UIL 10Q 2010 Q2 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 JUNE 30, 2010

£	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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).

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 August 2, 2010 was 30,074,782.

INDEX

PART I. FINANCIAL INFORMATION

		Page Number
Item 1.	Financial Statements.	3
	Consolidated Statement of Income for the three and six months ended June 30, 2010 and 2009.	3
	Consolidated Balance Sheet as of June 30, 2010 and December 31, 2009.	4
	Consolidated Statement of Cash Flows for the three and six months ended June 30, 2010 and 2009.	6
	Notes to the Consolidated Financial Statements.	7
	- Organization and Statement of Accounting Policies	7
	- Capitalization	13
	- Regulatory Proceedings	14
	- Short-term Credit Arrangements	20
	- Income Taxes	20
	- Supplementary Information	22
	- Pension and Other Benefits	22
	- Related Party Transactions	24
	- Commitments and Contingencies	24
	- Connecticut Yankee Atomic Power Company	24
	- Hydro-Quebec	25
	- Environmental Concerns	25
	- Middletown/Norwalk Transmission Project	27
	- GenConn	27
	- Property Tax Assessment	28
	- Cross-Sound Cable Company, LLC	28
	- Xcelecom	28
	- Acquisition Purchase Agreement Termination Fee	28
	- Fair Value of Financial Instruments	29
	- Segment Information	32
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	34
	- Major Influences on Financial Condition	34
	- Pending Acquisition of The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation and The Berkshire Gas Company	34
	- The United Illuminating Company	35
	- Liquidity and Capital Resources	40
	- Financial Covenants	42
	- 2010 Capital Resource Projections	42
	- Contractual and Contingent Obligations	42
	- Critical Accounting Policies	43
	- Off-Balance Sheet Arrangements	43
	- New Accounting Standards	43
	- Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	49
Item 4.	Controls and Procedures.	50

PART II. OTHER INFORMATION

Item 1A.	Risk Factors.	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	53
Item 6.	Exhibits.	54
	SIGNATURES	55

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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands except per share amounts)
(Unaudited)
	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009


Operating Revenues (Note F)	$	207,116		$	200,365	$	427,396		$	435,874
Operating Expenses
Operation
Purchased power		53,567			71,972		128,915			175,539
Operation and maintenance		62,367			50,410		113,988			102,917
Transmission wholesale		15,339			11,322		30,815			23,789
Depreciation and amortization (Note F)		27,038			22,809		54,289			46,796
Taxes - other than income taxes (Note F)		16,592			12,914		34,296			27,408
Acquisition-related costs (Note A)		6,700			-		6,700			-
Total Operating Expenses		181,603			169,427		369,003			376,449
Operating Income		25,513			30,938		58,393			59,425

Other Income and (Deductions), net (Note F), (Note H)		4,904			2,346		8,960			3,817

Interest Charges, net
Interest on long-term debt		9,928			9,496		19,805			17,888
Other interest, net (Note F)		138			420		419			911
		10,066			9,916		20,224			18,799
Amortization of debt expense and redemption premiums		401			481		794			994
Total Interest Charges, net		10,467			10,397		21,018			19,793

Income Before Income Taxes and Equity Earnings		19,950			22,887		46,335			43,449

Income Taxes (Note E)		8,927			9,134		19,268			17,666

Income Before Equity Earnings		11,023			13,753		27,067			25,783
Income (Loss) from Equity Investments		(897	)		16		(889	)		28
Net Income	$	10,126		$	13,769	$	26,178		$	25,811

Average Number of Common Shares Outstanding - Basic		30,093			26,999		30,037			26,092
Average Number of Common Shares Outstanding - Diluted		30,313			27,345		30,317			26,462

Earnings Per Share of Common Stock - Basic	$	0.34		$	0.51	$	0.87		$	0.99
Earnings Per Share of Common Stock - Diluted	$	0.33		$	0.51	$	0.86		$	0.98

Cash Dividends Declared per share of Common Stock	$	0.432		$	0.432	$	0.864		$	0.864

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

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UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET

ASSETS
(In Thousands)
(Unaudited)
	June 30,		December 31,
	2010		2009
Current Assets
Unrestricted cash and temporary cash investments	$	17,837	$	15,269
Restricted cash		1,702		3,695
Utility accounts receivable less allowance of $4,200 and $4,500, respectively		89,002		81,861
Other accounts receivable		12,150		11,980
Unbilled revenues		46,652		48,375
Current regulatory assets		40,306		59,040
Materials and supplies, at average cost		5,310		4,553
Deferred income taxes		8,364		4,410
Prepayments		5,086		3,891
Current portion of derivative assets (Note K)		3,424		2,738
Other current assets		1,520		882
Total Current Assets		231,353		236,694

Other investments		9,535		10,659

Property, Plant and Equipment at original cost
In service		1,444,199		1,408,811
Less, accumulated depreciation		400,790		379,951
		1,043,409		1,028,860
Construction work in progress		163,175		124,141
Net Property, Plant and Equipment		1,206,584		1,153,001

Regulatory Assets (future amounts due from customers through the ratemaking process)		594,215		676,428


Deferred Charges and Other Assets
Unamortized debt issuance expenses		6,569		6,613
Related party note receivable (Note H)		115,923		107,773
Other long-term receivable		1,583		2,186
Derivative assets (Note K)		29,010		27,956
Other		383		450
Total Deferred Charges and Other Assets		153,468		144,978

Total Assets	$	2,195,155	$	2,221,760

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

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UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET

LIABILITIES AND CAPITALIZATION
(In Thousands)
(Unaudited)
	June 30,		December 31,
	2010		2009
Current Liabilities
Line of credit borrowings	$	30,000	$	-
Current portion of long-term debt		59,426		58,256
Accounts payable		87,335		90,470
Dividends payable		12,992		12,930
Accrued liabilities		33,485		41,740
Current regulatory liabilities		9,740		23,624
Interest accrued		9,154		8,774
Taxes accrued		25,188		4,718
Current portion of derivative liabilities (Note K)		3,802		2,822
Total Current Liabilities		271,122		243,334

Noncurrent Liabilities
Pension accrued		143,114		140,454
Connecticut Yankee contract obligation		19,456		20,694
Other post-retirement benefits accrued		48,794		47,302
Derivative liabilities (Note K)		102,386		159,271
Other		7,129		6,965
Total Noncurrent Liabilities		320,879		374,686

Deferred Income Taxes (future tax liabilities owed to taxing authorities)		267,187		273,558

Regulatory Liabilities (future amounts owed to customers through the ratemaking process)		81,346		82,457

Commitments and Contingencies (Note J)

Capitalization (Note B)
Long-term debt		676,243		673,549

Common Stock Equity
Common stock		425,154		422,008
Paid-in capital		15,665		14,859
Retained earnings		137,559		137,309
Net Common Stock Equity		578,378		574,176

Total Capitalization		1,254,621		1,247,725

Total Liabilities and Capitalization	$	2,195,155	$	2,221,760

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

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

	Six Months Ended
	June 30,
	2010			2009
Cash Flows From Operating Activities
Net income	$	26,178		$	25,811
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		55,073			47,790
Deferred income taxes		(13,177	)		2,307
Stock-based compensation expense (Note A)		2,148			2,059
Pension expense		13,152			11,622
Allowance for funds used during construction (AFUDC) - equity		(2,716	)		(152
Undistributed (earnings) losses in equity investments		745			(29
Excess generation service charge		(19,950	)		397
Deferred transmission (income) expense		12,420			(12,149
Decoupling (income) expense		2,544			(4,016
Other non-cash items, net		(2,504	)		(3,143
Changes in:
Accounts receivable, net		(6,729	)		4,794
Unbilled revenues and other accounts receivable		1,723			9,528
Prepayments		(1,195	)		360
Accounts payable		6,724			(17,048
Interest accrued		380			1,700
Taxes accrued		20,471			1,476
Accrued liabilities		(7,033	)		3,594
Other assets		(730	)		(1,013
Other liabilities		(944	)		281
Total Adjustments		60,402			48,358
Net Cash provided by Operating Activities		86,580			74,169

Cash Flows from Investing Activities
Related party note receivable (Note H)		(8,150	)		(33,746
Plant expenditures including AFUDC debt		(85,529	)		(58,942
Changes in restricted cash		1,993			2,808
Other		144			58
Net Cash (used in) Investing Activities		(91,542	)		(89,822

Cash Flows from Financing Activities
Issuances of common stock		(7	)		91,994
Issuances of long-term debt		8,150			94,273
Payments on long-term debt		(4,286	)		(4,286
Line of credit borrowings (repayments)		30,000			(139,000
Payment of common stock dividend		(25,866	)		(21,824
Other		(461	)		(942
Net Cash provided by Financing Activities		7,530			20,215

Unrestricted Cash and Temporary Cash Investments:
Net change for the period		2,568			4,562
Balance at beginning of period		15,269			7,730
Balance at end of period	$	17,837		$	12,292

Non-cash investing activity:
Plant expenditures included in ending accounts payable	$	20,773		$	14,215

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

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UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(A) ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

Basis of Presentation

The primary business of UIL Holdings Corporation (UIL Holdings) is ownership of its operating regulated utility. The utility business consists of the electric transmission and distribution operations of The United Illuminating Company (UI). UI is also a 50-50 joint venturer with NRG Energy, Inc. (NRG) in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (collectively “GenConn”), was chosen by the Connecticut Department of Public Utility Control (DPUC) to build new peaking generation plants to help address Connecticut’s growing need for more power generation during the heaviest load periods. 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, 2009. 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 descri bed herein. All such adjustments are of a normal and recurring nature. The results for the six months ended June 30, 2010 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2010.

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

Pending Acquisition of The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation and The Berkshire Gas Company

On May 25, 2010, UIL Holdings entered into a Purchase Agreement (the Purchase Agreement), with Iberdrola USA, Inc. (Seller), under which UIL Holdings will acquire (i) Connecticut Energy Corporation, the owner of The Southern Connecticut Gas Company (SCG), (ii) CTG Resources, Inc., the owner of Connecticut Natural Gas Corporation (CNG), and (iii) Berkshire Energy Resources, the owner of The Berkshire Gas Company (Berkshire) for $1.296 billion in cash, less net debt of approximately $411 million. Accordingly, UIL Holdings expects to make a cash payment at closing of approximately $885 million, subject to post closing adjustments. As of December 31, 2009, the companies to be acquired had a combined customer total of approximately 369,000, approximately 130,000 of which will be customers of both UI and SCG. After the closing, UIL Holdings’ customer base will increase to approximately 694,000. UIL Holdings expects the acquisition to close in the first quarter of 2011.

UIL Holdings plans to finance the acquisition by issuing approximately $400 million of UIL Holdings unsecured debt and approximately $500 million in equity. The acquisition is expected to provide enhanced cash flow per share to UIL Holdings immediately upon consummation of the transaction, and earnings per share accretion beginning in 2012, the first full year following the closing of the transaction. While not a condition of closing, UIL Holdings may also need to secure a working capital facility to fund the gas companies’ operations.

UIL Holdings and Seller have made customary representations and warranties and covenants in the Purchase Agreement. The transaction is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act), receipt of required governmental approvals, including applicable state public utility regulatory approvals, and the absence of injunctions or restraints imposed by governmental entities. For further discussion of the regulatory approval process, see Note (C) “Regulatory Proceedings.”

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UIL HOLDINGS CORPORATION

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

The Purchase Agreement also contains certain termination rights for both UIL Holdings and Seller, including a termination right for either party if the closing does not occur by May 25, 2011 and the terminating party has not caused the closing not to occur by breaching in any material respect its representations, warranties, covenants or agreements contained in the Purchase Agreement (provided that either party may postpone such date to August 25, 2011, if the only closing conditions that remain to be satisfied are the receipt of governmental approvals or the expiration or termination of the HSR Act waiting period). Certain of the termination rights, such as termination by mutual agreement of the parties, do not require UIL Holdings to pay any termination fee. However, under the following circumstan ces, the Purchase Agreement may be terminated, and UIL Holdings would be required to pay to Seller a termination fee of $50 million (the Termination Fee):

·	by either party if state public utility regulatory approvals cannot be obtained;

by UIL Holdings if the Board of Directors of UIL Holdings reasonably determines in good faith that an offering of common stock to fund the acquisition (or any portion thereof) is not in the interests of UIL Holdings’ shareholders, subject to certain requirements to work with Seller to pursue alternative financing or extend the period provided by the Purchase Agreement for the pursuit of such an offering;

by UIL Holdings if state public utility regulatory approvals (i) materially and adversely impact UIL Holdings or any of the companies proposed to be acquired, or require divestments by UIL Holdings or material divestments by any of the companies proposed to be acquired, (ii) materially impair the expected benefits of the transaction, or (iii) materially impair UIL Holdings’ rights of ownership with respect to the companies proposed to be acquired;

·	by Seller if UIL Holdings does not close the acquisition because of any of the conditions listed in (i) through (iii) in the bullet point above;

·	by Seller if UIL Holdings has not obtained the financing necessary to fund the transaction by the end of the period provided by the Purchase Agreement for the pursuit of such financing; or

·	by Seller if there has been a material breach by UIL Holdings of its representations, warranties, covenants or agreements in the Purchase Agreement.

As of June 30, 2010, UIL Holdings has incurred pre-tax acquisition-related costs of approximately $6.7 million, all of which were expensed in the second quarter of 2010.

