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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission file number 1-1398
 UGI UTILITIES, INC.
  Pennsylvania
    
    23-1174060(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 þ o
  o o þ o
  o þ




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UGI UTILITIES, INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 PAGESPart I Financial InformationItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2007,
September 30, 2007 and December 31, 2006
    
    1Condensed Consolidated Statements of Income for the three
months ended December 31, 2007 and 2006
    
    2Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2007 and 2006
    
    3Notes to Condensed Consolidated Financial Statements
    
    4 - 14Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    15 - 19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    20Item 4. Controls and Procedures
    
    21Part II Other InformationItem 1A. Risk Factors
    
    22Item 6. Exhibits
    
    22Signatures
    
    23Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32
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December31,
    
    
    September 30,
    
    
    December31,2007
    
    
    2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,016
    
    
    $
    16,207
    
    
    $
    8,083Restricted cash
    
    
    14,812
    
    
    
    6,642
    
    
    
    6,981Accounts receivable (less allowances for doubtful accounts of $10,841,
$10,824 and $12,027, respectively)
    
    
    137,999
    
    
    
    74,696
    
    
    
    109,177Accounts receivable  related parties
    
    
    5,124
    
    
    
    1,450
    
    
    
    7,590Accrued utility revenues
    
    
    82,051
    
    
    
    17,889
    
    
    
    58,103Regulatory assets
    
    
    14,657
    
    
    
    14,782
    
    
    
    Inventories
    
    
    141,718
    
    
    
    162,259
    
    
    
    162,087Deferred income taxes
    
    
    6,322
    
    
    
    6,673
    
    
    
    13,348Prepaid expenses & other current assets
    
    
    2,951
    
    
    
    5,532
    
    
    
    8,436Total current assets
    
    
    428,650
    
    
    
    306,130
    
    
    
    373,805Property, plant and equipment, at cost (less accumulated depreciation and
amortization of $538,540, $536,132, and $513,410, respectively)
    
    
    1,085,984
    
    
    
    1,083,897
    
    
    
    1,053,283Goodwill
    
    
    162,309
    
    
    
    162,309
    
    
    
    182,851Regulatory assets
    
    
    90,621
    
    
    
    88,990
    
    
    
    73,764Other assets
    
    
    7,570
    
    
    
    7,712
    
    
    
    26,000Total assets
    
    $
    1,775,134
    
    
    $
    1,649,038
    
    
    $
    1,709,703LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    20,000Bank loans
    
    
    257,000
    
    
    
    190,000
    
    
    
    250,000Accounts payable
    
    
    94,748
    
    
    
    60,012
    
    
    
    78,144Accounts payable  related parties
    
    
    3,692
    
    
    
    15,871
    
    
    
    10,121Accrued income taxes
    
    
    9,668
    
    
    
    1,017
    
    
    
    6,099Deferred fuel refunds
    
    
    2,435
    
    
    
    
    
    
    
    11,914Other current liabilities
    
    
    74,974
    
    
    
    76,535
    
    
    
    75,091Total current liabilities
    
    
    442,517
    
    
    
    343,435
    
    
    
    451,369Long-term debt
    
    
    512,000
    
    
    
    512,000
    
    
    
    492,000Deferred income taxes
    
    
    184,091
    
    
    
    175,012
    
    
    
    166,316Deferred investment tax credits
    
    
    6,321
    
    
    
    6,417
    
    
    
    6,707Other noncurrent liabilities
    
    
    41,928
    
    
    
    41,460
    
    
    
    32,844Total liabilities
    
    
    1,186,857
    
    
    
    1,078,324
    
    
    
    1,149,236Commitments 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
    
    
    
    60,259Additional paid-in capital
    
    
    346,758
    
    
    
    346,758
    
    
    
    345,801Retained earnings
    
    
    196,855
    
    
    
    179,014
    
    
    
    158,593Accumulated other comprehensive loss
    
    
    (15,595
    )
    
    
    (15,317
    )
    
    
    (4,186
    )Total common stockholders equity
    
    
    588,277
    
    
    
    570,714
    
    
    
    560,467Total liabilities and stockholders equity
    
    $
    1,775,134
    
    
    $
    1,649,038
    
    
    $
    1,709,703
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Three Months EndedDecember 31,2007
    
    
    2006Revenues
    
    $
    364,388
    
    
    $
    299,324Costs and expenses:Cost of sales  gas, fuel and purchased power
    
    
    256,939
    
    
    
    205,976Operating and administrative expenses
    
    
    35,504
    
    
    
    33,210Operating and administrative expenses  related parties
    
    
    1,454
    
    
    
    2,461Taxes other than income taxes
    
    
    4,469
    
    
    
    4,563Depreciation and amortization
    
    
    10,231
    
    
    
