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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended June 30, 2006

OR



| ̈ | 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



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UGI UTILITIES, INC.

(Exact name of registrant as specified in its charter)



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

UGI UTILITIES, INC.

100 Kachel Boulevard, Suite 400

Green Hills Corporate Center, Reading, PA

(Address of principal executive offices)

19607

(Zip Code)

(610) 796-3400

(Registrants telephone number, including area code)



---

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

At July 31, 2006, there were 26,781,785 shares of UGI Utilities, Inc. Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.



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##### Table of Contents

UGI UTILITIES, INC.

TABLE OF CONTENTS



|                             |  |                                                                                           |  |        
|---------------------------- |  | ----------------------------------------------------------------------------------------- |  | -------
|                             |  |                                                                                           |  | PAGES  
|Part I Financial Information |  |                                                                                          
|                             |  |                                                                                          
|Item 1.                      |  | Financial Statements                                                                      |  |        
|                             |  |                                                                                          
|                             |  | Condensed Balance Sheets as of June 30, 2006, September 30, 2005 and June 30, 2005        |  | 1      
|                             |  |                                                                                          
|                             |  | Condensed Statements of Income for the three and nine months ended June 30, 2006 and 2005 |  | 2      
|                             |  |                                                                                          
|                             |  | Condensed Statements of Cash Flows for the nine months ended June 30, 2006 and 2005       |  | 3      
|                             |  |                                                                                          
|                             |  | Notes to Condensed Financial Statements                                                   |  | 4 - 15 
|                             |  |                                                                                          
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations     |  | 16 - 24
|                             |  |                                                                                          
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                |  | 24 - 25
|                             |  |                                                                                          
|Item 4.                      |  | Controls and Procedures                                                                   |  | 25     
|                             | 
|Part II
Other Information    |  |                                                                                          
|                             |  |                                                                                          
|Item 1.                      |  | Legal Proceedings                                                                         |  | 26     
|                             |  |                                                                                          
|Item 1A.                     |  | Risk Factors                                                                              |  | 26     
|                             |  |                                                                                          
|Item 6.                      |  | Exhibits                                                                                  |  | 26 - 27
|                             | 
|Signatures                   |  | 28                                                                                       



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UGI UTILITIES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

(Thousands of dollars)



|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ----------------- | - | ------------ |  | - | ------- | -
|                                                                                                                                         |  | June 30,2006 |         | September 30,2005 |   | June 30,2005 | 
|ASSETS                                                                                                                                   |  |              |         |                   |   |              |  |   |         |  
|Current assets:                                                                                                                          |  |              |         |                   |   |              |  |   |         |  
|Cash and cash equivalents                                                                                                                |  | $            | 8,418   |                   | $ | 2,686        |  | $ | 653     |  
|Accounts receivable (less allowances for doubtful accounts of $9,523, $4,562 and $7,222, respectively)                                   |  |              | 68,588  |                   |   | 48,597       |  |   | 56,207  |  
|Accounts receivable - related parties                                                                                                    |  |              | 1,240   |                   |   | 1,063        |  |   | 1,304   |  
|Accrued utility revenues                                                                                                                 |  |              | 12,240  |                   |   | 10,360       |  |   | 8,503   |  
|Inventories                                                                                                                              |  |              | 53,594  |                   |   | 71,584       |  |   | 39,198  |  
|Deferred income taxes                                                                                                                    |  |              | 9,430   |                   |   | 12,484       |  |   | 15,661  |  
|Derivative financial instruments                                                                                                         |  |              | 5,004   |                   |   | 5,688        |  |   | 638     |  
|Prepaid expenses and other current assets                                                                                                |  |              | 5,540   |                   |   | 3,875        |  |   | 3,095   |  
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|Total current assets                                                                                                                     |  |              | 164,054 |                   |   | 156,337      |  |   | 125,259 |  
|                                                                                                                                         |  |              |        
|Property, plant and equipment, at cost (less accumulated depreciation and amortization of $344,478, $330,329 and $327,961,
respectively) |  |              | 672,187 |                   |   | 655,322      |  |   | 644,882 |  
|Regulatory assets                                                                                                                        |  |              | 61,287  |                   |   | 61,334       |  |   | 66,778  |  
|Other assets                                                                                                                             |  |              | 26,460  |                   |   | 30,680       |  |   | 29,012  |  
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|Total assets                                                                                                                             |  | $            | 923,988 |                   | $ | 903,673      |  | $ | 865,931 |  
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|                                                                                                                                         |  |              |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                     |  |              |         |                   |   |              |  |   |         |  
|Current liabilities:                                                                                                                     |  |              |         |                   |   |              |  |   |         |  
|Current maturities of long-term debt                                                                                                     |  | $            | 20,000  |                   | $ | 50,000       |  | $ | 50,000  |  
|Bank loans                                                                                                                               |  |              | 112,100 |                   |   | 81,200       |  |   | 49,500  |  
|Accounts payable                                                                                                                         |  |              | 23,359  |                   |   | 38,430       |  |   | 23,243  |  
|Accounts payable - related parties                                                                                                       |  |              | 14,456  |                   |   | 14,371       |  |   | 15,616  |  
|Employee compensation and benefits accrued                                                                                               |  |              | 7,262   |                   |   | 9,007        |  |   | 9,048   |  
|Customer deposits and refunds                                                                                                            |  |              | 19,893  |                   |   | 20,064       |  |   | 12,178  |  
|Deferred fuel refunds                                                                                                                    |  |              | 10,054  |                   |   | 17,370       |  |   | 19,082  |  
|Accrued income taxes                                                                                                                     |  |              | 10,733  |                   |   |             |  |   | 12,264  |  
|Electric supplier collateral deposits                                                                                                    |  |              |        |                   |   | 13,500       |  |   | 6,600   |  
|Other current liabilities                                                                                                                |  |              | 8,196   |                   |   | 15,444       |  |   | 7,839   |  
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|Total current liabilities                                                                                                                |  |              | 226,053 |                   |   | 259,386      |  |   | 205,370 |  
|                                                                                                                                         |  |              |        
|Long-term debt                                                                                                                           |  |              | 217,000 |                   |   | 187,030      |  |   | 187,060 |  
|Deferred income taxes                                                                                                                    |  |              | 160,099 |                   |   | 160,920      |  |   | 164,732 |  
|Deferred investment tax credits                                                                                                          |  |              | 6,901   |                   |   | 7,193        |  |   | 7,290   |  
|Other noncurrent liabilities                                                                                                             |  |              | 16,367  |                   |   | 14,213       |  |   | 17,691  |  
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|Total liabilities                                                                                                                        |  |              | 626,420 |                   |   | 628,742      |  |   | 582,143 |  
|                                                                                                                                         |  |              |        
|Commitments and contingencies (note 5)                                                                                                   |  |              |         |                   |   |              |  |   |         |  
|                                                                                                                                         |  |              |        
|Common stockholders equity:                                                                                                             |  |              |         |                   |   |              |  |   |         |  
|Common Stock, $2.25 par value (authorized - 40,000,000 shares; issued and outstanding - 26,781,785 shares)                               |  |              | 60,259  |                   |   | 60,259       |  |   | 60,259  |  
|Additional paid-in capital                                                                                                               |  |              | 80,622  |                   |   | 80,622       |  |   | 79,773  |  
|Retained earnings                                                                                                                        |  |              | 154,765 |                   |   | 133,807      |  |   | 145,896 |  
|Accumulated other comprehensive income (loss)                                                                                            |  |              | 1,922   |                   |   | 243          |  |   | (2,140  | )
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|Total common stockholders equity                                                                                                        |  |              | 297,568 |                   |   | 274,931      |  |   | 283,788 |  
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  
|Total liabilities and stockholders equity                                                                                               |  | $            | 923,988 |                   | $ | 903,673      |  | $ | 865,931 |  
|                                                                                                                                         |  |              |         |                   |   |              |  |   |         |  

See accompanying notes to condensed financial statements.



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UGI UTILITIES, INC.

