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 Storage 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 $5,721 and $22,156 during the three and six months ended March 31, 2008, respectively, and $5,765 and $20,899 during the three and six months ended March 31, 2007, respectively.

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

The carrying value of gas storage inventories released under the Storage Agreement at March 31, 2008, comprising approximately 1.9 billion cubic feet of natural gas, was $16,026. The carrying value of these gas storage inventories at September 30, 2007, comprising approximately 8.2 billion cubic feet of natural gas, was $66,113. 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.

Gas Utility has gas supply and delivery service agreements 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, 2008 totaled $18,938 and $36,185, respectively, and during the three and six months ended March 31, 2007 totaled $17,887 and $27,814, 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, 2008, revenues associated with sales to Energy Services totaled $17,954 and $28,643, respectively. During the three and six months ended March 31, 2007, revenues associated with sales to Energy Services totaled $13,936 and $21,655, respectively. These transactions did not have a material effect on the Company’s results of operations.

7.Issuance of Long-Term Debt

In January 2008, UGI Utilities issued $20,000 of Medium-Term Notes due January 2018 bearing interest at a rate of 5.67%. The proceeds from the issuance of the $20,000 of Medium-Term Notes were used to reduce borrowings under UGI Utilities’ Revolving Credit Agreement.

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

8.Proposed Acquisition of PPL Gas Utilities

On March 5, 2008, UGI Utilities signed a definitive agreement to acquire all of the issued and outstanding stock of PPL Gas Utilities Corporation (“PPL Gas”), the natural gas distribution utility of PPL Corporation (“PPL”) (the “Acquisition”), for approximately $268,000 plus working capital. Immediately after the closing, UGI Utilities intends to sell the assets of PPL Gas’ wholly owned subsidiary Penn Fuel Propane, LLC (“Penn Fuel”), its retail propane distributor, to AmeriGas Propane, L.P. for cash consideration. PPL Gas distributes natural gas to approximately 75,000 customers in 35 counties in eastern and central Pennsylvania, and also distributes natural gas to several hundred customers in portions of one Maryland county. Penn Fuel sells approximately 15 million gallons of propane annually to more than 30,000 customers in eastern Pennsylvania. UGI Utilities expects to fund the acquisition of PPL Gas and Penn Fuel with a combination of cash on the balance sheet contributed by UGI and long-term debt issued by UGI Utilities.

The Acquisition is subject to PUC and Maryland Public Service Commission approval and is currently expected to close on or about September 30, 2008.

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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 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.

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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, 2008 (“2008 three-month period”) with the three months ended March 31, 2007 (“2007 three-month period”) and the six months ended March 31, 2008 (“2008 six-month period”) with the six months ended March 31, 2007 (“2007 six-month period”). Our analyses of results of operations should be read in conjunction with the segment information included in Note 2 to the Condensed Consolidated Financial Statements.

2008 three-month period compared with 2007 three-month period

							Increase
Three Months Ended March 31,	2008			2007			(Decrease)
(Millions of dollars)
Gas Utility:
Revenues	$	476.8		$	459.0		$	17.8		3.9	%
Total margin (a)	$	121.7		$	124.8		$	(3.1	)	(2.5	)%
Operating income	$	75.6		$	77.9		$	(2.3	)	(3.0	)%
Income before income taxes	$	66.0		$	67.5		$	(1.5	)	(2.2	)%
System throughput — bcf		49.6			49.8			(0.2	)	(0.4	)%
Heating degree days — % (warmer) colder than normal (b)		(4.2	)%		1.4	%		—		—
Electric Utility:
Revenues	$	38.6		$	34.9		$	3.7		10.6	%
Total margin (a)	$	12.2		$	12.1		$	0.1		0.8	%
Operating income	$	6.4		$	6.7		$	(0.3	)	(4.5	)%
Income before income taxes	$	5.9		$	6.1		$	(0.2	)	(3.3	)%
Distribution sales — gwh		279.1			281.9			(2.8	)	(1.0	)%