    10,234Other income, net
    
    
    (2,818
    )
    
    
    (1,561
    )305,779
    
    
    
    254,883Operating income
    
    
    58,609
    
    
    
    44,441Interest expense
    
    
    10,900
    
    
    
    11,422Income before income taxes
    
    
    47,709
    
    
    
    33,019Income taxes
    
    
    19,076
    
    
    
    13,260Net income
    
    $
    28,633
    
    
    $
    19,759
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Three Months EndedDecember 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    28,633
    
    
    $
    19,759Adjustments
to reconcile net income to net cash from operating activities:Depreciation and amortization
    
    
    10,231
    
    
    
    10,234Deferred income taxes, net
    
    
    8,738
    
    
    
    2,295Provision for uncollectible accounts
    
    
    3,812
    
    
    
    3,702Other, net
    
    
    554
    
    
    
    5,025Net change in:Accounts receivable and accrued utility
revenues
    
    
    (134,951
    )
    
    
    (98,119
    )Inventories
    
    
    20,541
    
    
    
    523Deferred fuel costs
    
    
    2,560
    
    
    
    (257
    )Accounts payable
    
    
    22,557
    
    
    
    26,769Other current assets and liabilities
    
    
    8,489
    
    
    
    24,452Net cash used by operating activities
    
    
    (28,836
    )
    
    
    (5,617
    )CASH FLOWS FROM INVESTING ACTIVITIES:Expenditures for property, plant and equipment
    
    
    (12,409
    )
    
    
    (12,867
    )Net costs of property, plant and equipment disposals
    
    
    (214
    )
    
    
    (88
    )Increase in restricted cash
    
    
    (8,170
    )
    
    
    (4,289
    )Net cash used by investing activities
    
    
    (20,793
    )
    
    
    (17,244
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of dividends
    
    
    (10,562
    )
    
    
    (5,998
    )Increase in bank loans
    
    
    67,000
    
    
    
    34,000Net cash provided by financing activities
    
    
    56,438
    
    
    
    28,002Cash and cash equivalents increase
    
    $
    6,809
    
    
    $
    5,141CASH AND CASH EQUIVALENTS:End of period
    
    $
    23,016
    
    
    $
    8,083Beginning of period
    
    
    16,207
    
    
    
    2,942Increase
    
    $
    6,809
    
    
    $
    5,141
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UGI UTILITIES, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
   1.
    
    Basis of PresentationUGI Utilities, Inc., a wholly owned subsidiary of UGI Corporation (UGI), and its wholly
owned subsidiary UGI Penn Natural Gas, Inc. (UGIPNG), own and operate (1) natural gas
distribution utilities in eastern and northeastern Pennsylvania (UGI Gas and PNG Gas,
respectively) and (2) an electric distribution utility in northeastern Pennsylvania
(Electric Utility). UGI Gas and PNG Gas are collectively referred to as Gas Utility.
Effective January 1, 2007, UGI Gas contributed its heating, ventilation and air conditioning
services business to its wholly owned second-tier subsidiary, UGI HVAC Services, Inc. UGI
HVAC Services, Inc., and UGIPNGs wholly owned subsidiary UGI Penn Natural Gas Services, Inc
(collectively, the HVAC Business), operate principally within the Gas Utility service
territory.Gas Utility and Electric Utility are subject to regulation by the PUC. The term UGI
Utilities is used sometimes as an abbreviated reference to UGI Utilities, Inc., or to UGI
Utilities, Inc. and its subsidiaries, including UGIPNG. Our condensed consolidated financial
statements include the accounts of UGI Utilities and its subsidiaries (collectively, we or
the Company). We eliminate all significant intercompany accounts when we consolidate.The accompanying condensed consolidated financial statements are unaudited and have been
prepared in accordance with the rules and regulations of the U.S. Securities and Exchange
Commission (SEC). They include all adjustments which we consider necessary for a fair
statement of the results for the interim periods presented. Such adjustments consisted only
of normal recurring items unless otherwise disclosed. The September 30, 2007 condensed
consolidated balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in the United
States of America. These financial statements should be read in conjunction with the
financial statements and the related notes included in our Annual Report on Form 10-K for
the year ended September 30, 2007 (Companys 2007 Annual Report). Due to the seasonal
nature of our businesses, the results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.Restricted Cash.Restricted cash represents those cash balances in our natural
gas futures brokerage accounts which are restricted from withdrawal.Comprehensive Income.The following table presents the components of comprehensive income
for the three months ended December 31, 2007 and 2006:
 Three Months EndedDecember 31,2007
    
    
    2006Net income
    
    $
    28,633
    
    
    $
    19,759Other comprehensive loss
    
    
    (278
    )
    
