AltaGas Utility Group Inc. Announces Record First Half 2009 Results and a Quarterly Dividend of $0.05 Per Share

CALGARY, ALBERTA--(Marketwire - Aug. 10, 2009) - AltaGas Utility Group Inc. (Utility Group) (TSX:AUI) today announced that net income for the six months ended June 30, 2009 was $5.7 million (six months ended June 30, 2008 - $4.1 million) or $0.71 per share (six months ended June 30, 2008 - $0.51 per share), an increase of $1.6 million. A dividend of $0.05 per common share payable on October 15, 2009 to shareholders of record at the close of business on September 30, 2009 was also declared. The $1.6 million increase in 2009 net income compared to the first half of 2008 was primarily due to lower average interest rates on Utility Group's debt; 7.9 percent colder weather in Alberta; an average of 16 percent rate base growth at AltaGas Utilities Inc. and Heritage Gas Limited; and an increase in the price received for natural gas at the Ikhil Joint Venture. For the three months ended June 30, 2009, Utility Group realized a net loss of $4 thousand (three months ended June 30, 2008 - $0.3 million or $0.04 per share), an improvement of $0.3 million. This improvement from the 2008 net loss was primarily due to lower average interest rates on Utility Group's debt; 8.6 percent colder weather in Alberta than last year; and an average of 15 percent rate base growth at AltaGas Utilities Inc. and Heritage Gas Limited. These improvements were partially offset by the comparative temporary timing difference on the recovery of cash income taxes through rates charged to customers in the second quarter of 2008. "It is my pleasure to once again announce record results at Utility Group reflecting cold weather and strong rate base growth in our regulated utility operations" said Patricia Newson, President and Chief Executive Officer. "I thank the outstanding employees in our three natural gas distribution businesses for the ongoing safe reliable service to our customers." Utility Group is a publicly traded company holding interests in AltaGas Utilities Inc., Heritage Gas Limited and Inuvik Gas Ltd. Combined, these regulated natural gas distribution businesses serve more than 71,000 customers in three areas of Canada through an infrastructure of over 20,000 kilometres of pipeline. Utility Group holds an interest in the Ikhil Joint Venture which produces and supplies natural gas in Inuvik, Northwest Territories. Utility Group pursues opportunities to invest in infrastructure-based utility and related businesses with long-term, stable returns. MANAGEMENT'S DISCUSSION AND ANALYSIS The following Management's Discussion and Analysis (MD&A) of financial condition and results of operations dated August 7, 2009 is a review of the results of operations and the liquidity and capital resources of AltaGas Utility Group Inc. (Utility Group) for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008. The MD&A should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto for the three and six months ended June 30, 2009 and the audited consolidated financial statements and MD&A contained in Utility Group's Annual Report for the year ended December 31, 2008. This MD&A contains forward-looking statements. When used in this MD&A the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect", and similar expressions, as they relate to Utility Group or an affiliate of Utility Group, are intended to identify forward-looking statements. In particular, this MD&A contains forward-looking statements with respect to, among other things, business objectives, expected growth, results of operations, performance, business projects and opportunities and financial results. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Such statements reflect Utility Group's current views with respect to future events based on certain material factors and assumptions and are subject to certain risks and uncertainties. Many factors could cause Utility Group's actual results, performance or achievements to vary from those described in this MD&A including, without limitation, changes in market, competition, governmental or regulatory developments, general economic conditions and other factors set out in Utility Group's public disclosure documents. These factors should not be construed as exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this MD&A as intended, planned, anticipated, believed, sought, proposed, estimated or expected, and accordingly such forward-looking statements included in, or incorporated by reference in this MD&A should not be unduly relied upon. Such statements speak only as of the date of this MD&A. Utility Group does not intend, and does not assume any obligation, to update these forward-looking statements except as required by law. The forward-looking statements contained in this MD&A are expressly qualified as cautionary statements. Additional information regarding Utility Group can be found on its website at www.altagasutilitygroup.com. The continuous disclosure materials of Utility Group, including its prospectus, MD&A and financial statements, Annual Information Form, Information Circular and Proxy Statement, material change reports and press releases issued by Utility Group are available through Utility Group's website or directly through the SEDAR system at www.sedar.com. I. ALTAGAS UTILITY GROUP INC. Utility Group was incorporated under the Canada Business Corporations Act as 6414958 Canada Limited on July 6, 2005, and changed its name to AltaGas Utility Group Inc. on July 28, 2005. Through a series of transactions which closed on November 17, 2005, Utility Group listed on the Toronto Stock Exchange and acquired all of the outstanding shares of AltaGas Utility Holdings Inc. (AUHI). AUHI owns 100 percent of AltaGas Utilities Inc. (AUI), an indirect 24.9 percent share in Heritage Gas Limited (Heritage Gas) and a one-third share in Inuvik Gas Ltd. (Inuvik Gas). On July 31, 2007, Utility Group acquired a 33.3335 percent interest in the Ikhil Joint Venture (Ikhil) through its wholly owned subsidiary Utility Group Facilities Inc. The investment in Ikhil is jointly controlled along with the other joint venture partners. II. OVERVIEW OF THE BUSINESS AND STRATEGY Utility Group owns and operates businesses that deliver and sell natural gas to end users, including regulated natural gas transmission and distribution facilities in Alberta, Nova Scotia and Northwest Territories, Canada and natural gas production and processing facilities in the Northwest Territories. Utility Group's earnings are highly seasonal, with revenues based primarily on the demand for space heating in the winter months, mainly from November to March. Costs, on the other hand, are generally incurred more uniformly throughout the year. As a result, Utility Group generates profits during the first and fourth quarters and net losses in the second and third quarters. Deviations in expected weather patterns can affect earnings as the actual volumes of natural gas delivered fluctuate accordingly. As well, volumes are affected by increases in the number of customers or changes in customer