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UIL Holdings Corporation. (NYSE:UIL)

Q4 2007 Earnings Call

Feb 21, 2008; 10:00 am ET

Executives

Rich Nicholas - Executive Vice President and Chief Financial Officer

Susan Allen - Vice President of Investor Relations

Jim Torgerson - President and Chief Executive Officer

Analysts

Chris Ellinghaus - Wall Street Access

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and year-end 2007 earnings conference call. My name is Amanda and I'll be your operator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference. (Operator Instructions) I’d now like to turn the call over to your host for today, Ms. Susan Allen, Vice President of Investor Relations, Treasurer and Assistant Secretary. Please proceed.

Susan Allen

Thank you, Amanda, and good morning to everyone. Thank you for joining us to discuss UIL Holdings fourth quarter and year-end 2007 earnings results. Participating on the call with me today is Jim Torgerson, UIL’s President and Chief Executive Officer, and Rich Nicholas, UIL’s Executive Vice President and Chief Financial Officer. If you do not already have a copy of our press release and financial statements, 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 Provisions 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 Jim.

Jim Torgerson

Thanks, Sue. What I'm going to do is touch on the annual highlights then Rich is going to go over the quarterly details, but to start off with I think the accomplishments and the results for 2007 were really very good and the prospects for the future for the Company are really shaping up well. Our strategy to focus on the utility activities is really showing positive results and plus, when we look at the partnership we negotiated with NRG for peaking generation under a cost-of-service basis that we’re making the proposal on, I think things – we’re actually very optimistic.

Looking at the results for 2007, you feel like on a consolidated basis we earned $44.7 million or $1.79 a share and that compared to a loss of $65.2 million or $2.66 a share in 2006. Now when we get rid of all the nonrecurring sales on Bridgeport Energy, Cross-Sound Cable, the Private Letter Ruling from the IRS, which was $0.27 a share, then the loss on Xcelecom, to put everything on an apples-to-apples basis we really show an earnings growth of 9.4%, which was $1.87 in 2007 versus $1.71 in 2006. So I think all in all it turned out to be a really good year.

The -- one of the items driving it was our transmission. The operating income was up 83%, and that's really a result of the Middletown Norwalk project, which is right on schedule -- actually we are over 70% complete with that -- and the construction work in progress that we now have in the rate base for that project. Also, our ten-year plan, which we put together this last year, is starting to show fruits, we are starting to make the investments that that ten-year plan called for, both in the distribution and the transmission business.

The transmission business actually had a return in equity of almost 12% in 2007, so again, a great start there. Another positive note was the conservation in load management, which was actually up somewhat in 2007 on our earnings, and even more importantly, testimony is going in this next week and the -- a bill has been raised in the state legislature which would allow us to put these conservation energy efficiency programs in the rate base. Now whether the legislature approves that or not, we'll see, but I'm actually testifying next Tuesday to that. So looking at all those things, when you take a look at 2007 it was really a good year, even the fact that we had flat kilowatt-hour sales and our uncollectibles were up fairly significantly because of the price increases that we've seen. Uncollectibles are actually up $2.8 million for the year.

Now when we look at our distribution business, the operating income there was actually down about 5%, and the result of that is really two things. One, the uncollectibles, and, two, our kilowatt-hour sales have actually been declining. 2006 over 2005 they were down about 0.3%, and these on weather-corrected numbers.

2007 the results were down about 0.8%, which although it doesn't sound significant but in our rates it assumed a 1% annual growth in kilowatt hour sales, which we're not seeing. With that, and also with the uncollectible, we believe these conditions are going to persist. We don't know what the sales are going to be, but right now we're not seeing the growth that was -- that is implicit in our rates. So we will be making regulatory filings in 2008 to seek appropriate relief that will allow us to earn our allowed return in 2009 on the distribution business and at the same time, we're also going to be requesting decoupling, which is actually required in the legislation that got passed in 2007. It requires all electric distribution companies to file for a decoupling.

We will be looking for what I'll characterize as a true or full decoupling mechanism and hopefully we'll be successful in that. So going on, when you look at the capital spending we did in 2007, that's the first year of our ten-year plan -- or I guess the first half of the year -- but we did spend $256 million in capital spending, which was pretty much right on our budget; $80 million in distribution and $176 million in transmission. Of the transmission, $165 million was for the Middletown Norwalk project, which as I said is 76% complete.