    
    (392
    )Comprehensive income
    
    $
    28,355
    
    
    $
    19,367
 Other comprehensive loss principally comprises net changes in the fair value of an
electricity price swap agreement and, in the three months ended December 31, 2006, interest
rate protection agreements qualifying as hedges, net of reclassifications to net income.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Natural Gas Inventories.UGI Utilities has storage contract administrative agreements
pursuant to which UGI Utilities has, among other things and subject to recall for
operational purposes, released certain storage and transportation contracts for the term of
the storage agreements. These agreements are currently scheduled to expire on October 31,
2008. UGI Utilities also transferred certain associated storage inventories upon
commencement of the storage agreements, will receive a transfer of storage inventories at
the end of the storage agreements, and makes payments associated with refilling storage
inventories during the term of such agreements. UGI Utilities reflects the historical cost
of natural gas storage inventories and any exchange receivable (representing amounts of
natural gas inventories used by the other parties to the agreements but not yet replenished)
on its balance sheets under the caption Inventories. The carrying value of gas storage
inventories released under these agreements at December 31, 2007, September 30, 2007 and
December 31, 2006, comprising 9.1 billion cubic feet (bcf), 8.2 bcf, and 8.9 bcf of
natural gas, was $72,629, $66,113 and $76,154, respectively.Use of Estimates.We make estimates and assumptions when preparing financial statements in
conformity with accounting principles generally accepted in the United States of America.
These estimates and assumptions affect the reported amounts of assets and liabilities,
revenues and expenses, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.Adoption of FIN 48.Effective October 1, 2007, we adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), which provides a comprehensive model for the recognition, measurement and disclosure
in financial statements of uncertain income tax positions that a company has taken or
expects to take on a tax return. Under FIN 48, a company can recognize the benefit of an
income tax position only if it is more likely than not (likelihood greater than 50%) that the tax
position will be sustained upon tax examination, based solely on the technical merits of
the tax position. Otherwise, no benefit can be recognized. Additionally, companies are
required to accrue interest and related penalties, if applicable, on all tax exposures for
which reserves have been established consistent with jurisdictional tax laws. Any
cumulative effect from the adoption of FIN 48 is recorded as an adjustment to opening
retained earnings. As a result of the adoption of FIN 48, effective October 1, 2007 we
recorded a non-cash reduction to retained earnings of $230.We classify interest on tax deficiencies and income tax penalties as income taxes. As of
October 1, 2007, we have unrecognized income tax benefits totaling $694 including related
accrued interest and penalties of $69. If these unrecognized tax benefits were
subsequently recognized, $694 would be recorded as a benefit to income taxes on the
consolidated statement of income and, therefore, would impact the reported effective tax rate.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 We join with UGI and its subsidiaries in filing a consolidated federal income tax return.
We are charged or credited for our share of current taxes resulting from the effects of our
transactions in the UGI consolidated federal income tax return including giving effect to
intercompany transactions. UGIs federal income tax returns are effectively settled through
the tax year 2004. UGIs federal income tax returns for fiscal 2005 and fiscal 2006 are
currently under audit. Although it is not possible to predict with certainty the timing of
the conclusion of UGIs pending federal tax audits, we anticipate that the aforementioned
federal tax audits will be completed by the end of fiscal 2008. Although we cannot predict
with certainty, we do not anticipate that our unrecognized federal income tax benefits will
significantly increase or decrease during the next twelve months..We file separate company income tax returns in a number of states but are subject to state
income tax principally in Pennsylvania. Pennsylvania income tax returns are generally
subject to examination for a period of three years after the filing of the respective
returns. We do not expect that any unrecognized state income tax benefits will
significantly increase or decrease during the next twelve months.Recently Issued Accounting Pronouncements.In December 2007, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations
(SFAS 141R). SFAS 141R applies to all transactions or other events in which an entity
obtains control of one or more businesses. SFAS 141R establishes, among other things,
principles and requirements for how the acquirer (1) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired
in a business combination or gain from a bargain purchase; and (3) determines what
information with respect to a business combination should be disclosed. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or after the
first annual reporting period beginning on or after December 15, 2008. We are currently
evaluating the impact of the provisions of SFAS 141R.Also in December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160). SFAS 160
establishes accounting and reporting standards that require, among other things, (1)
ownership interests in subsidiaries held by parties other than the parent be presented
within equity, but separate from the parents equity; (2) the amount of consolidated net
income attributable to the parent and the noncontrolling interest be presented clearly on
the income statement; (3) changes in a parents ownership interest while retaining control
be accounted for as equity transactions; and (4) any retained noncontrolling equity
investments in a former subsidiary be initially measured at fair value. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. We are currently evaluating the impact of the provisions of SFAS
160.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 2.
    