usage. AUI and Heritage Gas operate in regulated marketplaces where they are allowed the opportunity to recover their costs and earn regulated rates of return on capital from the capital investment base. Return on rate base comprises a recovery of financing costs and a return on common equity that are approved by regulatory authorities. Inuvik Gas operates a natural gas distribution franchise in a light handed regulatory environment where delivery service and natural gas pricing are market based. Ikhil produces natural gas for sale under long term contracts based on the price of diesel fuel. These contracts are with the Northwest Territories Power Corporation (NWTPC) and Inuvik Gas. Utility Group's strategy is to grow its existing business through infill and expansion of services within current franchise areas or, in the case of Heritage Gas, to develop new systems in new market areas. In addition, Utility Group actively pursues the prudent acquisition of other utility type infrastructure and related businesses in Canada. Utility Group's management team and Board of Directors have significant utility and infrastructure asset management, acquisition and capital markets experience. Utility Group believes this experience will ensure prudent management and financing of existing capital commitments to support the expansion of AUI's systems, the growth of the Heritage Gas system and new opportunities as they are identified. III. FINANCIAL AND OPERATING RESULTS Utility Group's financial information and the related discussion of financial results in the MD&A are for the three and six months ended June 30, 2009 and June 30, 2008. /T/ ---------------------------------------------------------------------------- Consolidated Financial Results Three months ended Six months ended ($ millions, except per share amounts June 30 June 30 or as otherwise noted) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Revenue 20.0 28.6 69.4 87.0 Net revenue (1) 11.3 9.8 27.3 25.7 Operating income (1) 1.5 0.6 7.9 7.7 Net income (loss) (0.0) (0.3) 5.7 4.1 Funds generated from operations (1) 2.5 1.6 10.7 7.8 ---------------------------------------------------------------------------- Shares outstanding (thousands) Basic 8,114 8,190 8,114 8,190 Diluted 8,114 8,190 8,114 8,191 Net income (loss) per share - basic and diluted $ (0.00) $ (0.04) $ 0.71 $ 0.51 (1) Non-GAAP financial measure: see discussion in "Non-GAAP Financial Measures" section of this MD&A. ---------------------------------------------------------------------------- Consolidated Financial Position ($ millions) June 30, 2009 December 31, 2008 ---------------------------------------------------------------------------- Total assets 251.1 256.9 Long-term liabilities 150.5 142.3 ---------------------------------------------------------------------------- /T/ 1. Discussion of Consolidated Financial Results for the three months ended June 30, 2009 Net loss for the three months ended June 30, 2009 was $4 thousand (three months ended June 30, 2008 - $0.3 million) or $0.00 per share (three months ended June 30, 2008 - $0.04 per share), an improvement of $0.3 million. The reduction from the 2008 second quarter net loss was primarily due to lower average interest rates on Utility Group's debt; 8.6 percent colder weather in Alberta than last year, or 18.6 percent colder than normal; and an average of 15 percent rate base growth at AUI and Heritage Gas. These increases were partially offset by the temporary changes in timing of the recovery of cash income tax through rates charged to customers in the prior year. Utility Group expects this year-over-year variance from timing differences to create a loss in the third quarter of 2009 and to have fully reversed and be insignificant by the end of 2009. AUI will pay no cash income tax in 2009 compared to paying $1.3 million of tax in 2008. /T/ The following table outlines significant net loss impacts for the second quarter. ---------------------------------------------------------------------------- Net Loss Variance Three months ended June 30 ($ millions) 2009 2008 ---------------------------------------------------------------------------- Net loss from the comparable prior year period (0.3) (0.5) Net loss lower due to: Decrease in short-term borrowing rates 0.5 - Colder weather than previous period 0.2 - Rate base growth 0.2 0.3 Other 0.2 0.2 ---------------------------------------------------------------------------- 0.8 - ---------------------------------------------------------------------------- Net loss higher due to: Corporate and administrative costs - (0.3) Timing of 2008 cash income tax expense and recovery (0.8) - ---------------------------------------------------------------------------- Net loss (0.0) (0.3) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ An analysis of Utility Group's revenue and expenses by income statement item follows. Generally, rate regulated cost of service entities such as AUI and Heritage Gas collect operating and administrative, depreciation expenses and income taxes paid in the rates charged to customers, and therefore, changes in these costs should not impact the net income of Utility Group. Utility Group generally records income tax each period based on the expected annual cash income tax expense. In 2009, cash taxes at AUI are expected to be nil due to income tax deductions available at AUI from its significant investment to upgrade its billing system software to make it Tariff Billing Code (TBC) compliant as required by the Alberta Utilities Commission (AUC). Consequently, as there is no cash income tax to be recovered from customers, revenue, net revenue and operating income will be lower than in 2008 when AUI included tax recoveries. For the three months ended June 30, 2009 Utility Group recorded $1.0 million of income tax (three months ended June 30, 2008 - recovered $0.2 million), primarily from Utility Group's corporate entity due to lower corporate borrowing costs compared to 2008. Utility Group's revenue for the three months ended June 30, 2009 decreased by $8.6 million or 30 percent to $20.0 million (three months ended June 30, 2008 - $28.6 million) mainly as a result of a decrease in the cost of natural gas. AUI's revenue of $17.7 million comprised 89 percent of consolidated revenue (three months ended June 30, 2008 - $26.1 million or 91 percent). Heritage Gas' revenue of $1.5 million comprised eight percent of consolidated revenue (three months ended June 30, 2008 - $1.7 million or six percent). Inuvik Gas and Ikhil revenues of $0.8 million comprised three percent of second quarter 2009 consolidated revenue (three months ended June 30, 2008 - $0.8 million or three percent). For the three months ended June 30, 2009 Utility Group's net revenue grew by $1.5 million or 15 percent to $11.3 million (three months ended June 30, 2008 - $9.8 million), after natural gas costs of $8.7 million (three months ended June 30, 2008 - $18.8 million). Net revenue at AUI was $1.2 million higher in 2009 compared to 2008 driven by contributions to net revenue from 8.6 percent colder weather in Alberta in 