We're on our Trumble substation, which is now more than 80% complete and that'll be operational this year. Our plan right now is to update this ten-year plan annually and we will have an update to that about mid-year and we'll be able to communicate to you where we see it going at that point.

The Energy Act that was passed had a number of components in 2007. Probably the biggest ones were that we had to submit a resource plan, which we did file, but also the ability for the electric distribution companies to make proposals to build peaking generation in the state. As you know, we partnered with -- or are partnering with NRG to build new peaking generation. We're really excited about this partnership. It's been going extremely well and we do see a very good fit with NRG.

The -- we've actually named the partnership, it's Gencon Energy. It's a 50/50 arrangement and what's very important about this it is on a cost-of-service basis, so we would be recovering our cost just as though it were regulated and the earnings growth potential, assuming we're selected, would be actually fairly significant for us. The proposals were made February 1st, and this was for the -- that was for the initial qualification of the program. The total package is going to be sent in on March 3rd, and then the DPUC will have until July 1st to make a decision on who the ultimate parties will be.

Now keep in mind the DPUC in an order in December, they identified about 500 megawatts that needed – that are needed for peaking generation, so with that, we are looking to make our proposal. And there's been some press about how much we're going to be proposing and some have suggested it's a full amount. We haven't put that in yet, so we'll still -- we'll comment on that when we actually do get to the point where we actually make the proposal. Now also part of the Energy Act was the filing of a collaborative effort between UICL&P and the Bradle Group with the Bradle Group being our consultant for – and what we call it is -- it's really going back to the old integrative resource planning that the Company hasn't done in quite a while. So what we did was filed the plan January 2. It's under the review of the Connecticut Energy Advisory Board. They will -- once they pass on it, whether they want changes made or approve it or -- my guess is they'll want to see some additions to it -- but that'll then go over to the DPUC. So with that, I'm going to turn it over to Rich and then he can comment on the quarter.

Rich Nicholas

Thank you, Jim. Good morning, everyone. We'll spend just a few minutes on the fourth quarter and then also focus in on our 2008 guidance. Continuing operations for the fourth quarter were up nicely, $0.35 a share, compared to $0.09 a share in 2006, really driven with a very solid quarter of the utility, as Jim mentioned, the Middletown Norwalk project, the significant Cap Ex spending, a lot of which occurred in the fourth quarter, and so the when the utility came in at $.34 a share compared to $.13 a share in 2006.

Continuing operations for the fourth quarter were up nicely, $0.35 a share, compared to $0.09 a share in 2006, really driven with a very solid quarter of the utility, as Jim mentioned, the Middletown Norwalk project, the significant CapEx spending, a lot of which occurred in the fourth quarter, and so the utility came in at $0.34 a share compared to $0.13 a share in 2006. We also achieved the incentives on the transmission project in 2007, not only the 100% quip and rate base, but also the 50 additional basis points on the return on equity on about half of the project for new technology and we saw the benefit of that in the fourth quarter, as well.

For the year, while sales were down a little bit, the fourth quarter did benefit from the cold weather, about 9% more heating degree days in the fourth quarter of '07 over the fourth quarter of '06. However, that was offset by increased uncollectibles, higher depreciation expense on the distribution side of the business resulting from the higher CapEx, and in 2006, we had the generation service procurement fee, which was no longer available to us in 2007.

At the corporate level we actually had $0.01 of earnings in the fourth quarter of 2007 versus a $0.04 loss in 2006, primarily due to interest income, both from interest income on cash reserves, as well as interest income on notes associated with the Xcelecom sales. Also we received a refund from the IRS related to the losses on the Xcelecom sales, and that generated $0.02 of interest income from the IRS.

At the end of the year, UIL Consolidated had $13 million of cash on hand, and on January 2 of 2008, we actually received that cash refund from the IRS, which including interest was almost $21 million of cash. And so we'll continue to use that cash to infuse into the utility in 2008 to maintain the capital structure as we move forward. Just a quick note on the Xcelecom front, we did continue to close out some of the remaining issues during 2007, achieved additional settlements there, and while there's still a little bit to go, that is continuing to be a smaller and smaller piece of the going-forward business.

