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UIL Holdings Corporation (NYSE:UIL)

Q3 2008 Earnings Call

November 5, 2008 10:00 am ET

Executives

James Torgerson – President, Chief Executive Officer

Richard Nicholas – Executive Vice President, Chief Financial Officer

Susan Allen – Vice President of Investor Relation & Treasurer

Analysts

Daniele Seitz - Seitz Research

[Unidentified Analyst]

Susan Allen

Hello everybody. Thank you for joining us to discuss the UIL Holdings third quarter 2008 earnings results. I am Susan Allen, the Vice President of Investor Relations and the Treasurer. Participating on the call with me today is James Torgerson, UIL’s President and Chief Executive Officer and Richard Nicholas, UIL’s Executive Vice President and Chief Financial Officer.

If you do not already have a copy of our press release or presentation for today’s call they are available on our website at www.uil.com in the Investors section. During today’s call we will make various forward-looking statements within the meaning of the Safe Harbor Provision of the U.S. Private Securities Litigation Reform Act of 1995. Significant factors that could cause results to differ from those anticipated are described in our earnings release and filings with the SEC.

With that said, I will now turn the call over to James Torgerson.

James Torgerson

Thanks Sue and good morning everyone and welcome to our call. In this quarter, there are number of significant positive events that occurred and we will talk about a few as we go along but let me just tell a couple. One was the [GenConn,] which is our partnership with NRG and which we were awarder another 200 megawatts of peaking generation to be built, under a [1.28] to service arrangement through the state. The second thing is the Middletown-to-Norwalk project is now 98% complete. Our senior substation is it being kept energized right now. So, we are moving along pretty well with that. So, this goes to the fact that we, the things we have promised you, will be getting done. We are in our timely basis.

For the results for the quarter, I am on page four now of the presentation. The transmission business is actually doing rather well. Like I said, completing the Middletown-to-Norwalk project on time, we should have it fully operational by early 2009. That is going well and contributing well to earnings. As you can see from our results that the transmission earnings nearly doubled in the quarter and they are doubled year-to-date as well over 2007.

Distribution business, the sales are below last year and this is what we have been telling you for probably the last year that we have been seeing a decline in our sales as a result of conservation energy efficiency. This is also the reason we took the proactive step of filing for a rate increase back in August, because we saw those trend and we knew it was an issue and there is something that had to be addressed and I will talk about the status of the rate case in the couple of minutes.

The earnings for the quarter, the consolidated earnings were $21 million or $0.84 per share in 2007. 2008 was $21.6 million or $0.86 per share. The 2007 number however, had $0.08 per share reduction as a loss due to discontinued operations. On a continuing basis, we would have had about $0.92 per share in the third quarter of 2007 compared to the $0.86 for the quarter, this quarter.

Our year-to-date, we are having from continuing operations in 2008, $39.6 million or $1.58 per share that is about a penny off of the consolidated earnings because we still have some discontinued operation flowing through. Last year, we had $36.1 million or $1.45 per share on total, taking in of CapEx loss on the discontinued would raise the earnings to $1.52.

In our quarter, and again this is going along with what we have been talking about for probably the last year. The distribution earnings are deteriorating and mainly because of the kilowatts hour sales. They are actually down 4.2% in the quarter and Rich is going to talk about more detail about the results. But, the three things we have been pointing to one the kilowatts hour sales, the increase on collectibles and the cost associated with our additional capital spending are causing to not earn what we are allow in the distribution business. The other thing that popped up was, as a result of the financial markets, we had to take some mark to market adjustment but are non-qualified plans. So, that affected earnings in the quarter by about $0.02 and really above $0.07 year-to-date.

The economy in the area is actually is doing okay, relative to the rest of the country. The unemployment rate is about 6.1% in the state. In New Haven is about 6.2% and that is about the national average, 6.1% to 6.2%. Bridgeport is a little bit better at about 5.5%. A year ago, we were seeing numbers more like, I think was about 4.1% on Bridgeport and 4.8% in New Haven. So, we have seen an uptake on the unemployment over the last year.

