Nathaniel D. Woodson  

Chairman and Chief Executive Officer

UIL Holdings Corporation

The environment in which we operate is dynamic. To ensure the company's success, we must respond effectively to changes in business conditions and customer needs. We do that by refining our strategies, adjusting our business focus and developing innovative initiatives. While we may change the way we do business, we never lose sight of why we do business: to provide quality service to our customers and to deliver the greatest value to our shareowners.

In the interest of enhancing shareowner value, we have decided to focus our future investments on our regulated utility, The United Illuminating Company. The time is right for UIL to make a major investment in the transmission infrastructure. We believe that this significant investment in the utility business will provide the most valuable return for you, while addressing the pressing needs of the region's electric customers.

There are several reasons why this is the time to invest in the regulated utility. During 2005, we took a number of steps to ensure that we would have the right tools in place to pursue this strategy. We witnessed important changes in the regulatory and legislative arenas. These changes give us the stability and confidence we need in order to execute our strategy. We are now in a position to move forward over the next four years with exceptional clarity of focus. I'd like to share with you some of the highlights of the past year and how they position us for the future.

THE UTILITY BUSINESS

We have decided to undertake the largest transmission infrastructure project in the company's history. We have committed $260 million to this 345 kilovolt transmission project, which is known as the Middletown to Norwalk Project (M/N). The M/N Project is the right investment at the right time. It will provide an excellent return on investment for our shareowners, improve electric reliability in southwest Connecticut and the surrounding region, and help reduce federally imposed congestion charges. This large-scale infrastructure project will benefit the company, its shareowners and its customers.

Changes in the regulatory arena during 2005 created more favorable conditions for this major transmission investment. In late 2005, the Federal Energy Regulatory Commission (FERC) approved our request to change the way it calculates our transmission revenue requirements. This new process allows us to begin to recover transmission construction project costs while the project is under way, rather than having to wait until the project is completed. The M/N Project will be our first project constructed under the new formula. The FERC will now allow 50 percent of the construction work in progress on this project to earn a return before it is in service. New state legislation has also mandated a transmission tracker that will adjust our retail transmission rate every six months to reflect revenue requirements. This adjustment mitigates the pre-existing lag between changes in UI's FERC approved transmission revenue requirements and its retail transmission rate.