2009 and a 15 percent growth in AUI's 2009 mid year rate base over 2008. This increase is partially offset by lower recoverable costs in 2009. In 2009, AUI is expecting to pay no current income tax, which reduces AUI's net revenue requirement when compared to 2008. Heritage Gas contributed $0.2 million of the quarter-over-quarter increase largely due to 31 percent growth in its average rate base. Inuvik Gas and Ikhil contributed $0.1 million of the 2009 net revenue increase over 2008. Operating and administrative expenses increased by 7 percent to $7.7 million for the three months ended June 30, 2009 (three months ended June 30, 2008 - $7.2 million), primarily due to general cost increases including pension expenses and increased staff costs to support business growth. Depreciation, depletion and amortization expense increased 5 percent to $2.1 million for the three months ended June 30, 2009 (three months ended June 30, 2008 - $2.0 million) as a result of higher investment in 2008 and 2009 in property, plant and equipment at AUI and Heritage Gas. Interest expense for the three months ended June 30, 2009 was $0.5 million (three months ended June 30, 2008 - $1.1 million), a period over period decrease of $0.6 million or 55 percent. While the average debt outstanding during the second quarter of 2009 increased to $117.3 million (three months ended June 30, 2008 - $108.6 million), average borrowing costs in the second quarter of 1.1 percent were significantly lower than the 4.1 percent incurred in the second quarter of 2008. The increase in average debt funded the capital expansion projects in AUI's and Heritage Gas' franchise areas. 2. Discussion of Consolidated Financial Results for the six months ended June 30, 2009 Net income for the six months ended June 30, 2009 was $5.7 million (six months ended June 30, 2008 - $4.1 million) or $0.71 per share (six months ended June 30, 2008 - $0.51 per share), an increase of $1.6 million. The increase in net income was due to lower average interest rates on Utility Group's debt; 7.9 percent colder weather in Alberta than for the same period last year, or 12.3 percent colder than normal; rate base average growth of 16 percent at AUI and Heritage Gas; and an increase in the price received for natural gas at Ikhil. These increases were partially offset by higher unrecovered corporate administrative costs and other changes in the natural gas volume consumption at AUI. Excluding weather impacts, 2009 natural gas volume consumption was normal while 2008 benefited from higher than normal natural gas consumption levels resulting in 2008 net income being higher than expected. The $0.8 million temporary income tax benefit realized by Utility Group in the first quarter of 2009 reversed in the second quarter of 2009 due to timing of the recovery of cash income tax through rates charged to customers in the prior year. Utility Group expects this year-over-year temporary variance from timing differences to create a loss in the third quarter of 2009 but to have fully reversed and be insignificant by the end of 2009. AUI will pay no cash income tax in 2009 compared to paying $1.3 million of tax in 2008. /T/ The following table outlines significant net income impacts for the first half of the year. ---------------------------------------------------------------------------- Net Income Variance Six months ended June 30 ($ millions) 2009 2008 ---------------------------------------------------------------------------- Net income from the comparable prior year period 4.1 3.2 Net income higher due to: Decrease in short-term borrowing rates 0.7 - Colder weather than previous period 0.5 0.2 Rate base growth 0.5 0.5 Increase in natural gas price at Ikhil 0.2 - Ikhil acquisition July 31, 2007 - 0.4 Increase in allowed return on equity in Alberta - 0.1 ---------------------------------------------------------------------------- 6.0 4.4 ---------------------------------------------------------------------------- Net income lower due to: Corporate and administrative costs and other (0.1) (0.3) 2009 natural gas volume consumption normal while 2008 natural gas volume consumption higher than expected (0.2) - ---------------------------------------------------------------------------- (0.3) (0.3) ---------------------------------------------------------------------------- Net income 5.7 4.1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ An analysis of Utility Group's revenue and expenses by income statement item follows. Generally, rate regulated cost of service entities such as AUI and Heritage Gas collect operating and administrative, depreciation expenses and income taxes paid in the rates charged to customers, and therefore, changes in these costs should not impact the net income of Utility Group. Utility Group generally records income tax each period based on the expected annual cash income tax expense. In 2009, cash taxes at AUI are expected to be nil due to income tax deductions available at AUI from its significant investment to upgrade its billing system software to make it TBC compliant as required by the AUC. Consequently as there is no cash income tax to be recovered from customers, revenue, net revenue and operating income will be lower than in 2008 when AUI included tax recoveries. For the six months ended June 30, 2009 Utility Group recorded $1.0 million of income tax (six months ended June 30, 2008 - $1.1 million). Utility Group's current income tax was incurred primarily from Utility Group's corporate entity due to lower corporate borrowing costs compared to 2008. Utility Group's revenue for the six months ended June 30, 2009 decreased by $17.6 million or 20 percent to $69.4 million (six months ended June 30, 2008 - $87.0 million) mainly as a result of a decrease in the cost of natural gas. AUI's revenue of $62.6 million comprised 90 percent of consolidated revenue (six months ended June 30, 2008 - $81.0 million or 93 percent). Heritage Gas' revenue of $4.7 million comprised seven percent of consolidated revenue (six months ended June 30, 2008 - $4.0 million or five percent). Inuvik Gas and Ikhil revenues of $2.1 million comprised three percent of the first six months of 2009 consolidated revenue (six months ended June 30, 2008 - $2.0 million or two percent). For the six months ended June 30, 2009 Utility Group's net revenue grew by $1.6 million or 6 percent to $27.3 million (six months ended June 30, 2008 - $25.7 million), after natural gas costs of $42.1 million (six months ended June 30, 2008 - 61.3 million). Net revenue at AUI was $0.9 million higher in 2009 compared to 2008 driven by contributions to net revenue from 7.9 percent colder weather in Alberta in 2009 and a 15 percent growth in AUI's 2009 mid year rate base over 2008. The increase is partially offset by lower recoverable costs in 2009 and net revenue declines in 2009 from the consumption of natural gas in 2009 being normal while 2008 natural gas volume consumption was higher than expected. In 2009, AUI is expecting to pay no current income tax, which reduces AUI's net revenue requirement when compared to 2008. Heritage