Utility Regulatory Assets and Liabilities and Regulatory Matters

For a description of the Company’s regulatory assets and liabilities other than those described below, see Note 8 to the Company’s 2011 Annual Financial Statements and Notes. UGI Utilities does not recover a rate of return on its regulatory assets. The following regulatory assets and liabilities associated with Gas Utility and Electric Utility are included in our accompanying Condensed Consolidated Balance Sheets:



	June 30, 2012		September 30, 2011		June 30, 2011
Regulatory assets:
Income taxes recoverable	$	99.9	$	97.9	$	92.7
Underfunded pension and postretirement plans	144.6		150.7		116.0
Environmental costs	16.6		19.5		20.7
Deferred fuel and power costs	9.8		12.2		7.8
Removal costs, net	11.8		12.3		11.2
Other	8.3		7.8		8.9
Total regulatory assets	$	291.0	$	300.4	$	257.3
Regulatory liabilities:
Postretirement benefits	$	12.3	$	11.5	$	11.6
Environmental overcollections	3.7		4.7		6.2
Deferred fuel and power refunds	10.3		6.6		22.4
State tax benefits—distribution system repairs	7.0		6.3		6.2
Other	0.7		0.7		—
Total regulatory liabilities	$	34.0	$	29.8	$	46.4

Deferred fuel and power—costs and refunds. Gas Utility’s tariffs and Electric Utility’s tariffs contain clauses which permit recovery of all prudently incurred purchased gas and power costs through the application of purchased gas cost (“PGC”) rates in the case of Gas Utility and default service (“DS”) rates in the case of Electric Utility. The clauses provide for periodic adjustments to PGC and DS rates for differences between the total amount of purchased gas and electric generation supply costs collected from customers and recoverable costs incurred. Net undercollected costs are classified as a regulatory asset and net overcollected costs are classified as a regulatory liability.

Gas Utility uses derivative financial instruments to reduce volatility in the cost of natural gas it purchases for firm- residential, commercial and industrial (“retail core-market”) customers. Realized and unrealized gains or losses on natural gas derivative financial instruments are included in deferred fuel costs or refunds. Unrealized gains (losses) on such contracts at June 30, 2012, September 30, 2011 and June 30, 2011 were $0.3, $(3.1) and $(1.1), respectively.

Electric Utility enters into forward electricity purchase contracts to meet a substantial portion of its electricity supply needs. During Fiscal 2010, Electric Utility determined that it could no longer assert that it would take physical delivery of substantially all of the electricity it had contracted for under its forward power purchase agreements and, as a result, such contracts no longer qualified for the normal purchases and normal sales exception related to derivative financial instruments. As a result, Electric Utility’s electricity supply contracts are required to be recorded on the balance sheet at fair value with an associated adjustment to regulatory assets or liabilities in accordance with Electric Utility’s DS recovery mechanism. At June 30, 2012, September 30, 2011 and June 30, 2011, the fair values of Electric Utility’s electricity supply contracts were losses of $13.1, $8.7 and $10.1, respectively, which amounts are reflected in current derivative financial instrument liabilities and other noncurrent liabilities on the Condensed Consolidated Balance Sheets with equal and offsetting amounts reflected in deferred fuel and power costs in the table above.

In order to reduce volatility associated with a substantial portion of its electric transmission congestion costs, Electric Utility obtains financial transmission rights (“FTRs”). FTRs are derivative financial instruments that entitle the holder to receive compensation for electricity transmission congestion charges when there is insufficient electricity transmission capacity on the electric transmission grid. Because Electric Utility is entitled to fully recover its DS costs, realized and unrealized gains or losses on FTRs are included in deferred fuel and power—costs or refunds. Unrealized gains on FTRs at June 30, 2012, September 30, 2011 and June 30, 2011 were not material.

Distribution System Improvement Charge. On April 14, 2012, legislation enabling gas and electric utilities in Pennsylvania to seek surcharge recovery of eligible capital investment in distribution system infrastructure improvement projects became effective. The surcharge enabled by the legislation is known as a distribution system improvement charge (“DSIC”). The primary benefit to a company from a DSIC surcharge is the elimination of regulatory lag, or delayed rate recognition, that occurs under traditional ratemaking relating to qualifying capital expenditures, for up to five percent of distribution rates. To be eligible for a DSIC, a utility must have filed a general rate filing within five years of its petition seeking permission to include a DSIC in its tariff. We are currently evaluating the potential effect of this legislation on our four regulated utilities. Filings to implement a DSIC surcharge may be filed no earlier than January 2, 2013.