UNITIL CORP - Quarter Report: 2018 March (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 2018

Commission File Number 1-8858

UNITIL CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (603) 772-0775

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

FORM 10-Q

For the Quarter Ended March 31, 2018

Table of Contents

2

Table of Contents

CAUTIONARY STATEMENT

This report and the documents incorporated by reference into this report contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included or incorporated by reference into this report, including, without limitation, statements regarding the financial position, business strategy and other plans and objectives for the Company’s future operations, are forward-looking statements.

These statements include declarations regarding the Company’s beliefs and current expectations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms or other comparable terminology. These forward-looking statements are subject to inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. Some, but not all, of the risks and uncertainties include those described in Item 1A (Risk Factors) and the following:

3

Table of Contents

Many of these risks are beyond the Company’s control. Any forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict all of these factors, nor can the Company assess the impact of any such factor on its business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

OVERVIEW

Unitil Corporation (Unitil or the Company) is a public utility holding company headquartered in Hampton, New Hampshire. Unitil is subject to regulation as a holding company system by the Federal Energy Regulatory Commission (FERC) under the Energy Policy Act of 2005.

Unitil’s principal business is the local distribution of electricity and natural gas throughout its service territory in the states of New Hampshire, Massachusetts and Maine. Unitil is the parent company of three wholly-owned distribution utilities:

Unitil Energy, Fitchburg and Northern Utilities are collectively referred to as the “distribution utilities.” Together, the distribution utilities serve approximately 105,000 electric customers and 81,300 natural gas customers in their service territory.

4

Table of Contents

In addition, Unitil is the parent company of Granite State Gas Transmission, Inc. (Granite State), an interstate natural gas transmission pipeline company, operating 86 miles of underground gas transmission pipeline primarily located in Maine and New Hampshire. Granite State provides Northern Utilities with interconnection to major natural gas pipelines and access to domestic natural gas supplies in the south and Canadian natural gas supplies in the north.

Unitil had an investment in Net Utility Plant of $972.4 million at March 31, 2018. Unitil’s total operating revenue includes revenue to recover the approved cost of purchased electricity and natural gas in rates on a fully reconciling basis. As a result of this reconciling rate structure, the Company’s earnings are not directly affected by changes in the cost of purchased electricity and natural gas. Earnings from Unitil’s utility operations are primarily derived from the return on investment in the utility assets of the three distribution utilities and Granite State.

Unitil also conducts non-regulated operations principally through Usource Inc. and Usource L.L.C. (collectively, Usource), which is wholly-owned by Unitil Resources Inc., a wholly-owned subsidiary of Unitil. Usource provides energy brokering and advisory services to large commercial and industrial customers (C&I) primarily in the northeastern United States. The Company’s other subsidiaries include Unitil Service Corp., which provides, at cost, a variety of administrative and professional services to Unitil’s affiliated companies, Unitil Realty Corp. (Unitil Realty), which owns and manages Unitil’s corporate office building and property located in Hampton, New Hampshire and Unitil Power Corp., which formerly functioned as the full requirements wholesale power supply provider for Unitil Energy. Unitil’s consolidated net income includes the earnings of the holding company and these subsidiaries.

RATES AND REGULATION

Regulation

Unitil is subject to comprehensive regulation by federal and state regulatory authorities. Unitil and its subsidiaries are subject to regulation as a holding company system by the FERC under the Energy Policy Act of 2005 with regard to certain bookkeeping, accounting and reporting requirements. Unitil’s utility operations related to wholesale and interstate energy business activities are also regulated by the FERC. Unitil’s distribution utilities are subject to regulation by the applicable state public utility commissions, with regard to their rates, issuance of securities and other accounting and operational matters: Unitil Energy is subject to regulation by the New Hampshire Public Utilities Commission (NHPUC); Fitchburg is subject to regulation by the Massachusetts Department of Public Utilities (MDPU); and Northern Utilities is regulated by the NHPUC and the Maine Public Utilities Commission (MPUC). Granite State, Unitil’s interstate natural gas transmission pipeline, is subject to regulation by the FERC with regard to its rates and operations. Because Unitil’s primary operations are subject to rate regulation, the regulatory treatment of various matters could significantly affect the Company’s operations and financial position.

Unitil’s distribution utilities deliver electricity and/or natural gas to all customers in their service territory, at rates established under cost of service regulation. Under this regulatory structure, Unitil’s distribution utilities recover the cost of providing distribution service to their customers based on a historical test year, and earn a return on their capital investment in utility assets. In addition, the Company’s distribution utilities and its natural gas transmission pipeline company may also recover certain base rate costs, including capital project spending and enhanced reliability and vegetation management programs, through annual step adjustments and cost tracker rate mechanisms.

Fitchburg is subject to revenue decoupling. Revenue decoupling is the term given to the elimination of the dependency of a utility’s distribution revenue on the volume of electricity or natural gas sales. The difference between distribution revenue amounts billed to customers and the targeted revenue decoupling amounts is recognized as an increase or a decrease in Accrued

5

Table of Contents

Revenue which forms the basis for resetting rates for future cash recoveries from, or credits to, customers. These revenue decoupling targets may be adjusted as a result of rate cases and other authorized adjustments that the Company files with the MDPU. The Company estimates that revenue decoupling applies to approximately 27% and 11% of Unitil’s total annual electric and natural gas sales volumes, respectively.

Tax Cuts and Jobs Act of 2017

At the end of December 2017, the United States Congress voted and the President signed into law major federal tax law changes Tax Cuts and Jobs Act of 2017 (TCJA) effective for tax year 2018. Among other things, the TCJA substantially reduces the corporate income tax rate to 21 percent, effective January 1, 2018. 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 the companies provide certain filings and calculations. Unitil is fully complying with these orders and will make any necessary changes to its rates as directed by the commissions. The FERC has opened a rulemaking proceeding on this matter (described below). The Company believes that the ultimate resolution of these matters will not have a material impact on its financial position, operating results or cash flows.

In Maine, Northern Utilities’ Maine division has recently completed a base rate case (described more fully below). The MPUC had issued a procedural order indicating that the tax law changes were to be reflected in its calculation of final rates for the Company, and the final order in that docket incorporated the lower tax rates.

