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Executives

Susan Allen – Vice President, Investor Relations

James Torgerson – President & Chief Executive Officer

Richard Nicholas – Executive Vice President & Chief Financial Officer

Analysts

Chris Ellinghaus - Williams Capital

Kit Konolige - BGC Financial

David Paz - Bank of America-Merrill Lynch

Noah Asher – Decade

UIL Holdings Corporation (UIL) Q2 2012 Earnings Conference Call August 6, 2012 10:00 AM ET

Operator

Good morning. My name is Debbie, and I will be your conference operator today. At this time, I would like to welcome everyone to the UIL Holdings Second Quarter 2012 Earnings Conference Call. After the presentation, there will be a Q&A session. Instructions will be given at that time. Ms. Allen, you may begin your conference.

Susan Allen

Thank you, Debbie, and good morning to everyone. Thank you for joining us to discuss UIL Holdings second quarter 2012 earnings results. I am Sue Allen, Vice President of Investor Relations. 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 or presentation, they are available at our Website at www.uil.com. 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 the filings with the SEC.

With that said, I would now turn the call over to Jim Torgerson.

James Torgerson

Thanks Sue. Good morning everybody. Our second quarter was a pretty challenging one, again due to the weather. And if you look at it in perspective, the April and May degree days are about equal to what we normally see in November. So, it was off quite a bit again, and another factor in the earnings – the earnings for the quarter were $12 million or $0.23 per diluted share versus 2011, where we had $14.2 million or $0.28 a share.

And for the year-to-date, we are at $59 million of net income, $1.16 which we reported to $1.30 in 2011. The lower GAAP sales volumes are really the primary driver, but also for the Electric distribution business, we recorded a charge related to sharing. So, once we exceed our allowed return on the distribution business and our expectation is that there will be an amount above that this year, then we record a sharing because we share 50-50 on anything over the allowed return.

So, we have that recorded in 2012 in the second quarter and that we didn’t record in 2011. So, that had an impact, and Rich will talk a little bit about that as we move forward.

The pre-tax earnings for GenConn increased $1.3 million in the quarter and $3.7 million year-to-date. The Middletown plant went operational in June of 2011. So, we really had it for a little bit of the second quarter in 2011 and small piece for the first half of 2011.

Our gas conversions go extremely well. We are on target to meet our goal for 2012 and also the 30,000 to 35,000 referrals of three-year period. Our conversions were up 46% over the year-to-date numbers from 2011. Actually, the mild winter did help in that regard a little bit and allowed us to get a jumpstart on the gas construction business during the February-March timeframe.

The other thing is we are reaffirming our 2012 earnings guidance of $2.00 to $2.15 per share. We are mitigating some of the weather impacts by continuing to maintain our focus on the short-term O&M cost controls that we have in place. So, that is an ongoing function. And so, we feel pretty good about our guidance for the $2.00 to $2.15, and Rich will talk about some of parameters around that.

The regulated businesses are expected to earn at or near the allowed returns on a weather-normalized aggregate business. So, in the aggregate, we expect to be at or near our allowed returns. And really the expectations from our acquisition of the gas companies, we believe we are being – you look at the weather normalization. So, we are still very happy with that acquisition and the performance we are driving.

On Page 4 of the presentation, and talk a little bit about the gas conversions, we have converted almost 4,700 customers through the end of June, a 46% increase over the same period in 2011. Our target of 30,000 to 35,000 for the three-year period, from 2011 to 2013, we are on track for that. And we are on track to achieve our goal of 10,200 customers using gas for heating this year.

We did convert our 8,300 customers in 2011 and you can see from the chart how we are doing, and the one on the left shows the month-to-month, and then the one on the right shows the cumulative. And you can see we are ahead of our target and we are ahead of 2011. Conversion targets for 2014 and beyond, we will talk about that in the fourth quarter of 2012 once we get our budgets and estimates put together.

On Page 5, the consumer interest is very strong on our gas conversions, financing options are in place. The natural gas supply prices, I think you know are still low, and not as low as they were, they are up more of closer to $3 range now, but versus the $2 they were earlier this year, but that’s still very attractive. It’s still half the cost of oil and we are seeing considerable amount of interest in people converting. And as you have said before, every customer that converts on average, about $300 of distribution net operating income annually from that.

The Connecticut Department of Energy & Environmental Protection comprehensive energy strategy is going to become out in the third quarter, and based on our input into the process, we expect the energy policy will support the natural gas expansion fairly strongly. So, we are pretty optimistic about what will come out in that report, and we should be seeing that sometime in this quarter, hopefully in the next month.