CONDENSED STATEMENTS OF INCOME

(unaudited)

(Thousands of dollars)



|                                                        |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Three Months Ended June 30, |         |   | Nine Months Ended June 30, |  
|                                                        |  | 2006                        |         |   | 2005                       |   |         | 2006 |  |   | 2005    |  
|Revenues                                                |  | $                           | 129,128 |   |                            | $ | 111,534 |      |  | $ | 694,446 |   |  | $ | 576,469 |  
|                                                        |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Costs and expenses:                                     |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Cost of sales-gas, fuel and purchased power             |  |                             | 82,802  |   |                            |   | 65,244  |      |  |   | 492,241 |   |  |   | 372,033 |  
|Operating and administrative expenses                   |  |                             | 22,050  |   |                            |   | 21,698  |      |  |   | 71,495  |   |  |   | 70,239  |  
|Operating and administrative expenses - related parties |  |                             | 3,749   |   |                            |   | 3,995   |      |  |   | 8,467   |   |  |   | 9,612   |  
|Taxes other than income taxes                           |  |                             | 3,172   |   |                            |   | 3,152   |      |  |   | 10,154  |   |  |   | 10,079  |  
|Depreciation and amortization                           |  |                             | 6,373   |   |                            |   | 6,019   |      |  |   | 18,856  |   |  |   | 17,785  |  
|Other income, net                                       |  |                             | (749    | ) |                            |   | (1,242  | )    |  |   | (3,930  | ) |  |   | (4,486  | )
|                                                        |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|                                                        |  |                             | 117,397 |   |                            |   | 98,866  |      |  |   | 597,283 |   |  |   | 475,262 |  
|                                                        |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Operating income                                        |  |                             | 11,731  |   |                            |   | 12,668  |      |  |   | 97,163  |   |  |   | 101,207 |  
|Interest expense                                        |  |                             | 5,344   |   |                            |   | 4,394   |      |  |   | 16,300  |   |  |   | 13,543  |  
|                                                        |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Income before income taxes                              |  |                             | 6,387   |   |                            |   | 8,274   |      |  |   | 80,863  |   |  |   | 87,664  |  
|Income taxes                                            |  |                             | 2,928   |   |                            |   | 3,367   |      |  |   | 32,450  |   |  |   | 35,083  |  
|                                                        |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Net income                                              |  | $                           | 3,459   |   |                            | $ | 4,907   |      |  | $ | 48,413  |   |  | $ | 52,581  |  
|                                                        |  |                             |         |   |                            |   |         |      |  |   |         |   |  |   |         |  

See accompanying notes to condensed financial statements.



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UGI UTILITIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(Thousands of dollars)



|                                                                                  |  |                            |          |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months Ended June 30, |         
|                                                                                  |  | 2006                       |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                            |          |   |      |   |         |  
|Net income                                                                        |  | $                          | 48,413   |   |      | $ | 52,581  |  
|Adjustments to reconcile net income to net cash used by operating activities:     |  |                            |          |   |      |   |         |  
|Depreciation and amortization                                                     |  |                            | 18,856   |   |      |   | 17,785  |  
|Deferred income tax expense (benefit), net                                        |  |                            | 769      |   |      |   | (3,531  | )
|Provision for uncollectible accounts                                              |  |                            | 8,777    |   |      |   | 7,135   |  
|Other, net                                                                        |  |                            | 6,566    |   |      |   | 2,136   |  
|Net change in:                                                                    |  |                            |          |   |      |   |         |  
|Accounts receivable and accrued utility revenues                                  |  |                            | (30,181  | ) |      |   | (24,510 | )
|Inventories                                                                       |  |                            | 17,990   |   |      |   | 25,979  |  
|Deferred fuel costs                                                               |  |                            | (7,316   | ) |      |   | 11,220  |  
|Accounts payable                                                                  |  |                            | (14,986  | ) |      |   | (23,848 | )
|Other current assets and liabilities                                              |  |                            | (10,779  | ) |      |   | 6,453   |  
|                                                                                  |  |                            |          |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                            | 38,109   |   |      |   | 71,400  |  
|                                                                                  |  |                            |          |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                            |          |   |      |   |         |  
|Expenditures for property, plant and equipment                                    |  |                            | (34,946  | ) |      |   | (30,355 | )
|Net costs of property, plant and equipment disposals                              |  |                            | (876     | ) |      |   | (873    | )
|                                                                                  |  |                            |          |   |      |   |         |  
|Net cash used by investing activities                                             |  |                            | (35,822  | ) |      |   | (31,228 | )
|                                                                                  |  |                            |          |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                            |          |   |      |   |         |  
|Payment of dividends                                                              |  |                            | (27,455  | ) |      |   | (28,140 | )
|Redemption of preferred shares subject to mandatory redemption                    |  |                            |         |   |      |   | (20,000 | )
|Increase (decrease) in bank loans with maturities of three months or less         |  |                            | 80,900   |   |      |   | (11,400 | )
|Issuances of debt including bank loans with maturities greater than three months  |  |                            | 70,000   |   |      |   | 60,000  |  
|Repayments of debt including bank loans with maturities greater than three months |  |                            | (120,000 | ) |      |   | (40,000 | )
|                                                                                  |  |                            |          |   |      |   |         |  
|Net cash provided (used) by financing activities                                  |  |                            | 3,445    |   |      |   | (39,540 | )
|                                                                                  |  |                            |          |   |      |   |         |  
|Cash and cash equivalents increase                                                |  | $                          | 5,732    |   |      | $ | 632     |  
|                                                                                  |  |                            |          |   |      |   |         |  
|CASH AND CASH EQUIVALENTS:                                                        |  |                            |          |   |      |   |         |  
|End of period                                                                     |  | $                          | 8,418    |   |      | $ | 653     |  
|Beginning of period                                                               |  |                            | 2,686    |   |      |   | 21      |  
|                                                                                  |  |                            |          |   |      |   |         |  
|Increase                                                                          |  | $                          | 5,732    |   |      | $ | 632     |  
|                                                                                  |  |                            |          |   |      |   |         |  

See accompanying notes to condensed financial statements.



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##### Table of Contents

UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per
share amounts)



|1. | Basis of Presentation
|-- | ---------------------

UGI Utilities, Inc.
(UGI Utilities), a wholly owned subsidiary of UGI Corporation (UGI), owns and operates a natural gas distribution utility (Gas Utility) in parts of eastern and southeastern Pennsylvania and an electricity
distribution utility (Electric Utility) in northeastern Pennsylvania. We refer to Gas Utility and Electric Utility collectively as the Company or we. Gas Utility and Electric Utility are subject to regulation by
the Pennsylvania Public Utility Commission (PUC).

The accompanying condensed 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, 2005 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and the related notes included in our Annual Report on Form 10-K for the year ended
September 30, 2005 (Companys 2005 Annual Report). Due to the seasonal nature of our businesses, the results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

Comprehensive Income. The following table presents the components of comprehensive income for the three and nine months ended
June 30, 2006 and 2005:



|                                  |  |                             |       |      |                            |        |      |  |      |        |  |   |        |  
|--------------------------------- |  | --------------------------- | ----- | ---- | -------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                  |  | Three Months Ended June 30, |       |      | Nine Months Ended June 30, |       
|                                  |  | 2006                        |       | 2005 |                            |        | 2006 |  | 2005 |       
|Net income                        |  | $                           | 3,459 |      | $                          | 4,907  |      |  | $    | 48,413 |  | $ | 52,581 |  
|Other comprehensive income (loss) |  |                             | 421   |      |                            | (1,509 | )    |  |      | 1,679  |  |   | (685   | )
|                                  |  |                             |       |      |                            |        |      |  |      |        |  |   |        |  
|Comprehensive income              |  | $                           | 3,880 |      | $                          | 3,398  |      |  | $    | 50,092 |  | $ | 51,896 |  
|                                  |  |                             |       |      |                            |        |      |  |      |        |  |   |        |  

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

Equity-Based Compensation. Under
UGIs 2004 Omnibus Equity Compensation Plan (OECP), certain key employees of UGI Utilities may be granted stock options and other equity-based awards (Units) of UGI Common Stock. Such awards typically vest ratably over a
period of three years. There are certain change of control and retirement eligibility conditions that, if met, generally result in accelerated vesting or eliminate further service requirements. Stock options for UGI Common Stock generally can be
exercised no later than ten years from the grant date. Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS
123R). Prior to October 1, 2005, as permitted, we applied the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock



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##### Table of Contents

UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



Issued to Employees (APB 25), in recording compensation expense for grants of stock, stock options and other equity instruments to
employees. Under APB 25, the Company did not record any compensation expense for stock options, but provided the required pro forma disclosures as if we had determined compensation expense under the fair value method prescribed by the provisions of
SFAS No. 123. Under SFAS 123R, all equity-based compensation cost is measured on the grant date or at period end based on the fair value of that award and is recognized in the income statement over the requisite service period.

