##### Table of Contents



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 December 31, 2010
 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.
  Pennsylvania
    
    23-1174060(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o
 o þ




---



##### 



UGI UTILITIES, INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 PAGESPart I Financial InformationItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2010,
 September 30, 2010 and December 31, 2009
    
    
    1Condensed Consolidated Statements of Income for the three 
months ended December 31, 2010 and 2009
    
    
    2Condensed Consolidated Statements of Cash Flows for the three 
months ended December 31, 2010 and 2009
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4  20Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21  25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25  26Item 4. Controls and Procedures
    
    
    26  27Part II Other InformationItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 6. Exhibits
    
    
    28Signatures
    
    
    29Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32
  -i-




---



##### Table of Contents



December 31,
    
    
    September 30,
    
    
    December 31,2010
    
    
    2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,646
    
    
    $
    4,318
    
    
    $
    12,678Restricted cash
    
    
    3,884
    
    
    
    4,698
    
    
    
    656Accounts receivable (less allowances for doubtful accounts of $8,492,
$7,072 and $11,889, respectively)
    
    
    124,417
    
    
    
    64,844
    
    
    
    132,499Accounts receivable  related parties
    
    
    12,347
    
    
    
    6,313
    
    
    
    8,417Accrued utility revenues
    
    
    75,284
    
    
    
    13,988
    
    
    
    84,395Inventories
    
    
    108,027
    
    
    
    118,858
    
    
    
    177,087Deferred income taxes
    
    
    21,593
    
    
    
    19,431
    
    
    
    27,162Regulatory assets
    
    
    10,633
    
    
    
    26,100
    
    
    
    10,344Derivative financial instruments
    
    
    2,750
    
    
    
    486
    
    
    
    874Prepaid expenses & other current assets
    
    
    5,648
    
    
    
    21,117
    
    
    
    4,590Total current assets
    
    
    376,229
    
    
    
    280,153
    
    
    
    458,702Property, plant and equipment, at cost (less accumulated depreciation and
amortization of $746,891, $734,739 and $703,722, respectively)
    
    
    1,399,042
    
    
    
    1,394,585
    
    
    
    1,365,441Goodwill
    
    
    180,145
    
    
    
    180,145
    
    
    
    180,145Regulatory assets
    
    
    236,221
    
    
    
    280,602
    
    
    
    121,646Other assets
    
    
    10,746
    
    
    
    4,091
    
    
    
    5,470Total assets
    
    $
    2,202,383
    
    
    $
    2,139,576
    
    
    $
    2,131,404LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank loans
    
    $
    74,000
    
    
    $
    17,000
    
    
    $
    179,000Accounts payable  trade
    
    
    68,328
    
    
    
    61,297
    
    
    
    70,845Accounts payable  related parties
    
    
    8,494
    
    
    
    8,144
    
    
    
    6,424Deferred fuel refunds
    
    
    15,175
    
    
    
    8,295
    
    
    
    40,343Derivative financial instruments
    
    
    5,890
    
    
    
    10,564
    
    
    
    125Other current liabilities
    
    
    148,909
    
    
    
    133,935
    
    
    
    127,755Total current liabilities
    
    
    320,796
    
    
    
    239,235
    
    
    
    424,492Long-term debt
    
    
    640,000
    
    
    
    640,000
    
    
    
    640,000Deferred income taxes
    
    
    286,347
    
    
    
    281,101
    
    
    
    184,641Deferred investment tax credits
    
    
    5,222
    
    
    
    5,311
    
    
    
    5,579Pension and postretirement benefit obligations
    
    
    117,127
    
    
    
    161,338
    
    
    
    151,561Other noncurrent liabilities
    
    
    74,785
    
    
    
    78,137
    
    
    
    60,278Total liabilities
    
    
    1,444,277
    
    
    
    1,405,122
    
    
    
    1,466,551Commitments and contingencies (note 7)Common stockholders equity:Common Stock, $2.25 par value (authorized - 40,000,000 shares;
issued and outstanding - 26,781,785 shares)
    
    
    60,259
    
    
    
    60,259
    
    
    
    60,259Additional paid-in capital
    
    
    467,903
    
    
    
    467,631
    
    
    
    467,160Retained earnings
    
    
    234,758
    
    
    
    217,960
    
    
    
    219,487Accumulated other comprehensive loss
    
    
    (4,814
    )
    
    
    (11,396
    )
    
    
    (82,053
    )Total common stockholders equity
    
    
    758,106
    
    
    
    734,454
    
    
    
    664,853Total liabilities and stockholders equity
    
    $
    2,202,383
    
    
    $
    2,139,576
    
    
    $
    2,131,404
   -1-




---



##### Table of Contents



Three Months EndedDecember 31,2010
    
    
    2009Revenues
    
    $
    350,516
    
    
    $
    362,203Costs and expenses:Cost of sales  gas, fuel and purchased power
(excluding depreciation shown below)
    
    
    213,484
    
    
    
    231,217Operating and administrative expenses
    
    
    39,894
    
    
    
    44,222Operating and administrative expenses  related parties
    
    
    2,925
    
    
    
    1,192Taxes other than income taxes
    
    
    4,358
    
    
    
    4,528Depreciation
    
    
    12,606
    
    
    
    12,681Amortization
    
    
    632
    
    
    
    607Other income, net
    
    
    (2,263
    )
    
    
    (1,517
    )271,636
    
    
    
    292,930Operating income
    
    
    78,880
    
    
    
    69,273Interest expense
    
    
    10,633
    
    
    
    10,637Income before income taxes
    
    
    68,247
    
    
    
    58,636Income taxes
    
    
    27,173
    
    
    
    23,473Net income
    
    $
    41,074
    
    
    $
    35,163
   -2-




---



##### Table of Contents



Three Months EndedDecember 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    41,074
    
    
    $
    35,163Adjustments to reconcile net income to net cash from operating activities:Depreciation and amortization
    
    
    13,238
    
    
    
    13,288Deferred income taxes, net
    
    
    (2,260
    )
    
    
    11,724Provision for uncollectible accounts
    
    
    3,161
    
    
    
    4,845Other, net
    
    
    2,560
    
    
    
    2,180Net change in:Accounts receivable and accrued utility revenues
    
    
    (130,063
    )
    
