UIL 10Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

£	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

None

(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 T No £

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 T		Accelerated filer £
Non-accelerated filer £		Smaller reporting company£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £No T

The number of shares outstanding of the issuer’s only class of common stock, as of October 31, 2008 was 25,258,357.

INDEX

PART I. FINANCIAL INFORMATION

		Page Number
Item 1.	Financial Statements.	3
	Consolidated Statement of Income for the three and nine months ended September 30, 2008 and 2007.	3
	Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2008 and 2007.	3
	Consolidated Balance Sheet as of September 30, 2008 and December 31, 2007.	4
	Consolidated Statement of Cash Flows for the nine months ended September 30, 2008 and 2007.	6
	Notes to the Consolidated Financial Statements.	7
	- Statement of Accounting Policies	7
	- Capitalization	12
	- Regulatory Proceedings	13
	- Short-term Credit Arrangements	18
	- Income Taxes	19
	- Supplementary Information	21
	- Pension and Other Benefits	22
	- Related Party Transactions	23
	- Commitments and Contingencies	24
	- Connecticut Yankee Atomic Power Company	24
	- Hydro-Quebec	25
	- Middletown/Norwalk Transmission Project	25
	- Environmental Concerns	25
	- Gross Earnings Tax Assessment	27
	- Property Tax Assessment	28
	- Cross-Sound Cable Company, LLC	28
	- GE Packaged Power	28
	- Fair Value of Financial Instruments	29
	- Segment Information	32
	- Discontinued Operations	33
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	35
	- Major Influences on Financial Condition	35
	- The United Illuminating Company	35
	- Xcelecom, Inc.	39
	- Liquidity and Capital Resources	40
	- Financial Covenants	41
	- 2008 Capital Resource Projections	41
	- Contractual and Contingent Obligations	41
	- Critical Accounting Policies	41
	- Off-Balance Sheet Arrangements	42
	- New Accounting Standards	42
	- Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	47
Item 4.	Controls and Procedures.	49

PART II. OTHER INFORMATION

Item 1A.	Risk Factors.	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	50
Item 6.	Exhibits.	50
	SIGNATURES	51

- 2 - -

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statement
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands except per share amounts)
(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Operating Revenues (Note F)
Utility	$	278,499		$	267,870		$	728,854		$	759,165
Non-utility		218			191			617			750
Total Operating Revenues		278,717			268,061			729,471			759,915
Operating Expenses
Operation
Purchased power (Note F)		121,371			125,933			330,890			413,623
Operation and maintenance		55,560			50,960			160,474			148,777
Transmission wholesale		15,906			11,296			33,888			23,907
Depreciation and amortization (Note F)		27,326			25,466			77,718			66,000
Taxes - other than income taxes (Note F)		14,657			12,617			38,218			34,196
Total Operating Expenses		234,820			226,272			641,188			686,503
Operating Income		43,897			41,789			88,283			73,412

Other Income and (Deductions), net (Note F)		2,374			3,727			6,253			10,562

Interest Charges, net
Interest on long-term debt		7,154			5,767			21,523			16,346
Other interest, net (Note F)		1,030			583			1,810			1,414
		8,184			6,350			23,333			17,760
Amortization of debt expense and redemption premiums		431			416			1,297			1,229
Total Interest Charges, net		8,615			6,766			24,630			18,989

Income Before Income Taxes, Equity Earnings and
Discontinued Operations		37,656			38,750			69,906			64,985

Income Taxes (Note E)		16,047			15,756			30,112			27,037

Income Before Equity Earnings and Discontinued Operations		21,609			22,994			39,794			37,948
Income (Loss) from Equity Investments		22			7			(231	)		55
Income from Continuing Operations		21,631			23,001			39,563			38,003
Discontinued Operations, Net of Tax (Note N)		(93	)		(2,008	)		(167	)		(1,861	)

Net Income	$	21,538		$	20,993		$	39,396		$	36,142

Average Number of Common Shares Outstanding - Basic		25,135			25,012			25,100			24,973
Average Number of Common Shares Outstanding - Diluted		25,429			25,288			25,411			25,272

Earnings Per Share of Common Stock - Basic:
Continuing Operations	$	0.86		$	0.92		$	1.58		$	1.52
Discontinued Operations		-			(0.08	)		(0.01	)		(0.07	)
Net Earnings	$	0.86		$	0.84		$	1.57		$	1.45

Earnings Per Share of Common Stock - Diluted:
Continuing Operations	$	0.85		$	0.91		$	1.56		$	1.50
Discontinued Operations		-			(0.08	)		(0.01	)		(0.07	)
Net Earnings	$	0.85		$	0.83		$	1.55		$	1.43

Cash Dividends Declared per share of Common Stock	$	0.432		$	0.432		$	1.296		$	1.296


UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Net Income	$	21,538		$	20,993		$	39,396		$	36,142
Other comprehensive income (loss), net of tax:
Interest rate cap mark-to-market		8			-			2			23
Other Comprehensive Income (Loss)		8			-			2			23
Comprehensive Income (Note A)	$	21,546		$	20,993		$	39,398		$	36,165

The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.

- 3 - -

Table of Contents

UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET

ASSETS
(In Thousands)
(Unaudited)
	September 30,		December 31,
	2008		2007
Current Assets
Unrestricted cash and temporary cash investments	$	15,823	$	13,156
Restricted cash		10,785		203
Utility accounts receivable less allowance of $4,200 and $3,900		97,859		83,572
Other accounts receivable		7,473		14,339
Related party note receivable (Note H)		15,000		-
Unbilled revenues		42,521		42,910
Current regulatory assets		36,705		51,929
Materials and supplies, at average cost		4,585		3,250
Deferred income taxes		7,398		9,647
Refundable taxes, net		-		12,973
Prepayments		6,654		2,254
Other current assets		2,258		7,567
Current assets of discontinued operations held for sale		6,349		6,104
Total Current Assets		253,410		247,904

Other investments		11,373		13,821

Property, Plant and Equipment at original cost
In service		979,820		914,666
Less, accumulated depreciation		337,497		314,361
		642,323		600,305
Construction work in progress		366,282		278,061
Net Property, Plant and Equipment		1,008,605		878,366
			��
Regulatory Assets (future amounts due from customers
through the ratemaking process)		634,610		616,966

Deferred Charges and Other Assets
Unamortized debt issuance expenses		6,544		7,219
Other long-term receivable		982		984
Contracts for differences		6,523		9,846
Other		818		728
Total Deferred Charges and Other Assets		14,867		18,777


Total Assets	$	1,922,865	$	1,775,834

The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.

- 4 - -

Table of Contents

UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET

LIABILITIES AND CAPITALIZATION
(In Thousands)
(Unaudited)
	September 30,			December 31,
	2008			2007
Current Liabilities
Line of credit borrowings	$	126,000		$	15,000
Current portion of long-term debt		104,286			104,286
Accounts payable		87,263			100,529
Dividends payable		10,891			10,834
Accrued liabilities		25,888			30,435
Current regulatory liabilities		9,413			18,647
Interest accrued		5,593			6,186
Taxes accrued		16,330			-
Purchase power contract obligation		5,136			19,899
Current liabilities of discontinued operations held for sale		5,169			5,040
Total Current Liabilities		395,969			310,856

Noncurrent Liabilities
Pension accrued		28,763			27,495
Connecticut Yankee contract obligation		23,617			25,086
Other post-retirement benefits accrued		37,926			36,076
Contracts for differences		92,467			47,830
Other		5,054			6,075
Total Noncurrent Liabilities		187,827			142,562

Deferred Income Taxes (future tax liabilities owed
to taxing authorities)		311,696			313,812

Regulatory Liabilities (future amounts owed to customers
through the ratemaking process)		77,167			64,996

Commitments and Contingencies (Note J)

Capitalization (Note B)
Long-term debt		475,031			479,317

Common Stock Equity
Common stock		330,313			327,488
Paid-in capital		13,160			12,582
Capital stock expense		(2,170	)		(2,170	)
Unearned employee stock ownership plan equity		(950	)		(1,662	)
Accumulated other comprehensive loss		(26	)		(28	)
Retained earnings		134,848			128,081
Net Common Stock Equity		475,175			464,291

Total Capitalization		950,206			943,608

Total Liabilities and Capitalization	$	1,922,865		$	1,775,834

The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.

- 5 - -

Table of Contents

UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)

	Nine Months Ended
	September 30,
	2008			2007
Cash Flows From Operating Activities
Net income	$	39,396		$	36,142
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss on settlements of divested businesses		-			1,650
Depreciation and amortization		63,539			51,472
Deferred income taxes		(9,361	)		(3,301	)
Stock-based compensation expense (Note A)		3,048			2,367
Excess tax benefits from share-based compensation		(124	)		(293	)
Pension expense		7,962			9,992
Deferred investment tax credits (net)		(110	)		(110	)
Allowance for funds used during construction - equity		(1,688	)		(1,624	)
Undistributed (earnings) losses in equity investments		339			(55	)
Excess generation service charge		(8,434	)		(389	)
Deferred Transmission (income) expense		(1,925	)		1,196
Other non-cash items (net)		4,210			(3,446	)
Changes in:
Accounts receivable - net		(7,847	)		(25,173	)
Materials and supplies		(1,335	)		(1,706	)
Prepayments		(4,463	)		(1,093	)
Accounts payable		(8,227	)		8,800
Interest accrued		(586	)		1,054
Taxes accrued and refundable		29,299			13,191
Accrued pension		(227	)		(4,329	)
Accrued liabilities		(420	)		(8,551	)
Other assets		2,169			(5,482	)
Other liabilities		(2,747	)		(333	)
Total Adjustments		63,072			33,837
Net Cash provided by Operating Activities		102,468			69,979

Cash Flows from Investing Activities
Proceeds from sale of Steel Point		-			4,600
Proceeds from settlement of note receivable		-			2,500
Related party note receivable		(15,000	)		-
Non-utility minority interest investments, net		173			-
Plant expenditures including AFUDC debt		(150,745	)		(160,729	)
Changes in restricted cash		(10,581	)		162
Net Cash (used in) Investing Activities		(176,153	)		(153,467	)

Cash Flows from Financing Activities
Issuances of common stock		1,847			999
Excess tax benefits from share-based compensation		124			293
Issuances of long-term debt		-			100,000
Payments on long-term debt		(4,286	)		(4,286	)
Notes payable - short-term, net		111,000			-
Expenses of issuances		-			(432	)
Payment of common stock dividend		(32,572	)		(21,628	)
Net Cash provided by Financing Activities		76,113			74,946

Unrestricted Cash and Temporary Cash Investments:
Net change for the period		2,428			(8,542	)
Balance at beginning of period		14,770			63,364
Balance at end of period		17,198			54,822
Less unrestricted cash and temporary cash investments of
discontinued operations at end of period		1,375			2,159
Continuing operations balance at end of period	$	15,823		$	52,663

The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.

- 6 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(A) STATEMENT OF ACCOUNTING POLICIES

Basis of Presentation

UIL Holdings Corporation (UIL Holdings) primarily operates its regulated utility business. The utility business consists of the electric transmission and distribution operations of The United Illuminating Company (UI). UI is also a 50-50 partner, together with NRG Energy, Inc., in GenConn Energy LLC, a project to build new peaking generation plants chosen by the DPUC to help address the state’s growing need for more power generation during the heaviest load periods. UIL Holdings also has non-utility businesses consisting of an operating lease and passive minority ownership interests in two investment funds (collectively held at United Capital Investments, Inc. (UCI)), a heating and cooling facility and an entity that collects receivables, disburses payables and manages claims related to a divested mechanical contracting business. The non-utility businesses also recently included the operations of Xcelecom, Inc. (Xcelecom) until the substantial completion of the sale of that business effective December 31, 2006. UIL Holdings is headquartered in New Haven, Connecticut, where its senior management maintains offices and is responsible for overall planning, operating and financial functions. UIL Holdings’ Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in UIL Holdings’ Annual Report on Form 10-K for the year ended December 31, 2007. Such notes are supplemented below.

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 months ended September 30, 2008 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2008.

Certain amounts reported in the Consolidated Balance Sheet, Consolidated Statement of Income and Consolidated Statement of Cash Flows in previous periods have been reclassified to conform to the current presentation. These reclassifications include the reporting of results of certain Xcelecom subsidiaries as continuing operations and additional detail regarding non-cash operating activities.

Discontinued Operations / Assets Held for Sale

Under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a long-lived asset or group of assets (disposal group) is classified as discontinued operations when (1) the company commits to a plan to sell the long-lived asset (disposal group) within a 12-month period, (2) there will be no significant continuing involvement following the sale, and (3) certain other criteria set forth in the statement are satisfied. In such a case:

·	The long-lived asset (disposal group) will be measured at the lower of its carrying value or fair value, less costs to sell, and will be classified as held for sale on the Consolidated Balance Sheet.

·	The long-lived asset (disposal group) will not be depreciated (amortized) while it is classified as held for sale.

·	The related operations of the long-lived asset (disposal group) will be reported as discontinued operations in the Consolidated Statement of Income, with all comparable periods restated.

·	The operations and cash flows of the disposal group are expected to be eliminated from ongoing operations.

In April 2006, UIL Holdings classified its wholly-owned subsidiary, Xcelecom as held for sale. Certain Xcelecom subsidiaries no longer meet the criteria of SFAS No. 144, and as such, the assets and liabilities and results of operations of those entities have been reclassified to continuing operations in UIL Holdings’ Consolidated Balance Sheet at September 30, 2008 and December 31, 2007, and Consolidated Statement of Income for the periods ended September 20, 2008 and 2007.

- 7 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

Major classes of assets and liabilities of the discontinued operations of Xcelecom consist of: current assets of $6.3 million, consisting primarily of cash, receivables and prepaid insurance; and current liabilities of $5.2 million, consisting mainly of accrued insurance payables.

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculation for the three and nine month periods ended September 30, 2008 and September 30, 2007:

	Income Applicable to			Average Number of		Earnings
	Common Stock			Shares Outstanding		per Share
	(In Thousands, except per share amounts)
Three Months Ended September 30:
2008
Income from Continuing Operations	$	21,631			25,135	$	0.86
Discontinued Operations, Net of Tax		(93	)		25,135		-
Net Income		21,538			25,135		0.86
Effect of Dilutive Securities (1)		-			294		(0.01	)
Diluted Earnings	$	21,538			25,429	$	0.85

2007
Income from Continuing Operations	$	23,001			25,012	$	0.92
Discontinued Operations, Net of Tax		(2,008	)		25,012		(0.08	)
Net Income		20,993			25,012		0.84
Effect of Dilutive Securities (1)		-			276		(0.01	)
Diluted Earnings	$	20,993			25,288	$	0.83

	Income Applicable to			Average Number of		Earnings
	Common Stock			Shares Outstanding		per Share
	(In Thousands, except per share amounts)
Nine Months Ended September 30:
2008
Income from Continuing Operations	$	39,563			25,100	$	1.58
Discontinued Operations, Net of Tax		(167	)		25,100		(0.01	)
Net Income		39,396			25,100		1.57
Effect of Dilutive Securities (1)		-			311		(0.02	)
Diluted Earnings	$	39,396			25,411	$	1.55

2007
Income from Continuing Operations	$	38,003			24,973	$	1.52
Discontinued Operations, Net of Tax		(1,861	)		24,973		(0.07	)
Net Income		36,142			24,973		1.45
Effect of Dilutive Securities (1)		-			299		(0.02	)
Diluted Earnings	$	36,142			25,272	$	1.43

(1) Reflecting the effect of dilutive stock options, performance shares and restricted stock.

Options to purchase 316,035 shares of common stock were outstanding but not included in computations of diluted earnings per share, because the exercise prices of those options were greater than the average market price of the common shares during the three and nine month periods ended September 30, 2008. All options to purchase shares of common stock outstanding were included in the computation of diluted earnings per share for the three and nine month periods ended September 30, 2007.

- 8 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

Stock-Based Compensation

Under the UIL Holdings 1999 Amended and Restated Stock Plan (Plan), UIL Holdings implemented a performance-based long-term incentive arrangement pursuant to which certain members of management have the opportunity to earn a pre-determined number of performance shares, the number of which is predicated upon the achievement of various pre-defined performance measures. These performance shares vest at the end of the three-year cycle with the actual issuance of UIL Holdings’ common stock in respect of such shares following the end of each three-year cycle. A new three-year cycle begins in January of each year. UIL Holdings records compensation expense for these performance shares ratably over the three-year period, except in the case of retirement-eligible employees, for whom compensation expense is immediately recognized in accordance with SFAS No. 123R, based on the value of the expected payout at the end of each year relative to the performance measures achieved. An additional $0.5 million of compensation expense was recorded in the first quarter of 2008 with respect to retirement-eligible employees based on the application of SFAS No. 123R retirement-eligible provisions. A target amount of 73,450 performance shares were granted in March 2008; the average of the high and low market price on the date of grant was $30.115 per share. In March 2008, 37,707 vested shares were issued to members of management and receipt of 14,377 vested shares was deferred. The number of deferred shares that ultimately will be issued is subject to the personal income tax elections of the applicable employees.

In March 2008, UIL Holdings granted a total of 2,615 shares of restricted stock to its President and Chief Executive Officer, James P. Torgerson, under the Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant was $30.115 per share. Compensation expense for this restricted stock is recorded ratably over the five-year vesting period for such restricted stock.