Something over the next page, page five, has some of the information on our GenConn project with the NRG. You can see, we have added another 200 megawatts of peaking generation. That will come on line in 2011. That will be building in NRG’s Middletown site, so that that will go along with 200 megawatts we will have at Devon site. So, in total of 400 megawatts, this is as we have talked in the past, the 50/50 partnership. We will have half the units on in June of 2010, the other half in June of 2011, and the contracts have been signed and this is going full speed ahead. We got orders now for the turbines and we should be able to get them done as we said. We do not see any problems or issues there right now.

On page six, it is a little summary of the terms of that. The initial ROE is 10 in the quarter and I think we said the past there is an adjustment with that based on the average ROEs for the two utilities in the state, us and CLNP, and there is a 9.75% floor. The dept equity is 50/50 and this is a third year contract. The O&M cost get reviewed annually and ROE gets reviewed at least once every four years. We are going to put in place project financing for the debt. It will be financed at the project level. This will lower the overall cost of the project and it gives us a lot of flexibility in the construction phase. We do have the option of including an equity bridge loan. We actually have funded some of the initial cost, both us and NRG until we close on the loan, which should be scheduled for early in the first quarter of 2009.

Now let me turn to page seven, and we will talk a little about distribution rate case. We filed this in early August. We were not earning our allowed rate in return, which was set 9.75% for the distribution part of our business. In 2007, we earned about 893 and we were forecasting that the distribution plus the CTA, and the CTA is set in 9.75% and we do earn that consistently.

The combined ROEs, the two is somewhere between 6.5 % and 7% for this year as our estimate. As I said the big numbers previously utilized in setting the rates we are seeing much lower kilowatt hour sales and uncollectible are up and the distribution capital which is needed for reliability, are up. The original request we had was for $32.6 million of revenue in 2009 compared to 2008 and this would have done 2.6% increase on total revenues and this is the total bill that a customer would get.

In 2010, we are asking for a $29.9 million increase, which is 2.4% over the 2009. We are asking for a 10.75% return on equity, 50% equity in the capital structure, a fold decoupling mechanism. This as you can see, was the declining kilowatt hour sales. We believe this is an important component of our rate request. We also were requesting an increase in the conservation and load management spending, and as you put that in the rate base and to be able to earn on that. Our projections had been above $4.5 million, we would spend in 2009 and somewhere around $18 million in 2010 is what we had requested.

Now, since then, we have updated our request. And this reflects lower than anticipated kilowatt hour sales. Keep in mind, when we put together our original request, it was done in the early part of the summer. Having seen how the summer came out and as we said, we would about 4.2% declines in sales, weather adjusted. So, we adjusted our projections for kilowatt hour sales and included that in an updated request which along with the impact from the market on our pension plan and post retirement expenses. We increased our request to $51.4 million for 2009. The 2010 piece stayed about the same. Actually, went down a couple of hundred thousand.

On page nine, you can see a graph that shows what had been included in rates. This was on the blue line from our 2006 rate decision. The projection was, we would see a 1% increase in sales. The red part is showing where we are at. On through 2007, our projection for 2008, 2009 and 2010, and you can see the gap continuing to grow. This is what we saw and why caused us to file a rate case earlier than we would have liked. We are pretty much living within our own and expenses that were allowed by the commission, except for uncollectibles. But all the other O&M expenses were pretty much living within those. So, this was the main reason to file for rate case early.

Page 10 gives you the time line, and you can see that interrogatories have been going on through September and October. We have had hearings in which started in October. They are going to continue later this week and then the late file hearings will be shortly thereafter. The Briefs will be due in the end of November and the early December and we were expecting a draft decision January 7. Then we will have written and oral arguments and a final decision hopefully by the end of January. We do have a regulatory page on our UIL web site to keep you all informed of the status of the rate case. The hearings have been going on and we will continue.

With that, I want to turn it over to Richard Nicholas and let him talk about the results for, so far, this year.

Richard Nicholas

Thank you, Jim. Good morning everyone. I plan to spend the few moments going through the third quarter and then also look at the rest of the year expectations for 2008 and a few moments on liquidity and financing.

