Executives: David Chong - IR Tom Meissner - Chairman, President & CEO Mark Collin - SVP, CFO &

Treasurer
Analysts:

Operator: Good day, ladies and gentlemen and welcome to Unitil Corporation's Second Quarter 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, today's conference is being recorded.

I would now like to turn the call over to Mr. David Chong, Investor Relations. Sir, you may begin.

David Chong: Good afternoon. And thank you for joining us to discuss Unitil Corporation's second 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; Larry Brock, Chief Accounting Officer and Controller; and Todd Black, Senior Vice President of External Affairs and Customer Relations. We will discuss financial and other information about our second 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 website 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: Thank you, David and thanks everyone for joining us today.

I'm going to begin on Slide 4 where today we announced net income of $3.6 million or $0.24 a share for the second quarter of 2018, an increase of $0.5 million or $0.01 per share over the second quarter of 2017. For the six months period ending June 30, the company reported net income of $19.2 million or $1.30 a share which was an increase of $3.7 million or $0.19 per share compared to the same six months period in 2017. The increase in earnings in 2018 was driven by higher sales margin reflecting customer growth, colder winter weather and new distribution rates compared to 2017. Turning to Slide 5, we've highlighted some recent noteworthy accomplishments. We're currently earning at record levels and continue to increase our customer base.

In addition to strong financial results, we are focused on superior operational performance to ensure the safe and reliable delivery of natural gas and electricity to all of our customers. We're also pleased to have achieved regulatory approval in all of our operating jurisdictions of rate adjustments related to the Tax Cuts & Jobs Act of 2017 or TCJA for short. During these proceedings we adjusted rates across multiple jurisdictions in a timely manner demonstrating the healthy relationship we have with our regulators. On a trailing 12 month basis, we're currently earning a return-on-equity of 10.1% on a consolidated basis which is in line with the authorized returns allowed by our regulators across our jurisdictions. Turning to Slide 6; we consider the location of our service areas to be a fundamental strength which generates significant growth opportunities for the company.

We're fortunate to provide service in thriving regions such as Greater Portland Maine and the sea coast region of New Hampshire; both regions are cultural hubs that continue to attract new jobs and businesses. We estimate that there is currently over $6.8 billion of new construction planned or underway across our service areas older the next decade including office buildings, hotels, condominiums and mixed juice developments. Slide 7 further highlights several notable economic developments across our service areas. We've identified hundreds of projects including new commercial and residential buildings that are either in the planning stage or under construction within our New Hampshire and Maine service areas. To put this economic development into perspective, approximately a quarter of the population of the states of New Hampshire and Maine reside within our service areas but of the total new construction spending identified in these two states, estimated at 12.6 billion, over 50% of this amount is in our territories.

Clearly, our service areas are the economic engines of New Hampshire and Maine and are the drivers of new job creation and housing. We are excited about the growth in these markets and the beneficial impact it will have on our customers' overtime. Turning to Slide 8, we expect robust economic activity in our service areas to continue to provide growth opportunities. We have been actively expanding our gas system with expansion projects that have added approximately 100 miles of new distribution mains over the past five years. We are also achieving rate-based growth through our investments in infrastructure replacement and safety programs which are fully tracked with cost recovery mechanisms.

In New Hampshire our infrastructure replacement program ended last year fully modernizing the gas infrastructure in that service area. Our Maine gas infrastructure replacement program is on-schedule to be completed by 2024, and our Massachusetts program is slightly further out with an anticipated completion approximately 15 years. Our targeted area build out program will refocus on expansion into densely populated areas continues to be highly successful. We currently have two programs in Maine in the cities of Saco and Sanford targeting a market potential of approximately 3,000 customers. In New Hampshire we recently made filings with the permission to add three additional towns to our natural gas franchise.

