Executives: David Chong - Director of Finance, Subsidiary Treasurer Tom Meissner - Chairman, President and Chief Executive Officer Mark Collin - Senior Vice President, Chief Financial Officer and Treasurer Larry Brock - Chief Accounting Officer and

Controller
Analysts: Julien Dumoulin-Smith - Bank of America Insoo Kim - RBC Capital

Markets
Operator: Good day, ladies and gentlemen. And welcome to the Unitil First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. David Chong. Sir, you may begin.

David Chong: Good afternoon. And thank you for joining us to discuss Unitil Corporation's first quarter 2018 financial results.

With me today are Tom Meissner, Chairman, President and Chief Executive Officer; Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer; and Larry Brock, Chief Accounting Officer and Controller. We will discuss financials and other information about our first quarter results on this call. As we mentioned in the press release announcing the call, we have posted that information, including a presentation, to the Investors section of our Web site at www.unitil.com. We will refer to that information during this call. Before we start, as you can see on Slide 2, the comments made today about future operating results or future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted. Statements made on this call should be considered together with cautionary statements and other information contained in our most recent Annual Report on Form 10-K and other documents we have filed with, or furnished to, the Securities and Exchange Commission. Forward-looking statements speak only as of today, and we assume no duty to update them. With that said, I’ll now turn the call over to Tom.

Tom Meissner: Thanks, David.

And thanks everyone for joining today. Before we begin the presentation, I did want to just take a minute and tell you how honored I am to be succeeding Bob as CEO of Unitil. I plan to pursue many of the same endeavors and strategic goals that enabled us to achieve record financial results and total market returns greater than both the S&P 500 in utility indices over the last five years. We will also carry on the same performance oriented culture that Bob has instilled in the company over the last 20 years. And as we look to the future, I'm very optimistic about where we are as a company.

I am going to begin today's presentation on Slide 4 where today we announced net income of $15.6 million or $1.06 per share for the first quarter of 2018. This is an increase of $3.2 million or $0.18 per share over the first quarter of 2017. We're pleased with our first quarter results, which benefited from continued customer growth, colder winter weather and our successful regulatory agenda. Turning to Slide 5, we've highlighted some of our significant recent accomplishments. We're currently generating record earnings, while serving a record number of customers.

In addition to strong financial results, we continue to focus on superior operational performance to ensure the safe reliable delivery of electricity and natural gas that our customers expect. We will continue to focus on expanding and upgrading our distribution system to support future growth while delivering exceptional service to our customers. Turning to Slide 6. We remain committed to exceeding our customers' expectations. We're very pleased that 90% of our customers report being satisfied with our services.

Customers rate us particularly higher and providing reliable service being responsive to their needs and being a company they can trust. Our new state-of-the-art customer information system, which was fully operational at the end of last summer, has transformed our communications capabilities. Our customers are now able to interface with us over a broad suite of digital and social interfaces that are demanded in today's environment. Finally, we have been recognized for our focus on our customers and on our communities by third party organizations, such as the Red Cross. We are committed to being a responsible corporate partner with the communities we serve.

Moving on to Slide 7, we implement many industry leading practices in our operations. Our gas emergency response and safety programs are best-in-class and we continue to receive recognition for our efforts in those areas. We maintain high safety standards and we are focused on upgrading and replacing our aging natural gas distribution systems. Unitil's natural gas distribution system is currently 91% modernized, which is well ahead of our New England Utility peers. On the electric side, we remain focused on reliability and we've seen our customer average interruption duration decreased by 9% annually since 2010.

This decrease is due in part to our industry leading vegetation management and emergency management programs. Slide 8 presents our multi-fascinated strategy that will facilitate growth well into the future. On the gas side of the business, we continue to have extensive growth opportunities. First, we have relatively low customer penetration of 60% along our existing mains, which provides for thousands of potential low cost customer conversions. We have also been actively upgrading and expanding our gas system with extension projects to that added approximately 100 miles of new distribution mains over the past five years.

Our targeted area build-out program where we focus on expansion into entire towns continues to be highly successful. We currently have two such projects in the cities of Saco and Sanford Maine, which represent a market potential of around 3,000 customers. In terms of infrastructure replacement and safety, we continue to make progress on our cast iron and bare steel replacement programs. Our New Hampshire program was completed last year, resulting in 100% modernized system in that state. Our Maine infrastructure replacement program is scheduled to be completed by 2024, and our Massachusetts program is a little further out with anticipated completion in little over 15 years.