Turning to Slides 11 through 13, slide 11 has the detailed results for net income and earnings per share for the third quarter and nine months to date. I would focus on continuing operations. As Jim mentioned, there is already a slight minimal amount left in discontinued ops. So, as we look at the overall net income from continuing operations for the third quarter it was down $1.4 million over 2007. By year-to-date, net income from continuing operation s up $1.6 million versus 2007. The distribution part of the business continues to impact our overall results from lower kilowatt hour sales and higher uncollectibles. The distribution plus CTA net income was down $4.5 million for the quarter and $6.8 million year-to-date. So, you could see a bigger impact in the third quarter than earlier in the year.

The lower kilowatt-hour sales on a weather-corrected basis -- weather-normalized, if you will, were down 4% both in the quarter, and year-to-date, year over year of, and higher uncollectibles in the third quarter, impacted earnings by about $0.06 per share.

In addition, we are required to mark to market our assets and our nonqualified pension plan, which impacted the quarter by $0.02 negatively. That is a below the line item, not a subject to rate making, and also impacted year-to-date compared to 2007 by $0.07 per share, where last year, we actually had some positive impacts in the nonqualified plan.

The quarter-end year to date are also helped by the fact that we did have a rate increase for distribution that took place January 1, 2008, coming out of the 2005 rate case, which did offset but could not completely offset the negative impacts from sales and uncollectibles.

As you will see on slide 12, as a result the distribution plus CTA return on equity for 12 months ending September 30 is 6.64% as compared to our authorized 9.75%.

On a positive front, on page 13, the transmission growth continues this year. As Jim mention, the Middletown-Norwalk is almost complete, and we do have a 100% of construction work in process in rate based, positively impacting real past earnings during the period both the quarter and the year.

The net income was up $3 million for transmission quarter over quarter and up $8.8 million year-to-date nine months of 2008 versus nine months of 2007. We are into the testing and commission phases and looking forward to the project going in service early on 2009.

Also impacting the quarter in the year, is we do have higher borrowings to support the CapEx plan as anticipated. And at the corporate holding company level there is really no change quarter over quarter and year-to-date, only a minimal amount.

Turning to the rest of the year, on slide 14, looking at our updated guidance. We did narrow the range but lowered the guidance as result of the impact of sales and uncollectibles on the distribution part of the business. So, for distribution, the prior guidance was a $1 to $1.20 per share. We have reduced that to $0.93 to $1.8. That does also include the CTA component, which remains unchanged. On the transition side, we have increased to just a penny per share, reflecting the current view of earning about 12.5% for the year on the transmission rate based. The corporate guidance remains unchanged, all of that coming a $1.75 to $1.90 versus the prior guidance of $1.82 to $2.02.

As we look out a little further beyond 2008, compound annual growth rate of 2008 to 2010 still in the range of 5% to 8% as compared to 2007, although that does assume that in 2010 we achieved our current allowed rate of return of 9.75% on distribution. It also assumes that there will be an equity issuance prior to the middle of 2010, primarily driven by the need for equity investment into GenConn. That is a good segue I think to looking at what is our financing plan requirements and liquidity, on slide 16. As you will note, we were successful in placing a $150 million of long-term debt and we actually priced that – circled and priced back in July, which has worked out very well given the current chaos. We did not need the funds until this month, and we have drawn down the $50 million of new long-term debt just this Monday. We used that to pay down existing short-term debt on our revolver. We also have a $100 million refinancing coming up in the December that we will take down and will roll over that existing debt.

In addition, as we look out beyond the end of this year, both our debt and equity needs will be dependent to some degree on the outcome of the distribution rate case. We did request in that rate case to increase the equity portion of our regulated capital structure from 48% to 50%, still depending on what the final decision is there and that will affect both the timing and the amount that we will need to go for, for equity. Then the ultimate amount of capital expenditures that are approved in that rate case will also affect the timing and the amount of that requirement.

So after we do have that decision, our plan will be to go back to the DPUC for approval of another round of long-term debt. Again, depending on the amount that is needed coming out of the rate case.

On the equity side, as I mentioned, right now, we are looking at, sometime before the middle of 2010, but that could be accelerated depending on the outcome of the rate case and depending on market conditions as we look out in time.

Moving to slide 17, just a few items on liquidity given current market conditions, this is obviously a very important item at this time. We do have a joint UI and UIL short-term revolver of $175 million of at the end of September, there was $42 million available under that revolver, and as previously mentioned. We just took down $50 million in November that we will use to reduce the amount outstanding on the revolver. We also had about $16 million of unrestricted cash available at the end of September.

