
	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 2012 Annual Financial Statements and Notes. UGI Utilities does not recover a rate of return on its regulatory assets. The following regulatory assets and liabilities associated with Gas Utility and Electric Utility are included in our accompanying Condensed Consolidated Balance Sheets:



	December 31, 2012		September 30, 2012		December 31, 2011
Regulatory assets:
Income taxes recoverable	$	103.7	$	103.2	$	98.7
Underfunded pension and postretirement plans	184.8		188.2		148.7
Environmental costs	17.1		16.8		19.4
Deferred fuel and power costs	7.8		11.6		14.8
Removal costs, net	11.5		12.7		11.9
Other	5.7		5.9		8.0
Total regulatory assets	$	330.6	$	338.4	$	301.5
Regulatory liabilities:
Postretirement benefits	$	13.5	$	13.1	$	11.8
Environmental overcollections	3.1		2.9		4.7
Deferred fuel and power refunds	1.9		4.4		5.0
State tax benefits—distribution system repairs	7.7		7.4		6.5
Other	0.6		0.5		0.4
Total regulatory liabilities	$	26.8	$	28.3	$	28.4

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 December 31, 2012, September 30, 2012 and December 31, 2011 were $(0.4), $5.3 and $(2.6), respectively.

Electric Utility enters into forward electricity purchase contracts to meet a substantial portion of its electricity supply needs. Because these contracts do not currently qualify for the normal purchases and normal sales exception under GAAP, the fair values of these contracts are required to be recognized on the balance sheet with an associated adjustment to regulatory assets or liabilities in accordance with GAAP related to rate-regulated entities. At December 31, 2012, September 30, 2012, and December 31, 2011, the fair values of Electric Utility’s electricity supply contracts were losses of $8.2, $9.2 and $13.5, 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 or losses on FTRs at December 31, 2012, September 30, 2012, and December 31, 2011, were not material.

Allentown, Pennsylvania Natural Gas Incident. On October 3, 2012, UGI Utilities and the PUC Bureau of Investigation and Enforcement (“PUC Staff”) submitted a Joint Settlement Petition (“Joint Settlement”) to settle all regulatory compliance issues raised in the PUC Staff's formal complaint, issued on June 11, 2012 (“PUC Staff Complaint”), pertaining to a natural gas explosion which occurred on February 9, 2011, in Allentown, Pennsylvania and resulted in five deaths, several personal injuries and significant property damage (the “Incident”). The PUC Commissioners adopted a Joint Motion on January 24, 2013 (the “Joint Motion”) to adopt the Joint Settlement, with certain modifications. In addition to the commitments made by UGI Utilities in the Joint Settlement, the Joint Motion would require UGI Utilities to (i) pay a civil penalty amount that increases the amount provided in the Joint Settlement from $0.4 to $0.5; (ii) conduct a pilot new technology leak detection program in Allentown; and (iii) accept new reporting requirements governing its agreed upon 14-year cast iron and 30-year bare steel pipeline replacement program and distribution integrity management program, but would not require UGI Utilities to concede to having violated any regulation or operating procedure. We anticipate that the PUC Staff will issue in the near future a tentative order that incorporates the terms and conditions of the Joint Settlement, as modified. The provisions of the tentative order will become final and effective unless any party to the Joint Settlement objects to any of the terms and conditions included in the tentative order within five business days from the date of the issuance. The Company does not believe that the cost of complying with the requirements of the Joint Motion will have a material impact on UGI Utilities' consolidated financial position, results of operations or cash flows.