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

Controller
Analysts: Insoo Kim - RBC Capital Markets Shelby Tucker - RBC Capital

Markets
Operator: Good day, ladies and gentlemen, and welcome to the Q4 2017 Unitil Earnings Conference Call. Currently 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] Also as a reminder, this conference call is being recorded. I would now like to turn the call over to your host David Chong, Director of Finance and Subsidiary Treasurer.

Sir, you may begin.

David Chong: Good afternoon and thank you for joining us to discuss Unitil Corporation's fourth quarter 2017 financial results. With me today are Bob Schoenberger, Chairman, President and Chief Executive Officer, Tom Meissner, Senior Vice President and Chief Operating Officer, Mark Collin, Senior Vice President, Chief Financial Officer and Treasurer, and Larry Brock, Chief Accounting Officer and Controller. We will discuss financial and other information about our fourth quarter and year-to-date 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'll 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 Bob.

Robert Schoenberger: Thanks, David. Good afternoon, everyone. Beginning on slide 5, 2017 was another great year for the company. Today, we announced net income of $29 million or %2.06 per share.

This represents an increase of $0.12 per share or a $1.9 million compared to prior year. Higher revenues, continued customer growth and the strengthening economy contributed to these results. On slide 6, we achieved record earnings and sales margin in 2017, which grew annually at a rate of 6% and 4% respectively. We continue to have very strong customer growth, having ended nearly 2100 customers and by the way the environment for the future looks really good for us. With the increase in the price of oil we currently have about 25% to 30% competitive advantage over oil.

The company continues to benefit from robust economic growth in the communities we serve and we expect that to continue. 2017 was a very busy year operationally as we completed major construction projects in both the gas and electric divisions. Tom Meissner will elaborate on these investments later on in the call. Our earnings growth has also been reflective of our successful regulatory initiatives. In 2017 alone we reached a settlement agreement at our New Hampshire electric utility in April for a base rate increase of $4.1 million.

In the middle of the year we filed for almost a $11 million dollars combined base rate relief for Maine and New Hampshire gas divisions, which Mark will cover in detail. Finally, this week the board announced raising our dividend by $0.02 on an annual basis. This is the third consecutive $0.02 increase, so the dividend has risen from $1.44 to a $1.46. Given the growth profile that I described before, we expect this trend to continue. With those overall comments, I'll turn the call over to Tom to talk about our capital spending.

Tom?

Tom Meissner: Thanks, Bob. And good afternoon. As Bob mentioned 2017 was another excellent year for our utility operations across all jurisdictions. If you turn to slide 7, this shows our 2018 capital budget, as well as historical rate base growth. Our utility rate base has grown at a strong compound annual rate of 7% since 2014.

The company continues to fund a variety of capital spending programs, including infrastructure replacement and gas and electric distribution expansion. Our capital budget for 2018 is projected to be $104 million. Of this amount, about 45% will be recoverable to capital tracker mechanisms and another 28% will be spent on growth projects that will add new customers and expand our system for future growth. Slide 8 covers some of the company's key operational highlights. Since 2008 when we acquired Northern Utilities, we have remained focused on growing our gas distribution business.

Robust customer growth reflects our relatively low customer penetration of 60% along our existing distribution mains, as well as system expansion projects that have added over 170 miles of new distribution mains since 2008. Similarly our targeted area build-out for TAB programs continue to progress and are proving to be highly successful in the cities of Soco in Sanford, Maine. Together, the Soco and Sanford test programs represent a market potential of approximately 3000 customers. We continue to evaluate other opportunities across our gas network for additional expansion. We're also developing a fill-in strategy to target key areas within cities we are already served, but that are not currently served with natural gas.

Our gas pipe infrastructure replacement and system upgrade programs are making great progress. Our New Hampshire infrastructure replacement program was completed last year in 2017, resulting in a 100% modern gas system with essentially no gas leaks. Our Maine infrastructure replacement program is on scheduled to be completed by 2024. While our Massachusetts program now in its third year is underway and making good progress. These programs are all supported by strong regulatory policies and we have established ratemaking mechanisms to provide for timely recovery of the capital spending for these programs.