In addition, UIL has an uncommitted money market facility that is available to us, which we continue to confirm on an ongoing basis that is available. At September 20, we did not have any debt outstanding under that facility.

So, we look forward to seeing many of you at EEI in the next week and we will turn it back to our operator, [Elvis] for the Q&A session.

Question-and-Answer Session

Operator

Good day ladies and gentlemen. (Operator Instruction) Your first question comes from Daniele Seitz - Seitz Research.

Daniele Seitz - Seitz Research

I was wondering if you have any new CapEx numbers for 2009 and 2010, or should we use the old estimates? Is there, assuming that financial markets get a little bit more difficult, do you think that there is some flexibility in your program?

James Torgerson

Right now, I would use the numbers we have putted out in the past. There is flexibility in our program. As a matter of fact, in our hearings with the commission, one of the questions they asked was, could we defer some of our capital spending and we were putting in those schedules together now. Obviously, you can defer something. Push out the timeframe on some of the capital requirement, mainly, with the distribution system. And if you also look in our capital spending for 2009 is about $20 million left than what it was for 2008.

We will just about probably complete the Middletown-Norwalk project. So, we will be at the point where the capital will be a little bit less. The things we would look at if we need to defer and the commission is going to determine what capital spending we should be doing, or at least they will put in the rate base. So, that is the capital spending we probably will be doing, at least in 2009. But some of the things you can defer, we have a transformer replacement project for the time that is ongoing that is really over a long period of time. You can stretch that out a little bit and some of our cable replacement programs we could stretch out. Depending on how the capital markets treat us during the next year, right now in the conversations we have been having with the banks we would say that things look a little tight, but they still think we could borrow if we needed to; it is just the matter of price. Prices are not really attractive right now, but we are in pretty good shape with liquidity as Rich pointed out. So, having put out the debt we needed to at the beginning of the summer was probably a very good move. So now, we have that extra $50 million that came in Monday.

We think we are in pretty good shape. But if we need the defer capital spending, there are certainly things we can do.

Daniele Seitz - Seitz Research

And it looks like your CapEx balance backed up again in 2010. Is that still the same numbers that we should be using for 2010?

James Torgerson

Yes Daniel it is. The reason it is jumping up is I think we have a substation that is kind of be going in on 2010.

Daniele Seitz - Seitz Research

I mean, that is where you think you may have some flexibility in the outer years maybe?

James Torgerson

Yes, depending on how our – in the thing with the substation is there really a matter of the peak load and how soon we will need them. It is not so much the win, we do need them, it is the matter of when and if we see the customer load growth going up or coming down a little bit, we will adjust. It is just a matter. It could be a matter moving it six to 12 months.

Really, the things we would be more flexible on or in the distribution system and related to, as I said, like transformers, cable replacements, those type of things that where we can stretch things out over the longer period of time.

Pole replacements, rather than doing it over 10 years or something, you can stretch it out over few more, it is not really hurting reliability too much.

Daniele Seitz - Seitz Research

I understand. Going to the rate case, I was wondering, there is no system for you to automatically collect for uncollectible, correct? It has to be recovered by rate cases, right?

James Torgerson

Not entirely, part of it is recovered and a good part of it is recovered through the system benefit charge. That goes through automatically, and those are for the hardship uncollectible, and that gets determined annually and updated it was updated every year. We do collect those really quickly. The other piece is, the piece goes to transmission which [24.09] has approved and that gets updated every six months. And then the last piece, would be, we have made a request in the filing to move a portion of the uncollectibles for the generation service charge and that would get updated more frequently like every, actually, going about every quarter.

So, the piece that would be with distribution is the one that would, you have to wait for the rate case. That was about $4.5 million in our rate case in 2006. If we get everything moved the way we question with the commission to generation and well, really, it is the generation now, because we have done the transmission and the system charge – it would be in the neighborhood of $6.5 million, I believe, that is what we have put in to the rate case.

Daniele Seitz - Seitz Research

And this would be almost like a rider. It would recover all the uncollectible then, at least through the year-to-date, I guess.

James Torgerson

Not in the distribution piece. That will depend on the rate case. But everything else is on a rider.