In New Hampshire, Northern Utilities’ New Hampshire division has a base rate case proceeding pending (described below), and the NHPUC issued an order directing the Company to show how the tax changes can be effected within the schedule for the rate case. On April 6, 2018, Northern Utilities filed a proposed comprehensive settlement agreement among the Company, the Staff of the Public Utilities Commission and the Office of Consumer Advocate which includes the effect of the tax changes in the calculation of the agreed upon revenue requirement. With respect to Unitil Energy, the NHPUC directed the Company to make a filing by April 1, 2018, showing the effect of the tax law changes on rates. On March 16, 2018, the Company filed for its annual step increase pursuant to the provisions of its last base rate case, and included in that filing proposed adjustments to account for the tax changes. This proposal remains pending.

In Massachusetts, the Attorney General filed a petition with the MDPU requesting that it open an investigation to require the flow-through of the tax law changes in rates for all utilities subject to the MDPU’s jurisdiction. On February 2, 2018 the MDPU issued an order opening an investigation into the effect on rates of the decrease in the federal corporate income tax rate on the MDPU’s regulated utilities. The MDPU consolidated the Attorney General’s petition into its investigation. In its order, the MDPU required each utility company subject to its jurisdiction to file, by May 1, 2018, a proposal to address the effects of the TCJA and to reduce its rates through the establishment of a revised cost of service incorporating the lower federal corporate income tax rate as of January 1, 2018. Such proposals must address the adjustment of rates going forward and also incorporate the timely refund of revenues associated with the lower tax expense on current income and excess accumulated deferred income taxes (ADIT). Fitchburg plans to submit filings for both its gas and electric divisions with estimated revenue reductions of $0.8 million at each respective division. This matter remains pending.

On March 15, 2018, the FERC issued a Notice of Proposed Rulemaking (NOPR) that would allow it to determine which pipelines under the Natural Gas Act may be collecting unjust and unreasonable rates in light of the corporate tax rate reduction and changes to the FERC’s income tax allowance policies. The proposed rule, if adopted, would require an interstate pipeline to file a

6

Table of Contents

one-time report on the regulated rate effect of the new tax law and changes to the FERC’s income tax allowance policies. In addition to filing the one-time report, each pipeline would have four options: 1) make a limited rate filing to reduce its rates by the percentage reduction in its cost of service shown in its report; 2) commit to file either a prepackaged uncontested rate settlement or a general rate case by December 31, 2018; 3) file a statement explaining why it believes its current rates are reasonable and no reduction is necessary; or 4) file the required report without taking any other action, at which point FERC would consider whether to initiate an investigation. Granite State is reviewing the NOPR and will comply with all FERC requirements. Granite State believes that the ultimate resolution of these matters will not have a material impact on its financial position, operating results or cash flows.

Rate Case Activity

Unitil Energy – Base Rates – On April 20, 2017 the NHPUC issued its final order approving a settlement between Unitil Energy, NHPUC Staff and the Office of Consumer Advocate providing for a permanent increase of $4.1 million in electric base rates, and a three year rate plan with an additional rate step adjustment, effective May 1, 2017, of $0.9 million, followed by two rate step adjustments in May of 2018 and 2019 to recover the revenue requirements associated with annual capital expenditures as defined under the rate plan. On March 16, 2018, Unitil Energy filed its second step adjustment. The filing also incorporated the revenue requirement effect of the federal tax decrease pursuant to the TCJA, along with the termination of the one-year reconciliation adjustment which had recouped the difference between temporary rates and final rates. The net effect of the three adjustments results in a proposed revenue decrease of $0.4 million. The proposal remains pending.

Fitchburg – Base Rates – Electric – On April 29, 2016 the MDPU issued an order approving a $2.1 million increase in Fitchburg’s electric base revenue decoupling target, effective May 1, 2016. As part of its order, the MDPU approved, with modifications, Fitchburg’s request for an annual capital cost recovery mechanism, which allows for increases to target revenues to recover the revenue requirement associated with capital additions as defined under the mechanism. In 2016, Fitchburg filed its first compliance report on capital investments for calendar year 2015. The MDPU approved the recovery of approximately $0.5 million, effective January 1, 2017, subject to further investigation and reconciliation. On December 18, 2017, the MDPU approved Fitchburg’s calendar year 2015 capital investments and associated revenue requirements for recovery. On June 29, 2017, Fitchburg filed its compliance report on capital investments for calendar year 2016. On December 20, 2017, the MDPU approved the recovery of approximately $0.4 million, effective January 1, 2018, subject to further investigation and reconciliation.

Fitchburg – Base Rates – Gas – On April 29, 2016, the MDPU issued an order approving a $1.6 million increase in Fitchburg’s gas base revenue decoupling target, effective May 1, 2016.

Fitchburg – Gas Operations – On October 31, 2016, Fitchburg submitted its annual filing under its gas system enhancement program to recover the revenue requirements associated with its projected capital additions in 2017 as defined under the program. The filing sought approval to collect an additional $0.9 million of annual revenue requirements. On April 28, 2017, the MDPU approved recovery of the projected 2017 revenue requirements, subject to reconciliation and a cap of 1.5% on the change in revenue requirement to be billed in any given year. The cap resulted in approval of an additional $0.5 million of annual revenue requirements to be billed effective May 1, 2017 with the remaining $0.4 million of annual revenue requirements deferred for billing in future periods. In its April 28, 2017 annual reconciliation filing for 2016 revenue requirements, the Company requested that the MDPU waive the 1.5% revenue requirement cap. On October 31, 2017, the MDPU approved a one-year waiver of the cap and allowed the Company to bill the total 2016 actual reconciliation balance. On October 31, 2017, Fitchburg submitted its annual filing under the program to recover the revenue requirements associated with its projected capital additions in 2018. In this filing, the Company has requested to change the revenue requirements cap to 3%. This matter remains pending.

7

Table of Contents

Northern Utilities – Base Rates – Maine – In May 2017, Northern Utilities filed a base rate case with the MPUC seeking to increase annual revenues by $6.0 million. The requested increase was subsequently supplemented by an additional $0.7 million associated with the Company’s Targeted Area Build-out (TAB) Program (see below). In addition to the distribution base rate increase, Northern Utilities requested to extend its Targeted Infrastructure Replacement Adjustment mechanism (TIRA) (see below).