As a result of these infrastructure improvements, our customers are currently served by one of the most modern gas distribution systems in the region. In 2017 we also completed the second of two electric substations in New Hampshire, as well as a 1.3 megawatt solar generation facility in Fitchburg, Massachusetts. The substations were a combined multi-year investment of approximately $25 million and will provide added capacity for continued low growth and reliability improvement. The solar generation facility in Fitchburg became operational in the fourth quarter of 2017, at an estimated cost of $3.5 million. We're proud to help - contribute to Massachusetts energy goals and we also have significant opportunities to continue growing our electric operations by pursuing reliability and grid modernization initiatives in both Massachusetts and New Hampshire both of which enjoy significant regulatory support.

Now I'll turn the call over to Mark Collin, who will discuss our 2017 financial results, as well as our current regulatory proceedings.

Mark Collin: Thanks, Tom. And good afternoon, everyone. As Tom and Bob have both illustrated, we had another great year in 2017. The company experienced significant earnings and sales margin growth.

Turning to slide 9. Natural gas sales margin was $109.7 million in 2017, an increase of $6.1 million compared to 2016, driven by higher natural gas distribution rates of $3.3 million and the positive impact of colder weather and customer growth of $2.8 million. Natural gas Therm sales increased 3.9% in 2017 compared to the prior year. Based on weather data collected in the company's natural gas service areas there are 5% more heating degree days in 2017, which we estimate positively impacted EPS by about $0.07 per share. However compared to normal heat injury days were down 1% which negatively impacted EPS by about $0.01 per share.

I know that residential sales were up 6.9% year-over-year and the total number of natural gas customers is up approximately 1400 in the last 12 months. Now turning to slide 10. Electric sales margin was $92.2 million in 2017, an increase of $4.1 million compared to 2016. Electric sales margin in 2017 was positively affected by higher electric distribution rates of $5.4 million and customer growth of $1 million, partially offset by lower sales volumes due to the net impact of milder summer weather of $0.5 million and lower transmission revenues of $1.8 million. Total electric kilowatt hour sales decreased 0.3% percent in 2017 reflecting mild summer weather in ’17, largely offset by customer growth.

Based on weather data collected in the company's electric service areas, there were 21% fewer cooling degree days in 2017 compared to 2016. As of December 31 2017, the number of electric customers served by Unitil has increased by 700 in the last 12 months. Now turning to slide 11. We've outlined the major expense variances year-to-date. Operation and maintenance expenses increased $3.9 million in 2017 compared to the prior year.

The change in O&M expenses reflects higher compensation and benefit cost of $2 million and higher utility operating costs of $1.9 million. Utility operating costs include higher pass-through regulatory and vegetation management cost of $1.1 million which are recovered on a reconciling basis in sales margins. Excluding these reconciling expenses O&M was up 4.2% year-over-year. Depreciation and amortization expense increased $0.3 million in 2017 compared to ’16, reflecting higher depreciation and higher utility plant assets and service, partially offset by lower amortization of deferred major storm costs which were being amortized for recovery over multi-year periods. Taxes other than income taxes increased $1.5 million in 2017, primarily reflecting higher local property tax rates on higher levels of utility plant assets and service.

Net interest expense increased $0.6 million, reflecting interest on higher levels of short term debt, partially offset by higher net interest income on regulatory assets and repayment of higher cost long-term debt. Lastly, income taxes increased $2.1 million for the 12 months ended December 31 2017, reflecting higher pre-tax earnings in 2017 compared to the prior year. Turning to slide 12, we take a look at our historical return on equity and regulation. We have a constructive regulatory environment that is supportive of growth initiatives and investments to provide our customers with safer reliable service at a reasonable cost. We have long term rate plans or cost trackers established crossed all our utility subsidiaries.

In 2017 we filed base rate cases for the Maine and New Hampshire divisions of one - of our gas utility per combined rate increase of about $10.7 million. These filings also include proposals for comprehensive long-term rate plans which will allow for more timely recovery of portions of our capital spending on our gas distribution system. As we have discussed in the past, in the New Hampshire gas rate case we were awarded a temporary rate increase of $1.6 million effective August 1st 2017, which will be reconciled to the permanent rate level which will be decided in 2000 - this year. We are currently incorporating the Tax Cuts and Jobs Act into both the Maine and New Hampshire gas base rate cases and expect the final decisions to reflect reductions to the requested revenue deficiency’s to reflect the lower tax provision on our distribution revenue. Now turning to slide 13, we offer a summary of the impact that recent federal legislation - tax legislation will have on the company.

