(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), Connecticut Natural Gas Corporation (CNG), and The Berkshire Gas Company (Berkshire, and together with SCG and CNG, the Gas Companies).

UI is also a party to a joint venture with certain affiliates of NRG Energy, Inc. (NRG) pursuant to which UI holds 50% of the membership interests in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (collectively with GCE Holding LLC, GenConn) operates peaking generation plants in Devon, Connecticut (GenConn Devon) and Middletown, Connecticut (GenConn Middletown).

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, 2013 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2013.

The Income from Equity Investments line item on UIL Holdings Consolidated Statement of Income, which was previously presented below the Income Taxes line item, is now being presented above the Income Taxes line item.

The Company has revised its previously issued annual financial statements for a correction in the 2012 Consolidated Balance Sheet. The effect of this revision on the balance sheet is a $13.1 million adjustment increasing accounts payable and decreasing accrued liabilities in the Consolidated Balance Sheet as of December 31, 2012. This adjustment is not considered to be material to previously issued financial statements. Additionally, certain immaterial amounts that were reported in the Consolidated Balance Sheet and Consolidated Statement of Income in previous periods have been reclassified to conform to the current presentation.

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 June 30, 2013 and December 31, 2012 were as follows:

	June 30,		December 31,
	2013		2012
	(In Thousands)
Gross derivative assets:
Current Assets	$	9,380	$	12,671
Deferred Charges and Other Assets	$	49,320	$	67,167

Gross derivative liabilties:
Current Liabilities	$	27,486	$	30,804
Noncurrent Liabilities	$	184,556	$	224,639

Contracts for Differences (CfDs)

Pursuant to Connecticut’s 2005 Energy Independence Act, the Connecticut Public Utilities Regulatory Authority (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 the 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 costs or benefits of each contract will be paid by or allocated to customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost or benefit is borne by or allocated to UI customers and approximately 80% is borne by or allocated to 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 June 30, 2013, UI has recorded a gross derivative asset of $58.7 million, a regulatory asset of $153.3 million, and a gross derivative liability of $212.0 million ($138.6 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 six-month periods ended June 30, 2013 and 2012 were as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013			2012
	(In Thousands)					(In Thousands)

Regulatory Assets - Derivative liabilities	$	(15,099	)	$	2,167	$	(23,263	)	$	(5,781	)

Regulatory Liabilities - Derivative assets	$	-		$	40	$	-		$	12

The increased unrealized losses in the three- and six-month periods ended June 30, 2013 compared to June 30, 2012 is primarily due to increases in forward pricing.

Weather Insurance Contracts

On an annual basis, SCG and CNG assess the need for 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; however, if temperatures are colder than normal at a prescribed level for the contract period, SCG and CNG would each be required to make a payment. 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 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 were warmer than normal, SCG and CNG each would have received a payment, up to a maximum of $3 million; however, if temperatures were colder than normal, SCG and CNG each would have made a payment of up to a maximum of $2 million. Upon the expiration of their respective contracts, SCG and CNG neither received nor made a payment since the variation from normal weather during the contract period did not reach the prescribed level stated in the contracts.

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, because temperatures were warmer than normal for the contract period, Berkshire received a payment of $1 million on January 8, 2013. The premiums paid were 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 December 31, 2012. Berkshire did not enter into a weather insurance contract for 2013.

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, 2013 and 2012:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(In Thousands, except per share amounts)
Numerator:
Net income	$	17,924	$	11,999	$	69,715	$	59,049
Less: Net income allocated to unvested units		18		18		83		105
Net income attributable to common shareholders	$	17,906	$	11,981	$	69,632	$	58,944

Denominator:
Basic average number of shares outstanding		50,972		50,793		50,939		50,740
Effect of dilutive securities		229		248		238		262
Diluted average number of shares outstanding		51,201		51,041		51,177		51,002

Earnings per share:
Basic	$	0.35	$	0.24	$	1.37	$	1.16
Diluted	$	0.35	$	0.23	$	1.36	$	1.16

All outstanding options to purchase shares of common stock during the six-month periods ending June 30, 2013 and 2012 and the three-month period June 30, 2012 were included in the computation of diluted earnings per share because the options’ exercise prices were lower than the average market price of UIL Holdings’ common shares during such period. There were no outstanding options to purchase shares of common stock during the three-month period ending June 30, 2013.

Equity Investments

UI is party to a 50-50 joint venture with NRG in GenConn, which operates two peaking generation plants in Connecticut. UI’s investment in GenConn is being accounted for as an equity investment, the carrying value of which was $122.7 million and $124.8 million as of June 30, 2013 and December 31, 2012, respectively.

UI’s pre-tax income from its equity investment in GenConn was $7.6 million and $8.4 million for the six-month periods ended June 30, 2013 and 2012, respectively. The decline in 2013 earnings compared to 2012 is primarily due to the absence in the first quarter 2013 of non-recurring adjustments recorded in the first quarter of 2012 largely relating to 2011. UI’s pre-tax income from its equity investment in GenConn was $3.8 million and $3.9 million for the three‑month periods ended June 30, 2013 and 2012, respectively. UI received cash distributions from GenConn of $9.8 million and $12.9 million during the six-month periods ended June 30, 2013 and 2012, respectively. UI received cash distributions from GenConn of $9.8 million and $8.2 million during the three-month periods ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there were no undistributed earnings from UI’s equity investment in GenConn.

