Electric Distribution and Transmission

Tropical Storm Irene, which passed through Connecticut in August 2011, and the autumn nor'easter, which passed through Connecticut in October 2011, (the “Storms”), caused extensive damage to the electric system in UI's service territory and left approximately 59% and 16%, respectively, of UI's customers without electricity. PURA has opened an investigation of the service response and communications of UI, among other utilities, following power outages resulting from the Storms. In accordance with PURA regulatory decisions and past storm cost guidance, UI has established a regulatory asset for its storm-related expenses. As of December 31, 2011, UI's estimate of the cost of repairing the damage resulting from the Storms and restoring service to customers is approximately $25 million, of which approximately $5 million has been capitalized as property plant and equipment and the remainder as a regulatory asset. UI expects to seek recovery of these costs in future rate 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. UI 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.

Rates

In rulings throughout 2009, PURA issued its final decision regarding UI's application requesting an increase in distribution rates (the 2009 Decisions), the results of which provided for an allowed distribution return on equity of 8.75%, a decrease from the previously approved 9.75%, and a capital structure of 50% equity and 50% debt, compared to the previously approved 48% equity and 52% debt capital structure. The 2009 Decisions continued the prior earnings sharing mechanism structure, applying to the new 8.75% allowed return, whereby 50% of any earnings over the allowed twelve month level is returned to customers and 50% is retained by UI. Additionally, the 2009 Decisions provided for a two year pilot program for full decoupling of distribution revenues from sales.

On April 1, 2010, UI filed its ratemaking proposal and underlying decoupling analysis for the 2009 rate year ended February 3, 2010. On September 1, 2010, PURA issued its final decision in this matter approving a decoupling charge totaling approximately $1.6 million, which was recovered from ratepayers over a twelve month period commencing in October 2010. In addition to the decoupling charge, PURA also approved a pension and earnings sharing over-recovery credit totaling approximately $3.6 million, which was refunded to ratepayers over the same twelve month period commencing in October 2010.

UI filed its 2010 rate year decoupling results with PURA on April 4, 2011 and on August 31, 2011 PURA issued a final decision approving a decoupling adjustment totaling approximately $1.4 million, to be credited to ratepayers over a twelve month period beginning in October 2011 and extending the decoupling pilot until UI's next general rate proceeding.

In December 2011, UI received a letter ruling approving rates effective January 1, 2012 incorporating the 2009 distribution rate changes mentioned above along with previously approved changes to the Generation Services Charges (GSC), Non-Bypassable

Federally Mandated Congestion Charges, transmission and systems benefits charges. Additionally, last resort service GSC rates have been approved for the period through March 31, 2012.

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 the Proposed Notes may be used by UI for the following purposes: (1) to finance capital expenditures; (2) to repay 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, due to be remarketed in the municipal bond market on February 1, 2012, and (7) for general corporate purposes. UI has issued $203.5 million principal amount of senior unsecured notes, $100 million of which were issued on July 27, 2010 and $103.5 million of which were issued on January 30, 2012. UI expects to issue an additional $100 million principal amount of senior unsecured notes in April 2012.

OtherProceedings

UI generally has several regulatory proceedings open and pending at PURA at any given time. Examples of such proceedings include an annual PURA review and reconciliation of UI's Competitive Transition Assessment (CTA) and Systems Benefits Charges (SBC) revenues and expenses, dockets to consider specific restructuring or electricity market issues, consideration of specific rate or customer issues, and review of conservation programs.

UI files semi-annual true-ups with PURA regarding Bypassable Federally Mandated Congestion Charges and Non-Bypassable Federally Mandated Congestion Charges. These customer charges relate to “congestion costs” associated with not having adequate transmission infrastructure to move energy from the generating sources to the consumer and costs associated with ensuring adequate capacity on the electric system, such as peaking generation and capacity CfDs with generators. These costs change from time to time and the semi-annual true-ups provide a mechanism for the electric distribution companies to adjust the charges to customers that allow the companies to recover the Federally Mandated Congestion Charges.

UI makes a semi-annual transmission adjustment clause (TAC) filing with PURA setting forth its actual transmission revenues, projected transmission revenue requirement, and the required TAC charge or credit so that any under- or over-collections of transmission revenues from prior periods are reconciled along with the expected revenue requirements for the next six months from filing. PURA holds an administrative proceeding to approve the TAC charge or credit and holds a hearing to determine the accuracy of customer billings under the TAC. The TAC tariff and this semi-annual change of the TAC charge or credit facilitates the timely matching of transmission revenues and transmission revenue requirements.

