Executives: David Chong - VP, Financial and Regulatory Services 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 Todd Black - Senior Vice President of External Affairs and Customer

Relations
Analysts: Shelby Tucker - RBC Capital

Markets
Operator: Good day, ladies and gentlemen and welcome to the Q3, 2018 Unitil Corporation 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 be given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the call over to David Chong, VP, Financial and Regulatory Services. Sir, you may begin.

David Chong: Good afternoon. And thank you for joining us to discuss Unitil Corporation's third 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 third 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 two, 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 four where today we announced net income of $2.8 million or $0.19 a share for the third quarter of 2018, which is an increase of $0.03 per share over the third quarter of 2017.

For the nine months ended September 30, the company reported net income of $22 million or $1.49 a share an increase of $0.22 per share compared to the same nine months period in 2017. The increases in 2018 earnings were driven by higher sales margin reflecting customer growth, favorable impacts of weather on unit sales and new distribution rates. Turning to Slide five, we've provided a look at the significant economic growth we are seeing in our service territories. We have identified over 6.8 billion of new construction investment for office buildings, hotels, condominiums and mixed-use developments that are planned or underway in the years ahead. In the Greater Portland area, there’s 2.4 billion of new construction, either planned or under construction, including 1000 housing units, which would increase the number of households in that city by 3%.

This robust level of growth will generate significant opportunities for the company well into the future. Turning to slide six, I’ll focus on some of the recent highlights we’ve had. Our gas expansion efforts continue to be successful and customer demand for natural gas remains strong. Year-to-date customer contracts are up about 25% relative to last year, we’ve already surpassed the number of customers we connected in 2017. This is driven in part by a significant price advantage relative to fuel oil of more than 50% in some cases depending on location customer and customer class with commercial customers seeing the largest differential relative to fuel oil.

As the prior slide highlighted, we are also continuing to see robust development activity in our service areas, which will translate into thousands of new customers over time as those projects are completed. In Maine, we’re in the third year and final year of our Saco Targeted Area Buildout or TAB program and are currently on track to meet 100% of the target for new customer additions. We also started the first year of our Buildout of the Sanford TAB and have installed almost 7 miles of new mains in the downtown of that city. We’ve spent over $10 million on these two projects to reach a market potential of approximately 3000 customers. In New Hampshire, we requested franchises in three new towns to meet anchor loads and commercial centers in Atkinson, Kingston and Epping.

This month the New Hampshire Public Utilities Commission approved our request to expand our franchise to returns of Kingston and Atkinson and we are currently completing Maine’s extensions to reach the anchor customers identified in those requests. A similar franchise request is currently pending for Epping, New Hampshire and we expect the final decision will be made by our regulators in the first half of 2019. All of this is part of our ongoing growth plan to expand our footprint, both, within and outside our current franchise areas. 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. As Tom just mentioned, we had a good third quarter, partly reflecting higher than average temperatures this past summer. Third quarter earnings per share of $0.19 were up 18.8% over the same period last year. Likewise, through the first nine months of the year, earnings per share of $1.49 have also reflected this growth trend, and are up 17.3% over the same period a year earlier. Now turning to slide seven, natural gas sales margins were $17.6 million and $80.4 million in the three and nine months ended September 30, 2018 respectively, which reflects increases of $0.8 million and $5.1 million compared to the same period in 2017.

Gas sales margins in the first nine months of 2018 were positively impacted by higher natural gas distribution revenues of $5.9 million, partly offset by lower revenues of $2.9 million to account for the reduction in gas rates due to the lower corporate income tax rate of 21% under the new tax law. Gas margin in the first nine months of 2018 also reflects the positive effect of colder winter weather, and customer growth on sales volume of $2.1 million. As a reminder, the reduction in revenues relates to the tax law changes also reflects a correspondingly lower and offsetting provision for income taxes in the period. Natural gas therm sales decreased 2.9% and increased 5.5% in the three and nine months periods ended September 30, 2018 respectively, compared to the same periods in 2017. The increase in gas therm sales in the company service areas in the nine month period were driven by customer growth and colder winter in 2018 compared 2017.

There were 9% more heating degree days in the first nine months of 2018 compared to the same period of 2017. As of September 30, 2018 the number of total natural gas customers served has increased by approximately 1,200 in the last 12 months. New customer connections continues to trend higher and is running about 25% above the pace connections in the same period last year. Next, on slide eight, electric sales margins were $25.9 million and $70.5 million in the three and nine month periods endings September 30, 2018, which reflect increases of $1.1 million important $4.4 million respectively compared to the same periods in 2017. Electric sales margin in the first nine months of 2018 were positively affected by higher electric distribution revenues of $2.5 million, partially offset by lower revenues of $2.1 million in 2018 to account for the reduction in electric rates due to lower corporate income tax rate of 21% under the new tax law.

Electric sales margin in the current period were also affected by warmer than average summer temperatures and customer growth of $1.4 million. These positive impacts on electric sales margins were partially offset by the absence in the current period of a one year $1.4 million temporary rate reconciliation adjustment which we recognized in 2017 revenue. Again, I would like to point out that the reduction in revenues related to the tax law changes also reflects a lower and offsetting provision for income taxes in the period. Total electric kilowatt hour sales increased 3.4% and 4.2% respectively in the three and nine month periods. Reflecting customer wrote and favorable impacts of the weather on unit sales and higher energy usage by commercial and industrial customers.

