##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-1398
 UGI UTILITIES, INC.
  Pennsylvania
(State or other jurisdiction of 
incorporation or organization)
    
    23-1174060
(I.R.S. Employer
Identification No.)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o
 o þ




---



##### 



UGI UTILITIES, INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 PAGESPart I Financial InformationItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2008, September 30, 2007 and June 30, 2007
    
    
    1Condensed Consolidated Statements of Income for the three and nine months ended June 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4 - 20Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21 - 28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29 - 30Item 4T. Controls and Procedures
    
    
    31Part II Other InformationItem 1.
Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 6. Exhibits
    
    
    33Signatures
    
    
    34Exhibit 10.1Exhibit 10.2Exhibit 12.1Exhibit 31.1Exhibit 31.2Exhibit 32
   -i-




---



##### Table of Contents



June 30,
    
    
    September 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,401
    
    
    $
    16,207
    
    
    $
    4,777Restricted cash
    
    
    
    
    
    
    6,642
    
    
    
    4,358Accounts receivable (less allowances for doubtful accounts of $14,751,
$10,824 and $15,342, respectively)
    
    
    114,500
    
    
    
    74,696
    
    
    
    104,512Accounts receivable  related parties
    
    
    7,589
    
    
    
    1,450
    
    
    
    2,591Accrued utility revenues
    
    
    22,253
    
    
    
    17,889
    
    
    
    20,950Regulatory assets
    
    
    
    
    
    
    14,782
    
    
    
    3,797Inventories
    
    
    91,723
    
    
    
    162,259
    
    
    
    88,002Deferred income taxes
    
    
    21,654
    
    
    
    6,673
    
    
    
    12,746Derivative financial instruments
    
    
    51,298
    
    
    
    1,201
    
    
    
    2,556Prepaid expenses & other current assets
    
    
    3,128
    
    
    
    4,331
    
    
    
    2,672Total current assets
    
    
    320,546
    
    
    
    306,130
    
    
    
    246,961Property, plant and equipment, at cost (less accumulated depreciation and
amortization of $557,859, $536,132 and $529,076, respectively)
    
    
    1,091,991
    
    
    
    1,083,897
    
    
    
    1,065,685Goodwill
    
    
    162,309
    
    
    
    162,309
    
    
    
    162,633Regulatory assets
    
    
    91,831
    
    
    
    88,990
    
    
    
    82,612Other assets
    
    
    8,719
    
    
    
    7,712
    
    
    
    24,647Total assets
    
    $
    1,675,396
    
    
    $
    1,649,038
    
    
    $
    1,582,538LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank loans
    
    $
    30,000
    
    
    $
    190,000
    
    
    $
    108,000Accounts payable
    
    
    69,706
    
    
    
    60,012
    
    
    
    56,663Accounts payable  related parties
    
    
    23,253
    
    
    
    15,871
    
    
    
    13,839Accrued income taxes
    
    
    29,014
    
    
    
    1,017
    
    
    
    13,075Deferred fuel refunds
    
    
    87,926
    
    
    
    
    
    
    
    7,494Other current liabilities
    
    
    63,572
    
    
    
    76,535
    
    
    
    59,834Total current liabilities
    
    
    303,471
    
    
    
    343,435
    
    
    
    258,905Long-term debt
    
    
    532,000
    
    
    
    512,000
    
    
    
    512,000Deferred income taxes
    
    
    191,646
    
    
    
    175,012
    
    
    
    172,710Deferred investment tax credits
    
    
    6,133
    
    
    
    6,417
    
    
    
    6,513Other noncurrent liabilities
    
    
    43,798
    
    
    
    41,460
    
    
    
    41,134Total liabilities
    
    
    1,077,048
    
    
    
    1,078,324
    
    
    
    991,262Commitments 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
    
    
    206,542
    
    
    
    179,014
    
    
    
    189,714Accumulated other comprehensive loss
    
    
    (15,211
    )
    
    
    (15,317
    )
    
    
    (4,498
    )Total common stockholders equity
    
    
    598,348
    
    
    
    570,714
    
    
    