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UIL HOLDINGS CORPORATION

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

Earnings per Share

The components of basic and diluted EPS for common shares under the two-class method for each of the three and six months ended June 30, 2010 are as follows:

	2010		2009
	(In Thousands, except per share amounts)
Three Months Ended June 30:
Numerator:
Net income	$	10,126	$	13,769
Less: Net income allocated to unvested units		36		62
Net income attributable to common shareowners	$	10,090	$	13,707

Denominator:
Basic average number of shares outstanding		30,093		26,999
Effect of dilutive securities (1)		220		346
Diluted average number of shares outstanding		30,313		27,345

Earnings per share:
Basic	$	0.34	$	0.51
Diluted	$	0.33	$	0.51


		2010		2009
	(In Thousands, except per share amounts)
Six Months Ended June 30:
Numerator:
Net income	$	26,178	$	25,811
Less: Net income allocated to unvested units		98		10
Net income attributable to common shareowners	$	26,080	$	25,801

Denominator:
Basic average number of shares outstanding		30,037		26,092
Effect of dilutive securities (1)		280		370
Diluted average number of shares outstanding		30,317		26,462

Earnings per share:
Basic	$	0.87	$	0.99
Diluted	$	0.86	$	0.98

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

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UIL HOLDINGS CORPORATION

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

As of June 30, 2010, options to purchase 136,945 shares of common stock were outstanding but not included in the three or six-month computation of diluted earnings per share, because the options’ exercise prices were greater than the average market price of the common shares during the three and six month periods ended June 30, 2010. As of June 30, 2009, options to purchase 379,152 and 359,152 shares of common stock were outstanding but not included in the three and six-month respective computations of diluted earnings per share, because the options’ exercise prices were greater than the average market price of the common shares during the three and six-month periods ended June 30, 2009.

Stock-Based Compensation

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 over a three-year period. These performance shares were issued under the UIL Holdings 1999 Amended and Restated Stock Plan prior to 2009 and are now issued under the UIL Holdings 2008 Stock and Incentive Compensation Plan (the 2008 Stock Plan). Each award of performance shares vests at the end of a three-year cycle with the actual issuance of UIL Holdings’ common stock in respect of such performance 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 ASC 718 “Compensation-Stock Compensation”, based on the value of the expected payout at the end of each year relative to the performance measures achieved. An additional $0.6 million of compensation expense was recorded in the first quarter of 2010 with respect to retirement-eligible employees based on the application of ASC 718 retirement-eligible provisions.

A target amount of 89,360 performance shares was granted in March 2010; the average of the high and low market price on the date of grant was $28.24 per share. In March 2010, upon the vesting of performance shares previously granted, 15,414 shares were issued to members of management and receipt of 19,991 shares was deferred as stock units. The number of shares issued and deferred reflects the personal income tax elections of the applicable employees.

In March 2010, UIL Holdings granted a total of 2,789 shares of restricted stock to its President and Chief Executive Officer (CEO), James P. Torgerson, under the 2008 Stock Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant was $28.24 per share. Compensation expense for this restricted stock is recorded ratably over the five-year vesting period for such restricted stock.

In March 2010, UIL Holdings granted a total of 31,076 shares of restricted stock to non-employee directors under the 2008 Stock Plan; the average of the high and low market price on the date of grant was $28.24 per share. Compensation expense for this restricted stock is recorded ratably over the three-year vesting period for such restricted stock, except in the case of directors who will reach the mandatory retirement age of 72 prior to the end of the three year vesting period, for whom compensation expense is recognized ratably over the remaining service period in accordance with ASC 718 “Compensation-Stock Compensation”, based on the value of the expected payout at the end of each year.

In March 2010, 20,307 shares of previously-granted restricted stock grants to directors vested, of which 11,487 shares were issued to directors who had not elected to have their vested shares deferred as stock units. In May 2010, 10,202 shares of restricted stock previously granted to a non-employee director vested upon his retirement from the board of directors and were issued to the retiring director. As a result of the May 2010 resignation of another non-employee director, and upon June 2010 Board of Directors approval, 8,551 shares of restricted stock previously granted to such director vested, all of which were elected for deferral as stock units. An additional $0.1 million of compensation expense was recorded with respect to such vesting based on the application of ASC 718. Also resulti ng from such resignation was the forfeiture of 1,994 shares of restricted stock previously granted to such director.

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UIL HOLDINGS CORPORATION

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

Total stock-based compensation expense for both six month periods ended June 30, 2010 and 2009 was $2.1 million. Total stock-based compensation for the three month periods ended June 30, 2010 and 2009 was $0.9 million and $0.8 million, respectively.

Income Taxes

In accordance with ASC 740 “Income Taxes”, UIL Holdings has provided deferred taxes for all temporary book-tax differences using the liability method. The liability method requires that deferred tax balances be adjusted to reflect enacted future tax rates that are anticipated to be in effect when the temporary differences reverse. In accordance with GAAP for regulated industries, UI has established a regulatory asset for the net revenue requirements to be recovered from customers for the related future tax expense associated with certain of these temporary differences. For ratemaking purposes, UI normalizes all investment tax credits (ITCs) related to recoverable plant investments.

Under ASC 740, 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 has not recognized any additional liability for unrecognized tax benefits, or accrued any interest or penalties associated with uncertain 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 June 30, 2010 and 2009, no interest or penalties associated with uncertain tax positions were recognized and as of June 30, 2010 and December 31, 2009, no accrued interest or penalties are reflected in the Consolidated Balance Sheet.

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UIL HOLDINGS CORPORATION

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

Regulatory Accounting

UIL Holdings’ regulatory assets and liabilities as of June 30, 2010 and December 31, 2009 included the following:

	Remaining	June 30,			December 31,
	Period	2010			2009
		(In Thousands)
Regulatory Assets:
Nuclear plant investments – above market	(a)	$	303,611		$	313,833
Income taxes due principally to book-tax differences	(b)		35,055			36,635
Connecticut Yankee	6 years		19,455			20,695
Unamortized redemption costs	12 to 24 years		14,109			14,510
CTA deferral amortization	(a)		-			7,874
Pension and other post-retirement benefit plans	(c)		160,787			169,234
Contracts for differences	(d)		80,179			137,730
Deferred pension and post-retirement expense	(f)		6,060			10,232
Distribution retail revenue decoupling	(g)		2,741			5,286
Other	(b)		12,524			19,439
Total regulatory assets			634,521			735,468
Less current portion of regulatory assets			40,306			59,040
Regulatory Assets, Net		$	594,215		$	676,428

Regulatory Liabilities:
Accumulated deferred investment tax credits	33 years	$	4,978		$	5,051
Deferred gain on sale of property	(a)		37,798			37,798
Middletown/Norwalk local transmission network service collections	41 years		23,408			23,695
Pension and other post-retirement benefit plans	< 1 year		1,355			-
Excess generation service charge	(e)		(107	)		19,506
Asset removal costs	(b)		1,423			1,993
Other	(b)		22,231			18,038
Total regulatory liabilities			91,086			106,081
Less current portion of regulatory liabilities			9,740			23,624
Regulatory Liabilities, Net		$	81,346		$	82,457

(a) Asset/Liability relates to the Competitive Transition Assessment (CTA). CTA deferral amortization completed during the 2nd quarter of 2010. Total CTA costs recovery is currently projected to be completed in 2015, with stranded cost amortization expected to end in 2013.

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

(c) Asset life is dependent upon timing of final pension plan distribution; balance is recalculated each year in accordance with ASC 715 "Compensation-Retirement Benefits" (Note G).

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

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

(f) Regulatory asset established for $10.2 million of 2009 pension and OPEB expense which will be recovered in the 2010 rate year.

(g) Regulatory asset or liability relating to revenue decoupling; proposed recovery treatment of 2009 decoupling is pending at the DPUC; timing of recovery of 2010 decoupling is to be addressed by DPUC in future proceedings.

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UIL HOLDINGS CORPORATION

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

New Accounting Standards

In January 2010, the FASB issued updated guidance to ASC 820 “Fair Value Measurements and Disclosures” which requires disclosure of transfers in and out of assets and liabilities that fall within Level 1 and 2 of the fair value hierarchy, as described in “Note K – Fair Value of Financial Instruments”, as well as the gross presentation of activities within the reconciliation of changes in the fair value of Level 3 assets and liabilities. This guidance is effective in the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 reconciliation information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. These requirements impact footn ote disclosures only. Because UIL Holdings does not currently have any Level 2 assets or liabilities, implementation of the transfer activity disclosure did not have an impact on UIL Holdings’ consolidated financial statements. The implementation of the reconciliation activity disclosure is not expected to have an impact on UIL Holdings’ consolidated financial statements.

In June 2009, the FASB issued updated guidance to ASC 810 “Consolidation” on the consolidation of variable interest entities (VIEs) which became effective as of January 1, 2010, for interim and annual reporting periods beginning in 2010. In the first quarter of 2010, UIL Holdings implemented this new guidance which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. As a result of implementing this guidance, UIL Holdings determined that it is not currently required to consolidate any VIEs with which it is associated and therefore, this guidance did not have an impact on UIL Holdings’ Consolidated Balance Sheet, Consolidated Statement of Income or Consolidated Statement of Cash F lows. As of June 30, 2010, UIL Holdings had identified Connecticut Yankee Atomic Power Company (Connecticut Yankee) and GenConn as VIEs, which were not subject to consolidation as UIL Holdings is not the primary beneficiary because it does not have a controlling financial interest, as defined in ASC 810, in either VIE. For further discussion of GenConn, see Note (C) “Regulatory Proceedings – Generation.” For further discussion of Connecticut Yankee, see Note (J) “Commitments and Contingencies.”

In December 2009, the FASB issued updated guidance to ASC 860 “Transfers and Servicing” which is effective for transfers of financial assets occurring in fiscal years beginning after November 15, 2009. UIL Holdings has not been a party to any transfers of financial assets, so this statement did not have an impact on UIL Holdings’ Consolidated Balance Sheet, Consolidated Statement of Income or Consolidated Statement of Cash Flows.

(B) CAPITALIZATION

Common Stock

UIL Holdings had 30,040,374 shares of its common stock, no par value, outstanding at June 30, 2010.

Long-Term Debt

On May 13, 2010, UI entered into a note purchase agreement with a group of institutional accredited investors providing for the sale to such investors of senior unsecured 6.09% notes in the principal amount of $100 million, due on July 27, 2040. Such notes were issued on July 27, 2010.

On February 1, 2010, $27.5 million of tax-exempt bonds were refunded with the proceeds from the issuance of $27.5 million of new tax-exempt bonds, at a fixed interest rate of 4.5%, for a period of five years and five months.

In April 2009, UI closed on a bank financing in the amount of $121.5 million with a syndicate of banks (the Equity Bridge Loan or EBL), the proceeds of which will be used by UI to fund its commitments as a 50% owner of GenConn. UI draws on this facility as needed to fund its commitments to GenConn as construction progresses. UI does not have any further funding commitments to GenConn at this time and does not guarantee any of GenConn’s obligations. Borrowings under this facility as of June 30, 2010 were $115.9 million.

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UIL HOLDINGS CORPORATION

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

GenConn obtained project financing in April 2009 in a separate transaction that makes $243 million available to GenConn for construction and related activities, and $48 million available under a working capital facility (collectively, the Project Financing). UI expects that those funds, together with the funds committed by UI and GenConn’s other 50% owner, NRG Energy, will be sufficient to allow GenConn to complete the construction of its planned peaking generation facilities.

The EBL must be repaid upon the earlier of its maturity date or the commencement of operations, as described under the terms of the EBL, which is expected to be in the third quarter of 2010 for GenConn Devon and in the first six months of 2011 for GenConn Middletown. The maturity date of the loan is October 24, 2010, and may be extended to June 1, 2011, as long as on the date of extension, project construction is continuing and the Project Financing is not due and payable.

Pending Acquisition of The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation and The Berkshire Gas Company

As discussed in Note A “Organization and Statement of Accounting Policies”, on May 25, 2010, UIL Holdings entered into the Purchase Agreement with Seller which provides for the sale of SCG, CNG, and Berkshire to UIL Holdings. Under the HSR Act, the parties to certain proposed transactions must submit pre-merger notification to the Federal Trade Commission and the U.S. Department of Justice which includes information about each company’s business. The parties may not consummate the proposed transactions until the waiting period outlined in the HSR Act has passed. UIL Holdings and Iberdrola USA each made its respective HSR Act filings on July 14, 2010.

The Connecticut Department of Public Utility Control (DPUC) must approve UIL Holding’s acquisition of SCG and CNG, and the Massachusetts Department of Public Utilities (DPU) must approve the purchase of Berkshire. On July 16, 2010, UI filed its application requesting approval with the DPUC. The application requesting such approval from the DPU was filed on July 23, 2010.

In addition, SCG and CNG hold certain wireless radio station licenses from the Federal Communications Commission (FCC) with respect to dispatch center and certain communications equipment and devices. Applications will be filed with the FCC for approval of the change of control of the holder of the licenses in connection with the Purchase Agreement.

DPUC

Rates

In rulings throughout 2009, the DPUC issued its final decision regarding UI’s application requesting an increase in distribution rates (the “2009 Decisions”), the results of which included a $6.8 million increase in revenue requirements for 2009, compared to 2008. Because a larger, previously approved increase in revenue requirements for 2009 had gone into effect January 1, 2009, UI returned approximately $1.0 million to ratepayers through a one-time adjustment in April 2009.

The 2009 Decisions provided for an allowed distribution return on equity of 8.75%, a decrease from the previously approved 9.75%, and a capital structure of 50% equity and 50% debt, compared to the previously approved 48% equity and 52% debt. The 2009 Decisions continued the prior earnings sharing mechanism structure, applying to the new 8.75% allowed return, whereby 50% of any earnings over the allowed twelve month level is returned to customers and 50% is retained by UI. Given the effective date of the 2009 Decisions, UI’s weighted average allowed distribution return on equity for 2009 was 8.84%. Additionally, the 2009 Decisions provided for full decoupling of distribution revenues from sales, recovery of updated pension and postretirement expense for 2010, a partial reconciliation fo r the as-issued cost of new debt, and an additional increase in distribution revenue requirements of $19.4 million for 2010.