Gas contributed $0.5 million of the increase largely due to 32 percent growth in its average rate base. Inuvik Gas and Ikhil contributed $0.2 million of the 2009 net revenue increase over 2008. Operating and administrative expenses increased by 7 percent to $15.1 million for the six months ended June 30, 2009 (six months ended June 30, 2008 - $14.1 million), primarily due to general cost increases including pension expenses and increased staff costs to support business growth. Depreciation, depletion and amortization expense increased 10 percent to $4.3 million for the six months ended June 30, 2009 (six months ended June 30, 2008 - $3.9 million) as a result of higher investment in 2008 and 2009 in property, plant and equipment at AUI and Heritage Gas. Interest expense for the six months ended June 30, 2009 was $1.2 million (six months ended June 30, 2008 - $2.5 million), a period over period decrease of $1.3 million or 52 percent. While the average debt outstanding during the first six months of 2009 increased to $117.4 million (six months ended June 30, 2008 - $107.5 million), average borrowing costs in the first six months of 2.0 percent were significantly lower than the 4.4 percent incurred in the comparable period of 2008. The increase in average debt funded the capital expansion projects in AUI's and Heritage Gas' franchise areas. /T/ 3. Business Operations ---------------------------------------------------------------------------- Natural Gas Distribution June 30, 2009 June 30, 2008 Service Service Sites(1) PJs (2)(3) Sites(1) PJs (2)(3) ---------------------------------------------------------------------------- Deliveries (PJ) (1) (2) AUI End-use 68,187 9.6 66,738 9.3 AUI Transportation 7 3.3 7 3.7 Heritage Gas 2,055 0.4 1,410 0.2 Inuvik Gas 887 0.1 824 0.1 ---------------------------------------------------------------------------- 71,136 13.4 68,979 13.3 ---------------------------------------------------------------------------- (1) Service sites reflect all of the service sites of AUI, Heritage Gas and Inuvik Gas. (2) A petajoule (PJ) is 1 million gigajoules. (3) Deliveries reflect Utility Group's 100 percent share in AUI and its proportionate share of Heritage Gas (24.9 percent) and Inuvik Gas (one-third). ---------------------------------------------------------------------------- AUI Degree Day Variance Three months ended Six months ended June 30 June 30 2009 2008 2009 2008 ---------------------------------------------------------------------------- Degree day variance from normal (percent) (1) 18.6 10.8 12.3 4.6 ---------------------------------------------------------------------------- Degree day variance from comparative period (percent)(1) 8.6 1.2 7.9 3.7 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Degree days relate to AUI's service area. A degree day is the cumulative extent to which the daily mean temperature falls below 15 degrees Celsius. Normal degree days are based on a 20-year rolling average. Positive variances from normal lead to increased delivery volumes from normal expectations. ---------------------------------------------------------------------------- Natural Gas Production Three months ended Three months ended June 30, 2009 June 30, 2008 GJs(1) Mcf (2) GJs(1) Mcf (2) ---------------------------------------------------------------------------- Ikhil production (3) 43,284 40,950 44,843 42,425 Sold to Inuvik Gas (20,452) (19,349) (18,614) (17,610) ---------------------------------------------------------------------------- Sold to NWTPC 22,832 21,601 26,229 24,815 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Natural Gas Production Six months ended Six months ended June 30, 2009 June 30, 2008 GJ (1) Mcf (2) GJs(1) Mcf (2) ---------------------------------------------------------------------------- Ikhil production (3) 115,755 109,513 121,831 115,261 Sold to Inuvik Gas (68,970) (65,251) (65,865) (62,313) ---------------------------------------------------------------------------- Sold to NWTPC 46,785 44,262 55,966 52,948 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) In Canada, the GJ, a metric measurement of heat energy, is considered the industry standard measurement for natural gas distribution deliveries. (2) The imperial measure of natural gas volumes is the cubic foot, the measure most commonly used in the natural gas production industry to report volumes of reserves and production. Mcf stands for thousand cubic feet. (3) Natural gas production reflects Utility Group's proportionate share (33.3335 percent) of Ikhil. /T/ AUI AUI's operating income for the first six months of 2009 was $6.4 million (six months ended June 30, 2008 - $6.2 million). The increase of $0.2 million in operating income was driven by contributions to net revenue from 7.9 percent colder weather in Alberta in 2009 and a 15 percent growth in AUI's 2009 mid year rate base, partially offset by lower recoverable costs in 2009, primarily income taxes, and net revenue declines in 2009 from the consumption of natural gas in 2009 being normal while 2008 natural gas volume consumption was higher than expected. AUI's market consists primarily of residential and small commercial consumers located in smaller population centres or rural areas of Alberta. AUI completed the period with 68,187 active service sites (six months ended June 30, 2008 - 66,738). In the six months ended June 30, 2009, the growth of AUI's service sites and business occurred through infill growth in established franchises. Infill growth demand for space and water heating fuel in AUI's franchise service areas continues to be concentrated in town distribution systems and relates to servicing new homes and commercial developments with natural gas. AUI serves almost all of the potential market in its existing service areas. The majority of AUI's service site additions generally occur in the last half of the year as new customers take natural gas service prior to the winter season. AUI service site additions were 420 in the first six months of 2009; down from 684 for the same period of 2008. In the first six months of 2009, the economic slowdown in the Alberta economy resulted in fewer service site additions than 2008, which benefited from the carry over of 2007's exceptional growth. AUI expects 2009 service site additions will return to historical growth levels of approximately two percent. Heritage Gas For the six months ended June 30, 2009, Utility Group's share of Heritage Gas' operating income was $1.5 million (six months ended June 30, 2008 - $1.2 million). The growth in operating income is a function of the increased average rate base over the same period in 2008. Utility Group's proportion of Heritage Gas' average rate base for the six months ended June 30, 2009 was $27.9 million (six months ended June 30, 2008 - $21.2 million). For the six months ended June 30, 2009, Heritage Gas' annualized natural gas volumes increased by 96,000 GJ's to 391,000 GJ's (six months ended June 30, 2008 - 295,000 GJ's) based on 74 residential (six months ended June 30, 2008 - 87) and 96 commercial (six months ended June 30, 2008 - 