As permitted by SFAS 123R, under the modified prospective approach, effective October 1, 2005, we began recording compensation expense for awards
that were not vested as of that date and did not restate any prior periods. For the periods prior to and subsequent to the adoption of SFAS 123R, we used the Black-Scholes option-pricing model to estimate the fair value of each option. The adoption
of SFAS 123R resulted in pre-tax compensation expense associated with stock options of $107 ($63 after-tax) and $295 ($173 after-tax) during the three and nine months ended June 30, 2006, respectively. As of June 30, 2006, there was $514
of unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted average period of 1.9 years. Assuming no significant change in the level of future stock option grants to UGI Utilities
employees, we do not believe that compensation expense associated with stock options will have a material impact on our financial position, results of operations or cash flows.

Both prior to and subsequent to the adoption of SFAS 123R, we measured and recorded compensation cost of Units awarded to employees prior to
January 1, 2006 (that can be settled at UGIs option in cash or shares of Common Stock, or a combination of both) based upon their fair value as of the end of each period. The fair value of Units is generally dependent upon UGIs
stock price and its performance in comparison to a group of peer companies. The fair value of these awards is expensed over requisite service periods.

Effective in June 2006, UGI modified the settlement terms of those Units awarded to employees having an original grant date of January 1, 2006. For these Unit awards, we used the Monte Carlo valuation model to
estimate their fair value. Compensation costs associated with these modified awards are measured based upon the fair value on the date of modification and as of the end of each period, as appropriate. Compensation costs are recorded over requisite
service periods. The Company did not incur any incremental compensation expense as a result of this modification.

We recorded total net
pre-tax equity-based compensation expense associated with both Units and stock options of $467 ($273 after-tax) and $277 ($162 after-tax) during the three and nine months ended June 30, 2006, respectively. The lower net equity-based
compensation expense recorded during the nine months ended June 30, 2006 is principally due to changes in the fair value of awards made under the OECP, largely resulting from changes in stock prices.



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##### Table of Contents

UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



The following table illustrates the effects on net income as if we had applied the provisions of SFAS
123R to all equity-based compensation awards for the comparable periods prior to the adoption of SFAS 123R.



|                                                                                                                                           |  |                                  |       |   |                                 |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ----- | - | ------------------------------- | - | ------ | -
|                                                                                                                                           |  | Three Months Ended June 30, 2005 |       |   | Nine Months Ended June 30, 2005 |  
|                                                                                                                                           | 
|Net income, as reported                                                                                                                    |  | $                                | 4,907 |   |                                 | $ | 52,581 |  
|Add: Equity-based employee compensation expense included in reported net income, net of related tax effects                                |  |                                  | 307   |   |                                 |   | 888    |  
|Deduct: Total equity-based employee compensation expense determined under the fair value method for all awards, net of related tax
effects |  |                                  | (337  | ) |                                 |   | (1,042 | )
|                                                                                                                                           |  |                                  |       |   |                                 |   |        |  
|Pro forma net income                                                                                                                       |  | $                                | 4,877 |   |                                 | $ | 52,427 |  
|                                                                                                                                           |  |                                  |       |   |                                 |   |        |  

During the nine months ended June 30, 2006, a portion of vested Unit awards were settled in
shares of UGI Common Stock and $384 in cash. As of June 30, 2006, there was a total of $873 of unrecognized compensation expense associated with 66,234 Unit awards that are expected to be recognized over a weighted average period of 1.9 years.
At June 30, 2006, total liabilities of $1,126 associated with Unit awards are reflected in other current liabilities and other noncurrent liabilities in the Condensed Balance Sheet.

The following table illustrates the number of unvested Unit awards:



|                                       |  |                     |   |  |                                                   |      
|-------------------------------------- |  | ------------------- | - |  | ------------------------------------------------- | -----
|                                       |  | Number of UGI Units |   |  | Weighted-Average Grant Date Fair Value (per
Unit)
|Non-vested awards - September 30, 2005 |  | 27,182              |   |  | $                                                 | 20.82
|Granted                                |  | 19,500              |   |  | $                                                 | 23.26
|Vested                                 |  | (17,599             | ) |  | $                                                 | 20.79
|                                       |  |                     |   |  |                                                   |      
|Non-vested awards - June 30, 2006      |  | 29,083              |   |  | $                                                 | 22.47
|                                       |  |                     |   |  |                                                   |      

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

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

Recently Issued Accounting Pronouncements.In June 2006, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective
for our fiscal year beginning October 1, 2007. We are currently evaluating the impact that this standard will have on our Financial Statements.



|2. | Segment Information
|-- | -------------------

We have two reportable
segments: (1) Gas Utility and (2) Electric Utility. The accounting policies of our two reportable segments are the same as those described in the Significant Accounting Policies note contained in the Companys 2005 Annual Report. We
evaluate each segments profitability principally based upon its income before income taxes. No single customer represents more than 10% of the total revenues of either Gas Utility or Electric Utility. There are no significant intersegment
transactions. In addition, all of our reportable segments revenues are derived from sources within the United States.



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



Financial information by business segment follows:

Three Months Ended June 30, 2006:



|                                              |  |       |         |             |   |                  |  |   |        
|--------------------------------------------- |  | ----- | ------- | ----------- | - | ---------------- |  | - | -------
|                                              |  | Total |         | Gas Utility |   | Electric Utility
|Revenues                                      |  | $     | 129,128 |             | $ | 106,263          |  | $ | 22,865 
|Cost of sales - gas, fuel and purchased power |  |       | 82,802  |             |   | 71,631           |  |   | 11,171 
|Depreciation and amortization                 |  |       | 6,373   |             |   | 5,533            |  |   | 840    
|Operating income                              |  |       | 11,731  |             |   | 6,553            |  |   | 5,178  
|Interest expense                              |  |       | 5,344   |             |   | 4,680            |  |   | 664    
|Income before income taxes                    |  |       | 6,387   |             |   | 1,873            |  |   | 4,514  
|Total assets at period end                    |  |       | 923,988 |             |   | 817,488          |  |   | 106,500
|                                              |  |       |        
|Three Months Ended June 30, 2005:             |  |       |         |             |   |                  |  |   |        
|                                              |  | Total |         | Gas Utility |   | Electric Utility
|Revenues                                      |  | $     | 111,534 |             | $ | 89,504           |  | $ | 22,030 
|Cost of sales - gas, fuel and purchased power |  |       | 65,244  |             |   | 54,612           |  |   | 10,632 
|Depreciation and amortization                 |  |       | 6,019   |             |   | 5,240            |  |   | 779    
|Operating income                              |  |       | 12,668  |             |   | 7,692            |  |   | 4,976  
|Interest expense                              |  |       | 4,394   |             |   | 3,923            |  |   | 471    
|Income before income taxes                    |  |       | 8,274   |             |   | 3,769            |  |   | 4,505  
|Total assets at period end                    |  |       | 865,931 |             |   | 768,723          |  |   | 97,208 



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



Nine Months Ended June 30, 2006:



|                                              |  |       |         |             |   |                  |  |   |        
|--------------------------------------------- |  | ----- | ------- | ----------- | - | ---------------- |  | - | -------
|                                              |  | Total |         | Gas Utility |   | Electric Utility
|Revenues                                      |  | $     | 694,446 |             | $ | 622,280          |  | $ | 72,166 
|Cost of sales - gas, fuel and purchased power |  |       | 492,241 |             |   | 454,540          |  |   | 37,701 
|Depreciation and amortization                 |  |       | 18,856  |             |   | 16,376           |  |   | 2,480  
|Operating income                              |  |       | 97,163  |             |   | 82,161           |  |   | 15,002 
|Interest expense                              |  |       | 16,300  |             |   | 14,380           |  |   | 1,920  
|Income before income taxes                    |  |       | 80,863  |             |   | 67,781           |  |   | 13,082 
|Total assets at period end                    |  |       | 923,988 |             |   | 817,488          |  |   | 106,500
|                                              |  |       |        
|Nine Months Ended June 30, 2005:              |  |       |         |             |   |                  |  |   |        
|                                              |  |       |        
|                                              |  | Total |         | Gas Utility |   | Electric Utility
|Revenues                                      |  | $     | 576,469 |             | $ | 506,584          |  | $ | 69,885 
|Cost of sales - gas, fuel and purchased power |  |       | 372,033 |             |   | 338,500          |  |   | 33,533 
|Depreciation and amortization                 |  |       | 17,785  |             |   | 15,470           |  |   | 2,315  
|Operating income                              |  |       | 101,207 |             |   | 84,379           |  |   | 16,828 
|Interest expense                              |  |       | 13,543  |             |   | 12,034           |  |   | 1,509  
|Income before income taxes                    |  |       | 87,664  |             |   | 72,345           |  |   | 15,319 
|Total assets at period end                    |  |       | 865,931 |             |   | 768,723          |  |   | 97,208 