On Page 6, we are updating our regulatory activities. And you can see that from the storm response, the investigation that was done by the Utility Commission, the final decision came out on August 1st, and it contained a lot of requirements, not a whole lot for United Illuminating, but mainly improving on mutual assistance and release of customer information in the emergency situation.

Actually, it also impacted Southern Connecticut Gas and Connecticut Natural Gas, but they need that fuelling plans and then look at lessons learned as well. So, it wasn’t just the electric business that was impacted, but the impact on a gas operations is pretty minimal.

And there is multiple dockets, if there is still an effect for the storm response and preparedness, including the establishment of the industry performance standards for the electric and gas companies, that’s still ongoing.

UI Electric Decoupling, we made a filing that would say that we would get $4.3 million from customers and that decision is expected this quarter, in the third quarter. And GenConn filed a rate case, with the final decision expected by the end of the year. Renewable energy, we filed with Public Utilities Regulatory Authority outlining the framework for our renewable program where we are allowed to build up to 10 megawatts. A final decision was issued in July. It approved one solar and one fuel cell facility in Bridgeport and a fuel cell in New Haven.

The allowed ROE on that project would be the same as the electric distribution, would actually attract the distribution ROE. We are evaluating whether we will be proceeding with that and we will be talking to our Board about it in the upcoming meeting.

We are still evaluating the timing for electric distribution rate case. Our thought is that we will probably be doing that in the first part of 2013, but we are still looking into it. The regulatory commission has changed somewhat. On May 9th, the General Assembly confirmed Art House as the Commissioner – actually directors, and not commissioners anymore – and Jack Betkoski as the director. Art was then named as the Chairman and Jack Betkoski as the Vice Chairman.

In July, the Governor announced an interim appointment of Michael Caron as the third director of PURA. Michael Caron was the state representative for nine terms, from 1991 to 2009, and Assistant Republican Leader for five of those terms. And he did serve out in the Energy and Technology Committee and he did work extensively on energy matters.

He also was a director of Public Affairs for Pfizer and an associate lobbyist for lobbying a firm at one point. So, looking forward to working closely with all three of them now, with them on Board.

As far as the economy in our service territory, basically it hasn’t changed much in the last couple of months. The Connecticut unemployment rate is still hovering around 8.1%. Nationally, I think we are 8.2%, and unemployment rates in our largest cities are still pretty flat. So, we haven’t seen much change over the last few months as far as the economic conditions are very service territories as well.

With the FERC-related developments on Page 8, there was the challenge to the regional transmission base ROE, the complaint at FERC by multiple state government authorities (inaudible) for Massachusetts, claiming that New England Transmission Owners’ base ROE is too high. The current base ROE is 11.14% and they were contending that the 9.2% ROE for the base was more appropriate.

In May, FERC issued an order setting the matter for hearing and establishing settlement procedures. As of last week, the parties have been unable to reach a settlement. So, the settlement hearings have been terminated and a hearing judge has now been assigned. We would expect after all the litigation process, FERC order would be expected in 2013 depending on the timeframe and how fast it goes. The original expectation would be about 15 months from the time when the litigation actually started. And so, we are going to have a, I guess, there’s going to be a conference later this week, scheduled. So, we will see how that works out.

And I think as we said before, the 25-basis point change would affect us about $600,000 after tax, and keep in mind that if there is any reduction that would be reflected back to the effective date of October 1, 2011.

With that update, I will turn it over to Rich to go over some of the financial business.

Richard Nicholas

Thank you, Jim. Good morning everyone. Thanks for joining us today. I am on Slide 9 and 10, we will go through some of the details of the various operating units. As you could see from the bar graph, total net income for the quarter was down $2.2 million and $1.7 million of that was due to the gas businesses. And year-to-date, we were down $7.2 million, actually $10.7 million is due to the gas business, as Jim said, really driven by the warm weather that we had all year long.

Looking at the electric distribution side of the equation, there is just a slight decline in net income for the second quarter, but up 15% year-to-date. One of the phenomenon that we have seen this year, both in distribution and transmission, is lower allowance for funds used during construction, as we moved some pretty big projects out of construction work in process into rate base. It averages in to the rate base over 13 months. So, you do see a little drop initially. We have also seen the AFUDC rate come down year-over-year as well. We did get a pickup in the quarter from GenConn, as it’s now fully in service, all eight units. And as Jim mentioned, we did record some after-tax sharing of $1.2 million to little over $0.02 a share. As we look at our forecast for the entire year, we do expect to be somewhat above the allowed return on distribution by year-end.