In March 2008, UIL Holdings granted a total of 13,282 shares of restricted stock to UI’s President and Chief Operating Officer, Anthony J. Vallillo, under the Plan; the average of the high and low market price on the date of grant was $30.115 per share. Compensation expense for this restricted stock is recorded 50% over a two-year vesting period and 50% over a three-year vesting period for such restricted stock.

In March 2008, UIL Holdings granted a total of 31,528 shares of restricted stock to non-executive directors under the Plan; the average of the high and low market price on the date of grant was $30.115 per share. Compensation expense for this restricted stock is recorded ratably over the three-year vesting period for such restricted stock. In March 2008, 20,000 shares of previously-granted restricted stock grants to directors vested, of which 8,000 shares were issued to directors who did not elect to have their vested shares deferred.

In May 2008, shareowners approved the 2008 Stock and Incentive Compensation Plan (the 2008 Plan), which was approved by the Board of Directors in March 2008. The 2008 Plan replaces the UIL Holdings 1999 Amended and Restated Stock Plan with respect to new grants. Under the 2008 Plan, a total of 613,677 shares are available for new grants, including 550,000 newly approved shares and 63,677 shares which were previously approved for grants under the 1999 Plan but were not issued.

Total stock-based compensation expense for the nine month periods ended September 30, 2008 and 2007 was $3.0 million and $2.4 million, respectively. Total stock based compensation expense for both three month periods ended September 30, 2008 and 2007 was $0.7 million.

Comprehensive Income

Comprehensive income for each of the three and nine month periods ended September 30, 2008 and 2007 was equal to net income, adjusted for an interest rate cap mark-to-market adjustment of an immaterial amount, after-tax, related to $64.5 million principal amount of Pollution Control Refunding Revenue Bonds. For further information regarding this interest rate cap transaction, see Note (B), “Capitalization – Long-Term Debt.”

- 9 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

Income Taxes

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income tax benefits recognized in an entity’s financial statements in accordance with SFAS No. 109. The interpretation prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that has a level of uncertainty of being sustained on audit by the taxing authority. Under FIN No. 48, UIL Holdings may recognize the tax benefit of an uncertain tax position only if management believes it is more likely than not that the tax position will be sustained on examination by the taxing authority based upon the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based upon the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

UIL Holdings adopted the provisions of FIN No. 48 on January 1, 2007 and did not recognize any additional liability for unrecognized tax benefits, or accrue any interest or penalties associated with uncertain tax benefits, as of January 1, 2007. During 2007 and the first nine months of 2008, UIL Holdings did not recognize any increase in unrecognized tax benefits as a result of positions taken during this period or for those positions taken in any prior period. As a result, as of September 30, 2008, UIL Holdings did not have any unrecognized tax benefits.

UIL Holdings’ policy is to recognize interest accrued and penalties associated with uncertain tax positions as a component of operating expense. During the quarterly and year-to-date periods ended September 30, 2008 and 2007, no interest or penalties associated with uncertain tax positions was recognized. As of each of September 30, 2008 and December 31, 2007, no accrued interest or penalties are reflected in the Consolidated Balance Sheet.

- 10 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

Regulatory Accounting

UIL Holdings’ regulatory assets and liabilities as of September 30, 2008 and December 31, 2007 were as follows:

	September 30,		December 31,
	2008		2007
	(In Thousands)
Regulatory Assets
Nuclear plant investments – above market	$	339,390	$	354,724
Income taxes due principally to book-tax differences		68,501		58,843
Long-term purchase power contracts–above market		5,136		19,899
Connecticut Yankee		23,617		25,086
Unamortized redemption costs		15,513		16,115
Stranded cost recovery		37,306		54,760
Pension and other post-retirement benefit plans		83,270		87,434
Contracts for differences		89,001		40,882
Other		9,581		11,152
Total regulatory assets		671,315		668,895
Less current portion of regulatory assets		36,705		51,929
Regulatory Assets, Net	$	634,610	$	616,966

Regulatory Liabilities
Accumulated deferred investment tax credits	$	5,234	$	5,344
Deferred gain on sale of property		37,579		37,579
Excess generation service charge		7,243		15,677
Asset removal costs		2,326		2,817
Other		34,198		22,226
Total regulatory liabilities		86,580		83,643
Less current portion of regulatory liabilities		9,413		18,647
Regulatory Liabilities, Net	$	77,167	$	64,996

- 11 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

New Accounting Standards

In January 2008, UIL Holdings adopted SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 does not require any new fair value measurements. See Note (K), “Fair Value of Financial Instruments” for additional disclosures related to SFAS No. 157.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 is an amendment of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact of this statement but does not expect it to have a material impact on UIL Holdings’ Consolidated Financial Statements

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS No. 162 is effective in November 2008. This statement is not expected to have a material impact on UIL Holdings’ Consolidated Balance Sheet, Consolidated Statement of Income or Consolidated Statement of Cash Flows.

(B) CAPITALIZATION

Common Stock

UIL Holdings had 25,258,357 shares of its common stock, no par value, outstanding at September 30, 2008, of which (1) 46,567 were unallocated shares held by UI’s 401(k)/Employee Stock Ownership Plan (KSOP) and (2) 64,157 were shares of restricted stock. The unallocated shares held by the KSOP and shares of restricted stock are not recognized as outstanding for purposes of calculating basic earnings per share.

UI has an arrangement under which it loaned $11.5 million to the KSOP. Prior to the formation of UIL Holdings, the trustee for the KSOP used the funds to purchase 547,167 shares of UI common stock in open market transactions. On July 20, 2000, effective with the formation of a holding company structure, unallocated shares held by the KSOP were converted into shares of UIL Holdings’ common stock. The shares will be allocated to employees’ KSOP accounts, as the loan is repaid, to cover a portion of the required KSOP contributions. Compensation expense is recorded when shares are committed to be allocated based on the fair market value of the stock. The loan will be repaid by the KSOP over a 12-year period ending October 1, 2009, using employer contributions and UIL Holdings’ dividends paid on the unallocated shares of the stock held by the KSOP. Dividends on allocated shares are charged to retained earnings. As of September 30, 2008, 46,567 shares, with a fair market value of $1.6 million, had been purchased by the KSOP and had not been committed to be released or allocated to KSOP participants.

Long-Term Debt

On March 9, 2006, UI entered into an interest rate cap (rate cap) transaction to mitigate interest rate risk with respect to the $64.5 million principal amount of Pollution Control Refunding Revenue Bonds, 2003 Series, due October 1, 2033, issued by the Business Finance Authority of the State of New Hampshire (Auction Rate Bonds). The Auction Rate Bonds are currently in an auction rate mode by which the interest rate is established at auction every 35 days. When there are insufficient clearing bids as a result of an auction, the interest rate will be set at a rate equal to the one-month London Interbank Offering Rate (LIBOR) times a margin of 125% to 225% based on the credit rating on the Auction Rate Bonds assigned by Moody’s or Standard & Poor’s (S&P). Currently, these bonds are rated by Moody’s with a rating of Aa3, as further described in Item 3, “Quantitative and Qualitative Disclosures About Market Risk.” In the event of subsequent failed auctions of the Auction Rate Bonds, the interest rate on the bonds will continue to be reset as described above. Beginning with the March 2008 auction, each of the auctions for the Auction Rate Bonds has failed. The interest rate on these bonds at September 29, 2008 was equal to 5.580%.

- 12 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

The rate cap was set at 3.68% and became effective March 30, 2006. It will terminate on August 5, 2009. The rate cap is tied to the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA), formerly the U.S. Dollar – Bond Market Association Municipal Swap Index. If the average of the index for the calculation period exceeds the rate cap, UI will be paid an amount based on such difference. In the past, the interest rate on the Auction Rate Bonds closely tracked the SIFMA index. However, the conditions in the auction rate bond market described in Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” and failed auctions of the Auction Rate Bonds, have resulted in interest rates on the Auction Rate Bonds having been set at rates that no longer closely track the SIFMA index. Therefore, although the interest rate on the Auction Rate Bonds as of September 29, 2008 was greater than the rate cap, the average of the SIFMA index for the calculation period was less than the rate cap, and UI did not receive payment under the rate cap. As of September 30, 2008, the rate cap was not effective and does not qualify for hedge accounting treatment. Any amounts previously recognized as other comprehensive income (loss) are being reversed. UI paid $0.6 million to enter into the rate cap transaction, which is being amortized over the life of the rate cap based upon quarterly fair market value analysis.

On July 29, 2008, UI entered into a note purchase agreement (the Agreement) with a number of institutional accredited investors providing for the sale to such investors of senior unsecured notes in the aggregate principal amount of $150 million, in the following series: (1) $50 million 6.46% Senior Notes, Series A, due November 3, 2018; (2) $50 million 6.51% Senior Notes, Series B, due December 1, 2018; and (3) $50 million 6.61% Senior Notes, Series C, due December 1, 2020. On November 3, 2008, UI issued $50 million 6.46% Senior Notes, Series A, due November 13, 2018 and expects to issue $100 million principal amount of Series B and Series C Senior Notes on December 1, 2008, subject to certain conditions. Under the agreement, UI is subject to certain covenants, including the requirement to maintain a ratio of consolidated indebtedness to consolidated capitalization of not greater than 65%. In addition, the Agreement describes typical events of default, including the situation in which UI defaults on indebtedness in the aggregate principal amount of at least $10 million due to (1) a default in payment or payments due on such indebtedness, or (2) default in the performance of or compliance with any term or condition of such indebtedness, which could result in the requirement that such indebtedness be repaid, or (3) the occurrence of any event or condition, which could require the purchase or repayment of such indebtedness prior to maturity.

Current credit conditions in the capital markets, in general, are resulting in reduced accessibility to capital and higher cost for many businesses. Although there is no indication of access issues at this time, UIL Holdings and UI could be impacted when seeking to access the capital markets to meet its financing requirements. In addition, interest rates on long-term debt have increased since UI last obtained a commitment, under the Agreement, for debt capital. UIL Holdings believes that it will be able to meet its financing requirements over the next twelve months.

Department of Public Utility Control (DPUC)

UI generally has several regulatory proceedings open and pending at the DPUC at any given time. Examples of such proceedings include an annual DPUC review and reconciliation of UI’s Competitive Transition Assessment (CTA) and Systems Benefit 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.

2008 Rate Case

- 13 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

based on the 2009 rate request. If approved by the DPUC, electric bills of a residential customer using 700 kilowatt-hours of electricity per month will rise by approximately $10.68 per month in 2009 and by an additional $6.80 per month in 2010, subject to final rate design. UI has undertaken substantial efforts to control expenses, but is requesting the rate increase due to lower sales, higher uncollectible expense, higher pension expense resulting from reduced value of pension assets and increased required capital projects to meet UI’s public service obligations. Hearings on UI’s rate application commenced in October 2008 and are ongoing. The DPUC is expected to issue its final decision in January 2009.

Approval of the Issuance of Debt

In April 2007, UI filed an application with the DPUC regarding its financing plan for the period from 2007 through 2009. UI received approval from the DPUC to issue not more than $375 million principal amount of debt securities (the Proposed Notes) at interest rates representing a maximum authorized spread of 250 basis points above the comparable U.S. Treasury rate. The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes: (1) to refinance $225 million principal amount of maturing existing debt; (2) to finance capital expenditures; (3) for general corporate purposes; (4) to repay short-term borrowings incurred to temporarily fund these requirements; and (5) to pay issuance costs related to the Proposed Notes. UI issued $175 million of debt in 2007. Since that time, the financial markets have experienced volatility and tightening credit conditions, and, although the ten-year U.S. Treasury security rate has declined, investor requirements have resulted in higher credit spreads over the comparable U.S. Treasury security rate. On April 11, 2008, UI filed a motion to reopen the docket for the limited purpose of requesting an increase in the amount of the maximum authorized credit spread above the comparable U.S. Treasury rate from 250 basis points to 400 basis points. On May 28, 2008, the DPUC granted UI’s request to increase the maximum authorized credit spread to 400 basis points above the comparable U.S. Treasury rate. On November 3, 2008, UI issued $50 million principal amount of Series A Senior Notes and expects to issue $100 million principal amount of Series B and Series C Senior Notes on December 1, 2008, subject to certain conditions.

Generation

In October 2007, UI entered into a joint development agreement (the Agreement) with NRG Energy, Inc. (NRG), pursuant to which UI and an NRG affiliate formed GenConn Energy LLC (GenConn), a 50-50 partnership, and agreed to work together on an exclusive basis to develop and submit to the DPUC a joint proposal to construct peaking generation in Connecticut. In its June 25, 2008 decision in Docket No. 08-01-01 (“Decision”), the DPUC selected three peaking generation projects among several projects proposed by various docket participants to help address the state’s growing need for more power generation during the heaviest load periods.

A peaking generation project with a nominal capacity of 200 megawatt (“MW”) to be built at NRG’s existing Devon plant in Milford and proposed by GenConn was among the three projects selected. The new plant will have a summer-related capacity of 194 MW, assuming the use of natural gas fuel. The peaking plant will be owned by GenConn and will be able to provide power to all Connecticut residents during peak usage periods. It is scheduled to be in operation by June 1, 2010. On August 4, 2008, GenConn signed a contract for differences (“CfD”) with The Connecticut Light & Power Company (CL&P). The cost of the contract will be paid by customers and will be subject to a cost-sharing agreement whereby 20% of the cost is borne by UI customers and 80% by CL&P customers.

GenConn also proposed a project consisting of building new peaking generation with a nominal capacity of 200 MW at NRG’s existing plant in Middletown, CT (the “Middletown Project”). The DPUC designated the Middletown Project as an alternative in the event that the project proposed by Bridgeport Energy II, LLC (“BEII”) and selected by the DPUC did not go forward. On October 3, 2008, BEII withdrew its proposal from further consideration by the DPUC. On October 6, 2008, GenConn executed a CfD with CL&P relating to the Middletown Project which was approved by the DPUC. The contract is subject to the same cost-sharing agreement whereby 20% of the cost is borne by UI customers and 80% by CL&P customers. The new plant in Middletown is scheduled to be in commercial operation by June 1, 2011.

- 14 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

2008 Rates

In December 2007, the DPUC issued a letter ruling to address changes to all of UI’s rate components effective as of January 1, 2008. The letter ruling approved requested changes to UI’s distribution charges (pursuant to the DPUC’s decisions resulting from the 2005 Rate Case) as well as changes to UI’s transmission, CTA, SBC, Conservation and Load Management (CLM), Renewable Energy Investment (REI), and Non-Bypassable Federally Mandated Congestion Charge (NBFMCC). The letter ruling also approved Generation Services Charge (GSC) rates for each of the six-month periods from January 1, 2008 through June 30, 2008 and July 1, 2008 through December 31, 2008, respectively and last resort service GSC rates for the January 1, 2008 through March 31, 2008 time period. In a separate letter ruling issued on March 26, 2008, the DPUC approved last resort service GSC rates for the April 1, 2008 through June 30, 2008 time period. Last resort service rates for the July 1, 2008 through September 30, 2008 and the October 1, 2008 through December 31, 2008 periods were approved by the DPUC in letters issued on July 1, 2008 and September 25, 2008, respectively.

Pension and Postretirement Expenses

In February 2007, the Internal Revenue Service (IRS) mandated a change in the mortality tables utilized for certain ERISA-related liability calculations, effective January 1, 2007. As a result, UI made a corresponding change to its mortality table assumption used to determine pension and postretirement expense for accounting purposes. This change resulted in an increase to pension and postretirement expenses of approximately $2.3 million annually. In its 2005 Rate Case, UI requested regulatory asset treatment for the increase in pension and postretirement expenses if, and when, the IRS mandated a change in the mortality tables during the 2006 to 2009 period. On August 1, 2007, in response to a UI request for clarification, the DPUC confirmed that it would be appropriate for UI to set up a regulatory asset for the change in such expenses resulting from the use of the new mortality tables. As of September 30, 2008, UI has deferred approximately $3.6 million of pension and postretirement expense and has set up a regulatory asset, reflecting the increase in costs. UI will continue to defer the incremental pension and postretirement costs resulting from the change in the mortality tables until its next rate case and believes it is probable that the regulatory asset will be recovered.

Power Supply Arrangements

UI’s retail electricity customers are able to choose their electricity supplier. Beginning January 1, 2007, UI is required to offer standard service to those of its customers who do not choose a retail electric supplier and who use a demand meter or 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 the DPUC. The procurement plan must provide for a portfolio of service contracts procured in an overlapping pattern over fixed time periods (a “laddering” approach). In June 2006, the DPUC approved a procurement plan for UI. As required by the statute, a third party consultant was retained by the DPUC to work closely with UI in the procurement process and to provide a joint recommendation to the DPUC as to selected bids.

UI has wholesale power supply agreements in place for the supply of all of UI’s standard service customers for all of 2008, 90% of the first half of 2009 and 80% of the second half of 2009. In addition, UI has procured 40% of its 2010 standard service requirement and 20% of its 2011 standard service requirement. Under Connecticut legislation passed in 2007, supplier of last resort service is procured on a quarterly basis. UI initially determined that these contracts are derivatives under SFAS No. 133 and elected the “normal purchase, normal sale” exception under SFAS No. 133. UI regularly assesses the accounting treatment for these contracts and recently confirmed that these contracts continue to be derivatives.

