BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2011

BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES [Abstract]

BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

The accompanying notes should be read in conjunction with 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, 2010.

In July 2011, as a result of Public Act 11-80 (PA 11-80), the Department of Energy and Environmental Protection (DEEP) was created by merging the Department of Environmental Protection and the Department of Public Utility Control (DPUC).  As part of the reorganization, the DPUC became the Public Utilities Regulatory Authority (PURA) and, as PURA, it will continue to be responsible for the rate review and compliance of regulated utilities, including electric and gas.  The term PURA will be used in this filing to refer to PURA’s future actions as well as the actions of its predecessor organization, the DPUC.

(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 utilities.  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.  The Gas Companies were acquired by UIL Holdings on November 16, 2010 for a purchase price of $1.296 billion (the Acquisition).  See Note (N) “Acquisition” for a further discussion of the Acquisition.

UI is also a 50-50 joint venturer, together with an affiliate of NRG Energy, Inc. (NRG), in GenConn Energy LLC (GenConn), a project selected 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 six month period ended June 30, 2011 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2011.  The comparative results for the six month period ended June 30, 2010 do not include the operations of the Gas Companies.

Certain immaterial amounts that were reported in the Consolidated Financial Statements in previous periods have been reclassified to conform to the current presentation.

Asset Retirement Obligations (ARO)

As of June 30, 2011, UIL Holdings’ ARO, including estimated conditional AROs, were $18.3 million and consisted primarily of obligations related to removal or retirement of asbestos, polychlorinated biphenyl (PCB) contaminated equipment, gas pipeline and cast iron gas mains.  The long-lived assets associated with the AROs are primarily gas storage property, distribution property and other property.  As of December 31, 2010, UIL Holdings’ ARO was $17.8 million.

Derivatives

UIL Holdings’ regulated subsidiaries are party to contracts and involved in transactions that have been determined to be derivatives and are discussed below.

The fair value of the gross derivative assets and liabilities as of June 30, 2011 and December 31, 2010 were as follows:

	June 30, 2011
	(In Thousands)
			Deferred Charges		Current			Noncurrent
	Current Assets		and Other Assets		Liabilities			Liabilities
Derivative assets/(liabilities), gross	$	10,615	$	73,679	$	(28,905	)	$	(240,601	)
	December 31, 2010
	(In Thousands)
			Deferred Charges		Current			Noncurrent
	Current Assets		and Other Assets		Liabilities			Liabilities
Derivative assets/(liabilities), gross	$	6,057	$	28,131	$	(13,246	)	$	(129,560	)

Contracts for Differences (CfDs)

As directed by PURA, UI and CL&P each executed two CfDs.  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.  As of June 30, 2011, UI has recorded the following amounts in the accompanying Consolidated Balance Sheet related to its CfDs:  a gross derivative asset of $84.3 million, a regulatory asset of $185.2 million and a gross derivative liability of $269.5 million ($164.2 million of which related to its portion of CL&P’s derivative liabilities).  See Note (K) “Fair Value Measurements” for additional CfD information.

On February 7, 2010, an explosion occurred at the construction site of a 620-megawatt plant being built by Kleen Energy Systems, LLC (Kleen), one of four capacity resources selected in 2008 by PURA to create new or incremental capacity resources.  CL&P has executed the CfD with the Kleen project which is subject to the cost-sharing agreement between UI and CL&P.  In July 2011, Kleen reported that the rebuilding of its facility is complete and that commercial operation of the facility commenced on July 19, 2011, at which time payments under the CfD began.

The unrealized gains and losses from mark-to-market adjustments to derivatives recorded in regulatory assets or regulatory liabilities for the three and six month periods ended June 30, 2011 and 2010 were as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011		2010			2011		2010
	(In Thousands)					(In Thousands)
Regulatory Assets - Derivative liabilities	$	29,722	$	4,905		$	70,536	$	(57,552	)
Regulatory Liabilities - Derivative assets	$	68	$	(192	)	$	5,748	$	(93	)

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculations for the three and six month periods ended June 30, 2011 and 2010:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Numerator:
Net income	$	14,156	$	11,489	$	66,200	$	27,404
Less:  Net income allocated to unvested units		29		41		143		103
Net income attributable to common shareholders	$	14,127	$	11,448	$	66,057	$	27,301
Denominator:
Basic average number of shares outstanding		50,628		30,093		50,574		30,037
Effect of dilutive securities		244		220		250		280
Diluted average number of shares outstanding		50,872		30,313		50,824		30,317
Earnings per share:
Basic	$	0.28	$	0.38	$	1.31	$	0.91
Diluted	$	0.28	$	0.38	$	1.30	$	0.90

As of June 30, 2011, options to purchase an average amount of 89,336 and 97,669 shares of common stock were outstanding but not included in the three or six-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 six month periods ended June 30, 2011.  As of June 30, 2010, options to purchase an average amount of 136,945 shares of common stock were outstanding but not included in the three or six-month 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 six month periods ended June 30, 2010.

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 $69.5 million and $62.8 million as of June 30, 2011 and December 31, 2010, respectively.

The loans UI had made to GenConn for the construction of GenConn Middletown of approximately $63 million were converted into equity in July 2011.