All of these programs have been supported by our regulators, and we have established the capital track and recovery mechanisms in each state. Turning to the electric side of the business. We believe there are significant trends in the industry to modernize the electric grid. Our regulators in both Massachusetts and New Hampshire support grid modernization initiatives for new investments in the electric distribution system. To give you an idea of the scope of this investment, the current 10 year preliminary planned spending is $24 million Massachusetts alone.

While the New Hampshire plan is still under development, it could be over $60 million over the next 10 years, if sized comparably to Massachusetts. We continue to be active participants in the proceedings in both states and we look forward to providing our customers with a more reliable in modern electric grid. Now, I'll turn the call over to Mark Collin who will discuss our financial results for the quarter.

Mark Collin: Thanks, Tom. Good afternoon everyone.

I will review a few of the financial results for the first quarter. Please turn to Slide 9. Natural gas sales margin was $39.9 million in the three months ended March 31, 2018, resulted in an increase of $1.9 million or 5% compared to the same period 2017. Gas sales margin in the first quarter of 2018 was positively affected by colder weather and customer growth of $1.8 million and higher natural gas distribution rate of $1.6 million, partially offset by lower revenue of $1.5 million to account for the reduction in the corporate income tax rate to 21% under the Tax Cuts and Jobs Act of 2017. Total Therm sales of natural gas increased 9.5% in the three months ended March 31, 2018 compared to the same period in 2017.

Based on weather data collected in the Company's natural gas service areas, there were 10% more heating degree days in the first quarter of 2018 compared to the same period in 2017, which contributed a positive $0.05 to EPS. Compared to normal, heating degree days were relatively flat in the first quarter 2018, which had a marginal impact on EPS. Finally, the number of total gas customers served has increased by approximately 1,500 customers in the last 12 months. Next on Slide 10. Electric sales margin was $22.3 million in the three months ended March 31, 2018, resulting in an increase of $0.3 million or 1.4% compared to the same period in 2017.

Electric sales margin in the first quarter 2018 was positively affected by higher electric distribution rates of $0.9 million, as well as colder weather and customer growth of $0.2 million. Again, partially offset by lower revenue of $0.8 million to account for the reduction in the corporate income tax rate under the tax act. Electric sales for the first quarter of 2018 were up compared to prior year by 5.8% and a number of electric customer serve was up over 500 in the last 12 months. Turning to Slide 11, we have outlined the major expense variances year-to-date. Operation and maintenance expenses increased $1.3 million in the three months ended March 31, 2018 compared to the same period in 2017.

The change in O&M expenses reflects an increase in compensation and benefit costs of $0.7 million, bad debt expenses of $0.2 million and higher utility operating costs of $0.4 million. Depreciation and amortization expense decreased $0.2 million in the three months ended March 31, 2018, reflecting lower amortization of deferred major storm costs, partially offset by higher utility plant and service and amortization of information system and software costs. Taxes, other than income taxes, increased $0.3 million in the first three months of 2018, primarily reflecting higher local property taxes on higher levels of utility plant assets and service. Net interest expense was essentially unchanged in the three months ended March 31, 2018, reflecting higher interest on long-term debt, offset by lower net interest expense on regulatory assets and liabilities, and lower levels of short-term debt. I would also like to point out two accounting changes that took effect this quarter.

First, we adopted ASU number 217-07 in the first quarter of 2018, which requires the presentation of certain pension costs outside of operating income. These costs are now reflected in the other expense income net line of our income statement, and were reflected both the current and historical periods. Second, we adopted ASU number 2014-09, which affected the presentation of revenues for Usource, our non-regulated energy brokering business in the current period. This accounting standard requires that payments made by Usource to third parties, or what we call channel partners for revenue-sharing agreements, are recognized as a reduction from revenue where those payers were previously recognized as an operating expense. This classification change is presented only in the current period.