- 15 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

Contracts for Differences

Pursuant to Connecticut’s Energy Independence Act (EIA), the DPUC initiated a process to solicit 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 resources and Connecticut electric customers, and provide the commitment necessary for these resources to obtain financing, the DPUC required that UI and CL&P execute long-term contracts with the selected resources. In August 2007, the DPUC approved four “contracts for differences” (“CfDs) under which each contract specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price. As directed by the DPUC, UI executed two of the contracts and CL&P executed the other two contracts. In addition, UI has executed a sharing agreement with CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contracts.

The DPUC has determined that costs associated with these contracts for differences will be recoverable by UI and CL&P, and in accordance with SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” UI has deferred recognition of costs (a regulatory asset) or has recognized obligations (a regulatory liability). The above contracts are derivatives and are marked-to-market in accordance with SFAS No. 133. For those contracts signed by CL&P, UI records its 20% portion of CL&P’s derivative, pursuant to the sharing agreement noted above. As of September 30, 2008, UI has recorded a derivative asset of $6.5 million ($3.0 million related to its portion of CL&P’s derivative assets), a regulatory asset of $89.0 million, a derivative liability of $92.5 million ($88.1 million related to its portion of CL&P’s derivative liabilities) and a regulatory liability of $3.1 million in the accompanying Consolidated Balance Sheet.

Pursuant to Connecticut’s Act Concerning Electricity and Energy Efficiency, the DPUC initiated a process to create new peaking generation resources to address the state’s shortage of fast-start peaking generation that is needed to provide energy reserves. As with the CfDs entered into pursuant to the EIA, the DPUC required that UI and CL&P execute long-term contracts with the selected peaking resources to facilitate the transactions and provide the commitment necessary for the peaking resources to obtain financing. During the third quarter, CL&P executed two peaking generation CfDs, one with GenConn relating to its Devon facility and the other with PSEG Power Connecticut LLC (“PSEG”), to which the sharing agreement also applies. These contracts are not considered to be derivatives under SFAS No. 133 and are being accounted for on an accrual basis. In addition, on October 6, 2008, CL&P entered into a peaking generation CfD, with GenConn, similar to the two peaking generation CfDs noted above, relating to its Middletown facility to which the cost sharing agreement also applies and which is expected to be accounted for on an accrual basis.

New Renewable Source Generation

Under Connecticut law, electric distribution companies are required to enter into contracts to purchase the output of new renewable source generation totaling at least 150 MW in the future statewide, at prices and upon terms approved by the DPUC in accordance with statutory requirements. In 2007, one contract was approved by the DPUC. UI was not a party to that contract but, as directed by the DPUC, UI has executed a sharing agreement with CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contract. In January 2008, the DPUC issued a decision approving seven projects; UI will be a party to contracts relating to two of these projects. As of September 30, 2008, UI had signed a contract for 4.8 MW for one of the projects and a contract for another of the projects to purchase, over a fifteen year time period, 84.5% of the delivered products generated by South Norwalk Generation. All of these contracts will be subject to the cost sharing agreement with CL&P. UI’s costs associated with all such contracts, whether UI is a direct party or pursuant to the sharing agreement, are recoverable by UI.

Bridgeport RESCO Generating Facility

Effective January 2003, UI began selling its energy entitlement from its long-term purchase power contract with the Bridgeport RESCO generating facility into the New England wholesale market at market prices. To the extent that UI receives revenue from these sales that exceeds the amount it pays to Bridgeport RESCO for this energy on a cumulative basis, the difference is used to adjust the above-market portion of purchase power expense recovered through UI’s CTA. This methodology has been approved by the DPUC, with all relevant data and calculations

- 16 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

subject to review in the annual CTA reconciliation docket. To the extent that expenses paid for this energy exceed revenues on a cumulative basis, UI would advise the DPUC and propose an alternative recovery mechanism. In a letter dated June 18, 2008, to the Connecticut Resources Recovery Authority, UI provided written notice that this arrangement will end on December 31, 2008, in accordance with the terms of the Bridgeport RESCO contract. On June 19, 2008, the Federal Energy Regulatory Commission (FERC) issued a decision resulting in UI having no future obligation beyond 2008 to purchase the output of the Bridgeport RESCO Generating Facility. This contract is a derivative under SFAS No. 133 and it qualifies for the “normal purchase, normal sale” exception under SFAS No. 133.

Regional Transmission Organization for New England

Transmission Return on Equity (ROE)

On October 31, 2006, the FERC issued an initial order establishing allowable ROEs for various types of transmission assets (ROE Order) for transmission owners in New England, including UI. The ROE Order set a base ROE of 10.20% and approved two ROE adders as follows: (i) a 50 basis point ROE adder on Pool Transmission Facilities (PTF) for participation in the Regional Transmission Organization for New England (RTO-NE); and (ii) a 100 basis point ROE adder for new transmission investment included in the ISO-New England Regional Transmission Expansion Plan (RTEP). In addition, the FERC approved an ROE adjustment reflecting updated U.S. Treasury Bond data, applicable prospectively from the date of the order.

Under the ROE Order, UI’s ROE on transmission facilities depends on whether they are PTF or non-PTF. As a member of RTO-NE, UI qualified for the 50 basis point ROE adder for its PTF. The 100 basis point ROE adder for new investment was available for new PTF identified by ISO-NE in its Regional System Plan. Non-PTF were not eligible for either the 50 basis point ROE adder for RTO participation or the 100 basis point ROE adder for new investment because the Transmission Owners (TOs) have not turned over complete operational control over non-PTF to ISO-NE and because non-PTF are not used to provide regional transmission service.

The TOs, various state agencies, public officials and electric cooperatives filed requests for rehearing of the FERC ROE Order. In March 2008, the FERC issued an order (Rehearing Order) granting, in part, the TOs request for rehearing and adjusted the base-level ROE upward from 10.2% to 10.4%. The FERC denied the requests of the state agencies, public officials and electric cooperatives for rehearing regarding the FERC’s prospective adjustment to the base-level ROE reflecting updated U.S. Treasury Bond data and confirmed that the TOs were entitled to a 74 basis point adjustment for the going-forward period.

The FERC granted rehearing in part with respect to the 100 basis point ROE adder for RTEP-approved projects. In particular, the FERC reaffirmed its approval of the 100 basis point ROE incentive for existing RTEP-approved projects, provided that these projects are completed and on line as of December 31, 2008. The FERC held, however, that it would not “extend a pre-approved authorization for any future projects without a specific showing justifying the incentive on a project-by-project basis, consistent with the requirements of the FERC order.”

Based on the ROE Order, the Middletown/Norwalk Transmission Project, as an RTEP-approved project, was eligible for the 100 basis point ROE adder for new transmission investment. However, the Middletown/Norwalk Transmission Project may not be in-service prior to the December 31, 2008 cut-off for that incentive established in the Rehearing Order. On April 23, 2008, UI asked FERC to confirm that the Middletown/Norwalk Transmission Project is entitled to the 100 basis point incentive. On August 4, 2008, the FERC issued an order granting relief from the December 31, 2008 cut-off date.

- 17 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

As a result of the Rehearing Order, the ROEs applicable to UI’s transmission rate base are as follows:

	Existing Transmission		New Transmission
	PTF	Non-PTF	PTF (1)	Non-PTF
2/1/05 to 10/30/06	10.90%	10.40%	11.90%	10.40%
10/31/06 and forward	11.64%	11.14%	12.64%	11.14%

(1) ROE available for new PTF identified by ISO-NE in its Regional System Plan for assets that come on line prior to December 31, 2008 and the Middletown/Norwalk Transmission Project. The ROE applicable to the Middletown/Norwalk Transmission Project is discussed below in more detail.

UI has determined that, as a result of the increase in the base-level ROE per the Rehearing Order, it should collect from customers approximately $0.6 million.

UI’s overall transmission ROE will be 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 2008, UI is estimating an overall allowed weighted-average ROE for its transmission business of approximately 12.49%.

Several public sector parties have filed a petition with the United States Court of Appeals for the D.C. Circuit seeking judicial review of the ROE Order and Rehearing Order. Briefing in that matter will not be completed until spring of 2009 and a date for oral argument has not yet been set.

Middletown/Norwalk Transmission Project

In April 2005, the Connecticut Siting Council (CSC) approved a project to construct a 345-kV transmission line from Middletown, Connecticut, to Norwalk, Connecticut, which was jointly proposed by UI and CL&P. This project is expected to improve the reliability of the transmission system in southwest Connecticut. UI is constructing and will own and operate transmission and substation facilities comprising approximately 20% of the total project cost. UI’s current estimate for its share of the project cost is approximately $280 million to $295 million (excluding allowance for funds used during construction). The increase in the previous estimated range of $265 million to $285 million is primarily attributable to increases in the cost of civil construction associated with underground cable. Upon project completion, UI’s transmission rate base will have increased by approximately $285 million to $300 million, an increase of more than 200% relative to UI’s net transmission assets existing prior to the project receiving CSC approval. In May 2007, the FERC issued an order which accepted UI’s request for the inclusion of 100% of Construction Work In Progress in rate base and accepted a 50 basis point adder for advanced transmission technologies, which will be applied to costs associated with certain elements of the project. UI estimates that approximately 50% of the project costs are associated with the advanced transmission technologies for which the 50 basis point adder was approved by the FERC. In July 2007, the FERC granted rehearing for further consideration but has not yet issued a substantive order on the requests for rehearing.

Based on the ROE Order, the Middletown/Norwalk Transmission Project (the Project), as an RTEP-approved project, was eligible for the 100 basis point ROE adder for new transmission investment. However, the Project may not be in-service prior to the December 31, 2008 cut-off for that incentive established in the Rehearing Order. On April 23, 2008, UI asked FERC to confirm that the Project is entitled to the 100 basis point incentive. On August 4, 2008, the FERC issued an order granting relief from the December 31, 2008 cut-off date.

(D) SHORT-TERM CREDIT ARRANGEMENTS

UIL Holdings has a money market loan arrangement with JPMorgan Chase Bank. This is an uncommitted short-term borrowing arrangement under which JPMorgan Chase Bank may make loans to UIL Holdings for fixed periods, depending on UIL Holdings’ credit rating, the Bank’s credit requirements, and conditions in the financial markets. JPMorgan Securities, Inc. acts as an agent and sells the loans to investors. As of September 30, 2008, UIL Holdings did not have any short-term borrowings outstanding under this arrangement.

- 18 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

UIL Holdings and UI have a revolving credit agreement with a group of banks that extends to December 22, 2011. The borrowing limit under the facility for UI is $175 million, with $50 million of the limit available for UIL Holdings. The facility permits borrowings at fluctuating interest rates determined by reference to Citibank’s New York base rate and the Federal Funds Rate (as defined in the facility), and also permits borrowings for fixed periods of time specified by UI and UIL Holdings at fixed interest rates determined by the Eurodollar interbank market in London (LIBOR). The facility also permits the issuance of letters of credit up to $50 million.

As of September 30, 2008, UI had $126 million outstanding under the facility in addition to a letter of credit in the amount of $6 million that expires on November 30, 2008. UIL Holdings had a standby letter of credit outstanding in the amount of $1 million that expires on January 31, 2009, but is automatically extended for one year from the expiration date (or any future expiration date), unless the issuer bank elects not to extend. Available credit at September 30, 2008 for UI and UIL Holdings in the aggregate was $42 million.

UIL Holdings’ and UI’s short-term borrowing costs fluctuate with the upward and downward movements in LIBOR. Due to current credit conditions experienced in the capital markets, one-month LIBOR had increased by approximately 100 basis points from September 2, 2008 to October 22, 2008. This increase has not impacted borrowing costs as neither UIL Holdings’ nor UI have accessed the capital markets during this period.

(E) INCOME TAXES
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(In Thousands)						(In Thousands)
Income tax expense consists of:
Income tax provisions (benefit):
Current
Federal	$	17,895		$	16,786		$	34,325		$	27,864
State		3,711			3,065			5,457			4,281
Total current		21,606			19,851			39,782			32,145
Deferred
Federal		(4,148	)		(3,004	)		(6,740	)		(3,271	)
State		(1,374	)		(1,054	)		(2,820	)		(1,727	)
Total deferred		(5,522	)		(4,058	)		(9,560	)		(4,998	)

Investment tax credits		(37	)		(37	)		(110	)		(110	)

Total income tax expense	$	16,047		$	15,756		$	30,112		$	27,037

Income tax components charged as follows:
Operating tax expense		16,240			15,802			32,059			27,593
Nonoperating tax benefit		(202	)		(49	)		(1,855	)		(578	)
Equity Investments tax expense		9			3			(92	)		22

Total income tax expense	$	16,047		$	15,756		$	30,112		$	27,037

The combined statutory federal and state income tax rate for UIL Holdings’ Connecticut-based entities for the three and nine month periods ended September 30, 2008 and 2007 was 39.875%. 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 months ended September 30, 2008 were 42.6% and 43.2%, respectively, as compared to 40.7% and 41.6% for the three and nine months ended September 30, 2007. The increase in the 2008 effective book income tax rates from those for the 2007 periods were due primarily to differences in the amount of book depreciation in excess of non-normalized tax depreciation. The effective book income tax rate for the nine months ended September 30, 2008 is higher than the 2008 statutory tax rate due primarily to: (1) non-normalized effect associated with the CTA, and (2) differences in the amount of book depreciation in excess of non-normalized tax depreciation.

- 19 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

UIL Holdings and its subsidiaries are subject to the United States federal income tax statutes administered by the Internal Revenue Service (IRS). UIL Holdings and its subsidiaries are also subject to the income tax statutes of the State of Connecticut and those of other states in which UIL Holdings’ subsidiaries have operated and transacted business in the past. As of September 30, 2008, the tax years 2004, 2005, 2006 and 2007 remain open and subject to audit for both federal income tax and state income tax purposes. Currently the IRS is conducting an examination of the tax years 2004, 2005 and 2006.

- 20 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

(F) SUPPLEMENTARY INFORMATION	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(In Thousands)						(In Thousands)
Operating Revenues
Utility:
Retail	$	253,314		$	248,940		$	652,334		$	697,975
Wholesale		12,290			8,805			34,665			27,000
Other		12,895			10,125			41,855			34,190
Non-utility revenues:
Other		218			191			617			750
Total Operating Revenues	$	278,717		$	268,061		$	729,471		$	759,915

Purchased Power
Purchased power expense	$	126,567		$	131,227		$	346,366		$	429,331
Purchased power above market fuel expense credit		(5,196	)		(5,294	)		(15,476	)		(15,708	)
Total Purchased Power Expense	$	121,371		$	125,933		$	330,890		$	413,623

Depreciation and Amortization
Utility property, plant, and equipment depreciation	$	9,622		$	8,273		$	29,074		$	26,595
Non-utility property, plant, and equipment depreciation		26			-			77			-
Total Depreciation	$	9,648		$	8,273		$	29,151		$	26,595
Amortization of nuclear plant regulatory assets		12,379			11,797			32,788			23,374
Amortization of purchase power contracts		5,196			5,294			15,476			15,708
Subtotal CTA Amortization		17,575			17,091			48,264			39,082
Amortization of intangibles		10			8			26			24
Amortization of other regulatory assets		93			94			277			299
Total Amortization		17,678			17,193			48,567			39,405
Total Depreciation and Amortization	$	27,326		$	25,466		$	77,718		$	66,000

Taxes - Other than Income Taxes
Operating:
Connecticut gross earnings	$	10,754		$	8,914		$	26,131		$	22,216
Local real estate and personal property		2,781			2,503			7,787			7,784
Payroll taxes		1,122			1,200			4,300			4,196
Total Taxes - Other than Income Taxes	$	14,657		$	12,617		$	38,218		$	34,196

Other Income and (Deductions), net
Interest income	$	578		$	712		$	1,471		$	2,881
Allowance for funds used during construction		893			557			2,837			2,952
Seabrook reserve reduction		-			270			-			270
C&LM incentive		198			1,459			89			1,760
Energy generation and load curtailment incentives		31			-			184			-
ISO load response, net		1,332			671			2,803			2,345
Miscellaneous other income and (deductions) - net		(658	)		58			(1,131	)		354
Total Other Income and (Deductions), net	$	2,374		$	3,727		$	6,253		$	10,562

Other Interest, net
Notes Payable	$	836		$	574		$	1,640		$	1,360
Other		194			9			170			54
Total Other Interest, net	$	1,030		$	583		$	1,810		$	1,414

- 21 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

(G) PENSION AND OTHER BENEFITS

The United Illuminating Company Pension Plan covers the majority of the officers and employees of UIL Holdings and UI. UI also has a non-qualified supplemental pension plan for certain employees and a non-qualified retiree-only pension plan for certain early retirement benefits.

UI has a supplemental retirement benefit trust and through this trust purchased life insurance policies on certain officers of UI to fund the future liability under the non-qualified supplemental plan. The cash surrender value of these policies is included in “Other Investments” on the Consolidated Balance Sheet and is marked-to-market at the end of each quarter.