    591,276Total liabilities and stockholders equity
    
    $
    1,675,396
    
    
    $
    1,649,038
    
    
    $
    1,582,538
   -1-




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    235,544
    
    
    $
    221,687
    
    
    $
    1,119,930
    
    
    $
    1,019,827Costs and expenses:Cost of sales  gas, fuel and purchased power
    
    
    165,082
    
    
    
    145,881
    
    
    
    803,914
    
    
    
    709,227Operating and administrative expenses
    
    
    34,785
    
    
    
    35,866
    
    
    
    110,920
    
    
    
    109,337Operating and administrative expenses  related
parties
    
    
    2,524
    
    
    
    2,331
    
    
    
    9,332
    
    
    
    8,958Taxes other than income taxes
    
    
    4,397
    
    
    
    4,209
    
    
    
    13,650
    
    
    
    13,937Depreciation and amortization
    
    
    10,246
    
    
    
    9,952
    
    
    
    30,826
    
    
    
    30,610Other income, net
    
    
    (1,548
    )
    
    
    (1,284
    )
    
    
    (9,048
    )
    
    
    (6,416
    )215,486
    
    
    
    196,955
    
    
    
    959,594
    
    
    
    865,653Operating income
    
    
    20,058
    
    
    
    24,732
    
    
    
    160,336
    
    
    
    154,174Interest expense
    
    
    8,879
    
    
    
    9,621
    
    
    
    29,880
    
    
    
    32,117Income before income taxes
    
    
    11,179
    
    
    
    15,111
    
    
    
    130,456
    
    
    
    122,057Income taxes
    
    
    4,931
    
    
    
    6,026
    
    
    
    52,489
    
    
    
    48,505Net income
    
    $
    6,248
    
    
    $
    9,085
    
    
    $
    77,967
    
    
    $
    73,552
   -2-




---



##### Table of Contents



Nine Months EndedJune 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    77,967
    
    
    $
    73,552Adjustments to reconcile net income to net cash from
operating activities:Depreciation and amortization
    
    
    30,826
    
    
    
    30,610Deferred income taxes, net
    
    
    (931
    )
    
    
    6,003Provision for uncollectible accounts
    
    
    13,831
    
    
    
    12,890Other, net
    
    
    (390
    )
    
    
    7,106Net change in:Accounts receivable and accrued utility revenues
    
    
    (66,229
    )
    
    
    (60,489
    )Inventories
    
    
    70,039
    
    
    
    74,608Deferred fuel costs, net of changes in unsettled derivatives
    
    
    53,359
    
    
    
    (8,736
    )Accounts payable
    
    
    17,585
    
    
    
    8,818Other current assets and liabilities
    
    
    15,749
    
    
    
    18,777Net cash provided by operating activities
    
    
    211,806
    
    
    
    163,139CASH FLOWS FROM INVESTING ACTIVITIES:Expenditures for property, plant and equipment
    
    
    (40,951
    )
    
    
    (45,621
    )PG Energy Acquisition working capital settlement
    
    
    
    
    
    
    23,670Decrease (increase) in restricted cash
    
    
    6,642
    
    
    
    (1,661
    )Other, net
    
    
    1,739
    
    
    
    (1,022
    )Net cash used by investing activities
    
    
    (32,570
    )
    
    
    (24,634
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of dividends
    
    
    (50,362
    )
    
    
    (28,670
    )Issuance of long-term debt
    
    
    20,000
    
    
    
    20,000Decrease in bank loans
    
    
    (160,000
    )
    
    
    (108,000
    )Cash portion of UGI HVAC dividend
    
    
    (1,381
    )
    
    
    Repayment of long-term debt
    
    
    
    
    
    
    (20,000
    )Other
    
    
    4,701
    
    
    
    Net cash used by financing activities
    
    
    (187,042
    )
    
    
    (136,670
    )Cash and cash equivalents (decrease) increase
    
    $
    (7,806
    )
    
    $
    1,835CASH AND CASH EQUIVALENTS:End of period
    
    $
    8,401
    
    
    $
    4,777Beginning of period
    
    
    16,207
    
    
    
    2,942(Decrease) increase
    
    $
    (7,806
    )
    
