10-Q 1 form10q.htm UIL HOLDINGS CORPORATION 10-Q 9-30-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ______

Commission file number 1-15052
 

(Exact name of registrant as specified in its charter)
Connecticut
 
06-1541045
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
157 Church Street, New Haven, Connecticut
 
06506
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  203-499-2000

N/A
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x      No   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x      No   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer        x
Accelerated filer                           o
Non-accelerated filer          o
Smaller reporting company         o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o           No x
 
The number of shares outstanding of the issuer’s only class of common stock, as of November 1, 2012 was 50,665,114.
 


 
 

 
 
INDEX

PART I.  FINANCIAL INFORMATION

   
Page
Number
Item 1.
3
 
3
 
3
 
4
 
6
 
7
Item 2.
27
 
27
 
33
 
35
 
36
 
36
 
36
Item 3.
41
Item 4.
41
     
PART II.  OTHER INFORMATION
     
Item 1A.
41
Item 2.
41
Item 6.
42
 
43
 
 
- 2 -

 
PART 1.  FINANCIAL INFORMATION
Item 1. 
Financial Statements
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands except per share amounts)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
             
   
2012
   
2011
   
2012
   
2011
 
                         
Operating Revenues
  $ 323,809     $ 321,427     $ 1,065,655     $ 1,196,529  
                                 
Operating Expenses
                               
Operation
                               
Purchased power
    43,565       52,974       118,581       139,548  
Natural gas purchased
    51,570       48,714       242,328       341,594  
Operation and maintenance
    88,202       92,279       262,995       267,804  
Transmission wholesale
    26,565       25,180       59,847       59,809  
Depreciation and amortization (Note F)
    46,279       41,628       135,886       125,676  
Taxes - other than income taxes (Note F)
    28,502       26,399       82,924       87,806  
Total Operating Expenses
    284,683       287,174       902,561       1,022,237  
Operating Income
    39,126       34,253       163,094       174,292  
                                 
Other Income and (Deductions), net (Note F)
    7,416       8,392       21,205       18,661  
                                 
Interest Charges, net
                               
Interest on long-term debt
    21,578       21,052       64,505       65,059  
Other interest, net (Note F)
    1,165       2,647       4,012       4,376  
      22,743       23,699       68,517       69,435  
Amortization of debt expense and redemption premiums
    610       644       1,818       1,979  
Total Interest Charges, net
    23,353       24,343       70,335       71,414  
                                 
Income Before Income Taxes, Equity Earnings
    23,189       18,302       113,964       121,539  
                                 
Income Taxes (Note E)
    10,835       9,629       50,924       51,347  
                                 
Income Before Equity Earnings
    12,354       8,673       63,040       70,192  
Income from Equity Investments
    3,421       3,521       11,823       8,230  
                                 
Net Income
    15,775       12,194       74,863       78,422  
Less:
                               
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests
    26       14       65       42  
                                 
Net Income attributable to UIL Holdings
  $ 15,749     $ 12,180     $ 74,798     $ 78,380  
                                 
Average Number of Common Shares Outstanding - Basic
    50,799       50,643       50,760       50,597  
Average Number of Common Shares Outstanding - Diluted
    51,032       50,927       51,004       50,886  
                                 
Earnings Per Share of Common Stock - Basic (Note A):
  $ 0.31     $ 0.24     $ 1.47     $ 1.55  
                                 
Earnings Per Share of Common Stock - Diluted (Note A):
  $ 0.31     $ 0.24     $ 1.46     $ 1.54  
                                 
Cash Dividends Declared per share of Common Stock
  $ 0.432     $ 0.432     $ 1.296     $ 1.296  
 

 
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Three  and Nine Months Ended September 30, 2012 and 2011
(Thousands of Dollars)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net Income
  $ 15,775     $ 12,194     $ 74,863     $ 78,422  
Other Comprehensive Income (Loss), net
    350       (1,012 )     551       (866 )
Comprehensive Income
    16,125       11,182       75,414       77,556  
Less:
                               
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests
    26       14       65       42  
Comprehensive Income attributable to UIL Holdings
  $ 16,099     $ 11,168     $ 75,349     $ 77,514  
 
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
 
 
- 3 -


UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
(In Thousands)
(Unaudited)

   
September 30,
   
December 31,
 
   
2012
   
2011
 
Current Assets
           
Unrestricted cash and temporary cash investments
  $ 15,201     $ 30,999  
Restricted cash
    3,145       6,522  
Accounts receivable less allowance of $10,492 and $10,939, respectively
    214,730       180,465  
Unbilled revenues
    52,584       71,957  
Current regulatory assets  (Note A)
    109,472       102,900  
Natural gas in storage, at average cost
    92,417       111,516  
Materials and supplies, at average cost
    10,993       8,370  
Deferred income taxes
    6,125       41,635  
Refundable taxes
    60,534       74,983  
Current portion of derivative assets (Note A)
    12,636       14,189  
Prepayments
    22,299       15,357  
Other
    4,562       8,335  
Total Current Assets
    604,698       667,228  
                 
Other investments
               
Equity investment in GenConn (Note A)
    125,295       131,082  
Other
    23,677       22,571  
Total Other investments
    148,972       153,653  
                 
Net Property, Plant and Equipment
    2,714,441       2,570,355  
                 
Regulatory Assets (future amounts due from customers through the ratemaking process) (Note A)
    898,325       983,222  
                 
Deferred Charges and Other Assets
               
Unamortized debt issuance expenses
    17,097       17,631  
Other long-term receivable
    1,275       1,278  
Derivative assets (Note A)
    68,792       73,264  
Goodwill
    266,205       266,797  
Other
    10,639       11,181  
Total Deferred Charges and Other Assets
    364,008       370,151  
                 
Total Assets
  $ 4,730,444     $ 4,744,609  
 
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.

 
- 4 -

 
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
(In Thousands)
(Unaudited)
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
Current Liabilities
           
Line of credit borrowings
  $ 155,000     $ 235,000  
Current portion of long-term debt
    28,359       13,712  
Accounts payable
    135,224       194,641  
Dividends payable
    21,888       21,847  
Accrued liabilities
    77,710       78,138  
Current regulatory liabilities (Note A)
    22,993       26,245  
Taxes accrued
    18,562       21,870  
Interest accrued
    25,262       21,527  
Current portion of derivative liabilities (Note A)
    30,683       28,888  
Total Current Liabilities
    515,681       641,868  
                 
Noncurrent Liabilities
               
Pension accrued
    203,698       237,083  
Connecticut Yankee contract obligation (Note J)
    11,932       14,247  
Other post-retirement benefits accrued
    87,102       84,810  
Derivative liabilities (Note A)
    226,210       239,147  
Other
    72,706       75,268  
Total Noncurrent Liabilities
    601,648       650,555  
                 
Deferred Income Taxes (future tax liabilities owed to taxing authorities)
    447,683       388,553  
                 
Regulatory Liabilities (future amounts owed to customers through the ratemaking process) (Note A)
    431,973       420,175  
                 
Commitments and Contingencies (Note J)
               
                 
Capitalization (Note B)
               
Long-term debt, net of unamortized discount and premium
    1,623,477       1,548,347  
                 
Preferred Stock of Subsidiary
               
Redeemable preferred stock, noncontrolling interests
    750       750  
                 
Common Stock Equity
               
Common stock
    936,383       931,153  
Paid-in capital
    19,726       19,791  
Retained earnings
    152,947       143,792  
Accumulated other comprehensive income (loss)
    176       (375 )
Net Common Stock Equity
    1,109,232       1,094,361  
                 
Total Capitalization
    2,733,459       2,643,458  
                 
Total Liabilities and Capitalization
  $ 4,730,444     $ 4,744,609  
 
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
 
 
- 5 -

 
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Cash Flows From Operating Activities
           
Net income
  $ 74,863     $ 78,422  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    137,704       127,655  
Deferred income taxes
    46,504       53,876  
Allowance for funds used during construction (AFUDC) - equity
    (5,473 )     (7,657 )
Stock-based compensation expense (Note A)
    3,914       4,326  
Pension expense
    29,949       30,380  
Undistributed (earnings) losses in equity investments
    (11,990 )     (8,650 )
Deferred purchased gas
    18,672       27,354  
Other non-cash items, net
    990       (33,279 )
Changes in:
               
Accounts receivable, net
    (30,047 )     32,812  
Unbilled revenues
    19,372       28,955  
Natural gas in storage
    19,099       982  
Prepayments
    (6,942 )     (5,708 )
Accounts payable
    (41,532 )     (33,133 )
Cash distributions from GenConn
    16,304       3,134  
Interest accrued
    3,735       2,074  
Taxes accrued/refundable, net
    34,441       (18,456 )
Accrued liabilities
    (1,685 )     (10,220 )
Accrued pension
    (57,680 )     (71,264 )
Other assets
    3,583       (1,208 )
Other liabilities
    (5,848 )     (12,737 )
Total Adjustments
    173,070       109,236  
Net Cash provided by Operating Activities
    247,933       187,658  
                 