On February 28, 2018 the MPUC issued its Final Order (Order) in the base rate case. The Order provides for a revenue increase of $2.1 million offset by a revenue decrease of $2.2 million to incorporate the effect of the lower federal income tax rate under the TCJA, resulting in an overall annual revenue decrease of $0.1 million. The MPUC approved a return on equity of 9.5 percent and a capital structure reflecting 50 percent equity and 50 percent long-term debt. The Order also provides for a reduction in annual depreciation expense reducing the Company’s annual operating costs by approximately $0.5 million. The Order addresses a number of other issues including a change to therm billing, increases in other delivery charges, and cost recovery under the Company’s TAB Program and TIRA mechanism. The new rates and other changes became effective as of March 1, 2018. On March 16, 2018, the Company filed a Motion for Clarification requesting the MPUC clarify its Order in light of what the Company believes to be an inadvertent inconsistency with the Order regarding 2016 TIRA Eligible Facilities, rate base and related annual revenue adjustments.

Northern Utilities – Targeted Infrastructure Replacement Adjustment – Maine – The settlement in Northern Utilities’ Maine division’s 2013 rate case allowed the Company to implement a TIRA rate mechanism to adjust base distribution rates annually to recover the revenue requirements associated with targeted investments in gas distribution system infrastructure replacement and upgrade projects, including the Company’s Cast Iron Replacement Program (CIRP). The TIRA had an initial term of four years and covered targeted capital expenditures in 2013 through 2016. In its Order in the current base rate case (see above), the MPUC approved an extension of the Company’s TIRA mechanism, with revision, for an additional eight-year period, which will allow for annual rate adjustments through the end of the CIRP program. On March 30, 2018, the Company filed its request to increase its annual base rates to recover the revenue requirements for 2017 Eligible Facilities. This matter remains pending.

Northern Utilities – Targeted Area Build-out Program – Maine – In December 2015, the MPUC approved a TAB program and associated rate surcharge mechanism. This program is designed to allow the economic extension of natural gas mains to new, targeted service areas in Maine. It allows customers in the targeted area the ability to pay a rate surcharge, instead of a large upfront payment or capital contribution to connect to the natural gas delivery system. The initial pilot of the TAB program was approved for the City of Saco, and is being built out over a period of three years, with the potential to add 1,000 new customers and approximately $1 million in annual distribution revenue in the Saco area. A second TAB program was approved for the Town of Sanford, and has the potential to add 2,000 new customers and approximately $2 million in annual distribution revenue in the Sanford area. In its base rate case Order (above), the MPUC approved the inclusion of Saco TAB investments in rate base along with a cost recovery incentive mechanism for future TAB investments.

Northern Utilities – Base Rates – New Hampshire – On June 5, 2017, Northern Utilities filed for a base rate increase with the NHPUC seeking to increase annual revenues by $4.7 million. On June 15, 2017, the NHPUC suspended the Company’s proposed permanent rates tariffs while the filing is under regulatory review

8

Table of Contents

Northern Utilities reached a settlement agreement on temporary rates to produce an increase in annual revenues of approximately $1.6 million, effective with service rendered on and after August 1, 2017, and until a final, non-appealable order on permanent rates is issued. The settlement agreement was approved by the NHPUC on July 31, 2017. As of March 31, 2018, Northern Utilities has deferred approximately $1.1 million of costs associated with this base rate case. Once a final decision on permanent rates is issued, it will be reconciled back to the date that temporary rates were implemented.

On April 6, 2018, Northern Utilities filed a proposed comprehensive settlement agreement among the Company, the NHPUC Staff and the Office of the Consumer Advocate. The settling parties agreed to an annual revenue increase of $2.6 million and an offsetting decrease of $1.7 million to reflect the effect of the TCJA, for a net annual revenue increase of $0.9 million, effective May 1, 2018. The parties also agreed to a step increase of $2.3 million to recover post-test year capital investments, also effective May 1, 2018. Under the agreement, the company may file for a second step increase for effect May 1, 2019 to recover eligible capital investments in 2018, up to a revenue requirement cap of $2.2 million. If the company chooses the option to implement the second step increase, the next distribution base rate case shall be based on an historic test year of no earlier than twelve months ending December 31, 2020. A hearing before the NHPUC to consider the settlement agreement was held on April 12, 2018. This matter remains pending.

Northern Utilities – Pipeline Refund – On February 19, 2015, the FERC issued Opinion No. 524-A, the final order in Portland Natural Gas Transmission’s (PNGTS) Section 4 rate case, requiring PNGTS to issue refunds to shippers. Northern Utilities received a pipeline refund of $22.0 million on April 15, 2015. As a gas supply-related refund, the entire amount refunded will be credited to Northern Utilities’ customers and marketers over three years as directed by the NHPUC and MPUC. As of March 31, 2018, $21.4 million has been refunded to Northern Utilities’ customers and marketers. The Company has recorded current Regulatory Liabilities related to these refunds of $0.6 million on its Consolidated Balance Sheets as of March 31, 2018.

Granite State – Base Rates – Granite State has in place a FERC-approved second amended settlement agreement under which it is permitted to file annually, each June, for a rate adjustment to recover the revenue requirements associated with specified capital investments in gas transmission projects up to a specific cap on expenditures. On June 21, 2017 Granite State filed for an annual revenue increase under this provision of $0.2 million, effective August 1, 2017. The FERC issued an order approving the filing on July 28, 2017. This is the last annual rate adjustment allowed under the second amended settlement because Granite must file a general rate case pursuant to Section 4 of the Natural Gas Act by April 30, 2018 with rates effective no later than November 1, 2018.