    $
    1,835
   -3-




---



##### Table of Contents



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 Utilities, Inc. contributed its heating, ventilation and air
conditioning services business to its wholly owned second-tier subsidiary, UGI HVAC
Services, Inc. (UGI HVAC). UGI HVAC and UGIPNGs wholly owned subsidiary UGI Penn HVAC
Services, Inc. (collectively, the HVAC Business) operate principally within the Gas Utility service
territory. Effective April 1, 2008, UGI Utilities transferred by dividend its ownership
interest in UGI HVAC to UGI.Gas Utility and Electric Utility are subject to regulation by the Pennsylvania Public
Utility Commission (PUC). The term UGI Utilities is used sometimes as an abbreviated
reference to UGI Utilities, Inc., or to UGI Utilities, Inc. and its subsidiaries, including
UGIPNG. Our condensed consolidated financial statements include the accounts of UGI
Utilities and its subsidiaries (collectively, we or the Company). We eliminate all
significant intercompany accounts when we consolidate.The accompanying condensed consolidated financial statements are unaudited and have been
prepared in accordance with the rules and regulations of the U.S. Securities and Exchange
Commission (SEC). They include all adjustments which we consider necessary for a fair
statement of the results for the interim periods presented. Such adjustments consisted only
of normal recurring items unless otherwise disclosed. The September 30, 2007 condensed
consolidated balance sheet data were derived from audited financial statements, but do 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 related notes included in our Annual Report on Form 10-K for the
year ended September 30, 2007 (Companys 2007 Annual Report). Due to the seasonal nature
of our businesses, the results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.Restricted Cash.Restricted cash represents cash balances in our natural gas futures
brokerage accounts which are restricted from withdrawal.Comprehensive Income.The following table presents the components of comprehensive income
for the three and nine months ended June 30, 2008 and 2007:
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    6,248
    
    
    $
    9,085
    
    
    $
    77,967
    
    
    $
    73,552Other comprehensive income (loss)
    
    
    193
    
    
    
    (702
    )
    
    
    106
    
    
    
    (704
    )Comprehensive income
    
    $
    6,441
    
    
    $
    8,383
    
    
    $
    78,073
    
    
    $
    72,848
  -4-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
  Natural Gas Inventories.
 Reclassifications.
 Use of Estimates.
 Adoption of FIN 48.
  -5-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
    Recently Issued Accounting Pronouncements.
   -6-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
      -7-




---



##### Table of Contents



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.
   -8-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
  Three Months Ended June 30, 2008:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    235,544
    
    
    $
    202,145
    
    
    $
    32,761
    
    
    $
    638Cost of sales
    
    
    165,082
    
    
    
    147,358
    
    
    
    17,724
    
    
    
    Depreciation and amortization
    
    
    10,246
    
    
    
    9,326
    
    
    
    920
    
    
    
    Operating income
    
    
    20,058
    
    
    
    12,412
    
    
    
    7,535
    
    
    
    111Interest expense
    
    
    8,879
    
    
    
    8,404
    
    
    
    475
    
    
    
    Income before income taxes
    
    
    11,179
    
    
    
    4,008
    
    
    
    7,060
    
    
    
    111Total assets at period end
    
    $
    1,675,396
    
    
    $
    1,558,530
    
    
    $
    115,879
    
    
    $
    987Goodwill at period end
    
    $
    162,309
    
    
    $
    162,309
    
    
    $
    
    
    
    $
    
 Three Months Ended June 30, 2007:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    221,687
    
    
    $
    185,897
    
    
    $
    29,873
    
    
    $
    5,917Cost of sales
    
    
    145,881
    
    
    
    128,261
    
    
    
    15,221
    
    
    
    2,399Depreciation and amortization
    
    
    9,952
    
    
    
    9,111
    
    
    
    847
    
    
    
    (6
    )Operating income
    
    
    24,732
    
    
    
    15,981
    
    
    
    7,519
    
    
    
    1,232Interest expense
    
    
    9,621
    
    
    
    9,055
    
    
    
    566
    
    
    
    Income before income taxes
    
    
    15,111
    
    
    