    Segment InformationWe have two reportable segments: (1) Gas Utility and (2) Electric Utility. The accounting
policies of our two reportable segments are the same as those described in the Significant
Accounting Policies note contained in the Companys 2007 Annual Report. We evaluate each
segments profitability principally based upon its income before income taxes. No single
customer represents more than 10% of the total revenues of either Gas Utility or Electric
Utility. There are no significant intersegment transactions. In addition, all of our
reportable segments revenues are derived from sources within the United States.As previously mentioned, effective January 1, 2007, UGI Utilities contributed its heating,
ventilation and air conditioning services business to its wholly-owned second-tier
subsidiary, UGI HVAC Services, Inc. The HVAC Business does not meet the quantitative
thresholds for separate segment reporting under the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information and has been included in Other
effective January 1, 2007. Prior periods have not been restated.Financial information by business segment follows:
 Three Months Ended December 31, 2007:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    364,388
    
    
    $
    326,642
    
    
    $
    31,936
    
    
    $
    5,810Cost of sales
    
    
    256,939
    
    
    
    236,778
    
    
    
    17,670
    
    
    
    2,491Depreciation and amortization
    
    
    10,231
    
    
    
    9,348
    
    
    
    880
    
    
    
    3Operating income
    
    
    58,609
    
    
    
    50,068
    
    
    
    7,459
    
    
    
    1,082Interest expense
    
    
    10,900
    
    
    
    10,359
    
    
    
    541
    
    
    
    Income before income taxes
    
    
    47,709
    
    
    
    39,710
    
    
    
    6,917
    
    
    
    1,082Total assets at period end
    
    $
    1,775,134
    
    
    $
    1,655,105
    
    
    $
    110,702
    
    
    $
    9,327Goodwill at period end
    
    $
    162,309
    
    
    $
    162,309
    
    
    $
    
    
    
    $
    
 Three Months Ended December 31, 2006:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    299,324
    
    
    $
    274,429
    
    
    $
    24,895
    
    
    $
    Cost of sales
    
    
    205,976
    
    
    
    193,800
    
    
    
    12,176
    
    
    
    Depreciation and amortization
    
    
    10,234
    
    
    
    9,294
    
    
    
    940
    
    
    
    Operating income
    
    
    44,441
    
    
    
    38,231
    
    
    
    6,210
    
    
    
    Interest expense
    
    
    11,422
    
    
    
    10,771
    
    
    
    651
    
    
    
    Income before income taxes
    
    
    33,019
    
    
    
    27,460
    
    
    
    5,559
    
    
    
    Total assets at period end
    
    $
    1,709,703
    
    
    $
    1,603,225
    
    
    $
    106,478
    
    
    $
    Goodwill at period end
    
    $
    182,851
    
    
    $
    182,851
    
    
    $
    
    
    
    $
    
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 3.
    
    Regulatory Assets and Liabilities and Regulatory MattersRegulatory assets and liabilities associated with Gas Utility and Electric Utility included
in our Condensed Consolidated Balance Sheets comprise the following:
 December 31,
    
    
    September 30,
    
    
    December 31,2007
    
    
    2007
    
    
    2006Regulatory assets:Income taxes recoverable
    
    $
    73,057
    
    
    $
    72,040
    
    
    $
    65,157Postretirement benefits
    
    
    4,672
    
    
    
    4,868
    
    
    
    5,277Environmental costs
    
    
    8,255
    
    
    
    8,255
    
    
    
    Deferred fuel costs
    
    
    14,657
    
    
    
    14,782
    
    
    
    Other
    
    
    4,637
    
    
    
    3,827
    
    
    
    3,330Total regulatory assets
    
    $
    105,278
    
    
    $
    103,772
    
    
    $
    73,764Regulatory liabilities:Postretirement benefits
    
    $
    7,797
    
    
    $
    7,502
    
    
    $
    4,159Deferred fuel refunds
    
    
    2,435
    
    
    
    
    
    
    
    11,914Total regulatory liabilities
    
    $
    10,232
    
    
    $
    7,502
    
    
    $
    16,073
 The Companys regulatory liabilities relating to postretirement benefits are included in
other noncurrent liabilities on the Condensed Consolidated Balance Sheets. The Company does not
recover a rate of return on its regulatory assets.In an order entered on November 30, 2006, the PUC approved a settlement of a PNG Gas base
rate proceeding. The settlement authorized PNG Gas to increase base rates $12,500 annually,
or approximately 4%, effective December 2, 2006.As a result of Pennsylvanias Electricity Generation Customer Choice and Competition Act
that became effective January 1, 1997, all of Electric Utilitys customers are permitted to
acquire their electricity from entities other than Electric Utility. Electric Utility
remains the provider of last resort (POLR) for its customers that are not served by an
alternate electric generation provider. The terms and conditions under which Electric
Utility provides POLR service, and rules governing the rates that may be charged for such
service, have been established in a series of PUC approved settlements, the latest of which
became effective June 23, 2006 (collectively, the POLR Settlement).In accordance with the POLR Settlement, Electric Utility may increase its POLR rates up to
certain limits through December 31, 2009. Consistent with the terms of the POLR Settlement,
Electric Utility increased its POLR rates effective January 1, 2007 which increased the
average cost to a residential heating customer by approximately 35% over such costs in
effect during calendar 2006. New PUC default service regulations became effective on
September 15, 2007, but do not disturb Electric Utilitys POLR Settlement through 2009.
Under the default service regulations, Electric Utility will be required to file a default
service plan with the PUC in 2008 that will establish the terms and conditions under which
it will offer POLR service commencing 2010.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 4.
    