Cash Flows from Investing Activities
               
Related party note receivable
    -       (1,050 )
Plant expenditures including AFUDC debt
    (214,240 )     (226,936 )
Acquisition of gas companies, net of cash acquired
    -       11,211  
Cash distributions from GenConn
    1,300       -  
Investment in GenConn
    -       (2,000 )
Changes in restricted cash
    3,377       (3,492 )
Deposits in New England East West Solution (NEEWS) (Note C)
    (5,885 )     (1,623 )
Other
    810       240  
Net Cash (used in) Investing Activities
    (214,638 )     (223,650 )
                 
Cash Flows from Financing Activities
               
Issuance of common stock
    1,943       977  
Issuances of long-term debt
    203,500       51,050  
Payments on long-term debt
    (108,500 )     (145,118 )
Line of credit borrowings (repayments), net
    (80,000 )     131,000  
Payment of common stock dividend
    (65,602 )     (65,439 )
Other
    (434 )     (459 )
Net Cash (used in) Financing Activities
    (49,093 )     (27,989 )
                 
Unrestricted Cash and Temporary Cash Investments:
               
Net change for the period
    (15,798 )     (63,981 )
Balance at beginning of period
    30,999       90,281  
Balance at end of period
  $ 15,201     $ 26,300  
                 
Non-cash investing activity:
               
Related party note receivable
  $ -     $ 62,989  
Equity investment in related party
  $ -     $ (62,989 )
Plant expenditures included in ending accounts payable
  $ 26,944     $ 45,553  
Plant expenditures funded by deposits in NEEWS
  $ (6,346 )   $ -  
Deposits in New England East West Solution (NEEWS)
  $ 6,346     $ -  
 
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.

 
- 6 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
 
The accompanying notes should be read in conjunction with the Notes to Consolidated Financial Statements included in UIL Holdings Corporations’ (UIL Holdings) Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

(A)
BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

UIL Holdings is headquartered in New Haven, Connecticut, where its senior management maintains offices and is responsible for overall planning, operating and financial functions.  The primary business of UIL Holdings is ownership of its operating regulated utility businesses.  The utility businesses consist of the electric distribution and transmission operations of The United Illuminating Company (UI) and the natural gas transportation, distribution and sales operations of The Southern Connecticut Gas Company (SCG), a subsidiary of Connecticut Energy Corporation (CEC), Connecticut Natural Gas Corporation (CNG), a subsidiary of CTG Resources, Inc. (CTG), and The Berkshire Gas Company (Berkshire), a subsidiary of Berkshire Energy Resources (BER, and together with SCG, CNG, Berkshire, CEC and CTG, the Gas Companies).  Each of CEC, CTG and BER is a holding company whose sole business is ownership of its respective operating regulated gas utility.

UI is also a 50-50 joint venturer with NRG Energy, Inc. (NRG) in GCE Holding LLC, whose wholly-owned subsidiary, GenConn Energy LLC (collectively, GenConn) was chosen by the Public Utilities Regulatory Authority (PURA) to build and operate new peaking generation plants in Devon (GenConn Devon) and Middletown (GenConn Middletown), to help address Connecticut’s need for power generation during the heaviest load periods.

Basis of Presentation

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).  Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted in accordance with Securities and Exchange Commission (SEC) rules and regulations.  UIL Holdings believes that the disclosures made are adequate to make the information presented not misleading.  The information presented in the Consolidated Financial Statements reflects all adjustments which, in the opinion of UIL Holdings, are necessary for a fair statement of the financial position and results of operations for the interim periods described herein.  All such adjustments are of a normal and recurring nature.  The results for the nine month period ended September 30, 2012 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2012.

The Company has revised its previously issued quarterly financial statements to correct an error in the 2011 Consolidated Financial Statements.  The effect of this revision on the financial statements is a $3.3 million and a $16.7 million adjustment increasing depreciation and amortization expense and decreasing operation and maintenance expense in the Consolidated Statement of Income for the three and nine month periods ended September 30, 2011, respectively, which had no impact on net income.  Corresponding adjustments were made within net cash provided by operating activities in the Consolidated Statement of Cash Flows for the nine-month period ended September 30, 2011.  These adjustments were not considered to be material individually or in the aggregate to previously issued financial statements.
 
 
- 7 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
 
Derivatives

UIL Holdings’ regulated subsidiaries are parties to contracts, and involved in transactions, that are derivatives.  The fair values of the gross derivative assets and liabilities as of September 30, 2012 and December 31, 2011 were as follows:

   
September 30, 2012
 
   
(In Thousands)
 
                         
   
Current Portion
   
Noncurrent Portion
   
Current Portion
   
Noncurrent Portion
 
   
Derivative Assets
   
Derivative Assets
   
Derivative Liabilities
   
Derivative Liabilities
 
                         
Contracts for differences
  $ 11,636     $ 68,792     $ (30,683 )   $ (226,210 )
Weather insurance contracts
    1,000       -       -       -  
Total derivative assets/(liabilities), gross
  $ 12,636     $ 68,792     $ (30,683 )   $ (226,210 )
 
 
   
December 31, 2011
 
   
(In Thousands)
 
                         
   
Current Portion
   
Noncurrent Portion
   
Current Portion
   
Noncurrent Portion
 
   
Derivative Assets
   
Derivative Assets
   
Derivative Liabilities
   
Derivative Liabilities
 
                         
Contracts for differences
  $ 10,678     $ 73,264     $ (28,888 )   $ (239,147 )
Weather insurance contracts
    3,511       -       -       -  
Total derivative assets/(liabilities), gross
  $ 14,189     $ 73,264     $ (28,888 )   $ (239,147 )
 
Contracts for Differences (CfDs)

Pursuant to Connecticut’s 2005 Energy Independence Act (EIA), PURA solicited bids to create new or incremental capacity resources in order to reduce federally mandated congestion charges, and selected four new capacity resources.  To facilitate the transactions between selected capacity resources and Connecticut electric customers, and provide the commitment necessary for owners of these resources to obtain necessary financing, PURA required that UI and The Connecticut Light and Power Company (CL&P) execute long-term contracts with the selected resources.  In August 2007, PURA approved four CfDs, each of which specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price.  UI executed two of the contracts and CL&P executed the other two contracts.  The cost of the contracts will be paid by customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost is borne by UI customers and approximately 80% by CL&P customers.

PURA has determined that costs associated with these CfDs will be recoverable by UI and CL&P, and in accordance with ASC 980 “Regulated Operations,” UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability).  The CfDs are marked-to-market in accordance with ASC 815 “Derivatives and Hedging.”  For those CfDs signed by CL&P, UI records its approximate 20% portion, pursuant to the cost-sharing agreement noted above.  As of September 30, 2012, UI has recorded a gross derivative asset of $80.4 million, a regulatory asset of $176.5 million, and a gross derivative liability of $256.9 million ($156.4 million of which is related to UI’s portion of CL&P’s derivative liabilities).  See Note (K) “Fair Value of Financial Instruments” for additional CfD information.

The unrealized gains and losses from fair value adjustments to these derivatives recorded in regulatory assets or regulatory liabilities for the three and nine month periods ended September 30, 2012 and 2011 were as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
Regulatory Assets - Derivative liabilities
  $ (1,832 )   $ 17,753     $ (7,613 )   $ 88,289  
                                 
Regulatory Liabilities - Derivative assets
  $ (27 )   $ (11 )   $ (15 )   $ 5,737  

 
- 8 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
 
Weather Insurance Contracts

SCG and CNG enter into weather insurance contracts for the winter period of November 1 through April 30 in order to provide financial protection from significant weather fluctuations.  According to the terms of such contracts, if temperatures are warmer than normal at a prescribed level for the contract period, SCG and CNG each receive a payment, up to the maximum amount allowed under the contracts; however, if temperatures are colder than normal at a prescribed level for the contract period, SCG and CNG each make a payment of up to a maximum amount.  The premiums paid are amortized over the terms of the contracts.  The fair value of the contracts is carried on the balance sheet as a derivative with changes in value recorded in the income statement as Other Income and (Deductions).  In May of 2012, each of SCG and CNG received a payment of $3 million upon the expiration of their respective contracts.

In October 2012, SCG and CNG each entered into weather insurance contracts for the winter period of November 1, 2012 through April 30, 2013.  If temperatures are warmer than normal, SCG and CNG will each receive a payment, up to the maximum amount allowed under the contracts of $3 million; however, if temperatures are colder than normal, SCG and CNG will each make a payment of up to a maximum of $2 million.

In November 2011, Berkshire entered into a weather insurance contract for 2012 in order to provide financial protection from significant weather fluctuations.  According to the terms of the contract, if temperatures are warmer than normal for the contract period, Berkshire will receive a payment, up to the maximum amount allowed under the contract of $1 million.  The premiums paid are amortized over the term of the contract.  The fair value of the contract is carried on the balance sheet as a derivative with changes in value recorded in the income statement as Other Income and (Deductions).  The derivative asset related to this contract totaled $1 million at September 30, 2012.