    6,926
    
    
    
    6,953
    
    
    
    1,232Total assets at period end
    
    $
    1,582,538
    
    
    $
    1,465,314
    
    
    $
    109,810
    
    
    $
    7,414Goodwill at period end
    
    $
    162,633
    
    
    $
    162,633
    
    
    $
    
    
    
    $
    
  -9-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Nine Months Ended June 30, 2008:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    1,119,930
    
    
    $
    1,005,590
    
    
    $
    103,294
    
    
    $
    11,046Cost of sales
    
    
    803,914
    
    
    
    739,259
    
    
    
    59,621
    
    
    
    5,034Depreciation and amortization
    
    
    30,826
    
    
    
    28,128
    
    
    
    2,689
    
    
    
    9Operating income
    
    
    160,336
    
    
    
    138,063
    
    
    
    21,407
    
    
    
    866Interest expense
    
    
    29,880
    
    
    
    28,339
    
    
    
    1,541
    
    
    
    Income before income taxes
    
    
    130,456
    
    
    
    109,724
    
    
    
    19,866
    
    
    
    866Total assets at period end
    
    $
    1,675,396
    
    
    $
    1,558,530
    
    
    $
    115,879
    
    
    $
    987Goodwill at period end
    
    $
    162,309
    
    
    $
    162,309
    
    
    $
    
    
    
    $
    
 Nine Months Ended June 30, 2007:
 Reportable SegmentsGas
    
    
    ElectricTotal
    
    
    Utility
    
    
    Utility
    
    
    OtherRevenues
    
    $
    1,019,827
    
    
    $
    919,325
    
    
    $
    89,645
    
    
    $
    10,857Cost of sales
    
    
    709,227
    
    
    
    656,236
    
    
    
    48,232
    
    
    
    4,759Depreciation and amortization
    
    
    30,610
    
    
    
    27,998
    
    
    
    2,609
    
    
    
    3Operating income
    
    
    154,174
    
    
    
    132,158
    
    
    
    20,457
    
    
    
    1,559Interest expense
    
    
    32,117
    
    
    
    30,233
    
    
    
    1,884
    
    
    
    Income before income taxes
    
    
    122,057
    
    
    
    101,925
    
    
    
    18,573
    
    
    
    1,559Total assets at period end
    
    $
    1,582,538
    
    
    $
    1,465,314
    
    
    $
    109,810
    
    
    $
    7,414Goodwill at period end
    
    $
    162,633
    
    
    $
    162,633
    
    
    $
    
    
    
    $
    
  -10-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 3.
    
    Regulatory Assets and Liabilities and Regulatory MattersThe following regulatory assets and liabilities associated with Gas Utility and Electric
Utility are included in our accompanying Condensed Consolidated Balance Sheets:
 June 30,
    
    
    September 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2007Regulatory assets:Income taxes recoverable
    
    $
    73,792
    
    
    $
    72,040
    
    
    $
    66,023Postretirement benefits
    
    
    4,497
    
    
    
    4,868
    
    
    
    5,044Environmental costs
    
    
    9,009
    
    
    
    8,255
    
    
    
    8,255Deferred fuel costs
    
    
    
    
    
    
    14,782
    
    
    
    3,797Other
    
    
    4,533
    
    
    
    3,827
    
    
    
    3,290Total regulatory assets
    
    $
    91,831
    
    
    $
    103,772
    
    
    $
    86,409Regulatory liabilities:Postretirement benefits
    
    $
    8,565
    
    
    $
    7,502
    
    
    $
    4,855Deferred fuel refunds
    
    
    87,926
    
    
    
    
    
    
    
    7,494Total regulatory liabilities
    
    $
    96,491
    
    
    $
    7,502
    
    
    $
    12,349
 Income taxes recoverable
 Postretirement benefits
   -11-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Environmental costs
 Deferred fuel costs and refunds.
 Other
  Other Regulatory Matters
    -12-




---



##### Table of Contents



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 domestic subsidiaries. In
addition, we provide postretirement health care benefits to certain retirees and
postretirement life insurance benefits to nearly all active and retired employees.
  -13-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
  Pension Benefits
    