The following tables represent the components of net periodic benefit cost for pension and other post-retirement benefits (OPEB) for the three month periods ended September 30, 2008 and 2007:

	Three Months Ended September 30,
	Pension Benefits						Other Post-Retirement Benefits
	2008			2007			2008			2007
	(In Thousands)
Components of net periodic benefit cost:
Service cost	$	1,717		$	1,831		$	349		$	325
Interest cost		5,242			5,009			1,051			879
Expected return on plan assets		(6,432	)		(6,506	)		(632	)		(596	)
Amortization of:
Prior service costs		188			221			(26	)		(31	)
Transition obligation (asset)		-			-			265			265
Actuarial (gain) loss		1,049			1,573			465			410
		1,764			2,128			1,472			1,252
Additional amount recognized due to settlement		-			-	(1)		-			-
Net periodic benefit cost (2)	$	1,764		$	2,128		$	1,472		$	1,252

The following tables represent the components of net periodic benefit cost for pension and OPEB for the nine month periods ended September 30, 2008 and 2007:

	Nine Months Ended September 30,
	Pension Benefits						Other Post-Retirement Benefits
	2008			2007			2008			2007
	(In Thousands)
Components of net periodic benefit cost:
Service cost	$	5,153		$	5,493		$	1,046		$	976
Interest cost		15,729			15,027			3,155			2,637
Expected return on plan assets		(19,297	)		(19,518	)		(1,897	)		(1,789	)
Amortization of:
Prior service costs		563			663			(77	)		(93	)
Transition obligation (asset)		-			-			794			794
Actuarial (gain) loss		3,146			4,734			1,394			1,232
		5,294			6,399			4,415			3,757
Additional amount recognized due to settlement		-			1,189	(1)		-			-
Net periodic benefit cost (2)	$	5,294		$	7,588		$	4,415		$	3,757

- 22 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

The following actuarial weighted average assumptions were used in calculating net periodic benefit cost for the three and nine month periods ended September 30, 2008 and 2007:

	Three and Nine Months Ended September 30,
	Pension Benefits						Other Post-Retirement Benefits
	2008			2007			2008			2007
Discount rate - Qualified Pension Benefits		6.35	%		5.75	%		N/A			N/A
Discount rate - Non-Qualified Pension Benefits		6.00	%		5.75	%		N/A			N/A
Discount rate - Other Post-Retirement Benefits		N/A			N/A			6.40	%		5.75	%
Average wage increase		4.40	%		4.40	%		N/A			N/A
Return on plan assets		8.50	%		8.50	%		8.50	%		8.50	%
Pre-65 health care trend rate (current year)		N/A			N/A			10.50	%		10.00	%
Pre-65 health care trend rate (2019 forward)		N/A			N/A			5.00	%		5.50	%	(3)
Post-65 health care trend rate (current year)		N/A			N/A			10.50	%		5.50	%
Post-65 health care trend rate (2019 forward)		N/A			N/A			5.00	%		5.00	%	(4)

N/A – not applicable

(1) Reflects settlement charges resulting from a distribution to a former employee upon retirement.

(2) For the three month periods ended September 30, 2008 and 2007, UI has reclassified $0.5 million and $0.4 million, respectively, of pension expense

and $0.1 million of OPEB expense in both three month periods ended September 30, 2008 and 2007, respectively, to a regulatory asset.

For the nine month periods ended September 30, 2008 and 2007, UI has reclassified $1.5 million and $1.1 million, respectively, of pension expense

and $0.3 million of OPEB expense in both nine month periods ended September 30, 2008 and 2007, respectively, to a regulatory asset.

These amounts were reclassified to a regulatory asset to reflect additional amounts recoverable in rates in the mortality tables (see Note (C),

Regulatory Proceedings).

(3) For the period ended September 30, 2007, the pre-65 health care trend rate was applicable for 2012 forward.

(4) For the period ended September 30, 2007, the post-65 health care trend rate was applicable for 2008 forward.

During 2008, and particularly during September and October, both the debt and equity markets have experienced significant downturns, resulting in reductions in asset values for funded pension and postretirement plans. These reductions, if not offset by December 31, 2008, will result in higher pension and postretirement expense in future years. In addition, the reduction in asset values could also result in a requirement that UI make significant cash contributions to the plans in 2009 and beyond.

(H) RELATED PARTY TRANSACTIONS

Arnold L. Chase, a Director of UIL Holdings since June 28, 1999, holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UI leases office space for its corporate headquarters. UI’s lease payments for this office space for the nine month periods ended September 30, 2008 and 2007 totaled $8.2 million and $8.6 million, respectively, and $2.7 million for both three month periods ended September 30, 2008 and 2007.

GenConn, of which UI is a 50-50 partner, has signed a promissory note (the “Loan”) with UI under which UI shall advance up to an aggregate principal amount of $30 million to fund GenConn’s construction and other cash needs until permanent financing can be arranged. As of September 30, 2008, the Loan balance was $15 million. On October 27, 2008, UI obtained approval from its Board of Directors to increase the aggregate principal amount of the loan to $45 million and expects to sign a revised promissory note in November.

UIL Holdings has executed guaranty agreements on behalf of each of GenConn Devon LLC and GenConn Middletown LLC, each of which is a wholly owned subsidiary of GenConn Energy LLC (which is 50% owned by UIL Holdings’ subsidiary UI), within which UIL Holdings guarantees that, in the event GenConn Devon LLC or GenConn Middletown LLC, as the case may be, fails to perform or observe the terms and provisions of its contract with GE Packaged Power, UIL Holdings shall take steps necessary to achieve performance or observance of such contract. Refer to “Note (J) Commitments and Contingencies, GE Packaged Power” for further discussion regarding the guaranties.

- 23 - -

Table of Contents

(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 $1.2 million as of September 30, 2008. 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. A settlement agreement approved by the FERC that became effective in 2000 allows Connecticut Yankee to collect, through the power contracts with the unit’s owners, the FERC-approved decommissioning costs, other costs associated with the permanent shutdown of the Connecticut Yankee Unit, the unrecovered investment in the Connecticut Yankee Unit, and a return on equity of 6%. The decommissioning project was completed in 2007. In October 2007, the State of Connecticut’s Department of Environmental Protection (CDEP) approved Connecticut Yankee’s application for a Stewardship Permit which states that all corrective action measures required at the Connecticut Yankee site pursuant to Connecticut law have been completed subject to post-remediation groundwater monitoring. In November 2007, the Nuclear Regulatory Commission (NRC) issued a license reduction for the Connecticut Yankee site limiting it to the independent spent-fuel storage installation (ISFSI) (see DOE Spent Fuel Litigation below). In accordance with the provisions of an August 2006 settlement agreement, approved by the FERC in November 2006, Connecticut Yankee wrote-off a portion of deferred decommissioning costs in the amount of $10 million as non-recoverable. UI’s share of this disallowance after-tax was $0.3 million, which was recorded in 2006. In 2007, in accordance with the settlement agreement, as a result of receiving the license reduction described above before January 1, 2008, Connecticut Yankee was allowed to reverse 50%, or $5 million, of the 2006 disallowance. UI’s share of this recovery after tax was $0.2 million, which was recorded in the fourth quarter of 2007. Further, the 2006 Settlement Agreement required Connecticut Yankee to file a true-up analysis within 90 days of receiving the license reduction and in compliance with that provision. Connecticut Yankee filed its true-up analysis with the FERC on February 28, 2008. On July 31, 2008 Connecticut Yankee submitted a filing with FERC that combines (i) the informational filing required by the 2006 Settlement Agreement to implement the adjustments resulting from the February 28, 2008 true-up analysis and (ii) a filing to implement recovery of additional post-employment benefits other than pensions (PBOP) expense. The filing assumed a proposed reduction of rates by $626,000 annually. On September 10, 2008, FERC issued an order accepting the true-up and PBOP filings.

Connecticut Yankee updates its cost to decommission the unit at least annually, and more often as needed, 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. At September 30, 2008, UI has regulatory approval to recover in future rates (through the CTA) its $23.6 million regulatory asset for Connecticut Yankee over a term ending in 2015.

DOE Spent Fuel Litigation

In the Nuclear Waste Policy Act of 1982, Congress provided for the Department of Energy (DOE) to dispose of spent nuclear fuel and other high-level waste, including greater-than-Class-C waste (GTCC) (hereinafter Nuclear Waste), from nuclear generating plants. In 1983, Connecticut Yankee and the DOE entered into a standard disposal contract mandated by the Act. The contract required the DOE to begin disposing of Connecticut Yankee’s Nuclear Waste by the end of January 1998. The DOE failed to honor these contract obligations.

In 1998, Connecticut Yankee, along with Maine Yankee and Yankee Atomic, two other New England-based owners of shut-down nuclear generating plants, filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 contracts by the DOE. In November of 1998, the Court ruled that the DOE had breached the contracts and was liable for damages, but left the amount of damages to be determined after a trial on the evidence. In October 2006, the Court issued judgment for Connecticut Yankee in the amount of $34.2 million for its spent-fuel-related costs through 2001, ruling in favor of Connecticut Yankee on substantially all of the major issues. Connecticut Yankee had sought $37.7 million in damages for the period covered by the decision. In December 2006, the DOE appealed the decision to the United States Court of Appeals for the Federal Circuit. In

- 24 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

August 2008, the Federal Circuit vacated the lower court's $34.2 million damage award, and remanded the case for a re-calculation of damages based on specific contractual rates set forth in one particular DOE publication. The lower court had based its damage ruling on its view of "reasonable rates". UI cannot determine what damages the court will now award, but expects that when the court applies the rates as ordered by this ruling, the damage award will be comparable to the prior award.

In December 2007, Connecticut Yankee filed a second set of complaints against the government seeking unspecified damages incurred since January 1, 2002 for the DOE’s failure to live up to its obligation to begin removing Connecticut Yankee’s spent fuel in 1998. As an interim measure until the DOE complies with its contractual obligation to dispose of Connecticut Yankee’s spent fuel, Connecticut Yankee constructed an 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.

Hydro-Quebec

UI is a participant in the Hydro-Quebec (HQ) transmission tie facility linking New England and Quebec, Canada. UI has a 5.45% participating share in this facility, which has a maximum 2000-megawatt equivalent generation capacity value. In April 1991, UI furnished a guaranty in the amount of $11.7 million, for its participating share of the debt financing for one phase of this facility. The amount of this guaranty, which expires in August 2015, is reduced monthly, proportionate with principal paid on the underlying debt. As of September 30, 2008, the amount of UI’s guaranty for this debt totaled approximately $2.1 million.

Middletown/Norwalk Transmission Project

In April 2007, during construction of the Project in Bridgeport, Connecticut, UI encountered soil contaminated with polychlorinated biphenyls (PCBs). UI stopped construction at the location, which was a road not owned by UI, and notified the CDEP. At the CDEP’s request, UI determined the extent of the contamination on property within, and to some extent beyond, the limits of the Project. UI filed a draft remediation action plan (RAP) with the CDEP and the United States Environmental Protection Agency (USEPA). Remediation of the PCBs began in March 2008 and was substantially completed in June 2008 at a cost of $2.9 million. UI expects to seek reimbursement for at least a portion of this amount from the property owner, the Connecticut Department of Transportation. Any costs that were incurred by UI are expected to be recovered through transmission rates and are reflected as such in UIL Holdings’ Consolidated Statement of Income.

In July 2008, UI funded escrow accounts in the aggregate amount of approximately $10 million for certain retention amounts withheld by UI which will remain in place until the completion of the Project.

On April 17, 2008, UI received two change order requests totaling approximately $19 million from the general contractor responsible for civil construction work in connection with the installation of UI’s portion of the Project’s underground electric cable system. The request, later revised to $20.5 million, seeks compensation for the general contractor’s subcontractor for alleged extra work and delay. On October 10, 2008, UI received further notification revising the request for compensation to $29.8 million. UI is evaluating the change order requests and, in doing so, has retained the services of an independent third party to review the requests and supporting information in order to determine whether they have any merit. If it is determined that any of the change order requests are valid, UI would seek recovery through the normal regulatory process.

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, 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, and it may incur 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. In

- 25 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

addition to the environmental issues related to the Middletown/Norwalk transmission project described above, significant environmental issues known to UIL Holdings at this time are described below.

Branford Landfill

In June 2007, the USEPA sent UI a request for information and documents related to the environmental conditions at, and the USEPA’s cleanup of, a portion of the East Main Street Disposal Superfund Site in Branford, Connecticut. That portion of the subject site cleaned up by the USEPA consists of two residential properties. The USEPA requested information related to the period 1967 to 1986, primarily with respect to UI’s construction and operation of the New Haven Harbor Station generating facility. After a diligent review of its corporate files and interviewing employees with knowledge regarding New Haven Harbor Station, UI completed and filed the information request with the USEPA in August 2007. UI cannot presently assess the impact, if any, of this USEPA request.

UI also received a letter in September 2007 (also addressed to Raytheon Corporation (Raytheon), successor to the building contractor for the New Haven Harbor Station facility, United Engineers and Constructors) in which the current property owner, Shoreline Trailer Court Mobile Homes, states its intent to file suit against UI and Raytheon under the Comprehensive Environmental Response, Liability, and Compensation Act, 42 U.S.C. Sec. 9601, et seq., for compensation relative to its remediation costs at the subject site. The owner claims to have remediated the site at a cost of $0.8 million and seeks compensation for that amount from UI and Raytheon. After a preliminary investigation of the owner’s claims, UI informed the owner that it will not address the claims until the owner provides information supporting the claims. UI has not received a response.

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 and settlement of all claims against the City with respect to relocation of a substation and repair/replacement of a bulkhead, in exchange for payment to UI of $14.9 million, which represents the commercial value of the property and cost to replace the bulkhead. Pursuant to a Memorandum of Understanding (MOU) among UI, the City of Bridgeport, and the City’s selected developer for the property, the City must also provide to UI, free of charge, a substation site within a reasonable proximity to the Steel Point property. In July 2006, the DPUC approved the proposed transfer of property and all of the terms of the MOU. The DPUC also accepted the proposed ratemaking treatment submitted by UI with respect to the property, the substation, and the bulkhead, which provides for UI to recover costs related to the Steel Point property through the CTA, subject to DPUC approval in the annual CTA/SBC reconciliation filing.

The City and developer released UI from any further liability with respect to the Steel Point property after title transferred, and the City and/or developer must now indemnify UI for environmental matters related to the Steel Point property. The Steel Point property includes the land up to the bulkhead. However, UI may be required to remove additional soil on the Steel Point property to achieve environmental compliance to remedy conditions that were discovered before title transferred. The City and the developer have subsequently claimed that there is additional remediation that may be necessary. UI has investigated the claim and determined that additional remediation does not appear to be warranted at this time. Any additional remediation costs are expected to be recovered through the CTA. The sole exception to the indemnity regarding the Steel Point property is for personal injury claims brought against UI by UI employees or contractors hired by UI relating to incidents that occurred on the site before title transferred to the City. UI is not aware of any such claims. In addition, the MOU provides that there is no indemnity for liability related to contaminated harbor sediments. UI would seek to recover all 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 the DPUC’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. Approximately $0.1 million of the escrow fund remains unexpended. QE has since sold the property to Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat). UI is unaware of what

- 26 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

agreement was reached between QE and Evergreen Power and Asnat regarding future environmental liability or what remediation activity remains to be undertaken at the site. UI could be required by applicable environmental laws to finish remediating any subsurface contamination at the site if it is determined that QE and/or Evergreen Power and Asnat have not completed the appropriate environmental remediation at the site. In July 2008, Evergreen Power and Asnat submitted a claim seeking compensation for environmental remediation on the property, including the existing building which remains on the site. Based upon the current status of the evaluation, UIL Holdings has not recorded a liability related to this claim in its Consolidated Balance Sheet as of September 30, 2008.

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.

In April 1999, UI also sold property to Bridgeport Energy LLC (BE). UIL Holdings, through its subsidiary, United Bridgeport Energy, Inc. (UBE), held a minority ownership interest in BE at that time and until the sale of that interest to the majority owner in March 2006. In connection with the sale of the property, UI entered into an environmental indemnity agreement with BE to provide indemnification related to certain environmental conditions specific to the site where BE’s generation facilities were constructed. This environmental indemnification remains in place following the sale of UBE’s interest in BE. Because of soil management and other environmental remediation activities that were performed during construction of the generation facilities, UI does not regard its exposure under the environmental indemnity agreement as material.

From 1961 to 1976, UI owned a parcel of property in Derby, Connecticut, on which it operated an oil-fired electric generating unit. For several years, CDEP 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.

Electric System Work Center

UI’s January 2004 purchase of its Electric System Work Center property, located in Shelton, Connecticut, caused a review under the CDEP’s Transfer Act Program. Under this review, the CDEP had an opportunity to examine the current environmental conditions at the site and direct remediation, or further remediation, of any areas of concern. At the conclusion of its review, the CDEP elected not to oversee any further site investigation or remediation at the site and directed UI to undertake any necessary evaluation and/or remediation (verification work) using an independent Licensed Environmental Professional (LEP). UI hired an LEP and submitted a schedule to the CDEP for the verification work. The schedule was approved by the CDEP and implementation of the verification work is on-going. The verification work is not expected to have a material impact on the financial position or results of operations of UI.