    Defined Benefit Pension and Other Postretirement PlansWe sponsor two defined benefit pension plans (Pension Plans) for employees of UGI Utilities,
UGIPNG, UGI, and certain of UGIs other wholly owned subsidiaries. In addition, we provide
postretirement health care benefits to certain retirees and postretirement life insurance benefits
to nearly all active and retired employees.Net periodic pension expense and other postretirement benefit costs relating to our employees
include the following components:
 Pension Benefits
    
    
    Other Postretirement BenefitsThree Months Ended
    
    
    Three Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    1,271
    
    
    $
    1,380
    
    
    $
    67
    
    
    $
    65Interest cost
    
    
    4,453
    
    
    
    4,277
    
    
    
    212
    
    
    
    243Expected return on assets
    
    
    (5,693
    )
    
    
    (5,456
    )
    
    
    (159
    )
    
    
    (151
    )Amortization of:Prior service cost (benefit)
    
    
    7
    
    
    
    60
    
    
    
    (97
    )
    
    
    (55
    )Actuarial loss
    
    
    
    
    
    
    216
    
    
    
    17
    
    
    
    37Net benefit cost
    
    
    38
    
    
    
    477
    
    
    
    40
    
    
    
    139Change in regulatory
assets and liabilities
    
    
    
    
    
    
    
    
    
    
    817
    
    
    
    715Net expense
    
    $
    38
    
    
    $
    477
    
    
    $
    857
    
    
    $
    854
 Pension Plans assets are held in trust and consist principally of equity and fixed income mutual
funds. The Company does not believe it will be required to make any contributions to the Pension
Plans during the year ending September 30, 2008. Pursuant to orders previously issued by the PUC,
UGI Utilities has established a Voluntary Employees Beneficiary Association (VEBA) trust to fund
and pay UGI Gas and Electric Utilitys postretirement health care and life insurance benefits
referred to above by depositing into the VEBA the annual amount of postretirement benefit costs
determined under SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions. The difference between the annual amount calculated and the amount included in UGI Gas
and Electric Utilitys rates is deferred for future recovery from, or refund to, ratepayers.
Amounts contributed to the VEBA by UGI Utilities were not material during the three months ended
December 31, 2007, nor are they expected to be material for the year ending September 30, 2008.
 We also sponsor an unfunded and non-qualified supplemental executive retirement income plan. We
recorded pre-tax expense for this plan of $83 and $125 for the three months ended December 31, 2007
and 2006, respectively.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 5.
    