110) customers activated, including Oland Brewery on May 8, 2009. The demand for activations in 2008, the first year of natural gas access on the Halifax Peninsula, has leveled off as the system moves into its second year of service. During the remainder of 2009, Heritage Gas expects to activate several large commercial and government customers on the peninsula, including a number of high rise office and apartment buildings and the Victoria General Hospital. These activations will result in a larger proportion of the revenue requirement being provided by billings to customers. Inuvik Gas and Ikhil Inuvik Gas and Ikhil's operating income contributed $1.0 million to Utility Group's results for the six months ended June 30, 2009 (six months ended June 30, 2008 - $0.9 million). The increase is mainly due to a higher price received for natural gas sold to NWTPC. The price charged to NWTPC for natural gas is set on August 1 each year based on the price of diesel. On August 1, 2008, the price increased to $15.21 per GJ from $11.83 per GJ. The price is expected to decline below the 2007/2008 levels with the contracted price re-set effective August 1, 2009. In March 2009, Ikhil completed a work-over project on one of its two producing wells to optimize well and plant operations. 4. Regulatory Update AUI 2007 General Tariff Application (GTA) On June 6, 2008, AUI applied for a rate rider to recover the difference between the 2007 revenue requirement approved by the AUC and the 2007 revenue charged to customers. In the same application, AUI requested approval of interim 2007 rates based on the approved 2007 revenue requirement in lieu of filing a 2007 GTA Phase 2 application. On October 21, 2008 the AUC issued Decision 2008 - 103 that approved the 2007 deficiency rider at the interim rates as proposed to collect the 2007 revenue shortfall over four months beginning in November 2008. 2008/2009 GTA On July 14, 2008, AUI filed Phase 1 of its 2008/2009 GTA, and updated it on October 10, 2008 and March 3, 2009. AUI is requesting AUC approval for a net rate base of $115.1 million for 2008 and $129.5 million for 2009. This increases AUI's 2007 approved net rate base of $104.4 million by $10.7 million in 2008 and by a total of $25.1 million in 2009. AUI is also requesting approval of a revenue requirement, net of natural gas costs and third party transportation costs, of $41.1 million for 2008 and $45.2 million for 2009. These are increases of $5.4 million and $9.5 million in each of 2008 and 2009 respectively from AUI's 2007 approved revenue requirement of $35.7 million. The public hearing for the application occurred in April and May 2009. A decision is expected in fall 2009. On February 11, 2009, the AUC approved interim rates whereby, effective March 1, 2009, AUI will collect through rates billed to customers, approximately 50 percent or $3.4 million of the 2009 revenue requirement in excess of the 2008 requirement as applied for in the 2008/2009 GTA. Prior to this increase, AUI was billing its customers interim rates based on those approved in the 2007 GTA. AUI is accumulating a revenue deficiency accrual for the difference between rates billed to customers and the applied-for revenue requirement. On March 30, 2009, the AUC approved incremental interim rates whereby, effective May 1, 2009, AUI will collect through rates billed to customers, approximately 50 percent or $2.9 million of the 2008 forecast revenue deficiency as applied-for in the 2008/2009 GTA. Prior to this increase, AUI was billing its customers interim rates based on those approved on February 11, 2009. AUI is accumulating a revenue deficiency accrual for the difference between rates billed to customers and the 2008 revenue requirement submission. At June 30, 2009, AUI had a revenue deficiency accrual of $7.0 million (six months ended June 30, 2008 - $5.4 million) with respect to the 2008/2009 GTA. Generic Cost of Capital Since 2004, the AUC has set the rate of return on equity for all AUC regulated utilities through a formula based on the long term Canada bond yields. On April 12, 2008, the AUC initiated a review of the continued use of a generic cost of capital formula in determining the allowed rate of return on equity (GCC Proceeding). In June 2009, AUI was a participant in the GCC Proceeding hearing and in late 2009 it is expected that the AUC will decide on the method to be used to determine utilities' allowed rate of return on equity for 2009 and future years. The AUC has determined an interim placeholder for return on equity for 2009 of 8.75 percent on a deemed equity structure of 41 percent for AUI. As part of the GCC Proceeding, AUI has applied for an 11.00 percent return on equity, and a 54/46 debt to equity capital structure. Heritage Gas On February 12, 2009, the NSUARB issued its decision approving Heritage Gas' September 12, 2008 GTA application for rate increases from 2009 to 2011, and suspending recovery of depreciation expense for the period of 2009 to 2011. The suspension of depreciation expense in the determination of the revenue requirement will not impact net income for Heritage Gas, but will accelerate the recovery of Heritage Gas' Revenue Deficiency Account (RDA) balance. The suspended depreciation is expected to be recognized over the remaining life of the property, plant and equipment, beginning 2012. The following was confirmed by the NSUARB decision: - Escalating tariffs and rates approved through December 31, 2011 superceding the previous 2.5 percent annual increases; - Capital structure of 55 percent debt and 45 percent equity; - Cost of debt of 8.75 percent; - Rate of return on equity of 13.0 percent; and - Indefinite use of the RDA with a forecast recovery in 2019. The RDA is based on the difference between Heritage Gas' actual revenue billed and the revenue required to earn the rates of return approved by the NSUARB. In Heritage Gas' current customer development stage, the actual revenue billed is less than the revenue required to earn the approved rates of return and therefore the RDA asset accumulates. The RDA is part of rate base, and earns a return of 13 percent on an equity portion of 45%. As the distribution network matures, the actual revenue billed is expected to exceed the revenue required to earn the approved rates of return and the RDA will be drawn down. The NSUARB has granted permission to use the RDA until such time as it is drawn down to zero. Utility Group's proportionate share of the RDA balance at June 30, 2009 was $7.3 million (December 31, 2008 - $6.7 million). 