BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2014

BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES [Abstract]

The financial statements of UIL Holdings are prepared on a consolidated basis and therefore include the accounts of UIL Holdings’ majority-owned subsidiaries noted above. Intercompany accounts and transactions have been eliminated in consolidation. 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. We believe 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 our opinion, 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 three- and nine-month periods ended September 30, 2014 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2014.

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

Philadelphia Gas Works

On March 2, 2014, we entered into an asset purchase agreement with the City of Philadelphia (Asset Purchase Agreement) pursuant to which UIL Holdings, through a wholly-owned subsidiary, will acquire the operating assets and assume certain liabilities of Philadelphia Gas Works (PGW) for an initial purchase price of $1.86 billion, subject to adjustment (the Acquisition).

The Acquisition is subject to the satisfaction or waiver of certain customary and other closing conditions for transactions of this type, including approvals from the Philadelphia City Council (City Council) and the Pennsylvania Public Utility Commission. The Asset Purchase Agreement also contains termination provisions, including the right by either UIL Holdings or the City of Philadelphia to terminate the Asset Purchase Agreement if the Acquisition has not been consummated prior to March 31, 2015, subject to certain extension rights. Since July 16, 2014, we have had the right to terminate the Asset Purchase Agreement pursuant to its terms because the City Council has not enacted an ordinance approving the Acquisition. On October 27, 2014, the City Council announced that it would not endorse the sale of PGW. In light of the City Council’s announcement, we are in the process of determining whether to exercise this contractual right and what future actions, if any, will be taken. Without future action by either party, the Asset Purchase Agreement provides that it will terminate automatically on December 31, 2014.

As of September 30, 2014, UIL Holdings incurred pre-tax acquisition-related expenses of approximately $21.3 million, $6.1 million of which represents legal, investment banking, and due diligence costs that are included in operating expenses and $15.2 million of which are fees associated with a Bridge Term Loan Agreement (Bridge Facility) that is included in other income and (deductions) in the Consolidated Statement of Income. See Note (D) “Short-Term Credit Arrangements” for additional information about the Bridge Facility.

Milford LNG Purchase

On July 31, 2014, United Resources, Inc., a wholly owned subsidiary of UIL Holdings, purchased from Iberdrola USA, Inc. and certain of its subsidiaries, all of the outstanding equity of certain entities (the Purchased Entities) owning (a) a 14.6 million gallon liquefied natural gas (LNG) storage tank operated by SCG and located on property owned by SCG in Milford, Connecticut (the Tank), (b) certain equipment, materials and supplies used in or useful for the operation of the Tank (together with the Tank, the Assets) and (c) the LNG inventory for a cash purchase price of approximately $20.2 million. The structure and the pricing of the transaction are intended to maintain the current regulatory structure of the Purchased Entities and the Assets, and have no impact on customers. The Assets earn a rate of return equal to SCG’s allowed rate of return.

Derivatives

Our 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, 2014 and December 31, 2013 were as follows:

	September 30, 2014		December 31, 2013
	(In Thousands)
Gross derivative assets:
Current Assets	$	6,861	$	9,098
Deferred Charges and Other Assets	$	21,945	$	44,349

Gross derivative liabilities:
Current Liabilities	$	23,404	$	26,976
Noncurrent Liabilities	$	59,948	$	169,327

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 between UI and CL&P pursuant to which 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 fully recoverable by UI and CL&P through electric rates, 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, 2014, UI has recorded a gross derivative asset of $28.8 million ($6.7 million of which is related to UI’s portion of the CfD signed by CL&P), a regulatory asset of $61.2 million, a gross derivative liability of $83.4 million ($55.7 million of which is related to UI’s portion of the CfD signed by CL&P) and a regulatory liability of $6.6 million 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, 2014 and 2013 were as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014			2013
	(In Thousands)					(In Thousands)

Regulatory Assets - Derivative liabilities	$	393	$	(5,585	)	$	(81,623	)	$	(28,849	)

Regulatory Liabilities - Derivative assets	$	5,077	$	-		$	(6,616	)	$	-

The fluctuations in unrealized gains in the three- and nine-month periods ended September 30, 2014 compared to September 30, 2013 are primarily due to increases in forward prices for capacity and reserves as a result of ISO New England market rule changes.