Pension and Postretirement Expenses

In response to the Internal Revenue Service (IRS) mandated change in mortality tables utilized for certain Employee Retirement Income Security Act of 1974 (ERISA)-related liability calculations, effective January 1, 2007, PURA allowed regulatory treatment for the change in pension and postretirement expenses resulting from the use of the new mortality tables. In the 2009 Decisions, PURA approved the recovery of these expenses over a four-year period beginning in 2009. As of December 31, 2011, the remaining regulatory asset was approximately $1.1 million.

The 2009 Decisions also provide for the establishment of an annual regulatory asset to address a portion of the actual increase in pension and postretirement expense for each of 2009 and 2010. As of December 31, 2009, UI had recorded a regulatory asset of approximately $10.2 million which was fully recovered in 2010. Additionally, $11.4 million was included in rates in 2010 for UI's estimate of 2010 pension and postretirement expense.

Power Supply Arrangements

UI's retail electricity customers are able to choose their electricity supplier. Since January 1, 2007, UI has been required to offer standard service to those of its customers who do not choose a retail electric supplier and have a maximum demand of less than 500 kilowatts. In addition, UI is required to offer supplier of last resort service to customers who are not eligible for standard service and who do not choose to purchase electric generation service from a retail electric supplier licensed in Connecticut.

UI must procure its standard service power pursuant to a procurement plan approved by PURA. The procurement plan must provide for a portfolio of service agreements procured in an overlapping pattern over fixed time periods (a laddering approach). In June 2006, PURA approved a procurement plan for UI. As required by Connecticut statute, a third party consultant retained by PURA works closely with UI in the procurement process and to provide a joint recommendation to PURA as to selected bids.

UI has wholesale power supply agreements in place for the supply of all of its standard service customers for all of 2012, and 40% of 2013. Supplier of last resort service is procured on a quarterly basis. UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and 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 2011, 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 December 31, 2011, UI would have had to post approximately $12.2 million in collateral.

UI is permitted to seek long-term contracts for up to 20% of standard service requirements, the goal of which is to obtain long-term energy supply contracts and Connecticut Class I Renewable Energy Certificates for UI's standard service customers that will result in an economic benefit to ratepayers, both in terms of risk and cost mitigation. UI continues to keep apprised of possible long-term contracts that could benefit customers; however, UI has not executed any long-term contracts.

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 the PURA in accordance with statutory requirements. In 2007, one contract was approved by PURA and executed by CL&P. As directed by PURA, UI executed a sharing agreement with CL&P whereby UI pays approximately 20% of the costs and obtains approximately 20% of the benefits of the contract. This contract will be accounted for on an accrual basis. In January 2008, PURA issued a decision approving seven projects; UI is a party to contracts relating to two of these projects. UI signed a contract to purchase, over a fifteen year time period, 100% of the delivered products generated by the Stamford Hospital Fuel Cell Combined Heat and Power Project which has a 4.8 MW capacity. This contract will be accounted for as an operating lease. UI also signed a contract to purchase, over a fifteen year time period, 84.5% of the delivered products generated by the South Norwalk Bio-Fuel Project which has a 30 MW capacity and which will be accounted for on an accrual basis. In April 2009, PURA approved five additional fuel cell projects to which accrual accounting will be applied and for which contracts were executed by CL&P in July 2009. All of these contracts will be subject to the cost sharing agreement with CL&P. UI's costs associated with all such contracts are recoverable, whether UI is a direct party or pursuant to the sharing agreement. On September 7, 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. This 47 MW includes the Stamford Hospital contract to which UI is a party, but does not include the South Norwalk project. Contracts are expected to be terminated as the commercial operation deadlines expire.

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 up to $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 with any remaining costs expected to be recovered in rates. In December 2011, UI and CL&P submitted a joint petition to PURA outlining a plan to address the new requirements. UI expects PURA to issue its final decision in the first quarter of 2012.

PA 11-80 also allows for the development of 30 MW of grid-connected renewable energy whereby UI & CL&P are each allowed to develop up to 10 MW and the Department of Energy and Environmental Protection (DEEP) solicited 10 MW from the market. On December 23, 2011, DEEP announced that it had selected two 5 MW solar projects in CL&P service territory. UI anticipates that CL&P will execute contracts to purchase energy and associated products from both projects, and that a sharing arrangement will be executed between UI and CL&P. Pursuant to PA 11-80, the costs of payments made to projects are recoverable through a reconciling component of 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. UI expects PURA to issue a final decision in the second quarter of 2012.