5. Non-GAAP Financial Measures Utility Group provides financial measures in this MD&A that do not have a standardized meaning prescribed by Canadian Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures may not be comparable to similar measures presented by other corporations. The purpose of these financial measures and their reconciliation to GAAP financial measures is discussed below. /T/ ---------------------------------------------------------------------------- Three months ended Six months ended Net revenue June 30 June 30 ---------------------------------------------------------------------------- ($ millions) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Net revenue 11.3 9.8 27.3 25.7 Add: Cost of natural gas 8.7 18.8 42.1 61.3 ---------------------------------------------------------------------------- Revenue (GAAP financial measure) 20.0 28.6 69.4 87.0 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ Management believes that net revenue better reflects operating performance than does revenue as changes in the market price of natural gas purchased for resale affect both revenue and the cost of natural gas. /T/ ---------------------------------------------------------------------------- Three months ended Six months ended Operating income June 30 June 30 ---------------------------------------------------------------------------- ($ millions) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Operating income 1.5 0.6 7.9 7.7 Deduct: Interest expense 0.5 1.1 1.2 2.5 Income taxes (recovery) (1) 1.0 (0.2) 1.0 1.1 ---------------------------------------------------------------------------- Net income (loss) (GAAP financial measure) (0.0) (0.3) 5.7 4.1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Income taxes consist of current and future income taxes. /T/ Operating income is used by management to measure operating performance without reference to financing decisions and income tax impacts, which are not controlled by the operating businesses. /T/ ---------------------------------------------------------------------------- Funds generated from operations Three months ended Six months ended June 30 June 30 ---------------------------------------------------------------------------- ($ millions) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Funds generated from operations 2.5 1.6 10.7 7.8 Net change in non-cash working capital 4.1 4.7 3.9 (4.5) ---------------------------------------------------------------------------- Cash from operations (GAAP financial measure 6.6 6.3 14.6 3.3 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ Funds generated from operations are provided to assist in determining Utility Group's ability to generate cash from operations, after interest and taxes, without regard to changes in non-cash working capital in the period. 6. Critical Accounting Estimates Since a determination of the value of many assets, liabilities, revenues and expenses depends upon future events, the preparation of Utility Group's consolidated financial statements requires the use of estimates and assumptions which have been made using careful judgment by management. Management has discussed the development and selection of these critical accounting estimates with the Audit and Governance Committee of the Board of Directors and its independent auditors, who have reviewed and approved Utility Group's disclosure relating to critical accounting estimates in this MD&A. Utility Group's significant accounting policies are described in the Notes to the audited consolidated financial statements of Utility Group for the year ended December 31, 2008. With respect to estimates, the most critical of these policies are those related to rate regulation, determination of pension and other employee benefits, amortization and depreciation expense, goodwill impairment assessment and asset retirement obligations. Actual results may differ from these estimates. 7. Changes in Accounting Policies Effective January 1, 2009, Utility Group prospectively adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064 - Goodwill and Intangible Assets. This new section establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. As a result of adopting this section, Utility Group reclassified $8.1 million of land rights, franchise consents, and computer software previously included in property, plant and equipment to intangible assets on January 1, 2009. Prior year comparative balances were also reclassified to conform to current year presentation. Effective January 1, 2009, Utility Group prospectively adopted the changes to CICA Handbook Section 1100 - GAAP, pertaining to the application of that Section to the recognition and measurement of assets and liabilities arising from rate regulation. As a result of adopting these changes, Utility Group reclassified $16.3 million of reserves for future removal and site restoration costs previously netted against property, plant and equipment to non current regulatory liabilities on January 1, 2009. Prior year comparative balances were also reclassified to conform to current year presentation. Effective January 1, 2009, Utility Group prospectively adopted the changes to CICA Handbook Section 3465 - Income Taxes, to require the recognition of future income tax liabilities and assets as well as corresponding regulatory assets or liabilities for the amount of future income taxes expected to be included in future rates and recovered from or paid to future customers. As a result of adopting these changes, Utility Group recognized $10.9 million of previously unrecognized future income tax liabilities and an offsetting regulatory asset, a $3.6 million change in estimate from the $8.4 million future income tax liability and $1.1 million future income tax asset as reported in the first quarter of 2009. Prior year comparative balances were not affected as a result of the adoption of these changes. 8. Transactions with Related Parties For the three months ended June 30, 2009 Utility Group purchased natural gas from AltaGas Income Trust (the Trust) for $6.3 million (three months ended June 30, 2008 - $16.0 million). Utility Group also incurred $0.1 million (three months ended June 30, 2008 - $0.1 million) for operating services and office space provided by the Trust. The Trust purchased transportation from Utility Group for $0.1 million (three months ended June 30, 2008 - $0.1 million). For the six months ended June 30, 2009 Utility Group purchased natural gas from the Trust for $36.2 million (six months ended June 30, 2008 - $58.2 million). Utility Group also incurred $0.2 million (six months ended June 30, 2008 - $0.3 million) for operating services and office space provided by the Trust. The Trust purchased transportation from Utility Group for $0.2 million (six months ended June 30, 2008 - $0.2 million). The Trust provided certain administrative and support services to Utility Group under an Administrative Service Agreement (ASA) that expired on June 30, 2009. Utility Group and the Trust negotiated a new ASA under which Utility Group will receive limited administrative and support services and office space until December 31, 2009. 