Right now, 12 months ending June 30th, the average distribution CTA return is 8.43%, but that does include, if you recall the fourth quarter of last year, where we had to spend some additional O&M coming out of the various storms in 2011.

On the transmission side, as I mentioned the decrease in the AFUDC was partially offset by an increase in the rate base over that period. And we are still in the 12.2% to 12.4% range on our transmission return on equity.

On the GAAP side, our sales were actually down about 15% as measured by millions of cubic feet compared to second quarter of 2011, and year-to-date, they are down about 16%. So, pre-tax gross margin decline of $4.1 million in 2012 is about a 10% drop in margin compared to 2011.

We did have $3.5 million of weather insurance that we have talked about in prior quarter that was able to offset some of that, but the weather truly did set records in the weather insurance, while it mitigated part of it, did not cover all of it, especially when you see heating degree days in the range of 24% below normal during the period. It’s tough to overcome that even with our significant focus on O&M cost.

As a result on the gas side, the preliminary returns on equity are in the 4.5% range for Southern and 5.5% for CNG. Weather normalized they pop up to about 6.5 to 7.5 then we’re continuing to focus to bring those up towards the allowed return. On the corporate side, no major change there, year-to-date a slight decrease in interest expense.

Moving to slide 11, from a liquidity standpoint, we’re very good in shape. All of our major refinancing and financings have been done for 2012. And at the end of June, we did have available liquidity of over $300,000 million available to us. In addition, S&P just recently affirmed our investment grade credit ratings with a stable outlook.

We are now looking at what’s the right timing around the next need for extra equity. The renewal generation project that Jim mentioned is incremental to our current plan. We’ll also be updating our outlook for a 10-year capital spending as well as the forecast of the gas conversions, as Jim mentioned earlier. This all will take a lot into account than what the market conditions are and continue to evaluate around what’s the right timing there. You may have all seen some pension funding relief that is temporary if you will, it helps in the short run but in the long run you still have to fund the plan. So, we’re looking at the impact of that as well as various congressional proposals, some of which have included bonus depreciation. Don know that anything will come of that in an election year, but everyone’s going to know what does followup out of these.

So moving to slide 12, even with the warm weather we are reaffirming our 2012 earnings guidance of $2 to $2.15, that reflects hitting our goal of converting 10,200 customers at the natural gas heating executing on the capital plan that we’ve laid out, while still being focused on the O&M cost controls across all of our enterprises and including the holding company. And, we have factored in the warmer weather so far, but we do look at the rest of the year and pace that on normal weather. And so that is both a risk and an opportunity as we move into the fourth quarter.

So, now I hand it back to operator Debbie, for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from Chris Ellinghaus from Williams Capital, please proceed with your question.

Chris Ellinghaus - Williams Capital

Hey guys, how are you?

James Torgerson

Good Chris, how are you.

Chris Ellinghaus - Williams Capital

Okay, are you currently reserving for the potential for the FERC ROE?

James Torgerson

No, we’ve not established in the (inaudible) yet.

Chris Ellinghaus - Williams Capital

Okay, did you estimate what the weather impact was to earnings for the quarter?

James Torgerson

Yes, I’ve got that somewhat here. I think it was about $0.05 Chris.

Chris Ellinghaus - Williams Capital

Okay great, and can you give us a little bit more in color on the state energy policy plan, what do you know and how is it going to help conversions?

James Torgerson

Well, we haven’t seen it yet. We’ve had conversations with the people that are putting together at the Department Of Energy And Environment Protection. They seem to be receptive to the suggestions that we expand the use of natural gas and convert those particularly On main which is easy to do, those are easy ones to get, but they are also very interested in Off main and how we can use state policy to push that forward because obviously it says customers money, it reduces pollution and it frankly creates the jobs. So, I think those are all positives. So, we’re watching to see what comes out of it, but I think we’re fairly optimistic that it’s going to be positive, particularly the conversations I’ve had with both the Governor and the Head of Department.

Richard Nicholas

This is Rich, to confirm the $0.05 is corrected, its related to the $4.1 million drop in gross margin.

Chris Ellinghaus - Williams Capital

One more thing, about GenConn, the improvement, is that merely the new units, or is there more of fundamental improvement taking place there.

James Torgerson

Testing the unit.