FERC

UI recovers its transmission revenue requirements on a prospective basis, subject to reconciliation with actual revenue requirements. UI is required to file information regarding its approved formula rates on an annual basis with the FERC.

ISO-NE and Regional Transmission Organization (RTO)

ISO-NE, an independent, not-for-profit corporation, is the RTO for New England. ISO-NE is responsible for the reliable operation of the region's bulk electric power system, which includes UI's electric system, and administration of the region's wholesale electricity marketplace. ISO-NE also is responsible for the management of the comprehensive bulk electric power system and wholesale markets' planning processes that address the region's electricity needs.

The FERC has issued orders establishing allowable ROEs for transmission projects of transmission owners in New England, including UI. The FERC established a base-level ROE of 11.14% as well as a 50 basis point ROE adder on Pool Transmission Facilities (PTF) for participation in the RTO for New England and a 100 basis point ROE incentive for projects included in the ISO-NE Regional System Plan that were completed and on line as of December 31, 2008. For projects placed in service after December 31, 2008, incentives may be requested from the FERC, through a specific showing justifying the incentive, on a project-specific basis.

UI's overall transmission ROE is determined by the mix of UI's transmission rate base between new and existing transmission assets, and whether such assets are PTF or non-PTF. UI's transmission assets are primarily PTF. For 2011, UI's overall allowed weighted-average ROE for its transmission business was 12.4%.

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, (2) the Interstate Reliability Project and (3) the Central

Connecticut Reliability Project. In December 2011, CL&P submitted an application to the CSC seeking siting approval of the Interstate Reliability Project.

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 affect on the assets previously transferred to UI.

Through December 31, 2011, UI has made deposits totaling $9.6 million in NEEWS 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 $1 million on such deposits in 2011. On February 6, 2012, UI made an additional deposit in NEEWS of $1.3 million.

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 operating in the ISO-New England markets. PURA has approved revenue requirements for the period from January 1, 2012 through December 31, 2012 of $34 million and $42.3 million for GenConn Devon and GenConn Middletown, respectively.

Gas Distribution

Rates

Utilities are entitled by Connecticut and Massachusetts statute to charge rates that are sufficient to allow them an opportunity to cover their reasonable operating and capital costs, to attract needed capital and to maintain their financial integrity, while also protecting relevant public interests.

SCG and CNG

In July and August 2009, PURA issued final decisions in rate cases for CNG and SCG, respectively. Subsequent to the issuance of these final decisions, both CNG and SCG appealed the PURA orders to the Connecticut superior court. The rates established in the 2009 decisions, and certain other orders, were stayed by stipulation pending the resolution of the appeals. In April 2010, the Connecticut superior court ruled in favor of PURA and dismissed the appeals. CNG and SCG appealed the superior court's dismissal to the Connecticut supreme court. On March 24, 2011, SCG, CNG and the Office of Consumer Counsel filed a motion with PURA to reopen the SCG and CNG rate cases for the purposes of reviewing and approving a settlement agreement. On April 13, 2011, PURA reopened the rate cases and then issued a final decision on August 3, 2011. PURA's final decision approves the settlement agreement, except for minor modifications, including removing the provision that would have combined SCG and CNG for ratemaking purposes without further PURA approval. The final decision resolves all pending issues related to the rate case appeals and terminates the SCG potential overearnings investigation. Among other things, it results in the removal for monitoring purposes of the ten basis point penalty originally imposed at both companies for billing issues which have since been remediated resulting in authorized ROEs of 9.41% and 9.36% for CNG and SCG respectively. Additionally, the companies will be allowed to recover carrying charges on the excess interim rate decrease over-credited to customers during the stay of the rate case decisions while on appeal. Recoverable carrying charges of approximately $2.2 million were recorded in the third quarter of 2011 and are included in “Other Income and (Deductions)” in UIL Holdings' Consolidated Statement of Income. Monthly recognition of carrying charges will continue until the outstanding surcharge balance, which is being collected during the non-winter months (April – November) through November 2012, is extinguished. The rate case appeals were withdrawn in September 2011 and the stays are no longer in effect.

Berkshire

Berkshire's rates are established by the DPU. During 2011, Berkshire operated under a 10-year rate plan, approved by the DPU and which expired on January 31, 2012. The ROE approved in Berkshire's rate plan is 10.5%. Berkshire is currently assessing what action, if any, should be taken.