    
    Other Postretirement BenefitsThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    1,271
    
    
    $
    1,383
    
    
    $
    66
    
    
    $
    65Interest cost
    
    
    4,453
    
    
    
    4,282
    
    
    
    212
    
    
    
    243Expected return on assets
    
    
    (5,693
    )
    
    
    (5,463
    )
    
    
    (159
    )
    
    
    (151
    )Amortization of:Prior service cost (benefit)
    
    
    7
    
    
    
    61
    
    
    
    (96
    )
    
    
    (55
    )Actuarial loss
    
    
    
    
    
    
    217
    
    
    
    17
    
    
    
    37Net benefit cost
    
    
    38
    
    
    
    480
    
    
    
    40
    
    
    
    139Change in regulatory
assets and liabilities
    
    
    
    
    
    
    
    
    
    
    818
    
    
    
    714Net expense
    
    $
    38
    
    
    $
    480
    
    
    $
    858
    
    
    $
    853
 Pension Benefits
    
    
    Other Postretirement BenefitsNine Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    3,812
    
    
    $
    4,149
    
    
    $
    200
    
    
    $
    195Interest cost
    
    
    13,360
    
    
    
    12,847
    
    
    
    636
    
    
    
    728Expected return on assets
    
    
    (17,079
    )
    
    
    (16,388
    )
    
    
    (477
    )
    
    
    (454
    )Amortization of:Prior service cost (benefit)
    
    
    22
    
    
    
    182
    
    
    
    (290
    )
    
    
    (165
    )Actuarial loss
    
    
    
    
    
    
    650
    
    
    
    51
    
    
    
    111Net benefit cost
    
    
    115
    
    
    
    1,440
    
    
    
    120
    
    
    
    415Change in regulatory
assets and liabilities
    
    
    
    
    
    
    
    
    
    
    2,453
    
    
    
    2,143Net expense
    
    $
    115
    
    
    $
    1,440
    
    
    $
    2,573
    
    
    $
    2,558
    -14-




---



##### Table of Contents



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 June 30,
2008, neither the Companys undiscounted amount nor its accrued liability for environmental
investigation and cleanup costs was material.
     -15-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
  South Carolina Electric & Gas Company v. UGI Utilities, Inc.
 City of Bangor, Maine v. Citizens Communications Company.
  -16-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 Consolidated Edison Company of New York v. UGI Utilities, Inc.
 
 Sag Harbor, New York Matter.
 Yankee Gas Services Company and Connecticut Light and Power Company v. UGI Utilities, Inc.
  -17-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
  6.
    
    Related Party TransactionsUGI provides certain financial and administrative services to UGI Utilities. UGI bills UGI
Utilities monthly for all direct expenses incurred by UGI on behalf of UGI Utilities, and an
allocated share of indirect corporate expenses incurred or paid with respect to services
provided to UGI Utilities. The allocation of indirect UGI corporate expenses to UGI
Utilities utilizes a weighted, three-component formula comprising revenues, operating
expenses and net assets employed and considers UGI Utilities relative percentage of such
items to the total of such items for UGIs other operating subsidiaries for which general
and administrative services are provided. Management believes that this allocation method
is reasonable and equitable to UGI Utilities and this allocation method has been accepted by
the PUC in past rate case proceedings and management audits as a reasonable method of
allocating such expenses. These billed expenses are classified as operating and
administrative expenses  related parties in the Condensed Consolidated Statements of
Income. In addition, UGI Utilities provides limited administrative services to UGI and
certain of UGIs subsidiaries, principally payroll-related services. Amounts billed to these
entities by UGI Utilities for all periods presented were not material.
   -18-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
    7.
    
    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.
  -19-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES  Notes to Condensed Consolidated Financial Statements
 8.
    