So that $0.3 million of the $0.4 million variance for the quarter is attributable to this accounting change. Lastly, income taxes decreased by $2.9 million for the three months ended March 31, 2018, reflecting $2.3 million from a lower tax rate on higher pretax earnings, and the current tax benefit of $0.6 million related to book tax items that are not previously included in customers’ rates. Looking forward, for the remainder of 2018, we expect to maintain a lower effective tax rate of 23% to 24%, and that’s a combined federal and state tax rate compared to our combined federal and state statutory tax rate of a little over 27% due to this book tax benefit. In 2019, we expect to return to effective rate closer to our statutory rate. Slide 12 provides a trailing 12 months actual earned return on equity in each of our regulatory jurisdictions.

Unitil on a consolidated basis earned a total return on equity of 9.9% in the last 12 months ended March 31, 2018. I point out that these results are not weather normalized. We have a constructive regulatory environment that is supportive of growth initiatives and investments to provide our customers with safe and reliable service at a reasonable cost. We have long-term plans or trackers established across nearly all our utility subsidiaries. The chart also provides a summary of the impact of recent federal tax legislation on each of our regulated utilities.

Importantly, in our two base rate case proceedings filed last year, we incorporated the effect of the tax act. We completed the Maine gas division with $2.1 million increase related to the test year adjusted cost of service and $2.2 million decrease for the Tax Act for a net reduction of $0.1 million effective March 1, 2018. The rate case also provided for lower ongoing depreciation expense of $0.5 million annually. In our natural gas division, we recently entered into a settlement agreement, which if approved, will provide for $2.6 million increase related to the test year adjusted cost of service and $1.7 million decrease for the tax act for a net increase of $0.9 million, which will be reconciled to January 1, 2018. The settlement also includes the capital tracker stepped increase of $2.3 million for effect May 1, 2018.

I'll also point out that settlement is uncontested. For the remainder of our jurisdiction, we've shown capital tracker rate adjustments, as well as the impact of tax act for this year. Now, this concludes our summary of our financial performance for the period. I'll turn the call over to the operator who will coordinate questions. Thank you.

Operator: [Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Bank of America. Your line is now open. Julien Dumoulin-Smith: So I suppose first starting with the grid modernization stuff. Can you talk about the impact on CapEx as you see it just in terms of the delay and how you think about the timelines to true that up? But then secondarily you talked about New Hampshire equivalent of the $60 million over 10 years. What's the process there and when do we start to see some of that ultimately flowing into capital?

Mark Collin: In Massachusetts, I think we're currently waiting for an order that we expect imminently and likely within the second quarter although, there's no hard deadline for that.

Once we get the order, we already have the plan, so we'll begin the process of essentially firming up and going out to bid on the types of investments that we intend to make. In New Hampshire, they're following virtually an identical process to Massachusetts, so we expect sit to be very similar. But we, at this point, are still waiting for a commission order on the report that resulted from the stakeholder process in New Hampshire. As soon as we get the order on that then we'll be putting together our plan in New Hampshire. And it is going to be commensurately larger investments just because of the larger customer base, distribution system and substations.

Julien Dumoulin-Smith: And perhaps just following up on the results of late here just with respect to Unitil Energy, and the returns on equity seen on a trailing basis. Is that more seasonal here or is there something about 2018 as you think about it, especially given the forthcoming rate increase in what seems like the May timeframe? How does that frame the overall annual expectations for that sub?

Mark Collin: We have seen an uptick in the economy and we have seen some improvement in electric sales. It's a division in New Hampshire that's not decoupled, so it does benefit from the sales increases. And I think that as a result of that, we've seen some improvement in performance. As we go forward, one of the important aspects of our tracker systems is it allows us to keep up with the level of capital expenditures we're making.

So while we're still going to benefit from a tracker increase, as you said in May of this year, we also are bringing more capital and to rate base more investment, more depreciation, et cetera. So on an overall basis, I think we expect to continue to be able to earn our overall rate of return on Unitil Energy, which is -- that's where we're at and we may have periods of continued over-performance. But overall, I think it will be around our allowed return. Julien Dumoulin-Smith: And then can you come back to the Fitchburg side of things. Obviously, there are conversely things on the 8% zip code.

What's the timing and expectation for improvement there probably by a rate case?

Mark Collin: There is legislation in Massachusetts that requires electric utilities to file every five years, gas utilities every 10 years. Our last test year in Fitchburg was 2014, so arguably five year from a test year perspective would be a 2019 test year just following the legislation. There may be some interpretation there. We're still trying to -- as with all legislation, you can interpret would that be 2019 or 2020. But in any event, sometime in that timeframe is going to be required.