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UIL HOLDINGS CORPORATION

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

The 2009 Decisions also provided for the establishment of a regulatory asset to address the portion of the actual increase in pension and postretirement expense for 2009 and 2010 that was not included in rates. For 2009, a $10.2 million regulatory asset was approved and established, for which full recovery in the 2010 rate year was subsequently approved by the DPUC. Accordingly, it will be removed from rates effective February 4, 2011. The DPUC also approved the 2010 cash recovery of $11.4 million for UI’s current estimate of 2010 pension and postretirement expense not previously included in rates.

On April 1, 2010, UI filed its ratemaking proposal and underlying decoupling analysis for the 2009 rate year ended February 3, 2010. UI identified a net regulatory liability of approximately $0.5 million, which would be applied against the proposed decoupling adjustment for the 2010 rate year ending February 3, 2011. The proposal seeks to net various regulatory adjustments against the 2009 rate year decoupling regulatory asset of $1.5 million, resulting in an overall net regulatory liability. The filing also requested the DPUC undertake the review of the decoupling pilot contemplated originally for the later part of 2010 in this proceeding to determine if the decoupling pilot will be extended beyond the 2010 rate year. The DPUC is expected to issue a final decision in August 2010.

In December 2009, UI received a letter ruling approving rates effective January 1, 2010, incorporating the above mentioned distribution rate changes along with previously approved changes to the Generation Services Charges (GSC), Non-Bypassable Federally Mandated Congestion Charges (NBFMCC), transmission and system benefits charge, resulting in no change in the total rate for a residential Rate R customer with standard service generation. Additionally, last resort service GSC rates have been approved for the period through September 30, 2010.

Approval for the Issuance of Debt

On April 14, 2010, the DPUC approved UI’s application requesting approval of the issuance of up to $275 million principal amount of debt securities (the Proposed Notes) during 2010 through 2013. The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes: (1) to finance capital expenditures; (2) to repay the EBL, the proceeds of which are being used to finance UI’s 50% share of the equity contribution in GenConn Energy LLC for the development and construction of the Devon and Middletown peaking generation plants; (3) funding UI’s pension plan; (4) to partially repay short-term borrowings that are incurred to temporarily fund the preceding needs; (5) to pay for issuance costs related to the Proposed Notes; and (6) for general corporate purposes. On Jul y 27, 2010, UI issued $100 million principal amount of senior unsecured notes.

In February 2009, the DPUC approved an application filed by UI to afford UI additional flexibility to market outstanding tax-exempt bonds in the municipal bond market. Specifically, UI requested approval to refund with the proceeds of the issuance of new bonds, without insurance, $25.0 million, $27.5 million and $64.5 million principal amount of tax-exempt bonds outstanding. In December 2008, UI purchased $25.0 million principal amount of insured tax-exempt bonds, which were refunded with the proceeds from the issuance, without insurance, of $25.0 million tax-exempt bonds in March 2009. In February 2010, UI purchased $27.5 million principal amount of insured tax-exempt bonds which were refunded with the proceeds from the issuance, without insurance, of $27.5 million tax-exempt bonds on January 28, 2010. UI plans to refund $64.5 million principal amount of tax-exempt bonds, for which the interest rate is periodically reset by auction, at such time and on such terms as municipal bond market conditions allow.

Generation

UI is a 50-50 joint venturer with NRG Energy, Inc. (NRG) in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (collectively “GenConn”), was chosen by the DPUC to build new peaking generation plants to help address Connecticut’s growing need for more power generation during the heaviest load periods.

The two peaking generation projects, each with a nominal capacity of 200 megawatts (MW), are located at NRG’s existing Connecticut plant locations in Devon and Middletown. GenConn’s Devon plant is now operating, and its Middletown plant is scheduled to be in operation by June 2011. GenConn recovers its costs under a contract for differences (CfD) agreement which is cost of service based. GenConn has signed CfDs for both projects with the Connecticut Light & Power Company (CL&P). The cost of the contracts will be paid by customers and will be

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UIL HOLDINGS CORPORATION

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

subject to a cost-sharing agreement whereby approximately 20% of the cost is borne by UI customers and approximately 80% by CL&P customers.

GenConn filed a rate case request with the DPUC in December 2009, seeking approval of 2010 revenue requirements for the period commencing June 1, 2010 for the GenConn Devon facility. The DPUC issued a final decision on May 26, 2010, approving the proposed $18.7 million 2010 revenue requirement for the GenConn Devon plant. GenConn has bid the full capacity of the GenConn Devon facility into the ISO New England, Inc. (ISO-NE) locational forward reserve market (LFRM) for the summer 2010 period (June 1, 2010 - September 30, 2010). The DPUC’s decision states that final determination regarding prudent construction costs will be made in the 2013 revenue requirements proceeding to be filed in 2012 after the GenConn Devon and GenConn Middletown facilities are operational and costs are complete.

The four units at the GenConn Devon facility have been released to the ISO-NE LFRM (three in June 2010 and one in July 2010), but GenConn incurred availability penalties for such units not being available to the ISO-NE LFRM as of June 1, 2010. GenConn was able to mitigate these penalties by obtaining coverage for the unavailable capacity. UI’s 50% share in the income (loss) from equity investments of $0.9 million, included in UIL Holdings’ consolidated financial statements as of June 30, 2010, includes these mitigated penalties, as well as ISO-NE revenues for units that were released to the ISO-NE LFRM, revenues associated with its CfD with CL&P, and normal operating expenses.

GenConn filed a rate case request with the DPUC on July 30, 2010, seeking approval of 2011 revenue requirements for the period commencing January 1, 2011 for the GenConn Devon facility and June 1, 2011 for the GenConn Middletown facility. As a result of changed financial market conditions and updated cost information, GenConn project costs have increased over the proposal it originally submitted to the DPUC. The increase was driven primarily by increased financing costs and the cost to build interconnection facilities at the Middletown site. The DPUC has ruled that prudently incurred financing costs, interconnection costs and taxes will be recoverable and, therefore, GenConn expects to recover such costs in DPUC-approved future reve nues. The CfDs provide for a true-up of revenue from the ISO New England Markets in which GenConn participates to DPUC-approved revenue requirements.

Pension and Postretirement Expenses

In response to the Internal Revenue Service (IRS) mandated change in mortality tables utilized for certain Employee Retirement Income Security Act of 1974 (ERISA)-related liability calculations, effective January 1, 2007, the DPUC allowed regulatory treatment for the change in pension and postretirement expenses resulting from the use of the new mortality tables. In the 2009 Decisions, the DPUC approved the recovery of these expenses over a four-year period beginning in 2009. As of June 30, 2010, the remaining regulatory asset was approximately $2.7 million.

The 2009 Decisions also provide for the establishment of an annual regulatory asset to address a portion of the actual increase in pension and postretirement expense for each of 2009 and 2010. For 2009, UI recorded a regulatory asset of approximately $10.2 million which will be recovered fully in the 2010 rate year. As of June 30, 2010, the remaining annual pension regulatory asset was approximately $6.1 million. Additionally, $11.4 million will be recovered in rates in the 2010 rate year for UI’s estimate of 2010 pension and postretirement expense.

Power Supply Arrangements

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

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UIL HOLDINGS CORPORATION

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

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 agreements 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 Connecticut statute, a third party consultant retained by the DPUC works 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 2010, 90% for 2011 and 30% for 2012. Supplier of last resort service is procured on a quarterly basis. UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and elected the “normal purchase, normal sale” exception under ASC 815 “Derivatives and Hedging”. As such, UI regularly assesses the accounting treatment for its power supply contracts. These wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on sen ior debt was to fall below investment grade. In May 2010, Moody’s Investor Services (Moody’s) released its updated credit opinion for UI and maintained its Baa2 rating with a stable outlook. In May 2010, Standard & Poors’ Investor Services (S&P) released its updated credit opinion for UI maintaining its BBB rating. If UI’s credit rating were to decline one rating and UI were to be placed on negative credit watch, monthly amounts due and payable to the power suppliers would be accelerated to semi-monthly payments. UI’s credit rating would have to decline two ratings to fall below investment grade at either rating service. If this were to occur, UI would have to deliver collateral security in an amount equal to the receivables due to the sellers for the thirty day period immediately preceding the default notice. If such a situation had been in effect as of June 30, 2010, UI would have had to post approximately $19.5 m illion in collateral.

Derivatives

Pursuant to Connecticut’s 2005 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 capacity resources and Connecticut electric customers, and provide the commitment necessary for owners of these resources to obtain necessary financing, the DPUC required that UI and CL&P execute long-term contracts with the selected resources. In August 2007, the DPUC approved four CfDs, each of which specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price. 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 CfDs will be recoverable by UI and CL&P, and in accordance with ASC 980 "Regulated Operations", UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability). The above contracts are derivatives and they, along with the contracts for standard service and supplier of last resort service discussed in the Power Supply Arrangement discussion above and the financial transmission rights (FTRs) discussed below, are the Company’s only derivative instruments. The CfDs are marked-to-market in accordance with ASC 815. For those CfDs signed by CL&P, UI records its approximate 20% portion of CL&P’s derivative, pursuant to the sharing agreement noted above. As of June 30, 2010, UI has record ed a gross derivative asset of $32.4 million ($6.4 million related to its portion of CL&P’s derivative assets), a regulatory asset of $80.2 million, a gross derivative liability of $106.2 million ($73.7 million related to its portion of CL&P’s derivative liabilities) and a regulatory liability of $6.4 million in the accompanying Consolidated Balance Sheet. See Note (K) “Fair Value of Financial Instruments” for additional CfD information.

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UIL HOLDINGS CORPORATION

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

Kleen's attainment of commercial operation. As such, during the first quarter of 2010, UIL Holdings adjusted the probability assumption input to the expected cash flow analysis, significantly reducing the fair value of the related regulatory asset and derivative liability on the Consolidated Balance Sheet. This change did not have an impact on UIL Holdings’ Consolidated Statement of Income.

The unrealized gains and losses from mark-to-market adjustments to derivatives recorded in regulatory assets or regulatory liabilities for the three and six month periods ended June 30, 2010 and 2009 were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(In Thousands)						(In Thousands)

Regulatory Assets - Derivative assets	$	4,905		$	517		$	(57,552	)	$	13,872

Regulatory Liabilities - Derivative liabilities	$	(192	)	$	(613	)	$	(93	)	$	(1,725	)

The reduction in the probability of Kleen’s attainment of commercial operation, as discussed above, resulted in the reduction of UI’s projected derivative liability relating to UI’s CfD with Kleen. The reduction of this derivative liability was the primary reason for the unrealized gain during the three and six month periods ended June 30, 2010.

The fair value of the gross derivative assets and liabilities as of June 30, 2010 and December 31, 2009 were as follows:

		June 30, 2010
	(In Thousands)

		Deferred Charges	Current	Noncurrent
	Current Assets	and Other Assets	Liabilities	Liabilities

Derivative assets/(liabilities), gross	$ 3,424	$ 29,010	3,802	$ 102,386

		December 31, 2009
	(In Thousands)

		Deferred Charges	Current	Noncurrent
	Current Assets	and Other Assets	Liabilities	Liabilities

Derivative assets/(liabilities), gross	$ 2,738	$ 27,956	$ 2,822	$ 159,271

Pursuant to Connecticut’s 2007 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 owners of the peaking resources to obtain financing. During 2008, CL&P executed three peaking generation CfDs, one with GenConn relating to its Devon facility, one with GenConn relating to its Middletown facility and the other with PSEG Power Connecticut LLC (“PSEG”), to which the sharing agreement betwee n UI and CL&P described above also applies. These contracts are not considered to be derivatives under ASC 815 and therefore will be accounted for on an accrual basis.

ISO-NE and RTO-NE

ISO-NE, an independent, not-for-profit corporation, was approved by the FERC as the regional transmission organization for New England (RTO-NE) on February 1, 2005. ISO-NE is responsible for the reliable operation of the region’s bulk electric power system and fair administration of the region’s wholesale electricity marketplace. ISO-NE also is responsible for the management of the comprehensive bulk electric power system and wholesale markets’ planning processes that address the region's electricity needs.

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UIL HOLDINGS CORPORATION

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

Transmission Return on Equity (ROE)

In March 2008, the FERC issued an order on rehearing (Rehearing Order) establishing allowable ROEs for transmission projects of transmission owners in New England, including UI. In the Rehearing Order, the FERC established the base-level ROE of 11.14% beginning in November 2006. The Rehearing Order also confirmed a 50 basis point ROE adder on Pool Transmission Facilities (PTF) for participation in the RTO-NE and a 100 basis point ROE incentive for projects included in the ISO-NE Regional System Plan that were completed and on line as of December 31, 2008. The Middletown/Norwalk Transmission Project received this 100 basis point ROE adder. For projects placed in service after December 31, 2008, incentives may be requested from the FERC, through a specific showing justify ing the incentive, on a project-specific basis.

In May 2008, several public entities, including the DPUC (petitioners), filed a petition with the United States Court of Appeals for the District of Columbia Circuit (U.S. Court of Appeals) challenging the Rehearing Order. In January 2010, the U.S. Court of Appeals issued a decision upholding the FERC order, and in April 2010, it denied the petitioners request for a rehearing by the full court.

UI’s overall transmission ROE is determined by the mix of UI’s transmission rate base between new and existing transmission assets, and whether such assets are PTF or non-PTF. UI’s transmission assets are primarily PTF. For 2010, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 12.3% to 12.5%.

New England East-West Solution

On July 14, 2010, UI entered into an agreement (Agreement) with CL&P, under which UI will have the right to invest in and own transmission assets associated with the Connecticut portion of CL&P’s New England East West Solution (NEEWS) projects to improve regional energy reliability. The Agreement is subject to state and federal regulatory approval. On July 15, 2010, UI and CL&P filed a joint application with the DPUC requesting such approval.

NEEWS consists of four inter-related transmission projects being developed by subsidiaries of Northeast Utilities (NU), the parent company of CL&P, in collaboration with National Grid USA. Three of the projects have portions sited in Connecticut: (1) the Greater Springfield Reliability Project, (2) the Interstate Reliability Project and (3) the Central Connecticut Reliability Project. Based on data prepared by CL&P, UI expects that the cost of building the Connecticut portions of these projects will be approximately $711 million.