Gross Earnings Tax Assessment

In September 2005, the Appellate Division of the Connecticut Department of Revenue Services (DRS) ruled against UI’s appeal of a gross earnings tax assessment made by the DRS as the result of an audit examination that covered the period July 1, 1998 through December 31, 2000. The assessment, in the amount of $0.1 million (including interest), is entirely attributable to activity within the year 2000 and arose as a result of changes to the gross earnings tax statutes enacted pursuant to Connecticut’s 1998 electric industry restructuring legislation. UI believes that the DRS has erroneously determined that the gross earnings tax statutes, as amended, apply to the following three specific categories of revenues: (1) late payment fees imposed on customers that do not pay their bills within the time specified in their terms of service; (2) returned check fees imposed on customers whose checks were returned to UI due to insufficient funds; and (3) reconnection fees paid by customers who request to have their premises reconnected to UI’s system.

- 27 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

UI has not paid the assessment and, in October 2005, filed a lawsuit with the Superior Court for the State of Connecticut in order to appeal the DRS’s ruling. Because this issue has not been previously adjudicated, UI has recorded a reserve of $1.6 million representing UI’s total estimated liability for additional tax and interest covering: (1) the original audit period of July 1, 1998 through December 31, 2000; (2) a subsequent audit period of July 1, 2001 through June 30, 2004; (3) the period of January 1, 2005 through December 31, 2007, which is currently under audit; and (4) the unaudited period January 1, 2008 through September 30, 2008.

In April 2006, the DRS filed a petition with the DPUC with respect to this matter, specifically seeking a declaratory ruling from the DPUC as to its position regarding the applicability of the gross earnings tax statutes for periods on and after January 1, 2000 to the three specific categories of revenue in question noted above. In August, 2006, the DPUC issued its final decision, which stated that although the applicable tax statute does not fall within the DPUC’s jurisdiction, the DPUC believes those specific categories of revenue should be subject to the gross earnings tax. UI disagrees with this interpretation of the applicable tax statute and, as mentioned above, is contesting the DRS’s ruling in the Superior Court of the State of Connecticut.

Property Tax Assessment

In the first quarter of 2007, UI received notice from the City of Bridgeport (Bridgeport) that the personal property tax assessment for October 1, 2006 had been increased from the amount declared by UI of $55.7 million to $69.7 million, based upon the assertion by Bridgeport that UI’s property tax declaration was not timely filed. UI mailed the declarations prior to the November 1, 2006 filing deadline, but the assessor asserts that the declarations were received after November 1, 2006 and were thus not timely filed. UI appealed the increased assessment to the Bridgeport Board of Assessment Appeal which denied the appeal. The increase in the personal property tax levied by Bridgeport equates to approximately $0.6 million. UI believes that its property tax declaration was filed on a timely basis under Connecticut law and is contesting the increased assessment in the Superior Court of the State of Connecticut. UI paid its property tax obligations to Bridgeport, which included the increased assessment, or $0.6 million, in order to avoid any potential interest charges applicable to unpaid property tax assessments. UI has amended its complaint with the Superior Court to seek a refund of this $0.6 million payment and has recorded a receivable on UIL Holdings’ Consolidated Balance Sheet.

Cross-Sound Cable Company, LLC (Cross-Sound)

UIL Holdings and UCI continue to provide two guaranties, in original amounts of $2.5 million and $1.3 million, in support of guaranties by Hydro-Quebec (HQ), the former majority owner of Cross-Sound (an entity in which UCI held a minority interest until the sale of that interest in February 2006), to third parties in connection with the construction of the project.

The $2.5 million guaranty supports an HQ guaranty to the Long Island Power Authority to provide for damages in the event of a delay in the date of achieving commercial operation of the Cross-Sound cable. UIL Holdings expects commercial operating status to be maintained and, accordingly, it has not recorded a liability related to this guaranty in its Consolidated Balance Sheet as of September 30, 2008.

The $1.3 million guaranty supports an agreement under which Cross-Sound is providing compensation to shell fishermen for their losses, including loss of income, incurred as a result of the installation of the cable. The payments to the fishermen are being made over a 10-year period, ending October 2013, and the obligation under this guaranty reduces proportionately with each payment made. As of September 30, 2008, the remaining amount of the guaranty was $1 million. Based upon a management assessment, UIL Holdings has not recorded a liability related to this guaranty in its Consolidated Balance Sheet as of September 30, 2008.

GE Packaged Power

On September 5, 2008, UIL Holdings executed a Guaranty Agreement (the “Guaranty”) for the benefit of GE Packaged Power, Inc. (“Contractor”), an affiliate of General Electric Company. UIL Holdings guarantees to Contractor that in the event GenConn Devon LLC (the “Buyer”), a wholly-owned subsidiary of GenConn Energy LLC (which is 50% owned by UIL Holdings’ subsidiary UI), fails to perform or observe the terms and provisions of

- 28 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

its agreement (the “Contract”) with Contractor dated August 28, 2008 for the supply of four LM6000 gas turbine generators to be installed at Buyer’s to-be constructed peaking power generation facility at Devon Station in Milford, Connecticut, UIL Holdings shall take steps necessary to achieve performance or observance of the Contract. As of November 4, 2008, UIL Holdings’ aggregate exposure under the Guaranty was approximately $27.9 million. UIL Holdings’ exposure under the Guaranty will be reduced as the Buyer makes periodic payments under the Contract, and such exposure will be eliminated on the date the Buyer secures financing in an amount that demonstrates the Buyer’s financial capability to meet its obligations under the Contract. Buyer expects to secure such financing during 2009. Based upon a management assessment, UIL Holdings has not recorded a liability related to this guaranty in its Consolidated Balance Sheet as of September 30, 2008.

On October 29, 2008, UIL Holdings executed a second Guaranty Agreement (the “Guaranty”) for the benefit of GE Packaged Power, Inc. (“Contractor”), an affiliate of General Electric Company. UIL Holdings guarantees to Contractor that in the event GenConn Middletown LLC (the “Buyer”), a wholly-owned subsidiary of GenConn Energy LLC (which is 50% owned by UIL Holdings’ subsidiary UI), fails to perform or observe the terms and provisions of its agreement (the “Contract”) with Contractor dated October 20, 2008 for the supply of four LM6000 gas turbine generators to be installed at Buyer’s to-be constructed peaking power generation facility in Middletown, Connecticut, UIL Holdings shall take steps necessary to achieve performance or observance of the Contract. As of November 4, 2008, UIL Holdings’ aggregate exposure under the Guaranty was approximately $33 million. UIL Holdings exposure under the Guaranty will be reduced as the Buyer makes periodic payments under the Contract, and such exposure will be eliminated on the date the Buyer secures financing in an amount that demonstrates the Buyer’s financial capability to meet its obligations under the Contract. Buyer expects to secure such financing during 2009.

(K) FAIR VALUE OF FINANCIAL INSTRUMENTS

UIL Holdings adopted SFAS No. 157 effective January 1, 2008 on a prospective basis. UIL Holdings applies fair value measurements to certain assets and liabilities, primarily derivative assets and liabilities related to contracts for differences and asset retirement obligations. See Note (C), “Regulatory Proceedings” for additional disclosures related to SFAS No. 157.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 outlines three valuation techniques, including: 1) the market approach, which utilizes prices and other relevant information generated by market transactions; 2) the income approach, which converts future amounts, including cash flows, to a discounted present value; and 3) the cost approach, which is based on the amount that currently would be required to

replace the asset. Inputs into these valuation techniques can be readily observable, market corroborated, or generally unobservable. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

Level 1 -

Quoted prices are available in active markets for identical assets and liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 -

Pricing inputs are other than quoted prices in active markets as included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, which can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

- 29 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

Level 3 -

Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally-developed methodologies that result in management’s best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs. At each balance sheet date, UIL Holdings performs an analysis of all instruments subject to SFAS No. 157 and includes in Level 3 all of those whose fair value is based on significant unobservable inputs.

UIL Holdings utilizes an income approach valuation technique to value the majority of its assets and liabilities measured and reported at fair value. The following table sets forth, by level within the fair value hierarchy, UIL Holdings’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2008. As required by SFAS No. 157, 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.

	Level 1		Level 2		Level 3			Total
	(In Thousands)

Assets:
Contracts for differences	$	-	$	-	$	6,523		$	6,523
Interest rate cap (Note B)		-		201		-			201
Deferred Compensation Plan		3,355		-		-			3,355
Supplemental retirement benefit trust life insurance policies (Note G)		4,846		-		-			4,846
	$	8,201	$	201	$	6,523		$	14,925

Liabilities:
Contracts for differences	$	-	$	-	$	92,467		$	92,467

Net fair value assets/(liabilities), September 30, 2008	$	8,201	$	201	$	(85,944	)	$	(77,542	)

The determination of fair value of the contracts for differences was based on a probability-based expected cash flow analysis that was discounted at the September 30, 2008 risk-free interest rate and an adjustment for credit risk. Certain management assumptions were required, including development of pricing that extended over the term of the contracts. 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. Included in this assessment was the withdrawal of an appeal, during the first quarter of 2008, by an entity that submitted a proposal to the DPUC but was not selected. This event increased the probability that the projects will attain commercial operation, resulting in an increase in the contracts for differences liability during the first nine months of the year. The DPUC has determined that costs associated with these contracts for differences are recoverable. As a result, there is no impact to net income.

Under the UIL Deferred Compensation Plan (DCP), Named Executive Officers and certain other executives 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 non-publicly traded mutual funds available through variable insurance products and Company 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 at the end of each quarter based upon such pricing information.

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, 2008:

- 30 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

	Nine Months Ended
	September 30, 2008
	(In Thousands)

Net contracts for differences assets/(liabilities), January 1, 2008	$	(37,984	)
Unrealized gains and (losses), net		(47,960	)
Purchases, issuances, and settlements		-
Transfers in and/or out of Level 3		-
Net contracts for differences assets/(liabilities), September 30, 2008	$	(85,944	)

Change in unrealized gains (losses), net relating to net contracts
for differences assets/(liabilities), still held as of September 30, 2008	$	(47,960	)

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 contracts for differences for the nine month period ended September 30, 2008. The amounts offset the net contract for differences liabilities detailed above.


	Nine Months Ended
	September 30, 2008
	(In Thousands)

Net regulatory assets/(liabilities), January 1, 2008	$	37,984
Unrealized (gains) and losses, net		47,960
Net regulatory assets/(liabilities), September 30, 2008	$	85,944

The following table sets forth, by level within the fair value hierarchy, UIL Holdings’ financial liabilities that were accounted for at fair value on a non-recurring basis as of September 30, 2008.

	At Fair Value as of September 30, 2008
	Level 1		Level 2		Level 3		Total
	(In Thousands)

Asset Retirement Obligations	$	-	$	-	$	218	$	218

The determination of fair value of the asset retirement obligations is based on a discounted cash flow analysis which utilizes inputs that include estimated useful lives of identified assets, a discount rate and an inflation factor.

- 31 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

(M) SEGMENT INFORMATION

UIL Holdings has two reporting segments related to UI: distribution of electricity and transmission of electricity. 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 for purposes of making 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 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, including minority interest investments and administrative costs.

(In Thousands)
	Three months ended September 30, 2008
	UI
	Distribution		Transmission			Total UI		Other (1)			Total
Operating Revenues	$	239,908	$	38,591		$	278,499	$	218		$	278,717
Purchased power		121,371		-			121,371		-			121,371
Operation and maintenance		49,719		5,608			55,327		233			55,560
Transmission wholesale		-		15,906			15,906		-			15,906
Depreciation and amortization		26,163		1,127			27,290		36			27,326
Taxes - other than income taxes		10,964		3,693			14,657		-			14,657
Operating Income (Loss)		31,691		12,257			43,948		(51	)		43,897

Other Income and (Deductions), net		2,025		214			2,239		135			2,374

Interest Charges, net		4,756		2,794			7,550		1,065			8,615

Income (Loss) From Continuing Operations Before Income
Taxes and Equity Earnings		28,960		9,677			38,637		(981	)		37,656
Income Taxes (Benefits)		12,669		3,619			16,288		(241	)		16,047
Income (Loss) From Continuing Operations Before Equity Earnings		16,291		6,058			22,349		(740	)		21,609
Income (Losses) from Equity Investments		22		-			22		-			22
Income (Loss) From Continuing Operations		16,313		6,058			22,371		(740	)		21,631
Discontinued Operations, Net of Tax		-		-			-		(93	)		(93	)
Net Income (Loss)	$	16,313	$	6,058		$	22,371	$	(833	)	$	21,538

	Three months ended September 30, 2007
	UI
	Distribution		Transmission			Total UI		Other (1)			Total
Operating Revenues	$	242,104	$	25,766		$	267,870	$	191		$	268,061
Purchased power		125,933		-			125,933		-			125,933
Operation and maintenance		45,998		4,512			50,510		450			50,960
Transmission wholesale		-		11,296			11,296		-			11,296
Depreciation and amortization		24,247		1,211			25,458		8			25,466
Taxes - other than income taxes		9,907		2,710			12,617		-			12,617
Operating Income (Loss)		36,019		6,037			42,056		(267	)		41,789

Other Income and (Deductions), net		3,382		(100	)		3,282		445			3,727

Interest Charges, net		4,455		1,157			5,612		1,154			6,766

Income (Loss) From Continuing Operations Before Income
Taxes and Equity Earnings		34,946		4,780			39,726		(976	)		38,750
Income Taxes (Benefits)		14,240		1,679			15,919		(163	)		15,756
Income (Loss) From Continuing Operations Before Equity Earnings		20,706		3,101			23,807		(813	)		22,994
Income (Losses) from Equity Investments		7		-			7		-			7
Income (Loss) From Continuing Operations		20,713		3,101			23,814		(813	)		23,001
Discontinued Operations, Net of Tax		-		-			-		(2,008	)		(2,008	)
Net Income (Loss)	$	20,713	$	3,101		$	23,814	$	(2,821	)	$	20,993

(1) Includes UIL Holdings Corporate and UIL Holdings' non-utility activities and unallocated corporate costs.

- 32 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

(In Thousands)
	Nine months ended September 30, 2008
	UI
	Distribution			Transmission		Total UI			Other (1)			Total
Operating Revenues	$	633,709		$	95,145	$	728,854		$	617		$	729,471
Purchased power		330,890			-		330,890			-			330,890
Operation and maintenance		143,006			16,548		159,554			920			160,474
Transmission wholesale		-			33,888		33,888			-			33,888
Depreciation and amortization		73,944			3,670		77,614			104			77,718
Taxes - other than income taxes		29,329			8,896		38,225			(7	)		38,218
Operating Income (Loss)		56,540			32,143		88,683			(400	)		88,283

Other Income and (Deductions), net		4,687			908		5,595			658			6,253

Interest Charges, net		14,591			7,017		21,608			3,022			24,630

Income (Loss) From Continuing Operations Before Income
Taxes and Equity Earnings		46,636			26,034		72,670			(2,764	)		69,906
Income Taxes (Benefits)		22,071			8,993		31,064			(952	)		30,112
Income (Loss) From Continuing Operations Before Equity Earnings		24,565			17,041		41,606			(1,812	)		39,794
Income (Losses) from Equity Investments		(231	)		-		(231	)		-			(231	)
Income (Loss) From Continuing Operations		24,334			17,041		41,375			(1,812	)		39,563
Discontinued Operations, Net of Tax		-			-		-			(167	)		(167	)
Net Income (Loss)	$	24,334		$	17,041	$	41,375		$	(1,979	)	$	39,396

	Nine months ended September 30, 2007
	UI
	Distribution			Transmission		Total UI			Other (1)			Total
Operating Revenues	$	697,450		$	61,715	$	759,165		$	750		$	759,915
Purchased power		413,623			-		413,623			-			413,623
Operation and maintenance		133,646			13,830		147,476			1,301			148,777
Transmission wholesale		-			23,907		23,907			-			23,907
Depreciation and amortization		62,369			3,607		65,976			24			66,000
Taxes - other than income taxes		27,475			6,721		34,196			-			34,196
Operating Income (Loss)		60,337			13,650		73,987			(575	)		73,412

Other Income and (Deductions), net		7,341			1,176		8,517			2,045			10,562

Interest Charges, net		12,813			2,826		15,639			3,350			18,989

Income (Loss) From Continuing Operations Before Income
Taxes and Equity Earnings		54,865			12,000		66,865			(1,880	)		64,985
Income Taxes (Benefits)		23,780			3,764		27,544			(507	)		27,037
Income (Loss) From Continuing Operations Before Equity Earnings		31,085			8,236		39,321			(1,373	)		37,948
Income (Losses) from Equity Investments		55			-		55			-			55
Income (Loss) From Continuing Operations		31,140			8,236		39,376			(1,373	)		38,003
Discontinued Operations, Net of Tax		-			-		-			(1,861	)		(1,861	)
Net Income (Loss)	$	31,140		$	8,236	$	39,376		$	(3,234	)	$	36,142

	UI (2)
	Distribution			Transmission		Total UI			Other (1) (3)			Total
Total Assets at September 30, 2008	$	-		$	-	$	1,901,912		$	20,953		$	1,922,865

Total Assets at December 31, 2007	$	-		$	-	$	1,717,316		$	58,518		$	1,775,834

(1) Includes UIL Holdings Corporate and UIL Holdings' non-utility activities and unallocated corporate costs.
(2) Information for segmenting total assets between Distribution and Transmission is not available. Total UI assets are disclosed
in the Total UI column. Net plant in service is segregated by segment and, as of September 30, 2008, was $575.6 million and
$432.8 million, respectively, for Distribution and Transmission. As of December 31, 2007, net plant in service was $527.7 million
and $350.4 million, respectively, for Distribution and Transmission.
(3) Includes assets of discontinued operations held for sale.