bcf — billions of cubic feet. gwh — millions of kilowatt-hours.
(a)	Gas Utility’s total margin represents total revenues less total 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 $2.2 million and $2.0 million during the three-month periods ended March 31, 2008 and 2007, respectively. For financial statement purposes, revenue-related taxes are included in “Taxes other than income taxes” in the Condensed Consolidated Statements of Income.
(b)	Deviation from average heating degree days for the 30-year period 1975-2004 based upon weather statistics provided by the National Oceanic and Atmospheric Administration (“NOAA”) for airports located within Gas Utility’s service territory.

Gas Utility.Temperatures in the Gas Utility service territory based upon heating degree days were 4.2% warmer than normal compared with temperatures that were 1.4% colder than normal in the prior-year period. Total distribution throughput decreased 0.2 bcf in the 2008 three-month period reflecting the effects of the warmer 2008 three-month period weather on throughput to Gas Utility’s core market customers. Gas Utility’s core market customers comprise firm- residential, commercial and industrial (“retail core-market”) customers, who purchase their gas from Gas Utility, and, to a much lesser extent, residential and small commercial and industrial (“core market transportation”) customers who purchase their gas from alternate suppliers.

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UGI UTILITIES, INC. AND SUBSIDIARIES

Gas Utility revenues increased $17.8 million principally reflecting a $20.2 million increase in revenues from off-system sales. Core market revenues were virtually unchanged in the 2008 three-month period as the revenue effects of lower core market volumes resulting from the warmer 2008 three-month period weather were offset by the effects on revenues from higher average retail core-market purchased gas cost (“PGC”) rates. 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 costs collected through the PGC recovery mechanism. Under the PGC 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 amounts 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 $355.1 million in the 2008 three-month period compared with $334.2 million in the 2007 three-month period principally reflecting the increase in off-system sales and higher average retail core-market PGC rates reduced by the effects of the lower retail core-market sales.

Gas Utility total margin decreased $3.1 million principally reflecting a $4.0 million decrease in core market margin partially offset by greater interruptible and large firm delivery service total margin.

The decreases in Gas Utility operating income and income before income taxes principally reflects the previously mentioned decrease in total margin and slightly higher operating and administrative costs partially offset by a $1.1 million increase in other income and, with respect to income before income taxes, slightly lower interest expense.

Electric Utility.Electric Utility’s kilowatt-hour sales in the 2008 three-month period were slightly lower than in the prior year. Electric Utility revenues increased $3.7 million principally as a result of higher Provider of Last Resort (“POLR”) rates and, to a lesser extent, greater revenues from spot market sales of electricity. In accordance with the terms of its June 2006 POLR Settlement, Electric Utility increased its POLR rates effective January 1, 2008. This increase raised the average cost to a residential heating customer by approximately 5.5% over costs in effect during calendar year 2007. Electric Utility cost of sales increased to $24.2 million in the 2008 three-month period from $20.8 million in the prior year reflecting higher per-unit purchased power costs partially offset by the lower sales.

Electric Utility total margin increased $0.1 million during the 2008 three-month period reflecting the effects of the higher POLR rates partially offset by the higher per-unit purchased power costs and lower sales.

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UGI UTILITIES, INC. AND SUBSIDIARIES

The decrease in Electric Utility operating income and income before income taxes in the 2008 three-month period reflects the slightly higher total margin more than offset by slightly higher operating and administrative costs.