Under the terms of the Agreement, UI has the option to make quarterly payments to CL&P in exchange for ownership of specific transmission assets as they come into commercial operation. Following regulatory approval, UI will have the right to invest up to the greater of $60 million or an amount equal to 8.4% of CL&P’s costs for the Connecticut portions of these projects. As assets come into commercial operation, CL&P will transfer title to transmission assets such as poles and wires to UI in proportion to its investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating and maintenance agreement with UI. Also, under the terms of the Agreement, there are certain circumstances under which CL&P can terminate the Agreement.

Middletown/Norwalk Transmission Project

In a May 2007 Order, the FERC approved rate incentives for the 345-kilovolt (kV) transmission line from Middletown, Connecticut to Norwalk, Connecticut (the Project). The Project was allowed to include Construction Work In Progress (CWIP) expenditures in rate base. For project costs incurred before August 8, 2005, the FERC allowed UI to include 50% of CWIP expenditures in rate base, and for project costs incurred after August 8, 2005, the FERC allowed UI to include 100% of CWIP expenditures in rate base. The FERC also accepted a 50 basis point adder which will be applied only to costs associated with advanced transmission technologies.

Certain parties requested rehearing of the FERC May 2007 order, but in January 2009, the FERC denied those requests. Also, in January 2009, the DPUC and the Attorney General of Connecticut filed a petition with the U.S.

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UIL HOLDINGS CORPORATION

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

Court of Appeals seeking judicial review of the FERC’s May 2007 and January 2009 orders. In May 2010, the parties withdrew their petition for judicial review and the U.S. Court of Appeals dismissed the cases.

(D) SHORT-TERM CREDIT ARRANGEMENTS

As of June 30, 2010, UI had $25 million outstanding under the facility. UIL Holdings had $5 million in short-term borrowings outstanding under the facility, as well as a standby letter of credit outstanding in the amount of $1 million that expired on January 31, 2010, but is expected to be automatically extended for one year periods from the expiration date (or any future expiration date), unless the issuer bank elects not to extend. Available credit under this facility at June 30, 2010 was $144 million for UI and UIL Holdings in the aggregate. UIL Holdings records borrowings under this facility as short-term debt, but the agreement has longer term commitments from banks allowing the Company to borrow and reborrow funds, at its option, to December 22, 2011, thus affording it flexibil ity in managing its working capital requirements.

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 June 30, 2010, UIL Holdings had no short-term borrowings outstanding under this arrangement.

(E) INCOME TAXES

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
(In Thousands)
Income tax expense consists of:
Income tax provisions (benefit):
Current
Federal	$	14,140		$	7,019		$	26,766		$	13,030
State		3,170			1,315			5,752			2,402
Total current		17,310			8,334			32,518			15,432
Deferred
Federal		(5,937	)		1,325			(9,123	)		3,168
State		(2,410	)		(489	)		(4,054	)		(861	)
Total deferred		(8,347	)		836			(13,177	)		2,307

Investment tax credits		(36	)		(36	)		(73	)		(73	)

Total income tax expense	$	8,927		$	9,134		$	19,268		$	17,666

Income tax components charged as follows:
Operating tax expense	$	12,084		$	9,761		$	22,548		$	19,194
Nonoperating tax benefit		(2,630	)		(633	)		(2,756	)		(1,489	)
Equity Investments tax expense (benefit)		(527	)		6			(524	)		(39	)

Total income tax expense	$	8,927		$	9,134		$	19,268		$	17,666

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UIL HOLDINGS CORPORATION

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

The combined statutory federal and state income tax rates for UIL Holdings for the three and six month periods ended June 30, 2010 and 2009 were 40.4% and 39.9%, respectively. The increase in the combined statutory federal and state income tax rate for the 2010 periods was due to legislation enacted in Connecticut in the third quarter of 2009 which imposed a 10% surcharge on the corporation business tax. This surcharge increased the statutory rate of Connecticut corporation business tax rate from 7.5% to 8.3%.

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 six month periods ended June 30, 2010 were 46.9% and 42.4%, as compared to 39.9% and 40.6% for the three and six month periods ended June 30, 2009. The increase in the 2010 effective book income tax rates was due primarily to the non-normalized effect associated with increased nuclear stranded cost amortization in the CTA in the second quarter of 2010.

The increase in current income tax expense for the three and six month periods ended June 30, 2010, compared to the three and six month periods ended June 30, 2009, is primarily due to higher transmission revenues. This current tax effect is deferred for book purposes resulting in an offsetting decrease to deferred tax expense.

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UIL HOLDINGS CORPORATION

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

(F) SUPPLEMENTARY INFORMATION

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
	(In Thousands)
Operating Revenues
Retail	$	174,307		$	182,311	$	361,127		$	394,473
Wholesale		61			-		61			202
Other		32,748			18,054		66,208			41,199
Total Operating Revenues	$	207,116		$	200,365	$	427,396		$	435,874

Depreciation and Amortization
Utility property, plant, and equipment depreciation	$	13,191		$	12,202	$	26,146		$	24,225
Non-utility property, plant, and equipment depreciation		-			47		-			93
Total Depreciation		13,191			12,249		26,146			24,318
Amortization of nuclear plant regulatory assets (CTA)		10,485			10,108		22,529			21,758
Amortization of intangibles		13			12		23			21
Amortization of other regulatory assets		3,349			440		5,591			699
Total Amortization		13,847			10,560		28,143			22,478
Total Depreciation and Amortization	$	27,038		$	22,809	$	54,289		$	46,796

Taxes - Other than Income Taxes
Operating:
Connecticut gross earnings	$	10,868		$	8,096	$	21,952		$	16,842
Local real estate and personal property		4,485			3,597		9,032			7,415
Payroll taxes		1,239			1,221		3,312			3,151
Total Taxes - Other than Income Taxes	$	16,592		$	12,914	$	34,296		$	27,408

Other Income and (Deductions), net
Interest income (Note H)	$	1,068		$	786	$	2,063		$	1,447
Allowance for funds used during construction		2,741			419		4,692			823
Conservation & Load Management incentive		361			305		645			594
Energy generation and load curtailment incentives		863			26		882			217
ISO load response, net		545			281		1,052			630
Miscellaneous other income and (deductions), net		(674	)		529		(374	)		106
Total Other Income and (Deductions), net	$	4,904		$	2,346	$	8,960		$	3,817

Other Interest, net
Notes Payable	$	38		$	224	$	64		$	623
Other		100			196		355			288
Total Other Interest, net	$	138		$	420	$	419		$	911

(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 pension plan. The cash surrender value of these policies is included in “Other Investments” on the Consolidated Balance Sheet and is marked-to-market.

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UIL HOLDINGS CORPORATION

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

The following tables represent the components of net periodic benefit cost for pension and other postretirement benefits (OPEB) for the three and six month periods ended June 30, 2010 and 2009:

	Three Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2010			2009			2010			2009
	(In Thousands)
Components of net periodic benefit cost:
Service cost	$	1,781		$	1,534		$	340		$	333
Interest cost		5,272			5,231			983			1,035
Expected return on plan assets		(4,766	)		(4,279	)		(439	)		(410	)
Amortization of:
Prior service costs		161			174			(25	)		(25	)
Transition obligation (asset)		-			-			264			264
Actuarial (gain) loss		3,076			3,606			487			672
Net periodic benefit cost (1)	$	5,524		$	6,266		$	1,610		$	1,869


	Six Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
		2010			2009			2010			2009
	(In Thousands)
Components of net periodic benefit cost:
Service cost	$	3,561		$	3,067		$	680		$	667
Interest cost		10,544			10,463			1,965			2,069
Expected return on plan assets		(9,533	)		(8,557	)		(877	)		(820	)
Amortization of:
Prior service costs		323			349			(51	)		(50	)
Transition obligation (asset)		-			-			529			529
Actuarial (gain) loss		6,154			7,212			975			1,343
Net periodic benefit cost (1)	$	11,049		$	12,534		$	3,221		$	3,738

(1) For the three month period ended June 30, 2009, UI recorded $2.3 million of pension expense and $0.5 million of OPEB expense as a regulatory asset. For the six month period ended
June 30, 2009, UI recorded $4.6 million of pension expense and $0.9 million of OPEB expense as a regulatory asset. These amounts reflect the establishment of an annual regulatory
asset, as approved by the DPUC, to address the actual increase in pension and post-retirement expense for 2009 (see Note (C), Regulatory Proceedings).

The following actuarial weighted-average assumptions were used in calculating net periodic benefit cost for the three and six month periods ended June 30, 2010 and 2009:

	Three and Six Months Ended June 30,
	Pension Benefits		Other Postretirement Benefits
	2010	2009	2010	2009
Discount rate - Qualified Pension Benefits	5.85%	6.20%	N/A	N/A
Discount rate - Non-Qualified Pension Benefits	5.65%	6.10%	N/A	N/A
Discount rate - Other Post Retirement Benefits	N/A	N/A	5.80%	6.10%
Average wage increase	3.80%	3.80%	N/A	N/A
Return on plan assets	8.50%	8.50%	8.50%	8.50%
Composite health care trend rate (current year)	N/A	N/A	9.50%	10.00%
Composite health care trend rate (2019 forward)	N/A	N/A	5.00%	5.00%

N/A – not applicable

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UIL HOLDINGS CORPORATION

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

Asset values of funded pension and postretirement plans as of June 30, 2010 and December 31, 2009 were approximately $217.9 million and $231.3 million, respectively. While there was no minimum required pension contribution for the 2009 plan year, UI currently expects to make total contributions of approximately $8 million in 2010 and $21 million in 2011, subject to true-ups of actuarial data.

(H) RELATED PARTY TRANSACTIONS

Arnold L. Chase, a Director of UIL Holdings since 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 totaled $5.2 million and $5.5 million for the six month periods ended June 30, 2010 and 2009, respectively. For the three month periods ended June 30, 2010 and 2009, such lease payments totaled $2.5 million and $2.9 million, respectively.

GenConn, of which UI is a 50-50 joint-venturer, had signed a promissory note (the “Loan”) with UI under which UI advanced up to an aggregate principal amount of $48.5 million to fund GenConn’s construction and other cash needs until permanent financing was arranged. In connection with the EBL obtained by UI and the Project Financing obtained by GenConn on April 27, 2009, all outstanding balances on the Loan were replaced by a new promissory note, the balance of which was $115.9 million as of June 30, 2010. See “Note (B) – Capitalization – Long-Term Debt” for further discussion regarding the EBL. Additionally, for the three and six month periods ended June 30, 2010, $0.9 million and $1.8 million, respectively, of interest income related to the promissory note is included in other income and (deductions), net in the accompanying Consolidated Statement of Income, which is fully offset by the interest expense incurred by UI under the EBL.

(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 $0.3 million as of June 30, 2010. 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 C onnecticut 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).

Connecticut Yankee updates the cost of its remaining decommissioning activity, which consists primarily of ground water monitoring and nuclear fuel storage, 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 June 30, 2010, UI has regulatory approval to recover in future rates (through the CTA) its $19.5 million regulatory asset for Connecticut Yankee over a term ending in 2015.

Stock Redemption

In September 2009, the Connecticut Yankee Board of Directors voted to redeem $6.0 million of Connecticut Yankee stock. In October 2009, UI received $0.6 million in the redemption and its stock ownership share in Connecticut Yankee remains at 9.5%, because the redemption was done on a proportional basis. The stock redemption continues a redemption program designed to fund equity at levels necessary to meet expected on-going requirements.

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UIL HOLDINGS CORPORATION

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

DOE Spent Fuel Litigation

In the Nuclear Waste Policy Act of 1982, Congress provided for the United States Department of Energy (DOE) to dispose of spent nuclear fuel and other high-level waste (hereinafter Nuclear Waste) from nuclear generating plants. In 1983, Connecticut Yankee and the DOE entered into a standard disposal contract mandated by the Act which required the DOE to begin disposing of Connecticut Yankee’s Nuclear Waste by the end of January 1998.

In 1998, Connecticut Yankee 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 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. UI’s 9.5% ownership share would result in a payment of approximately $3.2 million which, if awarded, would be refunded to customers. In August 200 8, the United States Court of Appeals for the Federal Circuit vacated the lower court's $34.2 million damage award, and remanded the case for a re-calculation of damages. 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 remove Connecticut Yankee’s spent fuel. In July 2009, Connecticut Yankee provided the government with a second set of damage claims totaling approximately $135 million for damages incurred from January 1, 2002 through December 31, 2008. UI’s 9.5% ownership share would result in a payment of approximately $12.8 million which, if awarded, would be refunded to customers. 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 co mpleted 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 guarantee 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 guarantee, which expires in August 2015, is reduced monthly, proportionate with principal paid on the underlying debt. As of June 30, 2010, the amount of UI’s guarantee for this debt totaled approximately $1.6 million.

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, climate change 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. Significant environmental issues known to UIL Holdings at this time are described below.

Middletown/Norwalk Transmission Project

During construction of the Middletown/Norwalk Transmission Project in Bridgeport, Connecticut, UI encountered soil contaminated with Polychlorinated Biphenyls (PCBs). Remediation of the PCBs was completed in June 2008 at a cost of $2.9 million. In accordance with a construction agreement between UI, Connecticut Light & Power and the Connecticut Department of Transportation (CDOT), CDOT will be reimbursing UI approximately $0.5 million of these costs. The remaining $2.4 million was recovered through transmission rates and is reflected as such in UIL Holdings’ Consolidated Financial Statements.

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UIL HOLDINGS CORPORATION

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

Branford Landfill

In August 2009, UI received a demand letter from EPA for approximately $0.6 million to cover the cost of EPA’s remediation of the East Main Street Disposal Superfund Site. UI has examined relevant documents in EPA’s possession and is continuing discussions with EPA regarding its claim. UI cannot presently assess the potential financial impact, if any, of the EPA claim, beyond the amount identified in EPA’s demand letter to UI.

