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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2003

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.

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

UNITIL CORPORATION AND SUBSIDIARY COMPANIES
FORM 10-Q
For the Quarter Ended March 31, 2003

Table of Contents

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SAFE HARBOR CAUTIONARY STATEMENT

This report contains forward-looking statements which are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause the actual results to differ materially from those projected in these forward-looking statements include, but are not limited to; variations in weather, changes in the regulatory environment, customers’ preferences on energy sources, general economic conditions, increased competition and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of the Unitil Corporation (Unitil or the Company).

RESULTS OF OPERATIONS

In the first quarter this year, our customers experienced a record number of days with temperatures below freezing. This stands in sharp contrast to the first quarter last year when the warmest winter on record in New England adversely affected our Company’s sales of electricity and natural gas. Sales of electricity were up 12% and sales of natural gas were up 29% over last year. On average, heating degree-days (a measurement of a utility’s billed consumption) were 30% above last winter and 10% above normal in the areas served by our utility companies.

Earnings per share were $0.52 for the first quarter of 2003; up $0.16 compared to the $0.36 earned in the first quarter of 2002. This improved performance is primarily attributable to strong electric and gas sales volumes, driven by weather and system growth, and higher retail prices for electric and gas distribution services. Total Operating Revenues were $64.8 million for the first quarter of 2003 compared to $44.3 million for the same period last year.

In December 2002, the Company implemented new rates for electric and gas distribution services for all of its utility operating divisions. Those new rates reflect the recovery of higher operating costs, depreciation and amortization expense, taxes and a return on the Company’s utility investments. The Company recovers the costs of Fuel and Purchased Power and Gas energy supply in its rates as a pass through to customers at cost. Those energy supply costs were also higher in 2003 compared to 2002.

Total firm therm gas sales increased 29% in the first quarter of 2003, reflecting a colder winter heating season and an increase in the number of non-residential customers. Gas sales to residential customers were 28% higher than the first quarter last year and gas sales to Commercial/Industrial customers were 30% higher over the same period. Gas revenues in total increased by $5.5 million over the first quarter of 2002 to $12.4 million, reflecting higher unit sales, new gas distribution service rates and increased gas commodity wholesale supply prices compared to the prior year.

Total electric kilowatt-hour (kWh) sales volume increased over 11% in the first quarter of 2003 due as well to the colder winter heating season and customer growth over the same period last year. Residential kWh sales increased 12% and sales to Commercial/Industrial customers increased 11% compared to the first quarter last year. In total, electric revenues increased by $14.9 million in the first quarter of 2003 to $52.1 million compared to 2002 due to the increases in unit sales and new electric distribution service rates and an increase in wholesale commodity fuel prices. Both electric and gas supply costs are collected from customers through periodic cost recovery mechanisms, and therefore, changes in these costs do not affect the Company’s net income.

For the quarter ended March 31, 2003, Operation and Maintenance expenses increased $1.4 million over prior year net of the savings achieved by the Company from the management reorganization implemented in January, 2003. Approximately half of this increase is due to increased spending on expenses collected in revenues from cost reconciling rate mechanisms. These costs include amounts expended to implement electric utility industry restructuring in New Hampshire and higher spending over prior year for energy efficiency and conservation programs. Due to the reconciling nature of these costs, they do not have an impact on net income. The remaining portion primarily reflects higher employee and retiree related costs including health and pension costs, credit and collection costs and higher utility operating costs due to the colder than usual winter weather.

The $1.4 million increase in Depreciation and Amortization expenses during the same period was due to new utility asset depreciation rates put into place as a result of the implementation of new retail rates discussed above and the increase in utility plant capital additions placed in service during the past year. Local Property and Other taxes reflect these higher plant additions as well as an increase in payroll taxes in 2003 over 2002.

Interest Expense, net, was $0.2 million higher in the first quarter of 2003 than the same period last year, primarily due to higher short-term debt balances and lower interest income earned on Regulatory Asset balances. Federal and State income tax expense is higher in 2003 reflecting higher pre-tax earnings and a net increase in state tax rates.