Regulatory Accounting

UIL Holdings’ regulatory assets and liabilities as of June 30, 2013 and December 31, 2012 included the following:

	Remaining	June 30,		December 31,
	Period	2013		2012
		(In Thousands)
Regulatory Assets:
Nuclear plant investments – above market	(a)	$	242,275	$	252,498
Connecticut Yankee	Not applicable		-		11,129
Unamortized redemption costs	8 to 20 years		11,702		12,103
Pension and other post-retirement benefit plans	(b)		448,252		458,019
Environmental remediation costs	4 to 5 years		15,006		14,772
Hardship programs	(c)		23,915		29,852
Debt premium	1 to 24 years		37,452		41,016
Deferred purchased gas	(d)		-		12,444
Unfunded future income taxes	(e)		21,545		17,319
Contracts for differences	(f)		153,286		176,597
Excess generation service charge	(g)		14,967		8,864
Deferred transmission income/expense	(h)		24,761		21,379
Storm costs	(i)		53,465		52,009
Other	(j)		28,343		27,449
Total regulatory assets			1,074,969		1,135,450
Less current portion of regulatory assets			120,766		120,935
Regulatory Assets, Net		$	954,203	$	1,014,515

Regulatory Liabilities:
Accumulated deferred investment tax credits	30 years	$	4,538	$	4,612
Income taxes due principally to book-tax differences	(j)		51,260		41,928
Deferred gain on sale of property	(a)		37,933		37,933
Middletown/Norwalk local transmission network service collections	36 years		21,688		21,975
Pension and other post-retirement benefit plans	1 to 7 years		12,995		15,016
Deferred income taxes	(e)		45,570		41,816
Asset retirement obligation	(k)		4,504		4,995
Deferred purchased gas	(d)		32,248		-
Low income programs	(l)		22,475		17,651
Asset removal costs	(j)		251,548		243,854
Other	(j)		43,685		36,660
Total regulatory liabilities			528,444		466,440
Less current portion of regulatory liabilities			27,948		21,284
Regulatory Liabilities, Net		$	500,496	$	445,156

(a) Asset/Liability relates to the Competitive Transition Assessment (CTA). Total CTA costs recovery is currently projected to be completed in 2013, with stranded cost amortization expected to end in the fourth quarter of 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." See Note (G) “Pension and Other Benefits” for additional information.

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

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

(f) Asset life is equal to delivery term of related contracts (which vary from approximately 7 - 14 years); balance fluctuates based upon quarterly market analysis performed on the related derivatives (Note K).

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

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

(i) Storm costs include accumulated costs for major storms occurring from January 2009 forward. UI is seeking recovery of these costs in its rate proceeding discussed in Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Rates.”

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

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

(l) 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), target amounts of 101,150 and 5,860 performance shares were granted to certain members of management in March and May of 2013, respectively; the averages of the high and low market prices on the grant dates were $38.73 and $41.34 per share, respectively.

Also in March 2013, UIL Holdings granted a total of 2,033 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 $38.73 per share. Such shares vest in equal annual installments over a five-year period.

In May 2013, UIL Holdings granted a total of 21,558 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 $40.69 per share. Such shares vest in May 2014.

Also in May 2013, UIL Holdings granted a total of 2,177 shares of restricted stock to its Vice President – Information Technology and Chief Information Officer under the 2008 Stock Plan; the average of the high and low market price on the date of grant was $41.34 per share. Such shares vest in May 2016.

Total stock-based compensation expense for the six-month periods ended June 30, 2013 and 2012 was $3.0 million and $3.7 million, respectively. Total stock-based compensation expense for the three-month periods ended June 30, 2013 and 2012 was $0.8 million and $0.9 million, respectively.

Variable Interest Entities

UIL Holdings has identified GenConn as a variable interest entity (VIE), which is 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 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. For further discussion of GenConn, see “–Equity Investments” as well as Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Equity Investment in Peaking Generation.”

UIL Holdings has identified the selected capacity resources with which UI has CfDs as VIEs and has concluded that UI is not the primary beneficiary as UI does not have the power to direct any of the significant activities of these capacity resources. As such, UIL Holdings has not consolidated the selected capacity resources. UI’s maximum exposure to loss through these agreements is limited to the settlement amount under the CfDs as described in “–Derivatives – Contracts for Differences (CfDs)” above. UI has no requirement to absorb additional losses nor has UI provided any financial or other support during the periods presented that were not previously contractually required.

UIL Holdings has identified the entities for which UI is required to enter into long-term contracts to purchase Renewable Energy Credits (RECs) as VIEs. In assessing these contracts for VIE identification and reporting purposes, UIL Holdings has aggregated the contracts based on similar risk characteristics and significance to UI. UI is not the primary beneficiary as UI does not have the power to direct any of the significant activities of these entities. UI’s exposure to loss is primarily related to the purchase and resale of the RECs, but, any losses incurred are recoverable through electric rates. For further discussion of RECs, see Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – New Renewable Source Generation.”

New Accounting Pronouncements

In July 2013, the FASB issued updated guidance to ASC 740 “Income Taxes” which prescribes the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective during interim and annual periods beginning after December 15, 2013 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.