    Commitments and ContingenciesFrom the late 1800s through the mid-1900s, UGI Utilities and its former subsidiaries owned and
operated a number of manufactured gas plants (MGPs) prior to the general availability of natural
gas. Some constituents of coal tars and other residues of the manufactured gas process are today
considered hazardous substances under the Superfund Law and may be present on the sites of former
MGPs. Between 1882 and 1953, UGI Utilities owned the stock of subsidiary gas companies in
Pennsylvania and elsewhere and also operated the businesses of some gas companies under agreement.
Pursuant to the requirements of the Public Utility Holding Company Act of 1935, UGI Utilities
divested all of its utility operations other than those which now constitute UGI Gas and Electric
Utility by the early 1950s. At December 31, 2007, neither the Companys undiscounted amount nor its
accrued liability for environmental investigation and cleanup costs was material.UGI Utilities does not expect its costs for investigation and remediation of hazardous substances
at Pennsylvania MGP sites to be material to its results of operations because UGI Gas is currently
permitted to include in rates, through future base rate proceedings, a five-year average of such
prudently incurred remediation costs. In accordance with the terms of the PNG Gas base rate case
order which became effective December 2, 2006, site-specific environmental investigation and
remediation costs associated with PNG Gas incurred prior to December 2, 2006 are amortized as
removal costs over five-year periods. Such costs incurred after December 1, 2006 are expensed as
incurred.As a result of the PG Energy Acquisition, UGIPNG became a party to a Multi-Site Remediation Consent
Order and Agreement between PG Energy and the Pennsylvania Department of Environmental Protection
dated March 31, 2004 (Multi-Site Agreement). The Multi-Site Agreement requires UGIPNG to perform
a specified level of activities associated with environmental investigation and remediation work at
11 currently owned properties on which MGP-related facilities were operated (Properties). Under
the Multi-Site Agreement, environmental expenditures, including costs to perform work on the
Properties, are capped at $1,100 in any calendar year. Costs related to investigation and
remediation of one property formerly owned by UGIPNG are also included in this cap. The Multi-Site
Agreement terminates in 2019 but may be terminated by either party effective at the end of any
two-year period beginning with the original effective date.UGI Utilities has been notified of several sites outside Pennsylvania on which private parties
allege MGPs were formerly owned or operated by it or owned or operated by its former subsidiaries.
Such parties are investigating the extent of environmental contamination or performing
environmental remediation. UGI Utilities is currently litigating four claims against it relating to
out-of-state sites. We accrue environmental investigation and cleanup costs when it is probable
that a liability exists and the amount or range of amounts can be reasonably estimated.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.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 South Carolina Electric & Gas Company v. UGI Utilities, Inc.On September 22, 2006, South Carolina
Electric & Gas Company (SCE&G), a subsidiary of SCANA Corporation, filed a lawsuit against UGI
Utilities in the District Court of South Carolina seeking contribution from UGI Utilities for past
and future remediation costs related to the operations of a former MGP located in Charleston, South
Carolina. SCE&G asserts that the plant operated from 1855 to 1954 and alleges that UGI Utilities
controlled operations of the plant from 1910 to 1926 and is liable for 47% of the costs associated
with the site. SCE&G asserts that it has spent approximately $22,000 in remediation costs and
$26,000 in third-party claims relating to the site and estimates that future remediation costs
could be as high as $2,500. SCE&G further asserts that it has received a demand from the United
States Justice Department for natural resource damages. UGI Utilities is defending the suit.City of Bangor, Maine v. Citizens Communications Company.In April 2003, Citizens Communications Company
(Citizens) served a complaint naming UGI Utilities as a third-party defendant in a civil action
pending in the United States District Court for the District of Maine. In that action, the
plaintiff, City of Bangor, Maine (City) sued Citizens to recover environmental response costs
associated with MGP wastes generated at a plant allegedly operated by Citizens predecessors at a
site on the Penobscot River. Citizens subsequently joined UGI Utilities and ten other third-party
defendants alleging that the third-party defendants are responsible for an equitable share of costs
Citizens may be required to pay to the City for cleaning up tar deposits in the Penobscot River.
Citizens alleges that UGI Utilities and its predecessors owned and operated the plant from 1901 to
1928. Studies conducted by the City and Citizens suggest that it could cost up to $18,000 to clean
up the river. Citizens third-party claims have been stayed pending a resolution of the Citys suit
against Citizens, which was tried in September 2005. Maines Department of Environmental Protection
(DEP) informed UGI Utilities in March 2005 that it considers UGI Utilities to be a potentially
responsible party for costs incurred by the State of Maine related to gas plant contaminants at
this site. On June 27, 2006, the court issued an order finding Citizens responsible for 60% of the
cleanup costs. On February 14, 2007, Citizens and the City entered into a settlement agreement
pursuant to which Citizens agreed to pay $7,625 in exchange for a release of its liabilities. UGI
Utilities is evaluating what effect, if any, the settlement agreement would have on claims against
it. UGI Utilities believes that it has good defenses to any claim that the DEP may bring to recover
its costs, and is defending the Citizens suit.Consolidated Edison Company of New York v. UGI Utilities, Inc.On September 20, 2001, Consolidated
Edison Company of New York (ConEd) filed suit against UGI Utilities in the United States District
Court for the Southern District of New York, seeking contribution from UGI Utilities for an
allocated share of response costs associated with investigating and assessing gas plant related
contamination at former MGP sites in Westchester County, New York. The complaint alleges that UGI
Utilities owned and operated the MGPs prior to 1904. The complaint also seeks a declaration that
