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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

OR

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE

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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Based on the closing price of June 30, 2003, the aggregate market value of common stock held by non-affiliates of the registrant was $112,473,808.

The number of common shares outstanding of the registrant was 5,507,880 as of February 24, 2004.

Documents Incorporated by Reference:

Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held April 15, 2004, are incorporated by reference into Part III of this Report.

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UNITIL CORPORATION

FORM 10-K

For the Fiscal Year Ended December 31, 2003

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PART I

Item 1. Business

UNITIL CORPORATION

Unitil Corporation (Unitil or the Company) was incorporated under the laws of the State of New Hampshire in 1984. Unitil is a registered public utility holding company under the Public Utility Holding Company Act of 1935 (PUHCA). The following companies are wholly-owned subsidiaries of Unitil:

In December 2002, Exeter & Hampton Electric Company (E&H), a wholly-owned subsidiary of Until, was merged with and into Concord Electric Company (CECo), also a wholly-owned subsidiary of Unitil. CECo changed its name to Unitil Energy Systems, Inc. (UES) immediately following the merger.

Unitil’s principal business is the retail distribution of electricity in the southeastern seacoast and capital city areas of New Hampshire and the retail distribution of both electricity and natural gas in the greater Fitchburg area of north central Massachusetts, through our two utility subsidiaries, UES and FG&E, collectively referred to as the retail distribution utilities. Unitil’s retail distribution utilities serve approximately 112,800 electric and natural gas customers in their franchise areas. Unitil’s utility subsidiaries have effectively divested their ownership interest in electric generating facilities and do not own or operate major transmission facilities. Rather, the retail distribution companies are local “pipes and wires” electric and natural gas distribution companies with a combined investment in net utility plant of $195.1 million at December 31, 2003. Unitil’s total revenues were $220.7 million in 2003. Net income applicable to common shareholders for 2003 was $7.7 million. Substantially all of Unitil’s revenues and net income are derived from regulated utility operations.

A third utility subsidiary, Unitil Power, formerly functioned as the full requirements wholesale power supply provider for UES. In connection with the implementation of electric industry restructuring in New Hampshire, Unitil Power ceased being the wholesale supplier of UES 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 UES’ 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 and management services on a centralized basis to its affiliated Unitil companies. Unitil Realty owns and manages the Company’s corporate office building and property located 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 unregulated subsidiary that provides energy brokering, consulting and management related services. Usource, Inc. and Usource L.L.C. (collectively, Usource) are wholly-owned subsidiaries of Unitil Resources. Usource provides energy brokering services, as well as various energy consulting services to large commercial and industrial customers in the northeastern United States.

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OPERATIONS

Electric Utility Operations

Unitil’s electric utility operations are conducted through the retail distribution utilities, UES and FG&E. Revenues from Unitil’s electric utility operations were $190.9 million for 2003. Earnings from electric utility operations were $7.0 million for the same 12-month period.

The primary business of the Company’s electric utility operations is the local distribution of electricity to customers in the retail distribution utilities’ franchise areas. As a result of the implementation of retail choice in New Hampshire and Massachusetts, Unitil’s customers are free to contract for their supply of electricity with third-party suppliers. Both UES and FG&E supply electricity to those customers who do not obtain their supply from third-party suppliers, with the costs associated with electricity supplied by the Company being recovered on a pass-through basis under periodically-adjusted rates.

UES is engaged principally in the retail distribution of electricity to approximately 70,000 customers in New Hampshire in the capital city of Concord as well as 12 surrounding towns and all or part of 16 towns in the southeastern and seacoast regions of New Hampshire, including the towns of Hampton, Exeter, Atkinson and Plaistow. UES’s franchise areas consist of approximately 408 square miles.

The state capital of New Hampshire is located within UES’s franchise areas, and includes the executive, legislative and judicial branches and offices and facilities for all major state government services as well as several federal government facilities. In addition, UES’s franchise areas are retail trading and recreation centers for the north central and southeastern parts of the state. These areas serve diversified commercial and industrial businesses, including manufacturing firms engaged in the production of electronic components, wires and plastics. UES’ franchise areas include popular resort areas and beaches along the Atlantic Ocean. UES’s 2003 retail electric operating revenues were $130.4 million, of which approximately 42% were derived from residential sales and 58% from commercial/industrial sales. UES’s earnings for the same 12-month period were $3.7 million.

FG&E is engaged in the retail distribution of both electricity and natural gas in the city of Fitchburg and several surrounding communities. FG&E’s franchise area encompasses approximately 170 square miles. Electricity is supplied and distributed by FG&E to approximately 27,000 customers in the communities of Fitchburg, Ashby, Townsend and Lunenburg. FG&E’s industrial customers include paper manufacturing and paper products companies, rubber and plastics manufacturers, chemical products companies and printing, publishing and allied industries. FG&E’s 2003 retail electric operating revenues were $60.5 million, of which approximately 38% were derived from residential sales and 62% from commercial/industrial sales. FG&E’s earnings from electric utility operations were $3.3 million in 2003.

Gas Utility Operations

Natural gas is supplied and distributed by FG&E to approximately 15,000 retail customers in the communities of Fitchburg, Lunenburg, Townsend, Ashby, Gardner and Westminster, all located in Massachusetts. Revenues from FG&E’s gas utility operations were $28.6 million in 2003. Earnings from FG&E’s gas utility operations were $1.1 million for the same 12-month period.

As a result of the introduction of retail choice for all natural gas customers in Massachusetts, FG&E’s customers are free to contract for their supply of natural gas with third-party suppliers. FG&E continues to provide natural gas supply services to those customers who do not obtain their supply from third-party suppliers, with the actual costs associated with natural gas supplied by FG&E being recovered on a pass-through basis under periodically-adjusted rates.

FG&E’s 2003 gas operating revenues were $28.6 million, of which approximately 55% was derived from residential firm sales, 44% from commercial/industrial firm sales and 1% from interruptible sales.

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Seasonality

Natural gas sales in New England are seasonal, and the Company’s results of operations reflect this seasonal nature. Accordingly, results of operations are typically positively impacted by gas operations during the five heating season months, from November through March. Electric sales in New England are far less seasonal than natural gas sales; however, the highest usage typically occurs in both the summer and winter months due to air cooling and heating requirements, respectively.

Non-Utility, Unregulated Operations and Other

Unitil’s non-utility, unregulated operations are comprised of Unitil Resources and its subsidiaries, which are collectively referred to as Usource. Unitil Resources provides energy brokering services, through Usource, as well as various energy consulting services to large commercial and industrial customers in the northeastern United States. Revenues from Unitil’s unregulated operations were $1.1 million and $0.8 million in 2003 and 2002, respectively. Non-utility, unregulated operations recorded accounting book losses of $0.6 million in 2003.

Unitil’s other subsidiaries include Unitil Service and Unitil Realty, which provide centralized facilities, management and administrative services to Unitil’s affiliated companies. Unitil’s consolidated net income includes the earnings of the holding company and these subsidiaries. The earnings of these subsidiaries are principally derived from income earned on short-term investments and real property owned for Unitil’s and its subsidiaries’ use and is reported in Other segment income. Other segment earnings for 2003 were approximately $254,000.

(For details on Unitil’s Results of Operations, see Part II, Item 7 herein.)

(For segment information, see Part II, Item 8, Note 11 herein.)