2008 six-month period compared with 2007 six-month period

Six Months Ended March 31,	2008			2007			Increase
(Millions of dollars)
Gas Utility:
Revenues	$	803.4		$	733.4		$	70.0	9.5	%
Total margin (a)	$	211.5		$	205.4		$	6.1	3.0	%
Operating income	$	125.7		$	116.2		$	9.5	8.2	%
Income before income taxes	$	105.7		$	95.0		$	10.7	11.3	%
System throughput — bcf		89.1			83.2			5.9	7.1	%
Heating degree days — % warmer than normal (b)		5.0	%		5.4	%		—	—
Electric Utility:
Revenues	$	70.5		$	59.8		$	10.7	17.9	%
Total margin (a)	$	24.6		$	23.5		$	1.1	4.7	%
Operating income	$	13.9		$	12.9		$	1.0	7.8	%
Income before income taxes	$	12.8		$	11.6		$	1.2	10.3	%
Distribution sales — gwh		533.5			530.9			2.6	0.5	%

bcf — billions of cubic feet. gwh — millions of kilowatt-hours.
(a)	Gas Utility’s total margin represents total revenues less total 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 $4.0 million and $3.3 million during the six-month periods ended March 31, 2008 and 2007, respectively. For financial statement purposes, revenue-related taxes are included in “Taxes other than income taxes” in the Condensed Consolidated Statements of Income.
(b)	Deviation from average heating degree days for the 30-year period 1975-2004 based upon weather statistics provided by the National Oceanic and Atmospheric Administration (“NOAA”) for airports located within Gas Utility’s service territory.

Gas Utility.Temperatures in the Gas Utility service territory based upon heating degree days were 5.0% warmer than normal compared with temperatures that were 5.4% warmer than normal in the prior-year period. Total distribution throughput increased 5.9 bcf in the 2008 six-month period principally reflecting greater interruptible and large firm delivery service volumes, an increase in the number of Gas Utility customers and, to a much lesser extent, the effects of the slightly colder weather on core market throughput.

Gas Utility revenues increased $70.0 million principally reflecting the effects of higher average PGC rates on retail core-market revenues and a $32.2 million increase in revenues from off-system sales. Gas Utility’s cost of sales was $591.9 million in the 2008 six-month period compared with $528.0 million in the 2007 six-month period principally reflecting the increase in retail core-market PGC rates and the greater off-system sales.

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UGI UTILITIES, INC. AND SUBSIDIARIES

Gas Utility total margin increased $6.1 million primarily reflecting an increase in core market margin of $4.6 million from the higher core market throughput. The increase in total margin also reflects higher margin from large firm and interruptible delivery service customers reflecting 2008 higher six-month period volumes and higher unit margins.

The increases in Gas Utility operating income and income before income taxes reflects the previously mentioned increase in total margin, a $3.1 million increase in other income, and slightly lower operating and administrative expenses and, with respect to income before income taxes, slightly lower interest expense. The higher other income reflects in large part greater PGC interest income and storage contract fees.

Electric Utility.Electric Utility’s kilowatt-hour sales increased 0.5% in the 2008 six-month period reflecting in part the effects of colder weather compared with the prior year. Electric Utility revenues increased $10.7 million principally as a result of higher POLR rates and, to a much lesser extent, the effects of the greater kilowatt-hour sales. Electric Utility cost of sales increased to $41.9 million in the 2008 six-month period from $33.0 million in the prior year reflecting higher per-unit purchased power costs and the greater sales.

Electric Utility total margin increased $1.1 million during the 2008 six-month period reflecting the effects of the higher POLR rates partially offset by the higher per-unit purchased power costs and higher revenue-related taxes.

The increase in Electric Utility operating income and income before income taxes in the 2008 six-month period reflects the higher total margin, slightly higher operating and administrative costs and, with respect to income before income taxes, slightly lower interest expense.

FINANCIAL CONDITION AND LIQUIDITY

Financial Condition

The Company’s total debt outstanding at March 31, 2008 was $628.0 million compared to total debt outstanding of $702.0 million at September 30, 2007. UGI Utilities’ total debt at March 31, 2008 includes $275 million of Senior Notes, $257 million of Medium-Term Notes and $96 million outstanding under UGI Utilities Revolving Credit Agreement. In January 2008, UGI Utilities issued $20 million of 5.67% Medium-Term Notes due January 2018 and used the proceeds to reduce bank loan borrowings under its Revolving Credit Agreement.