(N) DISCONTINUED OPERATIONS

UIL Holdings substantially completed its sale of the business of its wholly-owned subsidiary Xcelecom, effective December 31, 2006, and in accordance with the provisions of SFAS No. 144, the results of those Xcelecom businesses have been reported as discontinued operations in the accompanying Consolidated Statement of Income for the three and nine month periods ended September 30, 2008 and 2007, respectively, and as discontinued operations held for sale in the Consolidated Balance Sheet as of September 30, 2008 and December 31, 2007. Certain Xcelecom businesses that did not meet the criteria of SFAS No. 144 are reported in continuing operations, as further described in Note (A), “Statement of Accounting Policies – Discontinued Operations / Assets Held for Sale.”

- 33 - -

Table of Contents

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (continued)

A summary of the discontinued operations of Xcelecom follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(In Thousands)						(In Thousands)

Net operating revenues	$	-		$	-		$	-		$	-

Operating loss	$	(156	)	$	(722	)	$	(561	)	$	(1,685	)

Income (Loss) before income taxes	$	(155	)	$	(3,297	)	$	(274	)	$	(3,169	)
Income tax benefit (expense)		62			1,289			107			1,308
Net income (loss) from discontinued operations	$	(93	)	$	(2,008	)	$	(167	)	$	(1,861	)

UIL Holdings is contingently liable to sureties on performance and payment bonds issued by those sureties, relating to construction projects entered into by Xcelecom and its former subsidiaries in the normal course of business. These bonds provide a guaranty to the customer that Xcelecom or its former subsidiaries will perform under the terms of a contract and that it will pay subcontractors and vendors. Surety bonds remain outstanding on certain projects being completed by Xcelecom’s former companies. The majority of these projects will be completed in 2008. If Xcelecom’s former companies and the buyers of those companies fail to perform under a contract or to pay subcontractors or vendors, the customer may demand that the surety make payments or provide services under the bond. UIL Holdings must reimburse the surety for any expenses or outlays it incurs and seek recoupment of those expenses from the buyers of Xcelecom’s former companies. Sureties have never been required to make payments on Xcelecom’s behalf under the bonds, and UIL Holdings believes that the buyers of Xcelecom’s former companies have every incentive to continue to perform their obligations on the construction projects and have adequate management and other resources to do so. Accordingly, UIL Holdings concluded that it need not record a liability in connection with these obligations in its Consolidated Balance Sheet as of September 30, 2008. As of September 30, 2008, sureties had issued bonds for the account of Xcelecom in the aggregate amount of approximately $65 million. The expected remaining cost to complete for the projects covered by such surety bonds was approximately $2 million as of September 30, 2008.

Xcelecom recognizes certain significant claims for recovery of incurred costs when (1) it is probable that the claim will result in additional contract revenue, (2) when the amount of the claim can be reliably estimated, and (3) when it is determined that there is legal basis for the claim. UIL Holdings has the right to certain claims related to the sales of the Xcelecom businesses that are not included in the accompanying statement of financial position as of September 30, 2008.

Financial results going forward could be positively or negatively impacted by the following Xcelecom contractual divestiture issues: (1) the completion of certain outstanding projects for which UIL Holdings retained financial responsibility, (2) the collection of certain accounts receivables and promissory notes related to the sales of certain Xcelecom companies, and (3) resolution of certain transitional financial issues. UIL Holdings also has exposure (a) relating to its indemnification obligations to the buyers of the former Xcelecom companies under the agreements relating to the sales of those companies, and (b) to the sureties that have provided performance bonds to certain former Xcelecom companies related to projects bid or awarded prior to the sales of those companies.

The buyer of the former Xcelecom companies comprising its systems integration business signed a promissory note payable to Xcelecom or UIL Holdings in connection with the sale of that business, which totals $1.5 million as of September 30, 2008. In June 2008, UIL Holdings was notified that the buyer was in default on its senior third party credit line, which prohibits it from making any subordinated debt payments, including payments under the promissory note. UIL Holdings and the buyer have agreed to a replacement note which calls for principal payments beginning in July 2009 with full payment in September 2010. The buyer will also pay all past due interest through September 30, 2008 and pay interest monthly thereafter.

- 34 - -

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements contained herein, regarding matters that are not historical facts, are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These include statements regarding management’s intentions, plans, beliefs, expectations or forecasts for the future. Such forward-looking statements are based on UIL Holdings Corporation’s expectations and involve risks and uncertainties; consequently, actual results may differ materially from those expressed or implied in the statements. Such risks and uncertainties include, but are not limited to, general economic conditions, legislative and regulatory changes, changes in demand for electricity and other products and services, unanticipated weather conditions, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental, and technological factors affecting the operations, markets, products and services of UIL Holdings Corporation’s subsidiary, The United Illuminating Company. The foregoing and other factors are discussed and should be reviewed in UIL Holdings Corporation’s most recent Annual Report on Form 10-K and other subsequent periodic filings with the Securities and Exchange Commission (SEC). Forward-looking statements included herein speak only as of the date hereof and UIL Holdings Corporation undertakes no obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or circumstances.

MAJOR INFLUENCES ON FINANCIAL CONDITION

UIL Holdings Corporation’s (UIL Holdings’) financial condition and financing capability will be dependent on many factors, including the level of income and cash flow of UIL Holdings’ subsidiaries, conditions in the securities markets, economic conditions, interest rates, legislative and regulatory developments, and its ability to retain key personnel.

The loss of key personnel or the inability to hire and retain qualified employees could have an adverse effect on the business, financial condition and results of operations for UIL Holdings and The United Illuminating Company (UI). These operations depend on the continued efforts of their respective current and future executive officers, senior management and management personnel. UIL Holdings cannot guaranty that any member of management at the corporate or subsidiary level will continue to serve in any capacity for any particular period of time. In an effort to enhance UIL Holdings’ ability to attract and retain qualified personnel, UIL Holdings continually evaluates the overall compensation packages offered to employees at all levels of the organization.

The United Illuminating Company

UI is an electric transmission and distribution utility whose structure and operations are significantly affected by legislation and regulation. UI’s rates and authorized return on equity are regulated by the Federal Energy Regulatory Commission (FERC) and the Connecticut Department of Public Utility Control (DPUC). Legislation and regulatory decisions implementing legislation establish a framework for UI’s operations. Other factors affecting UI’s financial results are operational matters, such as sales volume and ability to control expenses, major weather disturbances, and capital expenditures. UI expects significant growth in its capital investment in its distribution and transmission infrastructure. Construction of a 345-kV transmission line and associated facilities is more than 90% completed in southwest Connecticut. UI has also constructed a substation in Trumbull, Connecticut, which was energized in June 2008.

Generation

- 35 - -

Table of Contents

to be in operation by June 1, 2010. On August 4, 2008, GenConn signed a contract for differences (“CfD”) with The Connecticut Light & Power Company (CL&P). The cost of the contract will be paid by customers and will be subject to a cost-sharing agreement whereby 20% of the cost is borne by UI customers and 80% by CL&P customers.

GenConn also proposed a project consisting of building new peaking generation with a nominal capacity of 200 MW at NRG’s existing plant in Middletown, CT (the “Middletown Project”). The DPUC designated the Middletown Project as an alternative in the event that the project proposed by Bridgeport Energy II, LLC (“BEII”) and selected by the DPUC did not go forward. On October 3, 2008, BEII withdrew its proposal from further consideration by the DPUC. As directed by the DPUC, on October 6, 2008, GenConn executed a CfD with CL&P relating to the Middletown Project which was filed with and approved by the DPUC. The contract is subject to the same cost-sharing agreement whereby 20% of the cost is borne by UI customers and 80% by CL&P customers. The new plant in Middletown is scheduled to be in commercial operation by June 1, 2011.

Legislation & Regulation

2008 Rate Case

On August 8, 2008, UI filed an application with the DPUC requesting an increase in distribution rates designed to produce additional revenues of approximately $33 million in 2009 and an incremental $33 million in 2010. On October 27, 2008, UI filed an exhibit in the DPUC proceeding that updates UI’s request, including effects of recent events in the economy. UI’s updated request is to increase distribution rates designed to produce additional revenues of approximately $51 million in 2009 (rather than the original approximately $33 million request) and an incremental $30 million in 2010 (rather than the originally requested increment of approximately $33 million). The revenues included in the updated request represent an increase of approximately 4.0% in 2009 over the total revenues that would be expected under the current rate schedules on a total bill basis. For 2010, the additional revenues included in the updated request represent an increase of approximately 2.4% over 2009 expected revenues based on the 2009 rate request. If approved by the DPUC, electric bills of a residential customer using 700 kilowatt-hours of electricity per month will rise by approximately $10.68 per month in 2009 and by an additional $6.80 per month in 2010, subject to final rate design. UI has undertaken substantial efforts to control expenses, but is requesting the rate increase due to lower sales, higher uncollectible expense, higher pension expense resulting from reduced value of pension assets and increased required capital projects to meet UI’s public service obligations. Hearings on UI’s rate application commenced in October 2008 and are ongoing. The DPUC is expected to issue its final decision in January 2009.

2008 Rates

In December 2007, the DPUC issued a letter ruling to address changes to all of UI’s rate components effective as of January 1, 2008. The letter ruling approved requested changes to UI’s distribution charges (pursuant to the DPUC’s decisions resulting from the 2005 Rate Case) as well as changes to UI’s transmission, Competitive Transition Assessment (CTA), Systems Benefit Charges (SBC), Conservation and Load Management (CLM), Renewable Energy Investment (REI), and Non-Bypassable Federally Mandated Congestion Charge (NBFMCC). The letter ruling also approved Generation Services Charge (GSC) rates for each of the six-month periods from January 1, 2008 through June 30, 2008 and July 1, 2008 through December 31, 2008, respectively and last resort service GSC rates for the January 1, 2008 through March 31, 2008 time period. In a separate letter ruling issued on March 26, 2008, the DPUC approved last resort service GSC rates for the April 1, 2008 through June 30, 2008 time period. Last resort service rates for the July 1, 2008 through September 30, 2008 and the October 1, 2008 through December 31, 2008 periods were approved by the DPUC in letters issued on July 1, 2008 and September 25, 2008, respectively.

Other Regulation

In its June 19, 2008 decision, the DPUC reduced the Company’s incentive performance management fee earned for CLM in 2007 by approximately $0.5 million, after-tax, based on adjustments to CLM program goals.

- 36 - -

Table of Contents

Power Supply Arrangements

Competitive Transition Assessment

UI’s CTA collection recovers costs that have been reasonably incurred, or will be incurred, to meet its public service obligations and that will likely not otherwise be recoverable in a competitive market. These “stranded costs” include above-market long-term purchased power contract obligations, regulatory asset recovery and above-market investments in power plants. A significant amount of UI’s earnings is generated by the authorized return on the equity portion of unamortized stranded costs in the CTA rate base. UI’s after-tax earnings attributable to CTA for the nine month periods ended September 30, 2008 and 2007 were $6.9 million and $8.0 million, respectively. A significant portion of UI’s cash flow from operations is also generated from those earnings and from the recovery of the CTA rate base. Cash flow from operations related to CTA amounted to $30.0 million and $25.4 million, respectively, for the nine month periods ended September 30, 2008 and 2007. The CTA rate base has declined from year to year for a number of reasons, including: amortization of stranded costs, the sale of UI’s nuclear units, and adjustments made through the annual DPUC review process. The original rate base component of stranded costs, as of January 1, 2000, was $433 million. It has since declined to $195.7 million at September 30, 2008. In the future, UI’s CTA earnings will decrease while, based on UI’s current projections, cash flow will remain fairly constant after the expiration of the Bridgeport RESCO generating facility contract on December 31, 2008 until stranded costs are fully amortized. Total CTA cost recovery is currently projected to be completed in 2015, with stranded cost amortizations expected to end in 2013. The date by which stranded costs are fully amortized depends primarily upon the DPUC’s future decisions, which could affect future rates of stranded cost amortization

Capital Projects

In order to maintain and improve its electricity delivery system and to provide quality customer service, UI is required to spend a significant amount each year on capital projects in the Distribution and Transmission Divisions. A large portion of the funds required for capital projects is provided by operating activities, and the remainder must be financed externally.

UI is constructing, and will own and operate transmission and substation facilities comprising approximately 20% of the total project cost. UI’s current estimate for its share of the project cost is approximately $280 million to $295 million (excluding allowance for funds used during construction). The increase in the previous estimated range of $265 million to $285 million is primarily attributable to increases in the cost of civil construction associated with

- 37 - -

Table of Contents

underground cable. Upon project completion, UI’s transmission rate base will have increased by approximately $285 million to $300 million, an increase of more than 200% relative to UI’s net transmission assets existing prior to the project receiving CSC approval. For project costs incurred prior to August 8, 2005, the FERC approved UI’s request to include 50% of those Construction Work In Progress (CWIP) expenditures in the rate base, allowing a return to be earned on that portion of UI’s investment before the project is completed. UI will commence earning a return on the remaining 50% of the project costs incurred prior to that date when those costs are added to the rate base in conjunction with the investment being placed in service. For project costs incurred after August 8, 2005, the FERC approved UI’s request to include 100% of those CWIP expenditures in rate base, effective as of May 23, 2007. UI’s costs for the project are expected to be included in and recovered through transmission revenues requirements, which are under FERC jurisdiction. Certain parties have requested rehearing of the FERC’s order. In July 2007, the FERC granted rehearing for further consideration but has not yet issued a substantive order on the requests for rehearing.

The Middletown/Norwalk Transmission Project (the Project) is 98% complete. Construction of the 345-kV transmission line and associated facilities is complete and extensive testing and commissioning will begin in the fourth quarter of 2008. Absent any unanticipated events, UI expects the project to be in service at the end of 2008 or early 2009. The Project team filed a transmission cost allocation application with ISO-NE in April 2008. ISO-NE will determine whether any of the costs of the transmission line should be categorized as Localized Costs and not recovered from customers in New England on a region-wide basis. In that case, UI will seek to recover those costs from customers throughout the State of Connecticut.

A number of appeals to the Connecticut Superior Court were taken following CSC approval of the project, but there are currently no pending appeals with respect to UI.

Regional Transmission Organization for New England

Transmission Return on Equity (ROE)

- 38 - -

Table of Contents

As a result of the Rehearing Order, the ROEs applicable to UI’s transmission rate base are as follows:

	Existing Transmission		New Transmission
	PTF	Non-PTF	PTF (1)	Non-PTF
2/1/05 to 10/30/06	10.90%	10.40%	11.90%	10.40%
10/31/06 and forward	11.64%	11.14%	12.64%	11.14%

UI has determined that, as a result of the increase in the base-level ROE per the Rehearing Order, it should collect from customers approximately $0.6 million.

Xcelecom, Inc.

With the substantial completion of the divestiture of Xcelecom, Inc. (Xcelecom), UIL Holdings is no longer subject to the same level of operating risk factors that affected the financial results of Xcelecom in prior reporting periods. UIL Holdings’ exposure regarding Xcelecom is now related to (1) the collection of accounts receivable and promissory notes related to the sales of certain Xcelecom companies, and (2) its indemnification obligations to the buyers of the former Xcelecom companies.

UIL Holdings has retained primary risk management and insurance exposures on Xcelecom’s completed operations in the area of bodily injury, property damage, uncompleted projects, professional, employment practice and fiduciary responsibility. To assist in minimizing the risk exposures, UIL Holdings has secured completed operations insurance coverage for third party liability claims subject to a deductible. Losses will be accrued based upon UIL Holdings’ estimates of the liability for claims incurred and an estimate of claims incurred but not reported. UIL Holdings will review the general liability reserves quarterly to ensure the adequacy of those reserves.

- 39 - -

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

UIL Holdings generates its capital resources primarily through operations. At September 30, 2008, UIL Holdings had $15.9 million of unrestricted cash and temporary cash investments. This represents an increase of $2.7 million from the corresponding balance at December 31, 2007. The components of this increase, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows:

	(In Millions)

Continuing operations balance, December 31, 2007	$	13.2

Net cash provided by operating activities		102.5

Net cash provided by (used in) investing activities:
Related party note receivable		(15.0	)
Non-utility minority interest investments, net		0.2
Restricted cash (1)		(10.6	)
Cash invested in plant - including AFUDC debt		(150.7	)
		(176.1	)

Net cash provided by (used in) financing activities:
Financing activities, excluding dividend payments		108.7
Dividend payments		(32.6	)
		76.1

Add change in cash of discontinued operations included above		0.2

Net change in cash		2.7

Continuing operations balance, September 30, 2008	$	15.9

(1) As of September 30, 2008, UIL Holdings had $10.8 million in restricted cash of which $0.2 million related to self-insurance at UI and approximately $10.6 million related to certain retention amounts concerning the Middletown/Norwalk Transmission Project which have been withheld by UI and will remain in place until the completion of the project.