RESULTS OF OPERATIONS

The following section of MD&A compares the results of operations for each of the two fiscal periods ended March 31, 2018 and March 31, 2017 and should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and the accompanying Notes to unaudited Consolidated Financial Statements included in Part I, Item 1 of this report, which are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

The Company’s results of operations reflect the seasonal nature of the natural gas business. Annual gas revenues are substantially realized during the heating season as a result of higher sales of natural gas due to cold weather. Accordingly, the results of operations are historically most favorable in the first and fourth quarters. Fluctuations in seasonal weather conditions may have a significant effect on the result of operations. Sales of electricity are generally less sensitive

9

Table of Contents

to weather than natural gas sales, but may also be affected by the weather conditions in both the winter and summer seasons. Also, as a result of recent rate cases, the Company’s natural gas sales margins are derived from a higher percentage of fixed billing components, including customer charges. Therefore, natural gas revenues and margin will be less affected by the seasonal nature of the natural gas business. In addition, as previously discussed, approximately 27% and 11% of the Company’s total annual electric and natural gas sales volumes, respectively, are decoupled and changes in sales to existing customers do not affect sales margin.

Earnings Overview

The Company’s Net Income was $15.6 million, or $1.06 per share, for the first quarter of 2018, an increase of $3.2 million in Net Income, and $0.18 in Earnings Per Share, compared to the first quarter of 2017. The Company’s earnings in the first quarter of 2018 were driven by higher natural gas and electric sales margins, reflecting: customer growth, colder winter weather and new distribution rates compared to the first quarter of 2017.

Natural gas sales margin was $39.9 million in the three months ended March 31, 2018, an increase of $1.9 million compared to the same period in 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 rates of $1.6 million, partially offset by lower revenue of $1.5 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 also reflects a lower provision for income taxes.

Natural gas therm sales 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 HDD in the first quarter of 2018 compared to the same period in 2017. As of March 31, 2018, the number of total natural gas customers served has increased by 1,478 in the last twelve months.

Electric sales margin was $22.3 million in the three months ended March 31, 2018, an increase of $0.3 million compared to the same period in 2017. Electric sales margin in the first quarter of 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, partially offset by lower revenue of $0.8 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 also reflects a lower provision for income taxes.

Total electric kWh sales increased 5.8% compared to the first quarter of 2017. As of March 31, 2018, the number of total electric customers served has increased by 516 in the last twelve months.

Operation and Maintenance (O&M) 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 utility operating costs of $0.4 million.

Depreciation and Amortization expense decreased $0.2 million in the three months ended March 31, 2018 compared to the same period in 2017, reflecting lower amortization of deferred major storm costs, partially offset by higher utility plant in service and amortization of information system and software costs.

Taxes Other Than Income Taxes increased $0.3 million in the three months ended March 31, 2018 compared to the same period in 2017, primarily reflecting higher local property taxes on higher levels of utility plant assets in service.

10

Table of Contents

Interest Expense, net was essentially unchanged in the three months ended March 31, 2018 compared to the same period in 2017, reflecting higher interest on long-term debt offset by lower net interest expense on net regulatory assets/liabilities and lower levels of short-term debt.

Federal and State Income Taxes decreased by $2.9 million for the three months ended March 31, 2018 compared to the same period in 2017, reflecting $2.3 million from a lower tax rate on higher pre-tax earnings in Q1 2018 (see revenue discussion above) and the current tax benefit of $0.6 million on book/tax items not previously included in customers’ utility rates.

At its January 2018 and April 2018 meetings, the Unitil Corporation Board of Directors declared quarterly dividends on the Company’s common stock of $0.365 per share. These quarterly dividends result in a current effective annualized dividend rate of $1.46 per share, representing an unbroken record of quarterly dividend payments since trading began in Unitil’s common stock.

A more detailed discussion of the Company’s results of operations for the three months ended March 31, 2018 is presented below.

Gas Sales, Revenues and Margin

Therm Sales – Unitil’s total therm sales of natural gas increased 9.5% in the three months ended March 31, 2018 compared to the same period in 2017, reflecting increases of 13.3% and 8.3% in sales to Residential and Commercial and Industrial (C&I) customers, respectively. The increase in gas therm sales in the Company’s service areas was driven by customer growth and colder winter weather in the first quarter of 2018 compared to 2017. Based on weather data collected in the Company’s natural gas service areas, there were 10% more HDD in the first quarter of 2018 compared to the same period in 2017. The Company estimates that weather-normalized gas therm sales, excluding decoupled sales, were up 3.6% in the first quarter of 2018 compared to the same period in 2017. As of March 31, 2018, the number of total natural gas customers served has increased by 1,478 in the last twelve months. As previously discussed, sales margin derived from decoupled unit sales (representing approximately 11% of total annual therm sales volume) is not sensitive to changes in gas therm sales.

The following table details total firm therm sales for the three months ended March 31, 2018 and 2017, by major customer class:

11

Table of Contents

Gas Operating Revenues and Sales Margin – The following table details total Gas Operating Revenues and Sales Margin for the three months ended March 31, 2018 and 2017:

The Company analyzes operating results using Gas Sales Margin, a non-GAAP measure. Gas Sales Margin is calculated as Total Gas Operating Revenues (See “Utility Revenue Recognition” in Note 1 to the accompanying Consolidated Financial Statements) less Cost of Gas Sales. The Company believes Gas Sales Margin is an important measure to analyze profitability because the approved cost of sales are tracked and reconciled costs that are passed through directly to the customer, resulting in an equal and offsetting amount reflected in Total Gas Operating Revenue. Sales margin can be reconciled to Operating Income, a GAAP measure, by including Operation and Maintenance, Depreciation and Amortization and Taxes Other Than Income Taxes for each segment in the analysis.

Natural gas sales margin was $39.9 million in the three months ended March 31, 2018, an increase of $1.9 million compared to the same period in 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 rates of $1.6 million, partially offset by lower revenue of $1.5 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 also reflects a lower provision for income taxes.

The increase in Total Gas Operating Revenues of $12.2 million in the first quarter of 2018 reflects higher natural gas sales volumes and higher cost of gas sales, which are tracked and reconciled costs that are passed through directly to customers, partially offset by lower revenue related to the TCJA, discussed above.

Electric Sales, Revenues and Margin

Kilowatt-hour Sales – In the first quarter of 2018, Unitil’s total electric kWh sales increased 5.8% compared to the first quarter of 2017. Sales to Residential and C&I customers increased 7.0% and 4.9%, respectively, in the first quarter of 2018 compared to the same period in 2017, reflecting the positive impact of colder weather, customer growth and higher usage by industrial customers for production purposes. As of March 31, 2018, the number of total electric customers served has increased by 516 in the last twelve months. As previously discussed, sales margins derived from decoupled unit sales (representing approximately 27% of total annual kWh sales volume) are not sensitive to changes in electric kWh sales.