Purchased Gas Adjustment Clause

The Gas Companies have purchased gas adjustment clauses approved by PURA and DPU which enable them to pass the reasonably incurred cost of gas purchases through to customers. These clauses allow companies to recover changes in the market price of purchased natural gas, substantially eliminating exposure to natural gas price risk.

Approval for the Issuance of Debt

On July 5, 2011, PURA approved SCG's application requesting approval of the issuance of up to $50 million of secured medium-term notes (MTNs) to be priced at a fixed coupon rate not to exceed 7.0% and with maturities ranging from one to 40 years. The proceeds from the sale of the MTNs may be used by SCG for the following purposes: (1) to refinance $30 million principal amount of maturing existing debt; (2) to finance capital expenditures; (3) for working capital purposes; and (4) for general corporate purposes. In September 2011, SCG issued $50 million of debt in accordance with the terms and conditions approved by PURA. See Note (B) “Capitalization – Long-Term Debt” for further information.

Gas Supply Arrangements

The Gas Companies satisfy their natural gas supply requirements through purchases from various producer/suppliers, withdrawals from natural gas storage capacity contracts and winter peaking supplies and resources. The Gas Companies operate diverse portfolios of gas supply, firm transportation, gas storage and peaking resources. Each Gas Company contracts for such gas resources in its own name for regulatory and other reasons. Actual reasonable gas costs incurred by each of the Gas Companies are passed through to customers through state regulated purchased gas adjustment mechanisms subject to regulatory review.

The Gas Companies purchase the majority of the natural gas supply at market prices under seasonal, monthly or mid-term supply contracts and the remainder is acquired on the spot market. The Gas Companies diversify their sources of supply by amount purchased and location. The Gas Companies primarily acquire gas at various locations in the US Gulf of Mexico region, in the Appalachia region and in Canada.

The Gas Companies acquire firm transportation capacity on interstate pipelines under long-term contracts and utilize that capacity to transport both natural gas supply purchased and natural gas withdrawn from storage to the local distribution system. Collectively, the Gas Companies hold eighty-nine firm transportation contracts on twelve different pipelines. Three of those pipelines, Tennessee Gas Pipeline, Algonquin Gas Transmission and Iroquois Gas Transmission, interconnect with one or more of the Gas Companies' distribution system and the other pipelines provide indirect services upstream of the city gates. The prices and terms and conditions of the firm transportation capacity long-term contracts are regulated by the FERC. Similar to the treatment of gas costs, the actual reasonable cost of such contracts is passed through to customers through state regulated purchased gas adjustment mechanisms. The future obligations under these contracts as of December 31, 2011 are as follows:

	(In Thousands)
2012	$	116,086
2013		111,169
2014		104,823
2015		84,538
2016		71,639
2017-after		136,694
	$	624,949

In November 2010, the Tennessee Gas Pipeline Company (Tennessee), the company that operates a pipeline on which the Gas Companies hold firm transportation contracts, filed a FERC rate case proposing significant rate increases across their entire system which runs from south Texas through New England. In December 2010, the FERC issued an order setting the Tennessee rate proceeding for hearing and suspended the proposed rate increase until June 1, 2011. On that date the rates were placed into effect by Tennessee subject to refund to final rates determined through the federal regulatory process. These rates were nearly double the pre-existing rates for reserving pipeline capacity with Tennessee, but provided for lower variable costs, resulting in a significant net cost increase. On September 30, 2011, Tennessee made a FERC filing seeking approval of a settlement of the issues in the case reached by the active parties, including FERC staff and the Gas Companies. On December 5, 2011 the FERC approved the settlement which reduced the rate increase effective as of November 1, 2011 and provided for refunds for the period of June 1, 2011 through October 31, 2011. The settlement did not have an impact on earnings as the cost of gas is included in customer rates through a purchased gas adjustment mechanism in place at the Gas Companies.

The Gas Companies acquire firm underground natural gas storage capacity using long-term contracts and fill the storage facilities with gas in the summer for subsequent withdrawal in the winter. Collectively, the Gas Companies hold twenty-four gas storage contracts with six different storage contractors. The storage facilities are located in Pennsylvania, New York, West Virginia and Michigan.

Winter peaking resources are primarily attached to the local distribution systems and are either owned or are contracted for by the Gas Companies, each of which is a Local Distribution Company (LDC). Each LDC owns or has rights to the natural gas stored in each of a Liquefied Natural Gas (LNG) facility directly attached to its distribution system.