The Tax Cuts and Jobs Act of 2017 which became effective January 1, 2018 reduces the corporate income tax rate from 35% to 21%. Each state Public Utility Commission with jurisdiction over the areas that are served by Unitil's electric and gas subsidiary companies has or is in the process of issuing procedural orders directing how the tax law changes are to be reflected in rates, including requiring that companies provide certain filings and calculations. The company is fully complying with these orders and will make any necessary changes to its rate as directed by the commission. We expect tax normalization and excess deferred tax flow back provisions will be reflected in ratemaking. The company does expect its distribution revenue to decrease about $7.5 million across all our regulated entities, offset by an equal amount of tax provision reductions.

So there will be no material effect on net income. Cash flow will be negatively impacted but our credit market metrics are expected to remain strong, particularly in light of the equity offering we recently completed in December 2017. Slide 14 provides an update of our capitalization and long-term financings. Last year three of our regulated utilities entered into multiple agreements to issue and sell $90 million of senior unsecured notes through a private placement marketing process to institutional investors. These long-term financings were closed and funded in November of 2007.

The net proceeds from the offerings were used to refinance higher costs, long-term debt that matured late in 2017 to repay short term debt and for general corporate purposes. Also in December of 2017, we raised approximately $31.7 million through a public offering of 690,000 newly issued shares of common stock. The total net proceeds were used to make equity capital contributions to the company's Maine and New Hampshire gas utilities, to repay short term debt and for general corporate purposes. We continue to strive to achieve a balanced capital structure with strong equity capitalization that is approximately 50% equity and 50% long-term debt. Now turning to slide 15, as we do each quarter, we have again provided an update of our financial results at the utility operating company level.

The chart shows the trailing 12 months actual earn return on equity in each of our regulatory jurisdictions. Unitil Corporation on a consolidated basis earned a total return on equity of 9.7% in 2017. I would like to point out that these results are not weather normalized. Also as we've discussed in the past and as shown in the table on the right, we have long-term capital trackers in place to recover a significant portion of current and future capital spending. These capital trackers coupled with sustained customer growth help us maintain and stabilize the level of earnings and our return on equity across all our utilities subsidiaries.

Now this concludes our summary of our financial performance for 2017. We look forward to another year of growth and success in 2018. At this point, I will turn the call over to the operator. Thank you.

Operator: Thank you, sir.

[Operator Instructions] Our first question comes from Julien Dumoulin of Bank of America Merrill Lynch. Your question please?

Unidentified Analyst: Good afternoon. This is Josephine [ph] and congrats. How are you guys?

Robert Schoenberger: How are you?

Unidentified Analyst: Good. So maybe I just have a few questions here.

First of all, how to think about the O&M moving forward. I know historically you had been talking about 3% to 4% O&M growth, that's been a little bit higher this year. And any guidance on how to think about it moving forward?

Mark Collin: Yeah. I think 3% to 4% range is still an appropriate range for us moving forward. We haven't seen and – you know, haven't seen any real inflationary pickup to any extent at this point.

And I think we continue to believe that the 3% to 4% is a good measure for us.

Unidentified Analyst: Got it. And the 2 million of - I think it was non-utility O&M, whether its more like a one-time pickup or any color on that?

Mark Collin: No what we were really just describing in that area is that there are certain costs that are included in and reported in operating maintenance expense that are reconciling and they tend to have a more volatile nature or they will go up and down based on regulatory requirements or different needs during the year. But because they're matched dollar for dollar with margin changes and margins are essentially a flow-through cost. We like to pull them out because they - while they may affect the O&M level or the percent change in O&M they're really of a different nature because of their reconciling and flow-through.

Unidentified Analyst: Got it. Great. And then on the rate base front, I know you had historically roughly 7% rate base growth, now I was wondering on the – is there upside from tax reform, like loss of bonus depreciation and then I know that - I think the grid modernization stuff hadn't been like the base case assumption. So could we see some acceleration there?

Mark Collin: Yeah, I think we've talked in the past that there are some potential upsides, they can - you know, the couple of items you talked about, particularly the grid modernization, reliability investments we’ve talked about that potentially accelerating some of our CapEx on the electric side. So there's definitely some potential upside on rate base growth there.