12

Table of Contents

The following table details total kWh sales for the three months ended March 31, 2018 and 2017 by major customer class:

Electric Operating Revenues and Sales Margin – The following table details total Electric Operating Revenues and Sales Margin for the three months ended March 31, 2018 and 2017:

The Company analyzes operating results using Electric Sales Margin, a non-GAAP measure. Electric Sales Margin is calculated as Total Electric Operating Revenues (See “Utility Revenue Recognition” in Note 1 to the accompanying Consolidated Financial Statements) less Cost of Electric Sales. The Company believes Electric Sales Margin is an important measure to analyze profitability because the approved cost of sales are tracked and reconciled costs that are passed through directly to the customer resulting in an equal and offsetting amount reflected in Total Electric Operating Revenues. Sales margin can be reconciled to Operating Income, a GAAP measure, by including Operation and Maintenance, Depreciation and Amortization and Taxes Other Than Income Taxes for each segment in the analysis.

Electric sales margin was $22.3 million in the three months ended March 31, 2018, an increase of $0.3 million compared to the same period in 2017. Electric sales margin in the first quarter of 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, partially offset by lower revenue of $0.8 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 also reflects a lower provision for income taxes.

The increase in Total Electric Operating Revenues of $8.0 million in the first quarter of 2018 reflects higher electric sales volumes and higher cost of electric sales, which are tracked and reconciled costs that are passed through directly to customers, partially offset by lower revenues related to the TCJA, discussed above.

13

Table of Contents

Operating Revenue – Other

The following table details total Other Operating Revenue for the three months ended March 31, 2018 and 2017:

Total Other Operating Revenue (See “Other Operating Revenue – Non-regulated” in Note 1 to the accompanying Consolidated Financial Statements), which is comprised of revenues from the Company’s non-regulated energy brokering business, Usource, decreased $0.4 million, or 23.5% in the first quarter of 2018, compared to the first quarter of 2017, primarily as a result of the adoption of a new accounting standard.

In the first quarter of 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, and its subsequent clarifications and amendments outlined in ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2017-13, on a modified retrospective basis, which requires application to contracts with customers effective January 1, 2018. ASU 2014-09 requires that payments made by Usource to third parties (“Channel Partners”) for revenue sharing agreements are recognized as a reduction from revenue, where those payments were previously recognized as an operating expense. Therefore, beginning with the three months ended March 31, 2018 and going forward, payments made by Usource to third parties for revenue sharing agreements are reported as “Other” in the “Operating Revenues” section of the Consolidated Statements of Earnings, along with Usource’s revenues. Prior to the adoption of ASU 2014-09, payments by Usource to Channel Partners for revenue sharing agreements are included as “Operation and Maintenance” in the “Operating Expenses” section of the Consolidated Statements of Earnings. Those Channel Partner payments were $0.3 million each of the first quarters of 2018 and 2017.

If ASU 2014-09 had been in effect for the three months ended March 31, 2017, the result would have been corresponding reductions of $0.3 million in both “Other” in in the “Operating Revenues” section of the Consolidated Statements of Earnings and “Operation and Maintenance” in the “Operating Expenses” section of the Company’s Consolidated Statements of Earnings. Usource’s revenues are primarily derived from fees and charges billed to suppliers as customers take delivery of energy from those suppliers under term contracts brokered by Usource.

Operating Expenses

Cost of Gas Sales – Cost of Gas Sales includes the cost of natural gas purchased and manufactured to supply the Company’s total gas supply requirements and spending on energy efficiency programs. Cost of Gas Sales increased $10.3 million, or 28.0%, in the three months ended March 31, 2018 compared to the same period in 2017. This increase reflects higher wholesale natural gas prices and higher sales of natural gas. The Company reconciles and recovers the approved Cost of Gas Sales in its rates at cost on a pass-through basis and therefore changes in approved expenses do not affect earnings.

14

Table of Contents

Cost of Electric Sales – Cost of Electric Sales includes the cost of electric supply as well as other energy supply related restructuring costs, including power supply buyout costs, and spending on energy efficiency programs. Cost of Electric Sales increased $7.7 million, or 28.0%, in the three months ended March 31, 2018 compared to the same period in 2017. This increase reflects higher wholesale electricity prices and higher sales of electricity. The Company reconciles and recovers the approved Cost of Electric Sales in its rates at cost on a pass-through basis and therefore changes in approved expenses do not affect earnings.

Operation and Maintenance – O&M expense includes electric and gas utility operating costs, and the operating costs of the Company’s other business activities. O&M expenses increased $1.3 million, or 8.1%, 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 utility operating costs of $0.4 million.The higher utility operating costs reflect increased system maintenance costs related to a higher level of storms and colder weather in the first quarter of 2018 compared to the prior year period, as well as higher bad debt expense related to increased sales.

Depreciation and Amortization – Depreciation and Amortization expense decreased $0.2 million, or 1.6%, in the three months ended March 31, 2018 compared to the same period in 2017, reflecting lower amortization of deferred major storm costs, partially offset by higher utility plant in service and amortization of information system and software costs.

Taxes Other Than Income Taxes – Taxes Other Than Income Taxes increased $0.3 million, or 5.5%, in the three months ended March 31, 2018 compared to the same period in 2017, primarily reflecting higher local property taxes on higher levels of utility plant assets in service.

Other Expense, net – Other Expense, net in the three month period ended March 31, 2018 increased $0.1 million compared with the same period in 2017. In the first quarter of 2018, the Company adopted ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715)” which amends the existing guidance relating to the presentation of net periodic pension cost and net periodic other post-retirement benefit costs. On a retrospective basis, the amendment requires an employer to separate the service cost component from the other components of net benefit cost and provides explicit guidance on how to present the service cost component and other components in the income statement.