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UGI UTILITIES, INC. AND SUBSIDIARIES

UGI Utilities has a $350 million Revolving Credit Agreement which expires in August 2011. At March 31, 2008, UGI Utilities had $96 million of borrowings outstanding under its Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement are classified as bank loans on the Condensed Consolidated Balance Sheets. During the six months ended March 31, 2008 and 2007, average daily bank loan borrowings were $190.1 million and $214.6 million, respectively, and peak bank loan borrowings totaled $267 million and $259 million, respectively. Because of the Company’s seasonal cash needs, peak bank loan borrowings typically occur during the peak heating season months of December and January.

UGI Utilities also has an effective shelf registration statement with the SEC under which it may issue Medium-Term Notes or other debt securities. UGI Utilities has authority from the PUC to issue an additional $35 million of Medium-Term Notes 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, to meet its seasonal cash flow needs.

Cash flow provided by operating activities was $128.5 million during the 2008 six-month period compared with $99.1 million in the prior-year six-month period. Cash flow from operating activities before changes in operating working capital declined slightly to $96.9 million in the 2008 six-month period compared to $103.0 million in the prior-year six-month period principally due to lower non-cash charges for deferred income taxes partially offset by the higher 2008 six-month period earnings. Changes in operating working capital provided $31.6 million of operating cash flow during the 2008 six-month period compared with $4.0 million of operating cash flow used during the prior-year six-month period. The greater cash flow from changes in operating working capital in the 2008 six-month period compared with the 2007 six-month period principally reflects the timing of cash recoveries in excess of purchased gas costs through Gas Utility’s PGC recovery mechanism which increased cash flow from operations by $46.3 million offset by the timing of cash payments for accounts payable which decreased cash flow from operating activities by $11.4 million.

Investing activities.Cash used by investing activities was $19.7 million in the 2008 six-month period compared to $4.6 million in the 2007 six-month period which is net of a $23.7 million payment by Southern Union Company (“SU”) to UGI Utilities associated with UGI Utilities’ August 2006 acquisition of the PG Energy Division of SU. Capital expenditures in the 2008 six- month period were $3.1 million lower than the prior-year period principally reflecting lower cash used for Gas Utility capital expenditures.

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UGI UTILITIES, INC. AND SUBSIDIARIES

Financing activities.Cash used by financing activities was $109.5 million in the 2008 six-month period compared with cash used by financing activities of $87.3 million in the 2007 six-month period. Financing activity cash flows are primarily the result of issuances and repayments of long-term debt, net borrowings and repayments under our Revolving Credit Agreement, cash dividends paid to UGI, and capital contributions from UGI. We paid cash dividends to UGI totaling $35.5 million and $17.3 million during the 2008 and 2007 six-month periods, respectively. During the 2008 six-month period, net bank loan repayments totaled $94 million compared with net bank loan repayments of $70 million in the prior-year six-month period. During the 2008 six-month period, UGI Utilities issued $20 million of Medium-Term Notes due January 2018 the proceeds of which were used to reduce bank loan borrowings under the Revolving Credit Agreement.

Adoption of FIN 48

Effective October 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48), which provides a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under FIN 48, a company can recognize the benefit of an income tax position only if it is more likely than not (likelihood greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Any cumulative effect from the adoption of FIN 48 is recorded as an adjustment to opening retained earnings. As a result of the adoption of FIN 48, effective October 1, 2007 we recorded a non-cash reduction to retained earnings of $0.2 million. For a more detailed description of the effects of the adoption of FIN 48 and additional information associated with the accounting for our income taxes, see Note 1 to Condensed Consolidated Financial Statements.