In 2007, we also were successful in issuing $175 million of long-term debt, $100 million of which was new to support our CapEx program, $75 million was a refinancing. And we do plan to be back out in the market in 2008, both placing about $50 million of new debt, as well as $100 million of refinancing. Moving to our 2008 guidance, which for UIL Consolidated continuing operations is $1.82 to $2.02, it's primarily driven by transmission as we continue to build out Middletown Norwalk, the Trumble substation, that Jim mentioned, and a very solid growth. 2007 for transmission was about $0.51 a share and our guidance is $0.80 to $0.84 a share.

On the distribution side of the business, it's continuing to impacted by the slowing economy, the effect of higher prices on sales and on collectibles, and as a result, we're projecting a distribution return in the range of 8% to 8.5% in 2008. On the transmission side, the weighted average projected rate of return for 2008 is 12.15%. So we'll be working during 2008 to take the regulatory initiatives that Jim mentioned to get back up to the allowed return in future years on the distribution side of the business. One other item on the guidance.

Corporate costs, UIL Corporate is projected -$0.12 to -$0.07, and that's primarily because – I mentioned earlier, in 2007 we had interest income on cash reserves and some Xcelecom notes. The cash is going back into the utility and most of the Xcelecom notes have been settled. So with that, I will turn it back to Sue Allen.

Susan Allen

Hello, everyone -- excuse me. Before we get to the Q-and-A, I want to let everyone to know that UIL will be presenting at the Wall Street Access [Darrenson] and Company Northeast Conference in Boston Thursday, February 28th. The preliminary agenda has the UIL scheduled to present at 3:45. With that I'm sending it back to you, Amanda, for the Q&A.

Question-and-Answer-Session

Operator

Thank you, ma’am. (Operator Instructions) Your first question comes from the line of Chris Ellinghaus of UIL. Please proceed

Chris Ellinghaus - Wall Street Access

Hi, everybody. How are you?

Jim Torgerson

Good, Chris, how are you?

Chris Ellinghaus - Wall Street Access

I 'm good. Relative to your expectations for distribution ROE, what do you plan to file for?

Jim Torgerson

As far as the ROE?

Chris Ellinghaus - Wall Street Access

Yes. Are you planning to go -- go back and ask for what you should have earned at 9.75%, or have you flushed out your plan yet?

Jim Torgerson

We haven't really flushed it out yet, Chris. We're working on that. We'll have an outside consultant who will be the cost of money witness and we'll be looking for something that's appropriate, I guess is the best way to put it, and we want to make sure we're able to earn it too, what we end up getting. You know how the regulatory stuff works. They can grant you rates and then make it difficult to earn, so we want to make sure we're able to earn our alow -- the allowed return and we'll be looking for something that's, again, working with the consultant, but we haven't finished that yet at all.

Chris Ellinghaus - Wall Street Access

I presume that will incorporate also whatever decoupling mechanism you want to propose?

Jim Torgerson

Yes, we're -- yes, we are. Just so -- let me talk a second about the decoupling mechanism we're going to be looking for. We're going to be looking for one that would allow us to basically earn our allowed rate of return, to earn the revenue requirement on an annual basis, so that we will manage the O&M expenses and so forth. But to have it fluctuate based on kilowatt-hour sales, which are declining -- and energy efficiency's working well, the prices and people are conserving, but it's causing our sales to go down, so we want to be able to earn based on what the revenue requirement is, earn that revenue requirement on an annual basis -- we'll manage the O&M -- but put the revenue where it should be and do that on -- every year, true it up based on -- if kilowatt-hour sales are too high or too low it really won't matter, just make sure we earn the revenue requirement. It's going to be pretty straight forward

Chris Ellinghaus - Wall Street Access

Okay. Rich, on the guidance, is that on a diluted basis or a basic basis?

Rich Nicholas

It's on a basic basis, Chris.

Chris Ellinghaus - Wall Street Access

Okay.

Operator

There are no more questions at this time.

Jim Torgerson

Okay.

Susan Allen

Thank you for joining us.

Jim Torgerson

Well, if anybody -- does anybody have any more questions before we terminate this? Okay. Well since it doesn't appear there are any other questions, if do you have questions, please don't hesitate to call Sue or Michelle, and I want to thank you all for joining us today.

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