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculations for the three and nine month periods ended September 30, 2012 and 2011:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands, except per share amounts)
 
Numerator:
                       
Net income
  $ 15,749     $ 12,180     $ 74,798     $ 78,380  
Less:  Net income allocated to unvested units
    23       25       126       167  
Net income attributable to common shareholders
  $ 15,726     $ 12,155     $ 74,672     $ 78,213  
                                 
Denominator:
                               
Basic average number of shares outstanding
    50,799       50,643       50,760       50,597  
Effect of dilutive securities
    233       284       244       289  
Diluted average number of shares outstanding
    51,032       50,927       51,004       50,886  
                                 
Earnings per share:
                               
Basic
  $ 0.31     $ 0.24     $ 1.47     $ 1.55  
Diluted
  $ 0.31     $ 0.24     $ 1.46     $ 1.54  
 
As of September 30, 2011, options to purchase an average amount of 89,336 shares of common stock were outstanding but not included in the three or nine-month respective computations of diluted earnings per share, because the options’ exercise prices were greater than the average market price of the common shares during the three and nine month periods ended September 30, 2011.

Equity Investments

In February 2008, UI and an NRG affiliate formed GenConn, a 50-50 joint venture, for the purpose of constructing peaking generation plants in Connecticut.  UI’s investment in GenConn is being accounted for as an equity investment, the carrying value of which was $125.3 million and $131.1 million as of September 30, 2012 and December 31, 2011, respectively.
 
 
- 9 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
 
UI’s pre-tax income from its equity investment in GenConn was $11.8 million and $8.2 million for the nine month periods ended September 30, 2012 and 2011, respectively.  For the three month periods ended September 30, 2012 and 2011, such income was $3.4 million and $3.5 million, respectively.  During the nine month periods ended September 30, 2012 and 2011, UI received cash distributions from GenConn of $17.6 million and $3.1 million, respectively, which are reflected as either distributions of earnings or as returns of capital in the operating and investing sections of the Consolidated Statement of Cash Flows, respectively.  For the three month periods ended September 30, 2012 and 2011, such cash distributions totaled $4.7 million and $3.1 million, respectively.  As of September 30, 2012, there were no undistributed earnings from UI’s equity investment in GenConn.

Regulatory Accounting

UIL Holdings’ regulatory assets and liabilities as of September 30, 2012 and December 31, 2011 included the following:
 
   
Remaining
 
September 30,
   
December 31,
 
   
Period
 
2012
   
2011
 
       
(In Thousands)
 
Regulatory Assets:
               
Nuclear plant investments – above market
 
(a)
  $ 257,609     $ 272,943  
Connecticut Yankee
 
4 years
    11,932       14,247  
Unamortized redemption costs
 
9 to 21 years
    12,304       12,906  
Pension and other post-retirement benefit plans
 
(b)
    333,824       344,746  
Environmental remediation costs
 
4 to 5 years
    19,528       19,101  
Customer rate surcharge
 
(c)
    6,713       15,757  
Hardship programs
 
(d)
    28,885       37,420  
Debt premium
 
1 to 26 years
    42,833       48,275  
Deferred purchased gas
 
(e)
    -       15,558  
Deferred income taxes
 
(f)
    26,815       20,994  
Unfunded future income taxes
 
(f)
    10,049       11,657  
Contracts for differences
 
(g)
    176,492       184,105  
Excess generation service charge
 
(h)
    10,089       13,758  
Deferred transmission income/expense
 
(i)
    8,194       -  
Storm costs
 
(j)
    27,534       29,618  
Other
 
(k)
    34,996       45,037  
Total regulatory assets
        1,007,797       1,086,122  
Less current portion of regulatory assets
        109,472       102,900  
Regulatory Assets, Net
      $ 898,325     $ 983,222  
                     
Regulatory Liabilities:
                   
Accumulated deferred investment tax credits
 
32 years
  $ 4,648     $ 4,758  
Income taxes due principally to book-tax differences
 
(k)
    26,720       14,445  
Deferred gain on sale of property
 
(a)
    37,798       37,798  
Middletown/Norwalk local transmission network service collections
 
38 years
    22,118       22,548  
Pension and other post-retirement benefit plans
 
1 to 8 years
    16,026       17,956  
Deferred income taxes
 
(f)
    33,166       48,740  
Asset retirement obligation
 
(l)
    8,208       8,941  
Deferred purchased gas
 
(e)
    3,115       -  
Low income programs
 
(m)
    15,816       9,958  
Unfunded future income taxes
 
(f)
    12,386       9,735  
Asset removal costs
 
(k)
    237,345       224,125  
Deferred transmission income/expense
 
(i)
    -       11,628  
Other
 
(k)
    37,620       35,788  
Total regulatory liabilities
        454,966       446,420  
Less current portion of regulatory liabilities
        22,993       26,245  
Regulatory Liabilities, Net
      $ 431,973     $ 420,175  
 
 
- 10 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(a) Asset/Liability relates to the Competitive Transition Assessment (CTA).  Total CTA costs recovery is currently projected to be completed in 2015, with stranded cost amortization expected to end in 2013.  The remaining balances will be fully offset by amounts primarily included in income taxes, due principally to book-tax differences.
(b) Asset life is dependent upon timing of final pension plan distribution; balance is recalculated each year in accordance with ASC 715 "Compensation-Retirement Benefits" (Note G).
(c) Deferral of revenue received for excess refund of overearnings, recovery of which will be complete by November 2012.
(d) Hardship customer accounts deferred for future recovery to the extent they exceed the amount in rates.
(e) Deferred purchase gas costs balances at the end of the rate year are normally recorded/returned in the next year.
(f) The balance will be extinguished when the asset or liability has been realized or settled, respectively.
(g) Asset life is equal to delivery term of related contracts (which vary from approximately 7 - 15 years); balance fluctuates based upon quarterly market analysis performed on the related derivatives (Note K).
(h) Working capital allowance for generation service charge; this amount fluctuates based upon cash inflows and outflows in a given period.
(i) Regulatory asset or liability which defers transmission income or expense and fluctuates based upon actual revenues and revenue requirements.
(j) Storm costs include accumulated costs for major storms occurring from January 2009 forward. UI will seek recovery of these costs in future rate proceedings.
(k) Amortization period and/or balance vary depending on the nature, cost of removal and/or remaining life of the underlying assets/liabilities.
(l) The liability will be extinguished simultaneous with the retirement of the assets and settlement of the corresponding asset retirement obligation.
(m) Various hardship and payment plan programs approved for recovery.
 
Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), a target amount of 119,640 performance shares was granted to certain members of management in March 2012; the average of the high and low market price on the grant date was $34.45 per share.

Also in March 2012, UIL Holdings granted a total of 2,286 shares of restricted stock to its President and Chief Executive Officer under the 2008 Stock Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant was $34.45 per share.  Such shares vest in equal annual installments over a five year period.

In May 2012, UIL Holdings granted a total of 23,461 shares of restricted stock to non-employee directors under the 2008 Stock Plan; the average of the high and low market price on the date of grant was $33.42 per share.  Such shares vest in May 2013.

In September 2012, 10,220 shares of previously-granted performance shares were forfeited upon the resignation of a member of management.

Total stock-based compensation expense for the nine month periods ended September 30, 2012 and 2011 was $3.9 million and $4.3 million, respectively.  Total stock-based compensation expense for the three month periods ended September 30, 2012 and 2011 was $0.2 million and $1.0 million, respectively.

Variable Interest Entities

GenConn is a variable interest entity (VIE), accounted for under the equity method.  UIL Holdings is not the primary beneficiary of GenConn, as defined in ASC 810 “Consolidation,” because it shares control of all significant activities of GenConn equally with its joint venturer, NRG.  As such, GenConn is not subject to consolidation.  GenConn recovers its costs through CfDs, which are cost of service-based and have been approved by PURA.  As a result, with the achievement of commercial operation by GenConn Devon and GenConn Middletown, UIL Holdings’ exposure to loss is primarily related to the potential for unrecovered GenConn operating or capital costs in a regulatory proceeding, the effect of which would be reflected in the carrying value of UIL Holdings’ 50% ownership position in GenConn and through “Income from Equity Investments” in UIL Holdings’ Consolidated Financial Statements.  Such exposure to loss cannot be determined at this time.
 
 
- 11 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
New Accounting Standards

In May 2011, the FASB issued amendments to ASC 820 “Fair Value Measurements and Disclosures,” which UIL Holdings adopted on a prospective basis on January 1, 2012.  The adoption of the amendments resulted in additional details being included in new and existing tabular fair value disclosures as well as additional discussion regarding unobservable inputs.  The implementation of this guidance did not have a material impact on UIL Holdings’ consolidated financial statements.

(B) 
CAPITALIZATION

Common Stock

UIL Holdings had 50,665,114 shares of its common stock, no par value, outstanding at September 30, 2012.