These towns are contiguous to our existing service area and provide additional opportunities to economically expand our gas system to reach new customers and new markets. Finally, we have relatively low customer penetration of 60% along our existing distribution mains which provides for thousands of potential low cost customer conversions overtime as customers replace their heating equipment. On the electric side, we continue to have incremental investment opportunities through grid modernization initiatives. In Massachusetts we have regulatory approval for the first three years of a 10-year plan with targeted spending of over $25 million over 10 years. In New Hampshire, our program is still in development and we are working with the regulatory commission to implement a program of over $60 million.

Slide 9 illustrates the price advantage of natural gas. As I indicated, natural gas prices are currently 40% favorable compared to heating oil prices which continues to contribute to our growth. We anticipate that the opportunity to reduce heating bills will continue to motivate customers to convert to natural gas overtime which in turn increases our customer base. Given our low penetration rate and the prevalence of heating oil in the northeast, we should see on-demand [ph] customers taking advantage of these low cost conversions. 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 our financial results at the halfway point of this year. As Tom just reviewed, we had a solid second quarter with net income of $3.6 million or $0.24 per share, and for the six month period we reported net income of $19.2 million or $1.30 per share, up $0.19 or 17% over the same six month period in 2017. Now let's take a look of how we got there.

Turning to Slide 10; natural gas sales margins were $22.9 million and $62.8 million in the three and six months ended June 30, 2018 respectively, which reflect increases of $2.4 million and $4.3 million respectively compared to the same periods in 2017. Gas sales margin in the for the six months of 2018 was positively affected by higher natural gas distribution rates of $4.8 million, including as a result of the final base rate award in the company's New Hampshire gas utility, a concurrent non-recurring adjustments to increase revenue and O&M expenses by $1.2 million in the second quarter of 2018 to reconcile permanent rates and deferred cost to the temporary rates which were effective July 1, 2017. Gas margin in the for the six months of 2018 also reflects the positive effect of colder weather and customer growth on sales volume of $2 million and lower revenue of $2.5 million to account for the reduction in rates due to the lower corporate income tax rate of 21% under the TCJA. The reduction in revenues related to the TCJA also reflects a lower in offsetting provision for income taxes in the period. Natural gas therm sales increased 2.8% and 7.2% in the three and six month periods respectively compared to the same periods in 2017.

The increase in gas therm sales and the company service areas was driven by customer growth and for the six month period colder weather in 2018 compared to 2017. There were 9% more heating degree days in the first six months of 2018 compared to the same period in 2017. The company estimates that weather normalized gas therm sales excluding decoupled sales were up 2.8% in the first six months of 2018 compared to the same period in 2017. As of June 30, 2018 the number of total natural gas customer served has increased by approximately 1,550 in the last 12 months or about 2%. Next, turning to Slide 11; electric sales margins were $22.3 million and $44.6 million in the three and six months ended June 30, 2018 which reflects decreases of $1 million and $0.7 million respectively compared to the same periods in 2017.

Electric sales margin in the first six months of 2018 was positively affected by higher electric distribution rates of $1.7 million, as well as colder weather and customer growth of $0.5 million, partially offset by non-recurring adjustment that was in the second quarter of 2017 but not recorded this year that increased revenue by $1.4 million in '17 to reconcile temporary rates to the company's New Hampshire electric utility which were effective July 1, 2016. Electric margin also reflects lower revenue of $1.5 million in 2018 to account for the reduction in rates due to the lower corporate income tax rate of 21% under the TCJA. The reduction in revenues related to TCJA also reflects a lower and offsetting provision for income taxes in the period. Total electric kilowatt hour sales increased 3.3% and 4.6% in the three and six month periods ended June 30, 2018 compared to the same periods in 2017 reflecting customer growth, higher usage by C&I customers and an improving economy, and the positive impact of colder winter weather for the six months period. As of June 30, 2018 the number of total electric customers served has increased by approximately 600 in the last 12 months.