RATES AND REGULATION

As a registered holding company under PUHCA, Unitil and its subsidiaries are regulated by the Securities and Exchange Commission (SEC) with respect to various matters, including: the issuance of securities, capital structure and certain acquisitions and dispositions of assets. UES and FG&E are subject to regulation by the New Hampshire Public Utilities Commission (NHPUC) and the Massachusetts Department of Telecommunications and Energy (MDTE), respectively, with respect to their rates, issuance of securities and other accounting and operational matters. Certain aspects of the Company’s utility operations as they relate to wholesale and interstate business activities are also regulated by the Federal Energy Regulatory Commission (FERC). In the past several years, the Company has completed the restructuring of its electric and natural gas operations resulting from the implementation of retail choice as mandated by the States of New Hampshire and Massachusetts.

Unitil’s retail distribution utilities have franchises to deliver electricity and/or natural gas to all customers in their franchise areas, at rates established under traditional cost of service regulation. Under this regulatory structure, through their distribution charges, UES and FG&E recover the cost of providing distribution service to their customers based on a historical test year, in addition to earning a return on their capital investment in utility assets. In 2002, the retail distribution utilities completed rate proceedings and were authorized by the NHPUC and MDTE to implement increased rates for electric and natural gas distribution operations beginning in December of that year. UES and FG&E also recover the actual cost of any electricity or natural gas they supply to their customers, as well as certain costs associated with industry restructuring, through periodically-adjusted rates.

In recent years, there has been significant legislative and regulatory activity to restructure the utility industry in order to introduce greater competition in the supply and sale of electricity and natural gas, while continuing to regulate the distribution operations of Unitil’s retail distribution utilities. Unitil implemented the restructuring of its electric and gas operations in Massachusetts in 1998 and 2000, respectively and implemented the final phase

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of a restructuring settlement for its New Hampshire electric operations on May 1, 2003. Following electric industry restructuring, Unitil’s retail distribution utilities have a continuing obligation to submit filings in both states that demonstrate their compliance with legislative and regulatory mandates and provide for timely recovery of costs in accordance with their approved restructuring plans.

In connection with industry restructuring and the implementation of retail choice for our customers in New Hampshire and Massachusetts, Unitil Power divested of its long-term power supply contracts and FG&E divested of its long-term power supply contracts and owned generation assets. Unitil Power divested its long-term power supply contracts to a subsidiary of Mirant Corporation (Mirant) and FG&E divested its owned generation assets and long-term power supply contracts to Select Energy, Inc. (Select Energy), a subsidiary of Northeast Utilities, Inc. Unitil Power’s and FG&E’s long-term power supply contracts were divested through the sale of the entitlements to the electricity associated with those contracts and owned generation assets. UES and FG&E recover in their rates all the costs associated with the divestiture of their power supply portfolios as a result of electric industry restructuring.

Unitil’s customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electric supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. Accordingly, UES and FG&E contract with wholesale power suppliers for the electricity necessary to meet their regulated energy supply obligations. Similarly, FG&E’s natural gas customers have the option to contract for their natural gas supply with third-party suppliers and FG&E remains the default service provider for these natural gas customers. The costs associated with the acquisition of such wholesale electric and natural gas supplies for customers who do not contract with third-party suppliers are recovered from those customers through periodic rate and cost recovery reconciliation mechanisms with no profit margin to UES or FG&E.

The Company has secured regulatory approval from both New Hampshire and Massachusetts state regulators for the recovery of approximately $203 million of power supply-related stranded costs principally over the next 6 to 8 years. Also, the Company has implemented comprehensive customer and financial information systems to accommodate the transition to competitive energy markets and retail choice. Unitil’s utility customers in Massachusetts have had the ability to choose their electric or gas supplier since March 1, 1998 and November 1, 2000, respectively and retail choice became available to the Company’s electric customers in New Hampshire on May 1, 2003.

ELECTRIC POWER SUPPLY

FG&E and UES contract directly for their electric supply with various wholesale suppliers. The wholesale power markets are conducted under the auspices of the New England Power Pool (NEPOOL) and the Independent System Operator—New England (ISO-NE).

FG&E, Unitil Power, and UES are members of NEPOOL. NEPOOL was formed in 1971 to assure reliable operation of the bulk power system in the most economic manner for the region. NEPOOL is governed by an agreement (NEPOOL Agreement) that is filed with and subject to the jurisdiction of the FERC. Under the NEPOOL Agreement and the NEPOOL Open Access Transmission Tariff (OATT), to which virtually all New England electric utilities are parties, substantially all operation and dispatching of electric generation and bulk transmission capacity in New England is performed on a regional basis. The NEPOOL Agreement and the OATT impose generating capacity and reserve obligations and provide for the use of major transmission facilities and support payments associated therewith. The most notable benefits of NEPOOL are coordinated power system operation in a reliable manner and a supportive business environment for the development of a competitive electric marketplace. The regional bulk power system is operated by an independent corporate entity, the ISO-NE, in order to avoid any opportunity for conflicting financial interests between the system operator and the market-driven participants.

There continue to be ongoing legislative and regulatory initiatives that are primarily focused on the deregulation of the generation and supply of electricity and the corresponding development of a competitive

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market place from which customers choose their electric energy supplier. As a result, the NEPOOL Agreement continues to be restructured. NEPOOL’s membership provisions have been broadened to cover all entities engaged in the electricity business in New England, including power marketers and brokers, independent power producers, load aggregators and retail customers in states that have enacted retail access statutes. Various energy and capacity products are traded in open markets, with transmission access and pricing subject to the regional OATT designed to promote competition among power suppliers. On March 1, 2003, ISO-NE implemented a Standard Market Design (SMD) that is intended to improve the ability to trade power between New England and other regions throughout the northeast. On October 31, 2003, ISO-NE and the major transmission owners in New England filed with the FERC to form a Regional Transmission Organization (RTO) with a proposed effective date not earlier than March 1, 2004. The implementation of the RTO, which is being contested at FERC, will further revise the conduct of wholesale markets in New England. The filing also proposes to eliminate NEPOOL as an organization and require all current NEPOOL members to be part of the RTO system. SMD, the formation of an RTO and other wholesale market changes are not expected to have a material impact on Unitil’s results of operations because of cost recovery mechanisms for wholesale energy costs approved by state regulators.

Energy Resources—In connection with industry restructuring and the implementation of retail choice in New Hampshire and Massachusetts, FG&E and Unitil Power have effectively divested their long-term power supply contracts and the owned generation assets of FG&E. Unitil Power divested its long-term power supply contracts to a subsidiary of Mirant Corporation, Mirant Americas Energy Marketing, LP (Mirant), which was approved by the NHPUC on March 14, 2003. The NHPUC Order completed the state approval process for Unitil’s restructuring plan under which UES implemented customer choice for its customers on May 1, 2003.

FG&E divested its owned generation assets and long-term power supply contracts to Select Energy, a subsidiary of Northeast Utilities. Under the Select Energy contract, which was approved by the MDTE in January 2000, and went into effect February 1, 2000, FG&E began selling the entire output from its remaining long-term power supply contracts and the output of its two joint ownership units to Select Energy. Upon the sale of FG&E’s share of Millstone Unit 3 in 2001, this portion of the contract sale ceased.

Unitil’s customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electric supply from third-party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. Accordingly, UES and FG&E contract with wholesale power suppliers for the electricity necessary to meet their regulated energy supply obligations which are provided through Standard Offer Service and Default Service in Massachusetts and Transition Service and Default Service in New Hampshire. The costs associated with the acquisition of such regulated wholesale electric supplies are recovered on a pass-through basis from customers through periodically-adjusted rates.

