Executives: David Chong - Director, Finance and Utility Treasurer Bob Schoenberger - Chairman, President & CEO Mark Collin - SVP, CFO & Treasurer Tom Meissner - SVP &

COO
Analysts: Insoo Kim - RBC Capital

Markets
Operator: Welcome to the Unitil Q2 2016 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference call, Mr. David Chong. You may begin, sir.

David Chong: Good afternoon and thank you for joining us to discuss Unitil Corporation's second quarter 2016 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer; Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer; Tom Meissner, Senior Vice President and Chief Operating Officer; and Larry Brock, Chief Accounting Officer and Controller. We will discuss financial and other information about our second quarter on this call. As we mentioned in the press release announcing the call, we have posted that information, including a presentation, to the investor section of our website at www.unitil.com. We will refer to that information during this call.

Before we start, please note that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding the Company's financial condition, results of operations, capital expenditures and other expenses, regulatory environment and strategy, market opportunities and other plans and objectives. In some cases, forward-looking statements can be identified by terminology such as may, will, should, estimate, expect or believe, the negative of such terms or other comparable terminology. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties. The Company's actual results could differ materially.

Those risks and uncertainties include those listed or referred to on slide 2 of the presentation and those detailed in the Company's filings with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31, 2015. Forward-looking statements speak only as the date they are made. The Company undertakes no obligation to update any forward-looking statements. With that said, I will now turn the call over to Bob.

Bob Schoenberger: Thanks, David.

Thank you for joining us this afternoon. I will begin by discussing the highlights of our past quarter. Beginning on slide 5 of our presentation, today we announce net income of $2.5 million or $0.18 per share for the second quarter of 2016, an increase of $0.8 million or $0.06 per share over the second quarter of 2015. For the first half of this year, we reported net income of $13.4 million and $0.96 per share, a decrease of $1.9 million or $0.14 per share compared to prior year. The increase in earnings for the second quarter of 2016 was driven by higher natural gas sales margins, reflecting a higher natural gas distribution rate and customer growth.

The decrease in earnings for the first six months of 2016 reflects lower natural gas and electric sales and margins, driven by significantly warmer winter weather in 2016 compared to 2015. We estimate that weather impacted our earnings per share negatively by $0.25 year to date, primarily in the first quarter. Next, on slide 6, I want to share with you an update on the economic climate in our service areas. First, we estimate there is more than $0.5 billion of new construction in our service areas. The Portsmouth/Dover region is New Hampshire's fastest-growing area and Portland, Maine, is an incredibly vibrant city with continuous investment in both the private and public sector.

All this is backed by unemployment rates that are lower than the national average in every state we serve. On slide 7, you will see that we're committed to investing in our service areas. Over the past few years, our combined investment in gas and electric rate base has grown at an annual rate of 7%. Looking forward, we believe we have ample investment opportunities that allow us to continue to grow all these levels for the foreseeable future. Leveraging our investment growth, we're working to cultivate new opportunities for expansion of our customer base.

The results can be seen in our gas sales group that has averaged about 4% annually on a weather-normalized basis. I would also like to highlight the large customer and adjustable sector growth. Customer counts are up and unit sales were up 6.4% in the first half of 2016 compared to the same period of 2015. Another exciting opportunity for us comes from our recently improved rate surcharge mechanism in Maine. This mechanism allows us to economically extend our gas mains to new targeted service areas.

This rate surcharge mechanism is being piloted in Saco, Maine. It allows customers in the targeted area of Saco the ability to pay a rate surcharge instead of a large upfront payment or capital contribution to connect our system. This pilot program has the potential to add 1000 new customers to our system with roughly $1 million in annual distribution revenue just in the Saco pilot area alone. We believe that the successful implementation of programs like this will allow us to continue to reach new service areas beyond the current reach of our distribution system in Maine and New Hampshire, adding thousands of new customers in a cost-effective and efficient manner. Moving to slide 8, we continue to focus on our operations performance.