Now turning to Slide 12, excluding the non-recurring adjustment to increase operation and maintenance expenses by $1.2 million in the second quarter of 2018 which was offset by a corresponding increase in gas revenue as I just highlighted in the margin discussion, total O&M expenses increased $0.1 million and $1.4 million for the three and six months ended June 30, 2018 compared to the same period in 2017. The increase in the three month period reflects higher labor cost of $1.1 million offset by lower professional fees of $0.8 million and lower utility operating cost of $0.2 million. The increase in the six month period reflects higher labor cost of $1.8 million, and higher utility operating cost of $0.4 million offset by lower professional fees of $0.8 million. Depreciation and amortization expense increased $0.8 million and $0.6 million in the three and six months periods respectively compared to the same periods in 2017. These increases reflect higher utility plant and service and higher amortization of software costs, partially offset by lower amortization of deferred major storm costs which are being amortized for recover over multi-year periods.

For the six months ended June 30, 2018 taxes other than income taxes have increased $0.3 million compared to the same period in 2017, this increase reflects higher payroll taxes corresponding to higher labor cost. Interest expense net increased $0.6 billion in each of the three and six months ended June 30, 2018, compared to the same periods in 2017. These increases primarily reflect interest on higher levels of long-term debt. In the first quarter I mentioned the adoption by the company of ASU number 2014-09 which affected the presentation of revenues for Usource, our non-regulated energy brokering business prospectively only. 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 payments were previously recognized as an operating expense.

This prospective change for Usource revenues and the primary driver of the decline in revenues shown in our financial statements for Usource. Lastly, federal and state income taxes decreased by $2.2 million and $5.1 million for the three and six months ended June 30, 2018, compared to the same periods in 2017. The decrease in the three month period reflect $1.7 million from the lower tax rate on a lower pretax earnings in 2018, and the current tax benefit of $0.5 million on book tax, temporary differences turning at the lower income tax rate from the TCJA in 2018. The decrease in the six month period reflects $4 million from the lower tax rate on the lower pretax earnings in 2018 and the current tax benefit of $1.1 million of book tax temporary differences turning at the lower income tax rate from the TCJA in 2018. Looking forward for the remainder of 2018, we expect to maintain a lower effective income tax rate in a range of 18% to 21%.

Slide 13 gives a brief summary of our financial position. We had strong investment grade ratings with a balance 50-50 equity-debt capital structure. We are well positioned to lower our weighted average cost of capital by financing higher cost long-term debt over the next five years as we refinance over $80 million of maturing long-term debt. We're also pleased that yesterday we entered into a new credit agreement; the second amended and restated credit agreement which provides for a new five year maturity date out to July of 2023. We also implemented an extension option where we can extend the maturity of the facility for one year upto two additional times.

We increase the coordinate [ph] feature of the facility from $30 million to $50 million to provide ample liquidity for future growth initiatives. Lastly, we attained improved pricing from LIBOR plus 1.25% to LIBOR plus 1.125%, about 12.5 bips improvement which reflects continued improvements in our financial and credit statistics. Slide 14 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 10.1% in the last 12 months ended June 30, 2018 which is in line with our authorized returns. 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.

We have long-term plans or cost trackers established across nearly all of our utility subsidiaries. The chart also provides a summary of the impact of recent federal tax legislation on each of our regulated utilities which have been fully approved by all our regulators. During the second quarter of 2018 we received approval for our New Hampshire gas utility rate case providing for $2.6 million annual increase in revenue partially offset by a TCJA reduction of $1.7 million. In that rate case we were also awarded a capital tracker mechanism with $2.3 million approved effective May 1, 2018. For the remainder of our jurisdictions, we've shown capital tracker rate adjustments, as well as the impact of the TCJA for this year.

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

Operator: [Operator Instructions] And our first question will come from the line of Shelby [ph] from RBC Capital Markets.

Unidentified Analyst: Just a quick clarification on your numbers on comparability.

So obviously you have this 2017 electric number of 1.4 million that was non-recurring. Are there any other numbers that we should be thinking about this year that might affect comparability for 2019?