FG&E has a contract for Standard Offer Service with Constellation Power Source through the end of the Standard Offer Service period in Massachusetts in February 2005. Beginning December 1, 2000, through December 1, 2003, FG&E procured Default Service through a bid process every six months. Effective December 1, 2003, as a result of revised regulatory requirements ordered by the MDTE, FG&E procures 50% of its Small Customer Default Service requirements semi-annually, for twelve-month terms. FG&E procures 100% of its Large Customer Default Service requirements for a three-month period.

Under the agreement whereby Mirant purchased the entitlements to Unitil Power’s long-term purchase power supply portfolio, it provides UES’ Transition and Default Service through April 30, 2006 for Small Customers and through April 30, 2005 for Large Customers at fixed prices.

Since April 1, 1998, each electric utility has been required to carry an allocated share of the NEPOOL capability responsibility under the NEPOOL Agreement. FG&E’s Standard Offer Service supplier, Constellation Power Source, and FG&E’s periodic Default Service suppliers are responsible for serving FG&E’s load obligations and associated capability responsibility under their respective contracts. Similarly, under the agreement between Unitil Power, UES and Mirant, whereby Mirant provides wholesale power to UES for

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Transition and Default Service, Mirant is also responsible for serving UES’ load obligations and associated capability responsibility. Unitil Power no longer has any load serving obligations in NEPOOL.

GAS SUPPLY

Unitil’s customers in Massachusetts now have the opportunity to purchase their gas supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort. The costs associated with the acquisition of such wholesale natural gas supplies for customers who do not contract with third-party suppliers are recovered through periodically-adjusted rates.

FG&E distributes natural gas purchased from domestic and Canadian suppliers under long-term contracts as well as gas purchased from producers and marketers on the spot market. The following tables summarize actual gas purchases by source of supply and the cost of gas sold for the years 2000 through 2003.

Sources of Gas Supply

(Expressed as percent of total MMBtu of gas purchased)

Cost of Gas Sold

As a supplement to pipeline natural gas, FG&E owns a propane air gas plant and a liquefied natural gas (LNG) storage and vaporization facility. These plants are used principally during peak load periods to augment the supply of pipeline natural gas.

ENVIRONMENTAL MATTERS

The Company’s past and present operations include activities that are generally subject to extensive federal and state environmental laws and regulations. The Company is in general compliance with all applicable environmental and safety laws and regulations, and Management believes that as of December 31, 2003, there are no material losses reasonably possible in excess of recorded amounts. However, there can be no assurance that significant costs and liabilities will not be incurred in the future. It is possible that other developments, such as increasingly stringent federal, state or local environmental laws and regulations could result in increased environmental compliance costs.

Sawyer Passway MGP Site—The Company continues to work with environmental regulatory agencies to identify and assess environmental issues at the former manufactured gas plant (MGP) site at Sawyer Passway, located in Fitchburg, Massachusetts. FG&E proceeded with site remediation work as specified on the Tier 1B

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permit issued by the Massachusetts Department of Environmental Protection (DEP), which allows FG&E to work towards temporary remediation of the site. Work performed in 2002 was associated with the five-year review of the Temporary Solution submittal (Class C Response Action Outcome) under the Massachusetts Contingency Plan that was filed for the site in 1997. Completion of this work has confirmed the Temporary Solution status of the site for an additional five years. A status of temporary closure requires FG&E to monitor the site until a feasible permanent remediation alternative can be developed and completed.

Since 1991, FG&E has recovered the environmental response costs incurred at this former MGP site pursuant to a MDTE approved Settlement Agreement (Agreement). The Agreement allows FG&E to amortize and recover from gas customers, over succeeding seven-year periods, the environmental response costs incurred each year. Environmental response costs are defined to include liabilities related to manufactured gas sites, waste disposal sites or other sites onto which hazardous material may have migrated as a result of the operation or decommissioning of Massachusetts gas manufacturing facilities from 1882 through 1978. In addition, any recovery that FG&E receives from insurance or third parties with respect to environmental response costs, net of the unrecovered costs associated therewith, are split equally between FG&E and its gas customers. The total annual charge for such costs assessed to gas customers cannot exceed five percent of FG&E’s total revenue for firm gas sales during the preceding year. Costs in excess of five percent will be deferred for recovery in subsequent years.

Former Electric Generating Station—FG&E has remediated environmental conditions at a former electric generating station also located at Sawyer Passway in Fitchburg, Massachusetts, which FG&E sold in 1983 to a general partnership, Rockware, who demolished several exterior walls of the generating station in order to facilitate removal of certain equipment. The demolition of the walls and the removal of generating equipment resulted in damage to asbestos-containing insulation materials inside the building, which had been intact and encapsulated at the time of the sale of the structure.

When Rockware encountered financial difficulties and failed to respond adequately to Orders of the environmental regulators to remedy the situation, FG&E agreed to take steps at that time and obtained DEP approval to temporarily enclose, secure and stabilize the facility. Based on that approval, between September and December 1989, contractors retained by FG&E stabilized the facility and secured the building. This work did not permanently resolve the problems caused by Rockware, but was deemed sufficient for the then foreseeable future.

Due to the continuing deterioration of this former electric generating station and Rockware’s continued lack of performance, FG&E, in concert with the DEP and the U.S. Environmental Protection Agency (EPA), conducted further testing and survey work during 2001 to ascertain the environmental status of the building. Those surveys revealed continued deterioration of the asbestos-containing insulation materials in the building.

By letter dated May 1, 2002, the EPA notified FG&E that it was a Potentially Responsible Party for planned remedial activities at the site and invited FG&E to perform or finance such activities. FG&E and the EPA entered into an Agreement on Consent, whereby FG&E, without an admission of liability, conducted environmental remedial action to abate and remove asbestos-containing and other hazardous materials. This project was completed during the fourth quarter of 2003. FG&E received complete coverage from its insurance carrier for this remediation project and the resolution of this matter did not have a material adverse impact on the Company’s financial position.

EMPLOYEES

As of December 31, 2003, the Company and its subsidiaries had 322 full-time and part-time employees. Management considers the Company’s relationship with employees to be good and has not experienced any major labor disruptions since the early 1960’s.

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There are approximately 100 employees represented by labor unions. In 2000, UES’ predecessor companies, E&H and CECo, entered into five-year pacts with their employees covered by collective bargaining agreements, which expire May 31, 2005. In 2000, FG&E reached a five-year pact with its employees covered by a collective bargaining agreement, which also expires May 31, 2005. The agreements provided discreet salary adjustments, established work practices and provided uniform benefit packages. The Company expects to successfully negotiate new agreements prior to the expiration dates of these contracts.

AVAILABLE INFORMATION

Unitil’s Internet address is www.unitil.com. There the Company makes available, free of charge, its SEC fillings, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports as well as amendments to those reports. These reports are made available through the Investors section of Unitil’s website via a direct link to the section of the SEC’s website which contains Unitil’s SEC filings.

The Company’s current Code of Ethics was approved by Unitil’s Board of Directors on January 15, 2004. This Code of Ethics, along with any amendments or waivers, is also available on Unitil’s website.

Unitil’s common stock is listed on the American Stock Exchange under the ticker symbol “UTL.”