And on the gas side, we just - we have very strong growth currently and I think the upside there is probably more likely to be driven by continuing improvements in the economy and the competitive. I think Bob mentioned upfront, the competitive price position we currently have over our main competitor home heating oil. And so there is some upside and potentially - and the gas growth is a result of that. And then lastly, kind of a more technical issue is you know, how the Tax Act may affect rate base. And I think most of our analysis to date generally indicates that rate base will be higher than it would have been had the Tax Act not passed.

So in other words the Tax Act is going to contribute to a slightly higher rate base growth and a higher rate base for rate making purposes, so that provide some upside as well.

Unidentified Analyst: Like, historically you had 7% like, is there any way to quantify it, its like looking – are we looking at like 8 now or…

Mark Collin: Well, we've given a range typically you know, anywhere from 6% to 8%. So - and particularly on the gas growth. So you know, at the higher end of our growth range I think is a reasonable way to think about if all these things and the dominoes fall on the right way with the economy. And with the rate making on the taxes and you know, we get approval of our grid modernization or reliability plans on electric, I think we're on the higher end of our growth trend.

Unidentified Analyst: Thank you so much. I don’t want to take up all the time here. So I’ll move on then. Thank you.

Mark Collin: Any time.

Operator: Thank you. [Operator Instructions] Our next question comes from Insoo Kim of RBC Capital Markets. Your question please?

Insoo Kim: Hi. Good afternoon, guys.

Mark Collin: Hey, Insoo.

Insoo Kim: Just, I guess, piggybacking off of the tax reform question as it relates to the rate base growth. Obviously, with the loss of bonus, you do expect that rate base to improve. How do you balance that and the amount of CapEx that you are looking to spend in the next couple of years and balancing that with potential financing, even credit metrics and all that?

Mark Collin: Yeah, I mean, I think in general we don't expect that the Tax Act and its provisions to have a material impact on either our CapEx budget or our overall regulatory plan or our growth plan. We think that we can manage any of the changes that it’s going to result. And I'll just you know, just pointing out bonus depreciation, for us we haven't relied significantly on bonus depreciation to drive our strategy or to provide us with additional funding for our CapEx program.

In fact, we've relied on you know, basic makers, as well as repairs - tax repairs allowances have actually contributed more to us and we're currently in a very strong and NOL, net operating loss position for tax. I think it's you know, right around $12 million or so. And so I think going forward we expected to - the NOL to continue to provide us the ability not to have to fund taxes from a cash basis that will continue to receive that benefit. And overall the implications of the Tax Act on other components of the company you know, our rate reductions is both a negative and a positive to that, the positive obviously being provide some benefits to customers and lower some rates on that perspective and potentially influences growth in that way. And you know all the other rate making we still need to do in terms of excess deferred taxes, we think that'll be over a longer period of time and won't have any sudden or short term impact on our on our plan.

So we're - generally I think we're neutral on all that act. It does - it does as you pointed out, and so it does have some impact on cash flow. It's the one to one area. But again I think we can manage that. When we look at you know, the important FFO to debt statistic that's been thrown up around quite a bit lately, particularly with the rating agencies.

You know, we expect to be able to maintain something in between 18 and 20 times on that. So that puts us in a good spot relative to the credit rating agencies and we think we'll be able to maintain where we are in terms of those and aren't vulnerable to any kind of downgrade or anything of that nature.

Insoo Kim: Got it. And then as regards to the grid mod plans in Massachusetts and New Hampshire, how much of that work do you expect this year and potentially next year?

Tom Meissner: Hi, Insoo. This is Tom.

In New Hampshire, I don't think we'll be undertaking it this year. We're still waiting for further direction from the commission. In Massachusetts, it depends on the timing of an order because we have not yet received an order approving our plan. We had expected that in the fourth quarter of last year, I think we're now expecting it in the fourth - the first quarter of this year. But we don't have any clear direction on when that order will be coming out.

Insoo Kim: Got it, okay. And then finally on my end, with the dividend increase that you guys had announced yesterday and if we're assuming fairly decent growth over the next couple of years, that payout ratio does start to fall within -- below that 70% to 75% range. Again, is it -- are you guys reiterating that range, pretty specifically to stay within that?

Mark Collin: Yeah, I mean, we’ve being consistent in saying that our target is between 70% and 75% payout ratio. And so that hasn't changed.

Insoo Kim: Got it.

All right. Thank you.