Chris Ellinghaus - Williams Capital

Okay, thanks so much, appreciate it.

Operator

Our next question comes from Kit Konolige with BGC Financial. Please proceed with your question.

Kit Konolige - BGC Financial

Good morning guys.

James Torgerson

Hi Kit.

Kit Konolige - BGC Financial

Question on the timing of the electric distribution case, can you review for us the puts and takes on why you would file, at what particular time, and then say what your waiting to see, etc?

James Torgerson

Well, right now I think as we indicated it looks like this year we’ll probably be somewhat above our allowed return on electric distribution but when we move into the next year, we’re going to have a significant increase on the rate base, which I think we’ve talked about before that’ll drive us to need to be to earn on allowed return more appropriately and with that increase in rate base, we’re not going to able to do with our current rate. Some of the reasons to look at it earlier in 2013 versus maybe at later, and be the timing of what test year you’re going to use.

Looking forward we’re probably looking at a multi-year rate plan that would take us out two or three years probably and also look at some of the how the economy is doing, political situation and we do have all the commissioners there now and I think we want to spend some time with them in the second half of this year we’re making certain they understand why we’ll be filing, where we’re going to file. Obviously we’d like to see higher ROE than the M3 quarter and well those are some of the things that we’re thinking about when we look at how the economies they would have then obviously the elections are going to have an impact on some things more at the federal level than the state because there aren’t any state changeovers. And then another reason for 2013 to 2014 is an election year, so I felt like to stay away from that one. Also in 2013 our CTA, the Competitive Transition Assessment goes away at the end of the year, so it’s good timing to match up a rate hike with a big decrease and then also the generation service charges are dropping in 2013, so all of the things combined it looks like it would be better timing in 2013. Get things put in place rather earlier or rather than later in the year. This is what we’d like to do.

Kit Konolige - BGC Financial

Okay great, very helpful. One other area, on the allowed return on the gas businesses, so I think it sounded like I think it was Rich expressed some confidence that you’d be able to get to the allowed return, what are the levers there, is that just follow through on post merger incremental improvements, that sort of thing?

Richard Nicholas

Yes Kit this is Rich. This year would obviously be a challenge with the weather. And even on a weather adjusted bases, we’re approaching the allowed returns, or goal with a long hall is to get the there. And so that includes both, the impact of gas conversions and maintaining focus on cost controls and best practices and leveraging that, as you said across all the enterprises, not just the gas so.

Kit Konolige - BGC Financial

Very good thank you.

Operator

Our next question comes from Dave Paz with Bank of America Merrill Lynch, please proceed with your question.

David Paz - Bank of America-Merrill Lynch

Hi good morning, just wanted to clarify your comments earlier on the need for external equity. I think in the past you guys have said that you wouldn’t see need through 2013. Am I interpreting this correctly that you guys may come sooner than that?

Richard Nicholas

What we’ve always said David is that we didn’t need it though 2013 based on then current business plan. This renewable generation opportunity was not in the business plan, it was uncertain as to what would be approved and when. So, that’s incremental and then we’ll also go into the process now of our annual update to the capital plan over the next several years. And so while there is -- a chance that it could come sooner, we haven’t made a decision as to exactly one year.

David Paz - Bank of America-Merrill Lynch

Okay and is it related at all to your current-- is there any consideration in terms of your rate case, when you file, like you need to true-up to a certain capital structure.

Richard Nicholas

No, we’ve been maintaining the operating company cap structure right around the allowed level.

David Paz - Bank of America-Merrill Lynch

Got it, okay. And then just on that renewable generation, I think you’re allowed out to build up to 10 megawatts of, I guess, solar or wind or renewable plant. Is that correct?

James Torgerson

That’s what’s in the legislation David. Right now, they approved the two projects that we submitted, one was for a fuel cell on a solar plant in Bridgeport. And then a fuel cell in New Haven and then it totals a little over 7.5 megawatt. So, we can still do a little bit more, we’re still evaluating it whether to proceed with that or not. So, we had to talk to our board about it, because it is a fairly significant capital investment,

David Paz - Bank of America-Merrill Lynch

How much, sorry, how much did you guys say how much that is?

James Torgerson

If we did all 10, I think it was in the $40 to $60 million range.

David Paz - Bank of America-Merrill Lynch

Got it, okay.

James Torgerson

So that’s one of the drivers that Rich mentioned in thinking about when to proceed with an equity offering. We’re not under any pressure to implement those that generation project. There’s no time frame when we got to do it. We went up volumes, we had to make our filing by 2013 which we did and a proposal which we did, and now they’ve approved it. So, we’re still evaluating it and we need to talk to our board about it.