Accordingly, for all periods presented in the Consolidated Financial Statements in this Form 10-Q for the quarter ended March 31, 2018, the service cost component of the Company’s net periodic benefit costs is reported in “Operations and Maintenance” in the “Operating Expenses” section of the Consolidated Statements of Earnings while the other components of net periodic benefit costs are reported in the “Other Expense (Income), net” section of the Consolidated Statements of Earnings. Prior to adoption, the Company reported all components of its net periodic benefit costs in “Operations and Maintenance” in the “Operating Expenses” section of the Consolidated Statements of Earnings. There are $1.5 million and $1.6 million of non-service cost net periodic benefit costs reported in “Other Expense (Income), net” for the three months ended March 31, 2018 and March 31, 2017, respectively.

Income Taxes – Federal and State Income Taxes decreased by $2.9 million for the three months ended March 31, 2018 compared to the same period in 2017, reflecting $2.3 million from a lower tax rate on higher pre-tax earnings in Q1 2018 and the current tax benefit of $0.6 million on book/tax items not previously included in customers’ utility rates.

Interest Expense, net

Interest expense is presented in the financial statements net of interest income. Interest expense is mainly comprised of interest on long-term debt and short-term borrowings. In addition, certain reconciling rate mechanisms used by the Company’s distribution operating utilities give rise to regulatory assets and regulatory liabilities on which interest is accrued.

15

Table of Contents

Unitil’s utility subsidiaries operate a number of reconciling rate mechanisms to recover specifically identified costs on a pass-through basis. These reconciling rate mechanisms track costs and revenue on a monthly basis. In any given month, this monthly tracking and reconciling process will produce either an under-collected or an over-collected balance of costs. In accordance with the distribution utilities’ rate tariffs, interest is accrued on these balances and will produce either interest income or interest expense. Consistent with regulatory precedent, interest income is recorded on an under-collection of costs which creates a regulatory asset to be recovered in future periods when rates are reset. Interest expense is recorded on an over-collection of costs, which creates a regulatory liability to be refunded in future periods when rates are reset.

Interest Expense, net was essentially unchanged in the three months ended March 31, 2018 compared to the same period in 2017, reflecting higher interest on long-term debt offset by lower net interest expense on net regulatory assets/liabilities and lower levels of short-term debt.

CAPITAL REQUIREMENTS

Sources of Capital

Unitil requires capital to fund utility plant additions, working capital and other utility expenditures recovered in subsequent periods through regulated rates. The capital necessary to meet these requirements is derived primarily from internally-generated funds, which consist of cash flows from operating activities. The Company initially supplements internally-generated funds through short-term bank borrowings, as needed, under its unsecured revolving Credit Facility. Periodically, the Company replaces portions of its short-term debt with long-term financings more closely matched to the long-term nature of its utility assets. Additionally, from time to time, the Company has accessed the public capital markets through public offerings of equity securities. The Company’s utility operations are seasonal in nature and are therefore subject to seasonal fluctuations in cash flows. The amount, type and timing of any future financing will vary from year to year based on capital needs and maturity or redemptions of securities.

The Company and its subsidiaries are individually and collectively members of the Unitil Cash Pool (the “Cash Pool”). The Cash Pool is the financing vehicle for day-to-day cash borrowing and investing. The Cash Pool allows for an efficient exchange of cash among the Company and its

16

Table of Contents

subsidiaries. The interest rates charged to the subsidiaries for borrowing from the Cash Pool are based on actual interest costs from lenders under the Company’s revolving Credit Facility. At March 31, 2018, March 31, 2017 and December 31, 2017, the Company and all of its subsidiaries were in compliance with the regulatory requirements to participate in the Cash Pool.

On October 4, 2013, the Company entered into an Amended and Restated Credit Agreement (as further amended, restated, amended and restated, modified or supplemented from time to time, the “Credit Facility”). The Credit Facility terminates October 4, 2020 and provides for a borrowing limit of $120 million which includes a $25 million sublimit for the issuance of standby letters of credit. The Credit Facility provides Unitil with the ability to elect that borrowings under the Credit Facility bear interest under several options, including at a daily fluctuating rate of interest per annum equal to one-month London Interbank Offered Rate (LIBOR) plus 1.25%. Provided there is no event of default under the Credit Facility, the Company may on a one-time basis request an increase in the aggregate commitments under the Credit Facility by an aggregate additional amount of up to $30 million.

The Company utilizes the Credit Facility for cash management purposes related to its short-term operating activities. Total gross borrowings were $88.9 million for the three months ended March 31, 2018. Total gross repayments were $81.9 million for the three months ended March 31, 2017. The following table details the borrowing limits, amounts outstanding and amounts available under the revolving Credit Facility as of March 31, 2018, March 31, 2017 and December 31, 2017:

The Credit Facility contains customary terms and conditions for credit facilities of this type, including affirmative and negative covenants. There are restrictions on, among other things, Unitil Corporation’s and its subsidiaries’ ability to permit liens or incur indebtedness, and restrictions on Unitil’s ability to merge or consolidate with another entity or change its line of business. The affirmative and negative covenants under the Credit Facility shall apply until the Credit Facility terminates and all amounts borrowed under the Credit Facility are paid in full (or with respect to letters of credit, they are cash collateralized). The only financial covenant in the Credit Facility provides that Funded Debt to Capitalization (as each term is defined in the Credit Facility) cannot exceed 65%, tested on a quarterly basis. At March 31, 2018, March 31, 2017 and December 31, 2017, the Company was in compliance with the covenants contained in the Credit Facility in effect on that date. (See also “Credit Arrangements” in Note 4.)

On November 1, 2017, Northern Utilities issued $20 million of Notes due 2027 at 3.52% and $30 million of Notes due 2047 at 4.32%. Fitchburg issued $10 million of Notes due 2027 at 3.52% and $15 million of Notes due 2047 at 4.32%. Granite State issued $15 million of Notes due 2027 at 3.72%. Northern Utilities, Fitchburg and Granite State used the net proceeds from these offerings to refinance higher cost long-term debt that matured in 2017, to repay short-term debt and for general corporate purposes. Approximately $0.7 million of costs associated with these issuances have been netted against Long-Term Debt for presentation purposes on the Consolidated Balance Sheets.