    
    (131,512
    )Inventories
    
    
    10,832
    
    
    
    19,511Deferred fuel and power costs
    
    
    15,459
    
    
    
    18,737Accounts payable
    
    
    29,886
    
    
    
    15,258Storage agreements security deposits
    
    
    
    
    
    
    3,500Other current assets
    
    
    3,546
    
    
    
    570Other current liabilities
    
    
    4,341
    
    
    
    13,414Net cash (used) provided by operating activities
    
    
    (8,226
    )
    
    
    6,678CASH FLOWS FROM INVESTING ACTIVITIES:Expenditures for property, plant and equipment
    
    
    (17,587
    )
    
    
    (13,810
    )Net costs of property, plant and equipment disposals
    
    
    (668
    )
    
    
    (671
    )Decrease (increase) in restricted cash
    
    
    814
    
    
    
    (656
    )Net cash used by investing activities
    
    
    (17,441
    )
    
    
    (15,137
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of dividends
    
    
    (24,277
    )
    
    
    (17,386
    )Increase in bank loans
    
    
    57,000
    
    
    
    25,000Other
    
    
    272
    
    
    
    Net cash provided by financing activities
    
    
    32,995
    
    
    
    7,614Cash and cash equivalents increase (decrease)
    
    $
    7,328
    
    
    $
    (845
    )CASH AND CASH EQUIVALENTS:End of period
    
    $
    11,646
    
    
    $
    12,678Beginning of period
    
    
    4,318
    
    
    
    13,523Increase (decrease)
    
    $
    7,328
    
    
    $
    (845
    )
   -3-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 1.
    
    Nature of Operations
 UGI Utilities, Inc. (UGI Utilities), a wholly owned subsidiary of UGI Corporation (UGI),
and UGI Utilities wholly owned subsidiaries UGI Penn Natural Gas, Inc. (PNG) and UGI
Central Penn Gas, Inc. (CPG) own and operate natural gas distribution utilities in
eastern, northeastern and central Pennsylvania. UGI Utilities also owns and operates an
electric distribution utility in northeastern Pennsylvania (Electric Utility). UGI
Utilities natural gas distribution utility is referred to as UGI Gas; PNGs natural gas
distribution utility is referred to as PNG Gas; and CPGs natural gas distribution utility
is referred to as CPG Gas. UGI Gas, PNG Gas and CPG Gas are collectively referred to as
Gas Utility. Gas Utility is subject to regulation by the Pennsylvania Public Utility
Commission (PUC) and the Maryland Public Service Commission, and Electric Utility is
subject to regulation by the PUC. Gas Utility and Electric Utility are collectively referred
to as Utilities. PNG also has a heating, ventilation and air-conditioning service business
(UGI Penn HVAC Services, Inc.) which operates principally in the PNG Gas service
territory.
 The term UGI Utilities is used sometimes as an abbreviated reference to UGI
Utilities, Inc., or to UGI Utilities, Inc. and its subsidiaries, including PNG and CPG.
 2.
    
    Significant Accounting Policies
 Basis of Presentation.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, 2010 condensed
consolidated balance sheet data were derived from audited financial statements but do not
include all disclosures required by accounting principles generally accepted in the United
States of America (GAAP). These financial statements should be read in conjunction with
the financial statements and related notes included in our Annual Report on Form 10-K for
the year ended September 30, 2010 (Companys 2010
Annual Financial Statements and Notes). 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.
  -4-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Comprehensive Income.The following table presents the components of comprehensive income
for the three months ended December 31, 2010 and 2009:
 Three Months EndedDecember 31,2010
    
    
    2009Net income
    
    $
    41,074
    
    
    $
    35,163Other comprehensive income
    
    
    6,582
    
    
    
    1,033Comprehensive income
    
    $
    47,656
    
    
    $
    36,196
 Other comprehensive income principally reflects net gains on interest rate protection
agreements qualifying as cash flow hedges in the 2010 three month period and actuarial gains
and losses on postretirement benefit plans, net of reclassifications to net income.
 Effective December 31, 2010, UGI Utilities merged the two defined benefit pension plans that
it sponsors. In accordance with GAAP relating to accounting for retirement benefits, we were
required to remeasure the merged plans assets and benefit obligations as of December 31,
2010 and record the funded status in the Condensed Consolidated Balance Sheet. Among other
things, the remeasurement resulted in  an
after-tax increase in other comprehensive income of $2,170 for the three months ended
December 31, 2010 (see Notes 5 and 6).
 Restricted Cash.Restricted cash represents those cash balances in our commodity futures and
option brokerage accounts which are restricted from withdrawal.
 Use of Estimates.The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and costs. These estimates are based on managements
knowledge of current events, historical experience and various other assumptions that are
believed to be reasonable under the circumstances. Accordingly, actual results may be
different from these estimates and assumptions.
 3.
    
    Segment Information
 We have determined that we have two reportable segments: (1) Gas Utility and (2) Electric
Utility. Gas Utility revenues are derived principally from the sale and distribution of
natural gas to customers in eastern, northeastern and central Pennsylvania. Electric Utility
derives its revenues principally from the sale and distribution of electricity in two
northeastern Pennsylvania counties. UGI Penn HVAC Services, Inc. does not meet the
quantitative thresholds for separate segment reporting under GAAP relating to business
segment reporting and has been included in Other.
 The accounting policies of our reportable segments are the same as those described in Note 2
of the Companys 2010 Annual Financial Statements and Notes. We evaluate the performance of our Gas Utility and
Electric Utility segments principally based upon their income before income taxes.
  -5-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 No single customer represents more than ten percent of our consolidated revenues and there
are no significant intersegment transactions. In addition, all of our reportable segments
revenues are derived from sources within the United States and all of our reportable
segments long-lived assets are located in the United States.
 Financial information by business segment follows:
 Three Months Ended December 31, 2010:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    350,516
    
    
    $
    321,114
    
    
    $
    28,940
    
    
    $
    462Cost of sales
    
    $
    213,484
    
    
    $
    194,913
    
    
    $
    18,571
    
    
    $
    Depreciation and amortization
    
    $
    13,238
    
    
    $
    12,225
    
    
    $
    1,013
    
    
    $
    Operating income
    
    $
    78,880
    
    
    $
    75,067
    
    
    $
    3,603
    
    
    $
    210Interest expense
    
    $
    10,633
    
    
    $
    10,108
    
    
    $
    525
    
    
    $
    Income before income taxes
    
    $
    68,247
    
    
    $
    64,959
    
    
    $
    3,078
    
    
    $
    210Total assets (at period end)
    