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



|3. | Long-Term Debt
|-- | --------------

In December 2005, UGI
Utilities refinanced $50,000 of its maturing 7.14% Medium-Term Notes with proceeds from the issuance of $50,000 of 5.64% Medium-Term Notes due in December 2015. These Medium-Term Notes were issued pursuant to the Companys $125,000 shelf
registration statement with the SEC.



|4. | Defined Benefit Pension and Other Postretirement Plans
|-- | ------------------------------------------------------

We sponsor a defined benefit pension plan (UGI Utilities Pension Plan) for employees of UGI, UGI Utilities and certain of UGIs other wholly owned subsidiaries. In addition, we provide postretirement
health care benefits to certain retirees and postretirement life insurance benefits to nearly all active and retired employees. Net periodic pension expense and other postretirement benefit costs relating to UGI Utilities employees include the
following components:



|                                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|----------------------------------------------------- |  | -------------------------------------------- | ------- | - | --------------------------------------------------------- | - | ------- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                      |  | Pension Benefits Three Months Ended June 30, |         |   | Other Postretirement Benefits Three Months Ended June 30, |  
|                                                      |  | 2006                                         |         |   | 2005                                                      |   |         | 2006 |  |   | 2005  |  
|Service cost                                          |  | $                                            | 1,309   |   |                                                           | $ | 1,090   |      |  | $ | 32    |   |  | $ | 29    |  
|Interest cost                                         |  |                                              | 3,220   |   |                                                           |   | 2,998   |      |  |   | 204   |   |  |   | 368   |  
|Expected return on assets                             |  |                                              | (4,444  | ) |                                                           |   | (3,975  | )    |  |   | (152  | ) |  |   | (119  | )
|Amortization of:                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|Transition obligation                                 |  |                                              |        |   |                                                           |   |        |      |  |   |      |   |  |   | 169   |  
|Prior service cost (benefit)                          |  |                                              | 196     |   |                                                           |   | 155     |      |  |   | (55   | ) |  |   |      |  
|Actuarial loss                                        |  |                                              | 427     |   |                                                           |   | 308     |      |  |   | 48    |   |  |   | 81    |  
|                                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|Net benefit cost                                      |  |                                              | 708     |   |                                                           |   | 576     |      |  |   | 77    |   |  |   | 528   |  
|Change in regulatory and other assets and liabilities |  |                                              | (96     | ) |                                                           |   |        |      |  |   | 698   |   |  |   | 247   |  
|                                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|Net expense                                           |  | $                                            | 612     |   |                                                           | $ | 576     |      |  | $ | 775   |   |  | $ | 775   |  
|                                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|                                                      |  |                                             
|                                                      |  | Pension Benefits Nine Months Ended June 30,  |         |   | Other Postretirement Benefits Nine Months Ended June 30,  |  
|                                                      |  | 2006                                         |         |   | 2005                                                      |   |         | 2006 |  |   | 2005  |  
|Service cost                                          |  | $                                            | 3,930   |   |                                                           | $ | 3,270   |      |  | $ | 97    |   |  | $ | 86    |  
|Interest cost                                         |  |                                              | 9,662   |   |                                                           |   | 8,994   |      |  |   | 612   |   |  |   | 1,105 |  
|Expected return on assets                             |  |                                              | (13,336 | ) |                                                           |   | (11,925 | )    |  |   | (457  | ) |  |   | (357  | )
|Amortization of:                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|Transition obligation                                 |  |                                              |        |   |                                                           |   |        |      |  |   |      |   |  |   | 507   |  
|Prior service cost (benefit)                          |  |                                              | 588     |   |                                                           |   | 465     |      |  |   | (166  | ) |  |   |      |  
|Actuarial loss                                        |  |                                              | 1,280   |   |                                                           |   | 924     |      |  |   | 144   |   |  |   | 244   |  
|                                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|Net benefit cost                                      |  |                                              | 2,124   |   |                                                           |   | 1,728   |      |  |   | 230   |   |  |   | 1,585 |  
|Change in regulatory and other assets and liabilities |  |                                              | (278    | ) |                                                           |   |        |      |  |   | 2,095 |   |  |   | 740   |  
|                                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  
|Net expense                                           |  | $                                            | 1,846   |   |                                                           | $ | 1,728   |      |  | $ | 2,325 |   |  | $ | 2,325 |  
|                                                      |  |                                              |         |   |                                                           |   |         |      |  |   |       |   |  |   |       |  



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



UGI Utilities Pension Plan assets are held in trust and consist principally of equity and fixed
income mutual funds. The Company does not believe it will be required to make any contributions to the UGI Utilities Pension Plan during the year ending September 30, 2006. Pursuant to orders previously issued by the PUC, UGI Utilities has
established a Voluntary Employees Beneficiary Association (VEBA) trust to fund and pay UGI Utilities postretirement health care and life insurance benefits referred to above by depositing into the VEBA the annual amount of
postretirement benefit costs determined under SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. The difference between the annual amount calculated and the amount included in UGI Utilities
rates is deferred for future recovery from, or refund to, ratepayers. During the nine months ended June 30, 2006, the Company made contributions of approximately $560 to the VEBA and expects to contribute a total of approximately $750 during
the twelve months ending September 30, 2006.

We also sponsor an unfunded and non-qualified supplemental executive retirement income
plan. We recorded pre-tax expense for this plan of $105 and $306 for the three and nine months ended June 30, 2006, respectively, and $116 and $332 for the three and nine months ended June 30, 2005, respectively.



|5. | Commitments and Contingencies
|-- | -----------------------------

From the late
1800s through the mid-1900s, UGI Utilities and its former subsidiaries owned and operated a number of manufactured gas plants (MGPs) prior to the general availability of natural gas. Some constituents of coal tars and other residues of
the manufactured gas process are today considered hazardous substances under the Superfund Law and may be present on the sites of former MGPs. Between 1882 and 1953, UGI Utilities owned the stock of subsidiary gas companies in Pennsylvania and
elsewhere and also operated the businesses of some gas companies under agreement. Pursuant to the requirements of the Public Utility Holding Company Act of 1935, UGI Utilities divested all of its utility operations other than those which now
constitute Gas Utility and Electric Utility.

UGI Utilities does not expect its costs for investigation and remediation of hazardous
substances at Pennsylvania MGP sites to be material to its results of operations because Gas Utility is currently permitted to include in rates, through future base rate proceedings, prudently incurred remediation costs associated with such sites.
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. We accrue environmental investigation and cleanup costs when it is probable that a
liability exists and the amount or range of amounts can be reasonably estimated.



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



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.

By letter dated July 14, 2006, SCANA Corporation (SCANA)
demanded contribution from UGI Utilities for a portion of past and future remediation costs related to the operations of a former MGP located in Charleston, South Carolina. According to the letter, the plant operated from 1855 to 1954. SCANA alleges
that UGI Utilities controlled operations of the plant from 1910 to 1926. SCANA asserts that it has spent approximately $22,000 in remediation costs and $26,000 in third-party claims relating to the site. It estimates that future remediation costs
could be as high as $2,500 and asserts that it has received a demand from the United States Justice Department for natural resource damages. SCANA claims that UGI Utilities is liable for 47% of the costs associated with the site. UGI Utilities is in
the process of reviewing the information provided by SCANA and is investigating this claim.