CAPITAL REQUIREMENTS

Capital expenditures for the three months ended March 31, 2003 were approximately $6.0 million as compared to $3.4 million during the same period last year, an increase of $2.6 million. This increase is primarily the result of planned expenditures on new electric system supply lines that added needed capacity to the seacoast region of Unitil’s service territories and other capital expenditures related to customer growth. Annual capital expenditures for the year 2003 are estimated to be approximately $20.9 million as compared to $20.8 million for 2002. This projection reflects normal capital expenditures for utility system expansions, replacements and other improvements.

CRITICAL ACCOUNTING POLICIES

The preparation of the Company’s financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management 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. Actual results could differ from those estimates. The following is a summary of the Company’s most critical accounting policies, which are defined as those policies where judgments or uncertainties could materially affect the application of those policies. For a complete discussion of the Company’s significant policies, refer to the attached financial statements and Note 1: Summary of Significant Accounting Policies.

Regulatory Accounting – The Company is a regulated utility and its principal business is the distribution of electricity and natural gas. Accordingly, the Company uses the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” In accordance with SFAS No. 71, the Company has recorded Regulatory Assets and Regulatory Liabilities which will be recovered in future electric and gas retail rates. The Company also has commitments under long-term contracts for the purchase of electricity from various suppliers. The annual costs under these contracts are included in Fuel and Purchased Power and Gas Purchased for Resale in the Consolidated Statements of Earnings and these costs are recoverable in current and future rates under various orders issued by state and federal regulators.

Commitments and Contingencies – The Company’s accounting policy is to record and/or disclose commitments and contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” For example, in 2002 the Company resolved a long standing contingency related to an environmental matter by entering into a fixed price contract to remediate the site while also settling on the funding of the project to be provided by the Company’s insurance carrier. As a result, management estimates that this matter will not have a material adverse effect on the Company’s financial position.

Newly Issued Pronouncements – In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires an investor with a majority of the variable interest in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. The Company is currently reviewing its investments and affiliations to determine whether the Company has any variable interest entities.

During fiscal 2003, the Company began following the guidelines of SFAS No. 143, “Accounting for Asset Retirement Obligations.” The adoption of this statement did not have a material adverse impact on the Company’s financial position or results of operations.

INTEREST RATE RISK

The Company meets its external financing needs by issuing short-term debt. The majority of the Company’s 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 rates may affect the interest rate and corresponding interest expense on any new long-term debt securities issued by the Company. In addition, the Company’s short-term debt borrowings bear a variable rate of interest. As a result, changes in short-term interest rates will increase or decrease the Company’s interest expense in future periods. For example, if the Company had an average amount of short-term debt outstanding of $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 rate on the Company’s short-term borrowings was 1.87% and 2.31% during the first three months of 2003 and 2002, respectively.

MARKET RISK

Please refer to Item 3.  “Quantitative and Qualitative Disclosures About Market Risk” discussed below on page 17.

REGULATORY MATTERS

Massachusetts Electric Operations Restructuring – Beginning March 1, 1998, Unitil’s Massachusetts utility subsidiary, Fitchburg Gas & Electric Company (FG&E), implemented its Restructuring Plan under the Massachusetts Electric Utility Restructuring Act of 1997 (Restructuring Act). As discussed in Note 6 to these Financial Statements, FG&E completed the divestiture of its entire regulated power supply business in 2000 in accordance with its Restructuring Plan. As of March 31, 2003, competitive suppliers were serving approximately 12% of FG&E’s load, mainly for large industrial customers.

On April 3, 2003, FG&E filed for an increase to its Standard Offer Service (SOS) fuel adjustment, effective May 1, 2003, to reflect a rise in prices for fuel oil and natural gas. The bill increase to residential SOS customers is approximately 1.9%. The increase in the SOS fuel adjustment does not affect net income, and is not subject to the rate cap required by the Restructuring Act.