    $
    2,202,383
    
    
    $
    2,061,337
    
    
    $
    141,046
    
    
    $
    Goodwill (at period end)
    
    $
    180,145
    
    
    $
    180,145
    
    
    $
    
    
    
    $
    Capital expenditures
    
    $
    17,587
    
    
    $
    16,086
    
    
    $
    1,501
    
    
    $
    
 Three Months Ended December 31, 2009:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    362,203
    
    
    $
    327,809
    
    
    $
    33,999
    
    
    $
    395Cost of sales
    
    $
    231,217
    
    
    $
    209,760
    
    
    $
    21,457
    
    
    $
    Depreciation and amortization
    
    $
    13,288
    
    
    $
    12,299
    
    
    $
    989
    
    
    $
    Operating income
    
    $
    69,273
    
    
    $
    63,728
    
    
    $
    5,359
    
    
    $
    186Interest expense
    
    $
    10,637
    
    
    $
    10,246
    
    
    $
    391
    
    
    $
    Income before income taxes
    
    $
    58,636
    
    
    $
    53,482
    
    
    $
    4,968
    
    
    $
    186Total assets (at period end)
    
    $
    2,131,404
    
    
    $
    2,015,558
    
    
    $
    115,846
    
    
    $
    Goodwill (at period end)
    
    $
    180,145
    
    
    $
    180,145
    
    
    $
    
    
    
    $
    Capital expenditures
    
    $
    13,810
    
    
    $
    13,040
    
    
    $
    770
    
    
    $
    
 4.
    
    Inventories
 Inventories comprise the following:
 December 31,
    
    
    September 30,
    
    
    December 31,2010
    
    
    2010
    
    
    2009Gas Utility natural gas
    
    $
    100,121
    
    
    $
    111,531
    
    
    $
    170,235Materials, supplies and other
    
    
    7,905
    
    
    
    7,327
    
    
    
    6,852Total inventories
    
    $
    108,026
    
    
    $
    118,858
    
    
    $
    177,087
  -6-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 At December 31, 2010, UGI Utilities is a party to three storage contract administrative
agreements (SCAAs) two of which expire in October 2012 and one of which expires in October
2013 (see Note 8). Pursuant to these and predecessor SCAAs, UGI Utilities has, among other
things, released certain storage and transportation contracts for the terms of the SCAAs.
UGI Utilities also transferred certain associated storage inventories upon commencement of
the SCAAs, will receive a transfer of storage inventories at the end of the SCAAs, and makes
payments associated with refilling storage inventories during the terms of the SCAAs. The
historical cost of natural gas storage inventories released under the SCAAs, which
represents 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 agreement but not yet replenished), are included in the caption Gas Utility
natural gas in the table above.
 The carrying value of gas storage inventories released under the SCAAs at December 31, 2010,
September 30, 2010 and December 31, 2009 comprising 11.1 billion cubic feet (bcf), 11.7
bcf, and 11.4 bcf of natural gas, was $58,363, $62,653 and $95,911, respectively. In
conjunction with the SCAAs, at December 31, 2010, September 30, 2010 and December 31, 2009,
UGI Utilities held a total of $22,500 of security deposits received from its SCAA
counterparties. These amounts are included in other current liabilities on the Condensed
Consolidated Balance Sheets.
 5.
    
    Regulatory Assets and Liabilities and Regulatory Matters
 For a description of the Companys regulatory assets and liabilities other than those
described below, see Note 5 to the Companys 2010 Annual
Financial Statements and Notes. UGI Utilities does not
recover a rate of return on its regulatory assets. The following regulatory assets and
liabilities associated with Gas Utility and Electric Utility are included in our
accompanying Condensed Consolidated Balance Sheets:
 December 31,
    
    
    September 30,
    
    
    December 31,2010
    
    
    2010
    
    
    2009Regulatory assets:Income taxes recoverable
    
    $
    83,601
    
    
    $
    82,525
    
    
    $
    80,524Underfunded pension and
postretirement plans
    
    
    116,288
    
    
    
    159,154
    
    
    
    10,908Environmental costs
    
    
    22,515
    
    
    
    22,587
    
    
    
    25,812Deferred fuel and power costs
    
    
    18,113
    
    
    
    36,597
    
    
    
    10,344Other
    
    
    6,337
    
    
    
    5,839
    
    
    
    4,402Total regulatory assets
    
    $
    246,854
    
    
    $
    306,702
    
    
    $
    131,990Regulatory liabilities:Postretirement benefits
    
    $
    10,835
    
    
    $
    10,472
    
    
    $
    9,538Environmental overcollections
    
    
    6,990
    
    
    
    7,211
    
    
    
    8,392Deferred fuel and power refunds
    
    
    15,175
    
    
    
    8,298
    
    
    
    40,343State tax benefits 
distribution system repairs
    
    
    6,716
    
    
    
    6,685
    
    
    
