February 19, 2008

To Our Shareholders:

As a smaller player in the electric and natural gas industry, your Company has concentrated on opportu-nities appropriate to our scale to grow shareholder value and to improve the service we provide to our local communities and to our customers. We believe that, in part due to our size and the local proximity of our utility operations, we are able to respond more quickly and effectively to changing regulatory and public policy initiatives, to leverage new technology solutions that significantly improve productivity and customer service, and to implement organizational changes that improve performance. These advan-tages are key to our success in making prudent investments and taking initiatives that create value for both our shareholders and our customers. We first laid out this strategy for you in our 2004 Annual Report. Given the sometimes turbulent times in our industry over this period, following this path certainly has not been a straight route.

In 2004, we described the key initiatives we would pursue. These focused on our core business, includ-ing: controlling our costs through increases in productivity; managing our regulatory and rate setting process; growing Usource, our unregulated energy brokering subsidiary; and expanding our distribution operations through customer growth and potential acquisitions. I am pleased to tell you that we are beginning to see the real benefits of implementing this game plan. Below we describe the financial and operational performance we have been able to achieve and highlight the progress we are making in our strategic initiatives.

Our recently announced acquisition of Northern Utilities, a 52,000 customer natural gas distribution utility located in New Hampshire and Maine, from NiSource Inc. of Merrillville, Indiana, underscores our pro-gress. This acquisition increases our customer base by more than 40% and further diversifies our asset mix between natural gas and electric energy delivery systems. The combination is a natural fit for Unitil. We expect to close on the purchase by the fourth quarter of 2008.

Financial Performance
The implementation of our strategic plan has provided a firm financial foundation for your Company. In 2007, we reported earnings per share of $1.52 compared to $1.41 last year, an increase of 8%. In addition, the total return to our shareholders, including the value of our dividend payments, was over 18% for 2007. We achieved these results despite record high energy prices, a related decline in average customer energy usage, and a softening economy. Our future challenge is to retain and grow these earnings on your behalf in a rapidly changing environment, while also helping our customers manage their energy costs and improve their energy efficiency.

Usource had a record year, generating $3.7 million in revenues - a 54% increase over 2006. Usource earned seven cents per share compared to a loss last year of three cents a share. We expect Usource to continue to contribute positively to the Company's bottom line, as it expands its geographical reach and works with new channel partners, including demand response firms and regional business associations.

Electric usage by our New Hampshire and Massachusetts electric distribution customers was down 0.5% in 2007 compared to 2006, due to cooler summer weather, energy conservation, and a slowing economy. Our natural gas distribution customers increased usage in 2007 by 7.6%, due principally to seasonably cold weather and expanded gas usage by industrial customers.

In spite of the sales decline, our electric sales margin increased by $1.9 million compared with the prior year, as a result of higher average delivery rates in 2007 compared to 2006. Our natural gas sales margin increased by $2.0 million for this same period, reflecting higher sales, as well as the effect of new natural gas distribution rates approved and implemented in 2007. In August 2007, we filed for an in-crease in electric distribution rates in Massachusetts. We expect a decision on our proposal by the end of the first quarter of 2008.

Operations
Our operational performance in 2007 continued to reflect the benefits of the investments we have been making in our systems and our technology. Electric reliability, one of the most visible performance metrics, exceeded our benchmarks for the year. Our safety record and our response time for natural gas odor calls also exceeded targets. Natural gas leak frequency has declined significantly, primarily as a result of our investments in cast iron and bare steel replacement. Our customer service and satisfaction survey results continue to far outpace national benchmarks.

We also maintained top performance in operating costs per customer. In 2007 we completed the re-placement of the traditional people-intensive meter reading technology with an advanced metering infrastructure utilizing a power-line carrier communication technology. This project, the largest single capital investment in the Company's history, was completed on-time and on-budget. This system already has significantly increased our productivity, and the technology platform it creates promises future benefits for customers and shareholders.

Regulation
Early in 2008, with the final approval of an electric distribution rate increase for our Massachusetts subsidiary, we will have completed the resource-intensive process of obtaining regulatory approval to update our base distribution rates for new investment and changes in operating costs for all of our utility operations. Base rate increases test our internal resources and challenge our key external relationships. We believe we have done a good job managing this process and have achieved significant savings for our customers by managing our costs over this period.

During 2007, legislative and regulatory activity in support of energy efficiency and renewable resources reached a new level of intensity in Massachusetts, in New Hampshire, and at the federal level. Regula-tory officials in both Massachusetts and New Hampshire initiated proceedings to consider alternative ratemaking structures which would decouple utility distribution revenues from sales. Such a policy would help to align utility ratemaking with federal and state energy policy priorities in support of energy efficiency and renewable resources, and could reduce the financial pressures that lead to more frequent base rate proceedings.

In 2007, New Hampshire adopted a Renewable Portfolio Standard (RPS) applicable to all retail suppliers of electricity, including distribution companies, thereby joining Massachusetts and a number of other states that have RPS programs in place. RPS requires companies to procure an increasing share of their electricity supply from renewable sources of various types, or make alternative compliance payments to the state at specified energy rates.