In April 2003, Citizens Communications Company
(Citizens) served a complaint naming UGI Utilities as a third-party defendant in a civil action pending in the United States District for the District of Maine. In that action, the plaintiff, City of Bangor, Maine (City) sued
Citizens to recover environmental response costs associated with MGP wastes generated at a plant allegedly operated by Citizens predecessors at a site on the Penobscot River. Citizens subsequently joined UGI Utilities and ten other third-party
defendants alleging that the third-party defendants are responsible for an equitable share of costs Citizens may be required to pay to the City for cleaning up tar deposits in the Penobscot River. Citizens alleges that UGI Utilities and its
predecessors owned and operated the plant from 1901 to 1928. Studies conducted by the City and Citizens suggest that it could cost up to $18,000 to clean up the river. Citizens third party claims have been stayed pending a resolution of the
Citys suit against Citizens, which was tried in September 2005. Maines Department of Environmental Protection (DEP) informed UGI Utilities in March of 2005 that it considers UGI Utilities to be a potentially responsible party
for costs incurred by the State of Maine related to gas plant contaminants at this site. On June 27, 2006, the court issued an order finding Citizens responsible for 60% of the cleanup costs. The amount of Citizens liability has not been
finally determined. UGI Utilities believes that it has good defenses to Citizens claim and to any claim that the DEP may bring to recover its costs, and is defending the Citizens suit.

By letter dated July 29, 2003, Atlanta Gas Light Company (AGL) served UGI Utilities with a complaint filed in the United States District
Court for the Middle District of Florida in which AGL alleges that UGI Utilities is responsible for 20% of approximately $8,000 incurred by AGL in the investigation and remediation of a former MGP site in St.



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



Augustine, Florida. UGI Utilities formerly owned stock of the St. Augustine Gas Company, the owner and operator of the MGP. In March 2005, the court granted
UGI Utilities motion for summary judgment dismissing AGLs complaint. AGL has appealed.

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

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

The trial court granted UGI Utilities motion for summary judgment and dismissed ConEds complaint. The grant of summary judgment was entered April 1, 2004. ConEd appealed and on September 9, 2005
a panel of the Second Circuit Court of Appeals affirmed in part and reversed in part the decision of the trial court. The appellate panel affirmed the trial courts decision dismissing claims that UGI Utilities was liable under CERCLA as an
operator of MGPs owned and operated by its former subsidiaries. The appellate panel reversed the trial courts decision that UGI Utilities was released from liability at three sites where UGI Utilities operated MGPs under lease. On
October 7, 2005, UGI Utilities filed for reconsideration of the panels order. On January 17, 2006, the Second Circuit denied UGI Utilities request for reconsideration of the panels order.

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 go as
high as $20,000. UGI Utilities is in the process of reviewing the information provided by KeySpan and is investigating this claim.

By
letter dated August 5, 2004, Yankee Gas Services Company and Connecticut Light and Power Company, subsidiaries of Northeast Utilities, (together the Northeast



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



Companies), demanded 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. By letter dated March 17, 2006, the Northeast Companies estimated that
remediation costs for all of the sites would total approximately $215,000 and claimed that UGI Utilities is responsible for approximately $103,000 of this amount. Based on information supplied by the Northeast Companies and UGI Utilities own
investigation, UGI Utilities believes that it may have operated one of the sites, Waterbury North, under lease for a portion of its operating history. UGI Utilities is reviewing the Northeast Companies estimate that remediation costs at
Waterbury North could total $23,000. UGI Utilities believes that it will have good defenses to any action that may arise out of the remaining sites.

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



|6. | Related Party Transactions
|-- | --------------------------

UGI provides
certain financial and administrative services to UGI Utilities. UGI bills UGI Utilities monthly for all direct and for an allocated share of indirect corporate expenses incurred or paid on behalf of UGI Utilities. These billed expenses are
classified as operating and administrative expenses-related parties in the Condensed 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.

Effective December 1, 2004,
following a competitive bidding process, UGI Utilities entered into a Storage Contract Administrative Agreement (Storage Agreement) with UGI Energy Services, Inc., a second-tier wholly owned subsidiary of UGI (Energy
Services). The Storage Agreement was initially scheduled to expire on October 31, 2005, but effective November 1, 2005, UGI Utilities and Energy Services agreed to extend the Storage Agreement through October 31, 2008. Under the
Storage Agreement, Energy Services provides a firm natural gas delivery service to UGI Utilities. UGI Utilities has released certain gas transportation and storage contracts through October 31, 2008 and transferred associated gas storage
inventories to Energy Services. UGI Utilities may recall such released transportation and storage contracts without penalty if recalled



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UGI UTILITIES, INC.

Notes to Condensed Financial Statements

(unaudited)

(Thousands of dollars, except per share amounts)



to meet operational requirements, and if not recalled, the releases will terminate at the end of the
term of the Storage Agreement. In exchange for the ability to utilize these assets, Energy Services pays a monthly fee to UGI Utilities. During the three and nine months ended June 30, 2006, UGI Utilities incurred costs associated with
purchases of natural gas storage inventories from Energy Services and incurred associated pipeline transportation and storage capacity charges pursuant to the Storage Agreement totaling $31,627 and $53,106, respectively. During the three and nine
months ended June 30, 2005, UGI Utilities incurred costs associated with purchases of natural gas storage inventories from Energy Services and incurred associated pipeline transportation and storage capacity charges pursuant to the Storage
Agreement totaling $36,659 and $44,396, 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 June 30, 2006, comprising approximately 5.5 billion cubic feet of natural gas, was $46,702.

UGI Utilities has a Gas
Supply and Delivery Service Agreement with Energy Services pursuant to which Energy Services provides certain gas supply and related delivery service to Gas Utility during the peak heating-season months of November to March. In addition, from time
to time, Gas Utility purchases natural gas or pipeline capacity from Energy Services. The aggregate amount of these transactions (exclusive of Storage Agreement transactions) during the three months ended June 30, 2006 and 2005, totaled $3,227
and $190, respectively, and during the nine months ended June 30, 2006 and 2005, totaled $12,161 and $8,256, respectively.

From time
to time, the Company sells natural gas or pipeline capacity to Energy Services. During the three and nine month periods ended June 30, 2006 and 2005, these transactions did not have a material effect on the Companys financial position,
results of operations or cash flows.



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##### Table of Contents

UGI UTILITIES, INC.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

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



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ANALYSIS OF RESULTS OF OPERATIONS

The following analyses compare our results of operations for (1) the three months ended June 30, 2006 (2006 three-month period) with the three
months ended June 30, 2005 (2005 three-month period) and (2) the nine months ended June 30, 2006 (2006 nine-month period) with the nine months ended June 30, 2005 (2005 nine-month period). Our
analyses of results of operations should be read in conjunction with the segment information included in Note 2 to the Condensed Financial Statements.

2006 three-month period compared with 2005 three-month period



|                                                  |  |      |       |   |      |   |       |                     |  |   |      |   |  |   |       |   
|------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ------------------- |  | - | ---- | - |  | - | ----- | --
|Three Months Ended June 30, (Millions of dollars) |  | 2006 |       |   | 2005 |   |       | Increase (Decrease) | 
|                                                  |  |     
|Gas Utility:                                      |  |      |       |   |      |   |       |                     |  |   |      |   |  |   |       |   
|Revenues (a)                                      |  | $    | 106.3 |   |      | $ | 89.5  |                     |  | $ | 16.8 |   |  |   | 18.8  | % 
|Total margin (a) (b)                              |  | $    | 34.6  |   |      | $ | 34.9  |                     |  | $ | (0.3 | ) |  |   | (0.9  | )%
|Operating income                                  |  | $    | 6.6   |   |      | $ | 7.7   |                     |  | $ | (1.1 | ) |  |   | (14.3 | )%
|Income before income taxes                        |  | $    | 1.9   |   |      | $ | 3.8   |                     |  | $ | (1.9 | ) |  |   | (50.0 | )%
|System throughput - bcf (a)                       |  |      | 14.3  |   |      |   | 15.3  |                     |  |   | (1.0 | ) |  |   | (6.5  | )%
|Heating degree days - % warmer than normal (c)    |  |      | 13.5  | % |      |   | 3.5   | %                   |  |   |     |   |  |   |      |   
|                                                  |  |      |       |  
|Electric Utility:                                 |  |      |       |   |      |   |       |                     |  |   |      |   |  |   |       |   
|Revenues (a)                                      |  | $    | 22.9  |   |      | $ | 22.0  |                     |  | $ | 0.9  |   |  |   | 4.1   | % 
|Total margin (a) (b)                              |  | $    | 10.5  |   |      | $ | 10.2  |                     |  | $ | 0.3  |   |  |   | 2.9   | % 
|Operating income                                  |  | $    | 5.2   |   |      | $ | 5.0   |                     |  | $ | 0.2  |   |  |   | 4.0   | % 
|Income before income taxes                        |  | $    | 4.5   |   |      | $ | 4.5   |                     |  | $ |     |   |  | $ | 0.0   | % 
|Distribution sales - gwh (a)                      |  |      | 222.4 |   |      |   | 222.5 |                     |  |   | (0.1 | ) |  |   | (0.0  | )%