    Total regulatory liabilities
    
    $
    39,716
    
    
    $
    32,666
    
    
    $
    58,273
  -7-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Underfunded pension and postretirement plans. This regulatory asset represents the
portion of prior service cost and net actuarial losses associated with pension and
postretirement benefits which is probable of being recovered through future rates based upon
established regulatory practices. These regulatory assets are adjusted annually or more
frequently under certain circumstances when the funded status of the plans is recorded in
accordance with GAAP relating to accounting for retirement benefits. These costs are
amortized over the average remaining future service lives of the plan participants.
 Effective December 31, 2010, UGI Utilities merged the two defined benefit pension plans that
it sponsors. In accordance with GAAP relating to accounting for retirement benefits, we were
required to remeasure the merged plans assets and benefit obligations as of December 31,
2010 and record the funded status in the Condensed Consolidated Balance Sheet. Among other
things, the remeasurement resulted in a decrease in regulatory assets
of $42,962 (see Note
6).
 Deferred fuel and power  costs and refunds.Gas Utilitys tariffs and, commencing January
1, 2010 Electric Utilitys default service tariffs, contain clauses which permit recovery of
all prudently incurred purchased gas and power costs through the application of purchased
gas cost (PGC) rates in the case of Gas Utility and default service (DS) rates in the
case of Electric Utility. The clauses provide for periodic adjustments to PGC and DS rates
for differences between the total amount of purchased gas and electric generation supply
costs collected from customers and recoverable costs incurred. Net undercollected 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 natural gas derivative financial instruments are
included in deferred fuel costs or refunds. Unrealized gains (losses) on such contracts at
December 31, 2010, September 30, 2010 and December 31, 2009 were $2,214, $(1,359) and
$(125), respectively.
 Electric Utility enters into forward electricity purchase contracts to meet a substantial
portion of its electricity supply needs. As more fully described in Note 10, during Fiscal
2010, Electric Utility determined that it could no longer assert that it would take physical
delivery of substantially all of the electricity it had contracted for under its forward
power purchase agreements and, as a result, such contracts no longer qualified for the
normal purchases and normal sales exception under GAAP related to derivative financial
instruments. As a result, Electric Utilitys electricity supply contracts are required to be
recorded on the balance sheet at fair value, with an associated adjustment to regulatory
assets or liabilities in accordance with GAAP relating to rate-regulated entities and
Electric Utilitys DS procurement, implementation and contingency plans. At December 31,
2010 and September 30, 2010, the fair values of Electric Utilitys electricity supply
contracts were losses of $13,369 and $19,702, respectively, which amounts are reflected in
current derivative financial instrument liabilities and other noncurrent liabilities on the
Condensed Consolidated Balance Sheets with equal and offsetting amounts reflected in
deferred fuel and power costs in the table above.
  -8-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 In order to reduce volatility associated with a substantial portion of its electric
transmission congestion costs, Electric Utility obtains financial transmission rights
(FTRs). FTRs are derivative financial instruments that entitle the holder to receive
compensation for electricity transmission congestion
charges when there is insufficient electricity transmission capacity on the electric
transmission grid. Because Electric Utility is entitled to fully recover its DS costs
commencing January 1, 2010 through DS rates, realized and unrealized gains or losses on FTRs
associated with periods beginning January 1, 2010 are included in deferred fuel and power 
costs or refunds. Unrealized gains on FTRs at December 31, 2010 and 2009 were not material.
 Other Regulatory Matters
 Approval of Transfer of CPG Storage Assets.On October 21, 2010, the Federal Energy
Regulatory Commission (FERC) approved CPGs application to abandon a storage service and
approved the transfer of its Tioga, Meeker and Wharton natural gas storage facilities, along
with related assets, to UGI Storage Company, a subsidiary of UGI Energy Services, Inc.
(Energy Services), a second-tier wholly owned subsidiary of UGI. CPG will transfer the
natural gas storage facilities on April 1, 2011. The net book value of the storage facility
assets was approximately $11,000 as of December 31, 2010.
 Subsequent Event  CPG Base Rate Filing.On January 14, 2011, CPG filed a request
with the PUC to increase its base operating revenues by $16,500 annually. The increased revenues
would fund system improvements and operations necessary to maintain safe and reliable
natural gas service and fund new programs that would provide rebates and other incentives
for customers to install new high-efficiency equipment. CPG is requesting that the new gas
rates become effective March 15, 2011. However, the PUC typically suspends the effective
date for general base rate proceedings to allow for investigation and public hearings. This
review process is expected to last approximately nine months, which would delay
implementation of the new rates until late October 2011.
 6.
    
    Defined Benefit Pension and Other Postretirement Plans
 Subsequent to the December 31, 2010 plan merger described below, we currently sponsor one
defined benefit pension plan (Pension Plan) for employees hired prior to January 1, 2009
of UGI Utilities, PNG, CPG, UGI and certain of UGIs other wholly owned domestic
subsidiaries. In addition, we provide postretirement health care benefits to certain
retirees and a limited number of active employees, and postretirement life insurance
benefits to nearly all active and retired employees.
  -9-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Net periodic pension expense and other postretirement benefit costs relating to our
employees include the following components:
 Pension Benefits
    
    
    Other Postretirement BenefitsThree Months Ended
    
    
    Three Months EndedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Service cost
    
    $
    1,925
    
    
    $
    1,745
    
    
    $
    54
    
    
    $
    40Interest cost
    
    
    5,355
    
    
    
    5,284
    
    
    
    182
    
    
    
    212Expected return on assets
    
    
    (6,022
    )
    
    
    (5,858
    )
    
    
    (130
    )
    
    
    (126
    )Amortization of:Prior service cost (benefit)
    
    
    62
    
    
    
    9
    
    
    
    (174
    )
    
    
    (102
    )Actuarial loss
    
    
    2,128
    
    
    
    1,333
    
    
    
    121
    
    
    
    89Net benefit cost
    
    
    3,448
    
    
    
    2,513
    
    
    
    53
    
    
    
    113Change in associated
regulatory liabilities
    
    
    
    
    
    
    
    
    
    
    785
    
    
    
    736Net expense
    
    $
    3,448
    
    
    $
    2,513
    
    
    $
    838
    
    
    $
    849
 Pension Plan assets are held in trust and consist principally of publicly traded,
diversified equity and fixed income mutual funds and UGI Common Stock. It is our general
policy to fund amounts for pension benefits equal to at least the minimum contribution
required by ERISA. Based upon current assumptions, the Company estimates that it will be
required to contribute approximately $20,303 to the Pension Plan during the next twelve
months. UGI Utilities has established a Voluntary Employees Beneficiary Association
(VEBA) trust to 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 GAAP. The difference between such amounts
calculated under GAAP and the amounts 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 three months ended December 31, 2010, nor are
they expected to be material for all of Fiscal 2011.
 We also participate in an unfunded and non-qualified defined benefit supplemental executive
retirement plan. Net benefit costs associated with this plan for all periods presented were
not material.
 Effective December 31, 2010, UGI Utilities merged its two defined benefit pension plans. The
merged plan will maintain separate benefit formulas and specific rights and features of each
predecessor plan. As a result of the merger and in accordance with GAAP relating to
accounting for retirement benefits, the Company remeasured the combined plans assets and
benefit obligations as of December 31, 2010 which decreased pension and postretirement
benefit obligations by $46,672; decreased associated regulatory assets by $42,962; and
increased pre-tax other comprehensive income by $3,710 (see Notes 2 and 5).
  -10-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 The following table provides a reconciliation of the projected benefit obligation (PBO),
plan assets and the funded status of the merged Pension Plan as of December 31, 2010:
 Three MonthsEndedDecember 31,2010Change in benefit obligations:Benefit obligations  October 1, 2010
    