New Hampshire Restructuring – As discussed in Note 6 to these Financial Statements, under Unitil’s New Hampshire restructuring plan, Unitil agreed to divest its existing power supply portfolio and conduct a solicitation for new power supplies from which to meet the 2003 obligations of its New Hampshire utility subsidiary, Unitil Energy System (UES) for ongoing Transition and Default Service. On February 26, 2003, Unitil filed for final approval from the New Hampshire Public Utilities Commission (NHPUC) of the Agreement among Unitil Power, UES and Mirant Americas Energy Marketing, LP. (Mirant), including final tariffs for UES for stranded cost recovery and Transition and Default Service. On March 14, 2003, the NHPUC approved the agreement between Unitil Power, UES and Mirant, which was entered into on February 25, 2003, under which Mirant will purchase the entitlements to Unitil Power’s Supply portfolio and provide Transition and Default Service to the customers of UES. The final amount of Unitil Power’s recoverable stranded costs, calculated on the basis of the amounts agreed to be paid by the parties under such Agreement for the Unitil Power power supply portfolio, was determined to be $108.7 million, with a recovery period of eight years. As of December 31, 2002, the Company had estimated these recoverable stranded costs and accordingly recorded on its balance sheet as of that date $94.5 million as Power Supply Buyout Obligations and Regulatory Assets. The NHPUC Order completes the state approval process for Unitil’s restructuring plan under which UES will implement customer choice for its customers on May 1, 2003.

Rate Proceedings – On March 21, 2003, the Massachusetts Department of Telecommunications and Energy (MDTE) opened an investigation into FG&E’s dealings with Enermetrix, Inc. (Enermetrix). Enermetrix provides an internet-based energy auction service that is used by utilities to post their natural gas and electric power needs for bids. FG&E used the Enermetrix Exchange to post its default service solicitations in September 2001 and March 2002 and Enermetrix earned approximately $19,000 in fees from these transactions. At the time of these solicitations, FG&E’s parent, Unitil Corporation, had an approximately 9% ownership interest in Enermetrix. The MDTE is investigating whether FG&E is in compliance with relevant statutes and regulations pertaining to transactions with affiliated companies and the MDTE’s Order setting forth the requirements for the pricing and procurement of default service. Management believes the outcome of this matter will not have a material adverse effect on the financial position of the company.

On the gas side, FG&E continues to provide a multi-year refund through its Cost of Gas Adjustment Clause in compliance with the MDTE’s May 2001 Order finding that FG&E had over-collected fuel inventory finance charges. At March 31, 2003, the unamortized balance of this refund was $1.2 million. FG&E believes a refund is not justified or warranted and has appealed the MDTE’s ruling to the Massachusetts Supreme Judicial Court (SJC). On a preliminary motion, a single justice of the SJC declined to stay the MDTE’s Order based on a finding that refunds made by FG&E may be recouped if FG&E prevails on the merits of its claims. The review of the MDTE Order by the SJC is pending.

On April 1, 2003, UES filed a Petition with the NHPUC for authority to adjust its Stranded Cost Charge and to issue short-term debt. UES requests authority to adjust the Stranded Cost Charge in order to provide for the timely recovery, rather than deferral, of a fuel and purchased power under-collection of approximately $8.2 million. The under-collection is due to the increases in fuel prices in 2003. UES also requests authority to increase its short-term debt limits to meet current and future working capital requirements, provide needed financial flexibility and optimize the cost and timing of future long-term financings.

ENVIRONMENTAL MATTERS

Former Electric Generating Station – As discussed in Note 7 to these Financial Statements, the Company is remediating environmental conditions at a former electric generating station located at Sawyer Passway, which FG&E sold to WRW, a general partnership, in 1983. The Company has recorded the estimated cost of the remediation action in Current Liabilities and an offsetting asset reflecting insurance proceeds in Current Assets. At the balance sheet date, net of amounts expended through the first quarter of 2003, the remaining project cost was an estimated $2.6 million.

Item 1. Financial Statements

UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTSOF EARNINGS
(000‘s except common shares and per share data)
(UNAUDITED)

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

UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(000‘s)

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

UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (Cont.)
(000‘s)

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

UNITIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000‘s)
(UNAUDITED)