17

Table of Contents

In April 2014, Unitil Service Corp. entered into a financing arrangement, structured as a capital lease obligation, for various information systems and technology equipment. Final funding under this capital lease occurred on October 30, 2015, resulting in total funding of $13.4 million. The capital lease matures on September 30, 2020. As of March 31, 2018, there are $2.7 million of current and $4.4 million of noncurrent obligations under this capital lease on the Company’s Consolidated Balance Sheets.

Unitil Corporation and its utility subsidiaries, Fitchburg, Unitil Energy, Northern Utilities, and Granite State are currently rated “BBB+” by Standard & Poor’s Ratings Services. Unitil Corporation and Granite State are currently rated “Baa2”, and Fitchburg, Unitil Energy and Northern Utilities are currently rated “Baa1” by Moody’s Investors Services.

The continued availability of various methods of financing, as well as the choice of a specific form of security for such financing, will depend on many factors, including, but not limited to: security market conditions; general economic climate; regulatory approvals; the ability to meet covenant issuance restrictions; the level of earnings, cash flows and financial position; and the competitive pricing offered by financing sources.

The Company provides limited guarantees on certain energy and natural gas storage management contracts entered into by the distribution utilities. The Company’s policy is to limit the duration of these guarantees. As of March 31, 2018, there were approximately $17.9 million of guarantees outstanding and the longest term guarantee extends through August 2018.

Northern Utilities enters into asset management agreements under which Northern Utilities releases certain natural gas pipeline and storage assets, resells the natural gas storage inventory to an asset manager and subsequently repurchases the inventory over the course of the natural gas heating season at the same price at which it sold the natural gas inventory to the asset manager. There was $1.0 million, $3.8 million and $8.5 million of natural gas storage inventory at March 31, 2018, March 31, 2017 and December 31, 2017, respectively, related to these asset management agreements. The amount of natural gas inventory released in March 2018 and payable in April 2018 is $1.0 million and is recorded in Accounts Payable at March 31, 2018. The amount of natural gas inventory released in March 2017 and payable in April 2017 was $2.0 million and was recorded in Accounts Payable at March 31, 2017. The amount of natural gas inventory released in December 2017 and payable in January 2018 was $3.1 million and was recorded in Accounts Payable at December 31, 2017.

The Company also guarantees the payment of principal, interest and other amounts payable on the notes issued by Granite State. As of March 31, 2018, the principal amount outstanding for the 7.15% Granite State notes was $3.3 million.

Off-Balance Sheet Arrangements

The Company and its subsidiaries do not currently use, and are not dependent on the use of, off-balance sheet financing arrangements such as securitization of receivables or obtaining access to assets or cash through special purpose entities or variable interest entities. Unitil Corporation’s subsidiaries conduct a portion of their operations in leased facilities and also lease some of their vehicles, machinery and office equipment under both capital and operating lease arrangements. Additionally, as of March 31, 2018, there were approximately $17.9 million of guarantees on certain energy and natural gas storage management contracts entered into by the distribution utilities outstanding and the longest term guarantee extends through August 2018. See Note 4 (Debt and Financing Arrangements) to the accompanying Consolidated Financial Statements.

18

Table of Contents

CRITICAL ACCOUNTING POLICIES

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In making those estimates and assumptions, the Company is sometimes required to make difficult, subjective and/or complex judgments about the impact of matters that are inherently uncertain and for which different estimates that could reasonably have been used could have resulted in material differences in its financial statements. If actual results were to differ significantly from those estimates, assumptions and judgment, the financial position of the Company could be materially affected and the results of operations of the Company could be materially different than reported. For a complete discussion of the Company’s significant accounting policies, refer to Note 1 to the Consolidated Financial Statements in this quarterly report on Form 10-Q and Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 1, 2018.

LABOR RELATIONS

As of March 31, 2018, the Company and its subsidiaries had 514 employees. The Company considers its relationship with employees to be good and has not experienced any major labor disruptions.

As of March 31, 2018, a total of 167 employees of certain of the Company’s subsidiaries were represented by labor unions. The following table details by subsidiary the employees covered by a collective bargaining agreement (CBA) as of March 31, 2018:

The CBAs provide discrete salary adjustments, established work practices and uniform benefit packages. The Company expects to negotiate new agreements prior to their expiration dates.

INTEREST RATE RISK

As discussed above, Unitil meets its external financing needs by issuing short-term and long-term debt. The majority of debt outstanding represents long-term notes bearing fixed rates of interest. Changes in market interest rates do not affect interest expense resulting from these outstanding long-term debt securities. However, the Company periodically repays its short-term debt borrowings through the issuance of new long-term debt securities. Changes in market interest

19

Table of Contents

rates may affect the interest rate and corresponding interest expense on any new issuances of long-term debt securities. In addition, short-term debt borrowings bear a variable rate of interest. As a result, changes in short-term interest rates will increase or decrease interest expense in future periods. For example, if the average amount of short-term debt outstanding was $25 million for the period of one year, a change in interest rates of 1% would result in a change in annual interest expense of approximately $250,000. The average interest rates on the Company’s short-term borrowings and intercompany money pool transactions for the three months ended March 31, 2018 and March 31, 2017 were 2.9% and 2.1%, respectively. The average interest rate on the Company’s short-term borrowings for the twelve months ended December 31, 2017 was 2.4%.

COMMODITY PRICE RISK

Although Unitil’s three distribution utilities are subject to commodity price risk as part of their traditional operations, the current regulatory framework within which these companies operate allows for full collection of electric power and natural gas supply costs in rates on a pass-through basis. Consequently, there is limited commodity price risk after consideration of the related rate-making.

REGULATORY MATTERS

Please refer to Note 6 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of Regulatory Matters.

ENVIRONMENTAL MATTERS

Please refer to Note 7 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of Environmental Matters.

20

Table of Contents

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Millions, except per share data)

(UNAUDITED)

(The accompanying notes are an integral part of these consolidated unaudited financial statements.)

21

Table of Contents

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Millions)

(UNAUDITED)

(The accompanying notes are an integral part of these consolidated unaudited financial statements.)

22

Table of Contents

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS (Cont.)

(Millions, except number of shares)

(UNAUDITED)

(The accompanying notes are an integral part of these consolidated unaudited financial statements.)