    $
    464,976Service cost
    
    
    2,188Interest cost
    
    
    5,805Actuarial gain
    
    
    (30,639
    )Benefits paid
    
    
    (4,664
    )Benefit obligations  December 31, 2010
    
    $
    437,666Change in plan assets:Fair value of plan assets  October 1, 2010
    
    $
    287,902Actual gain on assets
    
    
    19,285Employer contribution
    
    
    1,788Benefits paid
    
    
    (4,664
    )Fair value of plan assets  December 31, 2010
    
    $
    304,311Funded status of the merged plan  December 31, 2010
    
    $
    (133,355
    )Liabilities recorded in the balance sheet:Unfunded liabilities  included in other current liabilities
    
    $
    (20,303
    )Unfunded liabilities  included in other noncurrent liabilities
    
    
    (113,052
    )Net amount recognized
    
    $
    (133,355
    )Amounts recorded in regulatory assets and liabilities:Prior service cost
    
    $
    257Net actuarial loss
    
    
    112,733Total
    
    $
    112,990Amounts recorded in stockholders equity:Prior service cost
    
    $
    29Net actuarial loss
    
    
    9,925Total
    
    $
    9,954
 The accumulated benefit obligation (ABO) of the merged plan at December 31, 2010 is
$391,192. Actuarial assumptions for the merged plan at December 31, 2010 are as follows:
discount rate  5.5%; expected return on plan assets  8.5%; rate of increase in salary
levels  3.8%.
 7.
    
    Commitments and Contingencies
 From the late 1800s through the mid-1900s, UGI Utilities and its former subsidiaries owned
and operated a number of manufactured gas plants (MGPs) prior to the general availability
of natural gas. Some constituents of coal tars and other residues of the manufactured gas
process are today considered hazardous substances under the Superfund Law and may be present
on the sites of former MGPs. Between 1882 and 1953, UGI Utilities owned the stock of
subsidiary gas companies in Pennsylvania and elsewhere and also operated the businesses of
some gas companies under agreement. Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, by the early 1950s UGI Utilities divested all of its utility
operations other than certain Pennsylvania operations, including those which now constitute
UGI Gas and Electric Utility.
  -11-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 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. At December 31, 2010,
neither the undiscounted nor the accrued liability for environmental investigation and
cleanup costs for UGI Gas was material.
 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 three claims
against it relating to out-of-state sites.
 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 through control of a subsidiary that owned the plant UGI
Utilities controlled operations of the plant from 1910 to 1926 and is liable for
approximately 25% of the costs associated with the site. SCE&G asserts that it has spent
approximately $22,000 in remediation costs and paid $26,000 in third-party claims
relating to the site and estimates that future response costs, including a claim by the
United States Justice Department for natural resource damages, could be as high as $14,000.
Trial took place in March 2009 and the courts decision is pending.
  -12-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Frontier Communications Company v. UGI Utilities, Inc. et al.In April 2003, Citizens
Communications Company, now known as Frontier Communications Company (Frontier), 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 City of Bangor,
Maine (City) sued Frontier to recover environmental response costs associated with MGP
wastes generated at a plant allegedly operated by Frontiers predecessors at a site on the
Penobscot River. Frontier subsequently joined UGI Utilities and ten other third-party
defendants alleging that the third-party defendants are responsible for an equitable share
of any costs Frontier would be required to pay to the City for cleaning up tar deposits in
the Penobscot River. Frontier alleged that through ownership and control of a subsidiary,
Bangor Gas Light Company, UGI Utilities and its predecessors owned and operated the plant
from 1901 to 1928. Frontier made similar allegations of control against another third-party
defendant, CenterPoint Energy Resources Corporation (CenterPoint), whose predecessor owned
the Bangor subsidiary from 1928 to 1944. Frontiers third-party claims were stayed pending a
resolution of the Citys suit against Frontier, which was tried in September 2005. On June
27, 2006, the court issued an order finding Frontier responsible for 60% of the cleanup
costs, which were estimated at $18,000. On February 14, 2007, Frontier and the City entered
into a settlement agreement pursuant to which Frontier agreed to pay $7,600. The Citys suit
was dismissed, and Frontier filed the current action against the original third-party
defendants, repeating its claims for contribution. On September 22, 2009, the court granted
summary judgment in favor of co-defendant CenterPoint. UGI Utilities subsequently filed a
motion for summary judgment with respect to Frontiers claims and the court referred the
motion to a magistrate judge for findings and a recommendation. On October 19, 2010, the
magistrate judge entered an order recommending that the court grant UGI Utilities motion.
On November 19, 2010, the court affirmed the recommended decision of the magistrate judge
granting summary judgment in favor of UGI Utilities.
 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 through control of
former subsidiaries that owned the MGPs. The Northeast Companies estimated that remediation
costs for all of the sites could total approximately $215,000 and asserted that UGI
Utilities is responsible for approximately $103,000 of this amount. The Northeast Companies
subsequently withdrew their claims with respect to three of the sites and UGI Utilities
acknowledged that it had operated one of the sites, Waterbury North, pursuant to a lease. In
April 2009, the court conducted a trial to determine whether UGI Utilities operated any of
the nine remaining sites that were owned and operated by former subsidiaries. On May 22,
2009, the court granted judgment in favor of UGI Utilities with respect to all nine sites.
The Northeast Companies have appealed the decision. With respect to Waterbury North, the
Northeast Companies are expected to complete additional environmental investigations in
early 2011. A second phase of the trial is scheduled for August 2011 to determine what, if
any, contamination at Waterbury North is related to UGI Utilities period of operation. The
Northeast Companies previously estimated that remediation costs at Waterbury North could
total $25,000.
  -13-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 We cannot predict with certainty the final results of any of the environmental claims or
legal actions described above. 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. In
addition to the matters described above, there are other pending claims and legal actions
arising in the normal course of our businesses. While the results of these other pending
claims and legal actions cannot be predicted with certainty, we believe, after consultation
with counsel, the final outcome of such other matters will not have a significant effect on
our consolidated financial position, results of operations or cash flows.
 8.
    