Income Taxes

Effective January 1, 2011, UIL Holdings changed its method of accounting for income taxes for interim reporting periods from the discrete-period approach to the estimated annual effective tax rate approach as defined in ASC 740 “Income Taxes.”  The change conforms the methodology for determining income tax expense for interim periods for UIL Holdings and all of its subsidiaries.  The change in accounting is being reflected in the interim financial statements through retrospective application and does not impact annual reporting.  The impact of this change for the three and six month periods ended June 30, 2010 was a reduction of income tax expense in the amount of $1.4 million and $1.2 million respectively.

Regulatory Accounting

UIL Holdings’ regulatory assets and liabilities as of June 30, 2011 and December 31, 2010 included the following:

	Remaining	June 30,		December 31,
	Period	2011		2010
		(In Thousands)
Regulatory Assets:
Nuclear plant investments – above market	(a)	$	283,165	$	293,388
Income taxes due principally to book-tax differences	(b)		7,562		11,910
Connecticut Yankee	5 years		15,759		17,175
Unamortized redemption costs	11 to 23 years		13,307		13,708
Pension and other post-retirement benefit plans	(c)		335,740		351,610
Environmental remediation costs	4 to 5 years		2,441		17,285
Customer rate surcharge	(g)		17,118		12,816
Low income program	(h)		35,331		40,674
Debt premium	1 to 27 years		52,361		56,865
Deferred purchased gas	(i)		-		26,650
Deferred income taxes	(j)		12,349		5,859
Unfunded future income taxes	(j)		35,675		25,684
Contracts for differences	(d)		185,244		114,662
Excess generation service charge	(e)		6,520		8,711
Other	(b)		41,921		44,740
Total regulatory assets			1,044,493		1,041,737
Less current portion of regulatory assets			81,257		115,848
Regulatory Assets, Net		$	963,236	$	925,889
Regulatory Liabilities:
Accumulated deferred investment tax credits	33 years	$	4,831	$	4,905
Deferred gain on sale of property	(a)		37,798		37,798
Middletown/Norwalk local transmission network service collections	39 years		22,835		23,121
Pension and other post-retirement benefit plans	4 to 7 years		24,379		33,685
Deferred income taxes	(j)		16,228		29,793
Asset retirement obligation	(k)		7,979		8,451
Deferred purchased gas	< 1 year		24,721		15,275
Asset removal costs	(b)		223,611		219,121
Deferred transmission expense	(f)		38,494		27,036
Other	(b)		44,355		36,782
Total regulatory liabilities			445,231		435,967
Less current portion of regulatory liabilities			78,315		53,601
Regulatory Liabilities, Net		$	366,916	$	382,366

(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.

(b) Amortization period and/or balance vary depending on the nature, cost of removal and/or remaining life of the underlying assets/liabilities.

(c) 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).

(d) Asset life is equal to delivery term of related contracts (which vary from approximately 9 - 16 years); balance fluctuates based upon quarterly market analysis performed on the related derivatives (Note K).

(e) Working capital allowance for generation service charge; this amount fluctuates based upon cash inflows and outflows in a given period.

(f) Regulatory asset or liability which defers transmission income or expense and fluctuates based upon actual revenues and revenue requirements.

(g) Deferral of revenue received for excess refund of overearnings to be recovered over 2 -3 years.

(h) Various hardship and payment plan programs approved for recovery.

(i) Deferred purchase gas costs balances at the end of the rate year are normally recorded/returned in the next year.

(j) The balance will be extinguished when the asset or liability has been realized or settled, respectively.

(k) The liability will be extinguished simultaneous with the retirement of the assets and settlement of the corresponding asset retirement obligation.

Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), target amounts of 111,230, 5,314 and 3,627 performance shares were granted to certain members of management in February, April and May of 2011, respectively; the averages of the high and low market prices on the grant dates were $30.69, $31.76 and $31.85 per share, respectively.

In February 2011, UIL Holdings granted a total of 2,566 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 $30.69 per share.  Such shares vest 20% annually for a five year period.

In April 2011, UIL Holdings granted a total of 9,011 shares of restricted stock to non-employee directors under the 2008 Stock Plan as compensation for service from January 2011 to May 2011; the average of the high and low market price on the date of grant was $30.77 per share.  Such shares vested in May 2011.

In May 2011, UIL Holdings granted a total of 23,394 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 $33.51 per share.  Such shares vest in May 2012.

Total stock-based compensation expense for the six month periods ended June 30, 2011 and 2010 was $3.3 million and $2.1 million, respectively. Total stock-based compensation expense for the three month periods ended June 30, 2011 and 2010 was $1.4 million and $0.9 million, respectively.

Variable Interest Entities

UIL Holdings has identified Connecticut Yankee Atomic Power Company (Connecticut Yankee) and GenConn as variable interest entities (VIEs), which were not subject to consolidation as UIL Holdings is not the primary beneficiary because it does not have a controlling financial interest, as defined in ASC 810 “Consolidation,” in either VIE.  For further discussion of GenConn, see Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Equity Investment in Peaking Generation.”  For further discussion of Connecticut Yankee, see Note (J) “Commitments and Contingencies.”

New Accounting Pronouncements

In May 2011, the FASB issued amendments to ASC 820 “Fair Value Measurements and Disclosures.”  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied on a prospective basis.  The implementation of this guidance is not expected to have a material impact on UIL Holdings’ consolidated financial statements.

In June 2011, the FASB issued updated guidance to ASC 220 “Comprehensive Income” which allows entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance, which is to be applied retrospectively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The implementation of this guidance is not expected to have an impact on UIL Holdings’ consolidated financial statements.