Long-Term Debt
 
Due to conditions in the municipal bond market, UIL Holdings determined it was economically favorable to refinance multiple series of pollution control revenue bonds in the aggregate principal amount outstanding of $103.5 million with notes issued in the private placement market.  On January 30, 2012, UI entered into a Note Purchase Agreement with a group of institutional accredited investors to issue $203.5 million principal amount of senior unsecured notes.   On January 30, 2012, $103.5 million of such notes were issued as follows:  3.61%, Series B, due January 31, 2022, in the principal amount of $51.5 million and 4.89%, Series D, due January 30, 2042, in the principal amount of $52 million.  On April 2, 2012, the remaining $100 million of such notes were issued as follows:  2.98%, Series A, due January 31, 2019, in the principal amount of $31 million, 3.61%, Series C, due January 31, 2022 in the principal amount of $34 million and 4.89%, Series E, due January 30, 2042, in the principal amount of $35 million.

(C) 
REGULATORY PROCEEDINGS

On January 9, 2012, a panel formed by Connecticut Governor Malloy issued its “Report of the Two Storm Panel” (the Report).  The Report considered areas such as (i) utility preparedness, tree trimming and infrastructure hardening, (ii) communications and information sharing, and (iii) municipal matters such as preparedness, road safety and shelter operations.  The Report also makes a number of recommendations with respect to emergency preparedness in the State of Connecticut.  UIL Holdings is unable to assess if any of the recommendations related to Connecticut’s utilities will be implemented in the future, but expects any costs associated with any related legislative or regulatory action to be fully recoverable.

On June 18, 2012, pursuant to Connecticut law PA 11-80, PURA initiated a docket for the establishment of performance standards for electric distribution and gas companies.  PA 11-80 requires PURA to, among other things, establish industry specific standards, review service restoration practices, and establish standards for acceptable performance in an emergency in which more than 10% of any utility’s customers are without service for more than 48 hours. On November 1, 2012, PURA submitted a report to the General Assembly identifying the standards established and recommendations for legislative changes necessary to implement the standards. UIL Holdings will review the PURA report and determine the potential impacts of the standards from both an operational and financial perspective.

On August 1, 2012, PURA issued a final decision in its investigation of the service response and communications of utilities, including UI, CNG and SCG, after Tropical Storm Irene, which passed through Connecticut in August 2011, and the autumn nor’easter, which passed through Connecticut in October 2011. The decision contains reporting requirements for UI with respect to various recommendations, improving mutual assistance, and release of customer information in emergency situations and CNG and SCG with respect to a fueling plan and lessons learned.
 
 
- 12 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
Electric Distribution and Transmission
 
Hurricane Sandy, which passed through Connecticut on October 29, 2012, caused extensive damage to the electric system in UI’s service territory. Current estimates indicate approximately 250,000 customer outages. UI is currently undertaking restoration efforts and expects to seek recovery of the cost of repairing the damage and restoring service to customers in future rate proceedings.
 
Rates
 
UI’s allowed distribution return on equity established by PURA is 8.75%.   UI has an earnings sharing mechanism in place that allows the Company to retain 50% of any distribution earnings above the allowed 8.75% ROE in a calendar year.

UI filed its revised distribution 2011 rate year decoupling results with PURA on June 29, 2012.  The decoupling results included a decoupling adjustment of approximately $4.4 million which is to be collected from customers beginning in the fourth quarter of 2012, pending PURA approval.  PURA is expected to issue a decision on the decoupling adjustment in the fourth quarter of 2012.  Additionally, PURA approved last resort service Generation Services Charge rates for the period through December 31, 2012.

Transitional Standard Offer Incentive (TSO)

State legislation significantly restructured the electric utility industry in Connecticut in 1998 and 2003.  The primary restructuring legislation includes Public Act 98-28 (the 1998 Restructuring Legislation) and Public Act 03-135, as amended in part by Public Act 03-221 (the 2003 Restructuring Legislation).  The 2003 Restructuring Legislation provided for PURA to establish an incentive plan for the procurement of long-term contracts for transitional standard offer service that compares UI’s actual average contract price to a regional average price for electricity, making adjustments as deemed appropriate by PURA.  For each of 2004, 2005 and 2006, if UI’s price was lower than the average, the legislation provided for the plan to allocate $0.00025/kilowatt-hour of transitional standard offer service to the distribution company.  PURA issued a final decision in January 2009 that found UI was not eligible for a procurement incentive for 2004.  UI appealed PURA’s final decision to the state superior court.  By decision filed February 5, 2010, the superior court determined that PURA did not apply the proper standard in determining whether UI qualified for the incentive and that PURA made other errors, and remanded the case to PURA for further proceeding in accordance with the court's decision.  PURA appealed the superior court’s decision to the state appellate court.  On October 2, 2012, UI, CL&P and the Connecticut Office of Consumer Counsel (OCC) filed with PURA a joint motion for approval of a settlement agreement by and among UI, CL&P, and the OCC.  On October 31, 2012, PURA issued a final decision approving the settlement agreement which resolves all of the issues relating to the incentive for the procurement of power for 2004 through 2006.  The settlement agreement provides that UI has met the statutory standard for receiving 2005 and 2006 TSO incentives previously collected of approximately $2.7 million, which were recorded in the third quarter of 2012 and are included in “Other Income and (Deductions)” in UIL Holdings’ Consolidated Statement of Income.  The settlement agreement also provides that no further amounts are due from UI to customers relating to the 2004 incentive as amounts were previously refunded to customers in 2009.
 
Approval for the Issuance of Debt

UI has PURA approval for the issuance of up to $379 million principal amount of debt securities from 2010 through 2013 (the Proposed Notes).  The proceeds from the sales of any Proposed Notes may be used by UI for the following purposes:  (1) to finance capital expenditures; (2) the repayment, in July 2011, of the equity bridge loan, the proceeds of which were used to finance UI’s equity contribution in GenConn for the development and construction of  GenConn Devon and GenConn Middletown; (3) to fund UI’s pension plan; (4) to partially repay short-term borrowings that are incurred to temporarily fund the preceding needs; (5) to pay for issuance costs related to the Proposed Notes; (6) to repay $103.5 million principal amount outstanding of pollution control revenue bonds, which were remarketed in the municipal bond market in February 2012, and (7) for general corporate purposes.  UI has issued $303.5 million principal amount of senior unsecured notes pursuant to such PURA approval, $100 million of which were issued in July 2010, $103.5 million of which were issued in January 2012 and $100 million of which were issued in April 2012.
 
 
- 13 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
Power Supply Arrangements

UI has wholesale power supply agreements in place for the supply of all of its standard service customers for all of 2012 and 2013.  Supplier of last resort service is procured on a quarterly basis.  UI’s contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and it elected the “normal purchase, normal sale” exception under ASC 815 “Derivatives and Hedging.”  As such, UI regularly assesses the accounting treatment for its power supply contracts.  These wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt was to fall below investment grade.  In October 2011, Moody’s Investor Services released its updated credit opinion for UI and maintained its Baa2 rating with a stable outlook.   In May 2012, Standard & Poors’ Investor Services released its updated credit opinion for UI, maintaining its BBB rating with a stable outlook.  If UI’s credit rating were to decline one rating and UI were to be placed on negative credit watch, monthly amounts due and payable to the power suppliers would be accelerated to semi-monthly payments.  UI’s credit rating would have to decline two ratings to fall below investment grade at either rating service.  If this were to occur, UI would have to deliver collateral security in an amount equal to the receivables due to the sellers for the thirty-day period immediately preceding the default notice.  If such a situation had been in effect as of September 30, 2012, UI would have had to post approximately $8.9 million in collateral.

New Renewable Source Generation

Under Connecticut law, electric distribution companies were required to enter into contracts to purchase the output of new renewable generation totaling at least 150 MW, at prices and upon terms approved by PURA in accordance with statutory requirements.  PURA approved a number of these projects from 2007 through 2009, all of which are governed by a cost sharing agreement with CL&P whereby UI pays approximately 20% of the costs and obtains approximately 20% of the benefits of such contracts.  UI was a direct party to two of the contracts.   UI’s costs associated with all such contracts are recoverable, whether UI is a direct party or pursuant to the sharing agreement.  In September 2011, PURA issued a report to the legislature stating that, of the original 150 MW, only 47 MW have the capability of achieving commercial operation within contractual deadlines.  One of the contracts to which UI was a direct party has since been terminated.  Many of the other contracts are also expected to be terminated as the commercial operation deadlines expire.  On September 20, 2012, PURA approved a request by Bridgeport Fuel Cell Park, LLC to extend the in-service date under its contract with CL&P to February 14, 2014.  To date, none of the projects have achieved commercial operation.

Under a 2011 Connecticut law (PA 11-80), UI and CL&P are required to enter into long-term contracts to purchase Renewable Energy Credits (RECs) from new facilities installed behind distribution customer meters.  Under this program, UI will be required to enter into contracts totaling approximately $200 million in commitments over an approximate 21 year period.  The obligations will phase in over a six year solicitation period, and are expected to peak at an annual commitment level of about $13.6 million/year after six years.  The cost of the contracts is expected to be partially mitigated through the resale of the RECs.  PA 11-80 provides that the remaining costs of the contracts are recoverable through electric rates.  In December 2011, UI and CL&P submitted a joint petition to PURA outlining a plan to address the new requirements and on April 4, 2012, PURA approved the program.  On October 11 2012, UI received PURA approval for executed REC purchase contracts totaling up to approximately $1.5 million annually in payments for 15 year delivery terms commencing in 2013.