Daniele Seitz - Seitz Research

So far in your discussions with the commissions, did you feel that the decoupling was something that we are warming up toward? Is it a concept that sounds sound to them, especially in view of your work in conservation or, is it something that they feel is really reaching right now?

James Torgerson

Well, in the case, there have been a lot of questions. As a matter of fact, the first couple of days, first day or so, was spent on decoupling. There are a lot of questions about it from the commission staff and to the consumer’s council. The legislation in the state to get passed required us to file for decoupling mechanism. So, which is what we did and whether they are warming up or not, it remains to be seen. We will have to reserve to see what they decide, but there were a lot of question about it and I think we have put on a reasonable case to support the need for decoupling and how it can benefit both the customers and the company.

Daniele Seitz - Seitz Research

So it is more a matter of knowing how it works, etcetera. In my last question, as far as the rate case, I do not remember in the past, has the Connecticut Commission been pretty stiff on dates or the same time really lingers quite, some commissions do not feel like deadlines are deadlines.

James Torgerson

They have been pretty tight on the expected date –Yes for a rate case. They have 150 days and then they pretty much get an automatic 30-day extension to 180 days. They set out the schedule when they are going to make their decisions. Now, could it slip a week or so? Yes, it could, but I would expect it is going to be, they have until February 8, I think. Actually make the final diffusion and we put in our February 4, I guest it is. They put in their schedule to have a final decision by the end of January 28, though. Could have slipped a little bit, yes. But I do not see it slipping a month or anything like that. Unless we decide we want to enter a settlement discussion or some like that and we agreed to delay. But right now, it is on track.

Operator

(Operator Instruction) Your next question comes from [Unidentified Analyst]

[Unidentified Analyst]

Can you just give a quick update on you debt and equity financing commitments for the new Middletown project?

Richard Nicholas

Sure, this is Rich. That was, Middletown-Norwalk is almost complete. The CapEx it is just a little bit left to run. So, the financing plan that we had in place with DCUP approval for 2007 through 2009 of provided sufficient funds to meet the need of the Middletown-Norwalk project.

[Unidentified Analyst]

I am sorry Rich, I meant the Middletown peaking project.

James Torgerson

That is going to be a 2011 in service date, the Devon station will be 2010. We are looking to do the same type of project financing for the debt for Middletown and in fact, would probably do it as a consolidated offering and have a couple of different trenches for the timing of the construction. And then we would need to put our equity in as well. To the extent, we take the equity bridge loan option. We would not need to put our equity in until commercial operation date of June 2011.

[Unidentified Analyst]

So, it would be a consolidation offering with the Devon financing as well?

Richard Nicholas

That is an option, things are not completely nailed down at this point in time, but that is what we are looking at this point.

[Unidentified Analyst]

Sound kind of fluid, so you guys do not have committed financing terms for the Devon yet?

Richard Nicholas

Not a final commitment, but we have things pretty well lined up. In fact, we were down in New York, just Monday of this week, working on it with the institution. We were well on our way.

[Unidentified Analyst]

You do not have a secure commitment letter with which the lenders could not withdraw?

Richard Nicholas

Not at this point, No.

[Unidentified Analyst]

And then, with respect to your liquidity position, can you just give us a sense of the cost it would be associated with these two projects that you guys are going to internally fund until 2009 when you hope to raise capital?

James Torgerson

The two projects we have planned internally fund, you are then talking about GenConn?

[Unidentified Analyst]

Yes, exactly.

James Torgerson

Under our short-term revolver, we have a LIBOR-based borrowing that based on current market conditions is very good, it was locked in two years ago. A very low margin over LIBOR, so we are in good shape to meet those needs until the permanent financing comes in.

[Unidentified Analyst]

Can you just kind of give us a sense of the cost, though, up until maybe through the first quarter of what you would need to internally fund?

James Torgerson

In terms of total dollars?

[Unidentified Analyst]

Yes.

James Torgerson

We have put in $15 million so far for an inter-company loan, and there is a potential for another $15 million.

Operator

(Operator Instruction) We have no further question at this time sir.

James Torgerson

Okay, thank you very much and we appreciate your participating in this call and if you do have further questions, please do not hesitate to call either Sue or Michelle and we will respond in what ever you come up with. Thanks again and we will probably see you this weekend. Thank you. Goodbye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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