Fellow Shareowners

From Wall Street to the White House to Bridgeport, Connecticut, the operative word for 2008 was “change.” As many have said, we have entered a period like nothing we have seen before. We are clearly in a recession, but only history will tell if the current economic crisis is a modern Great Depression. Financial institutions have disappeared, and equity and debt markets have tightened to the point where even the most creditworthy companies are paying significant premiums to borrow. We all have witnessed the astonishing losses in the equity markets and the lack of buyers for even the most attractive stocks.

UIL began 2008 with successes. The United Illuminating Company (UI), our utility operation, was recognized by the Connecticut Department of Public Utility Control (DPUC) for its leadership in developing new peaking generation resources for customers. The agency granted GenConn Energy LLC, UIL’s joint venture
with NRG Energy, the right to build and operate 200 megawatts of peaking generation. Later in the year, GenConn was awarded an additional 200 megawatts after another party withdrew its proposal. The opportunity, however, is not without its challenges. This $400 million project requires financing in a time when the credit markets are in the worst shape in recent memory. We remain confident, however, that our staunch resolve in maintaining our investment grade credit rating should pave the way to success. Another success was the completion of our portion of the Middletown-to-Norwalk 345-kilovolt transmission line. The full line became operational ahead of schedule. The investment in this line has already benefited the region – and Connecticut in particular – by reducing the congestion costs resulting from previously existing transmission constraints. The transmission investments also provided significant earnings to UI at a time when the distribution business is experiencing declining sales.

As I mentioned in my letter to you last year, our customers are conserving energy and using electricity more efficiently. We recognized this trend and realized we needed to reflect this reality in our distribution rates. We demonstrated our leadership role by being one of the first utilities in the nation to be granted a full “decoupling” of the sale of electricity from our revenues. What this means is that our distribution business will receive the revenues, as determined by the DPUC, needed to operate our business regardless of the amount of sales of kilowatt hours of electricity.

We did not anticipate the financial crisis that occurred in the fourth quarter of 2008 and the extent to which it would exacerbate the recession that was already underway. This became clear as numerous customers asked the DPUC not to grant our request to raise rates for 2009 and 2010. Our request for a rate increase came only after we proposed an alternative that would have accomplished our goals but would not have increased customers’ rates in 2009. Unfortunately, the Connecticut Attorney General and Office of Consumer Counsel refused to accept our proposal. Another impact of the collapse of the equity markets was the decline in the asset value of our pension plan, resulting in a tripling of our annual pension expense to more than $30 million. It was fortuitous that we were already in a rate proceeding and were able to supplement our request to reflect this increase. 

The requests for the pension expense recovery and the decoupling mechanism were ultimately approved, but an increase in rates in 2009 was not. Now the question remains: What is your Company doing to weather the recession? And, more importantly, what are we doing for the future? Is all of this jeopardizing our plans for growth? To answer the first question, we have temporarily reduced our operating and maintenance expenses significantly, and have scaled back our capital spending plans for 2009. We will strive to minimize service reductions and other impacts on customers. Nevertheless, it is impossible to maintain service levels without adequate funding. Looking ahead, there will be a slowing of our expansion plans as we negotiate the recession, but over the longer term I view our future as bright. The opportunities to expand the transmission system as outlined by Washington policy-makers are even more pressing, especially when one looks at the requirements to use renewable energy. The renewable energy in this country is available only in certain areas; for New England, wind energy is generated primarily in northern Maine and in the Maritime provinces of Canada. Today there exists a paucity of transmission to bring this energy to customers in metropolitan areas. This should present an opportunity for us to invest in transmission.

Investing directly in renewable energy presents another opportunity, whether it is wind, solar or even distributed generation located in our service territory. We are presently precluded from making these investments and including them in our regulated operations. Therefore, we are working with legislators toward making appropriate changes. The Washington policy-makers’ focus on development of a “smart grid” opens the door for us to provide our customers the means to use technology to become even more energy efficient in their homes and businesses. We have been a national leader for more than 20 years in providing conservation and energy efficiency products and services to our customers. We fully plan to continue our leadership role in helping our customers save energy and money. Again, we need legislative changes to permit this, but we believe we can be successful in working with legislators to make this a reality.

All of the investments we need to make require access to capital, and today that is proving to be limited. Access is supported by maintaining our investment-grade rating and continuing to pay our dividend at its current level. Our plans are designed to achieve both goals and provide appropriate service levels to customers.

In 2008 our earnings per share from continuing operations was $1.93. That is an increase of three percent over 2007, a period during which sales declined 3.7 percent. This would be an excellent result at any time, and even more so given the current economic environment. We received the Edison Electric Institute’s 2008 award for the highest total shareholder return over a five-year period for a small-cap utility, and we look forward to delivering future competitive returns to you, the shareowners.

Our people are dedicated and resourceful and are to be congratulated for their achievements during the past year. I have every confidence in their ability to accomplish our goals by continuing to provide excellent customer service and top quartile returns to our shareowners.

Sincerely,
James P. Torgerson
President and Chief Executive Officer

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