If we do it earlier, we'll just be based on evaluation that we felt that that was needed. On the gas side, it's a little longer as I said 10 years and that will be dependent upon the particular earnings of the gas. In both those cases, as you see on the schedule on slide 12, Julian, there is new track or mechanisms that we recently implemented there. And so we do expect that to again help maintain the overall earnings over a longer period of time without the need for rate cases quite as often. And as those trackers come in, our goal is to try to manage expenses and manage other areas to try to bring up those returns without the need for a rate filing.

And then last I’ll just mention in Pittsburgh, because we've talked about this before. We do have some lower expected amortization expenses related to our storm cost falling off, which will also help contribute to the returns in that division. Julien Dumoulin-Smith: But to be clear here, I mean it's only because the delay in filing out for 2019 would only be because you anticipate an uplift that would be sufficient out of the trackers that are pending here?

Mark Collin: Yes, the trackers in both are our own cost management and third as I indicated the annualization of these costs, the storm related amortization that they're no longer going to -- they're going to term out basically. But because they're in base rates the fact they term out there’s no adjustments or rate storm.

Operator: Our next question comes from Insoo Kim with RBC Capital Markets.

Your line is now open.

Insoo Kim: In terms of the tax items, could you just elaborate a little bit more on the $0.6 million of book tax items that you mentioned that was a benefit this quarter. And is that more of one-time just for this quarter or could we see some of those items in future quarter this year?

Tom Meissner: In terms of the EPS impact, this is a quarterly impact of the -- as we've discussed, the $1.8 million of ADIT revaluation that was done that essentially being recognized this year. So the amount being recognized ratably over the year, there might be a little bit into 2019. But you can expect an impact every quarter, albeit in the softer quarters or the lower quarters, it will follow our income.

So it will be a less impact in where our income quarters are lower more of an impact but over the whole period that whole $1.8 million would be reflected. We got a pretty good write-up on that on Page 51 of our 10-Q and hopefully, that lays it out pretty clearly. And just staying on that topic Insoo for the year, we expect our -- as I said in my comments is that the effective tax rate will be around 24%, I think for the year, that’s a combined federal and state and next year we’ll probably return more to the 27% range.

Insoo Kim: And then in terms of your customer growth, what was the year-over-year customer growth in the gas and electric businesses? And was the impact of the benefit from customer growth somewhat higher than historic level this quarter?

Tom Meissner: No, I think we’ve seen pretty consistently and have been able to grow fairly consistently the gas business in that range of 1,200 and 1,500 customers a year. And the quarterly impact is as we do trailing 12 month basis that’s about what it looks like and we’ve been able to do that.

If anything, we’re optimistic that we might see a little more of a uptick. Looking forward on that be on the higher end of that range, if not better because of the improving economy and particularly in the areas we serve and the amount of development that we’re seeing going on in both the commercial and residential sector. And that will tend to follow on electric. Although, we don't expect to see the same robustness for obvious reasons between electric and gas; the gas we have a lot of unserved customer sitting on our pipeline that we’re still attracting. But again, our gas has grown, I think 500 customers in the last trailing period and I think we’ve been as high as 800-900 in certain periods or even little more, and that will fluctuate a little bit.

But again, we’re fairly optimistic that looking forward, we expect to see good growth there.

Insoo Kim: And then finally from me on, Granite State, FERC put out a note, investigating the tax reform impact on rates and whether there are any rates are unjustified or unfair. Based on what you know and the rate side of Granite State. Do you see any potential impact as just minor or could that be a scenario where the impact is a bit more material for you guys?

Tom Meissner: We were in the middle of a process, much like we have rate cases in northern in both New Hampshire and Maine that helped us address the tax act in a rate case, which if you ideally can do it on, that's clearly the best time to doing it and the best place to do. You can get all the items lined up.

Similarly with Granite we were in the middle of settlement discussions, because of our last settlement there and what they call a comeback provision requiring us to file a rate case this year for Granite. And we’re getting ready to do that. But in lieu of that, we've been able to work with the parties to address the tax act, and we don't expect the act itself to have a material impact on much Granite.

Operator: [Operator Instructions] I am showing no further questions. Ladies and gentlemen, thank you for your participation in today’s conference.

This does conclude the program and you may now disconnect. Everyone have a great day.