The unrestricted cash position of UIL Holdings increased by $2.7 million from December 31, 2007 to September 30, 2008, as cash provided by operating activities and net proceeds from short-term borrowing was supplemented by existing cash on hand to cover various investing and financing activities. Restricted cash increased by $10.6 million due primarily to the July 2008 funding by UI of escrow accounts for certain retention amounts withheld by UI relating to the Middletown/Norwalk Transmission Project. Cash used in investing activities during the first nine months consisted primarily of capital expenditures of $150.7 million for distribution and transmission infrastructure as well as a $15 million advance to GenConn to fund GenConn’s construction and other cash needs until permanent financing can be arranged. Cash provided by financing activities during the first nine months of 2008 included $111 million from short-term debt and $1.8 million from issuances of common stock associated with KSOP and stock option exercises, partially offset by the quarterly dividend payments on UIL Holdings’ common stock totaling $32.6 million and a $4.3 million principal payment on UIL Holdings’ long-term debt.

UIL Holdings accesses capital through both long-term and short-term financing arrangements. Total current and long-term debt outstanding as of September 30, 2008 was $579.3 million, as compared to $583.6 million at year-end December 31, 2007. UIL Holdings and UI have a joint short-term credit facility under which UI and UIL have aggregate borrowing capacity totaling $175 million, with $50 million of the limit available for UIL Holdings. UI had $126 million outstanding under the facility in addition to a letter of credit in the amount of $6 million and UIL Holdings had a standby letter of credit outstanding in the amount of $1 million as of September 30, 2008. The UIL Holdings standby letter of credit reduces the amount of credit available for UI, and, given the current amounts outstanding, UI’s borrowings and standby letter of credit outstanding reduce the amount of credit available for UIL Holdings. Available credit at September 30, 2008 for UI and UIL Holdings in the aggregate was $42 million.

- 40 - -

Table of Contents

All capital requirements that exceed available cash will have to be provided by external financing. Although there is no commitment to provide such financing from any source of funds, other than the short-term credit facility discussed above, future external financing needs are expected to be satisfied by the issuance of additional short-term and long-term debt. In addition to debt financing, UIL Holdings expects to seek to access the external equity markets to raise capital. The continued availability of these methods of financing will be dependent on many factors, including conditions in the securities markets, economic conditions, and UIL Holdings’ future income and cash flow. See Part I, Item 1, “Financial Statements - Notes to Consolidated Financial Statements – Note (B), Capitalization and Note (D), Short-Term Credit Arrangements” of this Form 10-Q and UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for a discussion of UIL Holdings’ financing arrangements.

As described in Item 1- Notes to the Consolidated Financial Statements- Note (C) Regulatory Proceeding above, GenConn has approval from the DPUC to build 200 MW of nominal capacity at NRG’s existing plant in Devon, CT (the “Devon Project”) and 200 MW of nominal capacity at NRG’s existing plant in Middletown, CT (the “Middletown Project”). UI and NRG have each arranged to lend to GenConn $30 million to fund GenConn’s construction and other cash needs until permanent financing can be arranged. As of October 16, 2008, GenConn had borrowed $30 million from each of UI and NRG, under identical promissory notes, for the Devon Project and is evaluating the capital requirements for the Middletown Project and determining the additional funding needs related to both projects. UI expects to sign a revised promissory note in November within which the aggregate principal amount will be increased to $45 million.

GenConn expects to finance 50% of its capital requirements through project financing. UI and NRG will each make an equity investment in GenConn on a 50%/50% basis to meet the remaining 50% of GenConn’s capital requirements. Such equity investments, each in the amount of approximately $50 million, are expected to occur within the first six months of 2010 for the Devon Project and within the first six months of 2011 for the Middletown Project. UI expects to generate cash for its portion of those requirements through a combination of equity provided by UIL Holdings and UI external debt financing. Accordingly, UIL Holdings expects to seek access to external equity markets to raise capital to fund UI’s obligations to GenConn.

Financial Covenants

UIL Holdings and its operating subsidiary, UI, are required to comply with certain covenants in connection with their respective loan agreements. The covenants are normal and customary in bank and loan agreements, and UIL Holdings and UI are both in compliance with such covenants at September 30, 2008.

2008 Capital Resource Projections

There have been no material changes in UIL Holdings’ 2008 capital resource projections from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Contractual and Contingent Obligations

In addition to UIL Holdings’ 2008 contractual and contingent obligations as reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2007, UI has signed a promissory note (the “Loan”) with GenConn, of which UI is a 50-50 partner, under which UI shall advance up to an aggregate principal amount of $30 million to fund GenConn’s construction and other cash needs until permanent financing can be arranged. As of September 30, 2008, the Loan balance was $15 million. An additional $15 million was advanced in October. Furthermore, UI expects to sign a revised promissory note in November within which the aggregate principal amount will be increased to $45 million.

CRITICAL ACCOUNTING POLICIES

UIL Holdings’ Consolidated Financial Statements are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. UIL Holdings believes that investors need to be aware of these policies and how they impact UIL Holdings’ financial reporting to gain a more complete understanding of UIL Holdings’ Consolidated Financial Statements as a whole, as well as management’s related discussion and analysis presented herein. While UIL Holdings believes that these

- 41 - -

Table of Contents

accounting policies are grounded on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2007 are those that depend most heavily on these judgments and estimates. At September 30, 2008, there have been no material changes to any of the Critical Accounting Policies described therein.

OFF-BALANCE SHEET ARRANGEMENTS

UIL Holdings and its subsidiaries occasionally enter into guaranty contracts in the ordinary course of business. At the time a guaranty is provided, an analysis is performed to assess the expected financial impact, if any, based on the likelihood of certain events occurring that would require UIL Holdings to perform under such guaranty. Subsequent analysis is performed on a periodic basis to assess the impact of any changes in events or circumstances. If such an analysis results in an amount that is inconsequential, no liability is recorded on the balance sheet related to the guaranty. As of September 30, 2008, UIL Holdings had certain guaranty contracts outstanding for which no liability has been recorded in the Consolidated Financial Statements. See Part I, Item 1, “Financial Statements – Notes to Consolidated Financial Statements – Note (J), Commitments and Contingencies,” of this Form 10-Q for further discussion of such guaranties.

NEW ACCOUNTING STANDARDS

UIL Holdings reviews new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have. As of the filing of this Quarterly Report on Form 10-Q, there were no new accounting standards issued that were projected to have a material impact on UIL Holdings’ consolidated financial position, results of operations or liquidity. Refer to Part I, Item 1, “Financial Statements – Notes to Consolidated Financial Statements – Note (A), Statement of Accounting Policies – New Accounting Standards,” for further discussion regarding new accounting standards.

RESULTS OF OPERATIONS

Use of Non-GAAP Measures

Within the “Results of Operations” section of this Quarterly Report on Form 10-Q, tabular presentations showing a comparison of UIL Holdings’ net income and earnings per share (EPS) for the three and nine month periods ended September 30, 2008 and 2007 are provided. UIL Holdings believes this information is useful in understanding the

fluctuations in earnings per share between the current and prior year periods. The amounts presented show the earnings per share from continuing operations for each of UIL Holdings’ lines of business, calculated by dividing the income from continuing operations of each line of business by the average number of shares of UIL Holdings’ common stock outstanding for the periods presented. The earnings per share tables presented in “The United Illuminating Company Results of Operations” and “Non-Utility Results of Operations” for all periods presented are calculated on the same basis and reconcile to the amounts presented in the table under the heading “UIL Holdings Corporation Results of Operations.” The total earnings per share from continuing operations and discontinued operations in the table presented under the heading “UIL Holdings Corporation Results of Operations” are presented on a GAAP basis.

In discussing the results of operations, UIL Holdings also believes that a breakdown, presented on a per share basis, of how particular significant items contributed to the change in income from continuing operations by line of business (item variance EPS presentation) is useful in understanding the overall change in the consolidated results of operations for UIL Holdings from one reporting period to another. UIL Holdings presents such per share amounts by taking the dollar amount of the applicable change for the revenue or expense item, booked in accordance with GAAP, and applying UIL Holdings’ combined effective statutory federal and state tax rate. See Item 1, “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note (E), Income Taxes” of this Form 10-Q for details of UIL Holdings’ combined effective statutory tax rate to obtain the after-tax impact of the item. The after-tax amount is then divided by the average number of shares of UIL Holdings’ common stock outstanding for the period presented. Any amounts provided as item variance EPS presentation are provided for informational purposes only and are not intended to be used to calculate “Pro-Forma” amounts.

- 42 - -

Table of Contents

Third Quarter 2008 vs. Third Quarter 2007

UIL Holdings Corporation Results of Operations: Third Quarter 2008 vs. Third Quarter 2007

UIL Holdings’ earnings from continuing operations were $21.6 million, or $0.86 per share, for the third quarter of 2008, a decrease of $1.4 million, or $0.06 per share, compared to the third quarter of 2007. The loss from discontinued operations was $0.1 million, with a minimal per share impact, for the third quarter of 2008, an improvement of $1.9 million, or $0.08 per share, compared to the third quarter of 2007. Total earnings, including discontinued operations, were $21.5 million, or $0.86 per share, an increase of $0.5 million, or $0.02 per share, compared to the third quarter of 2007. The table below presents a comparison of UIL Holdings’ net income and EPS for the third quarter of 2008 and the third quarter of 2007.


	Quarter Ended			Quarter Ended			2008 More (Less) than 2007
	September 30, 2008			September 30, 2007			Amount			Percent

Net Income (Loss) (In Millions except percent and per share amounts)

UI	$	22.3		$	23.8		$	(1.5	)		(6	) %
Non-Utility		(0.7	)		(0.8	)		0.1			(13	) %
Total Income from Continuing Operations		21.6			23.0			(1.4	)		(6	) %

Discontinued Operations		(0.1	)		(2.0	)		1.9			(95	) %
Total Net Income	$	21.5		$	21.0		$	0.5			2	%

EPS
UI	$	0.89		$	0.95		$	(0.06	)		(6	) %
Non-Utility		(0.03	)		(0.03	)		-			-	%
Total EPS from Continuing Operations - Basic		0.86			0.92			(0.06	)		(7	) %
Discontinued Operations		-			(0.08	)		0.08			(100	) %
Total EPS - Basic	$	0.86		$	0.84		$	0.02			2	%

Total EPS - Diluted (Note 1)	$	0.85		$	0.83		$	0.02			2	%

Note 1: Reflecting the effect of dilutive stock options, performance shares and restricted stock.

The United Illuminating Company Results of Operations: Third Quarter of 2008 vs. Third Quarter of 2007


	Quarter Ended			Quarter Ended		2008 More (Less) than 2007
	September 30, 2008			September 30, 2007		Amount			Percent
EPS
Total UI - basic	$	0.89		$	0.95	$	(0.06	)		(6	) %

Total UI - diluted (Note 1)	$	0.88		$	0.94	$	(0.06	)		(6	) %

Retail Sales*	$	1,588		$	1,619	$	(31	)		(2	) %
Weather Impact* (Note 2)		(7	)		30		(37	)		(2	) %
Retail Sales – Normalized*	$	1,581		$	1,649	$	(68	)		(4	) %

* Millions of kilowatt-hours

Note 1:Reflecting the effect of dilutive stock options, performance shares and restricted stock.

Note 2:Percentage change reflects impact to total retail sales.

UI’s net income was $22.3 million, or $0.89 per share, in the third quarter of 2008, compared to $23.8 million, or $0.95 per share, in the third quarter of 2007. The decrease in earnings was primarily due to decreases in distribution sales volume of $0.03 per share, increases in uncollectible expense of $0.06 per share, increases in interest expense from higher borrowings of $0.05, increases in compensation expense of $0.01 per share, and a mark-to-market adjustment to non-qualified pension investments of $0.02 per share. Actual kWh sales decreased 2.0% compared to the same period in 2007. The decrease in earnings year over year for the quarter was partially offset by growth in the transmission business of $0.12 per share, resulting from the earnings from construction work in progress on the Middletown/Norwalk transmission project, and previously approved increases in UI’s distribution rate components.

- 43 - -

Table of Contents

Overall, UI’s operating revenue increased by $10.6 million, from $267.9 million for the third quarter of 2007, to $278.5 million for the third quarter of 2008. Retail revenue increased $4.4 million due to previously approved increases in UI’s distribution rate components. The increase was partially offset by the impact of customers switching to alternate suppliers for generation services, which has no impact on net income, and by decreases in distribution sales volume. Other revenues increased $2.8 million, largely due to higher transmission revenue, partially offset by the net activity of the GSC “working capital allowance” due to timing differences.

Purchased power expense decreased by $4.5 million, from $125.9 million in the third quarter of 2007, to $121.4 million in the third quarter of 2008. Retail purchased power expense decreased by $7.0 million in the third quarter of 2008, primarily due to the impact of customers switching to alternate suppliers for generation services, partially offset by higher costs to procure power. UI receives electricity to satisfy its standard service and supplier of last resort requirements through fixed-price purchased power agreements. These costs are recovered through the GSC and BFMCC portions of UI’s unbundled retail customer rates. UI’s wholesale energy expense in the third quarter of 2008 increased by $2.5 million primarily due to higher pricing for generation at the Bridgeport RESCO generating plant.

UI’s operation and maintenance (O&M) expenses increased by $4.8 million, from $50.5 million in the third quarter of 2007, to $55.3 million in the third quarter of 2008. The increase was primarily attributable to higher uncollectible accounts of $2.2 million and increased compensation expense of $0.6 million.

UI’s transmission wholesale expenses increased by $4.6 million, from $11.3 million in the third quarter of 2007, to $15.9 million in the third quarter of 2008. The increase was primarily attributable to higher regional transmission expenses of which UI pays a portion based upon its relative load.

UI’s depreciation and amortization increased by $1.8 million, from $25.5 million in the third quarter of 2007, to $27.3 million in the third quarter of 2008. The increase was primarily attributable to increased software depreciation and CTA amortization. UI accrues or defers additional amortization to achieve the authorized return on equity of 9.75% on unamortized CTA rate base.

UI’s taxes other than income taxes increased $2.1 million, from $12.6 million in the third quarter of 2007 to $14.7 million in the third quarter of 2008. The increase was primarily attributable to increases in property taxes as well as gross earnings taxes, which is due to increased transmission revenues.

UI’s other income and deductions decreased by $1.1 million, from $3.3 million in the third quarter of 2007 to $2.2 million in the third quarter of 2008. The decrease was primarily attributable to a mark-to-market adjustment to non-qualified pension investments and the ISO-NE demand response program ending during the second quarter of 2008.

UI’s interest expense increased by $2.0 million, from $5.6 million in the third quarter of 2007, to $7.6 million in the third quarter of 2008. The increase was primarily attributable to interest charges associated with increased long-term and short-term borrowings.

Non-Utility Results of Operations: Third Quarter 2008 vs. Third Quarter 2007


	Quarter Ended			Quarter Ended			2008 More (Less) than 2007
	September 30, 2008			September 30, 2007			Amount		Percent
EPS
UCI	$	-		$	-		$	-		N/A
UIL Corporate (Note 1)		(0.03	)		(0.03	)		-		-	%
Total Non-Utility EPS from Continuing Operations		(0.03	)		(0.03	)		-		-	%
Discontinued Operations		-			(0.08	)		0.08		(100	) %
Total Non-Utility EPS – Basic	$	(0.03	)	$	(0.11	)	$	0.08		(73	) %

Total Non-Utility EPS – Diluted (Note 2)	$	(0.03	)	$	(0.11	)	$	0.08		(73	) %

Note 1: Includes interest charges and strategic and administrative costs of the non-utility holding company.

Note 2:

Reflecting the effect of dilutive stock options, performance shares and restricted stock.

The non-utility operations reported a loss of $0.7 million, or $0.03 per share, from continuing operations in the third quarter of 2008 compared to a loss of $0.8 million, or $0.03 per share in the third quarter of 2007. The following is an explanation of the quarterly variances for UIL Holdings’ non-utility operations.

- 44 - -

Table of Contents

Non-Utility Activities and Unallocated Corporate Costs

United Capital Investments, Inc. (UCI)

UCI earned a minimal amount in the third quarters of both 2008 and 2007.

UIL Corporate

UIL Holdings retains certain costs at the holding company, or “corporate” level which are not allocated to the various non-utility subsidiaries, as well as the results of the former Xcelecom entities which were not divested. UIL Corporate incurred net after tax costs of $0.7 million, or $0.03 per share, compared to net after-tax costs of $0.8 million, or $.03 per share, in the third quarter of 2007.

Discontinued Operations

Xcelecom, Inc.

The divested Xcelecom businesses incurred net after-tax costs of $0.1 million, with minimal per share impact, in the third quarter 2008 compared to net after-tax costs $2.0 million, or $0.08 per share, in the third quarter of 2007. The improvement was primarily due to the absence in 2008 of a loss from an adjustment to the sale of a former subsidiary.

UIL Holdings Corporation Results of Operations: First Nine Months 2008 vs. First Nine Months 2007

UIL Holdings’ earnings from continuing operations were $39.6 million, or $1.58 per share, for the first nine months of 2008, an increase of $1.6 million or $0.06 per share, compared to the first nine months of 2007. The loss from discontinued operations was $0.2 million, or $0.01 per share, for the first nine months of 2008, an improvement of $1.7 million, or $0.06 per share, compared to the first nine months of 2007. Total earnings, including discontinued operations, were $39.4 million, or $1.57 per share, an increase of $3.3 million, or $0.12 per share, compared to the first nine months of 2007. The table below presents a comparison of UIL Holdings’ net income and EPS for first nine months of 2008 and first nine months of 2007.