9. Summary of Eight Recently Completed Quarters The table below sets forth selected data from Utility Group's consolidated financial statements for the eight recently completed quarters ended June 30, 2009. This information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2008 and related notes thereto as well as the MD&A for the year ended December 31, 2008. /T/ ---------------------------------------------------------------------------- 2009 2008 2007 ($ millions) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 ---------------------------------------------------------------------------- Net revenue (1) 11.3 16.0 14.5 9.0 9.8 15.9 13.1 7.6 Operating income (loss) (1) 1.5 6.4 4.6 (0.1) 0.6 7.1 4.5 (0.5) Net income (loss) (0.0) 5.7 2.8 (1.0) (0.3) 4.4 2.5 (1.2) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2009 2008 2007 ($ per share) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 ---------------------------------------------------------------------------- Net income (loss) Basic and diluted (0.0) 0.71 0.35 (0.12) (0.04) 0.54 0.31 (0.14) Dividends declared 0.050 0.050 0.050 0.045 0.045 0.040 0.040 0.035 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Non-GAAP financial measure. See "Non-GAAP Financial Measures" section of this MD&A /T/ Utility Group's earnings are highly seasonal, as distribution revenues are primarily based on the demand for space heating in the winter months, mainly from November to March. Costs are generally incurred more uniformly over the year. This typically results in profitable first and fourth quarters and net losses in the second and third quarters. Earnings can be impacted by variations from normal weather resulting in delivered volumes that are different than anticipated as well as continued rate base growth and regulatory decisions. Increases in the number of customers or changes in customer usage are examples of other factors that might typically affect volumes. IV. UTILITY GROUP'S FINANCIAL POSITION The following table outlines the significant changes in the consolidated balance sheet of Utility Group at June 30, 2009 compared to December 31, 2008. /T/ ---------------------------------------------------------------------------- Balance Sheet Item Increase ($ millions) (decrease) Explanation ---------------------------------------------------------------------------- Accounts receivable (23.6) Reduction reflects seasonally lower volumes of natural gas delivered and low natural gas prices at the end of the second quarter of 2009 compared to December 2008. Intangible assets 3.1 Increase due to investment in Tariff Billing Code software at AUI Regulatory assets 11.9 Increase mainly due to the regulatory asset associated with the recognition of future tax liability previously not recorded by rate regulated entities. Accounts payable and accrued liabilities (22.3) Reduction reflects seasonally lower natural gas volumes purchased and lower natural gas prices at the end of the second quarter of 2009 compared to December 2008. Future income tax liability 10.9 Increase mainly due to the recognition of future tax liabilities previously not recorded by rate regulated entities. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ V. INVESTED CAPITAL Utility Group categorizes its invested capital into new business, system betterment and natural gas supply and general plant and regulatory and other assets. The invested capital reflected in the following tables is the net cash invested. /T/ ---------------------------------------------------------------------------- Three months ended Six months ended Net Capital Invested June 30 June 30 ---------------------------------------------------------------------------- ($ millions) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Invested capital: Property, plant and equipment 1.8 3.9 6.8 10.6 Intangible assets 2.0 0.2 3.3 0.2 Regulatory and other assets 0.4 0.6 0.8 2.1 ---------------------------------------------------------------------------- 4.2 4.7 10.9 12.9 Contributions and disposals: Contributions in aid of construction (0.6) (0.7) (0.9) (2.3) ---------------------------------------------------------------------------- Investing activities 3.6 4.0 10.0 10.6 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended Six months ended Net Capital Invested June 30 June 30 ---------------------------------------------------------------------------- ($ millions) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Invested capital: New business 1.7 2.7 6.0 7.1 System betterment and natural gas supply 0.2 0.5 0.9 1.8 General plant 1.9 0.9 3.2 1.9 Regulatory and other assets 0.4 0.6 0.8 2.1 ---------------------------------------------------------------------------- 4.2 4.7 10.9 12.9 ---------------------------------------------------------------------------- Contributions in aid of construction: New business (0.6) (0.7) (0.9) (2.0) System betterment and natural gas supply - - - (0.3) ---------------------------------------------------------------------------- (0.6) (0.7) (0.9) (2.3) ---------------------------------------------------------------------------- Investing activities 3.6 4.0 10.0 10.6 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ During the three months ended June 30, 2009, net capital invested by Utility Group was $3.6 million (three months ended June 30, 2008 - $4.0 million). The significant investments included: - $3.2 million (three months ended June 30, 2008 - $3.4 million) at AUI which funded infill expansion primarily in the Leduc, as well as expansion in the smaller Athabasca and St. Paul franchise areas and $1.3 million for TBC software; - $0.6 million (three months ended June 30, 2008 - $0.7 million) at Heritage Gas which funded expansion primarily in Dartmouth and on the Halifax peninsula. During the six months ended June 30, 2009, net capital invested by Utility Group was $10.0 million (six months ended June 30, 2008 - $10.6 million). The significant investments included: - $9.0 million (six months ended June 30, 2008 - $9.8 million) at AUI which funded infill expansion primarily in the Leduc, as well as expansion in the smaller Athabasca and St. Paul franchise areas and $3.3 million for TBC software; - $0.9 million (six months ended June 30, 2008 - $1.0 million) at Heritage Gas which funded expansion primarily in Dartmouth and on the Halifax peninsula; - $0.2 million (six months ended June 30, 2008 - $nil) at Ikhil to fund operational optimization work over costs. /T/ VI. LIQUIDITY AND CAPITAL RESOURCES ---------------------------------------------------------------------------- Three months ended Six months ended Cash Position June 30 June 30 ---------------------------------------------------------------------------- ($ millions) 2009 2008 2009 2008 ---------------------------------------------------------------------------- Cash, beginning of period 0.1 0.8 0.5 0.8 Cash from operations 6.6 6.3 14.6 3.3 Investing activities (3.6) (4.0) (10.0) (10.6) Financing activities (2.5) (2.5) (4.5) 7.1 ---------------------------------------------------------------------------- Cash, end of period 0.6 0.6 0.6 0.6 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ Cash from Operations Cash provided from operations for the three months ended June 30, 2009 was $6.6 million (three months ended June 30, 2008 - $6.3 million) and $14.6 million for the six months ended June 30, 2009 (six months ended June 30, 2008 - $3.3 million). Utility Group's operating cash flows may fluctuate significantly during a period due to working capital changes driven by seasonality, weather, natural gas prices, collections from customers