Weather Insurance Contracts

On an annual basis, SCG and Berkshire each assess the need for weather insurance contracts for the upcoming heating season 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, a payment is received by the gas company; in addition, under certain of the contracts, if temperatures are colder than normal at a prescribed level for the contract period, the gas company is required to make a payment. The premiums paid are amortized over the terms of the contracts. The intrinsic value of the contracts is carried on the balance sheet with changes in value recorded in the income statement as Other Income and (Deductions). As a result of PURA’s approval of a decoupling mechanism for CNG which went into effect in January 2014, CNG does not enter into weather insurance contracts.

In September 2014, SCG and Berkshire entered into weather insurance contracts for the winter period of November 1, 2014 through April 30, 2015. If temperatures are warmer than normal, SCG and Berkshire will receive payments up to a maximum of $3 million and $1 million, respectively.

In October 2013, Berkshire entered into a weather insurance contract for the winter period of November 1, 2013 through April 30, 2014. During the contract period, temperatures were colder than normal and Berkshire made a payment of $0.2 million upon expiration of the contract.

In September 2013, SCG entered into a weather insurance contract for the winter period of November 1, 2013 through April 30, 2014. During the contract period, temperatures were colder than normal and SCG made a payment of $2 million upon expiration of the contract.

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, 2014 and 2013:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In Thousands, except per share amounts)

Numerator:
Net income attributable to UIL Holdings	$	12,498	$	5,144	$	77,293	$	74,859
Less: Net income allocated to unvested units		7		5		45		83
Net income attributable to common shareholders	$	12,491	$	5,139	$	77,248	$	74,776

Denominator:
Basic average number of shares outstanding		56,855		50,989		56,827		50,956
Effect of dilutive securities (1)		278		242		287		281
Diluted average number of shares outstanding		57,133		51,231		57,114		51,237

Earnings per share:
Basic	$	0.22	$	0.10	$	1.36	$	1.47
Diluted	$	0.22	$	0.10	$	1.35	$	1.46

(1)

Includes unvested restricted stock and performance shares.

Equity Investments

UI is party to a 50-50 joint venture with NRG affiliates 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 $114.3 million and $118.2 million as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014, there was approximately $0.1 million of undistributed earnings from UI’s equity investment in GenConn.

UI’s pre-tax income from its equity investment in GenConn was $3.5 million and $3.9 million for the three‑month periods ended September 30, 2014 and 2013, respectively. UI’s pre-tax income from its equity investment in GenConn was $10.4 million and $11.6 million for the nine-month periods ending September 30, 2014 and 2013, respectively.

Cash distributions from GenConn 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. UI received cash distributions from GenConn of $5.5 million during the three-month period ended September 30, 2014. Due to timing, UI did not receive any cash distributions from GenConn during the three‑month period ended September 30, 2013. During the nine-month periods ending September 30, 2014 and 2013, UI received cash distributions from GenConn of approximately $14.3 million and $9.8 million, respectively.

Regulatory Accounting

Unless otherwise stated below, all of our regulatory assets earn a return. Our regulatory assets and liabilities as of September 30, 2014 and December 31, 2013 included the following:

	Remaining Period	September 30, 2014		December 31, 2013
		(In Thousands)
Regulatory Assets:
Nuclear plant investments – above market	(a)	$	-	$	238,868
Unamortized redemption costs	7 to 19 years		10,700		11,301
Pension and other post-retirement benefit plans	(b)		311,033		316,076
Environmental remediation costs	6 years		14,757		14,953
Hardship programs	(c)		27,119		25,019
Debt premium	1 to 24 years		28,763		34,178
Deferred purchased gas	(d)		-		2,556
Income taxes due principally to book-tax differences	(m)		155,191		149,015
Deferred income taxes	(e)		46,734		32,517
Contracts for differences	(f)		61,163		142,743
Excess generation service charge	(g)		-		6,909
Deferred transmission expense	(h)		3,272		9,615
Storm Costs	(i)		-		14,752
Other	(j)		32,594		37,628
Total regulatory assets			691,326		1,036,130
Less current portion of regulatory assets			69,721		332,391
Regulatory Assets, Net		$	621,605	$	703,739