We have significantly improved electric system reliability over the last few years as a result of our vegetation management programs across our electric operation. We have met or exceeded all service quality metrics for safety, reliability and customer service and our customers have seen a sharp reduction in outages since 2010. Another recent achievement supporting reliability is our Kingston, New Hampshire, substation that began commercial operation in April. We have a second new substation in New Hampshire coming online in the second quarter of 2017. Our investment in these electric distribution substations will provide the capacity needed for continued load growth and reliability improvement while addressing constraints of existing substations.

Finally, slide 9 highlights Usource, the Company's nonregulated energy brokerage business which recorded revenues of $1.5 million and $3.1 million with the 3 and 6 months ended June 30, 2016, respectively, on a par with the same periods in 2015. Low energy prices are driving our Usource customers to lock in prices over multiyear contracts. As a result, our forward book has grown over 25% year over year. Now I will turn the call over to Mark Collin to discuss the financials. Mark?

Mark Collin: Thanks, Bob.

Good afternoon, everyone. Turning to slide 10, natural gas sales margins were lower for the first six-month period ending June 30, 2016, compared to the same period last year. As Bob indicated earlier, this past winter was extremely mild and we estimate that this warmer winter weather negatively impacted gas sales margin by approximately $0.22 per share compared to prior year and $0.12 compared to normal. However, the underlying growth profile of our gas utility operations remains intact, where you can see that the weather-normalized sales were up 2.3% year over year, driven by growth in large commercial and industrial sales of 6.4%. Now turning to slide 11, we estimate that this past winter negatively impacted electric sales margin as well by approximately $0.03 per share compared to prior year or $0.01 compared to normal.

We also continue to see the effect of energy conservation measures and our customers using energy more efficiently on our New Hampshire electric division sales, where we estimate approximately $1 million of our margin was negatively impacted by energy conservation and efficiency initiatives. In addition to our recently filed base rate case in New Hampshire, we currently are in a regulatory proceeding with our New Hampshire regulators to implement a loss base revenue mechanism which will help us to offset lost energy conservation revenues in the future. Turning to slide 12, we have outlined the major expense variances year to date. Depreciation and amortization and property tax expenses are higher due to our continued growth in our investment and utility plant. This will be a continuing theme as we grow our rate base in the future.

However, operation and maintenance and interests costs are lower which I will explain on the next slide. If we turn to slide 13, we're actively managing our operating costs. Companywide, we're focused on controlling costs and have implemented initiatives to help offset the effects of one of the warmest winters on record in New England. As a result, operations and maintenance expenses have decreased $0.6 million or 3.7% in the second quarter of 2016 compared to the same period in 2015. Overall, according to our benchmarking studies, our O&M costs per customer are in the low third of our New England peer group which speaks to the operation's achievements Bob highlighted earlier.

Interest expense in 2016 also decreased $0.6 million in the first 6 months compared to the same period in 2015 due to lower levels of long term debt. This reduction reflects sinking fund payments totaling $6.8 million in the fourth quarter of 2015 on high interest rate debt. Looking forward, we have substantial redemptions of higher cost debt of over $100 million due over the next 5 years. Turning to slide 14, we have provided an update on our rate case activity. On May 1 of this year, base rate relief and a new electric capital tracker went into effect for our Massachusetts subsidiary.

Combined, both gas and electric divisions achieved approximately $4 million in rate relief. The approved capital structure reflects a 52% equity ratio and a return on equity of 9.8%. In addition, we recently filed a base rate case for our New Hampshire electric subsidiary, as I mentioned earlier. The total revenue increase requested is $6.3 million and the Company recently received a $2.4 million of temporary rate relief beginning in July which we will reconcile to once final rates are approved. The filing reflects a capital structure with a 51% equity ratio and a request of a 10.3% return on equity.

Another feature of the filing is a multiyear rate plan for recovery of future capital additions. We expect a final rate decision in this proceeding in the second quarter of 2017. Slide 15 provides an update of several important regulatory proceedings. We're actively producing grid modernization initiatives in both our Massachusetts and New Hampshire electric subsidiaries. At a high level, these programs are an effort to improve the reliability, resiliency and operational efficiency of the electric grid, while empowering our customers to use their electricity more efficiently and facilitating the integration of distributed energy resources.