    Proposed Acquisition of PPL Gas UtilitiesOn March 5, 2008, UGI Utilities signed a definitive agreement to acquire all of the issued
and outstanding stock of PPL Gas Utilities Corporation (PPL Gas), the natural gas
distribution utility of PPL Corporation (PPL) (the Acquisition), for approximately
$268,000 plus working capital. Immediately after the closing, UGI Utilities intends to sell
the assets of PPL Gas wholly owned subsidiary Penn Fuel Propane, LLC (Penn Fuel), its
retail propane distributor, to AmeriGas Propane, L.P., an affiliate
of UGI, for cash consideration. PPL Gas
distributes natural gas to approximately 75,000 customers in 35 counties in eastern and
central Pennsylvania, and also distributes natural gas to several hundred customers in
portions of one Maryland county. Penn Fuel sells approximately 15 million gallons of
propane annually to more than 30,000 customers in eastern Pennsylvania. UGI Utilities
expects to fund the acquisition of PPL Gas
and Penn Fuel with a combination of cash on the balance sheet contributed by UGI and
long-term debt issued by UGI Utilities.
   -20-




---



##### Table of Contents



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




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 ANALYSIS OF RESULTS OF OPERATIONS
  2008 three-month period compared with 2007 three-month period
 IncreaseThree Months Ended June 30,
    
    2008
    
    
    2007
    
    
    (Decrease)(Millions of dollars)Gas Utility:Revenues
    
    $
    202.1
    
    
    $
    185.9
    
    
    $
    16.2
    
    
    
    8.7
    %Total margin (a)
    
    $
    54.8
    
    
    $
    57.6
    
    
    $
    (2.8
    )
    
    
    (4.9
    )%Operating income
    
    $
    12.4
    
    
    $
    16.0
    
    
    $
    (3.6
    )
    
    
    (22.5
    )%Income before income taxes
    
    $
    4.0
    
    
    $
    6.9
    
    
    $
    (2.9
    )
    
    
    (42.0
    )%System throughput  bcf
    
    
    23.4
    
    
    
    25.4
    
    
    
    (2.0
    )
    
    
    (7.9
    )%Heating degree days  %
(warmer) colder
than normal (b)
    
    
    (4.3
    )%
    
    
    3.8
    %
    
    
    
    
    
    
    Electric Utility:Revenues
    
    $
    32.8
    
    
    $
    29.9
    
    
    $
    2.9
    
    
    
    9.7
    %Total margin (a)
    
    $
    13.2
    
    
    $
    13.0
    
    
    $
    0.2
    
    
    
    1.5
    %Operating income
    
    $
    7.5
    
    
    $
    7.5
    
    
    $
    
    
    
    
    0.0
    %Income before income taxes
    
    $
    7.1
    
    
    $
    7.0
    
    
    $
    0.1
    
    
    
    1.4
    %Distribution sales  gwh
    
    
    224.9
    
    
    
    231.1
    
    
    
    (6.2
    )
    
    
    (2.7
    )%
 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 $1.9 million and $1.7 million during the
three-month periods ended June 30, 2008 and 2007, respectively. For financial statement
purposes, revenue-related taxes are included in Taxes other than income taxes in the
Condensed Consolidated Statements of Income.(b)
    
    Deviation from average heating degree days for the 30-year period 1975-2004 based upon
weather statistics provided by the National Oceanic and Atmospheric Administration (NOAA)
for airports located within Gas Utilitys service territory. Gas Utility.
  -22-




---



##### Table of Contents



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




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
   2008 nine-month period compared with 2007 nine-month period
 IncreaseNine Months Ended June 30,
    
    2008
    
    
    2007
    
    
    (Decrease)(Millions of dollars)Gas Utility:Revenues
    
    $
    1,005.6
    
    
    $
    919.3
    
    
    $
    86.3
    
    
    
    9.4
    %Total margin (a)
    
    $
    266.3
    
    
    $
    263.1
    
    
    $
    3.2
    
    
    
    1.2
    %Operating income
    
    $
    138.1
    
    
    $
    132.2
    
    
    $
    5.9
    
    
    
    4.5
    %Income before income taxes
    
    $
    109.7
    
    
    $
    101.9
    
    
    $
    7.8
    
    
    
    7.7
    %System throughput  bcf
    
    
    112.4
    
    
    
    108.6
    
    
    
    3.8
    
    
    
    3.5
    %Heating degree days  % warmer
than normal (b)
    