PA 11-80 also allows for the development of 30 MW of grid-connected renewable energy.  UI and CL&P are each allowed to develop projects capable of generating up to 10 MW and the Department of Energy and Environmental Protection (DEEP) is to solicit proposals for projects capable of generating 10 MW.  In December 2011, DEEP announced that it had selected two 5 MW solar projects in CL&P service territory.  CL&P has executed contracts with the developers of the two 5 MW solar projects to purchase energy and associated products from both projects, and such contracts have been filed with PURA for approval.  UI and CL&P executed a sharing arrangement, pursuant to which UI will pay 20% of the costs, and receive 20% of the revenues, associated with the projects. Pursuant to PA 11-80, the costs of payments made to projects are recoverable through electric rates.  On January 18, 2012, UI filed a proposal with PURA outlining a framework for approval of UI’s renewable connections program under which UI would develop up to 10 MW of renewable generation for recovery on a cost of service basis.  PURA issued a final decision on July 18, 2012, in which it approved the construction of one solar facility and two fuel cell facilities.  The decision approves a return on equity (ROE) equal to the then currently allowed distribution ROE over the life of the investment, which is currently 8.75%.  UI had requested a ROE of 9.5% for the renewable connections program projects.  On September 5, 2012 PURA reopened the proceeding on its own motion.  PURA also issued interrogatories, responses to which were filed by UI.  UI’s participation in the program is voluntary.
 
 
- 14 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
New England East-West Solution

Pursuant to an agreement with CL&P (the Agreement), UI has the right to invest in, and own transmission assets associated with, the Connecticut portion of CL&P’s New England East West Solution (NEEWS) projects to improve regional energy reliability.  NEEWS consists of four inter-related transmission projects being developed by subsidiaries of Northeast Utilities (NU), the parent company of CL&P, in collaboration with National Grid USA.  Three of the projects have portions located in Connecticut:  (1) the Greater Springfield Reliability Project, which is currently under construction, (2) the Interstate Reliability Project, for which CL&P is currently in the siting and permitting process and (3) the Central Connecticut Reliability Project, which is currently being considered by ISO-NE as part of a broader study that includes other electrically connected areas within Connecticut.  
Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific transmission assets as they are placed in service.  UI has the right to invest up to the greater of $60 million or an amount equal to 8.4% of CL&P’s costs for the Connecticut portions of the NEEWS projects.  Based upon the current projected costs, this amount is approximately $60 million.  As assets are placed in service, CL&P will transfer title to certain transmission assets to UI in proportion to its investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating and maintenance agreement with UI.  Also, under the terms of the Agreement, there are certain circumstances under which CL&P can terminate the Agreement. Such termination would have no effect on the assets previously transferred to UI.

On June 20, 2012, NU, on behalf of CL&P, submitted for filing, the operation and maintenance agreement (O&M Agreement) between UI and CL&P to the FERC, which the FERC subsequently accepted.  Under the O&M Agreement, CL&P will serve as a contractor to manage, operate and maintain transmission assets in Connecticut that the FERC has authorized UI to acquire from CL&P.

On September 26, 2012, CL&P transferred approximately $6.2 million of transmission assets associated with the Greater Springfield Reliability Project to UI, upon which the O&M Agreement became effective.

Through September 30, 2012, UI has made deposits totaling $15.3 million in NEEWS, which includes the transferred assets noted above, and expects to make the remaining deposits over a period of three to five years, depending on the timing and amount of CL&P’s capital expenditures and the projects’ in service dates.  UI earned pre-tax income of approximately $0.4 million and $1.1 million on such deposits in the three and nine month periods ended September 30, 2012, respectively.

Equity Investment in Peaking Generation

UI is a 50-50 joint venturer with NRG in GenConn, which was chosen by PURA to build and operate two new peaking generation plants to help address Connecticut’s need for power generation during the heaviest load periods.  The two new peaking generation projects, GenConn Devon and GenConn Middletown, are both participating in the ISO-New England markets.  GenConn filed a rate case request with PURA on July 27, 2012, seeking approval of 2013 revenue requirements for the annual period commencing January 1, 2013 for both the GenConn Devon and GenConn Middletown facilities.  A final decision on this request is expected by the end of 2012.

Transmission Return on Equity (ROE)

PURA decisions do not affect the revenue requirements determination for transmission, including the applicable return on equity (ROE), which are within the jurisdiction of the FERC.  For 2012, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 12.2% to 12.4%.
 
 
- 15 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
In September 2011, several New England governmental entities, including PURA, the Connecticut Attorney General and the Connecticut Office of Consumer Counsel, filed a complaint with the FERC against ISO-NE and several New England transmission owners, including UI, claiming that the current approved base ROE on transmission investments of 11.14% is not just and reasonable and seeking a proposed reduction of the base ROE from 11.14% to 9.20%.  The New England transmission owners filed their response to the complaint in October 2011, opposing any change to the base ROE as unsupported.  In May 2012, the FERC issued an order setting the matter for hearing and establishing settlement procedures.  The parties have been unable to reach a settlement.  Settlement proceedings have terminated, and a hearing judge has been assigned.  Pursuant to the procedural schedule, the direct case of the complainants was filed on October 1, 2012 and included a reduction to the base ROE sought to 9.0%.  Respondents’ answer to the direct case is scheduled to be filed on November 20, 2012.  The hearing judge is expected to issue an initial decision in the third quarter of 2013.  UI is unable to predict the outcome at this time.  A 25 basis point change in the weighted-average ROE for UI’s transmission business would change net income by approximately $0.6 million annually.  In the event there is a reduction to the ROE, the May 2012 order established a refund effective date of October 1, 2011.
 
Gas Distribution
 
Rates

The allowed returns on equity established by PURA are 9.41% and 9.36% for CNG and SCG, respectively.  Berkshire’s rates are established by the Massachusetts Department of Public Utilities (DPU).  Berkshire’s 10-year rate plan, which was approved by the DPU, expired on January 31, 2012.  The ROE approved in Berkshire’s rate plan is 10.5%.  Berkshire continues to charge the rates that were in effect at the end of the rate plan.

Approval for the Issuance of Debt

On June 6, 2012, Berkshire filed a petition with the DPU for the approval to issue, from time to time, long-term debt in an aggregate principal amount not to exceed $20 million through a period ending December 14, 2014.  The proceeds from any such debt issuances may be used by Berkshire for the following purposes: (1) to finance capital expenditures; (2) to refinance short-term debt; (3) to pay anticipated environmental expenditures; (4) to provide general working capital; and (5) any other purposes as the DPU may authorize.  Berkshire may issue long-term debt with maturities up to 30 years and issue secured or unsecured securities or execute a bank financing.  A decision from the DPU is expected in the fourth quarter of 2012.

(D) 
SHORT-TERM CREDIT ARRANGEMENTS

As of September 30, 2012, $155 million of borrowings were outstanding under a revolving credit agreement with a group of banks that will expire on November 30, 2016 (the UIL Holdings Credit Facility).  Under the UIL Holdings Credit Facility, UIL Holdings also has outstanding standby letters of credit in the aggregate amount of $4.3 million, which expire on January 31, 2013 and June 16, 2013.  Available credit under the UIL Holdings Credit Facility at September 30, 2012 totaled $240.7 million for UIL Holdings and its subsidiaries in the aggregate.  UIL Holdings records borrowings under the UIL Holdings Credit Facility as short-term debt, but the UIL Holdings Credit Facility provides for longer term commitments from banks allowing UIL Holdings to borrow and reborrow funds, at its option, until its expiration, thus affording UIL Holdings flexibility in managing its working capital requirements.

As of September 30, 2012, UIL Holdings had no short-term borrowings outstanding under its money market loan arrangement.

On October 31, 2012, UIL Holdings entered into a credit agreement with a bank that expires on October 31, 2013 (the Credit Agreement).  The borrowing limit under the Credit Agreement, the purpose of which is to provide UIL Holdings additional liquidity, is $100 million.
 
On January 13, 2012, UI entered into a revolving credit agreement that expired on July 13, 2012 (the UI Credit Facility).  The borrowing limit under the UI Credit Facility was $105 million.    The UI Credit Facility was to provide additional liquidity for UI’s obligation to either remarket or repay and cancel $103.5 million of pollution control revenue bonds, due to be remarketed in the municipal bond market on February 1, 2012.  The pollution control revenue bonds were repaid and cancelled with the issuance of senior unsecured notes that UI entered into with a group of institutional accredited investors on January 30, 2012, as discussed above.  Subsequently, the UI Credit Facility was terminated.
 
 
- 16 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(E)
INCOME TAXES

The combined statutory federal and state income tax rates for UIL Holdings for both of the three and nine month periods ended September 30, 2012 and 2011 were 40.9% and 40.4%, respectively. The increase in the combined statutory federal and state income tax rate for the 2012 periods was due to legislation enacted in Connecticut in 2011 which imposed an additional 10% surcharge on the corporation business tax, effective January 1, 2012.  This additional surcharge increased the statutory rate of the Connecticut corporation business tax from 8.25% to 9%.