23

Table of Contents

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)

(UNAUDITED)

(The accompanying notes are an integral part of these consolidated unaudited financial statements.)

24

Table of Contents

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

(Millions, except number of shares)

(UNAUDITED)

(The accompanying notes are an integral part of these consolidated unaudited financial statements.)

25

Table of Contents

UNITIL CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – Unitil Corporation (Unitil or the Company) is a public utility holding company. Unitil and its subsidiaries are subject to regulation as a holding company system by the Federal Energy Regulatory Commission (FERC) under the Energy Policy Act of 2005. The following companies are wholly-owned subsidiaries of Unitil: Unitil Energy Systems, Inc. (Unitil Energy), Fitchburg Gas and Electric Light Company (Fitchburg), Northern Utilities, Inc. (Northern Utilities), Granite State Gas Transmission, Inc. (Granite State), Unitil Power Corp. (Unitil Power), Unitil Realty Corp. (Unitil Realty), Unitil Service Corp. (Unitil Service) and its non-regulated business unit Unitil Resources, Inc. (Unitil Resources). Usource Inc. and Usource L.L.C. are subsidiaries of Unitil Resources.

The Company’s earnings are seasonal and are typically higher in the first and fourth quarters when customers use natural gas for heating purposes.

Unitil’s principal business is the local distribution of electricity in the southeastern seacoast and state capital regions of New Hampshire and the greater Fitchburg area of north central Massachusetts, and the local distribution of natural gas in southeastern New Hampshire, portions of southern and central Maine and in the greater Fitchburg area of north central Massachusetts. Unitil has three distribution utility subsidiaries, Unitil Energy, which operates in New Hampshire, Fitchburg, which operates in Massachusetts and Northern Utilities, which operates in New Hampshire and Maine (collectively referred to as the distribution utilities).

Granite State is a natural gas transportation pipeline, operating 86 miles of underground gas transmission pipeline primarily located in Maine and New Hampshire. Granite State provides Northern Utilities with interconnection to three major natural gas pipelines and access to domestic natural gas supplies in the south and Canadian natural gas supplies in the north. Granite State derives its revenues principally from the transportation services provided to Northern Utilities and, to a lesser extent, third-party marketers.

A fifth utility subsidiary, Unitil Power, formerly functioned as the full requirements wholesale power supply provider for Unitil Energy. In connection with the implementation of electric industry restructuring in New Hampshire, Unitil Power ceased being the wholesale supplier of Unitil Energy on May 1, 2003 and divested of its long-term power supply contracts through the sale of the entitlements to the electricity associated with various electric power supply contracts it had acquired to serve Unitil Energy’s customers.

Unitil also has three other wholly-owned subsidiaries: Unitil Service; Unitil Realty; and Unitil Resources. Unitil Service provides, at cost, a variety of administrative and professional services, including regulatory, financial, accounting, human resources, engineering, operations, technology, energy management and management services on a centralized basis to its affiliated Unitil companies. Unitil Realty owns and manages the Company’s corporate office in Hampton, New Hampshire and leases this facility to Unitil Service under a long-term lease arrangement. Unitil Resources is the Company’s wholly-owned non-regulated subsidiary. Usource, Inc. and Usource L.L.C. (collectively, Usource) are wholly-owned subsidiaries of Unitil Resources. Usource provides brokering and advisory services to large commercial and industrial customers in the northeastern United States.

26

Table of Contents

Basis of Presentation – The accompanying unaudited consolidated financial statements of Unitil have been prepared in accordance with the instructions to Form 10-Q and include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018. For further information, please refer to Note 1 of Part II to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” of the Company’s Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (SEC) on February 1, 2018, for a description of the Company’s Basis of Presentation.

Utility Revenue Recognition – Gas Operating Revenues and Electric Operating Revenues consist of billed and unbilled revenue and revenue from rate adjustment mechanisms. Billed and unbilled revenue includes delivery revenue and pass-through revenue, recognized according to tariffs approved by federal and state regulatory commissions which determine the amount of revenue the Company will record for these items. Revenue from rate adjustment mechanisms is accrued revenue, recognized in connection with rate adjustment mechanisms, and authorized by regulators for recognition in the current period for future cash recoveries from, or credits to, customers.

Billed and unbilled revenue is recorded when service is rendered or energy is delivered to customers. However, the determination of energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each calendar month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenues are calculated. These unbilled revenues are calculated each month based on estimated customer usage by class and applicable customer rates and are then reversed in the following month when billed to customers.

In the first quarter of 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, and its subsequent clarifications and amendments outlined in ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2017-13, on a modified retrospective basis, which requires application to contracts with customers effective January 1, 2018, with the cumulative impact on contracts not yet completed as of December 31, 2017 recognized as an adjustment to the opening balance of Retained Earnings on the Company’s Consolidated Balance Sheets. There was no cumulative effect of adoption to be recognized as an adjustment to the opening balance of Retained Earnings on the Company’s Consolidated Balance Sheets. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements as of the adoption date or for the three months ended March 31, 2018. A majority of the Company’s revenue from contracts with customers continues to be recognized on a monthly basis based on applicable tariffs and customer monthly consumption. Such revenue is recognized using the invoice practical expedient which allows an entity to recognize revenue in the amount that directly corresponds to the value transferred to the customer.

As discussed below, the Company plans to disclose billed and unbilled revenue separately from rate adjustment mechanism revenue in the Notes to the Consolidated Financial Statements for periods in 2018 going forward, and will also provide this disclosure for prior periods for informational purposes.

The Company’s billed and unbilled revenue meets the definition of “revenues from contracts with customers” as defined in ASU 2014-09. Revenue recognized in connection with rate adjustment mechanisms is consistent with the definition of alternative revenue programs in Accounting Standards Codification (ASC) 980-605-25-3, as the Company has the ability to adjust rates in the future as a result of past activities or completed events. ASU 2014-09 requires the Company to disclose separately the amount of revenues from contracts with customers and alternative revenue program revenues.

27

Table of Contents

In the following tables, revenue is classified by the types of goods/services rendered and market/customer type. The lower revenues reported in the first quarter of 2018 to account for the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act of 2017 (TCJA) are shown separately in the table below for informational purposes.