    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 all UGI operating subsidiaries for which general and
administrative services are provided. Management believes that this allocation method is
reasonable and equitable to UGI Utilities and this allocation method has been accepted by
the PUC in past rate case proceedings and management audits as a reasonable method of
allocating such expenses. 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.
  -14-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 From time to time, UGI Utilities is a party to SCAAs with Energy Services. At December 31,
2010, UGI Utilities was a party to two three-year SCAAs with Energy Services expiring
October 31, 2012 and October 31, 2013 and, during the periods covered by the financial
statements, was a party to other SCAAs with Energy Services. Under the SCAAs, UGI Utilities
has, among other things, and subject to recall for operational
purposes, released certain storage and transportation contracts to Energy Services for the
terms of the SCAAs. UGI Utilities also transferred certain associated storage inventories
upon the commencement of the SCAAs, receives a transfer of storage inventories at the end of
the SCAAs, and makes payments associated with refilling storage inventories during the term
of the SCAAs. Energy Services, in turn, provides a firm delivery service and makes certain
payments to UGI Utilities for its various obligations under the SCAAs. UGI Utilities
incurred costs associated with Energy Services SCAAs totaling $2,293 and $7,484 during the
three months ended December 31, 2010 and 2009, respectively. In conjunction with the SCAAs,
UGI Utilities received security deposits from Energy Services. The amounts of such security
deposits, which amounts are included in other current liabilities on the Condensed
Consolidated Balance Sheets, were $15,000, $7,500 and $7,500 as of December 31, 2010,
September 30, 2010 and December 31, 2009, respectively.
 UGI Utilities reflects the historical cost of the gas storage inventories and any exchange
receivable from Energy Services (representing amounts of natural gas inventories used but
not yet replenished by Energy Services) on its balance sheet under the caption
Inventories. The carrying value of these gas storage inventories at December 31, 2010,
comprising approximately 7.5 bcf of natural gas, was $39,447. The carrying value of
these gas storage inventories at September 30, 2010, comprising approximately 4.1 bcf of natural gas, was $20,749. The carrying value of these gas storage inventories at December
31, 2009, comprising approximately 4.0 bcf of natural gas, was $32,855.
 UGI Utilities 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 months of November through 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 transactions pursuant to the SCAAs) during the
three months ended December 31, 2010 and 2009, totaled $18,755 and $16,282, respectively.
 From time to time, the Company sells natural gas or pipeline capacity to Energy Services.
During the three months ended December 31, 2010 and 2009, revenues associated with such sales to
Energy Services totaled $22,034 and $9,244, respectively. Also from time to time, the
Company purchases natural gas or pipeline capacity from Energy Services (in addition to
those transactions already described above). During the three months
ended December 31, 2010 and 2009, the aggregate amount of such purchases totaled $13,497 and $5,977,
respectively. These transactions did not have a material effect on the Companys financial
position, results of operations or cash flows.
  -15-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 9.
    
    Fair Value Measurements
 Derivative Financial Instruments
 The following table presents our financial assets and financial liabilities that are
measured at fair value on a recurring basis for each of the fair value hierarchy levels,
including both current and noncurrent portions, as of December 31, 2010, September 30, 2010
and December 31, 2009:
 Asset (Liability)Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    OtherIdentical Assets
    
    
    Observable
    
    
    Unobservableand Liabilities
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalDecember 31, 2010:Assets:Derivative financial instruments:Commodity contracts
    
    $
    2,398
    
    
    $
    352
    
    
    $
    
    
    
    $
    2,750Interest rate contracts
    
    $
    
    
    
    $
    7,249
    
    
    $
    
    
    
    $
    7,249Liabilities:Derivative financial instruments:Commodity contracts
    
    $
    (1,438
    )
    
    $
    (11,932
    )
    
    $
    
    
    
    $
    (13,370
    )September 30, 2010:Assets:Derivative financial instruments:Commodity contracts
    
    $
    61
    
    
    $
    425
    
    
    $
    
    
    
    $
    486Liabilities:Derivative financial instruments:Commodity contracts
    
    $
    (3,263
    )
    
    $
    (17,798
    )
    
    $
    
    
    
    $
    (21,061
    )December 31, 2009:Assets:Derivative financial instruments:Commodity contracts
    
    $
    233
    
    
    $
    641
    
    
    $
    
    
    
    $
    874Liabilities:Derivative financial instruments:Commodity contracts
    
    $
    (125
    )
    
    $
    
    
    
    $
    
    
    
    $
    (125
    )
 The fair values of our Level 1 exchange-traded commodity futures and option derivative
contracts and certain non exchange-traded electricity forward contracts are based upon
actively-quoted market prices for identical assets and liabilities. The fair values of the
remainder of our derivative financial instruments and electricity forward contracts, which
are designated as Level 2, are generally based upon recent market transactions and related
market indicators.
  -16-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Other Financial Instruments
 The carrying amounts of financial instruments included in current assets and current
liabilities (excluding unsettled
derivative instruments and current maturities of long-term debt) approximate their fair
values because of their short-term nature. The carrying amount and estimated fair value of
our long-term debt at December 31, 2010 were $640,000 and $720,011 respectively. The
carrying amount and estimated fair value of our long-term debt at December 31, 2009 were
$640,000 and $697,137, respectively. We estimate the fair value of long-term debt by using
current market rates and by discounting future cash flows using rates available for similar
types of debt.
 10.
    