MANAGEMENT

The following table provides information about our directors and senior management as of February 27, 2004:

Robert G. Schoenberger has been Unitil’s Chairman of the Board and Chief Executive Officer since 1997 and Unitil’s President since 2003. Prior to his employment with Unitil, he was President and Chief Executive Officer of the New York Power Authority (a state owned public power enterprise) from 1993 until 1997. He is also a Director of the Greater Seacoast (NH) United Way, Director of Southwest Power Pool, Inc. and Director and Vice Chairman of Exeter Health Resources.

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Mark H. Collin was appointed Unitil’s Senior Vice President and Chief Financial Officer in February 2003. Mr. Collin has served as Unitil’s Treasurer since 1998. Since 1992, he has been Treasurer of UES and FG&E. Mr. Collin joined Unitil in 1988.

Thomas P. Meissner, Jr. has been Unitil’s Senior Vice President, Operations since February 2003. Mr. Meissner joined Unitil in 1994 and served as Unitil’s Director of Engineering from 1998 to 2003. From 1985 to 1994, he was employed by the Public Service Company of New Hampshire.

George R. Gantz has been Unitil’s Senior Vice President, Customer Services and Communications since January 2003. Mr. Gantz previously served as Unitil’s Senior Vice President, Communication and Regulation from 1994 to 2003. Mr. Gantz joined Unitil in 1983.

George E. Long, Jr. has been Unitil’s Vice President, Administration since February 2003. Mr. Long joined Unitil in 1994 and was Director, Human Resources from 1998 to 2003. Prior to his employment with Unitil, Mr. Long was the Director of Compensation and Benefits at Monarch Life Insurance Company from 1985 to 1994.

Raymond J. Morrissey has been Unitil’s Vice President, Information Systems since February 2003. From 1992 to 2003, he served as Unitil’s Vice President of Customer Service, and from 1991 to 1992, he was the General Manager of Unitil’s subsidiary, FG&E. Mr. Morrissey joined Unitil in 1985.

Todd R. Black has been Unitil’s Vice President, Usource since January 2003. He served as Vice President, Sales and Marketing for Usource from 1998 to 2003. Prior to his employment with Unitil, he served as Vice President, Services Delivery for Energy USA, the unregulated subsidiary of Bay State Gas Company, from 1988 until 1998.

Laurence M. Brock, Unitil’s Vice President and Controller, joined Unitil in 1995 and is a Certified Public Accountant in the State of New Hampshire. Prior to his employment with Unitil, Mr. Brock served as a Corporate Controller with a group of diversified financial services and manufacturing companies. Mr. Brock gained his public accounting experience with Coopers & Lybrand in Boston, Massachusetts.

David K. Foote has been Unitil’s Vice President, Energy Contracts since 1984. Mr. Foote previously served as Senior Vice President of Unitil’s subsidiary, FG&E, where he began working for the Company in 1968.

Sandra L. Whitney has been Unitil’s Corporate Secretary and Secretary of the Board since February 2003. Ms. Whitney has been the Corporate Secretary of Unitil’s subsidiary companies, FG&E, UES, Unitil Power, Unitil Realty and Unitil Service since 1994. Ms. Whitney joined Unitil in 1990.

David P. Brownell was a Senior Vice President of Tyco International Ltd. from 1995 to 2003. He had been with Tyco since 1984. Mr. Brownell is also Vice Chairman of the University of New Hampshire Foundation.

Michael J. Dalton was Unitil’s President and Chief Operating Officer from 1984 to 2003. Mr. Dalton is a member of the Advisory Board of the University of New Hampshire College of Engineering and Physical Sciences.

Albert H. Elfner, III was the Chairman, from 1994, and Chief Executive Officer, from 1995, of Evergreen Investment Management Company until his retirement in 1999. Mr. Elfner is also a Director of NGM Insurance Company and Optimum Q Funds.

Ross B. George is the Chairman of the Board of Five G Management, LLC. He resigned as a Director of Simonds Industries, Inc. in August 2003 and served as their Chairman of the Board from 1999-2001 and their Chief Executive Officer from 1995 to 1999.

Edward F. Godfrey was the Executive Vice President and Chief Operating Officer of Keystone Investments, Incorporated from 1997 until his retirement in 1998. While at Keystone Investments, he was also a Senior Vice President, Chief Financial Officer and Treasurer from 1988 to 1996. Mr. Godfrey is also a Director of Reilly Mortgage Group.

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Michael B. Green has been the President and Chief Executive Officer of Capital Region Health Care and Concord Hospital since 1992. He serves as an adjunct faculty member of Dartmouth Medical School. He also serves as Chairman of the Board of the Foundation for Healthy Communities and as a Director on the Board of Merrimack County Savings Bank.

Eben S. Moulton has been the Managing Partner of Seacoast Capital Corporation since 1995. Mr. Moulton is also a Director of IEC Electronics, a Director of six private companies and a Trustee of Colorado College.

M. Brian O’Shaughnessy has been the Chairman of the Board, Chief Executive Officer and President of Revere Copper Products, Inc. since 1988. Mr. O’Shaughnessy also serves on the Board of Directors of the National Association of Manufacturers, the International Copper Association, the Copper Development Association and the Copper and Brass Fabricators Council. He also serves in New York State as Chairman of the Industrial Energy Consumer Coalition, and as a member of the Board of Directors of the Multiple Intervenors and the Economic Development Growth Enterprise.

Charles H. Tenney, III has been Director of Operations for Brainshift.com, Inc. since 2002. He served as a financial advisor for H&R Block Financial Advisors from 2001 to 2002 and as the Director of Corporate Services for Log On America, Inc. from 1999 to 2000. From 1997 to 1999, he served as the Secretary of both Northern Utilities, Inc. and Granite State Gas Transmission, Inc. From 1991 to 1999, he served as the Clerk of Bay State Gas Company, a subsidiary of NiSource, Inc.

Dr. Sarah P. Voll has been the Vice President, National Economic Research Associates, Inc. (NERA) since 1999. Dr. Voll was also a Senior Consultant at NERA from 1996 to 1999.

INVESTOR INFORMATION

Annual Meeting

The annual meeting of shareholders is scheduled to be held at the offices of the Company, 6 Liberty Lane West, Hampton, New Hampshire, on Thursday, April 15, 2004, at 10:30 a.m.

Transfer Agent

The Company’s transfer agent, EquiServe, is responsible for shareholder records, issuance of stock certificates, and the distribution of Unitil’s dividends and IRS Form 1099-DIV. Shareholders may contact EquiServe at:

Mail: EquiServe, P.O. Box 43010, Providence, RI 02940-3010

Telephone: 800-736-3001 (Outside MA); 781-575-3100 (Within MA)

Investor Information

For information about the Company and your investment, you may call the Company directly, toll-free, at: 800-999-6501 and ask for the Investor Relations Representative; visit the Investor page at www.unitil.com; or contact the transfer agent, EquiServe, at the number listed above.

Special Services & Shareholder Programs Available

To enroll, please contact the Company’s Investor Relations Representative at 800-999-6501.

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To enroll, please contact the Company’s Investor Relations Representative at 800-999-6501.

For information, please contact EquiServe at the number listed above or the Company’s Investor Relations Representative at 800-999-6501.