We're also participating in a net metering and distributed energy resource docket in New Hampshire. The purpose of this proceeding is to address net metering of distributed generation installations, including solar installations and to address the cost shifting occurring between distributed generation customers and non-distributed generation customers. Additionally, we continue to be active in proceedings regarding energy efficiency and renewable resource development in all three states we serve. Finally, our recent order by the Maine Public Utilities Commission on our retail choice proceeding was favorable to northern utilities, stabilizing our gas supply planning criteria and improving access to affordable and reliable gas supply to support our growth. Turning to slide 16, we provided an update on our financial results at the utility operating company level.

The chart shows the trailing 12-months actual earned return on equity in each of our regulatory jurisdictions. Our total return on equity is somewhat lower in the last 12 months ended June 30, 2016, reflecting the unseasonably warm weather in the first quarter. Also, as we have discussed in the past and as shown in the table on the right, we have long term capital cost trackers in place to recover a significant portion of current and future capital spending. And we implemented new base rates at our Massachusetts utility subsidiary starting in May of this year. Additionally, the UES rate case I just spoke of will help us to improve our rate of return as the year progresses, with temporary rates granted in July which we will reconcile to with the final rate decision.

Now this concludes our summary of our financial performance for the period. I will turn the call over to the operator, who will coordinate your questions. Thank you.

Operator: [Operator Instructions]. Our first question comes from Insoo Kim with RBC Capital Markets.

Insoo Kim: Just a couple of questions from me, the first is I know you touched on the O&M savings given the weather impact this year and how you are actively trying to manage it. Is that something that we should on a year-over-year basis continue to see for the balance of the year?

Mark Collin: Yes, we have implemented programs that should go throughout the year. We're very focused on our O&M across the Companywide and we expect to continue to see those savings in the year. Having said that, it is important to recognize that in the first quarter in particular, when we began some initiatives and some of that showed up in the second quarter, one of the O&M savings or one factor contributing to the O&M savings is the difference in weather. And that is our costs will follow the weather-related events and impacts.

So in the prior year, as you know, we had one of the most extreme snow winters and very cold weather. That led to some additional cost on both the gas and business side and the electric side of the business. Things such as snow removal, repair and maintenance costs and things are higher in that type of environment. So we have captured some savings as a result of the warmer weather in the period. So we've captured that, but in addition to that, we have also implemented specific initiatives and it will show up throughout the year as we control our costs to try to make up some of the reduced revenue we saw in the first quarter in particular.

Insoo Kim: And then turning to the various initiatives, regarding the TAB program, I know Saco, Maine, is now under the construction right now, with I guess construction to be completed in a couple years or so. Where are some of the other areas that you are looking to expand the TAB program? And what level of rate base growth or level of rate base could be added through this program in the next few years?

Bob Schoenberger: This is Bob. We're going to have Tom Meissner give you an update on the TAB program. Tom?

Tom Meissner: Well, first of all, with regard to the TAB that we currently started, as you indicated, we're in the first year of a three-year program. And the focus this year is really extending the mains into those areas.

So this year, we're installing 6 miles of a total of 9 miles of new mains in Saco. And we're currently over 60% complete with that and the mains actually should be completed by the end of August, currently slightly ahead of schedule, slightly ahead of budget. In terms of the new areas that you talked about, we're studying currently two other communities in Maine who we believe are both attractive candidates for a similar program. And if we're successful in implementing in those communities, I think it will be a program of approximately the same size as we're implementing in Saco.

Insoo Kim: And timeline for getting those two other areas proposed and approved? When could we expect that?

Tom Meissner: What we'd like to do is get a year of experience in Saco before we pursue other locations.

But assuming that we're successful there, I assume we would be making filings probably next year and be in a position to implement the year after that in other areas.

Operator: [Operator Instructions]. I'm not showing any further questions at this time. I would like to turn the call back over to our hosts.

David Chong: Thank you for joining us for our second quarter and we look forward to discussing with you next quarter.

Thank you. Bye.

Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.