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 federal law for compensation relating to its remediation costs at the subject site which is adjacent to East Main Street Disposal Superfund Site noted above. 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 ad dress the claims until the owner provides information supporting the claims.

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 represented 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. T he 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 has indemnified UI for environmental matters related to the Steel Point property. The Steel Point property includes the land up to the bulkhead. 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. In addition, the MOU provides that there is no indemnity for liability related to contaminated harbor sediments. UI is not aware of any such claims. UI would seek to recover any 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 agreement was reached between QE and Evergreen Power and Asnat regarding future environmental liability or what remediation activity remai ns 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. UI has not updated the original $1.9 million remediation estimate, and does not have specific knowledge of any remediation work done, or remaining to be done on behalf of QE or any subsequent owner. In July 2008, Evergreen Power and Asnat submitted a claim to UI seeking compensation for environmental remediation on the property, including the existing building which remains on the site. UIL Holdings cannot presently assess the potential financial impact, if any, of this claim. As such, as of June 30, 2010, no liability related to this claim has been recorded.

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UIL HOLDINGS CORPORATION

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

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.

Middletown/Norwalk Transmission Project (the Project)

The general contractor and two subcontractors responsible for civil construction work in connection with the installation of UI’s portion of the Middletown/Norwalk Transmission Project’s underground electric cable system have filed lawsuits seeking payment for change order requests for approximately $34.5 million, plus interest and costs. UI is currently awaiting a court conference date and intends to defend the litigation. To the extent that UI is required to satisfy any of the change order requests, UI would seek recovery through its transmission revenue requirement.

In 2008, UI funded escrow accounts for certain retention amounts withheld by UI which were to remain in place until the completion of the verification of fulfillment of contractor obligations. As of June 30, 2010, the balance of these escrow accounts was zero, as all remaining withheld retention amounts were paid to the contractors during the first quarter of 2010.

GenConn

The former general contractor responsible for the construction at the GenConn Devon facility has notified GenConn that it is seeking approximately $6.5 million related to alleged scope and rework changes. GenConn is reviewing the change order requests and cannot presently assess their merit. To the extent that GenConn is required to satisfy any of the change order requests, GenConn would expect to recover such costs through its revenue requirements. The former general contractor also notified GenConn that it is planning to submit a delay and impact claim under the terms of its contract with GenConn. This potential claim has been preliminarily estimated by the former general contractor to be approximately $16.5 million, subject to further review and adjustment. The former gene ral contractor has yet to file a formal delay and impact claim or provide supporting documentation. As such, GenConn cannot make an assessment of the potential claim nor can it determine the extent to which such costs, if any, could be recovered through its revenue requirements. To the extent that there is any financial impact on GenConn’s financial statements, the effect on UIL Holdings financial statements will be reflected in the carrying value of its 50% ownership position in GenConn and through “Income (Loss) from Equity Investments” in the Consolidated Statement of Income.

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UIL HOLDINGS CORPORATION

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

Property Tax Assessment

In 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 asserted 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. UI believed that its property tax declaration was filed on a timely basis under Connecticut law and contested the increased assessment in the Superior Court of the State of Connecticut. &# 160;UI paid its property tax obligations to Bridgeport, which included the increased assessment of $0.6 million, in order to avoid any potential interest charges applicable to unpaid property tax assessments and amended its complaint with the Superior Court to seek a refund of the $0.6 million payment. In May 2010, UI and Bridgeport agreed to a settlement of this litigation which entitled UI to a refund of $0.4 million of the $0.6 million previously paid. UI claimed the $0.4 million as a credit against its payment of property taxes to Bridgeport during July 2010.

Cross-Sound Cable Company, LLC

UIL Holdings and its subsidiary United Capital Investments, Inc. (UCI) continue to provide two guarantees, in original amounts of $2.5 million and $1.3 million, in support of guarantees by Hydro-Quebec (HQ), the former majority owner of Cross-Sound Cable LLC (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 guarantee supports an HQ guarantee 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 guarantee in its Consolidated Balance Sheet as of June 30, 2010.

The $1.3 million guarantee 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 guarantee reduces proportionately with each payment made. As of June 30, 2010, the remaining amount of the guarantee was $0.9 million. UIL Holdings believes there is a low probability that it would be required to fund this guarantee and, as such, has not recorded a liability related to this guarantee in its Consolidated Balance Sheet as of June 30, 2010.

Xcelecom

UIL Holdings also has exposure relating to its indemnification obligations to the buyers of the former Xcelecom companies under the agreements relating to the sales of those companies and 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. As of June 30, 2010, sureties had issued bonds for the account of Xcelecom in the aggregate amount of approximately $4.8 million. There are no remaining costs to complete the projects covered by such surety bonds as of June 30, 2010 and UIL Holdings does not expect to be required to make any payments to sureties. As such, UIL Holdings has not recorded a liability in its Consolidated Balance Sheet as of June 30, 2010.

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 June 30, 2010. The promissory note calls for monthly principal payments beginning on July 31, 2010, with full payment in September 2011. The buyer is currently paying principal and interest on a monthly basis.

Acquisition Purchase Agreement Termination Fee

On May 25, 2010, UIL Holdings entered into the Purchase Agreement with Seller which provides for the sale of SCG, CNG, and Berkshire to UIL Holdings. The Purchase Agreement contains termination rights for both UIL Holdings and Seller. Certain of the termination rights, such as termination by mutual agreement of the parties, do not require UIL Holdings to pay any termination fee. However, UIL Holdings would be required to pay to Seller the

- 28 -

UIL HOLDINGS CORPORATION

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

Termination Fee if the Purchase Agreement is terminated under certain circumstances. See Note A “Organization and Statement of Accounting Policies”, for further information.

(K) FAIR VALUE OF FINANCIAL INSTRUMENTS

UIL Holdings adopted the accounting and disclosure guidance set forth in ASC 820 “Fair Value Measurements and Disclosures” on January 1, 2008 as it relates to certain assets and liabilities, specifically derivative assets and liabilities related to contracts for differences and FTRs, assets related to its deferred compensation plan, and supplemental retirement benefit trust life insurance policies. See Note (C), “Regulatory Proceedings” for additional disclosures related to ASC 820.

As defined in ASC 820, 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. ASC 820 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. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. Th e three levels of the fair value hierarchy 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 not quoted prices but are either directly or indirectly observable as of the reporting date, including 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.

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 ASC 820 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. As required by ASC 820, 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.

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UIL HOLDINGS CORPORATION

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

The following tables set 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 June 30, 2010 and December 31, 2009.

	June 30, 2010

	Level 1		Level 2		Level 3			Total
	(In Thousands)

Assets:
Derivative assets	$	-	$	-	$	32,434		$	32,434
Deferred Compensation Plan		3,418		-					3,418
Supplemental retirement benefit trust life insurance policies (Note G)		4,807		-					4,807
	$	8,225	$	-	$	32,434		$	40,659

Liabilities:
Derivative liabilities	$	-	$	-	$	106,188		$	106,188

Net fair value assets/(liabilities), June 30, 2010	$	8,225	$	-	$	(73,754	)	$	(65,529	)

	December 31, 2009

	Level 1		Level 2		Level 3			Total
	(In Thousands)

Assets:
Derivative assets	$	-	$	-	$	30,694		$	30,694
Deferred Compensation Plan		3,367		-		-			3,367
Supplemental retirement benefit trust life insurance policies (Note G)		5,071		-		-			5,071
	$	8,438	$	-	$	30,694		$	39,132

Liabilities:
Derivative liabilities	$	-	$	-	$	162,093		$	162,093

Net fair value assets/(liabilities), December 31, 2009	$	8,438	$	-	$	(131,399	)	$	(122,961	)

The determination of fair value of the derivative assets and liabilities, which primarily consist of contracts for differences, was based on a probability-based expected cash flow analysis that was discounted at the June 30, 2010 or December 31, 2009 risk-free interest rates, as applicable, and an adjustment for non-performance risk using credit default swap rates. 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. The DPUC has determined that changes in fair value associated with the contracts for differences are fully recoverable. As a result, such changes have no impact on UIL Holdings’ net income.

On February 7, 2010, an explosion occurred at the construction site of the nearly completed 620-megawatt plant being built by Kleen Energy Systems, LLC (“Kleen”), one of the four capacity resources selected by the DPUC to create new or incremental capacity resources as noted above. CL&P has executed CfDs with two of the selected projects, including the Kleen project. The CfD with Kleen is subject to the sharing agreement between UI and CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contract. The extent of damage and any resulting delay in the attainment of commercial operation is currently under review. Based on information known to date, it appears to be reasonably likely that, at a minimum, there will be a delay in Kleen's attainment of comm ercial operation. As such, during the first quarter of 2010, UIL Holdings adjusted the probability assumption input to the expected cash flow analysis, significantly reducing the fair value of the related regulatory asset and derivative liability on the Consolidated Balance Sheet. This change did not have an impact on UIL Holdings’ Consolidated Statement of Income.

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UIL HOLDINGS CORPORATION

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

Under the UIL Deferred Compensation Plan (DCP), directors, 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 in accordance with ASC 815 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 six month period ended June 30, 2010. The reduction in the probability of Kleen’s attainment of commercial operation, as discussed above, resulted in the reduction of UI’s projected derivative liability relating to UI’s CfD with Kleen. The reduction of this derivative liability was the primary reason for the increase in the net fair value of the net derivative assets/(liabilities) during the six month period ended June 30, 2010 .

	Six Months Ended
	June 30, 2010
	(In Thousands)

Net derivative assets/(liabilities), December 31, 2009	$	(131,399	)
Unrealized gains and (losses), net		57,645
Purchases, issuances, and settlements		-
Transfers in and/or out of Level 3		-
Net derivative assets/(liabilities), June 30, 2010	$	(73,754	)


Change in unrealized gains (losses), net relating to net derivative assets/(liabilities), still held as of June 30, 2010	$	57,645

The unrealized loss relating to net derivative assets/(liabilities) for the comparable prior year period, the six months ended June 30, 2009, was $12.1 million which was primarily due to an increase in the probability of one of the contract for differences projects attaining commercial operation.

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 derivative assets/(liabilities) for the six month period ended June 30, 2010. The amounts offset the net derivative assets/(liabilities) detailed above.

	Six Months Ended
	June 30, 2010
	(In Thousands)

Net regulatory assets/(liabilities), December 31, 2009	$	131,399
Unrealized (gains) and losses, net		(57,645	)
Net regulatory assets/(liabilities), June 30, 2010	$	73,754

- 31 -

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.

	Three months ended June 30, 2010
	(In Thousands)
	UI
	Distribution			Transmission		Total UI			Other (1)			Total
Operating Revenues	$	162,142		$	44,971	$	207,113		$	3		$	207,116
Purchased power		53,567			-		53,567			-			53,567
Operation and maintenance		55,382			6,870		62,252			115			62,367
Transmission wholesale		-			15,339		15,339			-			15,339
Depreciation and amortization		23,788			3,238		27,026			12			27,038
Taxes - other than income taxes		10,408			6,184		16,592			-			16,592
Acquisition-related costs		-			-		-			6,700			6,700
Operating Income		18,997			13,340		32,337			(6,824	)		25,513

Other Income and (Deductions), net		4,124			648		4,772			132			4,904

Interest Charges, net		6,610			2,915		9,525			942			10,467

Income Before Income Taxes and Equity Earnings		16,511			11,073		27,584			(7,634	)		19,950
Income Taxes		7,653			3,982		11,635			(2,708	)		8,927
Income Before Equity Earnings		8,858			7,091		15,949			(4,926	)		11,023
Income (Loss) from Equity Investments		(897	)		-		(897	)		-			(897	)
Net Income	$	7,961		$	7,091	$	15,052		$	(4,926	)	$	10,126

	Three months ended June 30, 2009
	(In Thousands)
	UI
	Distribution		Transmission		Total UI		Other (1)			Total
Operating Revenues	$	162,873	$	37,288	$	200,161	$	204		$	200,365
Purchased power		71,972		-		71,972		-			71,972
Operation and maintenance		43,860		6,481		50,341		69			50,410
Transmission wholesale		-		11,322		11,322		-			11,322
Depreciation and amortization		19,741		3,011		22,752		57			22,809
Taxes - other than income taxes		9,251		3,660		12,911		3			12,914
Operating Income		18,049		12,814		30,863		75			30,938

Other Income and (Deductions), net		2,218		80		2,298		48			2,346

Interest Charges, net		6,542		2,861		9,403		994			10,397

Income Before Income Taxes and Equity Earnings		13,725		10,033		23,758		(871	)		22,887
Income Taxes		5,671		3,769		9,440		(306	)		9,134
Income Before Equity Earnings		8,054		6,264		14,318		(565	)		13,753
Income (Loss) from Equity Investments		16		-		16		-			16
Net Income	$	8,070	$	6,264	$	14,334	$	(565	)	$	13,769

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

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UIL HOLDINGS CORPORATION

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

	Six months ended June 30, 2010
	(In Thousands)
	UI
	Distribution			Transmission		Total UI			Other (1)			Total
Operating Revenues	$	337,232		$	90,157	$	427,389		$	7		$	427,396
Purchased power		128,915			-		128,915			-			128,915
Operation and maintenance		99,697			13,957		113,654			334			113,988
Transmission wholesale		-			30,815		30,815			-			30,815
Depreciation and amortization		47,857			6,410		54,267			22			54,289
Taxes - other than income taxes		21,844			12,452		34,296			-			34,296
Acquisition-related costs		-			-		-			6,700			6,700
Operating Income		38,919			26,523		65,442			(7,049	)		58,393

Other Income and (Deductions), net		7,579			1,039		8,618			342			8,960

Interest Charges, net		13,268			5,852		19,120			1,898			21,018

Income Before Income Taxes and Equity Earnings		33,230			21,710		54,940			(8,605	)		46,335
Income Taxes		14,453			7,899		22,352			(3,084	)		19,268
Income Before Equity Earnings		18,777			13,811		32,588			(5,521	)		27,067
Income (Loss) from Equity Investments		(889	)		-		(889	)		-			(889	)
Net Income	$	17,888		$	13,811	$	31,699		$	(5,521	)	$	26,178

	Six months ended June 30, 2009
	(In Thousands)
	UI
	Distribution		Transmission		Total UI		Other (1)			Total
Operating Revenues	$	359,580	$	75,853	$	435,433	$	441		$	435,874
Purchased power		175,539		-		175,539		-			175,539
Operation and maintenance		89,176		13,235		102,411		506			102,917
Transmission wholesale		-		23,789		23,789		-			23,789
Depreciation and amortization		40,724		5,959		46,683		113			46,796
Taxes - other than income taxes		19,791		7,611		27,402		6			27,408
Operating Income		34,350		25,259		59,609		(184	)		59,425

Other Income and (Deductions), net		3,624		140		3,764		53			3,817

Interest Charges, net		12,076		5,599		17,675		2,118			19,793

Income Before Income Taxes and Equity Earnings		25,898		19,800		45,698		(2,249	)		43,449
Income Taxes		11,070		7,434		18,504		(838	)		17,666
Income Before Equity Earnings		14,828		12,366		27,194		(1,411	)		25,783
Income (Loss) from Equity Investments		28		-		28		-			28
Net Income	$	14,856	$	12,366	$	27,222	$	(1,411	)	$	25,811

	UI (2)
	Distribution		Transmission		Total UI		Other (1)			Total
Total Assets at June 30, 2010	$	-	$	-	$	2,179,649	$	15,506		$	2,195,155

Total Assets at December 31, 2009	$	-	$	-	$	2,203,062	$	18,698		$	2,221,760

(1) Includes UIL Holdings Corporate and UIL Holdings' non-utility activities.
(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 June 30, 2010, was $729.5 million and $477.1 million for Distribution and Transmission, respectively. As of December 31, 2009, net
plant in service was $691.1 million and $461.8 million for Distribution and Transmission, respectively.