Item 2. Properties

As of December 31, 2003, Unitil owned, through its retail distribution utilities: two operation centers, approximately 2,113 pole miles of local transmission and distribution overhead electric lines and 371 conduit bank miles of underground electric distribution lines, along with 48 electric substations, including three mobile electric substations. FG&E’s natural gas operations property includes a liquid propane gas plant, a liquid natural gas plant and 311 miles of underground gas mains. In addition, Unitil’s real estate subsidiary, Unitil Realty, owns the Company’s corporate headquarters building and the 12 acres on which it is located.

UES owns and maintains distribution operations centers in Concord, New Hampshire and Kensington, New Hampshire. UES’s 31 electric distribution substations, including a 5,000 kilovolt ampere (kVA) mobile substation, constitute 224,237 kVA of capacity (includes spares and mobile) for the transformation of electric energy from the 34.5 kV subtransmission voltage to other primary distribution voltage levels. The electric substations are located on land owned by UES or occupied by UES pursuant to a perpetual easement.

UES has a total of approximately 1,567 pole miles of local transmission and distribution overhead electric lines and a total of 204 conduit bank miles of underground electric distribution lines. The electric distribution lines are located in, on or under public highways or private lands pursuant to lease, easement, permit, municipal consent, tariff conditions, agreement or license, expressed or implied through use by UES without objection by the owners. In the case of certain distribution lines, UES owns only a part interest in the poles upon which its wires are installed, the remaining interest being owned by telephone companies.

Additionally, UES owns 137.7 acres of non-utility property located on the east bank of the Merrimack River in Concord, New Hampshire. Of the total acreage, 81.2 acres are located within an industrial park zone.

The physical utility properties of UES, with certain exceptions, and its franchises are pledged as security under its indenture of mortgage and deed of trust under which the respective series of first mortgage bonds of UES are outstanding.

FG&E’s electric properties consist principally of 546 pole miles of local transmission and distribution overhead electric lines, 167 conduit bank miles of underground electric distribution lines and 17 transmission and distribution stations including two mobile electric substations. The capacity of these substations totals 562,650 kVA.

FG&E owns a liquid propane gas plant and a liquid natural gas plant and the land on which they are located. FG&E also has 311 miles of underground steel, cast iron and plastic gas mains.

FG&E’s electric substations, with minor exceptions, are located on land owned by FG&E or occupied by FG&E pursuant to a perpetual easement. FG&E’s electric distribution lines and gas mains are located in, on or under public highways or private lands pursuant to lease, easement, permit, municipal consent, tariff conditions, agreement or license, expressed or implied through use by FG&E without objection by the owners. FG&E leases its distribution operations center located in Fitchburg, Massachusetts.

Management believes that the Company’s facilities are currently adequate for their intended uses.

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Item 3. Legal Proceedings

On January 25, 2002, Unitil Power and UES’ predecessor companies, CECo and E&H, filed a proposal with the NHPUC to comprehensively restructure the operations of CECo and E&H (forming UES), to provide for the full recovery of stranded costs by UES and permit retail choice to their customers in order to comply with the New Hampshire restructuring law. On October 25, 2002, the NHPUC approved a multiparty settlement on all major issues in the proceeding, including a procedure under which Unitil Power would divest its existing power supply portfolio and UES would conduct a solicitation for new power supplies from which to meet its ongoing transition and default service energy obligations. On March 14, 2003, the NHPUC approved an agreement between Unitil Power, UES and Mirant Americas Energy Marketing, L.P., under which Mirant will purchase the entitlements to Unitil Power’s Supply portfolio and provide transition and default service to the customers of UES (Mirant Agreement). The March, 2003, NHPUC Order completed the state approval process for Unitil’s restructuring plan. On May 1, 2003, UES implemented customer choice and Mirant began providing transition and default service to the customers of UES. UES’s new tariffs, effective May 1, 2003, include the recovery of certain restructuring related costs through several surcharges that are subject to reconciliation, or future audit and review, by the NHPUC. On May 6, 2003, the Company withdrew, with prejudice its challenge to the Final Plan in U.S. District Court . We refer you to the NHPUC’s orders in DE 01-247 and the U.S. District Court’s orders in Civil Docket No. 97-1216 for further information.

On July 14, 2003, Mirant and most of its subsidiaries, including MAEM, filed for bankruptcy under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. The pre-petition amount owed, and not paid, by MAEM under the Mirant Agreement was approximately $5.3 million. UES and Unitil Power elected to hold back pre-petition amounts due to Mirant of approximately $5.3 million against the amount owed by MAEM, and MAEM disputed UES’ and Unitil Power’s withholding of such payments. In September, 2003, Unitil Power and UES filed a motion with the Bankruptcy Court requesting that MAEM be required to assume or reject the Mirant Agreement by December 1, 2003. On November 14, 2003, MAEM, Unitil Power and UES filed a settlement with the Bankruptcy Court under which MAEM agreed to assume and cure all pre-petition obligations, and to settle certain other disputes. UES and Unitil Power agreed to accelerate the payment of amounts held back from MAEM. On December 10, 2003, the settlement was approved by the federal bankruptcy court and MAEM is continuing to fulfill its obligations under the Mirant Agreement.

The Company is involved in legal and administrative proceedings and claims of various types, which arise in the ordinary course of business. In the opinion of Management, based upon information furnished by counsel and others, the ultimate resolution of these claims will not have a material impact on the Company’s financial position.

Item 4. Submission of Matters to a Vote of Security Holders

None

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PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

The Registrant’s Common Stock is traded on the American Stock Exchange. As of December 31, 2003, there were 1,946 Common Shareholders of record.

Common Stock Data

Information regarding Securities Authorized for Issuance Under Equity Compensation Plans is set forth in the table below.

EQUITY COMPENSATION PLAN BENEFIT INFORMATION

NOTES: (also see Note 3 to the Consolidated Financial Statements)

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Item 6. Selected Financial Data

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Note references are to Notes to the Consolidated Financial Statements in Item 8.)

EARNINGS & DIVIDENDS

Unitil’s Net Income Applicable to Common Shareholders for 2003 was $7.7 million.

Earnings per Share was $1.58 for 2003; reflecting an improvement of $0.15, or 10%, measured with comparable earnings of $1.43 per share in 2002. Comparable results for 2002 exclude the restructuring charge of $0.20 per share for our management reorganization.

Contributing positively to the Company’s earnings performance were higher electric and gas sales margins driven by higher utility rates and electric and gas sales volumes in 2003, and operating expense and capital overhead savings achieved as a result of a management restructuring at the beginning of the year. 2003 marked the first full year of revenues earned by Unitil’s electric and gas utilities at their new higher base distribution rates, which went into effect on December 1, 2002. Partially offsetting these positive contributors were higher operating and maintenance expenses relating to employee benefits, uncollectible accounts expenses and collection costs, and higher system maintenance and regulatory compliance expenditures. Depreciation, Taxes and Interest expenses were also higher in 2003 supporting the higher utility investments and customer growth.

In 2003, the Company completed an unprecedented restructuring process brought about by the deregulation of the natural gas and electric industries in New Hampshire and Massachusetts. As a result of this process, Unitil’s retail distribution utilities have divested their entire generation and power supply portfolio, transforming the Company’s vertically integrated utility operations into principally a pipes-and-wires business providing natural gas and electric delivery services. The Company implemented the final phase of its electric industry restructuring in New Hampshire on May 1, 2003. Unitil had previously implemented state mandated restructuring of its electric and gas operations in Massachusetts in 1998 and 2000, respectively. Unitil’s customers in both New Hampshire and Massachusetts now have the opportunity to purchase their electricity or natural gas supply from third party vendors, though most customers continue to purchase such supplies through Unitil as the provider of last resort.