	Nine Months Ended			Nine Months Ended			2008 More (Less) than 2007
	September 30, 2008			September 30, 2007			Amount			Percent

Net Income (Loss) (In Millions except percent and per share amounts)

UI	$	41.4		$	39.4		$	2.0			5	%
Non-Utility		(1.8	)		(1.4	)		(0.4	)		29	%
Total Income from Continuing Operations		39.6			38.0			1.6			4	%

Discontinued Operations		(0.2	)		(1.9	)		1.7			(89	) %
Total Net Income	$	39.4		$	36.1		$	3.3			9	%

EPS
UI	$	1.65		$	1.58		$	0.07			4	%
Non-Utility		(0.07	)		(0.06	)		(0.01	)		17	%
Total EPS from Continuing Operations - Basic		1.58			1.52			0.06			4	%
Discontinued Operations		(0.01	)		(0.07	)		0.06			(86	) %
Total EPS - Basic	$	1.57		$	1.45		$	0.12			8	%

Total EPS - Diluted (Note 1)	$	1.55		$	1.43		$	0.12			8	%

Note 1: Reflecting the effect of dilutive stock options, performance shares and restricted stock.

- 45 - -

Table of Contents

The United Illuminating Company Results of Operations: First Nine Months 2008 vs. First Nine Months 2007

	Nine Months Ended			Nine Months Ended		2008 More (Less) than 2007
	September 30, 2008			September 30, 2007		Amount			Percent
EPS
Total UI - basic	$	1.65		$	1.58	$	0.07			4	%

Total UI - diluted (Note 1)	$	1.63		$	1.56	$	0.07			4	%

Retail Sales*	$	4,358		$	4,486	$	(128	)		(3	) %
Weather Impact* (Note 2)		(13	)		31		(44	)		(142	) %
Retail Sales – Normalized*	$	4,345		$	4,517	$	(172	)		(4	) %

* Millions of kilowatt-hours

Note 1:Reflecting the effect of dilutive stock options, performance shares and restricted stock.

Note 2: Percentage change reflects impact to total retail sales.

UI’s net income was $41.4 million, or $1.65 per share, for the first nine months of 2008, compared to $39.4 million, or $1.58 per share, for the first nine months of 2007. The increase in earnings was primarily due to growth in the transmission business of $0.35 per share, resulting from the earnings from construction work in progress on the Middletown/Norwalk transmission project, and previously approved increases in UI’s distribution rate components. The earnings improvement year over year was partially offset by decreases in distribution sales volume of $0.12 per share, increases in interest expense from higher borrowings of $0.16 per share, mark-to-market adjustments to non-qualified pension investments of $0.07, and uncollectible expense of $0.08 per share. Actual kWh sales decreased 2.8% compared to the same period in 2007.

Overall, UI’s operating revenue decreased by $30.3 million, from $759.2 million for the first nine months of 2007, to $728.9 million for the first nine months of 2008. Retail revenue decreased $45.6 million due primarily to the impact of customers switching to alternate suppliers for services, which has no impact on net income, and to decreases in distribution sales volume, partially offset by previously approved increases in UI’s distribution rate components. Other revenues increased $7.7 million, largely due to higher transmission revenue, partially offset by the net activity of the GSC “working capital allowance” due to timing differences.

Purchased power expense decreased by $82.7 million, from $413.6 million for the first nine months of 2007, to $330.9 million for the first nine months of 2008. Retail purchased power expense decreased $88.4 million during the first nine months of 2008, primarily due to the impact of customers switching to alternate suppliers for generation services, partially offset by higher costs to procure power. UI receives electricity to satisfy its standard service and supplier of last resort requirements through fixed-price purchased power agreements. These costs are recovered through the GSC and BFMCC portion of UI’s unbundled retail customer rates. UI’s wholesale energy expense for the first nine months of 2008 increased by $5.6 million, primarily due to higher pricing for generation at the Bridgeport RESCO generating plant.

UI’s O&M expenses increased by $12.1 million, from $147.5 million in the first nine months of 2007, to $159.6 million in the first nine months of 2008. The increase was primarily attributable to higher uncollectible accounts of $3.2 million and increased salary expense of $1.1 million.

UI’s transmission wholesale expenses increased by $10.0 million, from $23.9 million in the first nine months of 2007, to $33.9 million in the first nine months of 2008. The increase was primarily attributable to higher regional transmission expenses of which UI pays a portion based upon its relative load.

UI’s depreciation and amortization increased by $11.7 million, from $66.0 million for the first nine months of 2007, to $77.7 million for the first nine months of 2008. The increase was primarily attributable to increased distribution plant and equipment depreciation and CTA amortization. UI accrues or defers additional amortization to achieve the authorized return on equity of 9.75% on unamortized CTA rate base.

UI’s taxes other than income taxes increased $4.0 million, from $34.2 million for the first nine months of 2007, to $38.2 million for the first nine months of 2008. The increase was primarily attributable to increases in property taxes as well as gross earnings taxes, which is due to increased transmission revenues.

- 46 - -

Table of Contents

UI’s other income and deductions decreased by $2.9 million, from $8.5 million for the first nine months of 2007, to $5.6 million for the first nine months of 2008. The decrease was primarily attributable to mark-to-market adjustments to non-qualified pension investments and the ISO-NE demand response program ending during the first nine months of 2008.

UI’s interest expense increased by $6.0 million, from $15.6 million for the first nine months of 2007, to $21.6 million for the first nine months of 2008. The increase was mainly attributable to interest charges associated with increased long-term and short-term borrowings.

Non-Utility Results of Operations: First Nine Months 2008 vs. First Nine Months 2007

	Nine Months Ended			Nine Months Ended			2008 More (Less) than 2007
	September 30, 2008			September 30, 2007			Amount			Percent
EPS
UCI	$	-		$	-		$	-			N/A
UIL Corporate (Note A)		(0.07	)		(0.06	)		(0.01	)		17	%
Total Non-Utility EPS from Continuing Operations		(0.07	)		(0.06	)		(0.01	)		17	%
Discontinued Operations		(0.01	)		(0.07	)		0.06			(86	) %
Total Non-Utility EPS – Basic	$	(0.08	)	$	(0.13	)	$	0.05			(38	) %

Total Non-Utility EPS – Diluted (Note B)	$	(0.08	)	$	(0.13	)	$	0.05			(38	) %

Note A:

Includes interest charges and strategic and administrative costs of the non-utility holding company.

Note B:

Reflecting the effect of dilutive stock options, performance shares and restricted stock.

The non-utility operations reported a loss of $1.8 million, or $0.07 per share, from continuing operations in the first nine months of 2008, compared to a loss of $1.4 million, or $0.06 per share, in the first nine months of 2007. The following is an explanation of the quarterly variances for UIL Holdings’ non-utility operations.

Non-Utility Activities and Unallocated Corporate Costs

United Capital Investments, Inc. (UCI)

UCI earned a minimal amount in the first nine months of both 2008 and 2007.

UIL Corporate

UIL Holdings retains certain costs at the holding company, or “corporate” level which are not allocated to the various non-utility subsidiaries as well as the results of the former Xcelecom entities which were not divested. UIL Corporate incurred a loss of $1.8 million, or $0.07 per share, compared to a loss of $1.4 million, or $0.06 per share, in the first nine months of 2007. The decrease in 2008 earnings was primarily due to lower interest income earned on short-term investments.

Discontinued Operations

Xcelecom, Inc.

The divested Xcelecom businesses incurred net after-tax costs of $0.2 million, or $0.01 per share, in the first nine months of 2008 compared to net after-tax costs of $1.9 million, or $0.07 per share, in the first nine months of 2007. The decrease was primarily due to the absence in 2008 of a net loss from adjustments of the sales of former subsidiaries.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

UIL Holdings and UI have market risk associated with (1) the refinancing of fixed rate debt at maturity, (2) the remarketing of multi-annual tax-exempt bonds, (3) the periodic reset by auction (every 35 days) of the interest rate on $64.5 million principal amount of tax exempt bonds (Auction Rate Bonds); and (4) the issuance of new debt and equity to refinance existing debt or finance capital expenditures (the Financings). The tax-exempt bonds are also referred to as pollution control revenue refunding bonds.

- 47 - -

Table of Contents

The weighted average remaining fixed rate period of outstanding long-term debt obligations of UIL Holdings and UI as of September 30, 2008 is 5.44 years, at an average interest rate of 5.10%.

The principal and interest payments on certain of UI’s tax exempt bonds are insured by Ambac Assurance Corporation (Ambac). The insured bonds are as follows: (1) $25 million principal amount of bonds remarketed December 3, 2007 for a rate period of one-year to December 1, 2008; (2) $27.5 million principal amount of multi-annual tax exempt bonds to be remarketed in February 2010; and (3) $64.5 million principal amount of Auction Rate Bonds. These insured bonds have been rated by either Moody’s Investors Service (Moody’s) or Moody’s and Standard & Poor’s (S&P), based on the credit rating of Ambac. Published reports indicate that Ambac was downgraded by the credit rating agencies, due to its exposure to sub-prime mortgages. In June, the ratings on UI’s insured bonds were lowered, based on Ambac’s credit rating. The credit rating from Moody’s was lowered from Aaa to Aa3, with an underlying rating of Baa2, based on UI’s credit rating, and the credit rating from S&P was lowered from AAA to AA. As of September 18, Moody’s placed Ambac’s credit rating under review for possible downgrade. The credit pressure on Ambac has increased the remarketing risk of the insured bonds and increased the potential for a failure to achieve sufficient clearing bids at future auctions of the Auction Rate Bonds.

Also, there has been considerable dislocation in the auction rate bond market, and there have been failed auctions, resulting from insufficient clearing bids. The auctions for the Auction Rate Bonds have failed, beginning with the March 2008 auction. When there are insufficient clearing bids as a result of an auction, the interest rate will be set at a rate equal to the one-month London Interbank Offering Rate (LIBOR) times a margin of 125% to 225%, based on the credit rating on the Auction Rate Bonds assigned by Moody’s or S&P. Currently, these bonds are rated by Moody’s. In the event of subsequent failed auctions of the Auction Rate Bonds, the interest rate on the bonds will continue to be reset as described above. The interest rate on these bonds at September 30, 2008 was equal to 150% times LIBOR or 5.580%. UI is evaluating its options with respect to outstanding tax exempt bonds that are insured by Ambac.

On March 9, 2006, UI entered into an interest rate cap (rate cap) transaction to mitigate interest rate risk with respect to the Auction Rate Bonds. The rate cap was set at 3.68% and became effective March 30, 2006. It will terminate on August 5, 2009. The rate cap is tied to the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA), formerly the U.S. Dollar – Bond Market Association Municipal Swap Index. If the average of the index for the calculation period exceeds the rate cap, UI will be paid an amount based on such difference. In the past, the interest rate on the Auction Rate Bonds closely tracked the SIFMA index. However, the conditions in the auction rate bond market and failed auctions of the Auction Rate Bonds, have resulted in interest rates on the Auction Rate Bonds having been set at rates that no longer closely track the SIFMA index. Therefore, although the interest rate on the Auction Rate Bonds as of the September 29, 2008 auction was greater than the rate cap, the average of the SIFMA index for the calculation period was less than the rate cap, and UI did not receive payment under the rate cap. As of September 30, 2008, the rate cap was not effective and does not qualify for hedge accounting treatment. Any amounts previously recognized as other comprehensive income (loss) are being reversed. Market risk also represents the risks of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuation in interest rates, and equity prices. At the end of each quarter, changes in the market value of the rate cap are marked-to-market, which resulted in an immaterial amount charged to income for the period ended September 30, 2008. UI paid $0.6 million to enter into the rate cap transaction, which is being amortized over the life of the rate cap based upon quarterly fair market value analysis.

UIL Holdings’ and UI short-term borrowing costs fluctuate with the upward and downward movements in LIBOR. Due to the current credit conditions experienced in the capital markets, one-month LIBOR had increased approximately 100 basis points from September 2, 2008 to October 22, 2008. This increase has not impacted borrowing costs as neither UIL Holdings’ nor UI have accessed the capital markets during this period, However, the continuation of these credit conditions will impact UIL Holdings as it accesses the capital markets to meet its financing requirements. Although UIL Holdings believes it will be able to meet these requirements, indicative interest rates indicate that interest rates on long-term debt have increased since UI entered into the note purchase agreement described in “Item 1 – Notes to the Consolidated Financial Statements – Note (B) Capitalization – Long-Term Debt.”

- 48 - -

Table of Contents

In addition, UI requires that its energy suppliers provide performance security to guaranty performance under contracts for standard service and supplier of last resort service. Specifically, UI requires wholesale suppliers to provide both parent guaranties and letters of credit. This performance assurance is intended to allow UI to recover for its customers the cost of replacement power, as well as administrative and legal costs, associated with a supplier default. Due to the credit conditions experienced in the capital markets, letters of credit and other credit support have become more difficult and costly to obtain for UI’s energy suppliers.

During 2008 and particularly during September and October, both the debt and equity markets have experienced significant downturns, resulting in reductions in asset values for funded pension and postretirement plans. These reductions, if not offset by December 31, 2008, will result in higher pension and postretirement expense in future years as these losses are amortized. In addition, the reduction in asset values could also result in a requirement that UI make significant cash contributions to the plans in 2009 and beyond.

Item 4. Controls and Procedures.

UIL Holdings maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to UIL Holdings’ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

UIL Holdings carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of UIL Holdings’ disclosure controls and procedures as of September 30, 2008. Based on the foregoing, UIL Holdings’ Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective as of September 30, 2008.

There have been no changes in UIL Holdings’ internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, UIL Holdings’ internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. – Risk Factors.

The financial condition and results of operations of UIL Holdings are subject to various risks, uncertainties and other factors, as described in UIL Holdings’ Annual Report on Form 10K for the year ended December 31, 2007. The following risk factors included in that report have been updated to reflect activity and changes in economic and market conditions as of September 30, 2008:

The inability to collect amounts due under a promissory note from the buyers of the divested Xcelecom companies could adversely impact UIL Holdings’ financial condition and results of operations.

The buyer of the former Xcelecom companies comprising its systems integration business signed a promissory note payable to Xcelecom or UIL Holdings in connection with the sale of that business, which totals $1.5 million as of September 30, 2008. In June 2008, UIL Holdings was notified that the buyer is in default on its third party senior credit line, which prohibits it from making any subordinated debt payments, including payments under the promissory note. UIL Holdings and the buyer have agreed to a replacement note which calls for principal payments beginning in July 2009 with full payment in September 2010. The buyer will also pay all past due interest through September 30, 2008 and pay interest monthly thereafter.

- 49 - -

Table of Contents

Volatility in the capital markets could negatively impact UIL Holdings’ cost of debt and equity and ability to meet its’ financing requirements

Changes in LIBOR impact the cost of UIL Holdings’ and UI’s short-term debt. Due to the current credit conditions experienced in the capital markets, one-month LIBOR had increased by approximately 100 basis points from September 2, 2008 to October 22, 2008. The continuation of these credit conditions will also impact UIL Holdings as it accesses the capital markets to meet its financing requirements. Although UIL Holdings believes it will be able to meet these requirements, indicative interest rates indicate that interest rates on long-term debt have increased

since UI entered into the note purchase agreement described in “Item 1 – Notes to the Consolidated Financial Statements – Note (B) Capitalization – Long-Term Debt.”

In addition, UI requires that its electric suppliers provide performance security to guaranty performance under contracts for wholesale power supply. Specifically, UI requires wholesale suppliers to provide both parent guaranties and letters of credit. This performance assurance is intended to allow UI to recover for its customers the cost of replacement power, as well as administrative and legal costs, associated with a supplier default. Due to the credit conditions experienced in the capital markets, letters of credit and other credit support have become more difficult and costly to obtain for UI’s electric suppliers, which could, in turn, increase the price of UI’s wholesale electric supply. Moreover, the volatility in the capital markets has increased the risk that, upon a supplier default, such supplier’s guarantor or letter of credit issuer will be unable to meet its obligations to UI.

Volatility in the capital markets could negatively impact pension and postretirement expenses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

UIL Holdings repurchased 13,142 shares of common stock in open market transactions to satisfy matching contributions for participants’ contributions into UIL Holdings 401(k) in the form of UIL Holdings stock as follows:

Period	Total Number of Shares Purchased*	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares That May Yet Be Purchased Under the Plans
July	4,834	30.94	None	None
August	8,308	32.93	None	None
September	-	-	None	None
Total	13,142	32.20	None	None

* All shares were purchased in open market transactions. The effects of these transactions did not change the number of outstanding shares of UIL Holdings’ common stock.

Item 6. Exhibits.

(a) Exhibits.

Exhibit Table Item Number	Exhibit Number	Description
(3)	3.2	Copy of Bylaws of UIL Holdings Corporation, as amended through September 22, 2008
(4)	4.4	Guaranty Agreement dated September 5, 2008
(31)	31.1	Certification of Periodic Financial Report.
(31)	31.2	Certification of Periodic Financial Report.
(32)	32	Certification of Periodic Financial Report.

- 50 - -

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	UIL HOLDINGS CORPORATION




Date 11/04/2008	/s/ Richard J. Nicholas
	Richard J. Nicholas
	Executive Vice President
	and Chief Financial Officer

- 51 -

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

UIL (UIL) Inactive 10-Q2008 Q3 Quarterly report

Content analysis