    Disclosures About Derivative Instruments and Hedging Activities
 We are exposed to certain market risks related to our ongoing business operations.
Management uses derivative financial and commodity instruments, among other things, to
manage these risks. The primary risks managed by derivative instruments are (1) commodity
price risk and (2) interest rate risk. Although we use derivative financial and commodity
instruments to reduce market risk associated with forecasted transactions, we do not use
derivative financial and commodity instruments for speculative or trading purposes. The use
of derivative instruments is controlled by our risk management and credit policies which
govern, among other things, the derivative instruments we can use, counterparty credit
limits and contract authorization limits. Because most of our commodity derivative
instruments are generally subject to regulatory ratemaking mechanisms, we have limited
commodity price risk associated with our Gas Utility or Electric Utility operations.
 Commodity Price Risk
 Gas Utilitys tariffs contain clauses that permit recovery of all of the prudently incurred
costs of natural gas it sells to retail core-market customers. As permitted and agreed to by
the PUC pursuant to Gas Utilitys annual PGC filings, Gas Utility currently uses New York
Mercantile Exchange (NYMEX) natural gas futures and option contracts to reduce commodity
price volatility associated with a portion of the natural gas it purchases for its retail
core-market customers. With respect to natural gas futures and option contracts, gains and
losses on Gas Utility unsettled natural gas futures contracts and any gains on natural gas
option contracts are recorded in regulatory assets or liabilities on the Condensed
Consolidated Balance Sheets in accordance with Accounting Standards Codification (ASC) 980
related to rate-regulated entities.
 Beginning January 1, 2010, Electric Utilitys DS tariffs permit the recovery of all
prudently incurred costs of electricity it sells to DS customers. Electric Utility enters
into forward electricity purchase contracts to meet a substantial portion of its electricity
supply needs. During Fiscal 2010, Electric Utility determined that it could no longer assert
that it would take physical delivery of substantially all of the electricity it had
contracted for under its forward power purchase agreements and, as a result, such contracts
no longer qualified for the normal purchases and normal sales exception under GAAP related
to derivative financial instruments. The inability of Electric Utility to continue to assert
that it would take physical delivery of such power resulted principally from a greater than
anticipated number of customers, primarily certain commercial and industrial customers,
choosing an alternative electricity supplier. Because these contracts no longer qualify for
the normal purchases and normal sales exception under GAAP, the fair value of these
contracts are required to be recognized on the balance sheet and measured at fair value. At
December 31, 2010, the fair values of Electric Utilitys forward purchase power agreements
comprising a loss of $13,369 are reflected in current derivative financial instrument
liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheet. In
accordance with ASC 980 related to rate regulated entities, Electric Utility has recorded
equal and offsetting amounts in regulatory assets on the December 31, 2010 Condensed
Consolidated Balance Sheet.
  -17-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 In order to reduce volatility associated with a substantial portion of its electric
transmission congestion costs, Electric Utility obtains FTRs through an annual PJM
Interconnection (PJM) allocation process and by purchases of FTRs at monthly PJM auctions.
FTRs are derivative financial instruments that entitle the holder to receive compensation
for electricity transmission congestion charges that result when there is insufficient
electricity transmission capacity on the electric transmission grid. PJM is a regional
transmission organization that coordinates the movement of wholesale electricity in all or
parts of 14 eastern and midwestern states. Because Electric Utility is entitled to fully
recover its DS costs commencing January 1, 2010, gains and losses on Electric Utility FTRs
associated with periods beginning on or after January 1, 2010 are recorded in regulatory
assets or liabilities in accordance with ASC 980 relating to rate-regulated entities and
reflected in cost of sales through the DS recovery mechanism (see Note 5). Gains and losses
associated with periods prior to January 2010 are reflected in cost of sales. At December
31, 2010 and 2009, the volumes associated with Electric Utility FTRs totaled
342.0 million kilowatt hours and 730.0 million kilowatt hours, respectively.
 At December 31, 2010, the volume of natural gas associated with our unsettled NYMEX natural
gas futures and option contracts totaled 25.2 million dekatherms and the maximum period over
which we are currently hedging natural gas futures and option contracts is 9 months. At
December 31, 2009, the volume of natural gas associated with unsettled NYMEX natural gas
futures contracts was not material. At December 31, 2010, the volume of electricity under
Electric Utilitys forward electricity purchase contracts was 984.3 million kilowatt hours
and the maximum period over which these contracts extend is 40 months with a weighted
average term of 16 months.
 In order to reduce operating expense volatility, UGI Utilities from time to time enters into
NYMEX gasoline futures and swap contracts for a portion of gasoline volumes expected to be
used in the operation of its vehicles and equipment. The volumes of gasoline under these
contracts and the values of these contracts were not material for all periods presented.
  -18-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Interest Rate Risk
 Our long-term debt typically is issued at fixed rates of interest. As these long-term debt
issues mature, we typically refinance such debt with new debt having interest rates
reflecting then-current market conditions. In order to reduce market rate risk on the
underlying benchmark rate of interest associated with near- to medium-term forecasted
issuances of fixed-rate debt, from time to time we enter into interest rate protection
agreements (IRPAs). We account for IRPAs as cash flow hedges. Changes in the fair values
of IRPAs are recorded in accumulated other comprehensive income (AOCI), to the extent
effective in offsetting changes in the underlying interest rate risk, until earnings are
affected by the hedged interest expense. As of December 31, 2010, the total notional amount
of our unsettled IRPA contracts was $106,500. Our current unsettled IRPA contracts hedge
forecasted interest payments associated with the issuance of long-term debt forecasted to
occur in September 2012 and September 2013. There were no unsettled IPRA contracts
outstanding at December 31, 2009.
 We account for IRPAs as cash flow hedges. Changes in the fair values of IRPAs are recorded
in AOCI, to the extent effective in offsetting changes in the underlying interest rate risk,
until earnings are affected by the hedged interest expense. At such time, gains and losses
are recorded in interest expense.
 At December 31, 2010, the amount of net losses associated with IRPAs expected to be
reclassified into earnings during the next twelve months is $1,165.
 Derivative Financial Instrument Credit Risk
 Our natural gas exchange-traded futures and options contracts are guaranteed by the NYMEX
and have limited credit risk. These contracts generally require cash deposits in margin
accounts. At December 31, 2010 and 2009, restricted cash in margin accounts totaled $3,884
and $656, respectively. We generally do not have credit-risk-related contingent features in
our derivative contracts.
 The following table provides information regarding the fair values and balance sheet
locations of our derivative assets and liabilities existing as of December 31, 2010 and
2009:
 
 Derivative Assets
    
    
    Derivative (Liabilities)Balance Sheet
    
    
    Fair Value
    
    
    Balance Sheet
    
    
    Fair ValueLocation
    
    
    2010
    
    
    2009
    
    
    Location
    
    
    2010
    
    
    2009Derivatives Designated as Hedging Instruments:Interest rate contracts
    
    Other Assets
    
    
    $
    7,249
    
    
    $
    Derivatives Accounted for Under ASC 980:Commodity contracts
    
    Derivative financial instruments
    
    
    