Diluted earnings per average common share were $1.58 for the year ended December 31, 2003, compared to $1.43 and $1.51, before other items, for 2002 and 2001 respectively. The return on average common equity (ROE) was 9.9% for 2003. Unitil’s annual common dividend was $1.38 in 2003, resulting in a payout ratio of 87%. At its January, 2004 meeting, the Unitil Board of Directors declared a regular quarterly dividend on the Company’s common stock of $0.345 per share, maintaining the Company’s continued commitment to a regular quarterly dividend.

The presentation of earnings per share data in the table above includes a line item identified as “Earnings per Share Before Other Items.” Though this measurement is based on Generally Accepted Accounting Principles (GAAP) consistently applied, the measurement itself is not specifically defined under GAAP and is therefore required to be presented as a non-GAAP measure. “Earnings per Share Before Other Items” is a non-GAAP measure and may not be comparable to other non-GAAP measures of earnings per share used by other

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companies. “ Management believes this measure is useful to investors because it includes the same company-specific information that is used by Management to assess the Company’s financial performance.

In 2002, Unitil recorded a Restructuring Charge of $1.6 million before taxes, or ($0.20) per share, related to the elimination of 19 management and administrative positions. In 2001, as a result of industry restructuring-related regulatory orders, Unitil recognized an Extraordinary Item to reduce Regulatory Assets by $3.9 million after tax, or ($0.83) per share. Also in 2001, Unitil recognized an Investment Write-down of $2.4 million after-tax, or ($0.50) per share, to recognize a decrease in the fair value of a non-utility energy technology investment.

A more detailed discussion of the Company’s 2003 Results of Operations and a year-to-year comparison of changes in financial position for the three-year period 2001 through 2003 are presented below.

RESULTS OF OPERATIONS

Operating Revenues—Electric

Electric Operating Revenues—Electric Operating Revenues, which represent approximately 87% of Unitil’s total Operating Revenues, increased by $23.5 million, or 14.1%, in 2003 compared to 2002. Electric Operating Revenues include the recovery of cost of electric sales, which are recorded as Purchased Electricity and Conservation & Load Management in Operating Expenses. Approximately 90% of the Conservation & Load Management expenses are related to electric operations. Electric operating revenues increase or decrease annually due to changes in Purchased Electricity expenses, Conservation & Load Management expenses and electric sales margin (Electric Operating Revenues less Purchased Electricity and Conservation & Load Management). Purchased Electricity expenses include the cost of electric supply as well as the other energy supply related restructuring costs including power supply buyout costs. Conservation and Load Management expenses are expenses associated with the development, management, and delivery of the Company’s energy efficiency programs.

The Purchased Electricity cost of sales component increased $17.2 million in 2003 compared to 2002. Approximately 75% of this increase reflects higher electric commodity prices while the remainder reflects an increase of approximately 3.5% in electric unit sales volume. Conservation & Load Management expenses related to electric operations increased $2.2 million, or 121.9% in 2003 compared to 2002 reflecting seven new energy efficiency programs that were implemented during the year. The Company recovers the costs of Purchased Electricity and Conservation & Load Management in its rates at cost and therefore changes in these revenues do not impact net income.

Electric sales margin was $52.7 million in 2003, an increase of $4.3 million over 2002. Approximately 60% of this increase reflects the impact of 2002 base rate cases, which resulted in higher base distribution rates for the Company’s electric retail distribution utilities as of December 2002. The remainder of the increase in electric sales margin is due to a 3.5% increase in electric unit sales in 2003 compared to 2002.

In 2002, Electric Operating Revenues decreased by $16.5 million, or 9.0% compared to 2001, primarily reflecting a decrease in Purchased Electricity due to lower electric commodity prices overall as well as lower electric distribution rates, partially offset by an increase in unit sales. Electric sales margin increased $0.7 million, or 1.5% in 2002 compared to 2001, reflecting the increase in unit sales.

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The following table details total Electric Operating Revenue and Sales Margin for the last three years by major customer class:

Kilowatt-hour Sales—Unitil’s total electric kilowatt-hour (kWh) sales increased 3.5% in 2003 compared to 2002. This increase reflects growth in sales to residential and commercial and industrial customer classes driven by a colder winter heating season and consistent customer growth year over year.

Sales to residential customers increased 4.2% in 2003 compared to 2002. The increase in energy sales reflects an increase in the number of residential customers as well as higher usage per customer, due to the colder winter heating season. Commercial and industrial sales of electricity increased 3.1% in 2003 compared to 2002, also reflecting an increase in the number of customers as well as the impact of the colder winter heating season.

Unitil’s total electric kilowatt-hour (kWh) sales increased by 3.9% in 2002 compared to 2001. This increase reflected growth in sales to residential and commercial and industrial customer classes driven by higher average summer temperatures, as well as increased sales to Industrial customers.

The following table details total kWh sales for the last three years by major customer class:

Operating Revenues—Gas

Gas Operating Revenues—Gas Operating Revenues, which represent approximately 13% of Unitil’s total Operating Revenues, increased $8.3 million, or 41.1%, in 2003 compared to 2002. Gas Operating Revenues include the recovery of cost of sales, which are recorded as Purchased Gas, and Conservation & Load Management in Operating Expenses. Approximately 10% of the Company’s total Conservation & Load Management expenses are related to Gas operations. Gas Operating revenues increase or decrease annually due to changes in Purchased Gas costs, Conservation & Load Management costs and gas sales margin (Gas Operating Revenues less Purchased Gas and Conservation & Load Management). Purchased Gas costs include the cost of gas supply as well as the other energy supply related costs. Conservation and Load Management expenses are expenses associated with the development, management, and delivery of the company’s energy efficiency programs.

Purchased Gas increased $5.1 million, or 41.6%, in 2003 compared to 2002. Approximately 77% of this increase reflects higher natural gas commodity prices while the remainder reflects an increase of approximately

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9.4% in gas unit sales. Conservation & Load Management expenses related to gas operations increased $0.1 million in 2003 compared to 2002. The Company recovers the costs of Purchased Gas and Conservation & Load Management in its rates at cost and therefore changes in these revenues do not impact net income.

Gas sales margin was $10.9 million in 2003, an increase of $3.1 million over 2002. Approximately 76% of this increase reflects the impact of 2002 base rate cases, which resulted in higher base distribution rates for the Company’s gas retail distribution utility as of December 2002. The remainder of the increase in gas sales margin is due to higher gas unit sales in 2003 compared to 2002.

In 2002, Gas Operating Revenue decreased by $2.5 million, or 11.1%, compared to 2001. This was attributable to lower unit sales, reflecting a warmer than normal winter heating season combined with a decrease in wholesale natural gas commodity prices.

The following table details total Gas Operating Revenue and Margin for the last three years by major customer class:

Therm Sales—Unitil’s total firm therm sales of natural gas increased 9.4% in 2003 compared to 2002, due to a colder winter heating season in early 2003. Sales to residential customers increased 10.5% and sales to commercial and industrial customers increased 8.3% in 2003 compared to 2002.

In 2002, total firm therm sales decreased 2.5% compared to 2001, primarily due to a warmer winter heating season compared to the prior year.