Mark Collin: There is two non-recurring that we mentioned in the financial report. One is the revenue adjustment that you're talking about that occurred in '17 related to temporary rates in the electric division which was set in 2016. And there was also the O&M revenue adjustment that just happened this quarter but $1.2 million which again is a non-recurring O&M adjustment increases O&M in the period relative to the prior period that also is non-recurring but those are the only two.

Unidentified Analyst: But as recent to '19, the -- obviously the '17 is no longer an issue, the $1.2 million is an issue and that one we do have to adjust as we think about '19.

And I just want to make sure there is nothing else in the '18 of this quarter's number or last two quarters number that could not materialize in this first and second quarter of 2019?

Mark Collin: No, there is no adjustment in '19.

Unidentified Analyst: And then Tom, you did mention that you saw a decade worth of investments in New England. We should be thinking about that as being a bit front-loaded or do you -- what kind of distribution of that investment activity in your territory?

Tom Meissner: I don't think we've gone through an exercise of trying to determine timing of all of that. The only thing I can say is there is a great deal of construction ongoing now, and a great deal of the construction that we've identified is planned to be in construction within the next one to three years; so I do think that we're going to see a lot of construction in the near-term.

Unidentified Analyst: And then I guess what re-caught my attention was the weather normalized electric unit sales, 3.3, which is quite unusual.

Do you have a sense of how sustainable that is given the construction expectations that you have? Is that unusual or should we think about that number being indicative of what you might see going forward?

Tom Meissner: In terms of electric sales, in terms of new meters and new services those are up only a little over 0.5% year-over-year, so a lot of that sales figure is actually increased used among our commercial and industrial customers and I think we would attribute that to the stronger economic activity. I don't know -- I don't think we have a good handle on the extent to which internal use among those customers will continue to our pace like that.

Operator: [Operator Instructions] And our next question will come from the line of [indiscernible].

Unidentified Analyst: So you like a lot of development in Maine along your grand [ph] state pipeline coming at a time when the governor certainly appears frustrated with the lack of pipeline infrastructure to get more gas into the region. Recently, I know he mentioned comments about possibly getting supply of the LNG, just wondering if that's an opportunity for Unitil? And if you've had any discussions in that area or any others to increase future supply up into the main region?

Tom Meissner: In terms of LNG imports, I don't know that we see any specific opportunity for us in that area.

I mean, I wouldn't say that we've had any specific conversations around LNG supply; I think we have improved our supply procurement from the northern Maine and essentially that's allowing us to continue our growth activities and meet all of our requirements going forward. I think Mark could comment on some of that supply that we've been able to improve coming into our system, but to answer your question directly, no, I think in terms of LNG.

Mark Collin: As we've talked about in the past, one of the -- being where we are located in northern New England and particularly in Maine, we have an advantage to take gas from Canada and gain access to that without having to come up through the rest of New England and essentially get shortcut before we get to our service territory. And so we have strengthened the backbone system we have on the PNGTS [ph] system here in the U.S. and then basically the Trans-Canadian system; once we get into Canada then taking us out to the trading hubs in that area and where we have about 4 Bcf of storage.

So that's really helped our gas supply position and we think we're going into the winter in a very healthy position. The Maine and northeast pipeline system is one that has -- doesn't have is richer portfolio of gas on it currently due to the shutdown of [indiscernible] in regions that it primarily relied on for gas supply. But that is a potential area that could bring in a gas that maybe used as a peaking supply in particular on a delivered basis during the winter period, so there is maybe some opportunity there. And then Boston -- the Boston market continues to rely on LNG import to serve a considerable portion of the demand during the winter period. So there is a lot of activity, not so much from us again because we're located in our supply resources but the New England region as a whole does contract for and rely upon LNG import and we hope that will continue to be a reliable lower cost to meet winter demands, in particular, given though as you cited the difficulties the states are having bringing in new pipeline supply so that we can bring in the lower cost gas from the Marcellus region and other regions.

And we have been able to get those pipelines really built and that is [indiscernible] look for other options.

Operator: Thank you. And I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.

Everyone have a great day.