Regulatory Liabilities:
Accumulated deferred investment tax credits	29 years	$	4,355	$	4,465
Income taxes due principally to book-tax differences	(m)		-		200,673
Deferred gain on sale of property	(a)		-		37,933
Excess generation service charge	(g)		25,296		-
Middletown/Norwalk local transmission network service collections	35 years		20,972		21,402
Pension and other post-retirement benefit plans	6 years		24,465		27,686
Asset retirement obligation	(k)		6,604		5,593
Low income programs	(l)		30,158		25,300
Asset removal costs	(j)		333,712		319,530
Deferred income taxes	(e)		26,247		43,421
Contracts for differences	(f)		6,608		-
Deferred purchased gas	(d)		6,596		-
Non-firm margin sharing credits	10 years		29,339		-
Other	(j)		29,413		20,818
Total regulatory liabilities			543,765		706,821
Less current portion of regulatory liabilities			30,043		261,729
Regulatory Liabilities, Net		$	513,722	$	445,092

(a) Asset/Liability relates to the Competitive Transition Assessment (CTA). Balances are fully offset by amounts primarily included in income taxes, due principally to book-tax differences. Total CTA costs recovery and stranded cost amortization are complete. As a result of the outcome of UI’s 2013 distribution rate request, PURA approved UI’s proposed rate treatment to leave CTA rates unchanged until January 1, 2014 at which point the charge ended. The remaining balances were eliminated. See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Other Proceedings” for additional information.

(b) Life is dependent upon timing of final pension plan distribution; balance, which is fully offset by a corresponding asset/liability, 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, which is fully offset by a corresponding liability, or liability has been realized or settled, respectively.

(f) Asset life is equal to delivery term of related contracts (which vary from approximately 6 - 13 years); balance fluctuates based upon quarterly market analysis performed on the related derivatives (Note K); amount, which does not earn a return, is fully offset by corresponding derivative asset/liability. See “-Contracts for Differences” discussion above for additional information.

(g) Regulatory asset or liability which defers generation-related and nonbypassable federally mandated congestion costs or revenues for future recovery from or return to customers. Amount fluctuates based upon timing differences between revenues collected from rates and actual costs incurred.

(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. See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Rates” for a discussion of the recovery of these costs.

(j) Amortization period and/or balance vary depending on the nature, cost of removal and/or remaining life of the underlying assets/liabilities; asset amount includes decoupling ($5.5 million) and certain other amounts that are not currently earning a return. See Note (C) “Regulatory Proceedings for a discussion of the decoupling recovery period.

(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.

(m) Amortization period and/or balance vary depending on the nature and/or remaining life of the underlying assets/liabilities; balances contain regulatory liabilities related to the CTA as well as regulatory assets not related to the CTA. Due to the end of the CTA charge, the CTA regulatory liabilities are classified as current regulatory liabilities as of December 31, 2013 and the regulatory assets not related to the CTA are reclassified as long-term regulatory assets.

Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), target amounts of 123,940, 2,430, and 2,340 performance shares were granted to certain members of management in March 2014, May 2014 and August 2014; the averages of the high and low market prices on the grant dates, which approximate fair value, were $35.87 per share, $36.23 per share, and $34.90 per share respectively.

Also in March 2014, we granted a total of 2,196 shares of restricted stock to our 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, which approximates fair value, was $35.87 per share. Such shares vest in equal annual installments over a five-year period.

In May 2014, UIL Holdings granted a total of 25,160 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, which approximates fair value, was $35.90 per share. Such shares vest in May 2015.

In June 2014, 9,540 shares of previously-granted performance shares and 2,177 shares of previously-granted restricted stock were forfeited.

Total stock-based compensation expense for the three-month periods ended September 30, 2014 and 2013 was an immaterial amount and $1.1 million, respectively. Total stock-based compensation expense for the nine-month periods ended September 30, 2014 and 2013 was $3.4 million and $4.1 million, respectively.

Variable Interest Entities

We have 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 affiliates. 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, our 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 our 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.”

We have identified the selected capacity resources with which UI has CfDs as VIEs and have 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, we have 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; however any such losses are fully recoverable through electric rates. 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.

We have 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, we have 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 May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and is to be applied retrospectively. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.

In June 2014, the FASB issued updated guidance to ASC 718 “Compensation – Stock Compensation” which prescribes the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance is effective during interim and annual periods beginning after December 15, 2015 and can be applied on a prospective basis to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. This guidance is not expected to have a material impact on UIL Holdings’ consolidated financial statements.