Differences in the treatment of certain transactions for book and tax purposes occur which cause the rate of UIL Holdings’ reported income tax expense to differ from the statutory tax rate described above.  The effective book income tax rates for the three and nine month periods ended September 30, 2012 were 40.7% and 40.5%, respectively, as compared to 44.1% and 39.6% for each of the three and nine month periods ended September 30, 2011.  The decrease in the effective book income tax rate for the three month period ended September 30, 2012 as compared to the three month period ended September 30, 2011 was due to flow-through book/tax differences associated with the Gas Companies in the three month period ended September 30, 2011 which are not reflected as flow-through book/tax differences in the three month period ended September 30, 2012 as a result of the rate case settlement.

(F) 
SUPPLEMENTARY INFORMATION
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
 
Depreciation and Amortization
                       
Property, plant and equipment depreciation
  $ 28,648     $ 24,591     $ 83,143     $ 72,029  
Amortization of nuclear plant regulatory assets
    14,272       13,416       35,433       34,340  
Amortization of other regulatory assets
    3,346       3,609       17,272       19,272  
Other amortization
    13       12       38       35  
Total Amortization
    17,631       17,037       52,743       53,647  
Total Depreciation and Amortization
  $ 46,279     $ 41,628     $ 135,886     $ 125,676  
                                 
Taxes - Other than Income Taxes
                               
Operating:
                               
Connecticut gross earnings
  $ 16,438     $ 14,525     $ 48,290     $ 54,322  
Local real estate and personal property
    10,866       9,375       29,630       25,845  
Payroll taxes
    1,117       2,507       4,747       7,869  
Other
    81       (8 )     257       (230 )
Total Taxes - Other than Income Taxes
  $ 28,502     $ 26,399     $ 82,924     $ 87,806  
                                 
Other Income and (Deductions), net
                               
Interest income
  $ 645     $ 791     $ 1,720     $ 2,585  
Allowance for funds used during construction - equity
    1,589       2,340       5,473       7,657  
Allowance for funds used during construction - debt
    1,427       2,303       5,231       6,579  
Conservation & Load Management incentive
    250       271       752       813  
ISO load response, net
    427       601       1,685       509  
Miscellaneous other income and (deductions) - net
    3,078       2,086       6,344       518  
Total Other Income and (Deductions), net
  $ 7,416     $ 8,392     $ 21,205     $ 18,661  
 
(G) 
PENSION AND OTHER BENEFITS
 
On July 6, 2012, federal legislation became effective which provides funding relief for employer-provided defined benefit pension plans.  Under the law's rate stabilization provision, the interest rates used to estimate pension liabilities and determine employer contributions, which statutorily have been based on the two-year average of interest rates, will be adjusted so that they are within 10% of the average of interest rates for the 25-year period preceding the current year (beginning in 2012) and within 30% of the average of interest rates for the 25-year period preceding the current year (beginning in 2016).  During the nine months ended September 30, 2012, UIL Holdings made pension contributions of $48.5 million.  Based upon the historical interest rates published by the U.S. Department of the Treasury, no further pension funding will be required in 2012.
 
 
- 17 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
The following table represents the components of net periodic benefit cost for pension and other postretirement benefits (OPEB) as well as the actuarial weighted-average assumptions used in calculating net periodic benefit cost for the three and nine month periods ended September 30, 2012 and 2011:

   
Three Months Ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
 
Components of net periodic benefit cost:
                       
Service cost
  $ 3,008     $ 3,143     $ 401     $ 541  
Interest cost
    10,368       10,120       1,562       1,659  
Expected return on plan assets
    (11,219 )     (10,647 )     (626 )     (740 )
Amortization of:
                               
Prior service costs
    162       162       (17 )     (25 )
Transition obligation
    -       -       98       255  
Actuarial loss
    3,294       3,507       241       502  
Net periodic benefit cost
  $ 5,613     $ 6,285     $ 1,659     $ 2,192  
 
 
   
Nine Months Ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
 
Components of net periodic benefit cost:
                       
Service cost
  $ 9,024     $ 9,430     $ 1,203     $ 1,622  
Interest cost
    31,104       30,362       4,686       4,977  
Expected return on plan assets
    (33,657 )     (31,941 )     (1,878 )     (2,222 )
Amortization of:
                               
Prior service costs
    486       483       (51 )     (76 )
Transition obligation
    -       -       294       765  
Actuarial loss
    9,882       10,523       723       1,506  
Net periodic benefit cost
  $ 16,839     $ 18,857     $ 4,977     $ 6,572  
 
 
   
Three and Nine Months Ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2012
   
2011
   
2012
   
2011
 
                         
Discount rate
    5.05% - 5.30 %     5.10% - 5.35 %     5.05% - 5.30 %     5.15% - 5.30 %
Average wage increase
    3.50% - 3.80 %     3.50% - 3.80 %     N/A       N/A  
Return on plan assets
    7.75% - 8.00 %     8.25% - 8.50 %     5.56% - 8.00 %     6.83% - 8.25 %
Composite health care trend rate (current year)
    N/A       N/A       8.00 %     7.80% - 8.50 %
Composite health care trend rate (2018 forward)
    N/A       N/A       5.00 %     4.50% - 5.00 %
                                 
N/A – not applicable
                               
 
(H) 
RELATED PARTY TRANSACTIONS

During the nine month periods ended September 30, 2012 and 2011, UI received cash distributions from GenConn.   See Note (A) “Business Organization and Statement of Accounting Policies – Equity Investments.”

A Director of UIL Holdings holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UIL Holdings leases office space. UIL Holdings’ lease payments for this office space for each of the nine month periods ended September 30, 2012 and 2011 totaled $4.4 million and $7.0 million, respectively.  For the three month periods ended September 30, 2012 and 2011, such lease payments totaled $0.4 million and $2.0 million, respectively.  The decrease in lease payments in 2012 is due to a reduction in office space utilized by UIL Holdings headquarters.
 
 
- 18 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(J) 
COMMITMENTS AND CONTINGENCIES

Connecticut Yankee Atomic Power Company

UI has a 9.5% stock ownership share in the Connecticut Yankee Atomic Power Company (Connecticut Yankee), the carrying value of which was $0.2 million as of September 30, 2012.  In 1996, the Board of Directors of Connecticut Yankee voted unanimously to retire the Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial operation.  Connecticut Yankee updates the cost of its remaining decommissioning activity, which consists primarily of ground water monitoring and nuclear fuel storage, at least annually, and provides UI with a projected recovery schedule depicting annual costs expected to be billed to UI, including a return on investment over the term of the projected recovery period.  The present value of these costs is calculated using UI’s weighted-average cost of capital and, after consideration of recoverability, recorded as a Connecticut Yankee Contract Obligation and a corresponding regulatory asset.  As of September 30, 2012, UI has regulatory approval to recover in future rates (through the CTA) its $11.9 million regulatory asset for Connecticut Yankee over a term ending in 2015.

DOE Spent Fuel Litigation

In the Nuclear Waste Policy Act of 1982 (the Act), Congress provided for the United States Department of Energy (DOE) to dispose of spent nuclear fuel and other high-level waste (Nuclear Waste) from nuclear generating plants.  In 1983, Connecticut Yankee and the DOE entered into a standard disposal contract mandated by the Act which required the DOE to begin disposing of Connecticut Yankee’s Nuclear Waste by the end of January 1998.

In 1998, Connecticut Yankee filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 contracts by the DOE.  In September 2010, the Court issued its decision and awarded Connecticut Yankee damages of $39.7 million for its spent fuel-related costs through 2001.  In November 2010, the DOE appealed the decision to the United States Court of Appeals for the Federal Circuit and Connecticut Yankee filed a notice of cross-appeal.  On May 18, 2012, the United States Court of Appeals affirmed the September 2010 United States Court of Federal Claims award and on August 1, 2012 the DOE filed a petition for rehearing with the appellate court.  In light of its ownership share, UI would receive approximately $3.8 million of such award which would be refunded to customers.

In December 2007, Connecticut Yankee filed a second set of complaints with the United States Court of Federal Claims against the DOE seeking unspecified damages incurred since January 1, 2002 for the DOE’s failure to remove Connecticut Yankee’s spent fuel.  In July 2009, Connecticut Yankee provided the DOE with a second set of damage claims totaling approximately $135 million for damages incurred from January 1, 2002 through December 31, 2008.  In light of its ownership share, UI would receive approximately $12.8 million of such award which would be refunded to customers.  As an interim measure until the DOE complies with its contractual obligation to dispose of Connecticut Yankee’s spent fuel, Connecticut Yankee constructed an independent spent fuel storage installation (ISFSI), utilizing dry-cask storage, on the site of the Connecticut Yankee Unit and completed the transfer of its Nuclear Waste to the ISFSI in 2005.