    
    5.0
    %
    
    
    4.3
    %
    
    
    
    
    
    
    Electric Utility:Revenues
    
    $
    103.3
    
    
    $
    89.6
    
    
    $
    13.7
    
    
    
    15.3
    %Total margin (a)
    
    $
    37.8
    
    
    $
    36.4
    
    
    $
    1.4
    
    
    
    3.8
    %Operating income
    
    $
    21.4
    
    
    $
    20.5
    
    
    $
    0.9
    
    
    
    4.4
    %Income before income taxes
    
    $
    19.9
    
    
    $
    18.6
    
    
    $
    1.3
    
    
    
    7.0
    %Distribution sales  gwh
    
    
    758.4
    
    
    
    762.0
    
    
    
    (3.6
    )
    
    
    (0.5
    )%
 bcf
    -
    billions of cubic feet.gwh
    -
    millions of kilowatt-hours.(a)
    
    Gas Utilitys total margin represents total revenues less total cost of sales.
Electric Utilitys total margin represents total revenues less total cost of sales and
revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $5.9 million and $5.0
million during the nine-month periods ended June 30, 2008 and 2007, respectively. For
financial statement purposes, revenue-related taxes are included in Taxes other than
income taxes in the Condensed Consolidated Statements of Income.(b)
    
    Deviation from average heating degree days for the 30-year period 1975-2004 based upon
weather statistics provided by the National Oceanic and Atmospheric Administration (NOAA)
for airports located within Gas Utilitys service territory.  -24-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 Gas Utility.
    Electric Utility.
  
  -25-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 FINANCIAL CONDITION AND LIQUIDITY
 Financial Condition
    Cash Flows
 Operating activities.
   -26-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 Investing activities.
 Financing activities.
 Adoption of FIN 48
   -27-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 Proposed Acquisition of PPL Gas Utilities
   Electric Utility Regulatory Matters
    -28-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     -29-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
    -30-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM 4T. 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.
  -31-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 PART II OTHER INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 Consolidated Edison Company of New York v. UGI Utilities, Inc.
  
 ITEM 1A. RISK FACTORS
   -32-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
 ITEM 6. EXHIBITS
  Incorporation by Reference
 Exhibit No.
    
    Exhibit
    
    Registrant
    
    Filing
    
    Exhibit10.1
    
    
    Form of Change in Control Agreement Amended and
Restated as of May 12, 2008 for Mr. Trego10.2
    
    
    Form of Change in Control Agreement Amended and
Restated as of May 12, 2008 for Messrs. Barney
and Terranova and Ms. Ebner10.3
    
    
    Form of Change in Control Agreement Amended and
Restated as of May 12, 2008 for Messrs.
Greenberg, Knauss and Walsh
    
    UGI
Corporation
    
    Form 10-Q
(6/30/08)
    
    
    10.312.1
    
    
    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, 2008, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification by the Chief Financial Officer
relating to the Registrants Report on Form
10-Q for the quarter ended June 30, 2008, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    
    Certification by the Chief Executive Officer
and the Chief Financial Officer relating to the
Registrants Report on Form 10-Q for the quarter
ended June 30, 2008, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  -33-




---



##### Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
 
   UGI Utilities, Inc.(Registrant)Date: August 8, 2008
    By:
    /s/ John C. BarneyJohn C. BarneySenior Vice President - Finance and
Chief Financial Officer  -34-




---



##### Table of Contents



UGI UTILITIES, INC.
 
 EXHIBIT INDEX
 10.1
    
    Form of Change in Control Agreement Amended and Restated as of May 12, 2008 for
Mr. Trego10.2
    
    Form of Change in Control Agreement Amended and Restated as of May 12, 2008 for
Messrs. Barney and Terranova and Ms. Ebner12.1
    
    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, 2008, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification by the Chief Financial Officer relating to the Registrants Report on Form
10-Q for the quarter ended June 30, 2008, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32
    
    Certification by the Chief Executive Officer and the Chief Financial Officer relating to
the Registrants Report on Form 10-Q for the quarter ended June 30, 2008, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.