UGI Utilities is responsible for an allocated percentage of future investigative and remedial costs
at the sites.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 The trial court granted UGI Utilities motion for summary judgment and dismissed ConEds
complaint. The grant of summary judgment was entered April 1, 2004. ConEd appealed and on
September 9, 2005 a panel of the Second Circuit Court of Appeals affirmed in part and
reversed in part the decision of the trial court. The appellate panel affirmed the trial
courts decision dismissing claims that UGI Utilities was liable under CERCLA as an operator
of MGPs owned and operated by its former subsidiaries. The appellate panel reversed the
trial courts decision that UGI Utilities was released from liability at three sites where
UGI Utilities operated MGPs under lease. ConEd claims that the cost of remediation for the
three sites would be approximately $14,000. On October 7, 2005, UGI Utilities filed for
reconsideration of the panels order which was denied by the Second Circuit Court of Appeals
on January 17, 2006. On April 14, 2006, UGI Utilities filed a petition requesting that the
United States Supreme Court review the decision of the Second Circuit Court of Appeals. On
June 18, 2007, the United States Supreme Court denied UGI Utilities petition. The case has
now been remanded back to the trial court. UGI Utilities is defending the suit.Sag Harbor, New York Matter.By letter dated June 24, 2004, KeySpan Energy (KeySpan)
informed UGI Utilities that KeySpan has spent $2,300 and expects to spend another $11,000 to
clean up an MGP site it owns in Sag Harbor, New York. KeySpan believes
that UGI Utilities is responsible for approximately 50% of these costs as a result of UGI
Utilities alleged direct ownership and operation of the plant from 1885 to 1902. By letter
dated June 6, 2006, KeySpan reported that the New York Department of Environmental
Conservation has approved a remedy for the site that is estimated to cost approximately
$10,000. KeySpan believes that the cost could be as high as $20,000. UGI Utilities is in the
process of reviewing the information provided by KeySpan and is investigating this claim.Yankee Gas Services Company and Connecticut Light and Power Company v. UGI Utilities, Inc.
On September 11, 2006, UGI Utilities received a complaint filed by Yankee Gas Services
Company and Connecticut Light and Power Company, subsidiaries of Northeast Utilities,
(together the Northeast Companies) in the United States District Court for the District of
Connecticut seeking contribution from UGI Utilities for past and future remediation costs
related to MGP operations on thirteen sites owned by the Northeast Companies in nine cities
in the State of Connecticut. The Northeast Companies allege that UGI Utilities controlled
operations of the plants from 1883 to 1941. The Northeast Companies estimated that
remediation costs for all of the sites would total approximately $215,000 and asserted that
UGI Utilities is responsible for approximately $103,000 of this amount. Based on information
supplied by the Northeast Companies and UGI Utilities own investigation, UGI Utilities
believes that it may have operated one of the sites, Waterbury North, under lease for a
portion of its operating history. UGI Utilities is reviewing the Northeast Companies
estimate that remediation costs at Waterbury North could total $23,000. UGI Utilities is
defending the suit.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 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 TransactionsUGI provides certain financial and administrative services to UGI Utilities. UGI bills UGI
Utilities monthly for all direct and an allocated share of indirect corporate expenses incurred or
paid on behalf of UGI Utilities. These billed expenses are classified as operating and
administrative expenses  related parties in the Condensed Consolidated Statements of Income. In
addition, UGI Utilities provides limited administrative services to UGI and certain of UGIs
subsidiaries, principally payroll related services. Amounts billed to these entities by UGI
Utilities for all periods presented were not material.UGI Utilities has entered into a Storage Contract Administration Agreement (Storage Agreement)
extending through October 31, 2008 with UGI Energy Services, Inc., a second-tier wholly owned
subsidiary of UGI (Energy Services). Under the Storage Agreement UGI Utilities has, among other
things, and subject to recall for operational purposes, released certain storage and transportation
contracts to Energy Services for the term of the Storage Agreement. UGI Utilities also transferred
certain associated storage inventories upon the commencement of the Storage Agreement, will receive
a transfer of storage inventories at the end of the Storage Agreement, and makes payments
associated with refilling storage inventories during the term of the Storage Agreement. Energy
Services, in turn, provides a firm delivery service and makes certain payments to UGI Utilities for
its various obligations under the Storage Agreement. UGI Utilities incurred costs associated with
the Storage Agreement totaling $16,435 and $15,134, during the three months ended December 31, 2007
and 2006, respectively.The carrying value of gas storage inventories released under the Storage Agreement at December 31,
2007, comprising approximately 7.7 billion cubic feet of natural gas, was $63,018. The carrying
value of these gas storage inventories at September 30, 2007, comprising approximately 8.2 billion
cubic feet of natural gas, was $66,113. The carrying value of these gas storage inventories at
December 31, 2006, comprising approximately 8.9 billion cubic feet of natural gas, was $76,154.
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UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Gas Utility has gas supply and delivery service agreements with Energy Services pursuant to
which Energy Services provides certain gas supply and related delivery service to Gas
Utility during the peak heating-season months of November to March. In addition, from time
to time, Gas Utility purchases natural gas or pipeline capacity from Energy Services. The
aggregate amount of these transactions (exclusive of Storage Agreement transactions) during
the three months ended December 31, 2007 and 2006 totaled $17,247 and $9,927, respectively.From time to time, the Company sells natural gas or pipeline capacity to Energy Services.
During the three months ended December 31, 2007 and 2006, revenues associated with sales to
Energy Services totaled $10,690 and $7,719, respectively. These transactions did not have a
material effect on the Companys financial position, results of operations or cash flows.7.
    