- 33 -

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, unanticipate d 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. Such risks and uncertainties with respect to UIL Holdings’ pending transaction with Iberdrola USA, Inc. include, but are not limited to: the possibility that the proposed transaction is delayed or does not close, including due to the failure to receive required regulatory approvals, the taking of governmental action (including the passage of legislation) to block the transaction, or the failure of other closing conditions; the possibility that the expected benefits will not be realized, or will not be realized within the expected time period; and the ability to issue equity and debt securities upon terms and conditions UIL Holdings believes are appropri ate. 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. 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 guarantee 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.

Pending Acquisition of The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation and The Berkshire Gas Company

On May 25, 2010, UIL Holdings entered into a Purchase Agreement (the Purchase Agreement), with Iberdrola USA, Inc. (Seller), under which UIL Holdings will acquire (i) Connecticut Energy Corporation, the owner of The Southern Connecticut Gas Company (SCG), (ii) CTG Resources, Inc., the owner of Connecticut Natural Gas Corporation (CNG), and (iii) Berkshire Energy Resources, the owner of The Berkshire Gas Company (Berkshire), for $1.296 billion in cash, less net debt of approximately $411 million. Accordingly, UIL Holdings expects to make a cash payment at closing of approximately $885 million, subject to post closing adjustments. As of December 31, 2009, the companies to be acquired had a combined customer total of approximately 369,000, approximately 130,000 of which will be customers of both UI and SCG. After the closing, UIL Holdings’ customer base will increase to approximately 694,000. UIL Holdings expects the acquisition to close in the first quarter of 2011.

- 34 -

The Purchase Agreement also contains certain termination rights for both UIL Holdings and Seller, including a termination right for either party if the closing does not occur by May 25, 2011 and the terminating party has not caused the closing not to occur by breaching in any material respect its representations, warranties, covenants or agreements contained in the Purchase Agreement (provided that either party may postpone such date to August 25, 2011, if the only closing conditions that remain to be satisfied are the receipt of governmental approvals or the expiration or termination of the HSR Act waiting period). Certain of the termination rights, such as termination by mutual agreement of the parties, do not require UIL Holdings to pay any termination fee. However, under the following circ umstances, the Purchase Agreement may be terminated, and UIL Holdings would be required to pay to Seller a termination fee of $50 million (the Termination Fee):

·	by either party if state public utility regulatory approvals cannot be obtained;

·	by Seller if UIL Holdings does not close the acquisition because of any of the conditions listed in (i) through (iii) in the bullet point above;

·	by Seller if UIL Holdings has not obtained the financing necessary to fund the transaction by the end of the period provided by the Purchase Agreement for the pursuit of such financing; or

·	by Seller if there has been a material breach by UIL Holdings of its representations, warranties, covenants or agreements in the Purchase Agreement.

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 Regulation 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 the ability to control expenses, manage uncollectibles and capital expenditures, in addition to major weather disturbances. Sales volume is not expected to have an impact on distribution earnings during the two-year decoupling pilot program established in the DPUC’s 2008 Rate Case final decision. The extent to which sales volume will have an impact on UI’s financial results beyond the two-year decoupling trial period will depend upon the nature and extent of decoupling implemented by the DPUC after the expiration of the pilot period. UI expects to continue to make capital investments in its distribution and transmission infrastructure.

Generation

- 35 -

Derivatives

In accordance with FASB ASC 820 “Fair Value Measurements and Disclosures” (ASC 820), UIL Holdings applies fair value measurements to certain assets and liabilities, a portion of which fall into Level 3 of the fair value hierarchy defined by ASC 820 as pricing inputs that include significant inputs that are generally less observable from objective sources. As of June 30, 2010, the assets and liabilities that are accounted for at fair value on a recurring basis as Level 3 instruments include contracts for differences and financial transmission rights (FTRs), which represent 79.8% of the total amount of assets, and 100% of the total amount of liabilities accounted for at fair value on a recurring basis. The determination of fair value of the Level 3 instruments is based on a probability-based expected cas h flow analysis that is discounted at risk-free interest rates and an adjustment for non-performance risk using credit default swap rates. Certain management assumptions were made in this valuation process, including development of pricing that extended over the term of the contracts. In addition, UIL performs an assessment of risks related to obtaining regulatory, legal and siting approvals, as well as obtaining financing resources and ultimately attaining commercial operation.

The DPUC has determined that costs associated with the contracts for differences are fully recoverable. As a result, there is no impact on UIL Holdings’ net income as any unrealized gains/(losses) resulting from quarterly mark-to-market adjustments are offset by the establishment of regulatory assets/(liabilities) that have been recognized for the purpose of such recovery.

Legislation & Regulation

Pending Acquisition of The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation and The Berkshire Gas Company

As discussed above, on May 25, 2010, UIL Holdings entered into the Purchase Agreement with Seller which provides for the sale of SCG, CTG, and Berkshire to UIL Holdings. Under the HSR Act, the parties to certain proposed transactions covered by the must submit premerger notification to the Federal Trade Commission and the U.S. Department of Justice which includes

- 36 -

information about each company’s business. The parties may not consummate the proposed transactions until the waiting period outlined in the HSR Act has passed. UIL Holdings and Iberdrola USA each made its respective HSR Act filings on July 14, 2010.

The DPUC must approve UIL Holding’s acquisition of SCG and CNG, and the Massachusetts Department of Public Utilities (DPU) must approve the purchase of Berkshire. On July 16, 2010, UI filed its application requesting approval with the DPUC. The application requesting such approval from the DPU was filed on July 23, 2010.

In addition, SCG and CNG hold certain wireless radio station licenses from the Federal Communications Commission (FCC) pursuant to the Communications Act of 1934 with respect to dispatch center and certain communications equipment and devices. Applications will be filed with the FCC for approval of the upstream change of control over the holder of the licenses in connection with the Purchase Agreement.

Rates

On April 1, 2010, UI filed its ratemaking proposal and underlying decoupling analysis for the 2009 rate year ended February 3, 2010. UI identified a net regulatory liability of approximately $0.5 million, which would be applied against the proposed decoupling adjustment for the 2010 rate year ending February 3, 2011. The proposal seeks to net various regulatory adjustments against the 2009 rate year decoupling regulatory asset of $1.5, million resulting in an overall net regulatory liability. The filing also requested the DPUC undertake the review of the decoupling pilot contemplated originally for the later part of 2010 in this proceeding to determine if the decoupling pilot will be extended beyond the 2010 rate year. The DPUC is expected to issue a final decision in August 2010.

In December 2009, UI received a letter ruling approving rates effective January 1, 2010 incorporating the above mentioned distribution rate changes along with previously approved changes to the Generation Services Charges (GSC), Non-Bypassable Federally Mandated Congestion Charges (NBFMCC), transmission and system benefits charge resulting in no change in the total rate for a residential Rate R customer with standard service generation. Additionally, last resort service GSC rates have been approved for the period through June 30, 2010.

Power Supply Arrangements

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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.

Competitive Transition Assessment (CTA)

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 six months ended June 30, 2010 and 2009 were $3.0 million and $3.8 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 and other stranded costs. Cash flow from operations related to CTA amounted to $19.7 million and $19.1 million for the six month periods ended June 30, 2010 and 2009, respectively. 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 $136.6 million at June 30, 2010. In the future, UI’s CTA earnings will decrease while, based on UI’s current projections, cash flow will remain fairly constant 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 depe nds primarily upon the DPUC’s future decisions and potential legislative activities, which could affect future rates of stranded cost amortization.

Other

Legislation enacted in March 2010 changed the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. UIL Holdings does not sponsor any such plans and, therefore, this legislation did not impact UIL Holdings consolidated financial statements.

- 38 -

ISO-NE and RTO-NE

Transmission Return on Equity (ROE)

New England East-West Solution

Under the terms of the Agreement, UI has the option to make quarterly payments to CL&P in exchange for ownership of specific transmission assets as they come into commercial operation. Following regulatory approval, UI will have the right to invest up to the greater of $60 million or an amount equal to 8.4 percent of CL&P’s costs for the Connecticut portions of these projects. As assets come into commercial operation, CL&P will transfer title to transmission assets such as poles and wires to UI in proportion to its investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating and maintenance agreement with UI. Also, under the terms of the Agreement, there are certain circumstances under which CL&P can terminate the Agreement.

UI expects to make investments over a period of three years or more depending on the project in service dates.

- 39 -

Middletown/Norwalk Transmission Project

In December 2008, the 345-kV transmission line from Middletown, Connecticut, to Norwalk, Connecticut (the Project) was completed and the transmission assets were placed in service.

Prior to the assets being placed in service, for project costs incurred before August 8, 2005, the FERC allowed UI to include 50% of Construction Work In Progress (CWIP) expenditures in the rate base and thus earn a return on that portion of UI’s investment before the Project was completed. Effective as of May 23, 2007, for project costs incurred after August 8, 2005, the FERC allowed UI to include 100% of CWIP expenditures in rate base. Certain parties requested rehearing of the FERC May 2007 order, but in January 2009, the FERC denied those requests. Also, in January 2009, the DPUC and the Attorney General of Connecticut filed a petition with the U.S. Court of Appeals seeking judicial review of the FERC’s May 2007 and January 2009 orders. In May 2010, th e parties withdrew their petition for judicial review and the U.S. Court of Appeals dismissed the cases.

LIQUIDITY AND CAPITAL RESOURCES

UIL Holdings generates its capital resources primarily through operations. At June 30, 2010, UIL Holdings had $17.8 million of unrestricted cash and temporary cash investments. This represents an increase of $2.5 million from the corresponding balance at December 31, 2009. The components of this increase, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows:

	(In Millions)

Unrestricted cash and temporary cash investments, December 31, 2009	$	15.3

Net cash provided by operating activities		86.6

Net cash provided by (used in) investing activities:
Related party note receivable		(8.2	)
Cash invested in plant - including AFUDC debt		(85.5	)
Restricted cash		2.0
Other investing activities		0.1
		(91.6	)

Net cash provided by (used in) financing activities:
Issuances of common stock		-
Issuances of long-term debt, net		3.9
Line of credit borrowings (repayments)		30.0
Dividend payments		(25.9	)
Other financing activities		(0.5	)
		7.5

Net change in cash		2.5

Unrestricted cash and temporary cash investments, June 30, 2010	$	17.8

Cash used in investing activities during the first six months of 2010 consisted primarily of capital expenditures of $85.5 million for distribution and transmission infrastructure as well as an additional $8.2 million in funds loaned to GenConn. Cash provided by financing activities during the first six months of 2010 included $30 million from short-term debt and $3.9 million from net issuances of long-term debt, partially offset by the quarterly dividend payments on UIL Holdings’ common stock totaling $25.9 million.

All capital requirements that exceed available cash will be funded through external financings. 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 and equity. In May 2009, UIL Holdings accessed the external equity markets to raise capital. A public offering of 4,600,000 shares of common stock at $21.00 per share resulted in net proceeds of $91.4 million, after expenses and underwriting discounts. The continued availability of these methods of financing will be

- 40 -

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 and Supplementary Data - Notes to Consolidated Financial Statements – Note (B), Capitalization and Note (D), Short-Term Credit Arrangements” of this Form 10-Q for a discussion of UIL Holdings’ financing arrangements.

UIL Holdings also accesses capital through both long-term and short-term debt financing arrangements. Total current and long-term debt outstanding as of June 30, 2010 was $735.7 million, as compared to $731.8 million at year-end December 31, 2009. On January 28, 2010, $27.5 million principal amount of a tax-exempt bonds were issued without insurance, the proceeds of which were used to refund $27.5 million principal amount of insured bonds on February 1, 2010. UI plans to refund $64.5 million principal amount of Auction Rate Bonds at such time and on such terms as municipal bond market conditions allow.