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

(a) Beginning in Fiscal 2006, Gas Utility and Electric Utility adjusted their methods of estimating unbilled sales volumes and associated revenues for service provided
through the end of the month by more closely correlating such estimated sales volumes to distribution system sendout data. The Company believes that the new methods of estimating unbilled sales volumes results in a more accurate quarterly estimate
of unbilled revenues and associated total margin. The change in the method of estimating Gas Utilitys unbilled sales volumes did not have a material impact on Gas Utilitys throughput, revenues or margin for the 2006 three-month period.
The change in the method of estimating Electric Utilitys unbilled sales volumes resulted in a 1.6 gwh decrease in distribution system sales and associated decreases in Electric Utility revenues and total margin of $0.1 million, for the 2006
three-month period.

(b) Gas Utilitys total margin represents total revenues less cost of sales. Electric Utilitys total margin represents
total revenues less total cost of sales and revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $1.2 million in each of the three-month periods ended June 30, 2006 and 2005. For financial statement purposes, revenue-related
taxes are included in Taxes other than income taxes on the Condensed Statements of Income.



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(c) Deviation from average heating degree days based upon weather statistics provided by the National Oceanic and
Atmospheric Administration (NOAA) for four airports located within our service territory. The 2005 three-month period degree day statistics have been restated to reflect the current-year, four-location average from the previous single
location statistic.

Gas Utility. Weather in Gas Utilitys service territory based upon heating degree days was 13.5% warmer than normal during
the 2006 three-month period compared to 3.5% warmer than normal in the prior-year three-month period. Notwithstanding year-over-year growth in the number of Gas Utilitys customers, total distribution system throughput decreased 6.5% in the
2006 three-month period reflecting a 0.7 bcf decrease in sales to firm- residential, commercial and industrial (retail core-market) customers and lower firm delivery service volumes. The decrease in retail core-market throughput largely
reflects the effects of significantly warmer spring weather and, to a lesser extent, the continued effects of lower average usage per customer resulting from significantly higher natural gas prices.

Notwithstanding the decline in distribution system throughput, Gas Utility revenues increased $16.8 million during the 2006 three-month period principally reflecting
(1) a $10.9 million increase in revenues from low-margin off-system sales and (2) increased retail core-market revenues, reflecting the result of higher average purchased gas cost (PGC) rates partially offset by the effects of
the lower volumes sold. Increases or decreases in retail core-market customer revenues and cost of sales result principally from changes in retail core-market volumes and the level of gas costs collected through the PGC recovery mechanism. Under
this recovery mechanism, Gas Utility records the cost of gas associated with sales to retail core-market customers at amounts included in PGC rates. The difference between actual gas costs and the amount included in rates is deferred on the balance
sheet as a regulatory asset or liability and represents amounts to be collected from or refunded to customers in a future period. As a result of this PGC recovery mechanism, increases or decreases in the cost of gas associated with retail
core-market customers have no direct effect on retail core-market margin. Gas Utilitys cost of gas was $71.6 million in the 2006 three-month period compared to $54.6 million in the 2005 three-month period largely reflecting greater costs
associated with the higher off-system sales and the impact of the higher retail core-market purchased gas costs.

Gas Utility total margin in the 2006
three-month period decreased $0.3 million reflecting decreased retail core-market margin principally resulting from the lower sales to retail core-market customers partially offset by higher total margin from interruptible customers reflecting
higher interruptible unit margins.

Gas Utility operating income decreased to $6.6 million in the 2006 three-month period from $7.7 million in the 2005
three-month period principally reflecting the $0.3 million decrease in total margin, slightly lower other income and higher depreciation and amortization expense. Total operating and administrative expenses were comparable to the prior-year period
as higher uncollectible accounts and customer assistance program costs were largely offset by lower incentive compensation and distribution system expenses.



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The decrease in Gas Utility income before income taxes reflects the previously mentioned decrease in operating income
and an increase in interest expense. The increase in interest expense is principally attributable to higher short-term debt outstanding, largely reflecting the effects of higher natural gas prices, and higher short-term interest rates.

Electric Utility.Electric Utilitys 2006 three-month period kilowatt-hour sales were comparable to the prior-year period. Electric Utility revenues
increased by $0.9 million in the 2006 three-month period largely reflecting the effects of a 3% increase in its Provider of Last Resort (POLR) rates effective January 1, 2006. Electric Utilitys cost of sales increased to $11.2
million in the 2006 three-month period from $10.6 million in the 2005 three-month period reflecting higher per unit purchased power costs.

Electric
Utility total margin in the 2006 three-month period increased $0.3 million principally reflecting lower 2006 three-month period transmission and congestion costs and the higher POLR rates partially offset by the higher per unit purchased power
costs.

Operating income increased in the 2006 three-month period principally reflecting the increase in total margin. The increase in income before income
taxes was comparable to the prior year as the increase in operating income was offset by higher interest expense on short-term debt.



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2006 nine-month period compared with 2005 nine-month period



|                                                 |  |      |       |   |      |   |       |                    |  |   |       |   |  |       |   
|------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ------------------ |  | - | ----- | - |  | ----- | --
|Nine Months Ended June 30, (Millions of dollars) |  | 2006 |       |   | 2005 |   |       | Increase(Decrease) | 
|Gas Utility:                                     |  |      |       |   |      |   |       |                    |  |   |       |   |  |       |   
|Revenues (a)                                     |  | $    | 622.3 |   |      | $ | 506.6 |                    |  | $ | 115.7 |   |  | 22.8  | % 
|Total margin (a) (b)                             |  | $    | 167.7 |   |      | $ | 168.1 |                    |  | $ | (0.4  | ) |  | (0.2  | )%
|Operating income                                 |  | $    | 82.2  |   |      | $ | 84.4  |                    |  | $ | (2.2  | ) |  | (2.6  | )%
|Income before income taxes                       |  | $    | 67.8  |   |      | $ | 72.3  |                    |  | $ | (4.5  | ) |  | (6.2  | )%
|System throughput - bcf (a)                      |  |      | 64.4  |   |      |   | 69.2  |                    |  |   | (4.8  | ) |  | (6.9  | )%
|Heating degree days - % warmer than normal (c)   |  |      | 8.8   | % |      |   | 0.7   | %                  |  |   |      |   |  |      |   
|                                                 |  |      |       |  
|Electric Utility:                                |  |      |       |   |      |   |       |                    |  |   |       |   |  |       |   
|Revenues (a)                                     |  | $    | 72.2  |   |      | $ | 69.9  |                    |  | $ | 2.3   |   |  | 3.3   | % 
|Total margin (a) (b)                             |  | $    | 30.5  |   |      | $ | 32.5  |                    |  | $ | (2.0  | ) |  | (6.2  | )%
|Operating income                                 |  | $    | 15.0  |   |      | $ | 16.8  |                    |  | $ | (1.8  | ) |  | (10.7 | )%
|Income before income taxes                       |  | $    | 13.1  |   |      | $ | 15.3  |                    |  | $ | (2.2  | ) |  | (14.4 | )%
|Distribution sales - gwh (a)                     |  |      | 748.8 |   |      |   | 753.7 |                    |  |   | (4.9  | ) |  | (0.7  | )%

(a) Beginning in Fiscal 2006, Gas Utility and Electric Utility adjusted their methods of estimating unbilled sales
volumes and associated revenues for service provided through the end of the month by more closely correlating such estimated sales volumes to distribution system sendout data. The Company believes that the new methods of estimating unbilled sales
volumes results in a more accurate quarterly estimate of unbilled revenues and associated total margin. The change in the method of estimating unbilled sales volumes did not have a material effect on Gas Utility or Electric Utility sales volumes,
revenues or margin for the nine months ended June 30, 2006.