Environmental Concerns

In complying with existing environmental statutes and regulations and further developments in areas of environmental concern, including legislation and studies in the fields of water quality, hazardous waste handling and disposal, toxic substances, climate change and electric and magnetic fields, UIL Holdings and its wholly-owned direct and indirect subsidiaries may incur substantial capital expenditures for equipment modifications and additions, monitoring equipment and recording devices, as well as additional operating expenses.  The total amount of these expenditures is not now determinable.  Environmental damage claims may also arise from the operations of UIL Holdings’ subsidiaries.  Significant environmental issues known to UIL Holdings at this time are described below.
 
 
- 19 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
Site Decontamination, Demolition and Remediation Costs

In June 2006, UI executed an agreement with the City of Bridgeport and its Redevelopment Authority (the City) for the transfer of title of UI’s Steel Point property to the City.  Pursuant to a Memorandum of Understanding (MOU) among UI, the City, and the City’s selected developer for the property, the City and the developer released UI from any further liability with respect to the Steel Point property after title transferred, and the City and/or the developer has indemnified UI for environmental matters related to the Steel Point property.  The Steel Point property includes the land up to the bulkhead.  The MOU provides that there is no indemnity for liability related to contaminated harbor sediments, and UI is not aware of any such claims.  UI would seek to recover any uninsured costs related to such sediments that are UI’s responsibility, to the extent incurred, through the CTA, in accordance with the ratemaking treatment approved in PURA’s July 2006 decision.

A site on the Mill River in New Haven was conveyed by UI in 2000 to an unaffiliated entity, Quinnipiac Energy LLC (QE), reserving to UI permanent easements for the operation of its transmission facilities on the site.  At the time of the sale, a fund of approximately $1.9 million, an amount equal to the then-current estimate for remediation, was placed in escrow for purposes of bringing soil and groundwater on the site into compliance with applicable environmental laws.  As of September 30, 2012, approximately $0.1 million of the escrow fund remained.  In 2006, QE sold the property to Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat).  UI is unaware of what agreement was reached between QE and Evergreen Power and Asnat regarding future environmental liability and of what remediation activity remains to be undertaken at the site.  In July 2008, Evergreen Power and Asnat submitted a claim to UI seeking compensation for environmental remediation on the property, including the existing building which remains on the site.  On January 5, 2012, Evergreen Power and Asnat filed a lawsuit in federal district court in Connecticut against UI seeking, among other things: (i) an order directing UI to reimburse the plaintiffs for costs they have incurred and will incur for the testing, investigating, and remediating of hazardous substances at the property and (ii) an order directing UI to investigate and remediate the property.  In May 2012, UI filed an answer and counterclaims, and the plaintiffs filed an answer to UI’s counterclaims.  On July 30, 2012, Evergreen Power and Asnat filed a motion for partial summary judgment with respect to UI’s liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act.  On October 12, 2012, the motion for summary judgment was denied without prejudice.  UI’s knowledge of the current conditions at the site is insufficient to make a reasonable update of the original $1.9 million remediation estimate.  UIL Holdings cannot presently assess the potential financial impact, if any, of the suit, and thus has not recorded a liability related to it.

In April 1999, UI completed the sale of its Bridgeport Harbor Station and New Haven Harbor Station generating plants in compliance with Connecticut’s electric utility industry restructuring legislation.  With respect to the portion of the New Haven Harbor Station site that UI retained, UI has performed an additional environmental analysis, indicating that approximately $3.2 million in remediation expenses will be incurred.  Actual remediation costs may be higher or lower than what is currently estimated.  The required remediation is virtually all on transmission-related property and UI has accrued these estimated expenses, which were recovered in transmission rates.

From 1961 to 1976, UI owned a parcel of property in Derby, CT, on which it operated an oil-fired electric generating unit.  For several years, DEEP has been monitoring and remediating a migration of fuel oil contamination from a neighboring parcel of property into the adjacent Housatonic River.  Based on its own investigation to date, UI believes it has no responsibility for this contamination.  If regulatory agencies determine that UI is responsible for the cost of these remediation activities, UI may incur substantial costs, no estimate of which is currently available.

The Gas Companies own or have previously owned properties where Manufactured Gas Plants (MGPs) historically operated.  MGP operations have led to contamination of soil and groundwater with petroleum hydrocarbons, benzene and metals, among other things, at these properties, the regulation and cleanup of which is regulated by the federal Resource Conservation and Recovery Act as well as other federal and state statutes and regulations.  Each of the Gas Companies has or had an ownership interest in one of such properties contaminated as a result of MGP-related activities.  Under the existing regulations, the cleanup of such sites requires state and at times, federal, regulators’ involvement and approval before cleanup can commence.  In certain cases, such contamination has been evaluated, characterized and remediated.  In other cases, the sites have been evaluated and characterized, but not yet remediated.  Finally, at some of these sites, the scope of the contamination has not yet been fully characterized; no liability was recorded in respect of these sites as of September 30, 2012.  In the past, the Gas Companies have received approval for the recovery of MGP-related remediation expenses from customers through rates and they will seek recovery in rates for ongoing MGP-related remediation expenses for all of their MGP sites.
 
 
- 20 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
SCG owns property on Housatonic Avenue in Bridgeport, CT, a former MGP site.  Costs associated with the remediation of the site could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates.  UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability.  As such, as of September 30, 2012, no liability related to this claim has been recorded.

SCG owns property located on Chapel Street in New Haven, CT, the site of one of its former operations centers and a former MGP site.  SCG may be subject to remediation expenses for part of the site, which could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates.  UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability.  As such, as of September 30, 2012, no liability related to this claim has been recorded.

A property located on Columbus Boulevard in Hartford, CT is the former Operations Center and Corporate Headquarters of CNG.  The property is also a former MGP site.  Costs associated with the remediation of the site could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates.  UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability.  As such, as of September 30, 2012, no liability related to this claim has been recorded.

A site on Mill Street in Greenfield, MA is currently owned by Berkshire and is used as a regional operations center.  This site is on the Massachusetts Department of Environmental Protection (MDEP) list of confirmed disposal sites and investigation and remediation of contamination resulting from disposal of byproducts and wastes generated by the historic coal and water gas manufacturing operations is ongoing.  Extensive soil, and coal tar product non-aqueous phase liquid (NAPL) recovery and remediation work on the land side of the property has been completed, and sediments containing NAPL have been removed from the adjoining Green River.  Evaluation of the NAPL distribution in the river sediments and in the subsurface in stream banks on an adjacent property has been completed.  Land based containment systems are currently being installed and will be completed in 2012.  River sediments, stream bank and adjacent properties are scheduled for remediation in 2013.    After completion of the additional remedial activities, there will be ongoing monitoring and reporting to the MDEP that will continue on the site for the foreseeable future.  UIL Holdings estimates that expenses will most likely amount to$7.5 million and has established a regulatory asset for such expenses as of September 30, 2012.  Historically Berkshire has received approval from the DPU for recovery of environmental expenses in its customer rates.  While management cannot predict the exact costs of the ongoing and future remediation and monitoring expenses, the company will seek regulatory rate recovery of these expenses.

Berkshire formerly owned a site on East Street (the East Street Site) in Pittsfield, MA that was used for gas manufacturing operations.  The East Street Site is part of a larger site known as the GE–Pittsfield/Housatonic River Site.  Berkshire sold the East Street Site to the General Electric Company (GE) in the 1970s and was named a potentially responsible party by the EPA in 1990.  GE filed suit against Berkshire in 2000 seeking reimbursement of and contribution toward costs incurred by GE in responding to releases of hazardous substances attributed to Berkshire’s predecessor at the East Street Site.  Berkshire was found liable to GE under the federal Comprehensive Environmental Response, Compensation and Liability Act and the Massachusetts Oil and Hazardous Materials Release Prevention and Response Act for costs that GE has and will incur in response to historic releases attributed to Berkshire’s predecessor.  In December 2002, Berkshire reached a settlement with GE (the Settlement Agreement) which provides, among other things, a framework for Berkshire and GE to allocate various monitoring and remediation costs at the East Street Site.  On July 25, 2012, Berkshire and GE signed an agreement whereby Berkshire will pay GE approximately $0.7 million for their share of response costs incurred by GE at the East Street Site from 2006 through 2010.  Berkshire expects that it and GE will continue to operate under the terms of the Settlement Agreement in connection with the East Street Site.  As of September 30, 2012, UIL Holdings has accrued approximately $3.3 million and established a regulatory asset for these and future costs incurred by GE in responding to releases of hazardous substances at the East Street Site.  Historically Berkshire has received approval from the DPU for recovery of environmental expenses in its customer rates.  While management cannot predict the exact costs of the ongoing and future remediation and monitoring expenses, the company will seek regulatory rate recovery of these expenses.
 