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 up to six months as specified by UI and UIL Holdings at fixed interest rates (London Interbank Offered Rate or LIBOR), determined by the Eurodollar Interbank Market in London. The facility also permits the issuance of letters of credit up to $50 million. As of June 30, 2010, UI had $25 million outstanding under the facility and UIL Holdings had $5 million in short-term borrowings outstanding under the facility, as well as a standby letter of credit outstanding in the amount of $1 million. The UIL Holdings standby letter of credit reduces the amount of credit available for UI. At June 30, 2010, available credit under this facility for UI was $144 million, of which $44 million was available for UIL Holdings.

As discussed in “Major Influences on Financial Condition”, the pending acquisition of SCG, CNG, and Berkshire is expected to close in the first quarter of 2011. UIL Holdings plans to finance the acquisition by issuing approximately $400 million of UIL Holdings unsecured debt and approximately $500 million in equity. UIL Holdings may also need to secure a working capital facility to fund the gas companies’ operations. The acquisition is expected to provide enhanced cash flow per share to UIL Holdings immediately upon consummation of the agreement, and earnings per share accretion beginning in 2012, the first full year following closing of the transaction.

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”). GenConn expects to finance 50% of its capital requirements with the proceeds of the Project Financing it obtained in April 2009. 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. UI’s equity investment in GenConn Devon is expected to occur in the third quarter of 2010 in the amount of approximately $54 million and the equity investment in GenConn Middletown is expected to occur in the first six months of 2011 in the amount of approximately $63 million. UI expects to continue to use the proceeds of the EBL it obtained in April 2009 for its remaining portion of those requirements and to replace the EBL with cash on hand and with funds raised in the capital markets. See Part I, Item 2, “Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements – Note (B), Capitalization” of this Form 10-Q for further discussion of the EBL.

UI’s wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt was to fall below investment grade. In May 2010, Moody’s Investor Services (Moody’s) released its updated credit opinion for UI and maintained its Baa2 rating with a stable outlook. In May 2010, Standard & Poors’ Investor Services (S&P) released its updated credit opinion for UI maintaining its BBB rating. If UI’s credit rating were to decline one rating and UI were to be placed on negative credit watch, monthly amounts due and payable to the power suppliers would

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be accelerated to semi-monthly payments. UI’s credit rating would have to decline two ratings to fall below investment grade at either rating service. If this were to occur, UI would have to deliver collateral security in an amount equal to the receivables due to the sellers for the thirty day period immediately preceding the default notice. If such a situation had been in effect as of June 30, 2010, UI would have had to post approximately $19.5 million in collateral.

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 were both in compliance with such covenants as of June 30, 2010.

2010 Capital Resource Projections

UIL Holdings has revised its planned capital spending for 2010 by reducing capital expenditure projections by $21 million from the previously disclosed $242 million projection included in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The details of the revised estimated capital expenditure program for 2010 are as follows:

	(In Millions)

Distribution
Capacity & Reliability	$	26
Infrastructure Replacement		59
System & Business Operations		17
Other Core, Support Functions		45
Distribution Subtotal		147

Transmission
Capacity & Reliability		13
Infrastructure Replacement		42
System & Business Operations		19
Transmission Subtotal		74

Total Projected UI Capital Expenditures	$	221

Contractual and Contingent Obligations

In addition to UIL Holdings’ 2010 contractual and contingent obligations as reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and as discussed in “Major Influences on Financial Condition”, the Purchase Agreement contains certain termination rights for both UIL Holdings and Seller. Certain of the termination rights, such as termination by mutual agreement of the parties, do not require UIL Holdings to pay any termination fee. However, UIL Holdings would be required to pay to Seller the Termination Fee if the Purchase Agreement is terminated under any of the following circumstances:

·	by either party if state public utility regulatory approvals cannot be obtained;

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·	by Seller if UIL Holdings does not close the acquisition because of any of the conditions listed in (i) through (iii) in the bullet point above;

·	by Seller if UIL Holdings has not obtained the financing necessary to fund the transaction by the end of the period provided by the Purchase Agreement for the pursuit of such financing; or

·	by Seller if there has been a material breach by UIL Holdings of its representations, warranties, covenants or agreements in the Purchase Agreement.

The payment of the Termination Fee could materially adversely impact UIL Holdings’ financial condition and results of operations.

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 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 desc ribed in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2009 are those that depend most heavily on these judgments and estimates. At June 30, 2010, 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 guarantee contracts in the ordinary course of business. At the time a guarantee 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 guarantee.

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 guarantee. As of June 30, 2010, UIL Holdings had certain guarantee 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 guarantees.

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 UIL Holdings expects to have a material impact on its 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.

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RESULTS OF OPERATIONS

Use of Non-GAAP Measures

Within the “Results of Operations” section of this Form 10-Q, tabular presentations showing a comparison of UIL Holdings’ net income and earnings per share (EPS) for the three and six month periods ended June 30, 2010 and 2009 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 for each of UIL Holdings’ lines of business, as well as non-utility acquisition-related costs, calculated by dividing the income 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” 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 in the table presented under the heading “UIL Holdings Corporation Results of Operations” are presented on a GAAP basis.

Many of the changes in UI’s unbundled revenue and expense components impact line items in its income statement, but do not affect net income, because the costs associated with those components are passed through to customers. As a result, UIL Holdings believes it is important to understand the factors that do have an impact on earnings in the discussion of UI’s distribution business below.

Second Quarter 2010 vs. Second Quarter 2009

UIL Holdings Corporation

UIL Holdings’ total earnings were $10.1 million, or $0.34 per share, a decrease of $3.7 million, or $0.17 per share, compared to the second quarter of 2009. The 2010 earnings include after-tax acquisition-related costs in the amount of $4.3 million, or $0.14 per share. Excluding after-tax acquisition-related costs, total earnings for the second quarter of 2010 were $14.4 million, or $0.48 per share. The dilutive effect of the May 2009 issuance of 4,600,000 shares of common stock on the second quarter of 2010 was $0.04 per share. The table below presents a comparison of UIL Holdings’ net income and EPS for the second quarter of 2010 and the second quarter of 2009.

	Quarter Ended			Quarter Ended			2010 More (Less) than 2009
	June 30, 2010			June 30, 2009			Amount			Percent

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

UI	$	15.1		$	14.3		$	0.8			6	%
Non-Utility		(0.7	)		(0.5	)		(0.2	)		(40	)%
Net Income before non-utility acquisition-related costs		14.4			13.8			0.6			(4	)%
Non-Utility acquisition-related costs		(4.3	)		-			(4.3	)		N/A
Total Net Income	$	10.1		$	13.8		$	(3.7	)		(27	)%

EPS
UI	$	0.50		$	0.53		$	(0.03	)		(6	)%
Non-Utility		(0.02	)		(0.02	)		-			-	%
Net Income before non-utility acquisition-related costs		0.48			0.51			(0.03	)		6	%
Non-Utility acquisition-related costs		(0.14	)		-			(0.14	)		N/A
Total EPS - Basic	$	0.34		$	0.51		$	(0.17	)		(33	)%

Total EPS - Diluted (Note 1)	$	0.33		$	0.51		$	(0.18	)		(35	)%

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

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The United Illuminating Company Results of Operations

	Quarter Ended			Quarter Ended		2010 More (Less) than 2009
	June 30, 2010			June 30, 2009		Amount			Percent
EPS
Total UI - basic	$	0.50		$	0.53	$	(0.03	)		(6	)%

Total UI - diluted (Note 1)	$	0.49		$	0.53	$	(0.04	)		(8	)%

Retail Sales*	$	1,363		$	1,257	$	106			8	%
Weather Impact* (Note 2)		(38	)		50		(88	)		(7	)%
Retail Sales – Normalized*	$	1,325		$	1,307	$	18			1	%

* 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.

The following discussion details variances which have the most significant impact on net income in the periods presented. Distribution includes all utility revenue and expenses except for transmission.

Distribution

The distribution business had total earnings of $8.0 million, a decrease of $0.1 million, compared to the second quarter of 2009. The decrease was primarily due to unfavorable variances in the revenue decoupling adjustment, depreciation and amortization, and income (loss) from equity investments, partially offset by favorable variances in distribution rates and pricing, and sales volume. The revenue decoupling adjustment reflects an accrual to true up actual revenues to the DPUC-allowed revenue requirements in accordance with the decoupling mechanism approved in the February 2009 final decision in UI’s 2008 distribution rate case. The warmer than normal weather in the second quarter of 2010 contributed to an increase of kilowatt-hour (kWh) usage above amounts assumed in rates, resulting in an unfa vorable adjustment. The unfavorable variance in depreciation and amortization was primarily due to increased amortization of the 2009 pension regulatory asset, which is recovered in 2010 rates. The unfavorable variance in income (loss) from equity investments was primarily due to a $0.9 million loss on the investment in GenConn. The favorable variance in distribution rates and pricing was primarily due to increases in UI’s distribution rates. The favorable variance in sales volume was primarily due to increased customer demand.

Transmission

The transmission business had total earnings of $7.1 million, an increase of $0.9 million, compared to the second quarter of 2009. The increase was primarily due to an increase in the allowance for funds used during construction, as well as higher rate base and equity capitalization with approximately the same allowed return compared to the second quarter of 2009.

Total UI

The following discussion details income statement variances on a line-by-line basis:

Overall, UI’s operating revenue increased by $6.9 million, from $200.2 million in the second quarter of 2009 to $207.1 million in the second quarter of 2010. Retail revenue decreased $8.0 million, due mainly to the impact of customers switching to alternate suppliers to supply the generation portion of their customer bill, which has no impact on net income. Other revenues increased $14.7 million, primarily due to the net activity of the GSC “working capital allowance” due to timing differences, and higher transmission revenue, partially offset by the distribution revenue decoupling adjustment approved in the second quarter of 2009.

Purchased power expense decreased by $18.4 million, from $72.0 million in the second quarter of 2009 to $53.6 million in the second quarter of 2010. The decrease was primarily due to the impact of customers switching to alternate suppliers to supply the generation portion of their customer bill, 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 Bypassable Federally Mandated Congestion Charges (BFMCC) portion of UI’s unbundled retail customer rates.

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UI’s O&M expenses increased by $12.0 million, from $50.3 million in the second quarter of 2009 to $62.3 million in the second quarter of 2010. The increase was primarily attributable to increases in payments to customers related to distributed generation grants which are recovered through rates.

UI’s transmission wholesale expenses increased by $4.0 million, from $11.3 million in the second quarter of 2009 to $15.3 million in the second quarter of 2010. 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 $4.2 million, from $22.8 million in the second quarter of 2009 to $27.0 million in the second quarter of 2010. The increase was primarily due to increased amortization in the 2009 pension regulatory asset, which is recovered in 2010 rates.

UI’s taxes other than income taxes increased $3.7 million, from $12.9 million in the second quarter of 2009 to $16.6 million in the second quarter of 2010. The increase was primarily attributable to increases in property taxes due to increases in plant and equipment.

UI’s other income and deductions increased by $2.5 million, from $2.3 million in the second quarter of 2009 to $4.8 million in the second quarter of 2010. The increase was primarily due to an increase in the allowance for funds used during construction, partially offset by a mark-to-market adjustment to non-qualified pension investments.

UI’s income (loss) from equity investments decreased by $0.9 million, from an immaterial amount in the second quarter of 2009 to $0.9 million in the second quarter of 2010. The decrease was primarily due to the $0.9 million loss on the investment in GenConn.

Non-Utility

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 $5.0 million, or $0.16 per share, in the second quarter of 2010 compared to net after-tax costs of $0.5 million, or $0.02 per share, in the second quarter of 2009. The increase was primarily due to after-tax acquisition related costs in the amount of $4.3 million, or $0.14 per share.

First Six Months 2010 vs. First Six Months 2009

UIL Holdings Corporation

UIL Holdings’ total earnings were $26.2 million, or $0.87 per share, an increase of $0.4 million and a decrease of $0.12 per share, compared to the first six months of 2009. The 2010 earnings include after-tax acquisition-related costs in the amount of $4.3 million, or $0.14 per share. Excluding after-tax acquisition-related costs, total earnings for the first six months of 2010 were $30.5 million, or $1.01 per share. The dilutive effect of the May 2009 issuance of 4,600,000 shares of common stock on the first six months of 2009 was $0.12 per share.

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The table below presents a comparison of UIL Holdings’ net income and EPS for the first six months of 2010 and the first six months of 2009.

	Six Months Ended			Six Months Ended			2010 More (Less) than 2009
	June 30, 2010			June 30, 2009			Amount			Percent

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

UI	$	31.7		$	27.2		$	4.5			17	%
Non-Utility		(1.2	)		(1.4	)		0.2			13	%
Net Income before non-utility acquisition-related costs		30.5			25.8			4.7			18	%
Non-Utility acquisition-related costs		(4.3	)		-			(4.3	)		N/A
Total Net Income	$	26.2		$	25.8		$	0.4			1	%

EPS
UI	$	1.05		$	1.04		$	0.01			1	%
Non-Utility		(0.04	)		(0.05	)		0.01			20	%
Net Income before non-utility acquisition-related costs		1.01			0.99			0.02			(2	)%
Non-Utility acquisition-related costs		(0.14	)		-			(0.14	)		N/A
Total EPS - Basic	$	0.87		$	0.99		$	(0.12	)		(12	)%

Total EPS - Diluted (Note 1)	$	0.86		$	0.98		$	(0.12	)		(12	)%

The United Illuminating Company Results of Operations

	Six Months Ended			Six Months Ended		2010 More (Less) than 2009
	June 30, 2010			June 30, 2009		Amount			Percent
EPS
Total UI - basic	$	1.05		$	1.04	$	0.01			1	%

Total UI - diluted (Note 1)	$	1.04		$	1.03	$	0.01			1	%

Retail Sales*	$	2,734		$	2,649	$	85			3	%
Weather Impact* (Note 2)		(27	)		35		(62	)		(2	)%
Retail Sales – Normalized*	$	2,707		$	2,684	$	23			1	%

* 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.