Operator: Thank you. Our next question comes from Shelby Tucker of RBC Capital Markets. Your question please?

Shelby Tucker: Good afternoon, guys.

It’s Shelby Tucker from RBC here. Just so maybe some more minor points. Your CapEx this year was or last year say it was about $120 million. Is that comparable to the 104, I mean, it’s declined or are the other elements in that 119 in ’17?

Mark Collin: And some other elements, it's all regulated rate base type items, but we had a couple of lot more lumpy or onetime projects this past year, in particular we constructed a new operating center in Fitchburg, Massachusetts for our Fitchburg operations both gas and electric, which is the building construction which again you don't do you know, every year, so that added. And then we also went live with it and began implementation of our new customer information system.

So it was a renewal of our entire back office customer information system and all the metering systems and work that went with that. And then thirdly, adding to the somewhat unusual type expenditures, we did also have the solar project in Fitchburg for about $3.5 million. So when you take all those items that's really what pushed us up this past year. But I think it's more - when you remove those types of onetime items its – to 104 it’s pretty comparable.

Shelby Tucker: Got it.

So the 104 is also a good base to use going forward?

Mark Collin: Yes.

Shelby Tucker: Got it. Okay. And then looking at your balance sheet, you had a reduction in deferred income tax obviously from the tax reform of about $50 million, but your deferred liability went up about $45 million, just want to reconcile the difference there?

Mark Collin: Well, the net adjustment we needed to - then we made and we just talked about in the 10-K was $48.9 million. So the net adjustment we made to the deferred tax accounts was a net of 48.9.

I'm trying to think what other - what you're exactly reconciled net…

Shelby Tucker: There might be some - current liabilities there rather than just only in the non-current?

Mark Collin: Yeah. There are other things in there.

Shelby Tucker: Got it. Okay. And then may be the last question.

Any color on Usource for the quarter and the progress that you're making there?

Robert Schoenberger: Yeah, I mean, Usource you know, has remained a steady contributor to the company. I would say what drives that business is volatility in the markets. We have begun to see volatility in the markets with the price of oil going up. And so they had a good fourth quarter in terms of new business and they feel really good about the first half of 2018, if that volatility continues.

Shelby Tucker: Great.

That's all from me.

Operator: Thank you.

Mark Collin: Thanks, Shelby.

Shelby Tucker: Thank you.

Operator: Thank you.

Our next question comes from Julien Smith of Bank of America Merrill Lynch. Question please.

Unidentified Analyst: Hi. Sorry, just want to follow up here really quickly. Could you give any color on the decrease in transmission revenues, what’s happening at Granite State?

Mark Collin: Yes, actually - and that actually electric transmission Josephine, that was on the Fitchburg side.

We had a true up of some of our transmission revenues in 2016. So basically what you're seeing there in terms of variances that 2016 had an unusual revenue source of $1.6 million that didn't repeat itself in ‘17. So it's not - our normal transmission revenues from period-to-period are pretty level or the same year-over-year. We're really just because ‘16 had a onetime true up that was a little higher.

Unidentified Analyst: Got it.

And then on the electric – on the sales growth there. I know - I think you had 1.5% weather normalized. Is that a good assumption to move forward with? Or - I know that you historically had said it’s rather flat then growing though?

Mark Collin: Yeah, we have a very you know, one of the largest conservation energy efficiency programs in the nation on a per customer basis. When you look at how much we spend on energy efficiency. So we're doing a lot to bend that curve down and to reduce electric energy usage and for that we have different mechanisms, including decoupling in Massachusetts and then energy efficiency loss revenue type mechanisms in New Hampshire to keep us whole on that.

But you know, overall from a sales perspective, I think from flat to 1% is kind of the range we're going to be in for a while as long as we continue to spend the amount we are on energy efficiency. The one caveat I'll give you again is, in one of the things we don't talk about - we often talk a lot about the rate making implications of the Tax Act and the - you know all the complexity of that. But there's probably not enough said yet, when you look at the business we're in as a utility and what we do with, if the Tax Act is designed to stimulate and grow the economy, we can only benefit from that and as our customers grow we're going to grow.

Unidentified Analyst: Got it. Great.

Well, thank you. Have a nice day.

Mark Collin: Thank you.

Operator: Thank you. I show no further questions in the queue.

This concludes our Q&A session. Thank you. Ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect.

Good day.