(b) Gas Utilitys total margin represents total revenues less cost of sales.
Electric Utilitys total margin represents total revenues less total cost of sales and revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $4.0 million and $3.9 million in the nine month periods ended June 30, 2006 and
2005, respectively. For financial statement purposes, revenue-related taxes are included in Taxes other than income taxes on the Condensed Statements of Income.

(c) Deviation from average heating degree days based upon weather statistics provided by the National Oceanic and Atmospheric Administration (NOAA) for four airports located within our service territory.
The 2005 nine-month period degree day statistics have been restated to reflect the current-year, four-location average from the previous single location statistic.

Gas Utility. Weather in Gas Utilitys service territory based upon heating degree days was 8.8% warmer than normal during the 2006 nine-month period and approximately normal in the prior-year nine-month period. Notwithstanding
year-over-year growth in the number of our customers, total distribution system throughput decreased 4.8 bcf due to a decrease in sales to retail core-market customers reflecting the warmer weather and price-induced customer conservation, and lower
volumes transported for firm and interruptible delivery service customers.



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Gas Utility revenues increased $115.7 million during the 2006 nine-month period principally reflecting an $81.9
million increase in retail core-market revenues, the result of higher average PGC rates, and a $33.8 million increase in revenues from low-margin off-system sales. Gas Utilitys cost of gas was $454.5 million in the 2006 nine-month period
compared to $338.5 million in the 2005 nine-month period reflecting the impact of the previously mentioned higher retail core-market purchased gas costs and greater costs associated with the higher off-system sales.

Gas Utility total margin in the 2006 nine-month period was comparable to the prior-year nine-month period as the decrease in retail core-market margin resulting from the
lower sales was offset by higher total margin from interruptible customers and customer assistance tariff revenues.

Gas Utility operating income decreased
$2.2 million in the 2006 nine-month period principally reflecting $0.9 million of increased depreciation and amortization expense, a $0.6 million decrease in other income and a $0.4 million increase in operating and administrative expenses. The
increase in operating and administrative expenses reflects increased required environmental remediation reserves and higher uncollectible accounts and customer assistance expenses largely offset by lower 2006 nine-month period stock-based incentive
compensation costs and lower distribution system maintenance expenses resulting, in large part, from the mild heating-season weather.

The decrease in Gas
Utility income before income taxes reflects the previously mentioned decrease in operating income and an increase in interest expense attributable to higher short-term debt outstanding, largely reflecting the effects of higher natural gas prices,
and higher short-term interest rates.

Electric Utility.Electric Utilitys 2006 nine-month period kilowatt-hour sales decreased 0.7% compared
to the prior-year period. Electric Utility revenues increased $2.3 million in the 2006 nine-month period largely reflecting higher POLR electric generation rates partially offset by the effects of the lower sales. Electric Utilitys cost of
sales increased to $37.7 million in the 2006 nine-month period from $33.5 million in the 2005 nine-month period reflecting higher per unit purchased power costs partially offset by the effects of lower sales.

Electric Utility total margin in the 2006 nine-month period decreased $2.0 million compared to the 2005 nine-month period principally reflecting the higher per unit
purchased power costs partially offset by the increase in POLR electric generation rates.

Operating income decreased in the 2006 nine-month period
principally reflecting the decrease in total margin partially offset by slightly lower operating and administrative expenses. The decrease in income before income taxes principally reflects the lower operating income and higher interest expense on
short-term debt.



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FINANCIAL CONDITION AND LIQUIDITY

Financial Condition

The Companys total debt outstanding
at June 30, 2006 was $349.1 million (including $112.1 million in bank loans) compared with $318.2 million (including $81.2 million in bank loans) at September 30, 2005. In December 2005, we refinanced $50 million of maturing 7.14%
Medium-Term Notes with proceeds from the issuance of $50 million of 5.64% Medium-Term Notes due 2015.

The Company has revolving credit agreements under
which it may borrow up to $110 million. These agreements expire in June 2007 through June 2008. From time to time, UGI Utilities makes short-term borrowings under uncommitted arrangements with major banks in order to meet liquidity needs. At
June 30, 2006, UGI Utilities had $40 million in short-term borrowings outstanding under such uncommitted arrangements and $72.1 million in borrowings outstanding under the revolving credit agreements. Short-term borrowings, including borrowings
under revolving credit agreements, are classified as bank loans on the Condensed Balance Sheets. During the nine months ended June 30, 2006 and 2005, average daily bank loan borrowings were $111.8 million and $50.4 million, respectively, and
peak bank loan balances were $175.9 million and $90.4 million, respectively. The increase in average and peak bank loan borrowings during the 2006 nine-month period reflects, in large part, borrowings to fund increased working capital resulting from
higher natural gas prices. UGI Utilities expects to increase its revolving credit agreement commitments to $350 million prior to September 30, 2006. The size of the increase takes into account expected working capital requirements of PG Energy
(see UGIs PG Energy Acquisition described below). UGI Utilities also has an effective shelf registration statement with the Securities and Exchange Commission under which it may issue up to an additional $75 million of Medium-Term
Notes or other debt securities.

Cash Flows

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

Cash flow provided by operating activities was $38.1 million for the nine months ended June 30, 2006 compared with cash provided by operating activities of $71.4
million in the prior-year nine-month period. The significant decrease in cash flow from operating activities reflects a $45.3 million decrease in cash flow from changes in operating working capital, principally greater cash required to fund accounts
receivable and inventories, a decrease in cash flow as a result of



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purchased gas cost undercollections during the period and the refund of $13.5 million in electricity supplier collateral deposits. The greater cash
requirements to fund working capital principally reflect the effects of higher natural gas costs in the 2006 nine-month period and higher natural gas storage inventory volumes at the end of the 2006 nine-month period. Cash flow from operating
activities before changes in operating working capital was $83.4 million in the 2006 nine-month period compared with $76.1 million for the 2005 nine-month period.

Investing activities.Cash used by investing activities was $35.8 million in the 2006 nine-month period compared to cash used by investing activities of $31.2 million in the 2005 nine-month period. An increase in 2006 nine-month
period capital expenditures principally reflects greater information system capital expenditures and greater Electric Utility capital expenditures principally associated with substation improvements.

Financing activities.Cash provided by financing activities was $3.4 million in the 2006 nine-month period compared with cash used by financing activities of
$39.5 million in the 2005 nine-month period. Financing activity cash flows are primarily the result of issuances and repayments of long-term debt, net short-term borrowings including borrowings under revolving credit agreements and other uncommitted
arrangements, cash dividends to UGI, and capital contributions from UGI. During the 2006 and 2005 nine-month periods, we paid dividends to UGI totaling $27.5 million and $28.1 million, respectively. During the 2006 nine-month period, net bank loan
borrowings totaled $30.9 million compared with net bank loan repayments of $11.4 million in the prior-year nine-month period. Included in the 2006 nine-month period net bank loan borrowings are repayments of two $35 million borrowings with
maturities greater than three months and a $20 million borrowing made on June 1, 2006, which matures on September 8, 2006. The increase in short-term borrowings in the 2006 nine-month period reflects borrowings needed to finance the higher
working capital requirements resulting from the previously mentioned higher natural gas costs. In December 2005, we refinanced $50 million of 7.14% maturing Medium-Term Notes through the issuance of $50 million of 5.64% Medium-Term Notes due in
2015.

UGIs PG Energy Acquisition

On
January 26, 2006, UGI signed a definitive agreement to acquire the natural gas utility assets of PG Energy from Southern Union Company for approximately $580 million in cash, subject to certain adjustments. PG Energy serves approximately
158,000 customers in thirteen counties in northeastern and central Pennsylvania. The proposed transaction is subject to PUC approval and is expected to close during the fourth fiscal quarter ending September 30, 2006. We anticipate that we will
acquire and operate, through a subsidiary, the regulated assets of PG Energy immediately following UGIs completion of the acquisition. We expect to fund the acquisition with a combination of equity and debt.