and regulatory lag. Significant working capital changes impacting the overall changes to cash from operations include the following: Accounts Receivable - June accounts receivable are usually lower than March accounts receivable due to normal, seasonally lower delivered volumes of natural gas. At June 2009, the effect of the seasonally lower volumes was compounded by a four percent lower purchase price for natural gas in June 2009 compared to March 2009. The AUI 2008/2009 GTA revenue deficiency accrued during the three month period in 2009 was $1.2 million lower than the same period in 2008. The net collection of accounts receivable over the second quarter of 2009 contributed $13.4 million (three months ended June 30, 2008 - $13.9 million) to cash from operations. - June accounts receivable are usually lower than December accounts receivable due to the normal seasonally lower delivered volumes of natural gas. At June 2009, the effect of the seasonally lower volumes was compounded by a 35 percent lower purchase price for natural gas in June 2009 compared to December 2008. The AUI 2008/2009 GTA revenue deficiency accrued during the six month period in 2009 was $3.2 million lower than the same period in 2008. The net collection of accounts receivable over the first half of 2009 contributed $23.6 million (six months ended June 30, 2008 - $11.3 million) to cash from operations. Accounts Payable - June accounts payable are usually lower than March accounts payable due to normal seasonally lower purchased volumes of natural gas. At June 2009, the effect of seasonally lower volumes was compounded by a lower purchase price for natural gas in June 2009 compared to March 2009. The net payment of accounts payable over the three months ended June 30, 2009 reduced cash from operations by $7.3 million (three months ended June 30, 2008 - $8.3 million). - June accounts payable are usually lower than December accounts payable due to normal seasonally lower purchased volumes of natural gas. At June 2009, the effect of the seasonally lower volumes was compounded by a lower purchase price for natural gas in June 2009 compared to December 2008. The net payment of accounts payable over the six months ended June 30, 2009 reduced cash from operations by $22.3 million (six months ended June 30, 2008 - $16.9 million). Investing Activities During the three months ended June 30, 2009, cash used in investing activities was $3.6 million (three months ended June 30, 2008 - $4.0 million). Cash invested in property, plant and equipment and intangible assets for the three months ended June 30, 2009 of $3.8 million (three months ended June 30, 2008 - $4.1 million) was partially offset by contributions in aid of construction of $0.6 million (three months ended June 30, 2008 - $0.7 million). Utility Group invested $0.4 million (three months ended June 30, 2008 - $0.6 million) in regulatory assets and investments and other assets. During the six months ended June 30, 2009, cash used in investing activities was $10.0 million (six months ended June 30, 2008 - $10.6 million). Cash invested in property, plant and equipment and intangible assets for the six months ended June 30, 2009 of $10.1 million (six months ended June 30, 2008 - $10.8 million) was partially offset by contributions in aid of construction of $0.9 million (six months ended June 30, 2008 - $2.3 million). Utility Group invested $0.8 million (six months ended June 30, 2008 - $2.1 million) in regulatory assets and investments and other assets. Refer to Section V. Invested Capital for Utility Group's invested capital discussion and analysis. Financing Activities During the three months ended June 30, 2009, cash used in financing activities was $2.5 million (three months ended June 30, 2008 - $2.4 million). Utility Group repaid $2.2 million (three months ended June 30, 2008 - $2.3 million) under its bank lines. Utility Group received $0.1 million (three months ended June 30, 2008 - $0.2 million) from customer deposits and other liabilities. Utility Group paid $0.4 million, or $0.05 per share, of dividends in the three months ended June 30, 2009 (three months ended June 30, 2008 - $0.3 million or $0.045 per share). During the six months ended June 30, 2009, cash used in financing activities was $4.5 million (six months ended June 30, 2008 - provided $7.1 million). Utility Group repaid $3.9 million (six months ended June 30, 2008 - drew $7.5 million) under its bank lines. Utility Group received $0.2 million (six months ended June 30, 2008 - $0.2 million) from customer deposits and other liabilities. Utility Group paid $0.8 million, or $0.10 per share, of dividends in the six months ended June 30, 2009 (six months ended June 30, 2008 - $0.6 million or $0.085 per share). The $11.5 million period-over-period change in financing was mainly a result of increased funds from operations in 2009 and changes in non cash working capital. Capital Resources Utility Group expects that funds from operations and undrawn capacity on bank lines are sufficient to fund its existing operations and meet its capital requirements. Acquisitions that require financing beyond existing lines would require new debt and equity capital. At this time, given the generally low risk credit profile of its utility businesses and its established banking relationships with its current syndicate and other banks, Utility Group expects that it will continue to have access to its anticipated sources of liquidity. This access is evidenced by the July 10, 2009 increase in the demand operating facility from $10.0 million to $20.0 million. Utility Group also believes that, while costly, it will have access to both private and public equity markets to fund accretive organic or acquisition growth. Any acquisition will, as is Utility Group's normal practice, be evaluated as to its accretive value to current shareholders given then current capital market conditions, and will only be entered into if it meets Utility Group's targets. The use of debt or equity funding is based on maintaining Utility Group's capital structure in an operating range which is determined by considering the norms and risks associated with each of its businesses, its bank covenant and the capital structures deemed by the AUC and NSUARB for AUI and Heritage Gas. Utility Group targets to operate at a debt to total capitalization ratio range centered on approximately 60 percent. Utility Group's debt to total capitalization ratio as at June 30, 2009 was 60.0 percent (December 31, 2008 - 62.4 percent). The ratio has decreased since December 31, 2008 mainly due to cash from operations reducing debt balances. Utility Group funds its long and short term borrowing requirements with credit facilities from a syndicate of Canadian chartered banks and from the Province of Nova Scotia. /T/ ---------------------------------------------------------------------------- Credit Facilities Drawn at Drawn at ($ millions) June 30, 2009 December 31, 2008 ---------------------------------------------------------------------------- Demand operating credit facility 0.7 1.1 Revolving, term credi