In 2008, we anticipate passage of a major energy bill in Massachusetts and the possibility of a major energy bill at the federal level. Massachusetts and New Hampshire are also both poised to join in a regional carbon cap-and-trade program pursuant to the Northeast Regional Greenhouse Gas Initiative. Both states began proceedings in 2007 to consider implementing the federal Energy Policy Act standards regarding smart metering and distributed generation interconnection, and this work is expected to continue in 2008. The New Hampshire Public Utilities Commission recently affirmed a commitment to Time of Use rates and will open proceedings to design and implement Time of Use rates for the state's utilities.

Your Company is an active participant in all of these legislative and regulatory initiatives. We believe that energy efficiency and the development of local energy resources - especially renewable fuels - are the most effective tools available in New England to directly influence the region's energy future. Increased deployment of energy efficiency and renewable energy sources offers long-term benefits in the form of improved energy costs and price volatility, economic development, lower pollution and global warming and, ultimately, enhanced energy security.

We have also consistently pointed out that traditional distribution utility ratemaking, which tends to reward utilities for increasing sales and penalize them for reductions in sales, is at odds with these policy priori-ties and needs to be re-aligned. Last year we began to explore the possibility of legislation in New Hampshire that would allow distribution utilities to invest in small-scale distributed energy resources, including energy efficiency, demand response, and renewable generation such as solar, wind, and combined heat and power. We believe that, over time, utility investments in these technologies may complement investments in distribution facilities to meet increasing peak demands. A bill has been introduced in 2008 with broad support that would authorize such investments and establish a process for distribution utilities to seek rate recovery for these types of investments, including an incentive rate of return.

Distribution Transformation
We have completed the installation of an Automated Metering Infrastructure (AMI). Some 117,000 electric and gas bills are now generated on the basis of electronic data acquired from the field and validated without physical meter reads. Estimated meter reads due to weather or other factors are no longer a problem, and the process of obtaining meter reads for property transfers is vastly simplified. We are beginning to explore the technical opportunities now available as a consequence of taking the leap to AMI - opportunities which offer additional value in terms of customer service and business process efficiencies.

Unitil also continues to make progress with the broader integration of electronic information systems, including AMI and geographical information systems (GIS). Integrating GIS tools throughout the engi-neering design process, facility construction, and distribution operations is vastly improving efficiency and accuracy in these key business functions. While these functions may be largely invisible to the customer, their impact on reliability, cost, and productivity is significant. Moreover, the capabilities provided by this integration process enable the Company and its employees to explore and implement additional en-hancements and system-wide innovations faster and more effectively.

We see these developments as part of a fundamental transformation of the distribution utility business from a static, one-way power delivery function to a dynamic multi-functional system that integrates and processes customer energy needs, energy market inputs, energy flows, and information on a simultane-ous basis. This is the future "smart grid" which will reflect the confluence of technological innovation, the penetration of distributed energy resources, and the evolution of communication modes and consumer choices. This transformation will be evolutionary. We intend to be part of this transformation.

Distribution Growth
High energy prices, the housing crisis, and economic uncertainty create challenges for Unitil's efforts to foster gas and electric customer growth in its service areas. However, we continue to see progress with in-territory growth of gas distribution sales, given favorable trends in comparative prices of natural gas and competing fuels and the environmental advantages and convenience of natural gas. Relative to other parts of the country, New England as a whole - and parts of Unitil's service territory specifically - have a low penetration of gas for business applications and home heating, providing continued opportunity for growth.

With the recent announcement of our acquisition of Northern Utilities, and the associated pipeline com-pany Granite State Gas Transmission, Inc., Unitil has also achieved a key milestone in fulfilling its growth objectives through acquisition of new service areas. Northern Utilities, with 52,000 customers located in 44 communities in eastern New Hampshire and southern Maine, is a unique fit with Unitil's existing distribution businesses. Portions of Northern Utilities' service territory overlap, or are contiguous with, Unitil's existing electric distribution service territory in New Hampshire. The acquisition significantly strengthens our gas operations, while adding customers in our existing and nearby service areas. It affirms our business commitment in New Hampshire, while extending our reach into Maine, and it brings to those customers Unitil's strong track record of efficiency and quality customer service.

Usource
Usource achieved another record year. The Company's energy brokering activities generated $3.7 million in revenues, a 54% increase over 2006. Usource contributed seven cents per share to Unitil's earnings in 2007, compared to a net loss last year of three cents per share. This success was built on Usource's efforts to retain and expand its impressive client list among large energy users throughout the Northeast, but also reflects its success with its channel partners. Significantly, Usource was able to expand the scope of a key channel relationship and create a successful aggregation program for small and medium-sized energy users.

Usource also began building relationships with a number of companies providing demand response services, allowing it to expand the range of services available to Usource clients while also offering energy brokerage services to an expanded pool of large energy users. We expect Usource to continue to contribute to the Company's bottom line, as it expands its geographical reach and works with new channel partners.

Conclusion
Your Company had a full and exciting year in 2007. We do not underestimate the short-term economic challenges facing our industry and country, or the significance of the transformations we expect in our industry over the long term. Nor do we take lightly the challenge of fulfilling our agenda for 2008 and beyond. We have the vision, the plans, and the resources needed to meet these challenges and achieve our long-term goal of increasing earnings per share by 3% to 5% per year.

We hope you agree that we are making the most of our opportunities.

Sincerely,

Robert G. Schoenberger
Chairman of the Board of Directors
President & Chief Executive Officer