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Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting
for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. We are currently evaluating the impact that this standard will have on our financial
position or results of operations. See Note 1 to the Condensed Financial Statements for additional information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Electric Utility purchases power from wholesale electricity suppliers under fixed-price energy and capacity contracts and, to a much lesser extent, on the spot market,
to provide retail POLR electric generation service to its customers that do not elect to receive such service from alternate suppliers. Currently, the rates it may charge its customers for POLR service are set at or below certain levels established
in settlements approved by the PUC. Under a settlement approved in 2004, Electric Utility increased its POLR rates for all metered customers by a total of 4.5% effective January 2005 and an additional 3% effective January 2006, above the total rates
in effect on December 31, 2004. In June 2006, the PUC approved a settlement permitting system average increases in maximum POLR rates, on a total bill basis, of 37.8% for 2007, and additional increases of 5.7% and 1.1% for 2008 and 2009,
respectively. Wholesale prices for electricity can be volatile, especially during periods of high demand or tight supply. Currently, Electric Utilitys fixed-price power and capacity contracts with electricity suppliers mitigate a substantial
portion of its commodity price risk associated with POLR service rate limits in effect through December 31, 2009. With respect to its existing fixed-price power and capacity contracts, should any of the counterparties fail to provide electric
power or capacity under the terms of such contracts, any increases in the cost of replacement power or capacity could negatively impact Electric Utility results. In order to reduce the risk associated with non-performance, Electric Utility has
diversified its purchases across several suppliers and entered into bilateral collateral arrangements with certain of them. From time to time, Electric Utility enters into electric price swap agreements to reduce the volatility in the cost of a
portion of its anticipated electricity requirements.

Our variable-rate debt includes short-term borrowings, including borrowings under our revolving
credit agreements. These agreements provide for interest rates on borrowings that are indexed to



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short-term market interest rates. Our long-term debt is typically issued at fixed rates of interest based upon market rates for debt having similar terms and
credit ratings. As these long-term debt issues mature, we expect to refinance such debt with new debt having an interest rate that is more or less than the refinanced debt. In order to reduce interest rate risk associated with near-term issuances of
fixed-rate debt, we may enter into interest rate protection agreements.

The fair values of our unsettled market risk sensitive derivative instruments
reflect the estimated amount that we would expect to receive or pay to terminate the contract based upon quoted market prices of comparable contracts at June 30, 2006. At June 30, 2006, the fair value of our electricity price swap was a
gain of $6.7 million. An adverse change in electricity prices of ten percent would result in a $1.4 million decrease in the fair value of the swap. At June 30, 2006, the fair value of our unsettled interest rate protection agreements, which
have been designated and qualify as cash flow hedges, was a gain of $1.6 million. An adverse change in interest rates on ten-year U.S. treasury notes of ten percent would result in a $6.0 million decrease in the fair value of these interest rate
protection agreements.

ITEM 4. CONTROLS AND PROCEDURES



|(a) | Evaluation of Disclosure Controls and Procedures
|--- | ------------------------------------------------

The
Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures as of the end of the period covered by this report were designed and functioning
effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding disclosure.



|(b) | Change in Internal Control over Financial Reporting
|--- | ---------------------------------------------------

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



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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Charleston, South Carolina Gas Plant Matter. By letter dated July 14, 2006, SCANA
Corporation (SCANA), demanded contribution from UGI Utilities for a portion of past and future remediation costs related to the operations of a former MGP located in Charleston, South Carolina. According to the letter, the plant operated
from 1855 to 1954. SCANA alleges that UGI Utilities controlled operations of the plant from 1910 to 1926. SCANA asserts that it has spent approximately $22 million in remediation costs and $26 million in third-party claims relating to the site. It
estimates that future remediation costs could be as high as $2.5 million and asserts that it has received a demand from the United States Justice Department for natural resource damages. SCANA claims that UGI Utilities is liable for 47% of the costs
associated with the site. UGI Utilities is in the process of reviewing the information provided by SCANA and is investigating this claim.

City of
Bangor, Maine v. Citizens Communications Co. In April 2003, Citizens Communications Company (Citizens) served a complaint naming UGI Utilities as a third-party defendant in a civil action pending in the United States District Court
for the District of Maine. In that action, the plaintiff, City of Bangor, Maine (City), sued Citizens to recover environmental response costs associated with MGP wastes generated at a plant allegedly operated by Citizens
predecessors at a site on the Penobscot River. Citizens subsequently joined UGI Utilities and ten other third-party defendants alleging that the third-party defendants are responsible for an equitable share of costs Citizens may be required to pay
to the City for cleaning up tar deposits in the Penobscot River. Citizens alleges that UGI Utilities and its predecessors owned and operated the plant from 1901 to 1928. Studies conducted by the City and Citizens suggest that it could cost up to $18
million to clean up the river. Citizens third-party claims have been stayed pending a resolution of the Citys suit against Citizens, which was tried in September 2005. Maines Department of Environmental Protection (DEP)
informed UGI Utilities in March of 2005 that it considers UGI Utilities to be a potentially responsible party for costs incurred by the State of Maine related to gas plant contaminants at this site. On June 27, 2006, the court issued an order
finding Citizens responsible for 60% of the cleanup costs. The amount of Citizens liability has not been finally determined. UGI Utilities believes that it has good defenses to Citizens claim and to any claim that the DEP may bring to
recover its costs, and is defending the Citizens suit.

Sag Harbor, New York Matter. By letter dated June 24, 2004, KeySpan Energy
(KeySpan) informed UGI Utilities that KeySpan has spent $2.3 million and expects to spend another $11 million 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 million. KeySpan believes that the cost could go as high as $20 million. UGI Utilities is in the process of reviewing the information provided by KeySpan and is investigating this
claim.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005, which could materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing the Company. Other unknown or unpredictable factors could also have material adverse effects on future results.

ITEM 6. EXHIBITS

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



|            |  |                                                                                                                                                            |  |                 |  |                 |  |        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | --------------- |  | -------
|Exhibit No. |  | Exhibit                                                                                                                                                    |  | Registrant      |  | Filing          |  | Exhibit
|10.1        |  | Description of UGI Corporation Senior Executive Employee Severance Pay Plan, amended July 25, 2006, for Messrs. Trego, Barney, Greenberg, Walsh and Knauss |  | UGI Corporation |  | 10-Q (8/8/2006) |  | 10.1   



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UGI UTILITIES, INC.



|            |  |                                                                                                                                                                                                                               |  |                 |  |                 |  |        
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | --------------- |  | -------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                                       |  | Registrant      |  | Filing          |  | Exhibit
|10.2        |  | Description of July 25, 2006 Amendment to the UGI Corporation Supplemental Executive Retirement Plan for Messrs. Trego, Barney, Greenberg, Walsh and Knauss                                                                   |  | UGI Corporation |  | 10-Q (8/8/2006) |  | 10.2   
|            |  |                                                                                                                                                                                                                               |  |                
|12.1        |  | Computation of ratio of earnings to fixed charges.                                                                                                                                                                            |  |                 |  |                 |  |        
|            |  |                                                                                                                                                                                                                               |  |                
|31.1        |  | Certification by the Chief Executive Officer relating to the Registrants Report on Form 10-Q for the quarter ended June 30, 2006, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                 |  |                 |  |                 |  |        
|            |  |                                                                                                                                                                                                                               |  |                
|31.2        |  | Certification by the Chief Financial Officer relating to the Registrants Report on Form 10-Q for the quarter ended June 30, 2006, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                 |  |                 |  |                 |  |        
|            |  |                                                                                                                                                                                                                               |  |                
|32          |  | Certification by the Chief Executive Officer and the Chief Financial Officer relating to the Registrants Report on Form 10-Q for the quarter ended June 30, 2006, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |  |                 |  |                 |  |        



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UGI UTILITIES, INC.



SIGNATURES

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



|                     |  |                     |  |                                                                             
|-------------------- |  | ------------------- |  | ----------------------------------------------------------------------------
|                     |  | UGI Utilities, Inc.
|                     |  | (Registrant)       
|                     |  |                    
|Date: August 7, 2006 |  | By:                 |  | /s/ John C. Barney                                                          
|                     |  |                     |  | John C. Barney Senior Vice President -
Finance (Principal Financial Officer)



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UGI UTILITIES, INC.

EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|12.1 |  | Computation of ratio of earnings to fixed charges.                                                                                                                                                                           
|     | 
|31.1 |  | Certification by the Chief Executive Officer relating to the Registrants Report on Form 10-Q for the quarter ended June 30, 2006, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                
|     | 
|31.2 |  | Certification by the Chief Financial Officer relating to the Registrants Report on Form 10-Q for the quarter ended June 30, 2006, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                
|     | 
|32   |  | Certification by the Chief Executive Officer and the Chief Financial Officer relating to the Registrants Report on Form 10-Q for the quarter ended June 30, 2006, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.