    Subsequent Event  Issuance of Long-Term DebtIn January 2008, UGI Utilities issued $20,000 of Medium-Term Notes due January 2018 bearing
interest at a rate of 5.67%. The proceeds from the issuance of the $20,000 of Medium-Term
Notes were used to reduce borrowings under UGI Utilities Revolving Credit Agreement.
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UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
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UGI UTILITIES, INC. AND SUBSIDIARIES
 ANALYSIS OF RESULTS OF OPERATIONS
  2007 three-month period compared with 2006 three-month period
 Three
Months Ended December 31,

    
    2007
    
    
    2006
    
    
    Increase(Millions of dollars)Gas Utility:Revenues
    
    $
    326.6
    
    
    $
    274.4
    
    
    $
    52.2
    
    
    
    19.0
    %Total margin (a)
    
    $
    89.9
    
    
    $
    80.6
    
    
    $
    9.3
    
    
    
    11.5
    %Operating income
    
    $
    50.1
    
    
    $
    38.2
    
    
    $
    11.9
    
    
    
    31.2
    %Income before income taxes
    
    $
    39.7
    
    
    $
    27.5
    
    
    $
    12.2
    
    
    
    44.4
    %System throughput  bcf
    
    
    39.5
    
    
    
    33.4
    
    
    
    6.1
    
    
    
    18.3
    %Heating degree days  % warmer
than normal (b)
    
    
    6.3
    %
    
    
    15.0
    %
    
    
    
    
    
    
    Electric Utility:Revenues
    
    $
    31.9
    
    
    $
    24.9
    
    
    $
    7.0
    
    
    
    28.1
    %Total margin (a)
    
    $
    12.4
    
    
    $
    11.4
    
    
    $
    1.0
    
    
    
    8.8
    %Operating income
    
    $
    7.5
    
    
    $
    6.2
    
    
    $
    1.3
    
    
    
    21.0
    %Income before income taxes
    
    $
    6.9
    
    
    $
    5.6
    
    
    $
    1.3
    
    
    
    23.2
    %Distribution sales  gwh
    
    
    254.4
    
    
    
    249.0
    
    
    
    5.4
    
    
    
    2.2
    %
 bcf  billions of cubic feet. gwh  millions of kilowatt-hours.(a)
    
    Gas Utilitys total margin represents total revenues less total cost of sales. Electric
Utilitys total margin represents total revenues less total cost of sales and revenue-related
taxes, i.e. Electric Utility gross receipts taxes, of $1.8 million and $1.3 million during the
three-month periods ended December 31, 2007 and 2006, respectively. For financial statement
purposes, revenue-related taxes are included in Taxes other than income taxes in the
Condensed Consolidated Statements of Income.(b)
    
    Deviation from average heating degree days for the 30-year period 1975-2004 based upon
weather statistics provided by the National Oceanic and Atmospheric Administration (NOAA)
for airports located within Gas Utilitys service territory.
 Gas Utility.
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UGI UTILITIES, INC. AND SUBSIDIARIES
    Electric Utility.
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UGI UTILITIES, INC. AND SUBSIDIARIES
 FINANCIAL CONDITION AND LIQUIDITY
 Financial Condition
    Cash Flows
 Operating activities.
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UGI UTILITIES, INC. AND SUBSIDIARIES
  Investing activities.
 Financing activities.
 Adoption of FIN 48
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UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM 4. CONTROLS AND PROCEDURES
 (a)
    
    Evaluation of Disclosure Controls and ProceduresThe 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 ReportingNo change in the Companys internal control over financial reporting occurred during the
Companys most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
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UGI UTILITIES, INC. AND SUBSIDIARIES
 
 PART II OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  Exhibit No.
    
    Exhibit12.1
    
    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
December 31, 2007, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification by the Chief Financial Officer relating to the
Registrants Report on Form 10-Q for the quarter ended
December 31, 2007, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    Certification by the Chief Executive Officer and the Chief
Financial Officer relating to the Registrants Report on Form
10-Q for the quarter ended December 31, 2007, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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UGI UTILITIES, INC. AND SUBSIDIARIES
 
   UGI Utilities, Inc.
(Registrant)Date:  February 8, 2008
    By:
    /s/ John C. BarneyJohn C. BarneySenior Vice President  Finance  -23-




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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 December 31, 2007, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification by the Chief Financial Officer relating to the Registrants Report on Form
10-Q for the quarter ended December 31, 2007, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32
    
    Certification by the Chief Executive Officer and the Chief Financial Officer relating to
the Registrants Report on Form 10-Q for the quarter ended December 31, 2007, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.