The following table details total firm therm sales for the last three years, by major customer class:

Operating Revenue—Other

Total Other Revenues increased $0.4 million, or 51.9%, in 2003 compared to 2002 and by $0.4 million, or 89.9%, in 2002 compared to 2001. This was the result of growth in revenues from the Company’s unregulated energy brokering business, Usource.

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The following table details total Other Revenue for the last three years:

Operating Expenses

Purchased Electricity—Purchased Electricity expenses include the cost of electric supply as well as the other energy supply related restructuring costs, including power supply buyout costs. Purchased Electricity expenses, recoverable from customers through periodic cost recovery adjustment mechanisms increased $17.2 million in 2003 compared to 2002. Approximately 75% of this increase reflects higher electric commodity prices while the remainder reflects an increase of approximately 3.5% in electric unit sales during the period. The Company recovers the costs of Purchased Electricity in its rates at cost and therefore changes in these expenses do not impact net income.

In 2002, Purchased Electricity expenses decreased $17.3 million, or 12.8%, compared to 2001. This change was mainly due to a decrease in electric commodity prices compared to the prior year.

Purchased Gas—Purchased Gas expenses includes the cost of gas purchased and manufactured to supply the Company’s total gas energy requirements. Gas supply costs are recoverable from customers through the Cost of Gas Adjustment mechanism. Purchased Gas expenses increased by $5.1 million, or 41.6% in 2003 compared to 2002. Approximately 77% of this increase reflects higher gas commodity prices while the remainder reflects an increase of approximately 9.4% in gas unit sales during the period. The Company recovers the costs of Purchased Gas in its rates at cost and therefore changes in these expenses do not impact net income.

In 2002, Purchased Gas decreased by $2.9 million, or 19.0%, compared to 2001, due to a decrease in gas commodity prices and lower gas unit sales, compared to 2001.

Operation and Maintenance (O&M)—O&M expense includes electric and gas utility operating costs, and the operating cost of the Company’s unregulated business activities. Total O&M expense increased $2.2 million, or 11.2%, in 2003 compared to 2002.

This increase reflects higher pension, insurance and employee medical benefit costs ($1.0 million) incurred in 2003 as well as annual increases in salaries and compensation expenses ($0.5 million). The Company also experienced higher uncollectible accounts expenses ($0.5 million) and higher legal and regulatory compliance costs ($0.4 million) in 2003. In addition, other utility operating and maintenance costs ($0.3 million) rose in 2003 due to the colder winter weather, as well as planned increases in distribution system maintenance programs. These increases were partially offset by operating expense savings of approximately $1.0 million achieved as a result of the management reorganization at the beginning of 2003.

Additionally, O&M expenses in 2003 reflect higher operating lease rent expense ($0.5 million) which, in prior years, was recognized under a capital lease and reflected in Depreciation and Amortization and Interest Expense, net. This change in accounting classification did not affect net income as the increase in O&M expense in 2003 was offset by a corresponding reduction in Depreciation and Amortization expense and Interest Expense, net. The change in classification was the result of a renegotiation of the lease terms in 2003.

In 2002, total O&M expense decreased $0.3 million, or 1.4%, compared to 2001.

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Conservation & Load Management—Conservation and Load Management expenses are expenses associated with the development, management, and delivery of the Company’s energy efficiency programs. Energy Efficiency programs are designed, in conformity to state regulatory requirements, to help consumers use natural gas and electricity more efficiently and thereby decrease their energy costs. Programs are tailored to residential, small business and large business customer groups and provide educational materials, technical assistance, and rebates that contribute toward the cost of purchasing and installing approved measures. Approximately 90% of these costs are related to electric operations and 10% to gas operations.

Total Conservation & Load Management expenses increased $2.1 million, or 121.9%, in 2003 compared to 2002 reflecting seven new Energy Efficiency programs that were implemented during the year. These costs are collected from customers on a fully reconciling basis and therefore, fluctuations in program costs have no impact on earnings.

In 2002, total Conservation & Load Management expenses increased less than $0.1 million, or 2.4%, compared to 2001.

Depreciation, Amortization and Taxes

Depreciation and Amortization—Depreciation and Amortization expense increased $3.8 million, or 25.8%, in 2003 compared to 2002, due mainly to higher utility depreciation rates, which were included as a component of the new rates implemented by our retail distribution utilities in December 2002, together with an increased investment in utility plant additions.

In 2002, Depreciation and Amortization expense increased $2.1 million, or 16.8%, compared to 2001, due to a higher level of utility plant investments and the accelerated amortization of restructuring-related Regulatory Assets.

Local Property and Other Taxes—Local Property and Other Taxes increased $0.1 million, or 1.6%, in 2003 compared to 2002 and by $0.1 million, or 1.4%, in 2002 compared to 2001. These increases were related to higher levels of utility plant in service.

Federal and State Income Taxes—Federal and State Income Taxes increased $1.1 million, or 42.8%, in 2003 compared to 2002, principally due to higher pre-tax operating income in 2003.

In 2002, Federal and State Income Taxes decreased $0.9 million, or 27.2%, compared to 2001, due to lower pre-tax operating income in 2002 and the amortization in 2002 of deferred tax liabilities related to the accelerated write-off of Regulatory Assets.

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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 interest on regulatory liabilities. Interest income is mainly derived from carrying charges on restructuring related stranded costs and other deferred costs recorded as regulatory assets by the Company’s retail distribution utilities as approved by regulators in New Hampshire and Massachusetts. Over the long run, as deferred costs are recovered through rates, the interest costs associated with these deferrals are expected to decrease together with a decrease in interest income. A summary of interest expense and interest income is provided in the following table:

In 2003, Interest Expense, net, increased by $0.5 million over 2002. This increase was driven by lower interest income on regulatory assets, which decreased $0.4 million in 2003 compared with 2002 due mainly to lower carrying charges applicable to regulatory asset balances. In addition, interest expense declined $0.1 million compared with 2002.

In 2002, Interest Expense, net, increased $0.3 million compared with 2001. Interest expense associated with long-term debt increased $0.6 million. Short-term interest expense decreased by $0.4 million due to lower interest short-term interest rates applicable to short-term debt balances outstanding. Interest income was lower in 2002 compared to 2001 by $0.1 million.

Other Items

2002 Restructuring Charge—In the fourth quarter of 2002, the Company recognized a pre-tax Restructuring Charge of $1.6 million. The after-tax effect of the Restructuring Charge was a reduction of $0.20 in Earnings Per Common Share, assuming full dilution.

In December 2002, the Company undertook a strategic review of its business operations and committed to a formal transition and reorganization plan (the Reorganization Plan) to streamline its management structure, in order to improve operating efficiency and to align the organization to meet ongoing business requirements. The Reorganization Plan resulted in the elimination of 19 management and administrative positions. As a result of the elimination of these positions, and consistent with existing Company policy, certain benefits were extended to the employees whose positions were eliminated. On January 8, 2003, the Company implemented the remainder of the Reorganization Plan. The Company estimates that the result of this management restructuring process will be an annual cash savings of approximately $2.3 million in operating expenses and construction project overheads.

Investment Write-down and Sale of Equity Stake in Enermetrix—2001—Beginning in 1998, Unitil invested $5.5 million in Enermetrix, Inc. (Enermetrix), an energy technology start-up enterprise. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company recorded a non-cash charge of $3.7 million, or $2.4 million, net of tax, in the fourth quarter of 2001 to recognize the decrease in fair value of its non-utility investment in Enermetrix.