    2,566
    
    
    
    644
    
    
    Derivative financial instruments and Other noncurrent liabilities
    
    
    $
    (13,370
    )
    
    $
    (125
    )Derivatives Not Designated as Hedging Instruments:Commodity contracts
    
    Derivative financial
instruments
    
    
    
    184
    
    
    
    230Total Derivatives
    
    
    
    
    
    $
    9,999
    
    
    $
    874
    
    
    
    
    
    
    $
    (13,370
    )
    
    $
    (125
    )
  -19-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 The amount of derivative
gains or losses representing ineffectiveness, and the amounts of
gains or losses recognized in income as a result of excluding IRPAs
from ineffectiveness testing were not material for the three months
ended December 31, 2010. During the three months ended December 31, 2010 and 2009, the amounts of IRPA net
losses included in AOCI that were reclassified into net income were not material. During
the three months ended December 31, 2009, the impact on net income from changes in the fair
value of FTRs not accounted for under ASC 980 was not material.
 We are also a party to a number of contracts that have elements of a derivative instrument.
These contracts include, among others, binding purchase orders, contracts which provide for
the purchase and delivery of natural gas, and service contracts that require the
counterparty to provide commodity storage, transportation or capacity service to meet our
normal sales commitments. Although many of these contracts have the requisite elements of a
derivative instrument, these contracts qualify for normal purchase and normal sale exception
accounting under GAAP because they provide for the delivery of products or services in
quantities that are expected to be used in the normal course of operating our business and
the price in the contract is based on an underlying that is directly associated with the
price of the product or service being purchased or sold.
  -20-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
     -21-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 ANALYSIS OF RESULTS OF OPERATIONS
  2010 three-month period compared with 2009 three-month period
 IncreaseThree Months Ended December 31,
    
    2010
    
    
    2009
    
    
    (Decrease)(Millions of dollars)Gas Utility:Revenues
    
    $
    321.1
    
    
    $
    327.8
    
    
    $
    (6.7
    )
    
    
    (2.0
    )%Total margin (a)
    
    $
    126.2
    
    
    $
    118.0
    
    
    $
    8.2
    
    
    
    6.9
    %Operating income
    
    $
    75.1
    
    
    $
    63.7
    
    
    $
    11.4
    
    
    
    17.9
    %Income before income taxes
    
    $
    64.9
    
    
    $
    53.5
    
    
    $
    11.4
    
    
    
    21.3
    %System throughput  bcf
    
    
    48.9
    
    
    
    42.3
    
    
    
    6.6
    
    
    
    15.6
    %Heating degree days  % colder than normal (b)
    
    
    7.9
    %
    
    
    0.4
    %
    
    
    
    
    
    
    Electric Utility:Revenues
    
    $
    28.9
    
    
    $
    34.0
    
    
    $
    (5.1
    )
    
    
    (15.0
    )%Total margin (a)
    
    $
    8.8
    
    
    $
    10.7
    
    
    $
    (1.9
    )
    
    
    (17.8
    )%Operating income
    
    $
    3.6
    
    
    $
    5.4
    
    
    $
    (1.8
    )
    
    
    (33.3
    )%Income before income taxes
    
    $
    3.1
    
    
    $
    5.0
    
    
    $
    (1.9
    )
    
    
    (38.0
    )%Distribution sales  gwh
    
    
    250.5
    
    
    
    242.4
    
    
    
    8.1
    
    
    
    3.3
    %
 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 $1.6 million and $1.9 million during the
three-month periods ended December 31, 2010 and 2009, respectively. For financial statement
purposes, revenue-related taxes are included in Taxes other than income taxes in the
Condensed Consolidated Statements of Income.(b)
    
    For 2010, deviation from average heating degree days for the 15-year period 1995-2009 based
upon weather statistics provided by the National Oceanic and Atmospheric Administration
(NOAA) for airports located within Gas Utilitys service territory. For 2009, deviation from
average heating degree days for the 15-year period 1990-2004 based upon weather statistics
provided by the National Oceanic and Atmospheric Administration (NOAA) for airports located
within Gas Utilitys service territory. Gas Utility
  -22-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
    Electric Utility
    -23-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 FINANCIAL CONDITION AND LIQUIDITY
 Financial Condition
    Cash Flows
 Operating activities.
  Investing activities
 Financing activities.
  -24-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 Merger of Pension Plans
  Subsequent Event  CPG Base Rate Filing
  
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    -25-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
    
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 (a)
    
    Evaluation of Disclosure Controls and Procedures
 The Companys disclosure controls and procedures are designed 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 SEC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 required
disclosure. 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 effective at the reasonable assurance level.
 (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.
  -26-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 PART II OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
 Frontier Communications Company v. UGI Utilities, Inc. et al .
 
 ITEM 1A.
    
    RISK FACTORS
   -27-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM 6.
    
    EXHIBITS
  Exhibit No.
    
    Exhibit12.1
    
    
    Computation of
ratio of earnings to
fixed charges31.1
    
    
    Certification by the
Chief Executive
Officer relating to
the Registrants
Report on Form 10-Q
for the quarter ended
December 31, 2010,
pursuant to Section
302 of the
Sarbanes-Oxley Act of
200231.2
    
    
    Certification by the
Chief Financial
Officer relating to
the Registrants
Report on Form 10-Q
for the quarter ended
December 31, 2010,
pursuant to Section
302 of the
Sarbanes-Oxley Act of
200232
    
    
    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
December 31, 2010,
pursuant to Section
906 of the
Sarbanes-Oxley Act of
2002
  -28-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
   UGI Utilities, Inc.
(Registrant)Date:  February 4, 2011
    By:
    /s/ Donald E. BrownDonald E. BrownVice President - Finance and
Chief Financial OfficerDate:  February 4, 2011
    By:
    /s/ Matthew J. NolanMatthew J. NolanController  -29-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 EXHIBIT INDEX
 12.1
    
    
    Computation of ratio of earnings to fixed charges31.1
    
    
    Certification by the Chief Executive Officer relating to the Registrants Report
on Form 10-Q for the quarter ended December 31, 2010, pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    Certification by the Chief Financial Officer relating to the Registrants Report
on Form 10-Q for the quarter ended December 31, 2010, pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    
    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 December 31,
2010, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002