David Paz - Bank of America-Merrill Lynch

Got it, okay. And coming back to the weather impact for I guess the year. I think you gave earlier a $0.05 for the quarter and that was really to the margin, should we interpret the weather impact year-to-date as actually like 18.1 million of gross margin, that you guys noticed in your slide?

James Torgerson

Less the weather in turn, 3.5.

David Paz - Bank of America-Merrill Lynch

Okay, and then just last question, in Q4’11 of last year, I believe there was warm weather, I think the heating degree days were around somewhere 20% lower than normal, do you know how much weather impacted your Q4’11 earnings.

James Torgerson

Not of top of my head, David, but I do know we booked $2.5 million of weather insurance so that offset it to some extent in the fourth quarter last year.

David Paz - Bank of America-Merrill Lynch

Okay, but your current met guidance of 70% to 80% while I guess for the second half that would be anywhere from $0.21% to $0.31% assume it will return back to normal winter, a normal Q4?

Richard Nicholas

That’s correct.

James Torgerson

Just to put it in perspective David, the heating degree days in November and December were off about 18%. So it a little warmer -- I don’t’ know if we have the margin impact right here.

David Paz - Bank of America-Merrill Lynch

Got it, thank you.

Operator

We have another question from Kit Konolige from BGC Financial, please proceed with your question.

Kit Konolige - BGC Financial

Thank you, just a follow on your comments about the potential investment in the solar and fuel cell. Are you guys staying in the ROE they would allow on this is the 8.75%, are you comfortable making the investment at that allowed return?

James Torgerson

Its good question Kit. At 8.75% it’s not that attractive, however it does trap with whatever is the distribution rate would be and looking at this as a long term project, we have to believe the ROE is going to be a little better in the future so when you look at a project that’s going to be there for 20+ years, you have to take that into consideration but if I knew to answer your question, if I knew it’s just going to be 8 in 3 quarters for ever , I think we will be a little hesitant about going forward with that.

Kit Konolige - BGC Financial

When do you have to pull the trigger on this then?

James Torgerson

We got the approvals, there is no time frame which we actually have to do it, I think we liked it probably started sometime next year. I’d like to also see what’s going to come out of the comprehensive energy strategy that PURA outs and that’s going to come out soon, so we’re not under pressure to start building anything right away and if then if we decide that doesn’t look that attractive to us in the end we don’t have to build anything, that’s why I said we’re still evaluating and we want to talk to the board and see how a couple of things play out before we commit to anything.

Kit Konolige - BGC Financial

Thank you.

Operator

We have a question from Noah Asher from Decade, please proceed with your question.

Noah Asher – Decade

The 7.5 megawatts that you guys were talking about the solar, what percentage of the 10 projects is that in total?

James Torgerson

I’m Sorry Noah, we couldn’t hear you, could you repeat that please?

Noah Asher - Decade

I’m sorry, the 7.5 megawatts, the first couple of projects that were approved, what percentage of the 10 total is that in terms of dollars or the megawatts, just I can understand, how is that initial spend is?

Richard J. Nicholas

The total, while we had – I think we have put that out, we said that the 10 megawatts was going to be $40 to $60 million, so take the midpoint, you’re looking at $5000 in the KW, that’s what you’re talking about?

Noah Asher - Decade

That’s not 10 project, that’s actually just 10 megawatts this $40 to $60 million?

Richard J. Nicholas

Yeah, 10 megawatts and there is two project that total about 7.5 megawatts.

Noah Asher - Decade

Got it and you guys seem fairly confident that the ROE would moving up in the rate case, is that the assumption?

Richard J. Nicholas

That’s an assumption there that we should be successful in moving the ROE up. When you look at it, we have the lowest ROE in the country for electric distribution and I think that the time, that commissioned at the time had reasons for putting it there because of the economy and so many other things. I think now you would make sense for the PURA to re-evaluate that in light of where other utilities are, the ROE’s are and be more reflective of something more closer to what other utilities are receiving. Even North East utilities which is somewhat higher, they’re 940, so I think they have to look at in light of the competition, let’s say.

Operator

There are no further questions in queue at this time.

Richard J. Nicholas

Okay, we’ll thank you everybody for participating, if you have further follow up questions, please contact our investor relations people and thanks for participating today.

Operator

That concludes today’s teleconference, you may now disconnect your line.

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