 
- 21 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
Middletown/Norwalk Transmission Project

The general contractor and two subcontractors responsible for civil construction work in connection with the installation of UI’s portion of the Middletown/Norwalk Transmission Project’s underground electric cable system filed lawsuits in Connecticut state court on September 22, 2009, March 23, 2009 and January 25, 2010, respectively.  The claims, as revised by the general contractor in October 2011, sought payment for change order requests of approximately $33.3 million, a 10% general contractor mark-up on any approved subcontractor change order claims (approximately $2.3 million), interest, costs, and attorneys' fees.  In December 2011, UI settled claims brought by the two subcontractors and their respective lawsuits were dismissed with prejudice.  The claim by the general contractor was not settled and UI is vigorously defending the litigation.  Based on the settlement of the claims of the two subcontractors, UI estimates that the claims of the general contractor have been reduced to approximately $8.4 million, exclusive of the contractor’s claims for interest, costs, and attorneys’ fees.

UI also is pursuing an indemnification claim against the general contractor. The trial on the general contractor’s claims and UI’s indemnification claim began in September 2012 and is expected to conclude by early December 2012, with a decision by the judge sometime thereafter.  UI expects to recover amounts paid to resolve the contractor and subcontractor claims through UI’s transmission revenue requirements.  In October 2012, the general contractor filed a complaint against UI with FERC alleging that UI’s inclusion of certain costs incurred by UI in connection with the Middletown/Norwalk Transmission Project were not reasonably and/or prudently incurred and/or were not incurred in good faith by UI.  UI expects to vigorously defend against these new allegations, and expects to file its answer to this new complaint in November 2012, pursuant to FERC rules of practice.

Purchase and Sale Agreement

As part of its plan to consolidate operations and office personnel, on July 7, 2011, UI entered into an agreement for the sale of the Electric System Work Center (ESWC) located at 801 Bridgeport Avenue in Shelton, CT for approximately $10.2 million.  The net book value of ESWC as of September 30, 2012 was approximately $15.0 million and UI expects to recover any loss resulting from the sale of the property through the regulatory process.  The transaction, which has been approved by PURA, is expected to close by the first quarter of 2014 after the completion of due diligence, zoning approval, and site plan approval periods.

(K)
FAIR VALUE MEASUREMENTS

As required by ASC 820 “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety, based on the lowest level of input that is significant to the fair value measurement.  UIL Holdings’ assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
 
 
- 22 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
The following tables set forth UIL Holdings’ financial assets and liabilities, other than pension benefits and OPEB, which were accounted for at fair value on a recurring basis, as well as the fair value of long-term debt, as of September 30, 2012 and December 31, 2011.

   
Fair Value Measurements Using
 
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total
 
September 30, 2012
 
(In Thousands)
 
Assets:
                       
Contracts for differences
  $ -     $ -     $ 80,428     $ 80,428  
Weather insurance contracts
    -       -       1,000       1,000  
Noncurrent investments available for sale
    9,717       -       -       9,717  
Deferred Compensation Plan
    3,726       -       -       3,726  
Supplemental retirement benefit trust life insurance policies
    -       6,375       -       6,375  
    $ 13,443     $ 6,375     $ 81,428     $ 101,246  
                                 
Liabilities:
                               
Contracts for differences
  $ -     $ -     $ 256,893     $ 256,893  
Long-term debt
    -       1,883,871       -       1,883,871  
    $ -     $ 1,883,871     $ 256,893     $ 2,140,764  
                                 
Net fair value assets/(liabilities), September 30, 2012
  $ 13,443     $ (1,877,496 )   $ (175,465 )   $ (2,039,518 )
       
December 31, 2011
     
Assets:
                               
Contracts for differences
  $ -     $ -     $ 83,942     $ 83,942  
Weather insurance contracts
    -       -       3,512       3,512  
Noncurrent investments available for sale
    9,152       -       -       9,152  
Deferred Compensation Plan
    3,739       -       -       3,739  
Supplemental retirement benefit trust life insurance policies
    -       5,655       -       5,655  
    $ 12,891     $ 5,655     $ 87,454     $ 106,000  
                                 
Liabilities:
                               
Contracts for differences
  $ -     $ -     $ 268,035     $ 268,035  
Long-term debt
    -       1,715,724       -       1,715,724  
    $ -     $ 1,715,724     $ 268,035     $ 1,983,759  
                                 
Net fair value assets/(liabilities), December 31, 2011
  $ 12,891     $ (1,710,069 )   $ (180,581 )   $ (1,877,759 )
 
The determination of fair value of the CfDs was based on a probability-based expected cash flow analysis that was discounted at the September 30, 2012 or December 31, 2011 risk-free interest rates, as applicable, and an adjustment for non-performance risk using credit default swap rates.  Certain management assumptions were required, including development of pricing that extended over the term of the contracts.  For information regarding the determination of the fair value of the weather insurance contracts, see Note (A) “Business Organization and Statement of Accounting Policies – Derivatives.”  Additional quantitative information about Level 3 fair value measurements is as follows:

 
 Unobservable Input
 
Range
 
         
Contracts for differences
Risk of non-performance
    1.11% - 1.54 %
 
Discount rate
    1.65% - 2.04 %
 
Forward pricing ($ per MW)
  $ 1.40 - $9.83  
           
Weather insurance contracts
Heating degree days
    4,976  

Significant isolated changes in the risk of non-performance, the discount rate or the contract term pricing would result in an inverse change in the fair value of the CfDs.  A significant change in heating degree days would result in an inverse change in the fair value of the weather derivative contracts.
 
 
- 23 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
In addition, UIL performed an assessment of risks related to obtaining regulatory, legal and siting approvals, as well as obtaining financing resources and ultimately attaining commercial operation.   PURA has determined that changes in fair value associated with the CfDs are fully recoverable.  As a result, such changes have no impact on UIL Holdings’ net income.

Fair value of long-term debt is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.

The fair value of the noncurrent investments available for sale is determined using quoted market prices in active markets for identical assets.  The investments primarily consist of money market funds.

Under the UIL Deferred Compensation Plan (DCP), directors, named executive officers and certain other employees may elect to defer certain elements of compensation.  Participants in the DCP are permitted to direct investments of their elective deferral accounts into “deemed” investments consisting of mutual funds and UIL Holdings common stock equivalents.  These investments, which are actively traded in sufficient frequency and volume to provide pricing information on an ongoing basis, are marked-to-market based upon such pricing information.

The determination of the fair value of the supplemental retirement benefit trust life insurance policies was based on quoted prices as of September 30, 2012 and December 31, 2011 in the active markets for the various funds within which the assets are held.

The following tables set forth a reconciliation of changes in the fair value of the assets and liabilities above that are classified as Level 3 in the fair value hierarchy for the nine month period ended September 30, 2012.
 
   
Nine Months Ended
 
   
September 30, 2012
 
   
(In Thousands)
 
       
Net fair value assets/(liabilities), December 31, 2011
  $ (180,581 )
Unrealized gains and (losses), net
       
Included in earnings
    3,488  
Included in regulatory assets/(liabilities)
    7,628  
Settlements
    (6,000 )
Net fair value assets/(liabilities), September 30, 2012
  $ (175,465 )
         
Change in unrealized gains (losses), net relating to net fair value assets/(liabilities), still held as of September 30, 2012
  $ 7,628  
 
The following table sets forth a reconciliation of changes in the net regulatory asset/ (liability) balances that were established to recover any unrealized gains/ (losses) associated with the CfDs for the nine month period ended September 30, 2012.  The amounts offset the net contract for differences liabilities included in the derivative liabilities detailed above.

   
Nine Months Ended
 
   
September 30, 2012
 
   
(In Thousands)
 
       
Net regulatory assets/(liabilities), December 31, 2011
  $ 184,093  
Unrealized (gains) and losses, net
    (7,628 )
Net regulatory assets/(liabilities), September 30, 2012
  $ 176,465  

 
- 24 -

 
UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(M) 
SEGMENT INFORMATION

UIL Holdings has three reporting segments:  Electric Distribution, Electric Transmission and Gas Distribution.  Revenues from inter-segment transactions are not material.  All of UIL Holdings’ revenues are derived in the United States.  The following measures of segment profit and loss are utilized by management to make decisions about allocating resources to the segments and assessing performance.  The following table reconciles certain segment information with that provided in UIL Holdings’ Consolidated Financial Statements.  In the table, distribution includes all electric utility revenue and expenses except for transmission, which is provided in a separate column.  “Other” includes the information for the remainder of UIL Holdings’ non-utility activities and unallocated corporate costs.

(In Thousands)
                                   
   
Three months ended September 30, 2012
 
   
Electric Distribution and Transmission
                   
   
Distribution
   
Transmission
   
Total
   
Gas Distribution
   
Other
   
Total
 
Operating Revenues
  $ 154,165     $ 62,932     $ 217,097     $ 105,755     $ 957     $ 323,809  
Purchased power and gas
    43,565       -       43,565       51,570       -       95,135  
Operation and maintenance
    42,599       9,840       52,439       35,788       (25 )     88,202  
Transmission wholesale
    -       26,565       26,565       -       -       26,565  
Depreciation and amortization
    25,286       3,787       29,073       16,410       796       46,279  
Taxes - other than income taxes
    12,202       8,256       20,458       8,011       33       28,502  
Operating Income (Loss)
    30,513       14,484       44,997       (6,024 )     153       39,126  
                                                 
Other Income and (Deductions), net
    6,071       863       6,934