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On April 11, 2002, the Company sold its equity ownership in Enermetrix for $1.5 million in cash and improved commercial terms for use of the Enermetrix Software Network. As a result of the sale, in 2002, the Company recognized the benefit of approximately $1.3 million from this capital loss as a carryback against capital gains in its 2002 tax return and recorded a gain, net of transaction costs, on the final disposition of $82 thousand, net of tax. In total, the final “book” loss on the investment was $2.3 million, net of tax.

Extraordinary Item—2001—In November 1997, the Massachusetts Legislature enacted the Massachusetts Electric Restructuring Act of 1997 (the Restructuring Act). The Restructuring Act required all electric utilities to file a restructuring plan with the MDTE by December 31, 1997. Among other things, the Restructuring Act resulted in the divestiture of electric generation assets and purchase power contracts, along with the restructuring of utility operations by all Massachusetts utilities to provide direct retail access to their customers by all qualified third-party energy suppliers.

The MDTE conditionally approved FG&E’s Restructuring Plan (the Plan) in February 1998, and started an investigation and evidentiary hearings into FG&E’s proposed recovery of Regulatory Assets related to stranded generation asset costs and power supply expenses related to the formulation and implementation of its Plan. In January 1999, the MDTE approved FG&E’s Plan, which included provisions for the recovery of stranded costs through a transition charge in FG&E’s electric rates. In September 1999, FG&E filed its first annual reconciliation of stranded generation asset costs and expenses and associated transition charge revenues and the MDTE initiated a lengthy investigation and hearing process.

On October 18 and 19, 2001, the MDTE issued a series of regulatory orders in several pending cases involving FG&E, including a final order on FG&E’s initial reconciliation filing. Those orders included the review and disposition of issues related to FG&E’s recovery of transition costs due to the restructuring of the electric industry in Massachusetts, as well as certain costs associated with gas industry restructuring and preparation and litigation of performance based rate proceedings initiated by the MDTE. The orders determined the final treatment of Regulatory Assets that FG&E had sought to recover from its Massachusetts electric customers over a multi-year transition period that began in 1998.

As a result of the industry restructuring-related orders, FG&E recorded a non-cash adjustment to Regulatory Assets of $5.3 million, which resulted in the recognition of an extraordinary charge of $3.9 million, net of taxes. The Company recognized the extraordinary charge of $0.83 per share, as of September 30, 2001.

As a result of all of these orders, the Company has been allowed recovery of its Massachusetts industry restructuring transition costs, estimated at $150 million after reconciliation, including the above-market or stranded generation and power supply related costs via a non-bypassable uniform transition charge. FG&E has been, and will continue to be, subject to annual MDTE investigation and review in order to reconcile the costs and revenues associated with the collection of transition charges from its customers over the next six to eight years.

Capital Requirements and Liquidity

Unitil requires capital to fund utility plant additions, working capital and other utility expenditures recovered in subsequent and future 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, exclusive of payments of current dividends. The Company initially supplements internally generated funds through bank borrowings under unsecured short-term bank lines. Periodically, the Company replaces portions of its short-term debt with long-term financings more closely matched to the long-term lives of its utility assets.

At December 31, 2003, Unitil had an aggregate of $52.0 million in unsecured revolving lines of credit through three banks. On January 1, 2004, the Company reduced its aggregate unsecured short-term bank lines to

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$45.0 million. The Company anticipates that it will be able to secure renewal or replacement of some or all of its revolving lines of credit, in accordance with projected requirements. Average short-term borrowings in 2003 were $39.1 million, an increase of $14.1 million over the average short-term debt outstanding in 2002. At December 31, 2003, the Company had available $29.6 million of unused bank lines of credit and had outstanding bank borrowings of $22.4 million. In addition, Unitil had $3.8 million in cash on hand as of December 31, 2003.

The maximum amount of short-term borrowings that may be incurred by Unitil and its subsidiaries is subject to periodic approval by the SEC under the Public Utility Holding Company Act of 1935 (PUHCA) and state regulators of the Company’s retail distribution utilities, FG&E and UES. At December 31, 2003, Unitil had regulatory authorization to incur total short-term borrowings up to a maximum of $55 million, and FG&E and UES had regulatory authorizations to borrow up to a maximum of $35 million and $22 million, respectively. UES’ short-term debt authorization is scheduled to be reduced to $16 million on May 1, 2004, reflecting reduced borrowing requirements. In 2003, UES and FG&E had average short-term debt outstanding of $9.4 million and $23.8 million, respectively. At December 31, 2003, UES and FG&E had short-term debt outstanding of $7.8 million and $14.6 million, respectively.

The Unitil Companies are individually and collectively members of the Unitil Cash Pool. The Cash Pool is the financing vehicle for day-to-day cash borrowing and investing by each of the Unitil companies. The Cash Pool Agreement allows an efficient exchange of cash among the Unitil companies. The Cash Pool Agreement and its transactions are strictly monitored by the SEC under PUHCA. The interest rates charged to the subsidiaries for borrowing from the Cash Pool are based on Unitil Corporation’s actual interest costs from its banks under the revolving lines of credit. In addition, Unitil, UES and FG&E are required by the SEC to maintain a minimum 30% common equity ratio, including short-term debt, in order to utilize the Cash Pool resources. At December 31, 2003, all Unitil subsidiaries were in compliance with the requirements to participate in the Cash Pool.

The Company periodically repays its short-term borrowings with internally generated funds and through the issuance of long-term financings. The Company issued two long-term financings in 2003 in the form of Unitil Corporation Common Stock and FG&E Long-term Notes. The Common Stock offering provided net proceeds of $16.9 million which were used to make capital contributions of $6.0 million each to UES and FG&E (see Note 3) and for general corporate purposes. FG&E issued $10.0 million in Long-term Notes under a debenture note structure (see Note 4). The Company expects to continue to be able to satisfy its external financing needs by utilizing additional short-term bank borrowings and additional long-term financings in the form of first mortgage bonds, debentures and/or equity. The continued availability of these methods of financing, as well as the Company’s choice of a specific form of security, will depend on many factors, including: security market conditions; general economic climate; regulatory approvals; the ability to meet covenant issuance restrictions, if any; the level of the Company’s net income, cash flows and financial position; and the competitive pricing offered by the financing source.

In 2003, the Company and its subsidiaries made cash contributions to their pension plans in the amount of $1.2 million. If the actual return on plan assets continues to be significantly below the expected returns, the Company may elect to fund the pension plans in future periods. Post-retirement benefits for employees of the Company and its subsidiaries were funded through contributions to the Unitil Retiree Trust (URT) in 2003. In January 2004, Unitil established Voluntary Employee Benefit Trusts (VEBT) to provide post-retirement benefits. Unitil expects to continue to make contributions to the VEBT’s in future years in amounts consistent with the amounts recovered in retail distribution utility rates for these benefit costs.

The Company does not currently use, and is 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. We do have material energy supply commitments that are discussed in Note 5. Cash outlays for the purchase of electricity and natural gas to serve our customers are subject to full recovery through periodic changes in rates, with carrying charges on deferred balances. From year to year, there are likely to be timing

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differences associated with the cash recovery of such costs, creating under- or over-recovery situations at any point in time. Rate recovery mechanisms are typically designed to collect the under-recovered cash or refund the over collected cash over subsequent 6-12 month periods.

The table below lists the Company’s significant contractual obligations as of December 31, 2003.