Based on weather data collected in the company’s electric service territories, there are 49% more cooling degree days in the third quarter of 2018 compared to the same period in 2017. As of September 30, 2018 the number of total electric customers served has increased by approximate 575 in the last 12 months. Now turning to slide nine, operation and maintenance expenses decreased $0.5 million and increased $2.1 million for the three and nine-month periods respectively, the decrease in the three-month period reflect lower professional fees of $0.5 million and lower labor cost of $0.3 million partially offset by higher utility operating cost of $0.3 million. The increase in the nine-month period reflect higher labor cost of $1.5 and higher utility operating cost of $1.9, offset by lower professional fees of $1.3 million, the higher utility operating costs in the nine-month period included non-recurring, temporary rate adjustment to increase O&M expenses by $1.2 million in the second quarter of 2018, which is offset by corresponding increase in gas revenue. Depreciation and amortization expense increased $1.6 million and $2.2 million in the three and nine months ended September 30, 2018 respectively, compared to the same period in 2017.

These increases reflect higher utility plant in service and higher amortization of information technology cost partially offset by lower amortization of deferred major storm costs which were being amortized for recovery over multiyear periods. Taxes other than income taxes increase $0.6 million and $0.9 million in the three and nine-month periods primarily reflecting higher local property rates -- tax rates on higher levels of utility plant assets in service and higher payroll taxes. Interest expense, net increase $0.2 million and $0.8 million in three and nine-month periods compared to the same periods in 2017. These increases primarily reflect interest on higher levels of long-term debt. Lastly, federal and state income taxes decreased by $1 million and $6.1 million for the three and nine month periods ended September 30, 2018.

The decrease in the three-month period reflects the effect of a lower tax rate on pretax earnings from the new tax law changes. The decrease in the nine-month period reflects $5 million from the lower tax rate on pretax earnings in 2018 and the current tax benefit of $1.1 million of book tax, temporary differences turning at the lower tax rate in 2018. Looking forward for the remainder of 2018, we expect to maintain a lower effective tax rate of approximately 18% compared to our statutory rate of a little over 27% due to this book tax benefit. Now turning to slide 10, this provides the trailing 12 month actual earn return on equity in each of our regulatory jurisdictions. Unitil on a consolidated basis earn a total return on equity of 10.3% in the last 12 months ended September 30, 2018 which is in line with authorized returns ranging from 9.5% to 9.8% across our regulatory jurisdictions.

As we have discussed in the past these results are not weather normalized. We have a very 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, our cost trackers establish across nearly all of our utility subsidiaries. These capital trackers coupled with sustained customer growth help us maintain and stabilize the level of earnings and our return on equity across our utility subsidiaries. Now this concludes our summary of our financial performance for the period.

I will turn the call to the operator, operator who will coordinate questions.

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Shelby Tucker, RBC Capital Markets. Your line is now open.

Shelby Tucker: Hey, guys.

Good afternoon.

Tom Meissner: Hi, Shelby.

Mark Collin: Hi, Shelby.

Shelby Tucker: I have a quick question on the level O&M. Clearly, you’ve done a very good job this quarter.

Would you mind just going to a bit more details as to what was it in that number and what should we expect going forward on a run rate basis?

Mark Collin: Yes. I think the quarter is as you said was -- we’re about 500,000 favorable for the quarter. And there were two favorable items in it that resulted in that. One was favorable on our professional fees of 500,000 plus. We had lower labor costs of around 300,000.

The lower professional fees or the favorability in professional fees was driven by a couple of items, Shelby, one was -- this year we did not have expenditures related to our customer information system that we installed last year and we had an significant amount of temporary help, particularly during the period that that was been first started up and first implemented. So that amount of temporary help we were able to reduce in the current period. In addition there is a accounting re-class due to the revenue recognition rules that affects the O&M line as well. Previous to in 2017 we use to include certain channel partner fees associated with our unregulated operation at Usource down in the O&M line as a result of the new revenue recognition rules that is now not included in O&M and in the current period in 2018, and is included up in revenue. So it's a -- netted from revenue.

So that was about the 300,000. So those are couple of the reasons that professional fees turned out favorable. The labor also shows some favorability, that generally just timing throughout the year. And then netting against those favorable items was just year-over-year higher utility maintenance cost. On a going forward basis I guess the best way to look at is to look at the trend for the year, and our goal is to generally try to maintain our O&M expenses in line with inflationary expectations.

So certainly from a budgetary or goal perspective we’re shooting for overall annual growth in our O&M accounts of around 3%, that different times a year and different periods we may run a little ahead of that. Hopefully, are able to even run a little behind that. But from planning purposes and certainly for modeling purposes we continue to think anything in the 3% range if you want be conservative, 3.5% to 4% is appropriate.

Shelby Tucker: And then of course, you just mentioned also on the second quarter you had a -- maybe a higher O&M due to additional cost for which you, you had revenue coming in. And also do we – how does that factor into our 3.5% to 4% for the long term O&M view?

Mark Collin: In the nine-month period there was a essentially a item related to some temporary rates that resulted in us recording an additional O&M of $1.2 million in the -- in 2018 that was previously deferred O&M costs from 2017.

And that was temporary rate adjustment and we do not expect that type of thing in our current outlook to reoccur. So for comparison purposes that $1.2 million essentially should be removed or considered a one time item in a nine-month period O&M.

Shelby Tucker: Got it. And then on Usource you seem to be lagging a little bit here relative to last year? Anything we should expect in the fourth quarter to make that up? Or we kind of trending toward a -- the lower results?

Mark Collin: Yes. I’d just be a little careful looking at that, because we’re actually ahead a little bit, but I think that the same thing I talked about the revenue recognition standard…

Shelby Tucker: Got it.

Mark Collin: And the revenue being reported at a lower level just because those channel partner fees are now netted against revenue, but revenue once you take in account the channel partner fees is actually running a little ahead of last year.

Shelby Tucker: Got it. Okay. Thank you, guys.

Tom Meissner: You’re welcome.

Thank you.

Operator: [Operator Instructions]. And I’m 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.