Proposed Acquisition of PPL Gas Utilities

On March 5, 2008, UGI Utilities signed a definitive agreement to acquire all of the issued and outstanding stock of PPL Gas Utilities Corporation (“PPL Gas”), the natural gas distribution utility of PPL Corporation (“PPL”) (the “Acquisition”), for approximately $268 million plus working capital. Immediately after the closing, UGI Utilities intends to sell the assets of PPL Gas’ wholly owned subsidiary Penn Fuel Propane, LLC (“Penn Fuel”), its retail propane distributor, to AmeriGas Propane, L.P. for cash consideration. PPL Gas distributes natural gas to approximately 75,000 customers in 35 counties in eastern and central Pennsylvania, and also distributes natural gas to several hundred customers in portions of one Maryland county. Penn Fuel sells approximately 15 million gallons of propane annually to more than 30,000 customers in eastern Pennsylvania. UGI Utilities expects to fund the acquisition of PPL Gas and Penn Fuel with a combination of cash on the balance sheet contributed by UGI and long-term debt issued by UGI Utilities.

The Acquisition is subject to PUC and Maryland Public Service Commission approval and is currently expected to close on or about September 30, 2008.

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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 operations. Gas Utility uses derivative financial instruments including exchange-traded natural gas futures contracts to reduce volatility in the cost of gas it purchases for its retail core-market customers. The cost of these derivative financial instruments, net of any associated gains or losses, is included in Gas Utility’s PGC recovery mechanism. Changes in market values of these contracts may require cash deposits in margin accounts with brokers, some or all of which may be restricted from withdrawal. At March 31, 2008, Gas Utility had no restricted cash associated with natural gas futures accounts with brokers.

Electric Utility purchases its electric power needs from electricity suppliers under fixed-price energy and capacity contracts and, to a much lesser extent, on the spot market. Wholesale prices for electricity can be volatile especially during periods of high demand or tight supply. In accordance with POLR settlements approved by the PUC, Electric Utility may increase its POLR rates up to certain limits through March 31, 2009. Electric Utility’s fixed-price contracts with electricity suppliers mitigate most risks associated with the POLR service rate limits in effect through December 2009. With respect to its existing fixed-price power contracts, should any of the counterparties fail to provide electric power under the terms of such contracts, any increases in the cost of replacement power 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.

Our variable-rate debt comprises our bank loan 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 or medium term issuances of fixed-rate debt, from time to time we enter into interest rate protection agreements.

The fair values of our unsettled market risk sensitive derivative instruments reflected in our condensed consolidated balance sheets represent the estimated amount that we would expect to receive or pay to terminate the contract based upon quoted market prices of comparable contracts. Other than Gas Utility’s exchange-traded natural gas futures contracts which are included in Gas Utility’s PGC recovery mechanism, there were no unsettled derivative instruments outstanding at March 31, 2008.

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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
	No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2007, 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.

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):

		Incorporation by Reference
Exhibit
No.	Exhibit	Registrant	Filing	Exhibit
10.1	Stock Purchase Agreement by and between PPL Corporation, as Seller, and UGI Utilities, Inc., as Buyer, dated as of March 5, 2008.	UGI Utilities, Inc.	Form 8-K (3/5/08)		10.1
10.2	Amendment dated May 2, 2008 to the Stock Purchase Agreement by and between PPL Corporation, as Seller, and UGI Utilities, Inc., as Buyer, dated as of March 5, 2008.
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, 2008, 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, 2008, 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, 2008, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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 9, 2008	By:	/s/ John C. Barney
		John C. Barney
		Senior Vice President - Finance and Chief Financial Officer

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UGI UTILITIES, INC.

EXHIBIT INDEX

10.2	Amendment dated May 2, 2008 to the Stock Purchase Agreement by and between PPL Corporation, as Seller, and UGI Utilities, Inc., as Buyer, dated March 5, 2008.
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, 2008, 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, 2008, 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, 2008, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.