Distribution

The distribution business had total earnings of $17.9 million, an increase of $3.0 million, compared to the first six months of 2009. The increase was primarily due to favorable variances in distribution rates and pricing, and sales volume, partially offset by unfavorable variances in the revenue decoupling adjustment, depreciation and amortization, and income (loss) from equity investments.

The favorable variance in distribution rates and pricing was primarily due to increases in UI’s distribution rates. The favorable variance in sales volume was primarily due to increased customer demand. The decoupling revenue adjustment reflects an accrual to true up actual revenues to the DPUC-allowed revenue requirements in accordance with the decoupling mechanism approved in the February 2009 final decision in UI’s 2008 distribution rate case. The unfavorable variance in the decoupling adjustment is primarily attributable to the acceleration of the previously approved 2010 rate increase to January 1, 2010 from the original effective date of February 4, 2010. This resulted in approximately $2.4 million of additional after-tax revenues, which offset the underlying first quar ter 2010 decoupling adjustment and resulted in the net unfavorable variance. Additionally, the warmer than normal weather in the second quarter of 2010 contributed to an increase of kWh usage above amounts assumed in rates, resulting in

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an unfavorable adjustment. The unfavorable variance in depreciation and amortization was primarily due to increased amortization of the 2009 pension regulatory asset, which is recovered in 2010 rates. The unfavorable variance in income (loss) from equity investments was primarily due to a $0.9 million loss on the investment in GenConn.

Transmission

The transmission business had total earnings if $13.8 million, an increase of $1.5 million, compared to the first six months of 2009. The increase was primarily due to an increase in the allowance for funds used during construction, as well as higher rate base and equity capitalization with approximately the same allowed return compared to the first six months of 2009.

Total UI

The following discussion details income statement variances on a line-by-line basis:

Overall, UI’s operating revenue decreased by $8.0 million, from $435.4 million in the first six months of 2009 to $427.4 million in the first six months of 2010. Retail revenue decreased $33.4 million, due mainly to the impact of customers switching to alternate suppliers to supply the generation portion of their customer bill, which has no impact on net income. Other revenues increased $25.0 million, primarily due to the net activity of the GSC “working capital allowance” due to timing differences, and higher transmission revenue, partially offset by the distribution revenue decoupling adjustment approved in the second quarter of 2009.

Purchased power expense decreased by $46.6 million, from $175.5 million in the first six months of 2009 to $128.9 million in the first six months of 2010. The decrease was primarily due to the impact of customers switching to alternate suppliers to supply the generation portion of their customer bill, 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 Bypassable Federally Mandated Congestion Charges (BFMCC) portion of UI’s unbundled retail customer rates.

UI’s O&M expenses increased by $11.3 million, from $102.4 million in the first six months of 2009 to $113.7 million in the first six months of 2010. The increase was primarily attributable to increases in payments to customers related to distributed generation grants which are recovered through rates.

UI’s transmission wholesale expenses increased by $7.0 million, from $23.8 million in the first six months of 2009 to $30.8 million in the first six months of 2010. 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 $7.6 million, from $46.7 million in the first six months of 2009 to $54.3 million in the first six months of 2010. The increase was primarily due to increased amortization in the 2009 pension regulatory asset, which is recovered in 2010 rates.

UI’s taxes other than income taxes increased $6.9 million, from $27.4 million in the first six months of 2009 to $34.3 million in the first six months of 2010. The increase was primarily attributable to increases in property taxes due to increases in plant and equipment.

UI’s other income and deductions increased by $4.9 million, from $3.8 million in the first six months of 2009 to $8.6 million in the first six months of 2010. The increase was primarily due to an increase in the allowance for funds used during construction, partially offset by mark-to-market adjustments to non-qualified pension investments.

UI’s interest expense increased by $1.4 million, from $17.7 million in the first six months of 2009 to $19.1 million in the first six months of 2010. The increase was mainly attributable to increased long-term borrowings.

UI’s income (loss) from equity investments decreased by $0.9 million, from an immaterial amount in the first six months of 2009 to $0.9 million in the first six months of 2010. The decrease was primarily due to the $0.9 million loss on the investment in GenConn.

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Non-Utility

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 $5.5 million, or $0.18 per share, in the first six months of 2010 compared to net after-tax costs of $1.4 million, or $0.05 per share, in the first six months of 2009. The increase was primarily due to after-tax acquisition related costs in the amount of $4.3 million, or $0.14 per share.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The following discussion details the primary market risks applicable to UIL Holdings and UI.

UIL Holdings plans to finance the pending acquisition of SCG, CNG and Berkshire by issuing approximately $400 million of UIL Holdings unsecured debt and approximately $500 million in equity. UIL Holdings faces market risk when accessing the capital markets, such as insufficient market capacity to raise amounts expected, issuance at lower than expected prices, earnings per share dilution, and the inability to secure a working capital facility to fund the gas companies’ operations.

UI is a 50-50 joint venturer with NRG Energy, Inc. (NRG) in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (collectively “GenConn”), was chosen by the Connecticut Department of Public Utility Control (DPUC) to build new peaking generation plants to help address Connecticut’s growing need for more power generation during the heaviest load periods. Two peaking generation projects, each with a nominal capacity of 200 megawatts (MW), are located at NRG’s existing Connecticut plants in Devon and Middletown. GenConn expects to finance 50% of its capital requirements with the proceeds of the Project Financing it obtained in April 2009. The interest rate on the project financing is a variable rate, of which 55% of the financing has been hedged to effectively eliminate interest rate risk. GenConn has interest exposure on the remaining 45%, which should be recoverable by GenConn in rates. 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. UI’s equity investment in GenConn Devon is expected to occur in the third quarter of 2010 in the amount of approximately $54 million and the equity investment in GenConn Middletown is expected to occur in the first six months of 2011 in the amount of approximately $63 million. UI expects to continue to use the proceeds of the EBL it obtained in April 2009 for its remaining portion of those requirements and will need sufficient cash on hand, potentially supplemented with funds raised in the capital markets, to repay the EBL. The EBL has a variable interest rate and UI has interest rate risk associated with this debt, but should be able to recover all interest expense from GenConn. &# 160;See Part I, Item 2, “Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements – Note (B), Capitalization” of this Form 10-Q for further discussion of the EBL.

On April 14, 2010 the DPUC approved UI’s application requesting approval of the issuance of up to $275 million principal amount of debt securities (the Proposed Notes) during 2010 through 2013. The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes: (1) to finance capital expenditures; (2) to repay the EBL, the proceeds of which are being used to finance UI’s 50% share of the equity contribution in GenConn Energy LLC for the development and construction of the Devon and Middletown peaking generation plants; (3) funding UI’s pension plan; (4) to partially repay short-term borrowings that are incurred to temporarily fund the preceding needs; (5) to pay for issuance costs related to the Proposed Notes; and (6) for general corporate purposes. On July 27, 2010, UI issued $100 million principal amount of senior unsecured notes.

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 rates are set at a rate equal to the one-month London Interbank Offered Rate (LIBOR) times a multiple of 125% to 225%, based on the credit rating on the Auction Rate Bonds assigned by Moody’s or S&P. The principal and interest payments on $64.5 million principal amount of Auction Rate Bonds are insured by Ambac Assurance Corporation (Ambac). These bonds are currently rated by Moody’s. The credit rating from Moody’s on these bonds is based on the high er of Ambac’s credit rating or UI’s underlying credit rating. Ambac has been downgraded by Moody’s to a rating below UI’s rating. Accordingly, the credit rating from Moody’s on these bonds is now based on the current

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underlying credit rating of UI of Baa2. 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 was 0.65% at July 26, 2010 which was equal to two times LIBOR. The interest rate risk of variable rate financings, including the reset at auction of the interest rate on $64.5 million principal amount of Auction Rate Bonds, is $161,250 of increased interest expense for every 0.25% increase in interest rates.

The weighted average remaining fixed rate period of outstanding long-term debt obligations of UIL Holdings and UI as of June 30, 2010 is 8.4 years, at an average interest rate of 6.4%.

UIL Holdings’ and UI’s short-term borrowing costs fluctuate with the upward and downward movements of LIBOR, Citibank’s New York base rate and the Federal Funds Rate (as defined in UIL Holdings’ and UI’s short-term credit facility and the EBL, respectively). Rates associated with the money market loan arrangement that UI has with JPMorgan Chase Bank fluctuate based on rates in the money market. Such rates are influenced by financial market conditions and the actions of the Federal Reserve.

In addition, UI requires that its energy suppliers provide performance security to guarantee performance under contracts for standard service and supplier of last resort service. Specifically, UI requires wholesale suppliers to provide both parent guarantees 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.

Asset values of funded pension and postretirement plans as of June 30, 2010 and December 31, 2009 were approximately $217.9 million and $231.3 million, respectively. These assets are impacted by changing conditions in the capital markets which can result in reductions in asset value and require UIL Holdings to make contributions to the plans. While there was no minimum required pension contribution for the 2009 plan year, UI currently expects to e total contributions of approximately $8 million in 2010 and $21 million in 2011, subject to true-ups of actuarial data.

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. Management designed its disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

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 June 30, 2010. As of June 30, 2010, UIL Holdings’ Chief Executive Officer and its Chief Financial Officer concluded that its disclosure controls and procedures were effective and provided reasonable assurance that the disclosure controls and procedures accomplished their objectives.

There have been no changes in UIL Holdings’ internal control over financial reporting during the three month period ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, UIL Holdings’ internal control over financial reporting.

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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, 2009. The following risk factors included in that report have been updated to reflect activity as of June 30, 2010:

The pending acquisition (the Acquisition) of The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation and The Berkshire Gas Company and their respective parent companies (SCG, CNG, Berkshire and their respective parent companies are referred to as the Target Companies) is subject to the receipt of governmental approvals that may impose conditions that could have an adverse effect on UIL Holdings or, lead the Board of Directors to not accept the conditions and not consummate the Acquisition, or, if such approvals are not obtained, could prevent consummation of the Acquisition.

Before the Acquisition may be completed, various approvals must be obtained from governmental authorities. These authorities may impose conditions on the completion of the Acquisition or require changes to the terms of the Acquisition. Such conditions or changes could have the effect of delaying consummation of the Acquisition or imposing additional costs associated with, or limiting the benefits expected to be derived from, the Acquisition. Additionally, pursuant to the terms of the Purchase Agreement, if the approvals impose certain material conditions or changes, UIL Holdings may decide not to consummate the Acquisition.

UIL Holdings may fail to realize all of the expected benefits of the Acquisition.

To be successful after the Acquisition, UIL Holdings will need to economically and efficiently provide the shared services and business support functions to the Target Companies that are currently provided by affiliates of the Target Companies. This will involve expanding UIL Holdings’ current business support functions and processes to incorporate the Target Companies. The acquisition and integration of independent companies is a complex, costly and time-consuming process. As a result, after the consummation of the Acquisition, UIL Holdings will be required to devote significant management attention and resources to integrating the diverse business practices and operations of UIL Holdings and the Target Companies. The integration process may divert the attention of UIL Holdings’ executive officers and management from day-t o-day operations and disrupt the business of its subsidiaries and, if implemented ineffectively, preclude realization of the full expected benefits of the Acquisition. The failure of UIL Holdings, after the Acquisition, to meet the challenges involved in successfully expanding the shared services and business support functions of UIL Holdings to incorporate the Target Companies or otherwise to realize any of the anticipated benefits of the Acquisition could cause an interruption of, or a loss of momentum in, the activities of UIL Holdings and could adversely affect its results of operations. In addition, the overall integration of the Target Companies may result in unanticipated problems, expenses, or liabilities (including the effects of any undisclosed or potential legal or tax liabilities of the Target Companies), and may cause UIL Holdings’ stock price to decline. The difficulties of integrating the Target Companies in clude, among others:

·	retaining key employees;

·	the diversion of management’s attention from ongoing business concerns;

·	unanticipated issues in integrating information, financial and other support systems; and

·	consolidating corporate and administrative infrastructures and eliminating duplicative operations.

In addition, even if the businesses and operations of UIL Holdings and the Target Companies are integrated successfully, UIL Holdings may not fully realize the expected benefits of the Acquisition within the intended time frame, or at all. Further, because the businesses of UIL Holdings and the Target Companies differ, the results of operations, after the Acquisition, of UIL Holdings and the market price of UIL Holdings’ common stock may be affected by factors different from those existing prior to the Acquisition and may suffer as a result of the Acquisition. As a result, the integration of the businesses and operations of UIL Holdings with the Target Companies may not result in the realization of the full benefits anticipated from the Acquisition.

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UIL Holdings will be expanding its operations into new geographic areas as a result of the Acquisition.

The market areas in Massachusetts served by Berkshire are areas in which UIL Holdings does not currently operate. In order to operate effectively in these new markets, UIL Holdings will need to understand the local market and regulatory environment and identify and retain certain employees from Berkshire who are familiar with these markets. If UIL Holdings is not successful in retaining these employees or operating in these new geographic areas, UIL Holdings may not be able to fully realize the expected benefits of the Acquisition.

UIL Holdings will incur significant transaction and integration costs in connection with the Acquisition.

UIL Holdings will incur significant transaction costs related to the Acquisition. In addition, UIL Holdings will incur integration costs following the completion of the Acquisition as the shared services and business support functions of UIL Holdings are expanded to incorporate the businesses of the Target Companies. Although management expects that the realization of benefits and efficiencies related to the integration of the businesses may offset these transaction and integration costs over time, no assurances can be made that this net benefit will be achieved in the near term, or at all, which could adversely affect UIL Holdings’ financial condition and results of operations.

Following the consummation of the Acquisition, UIL Holdings will be dependent on Iberdrola USA for certain transitional services to be provided pursuant to a transition agreement. The failure of Iberdrola USA to perform its obligations under the transition agreement could adversely affect UIL Holdings’ business, financial results and financial condition.

UIL Holdings will be initially dependent upon Iberdrola USA to continue to provide certain shared services and business support functions in areas such as technology, finance and human resources along with management support for a period of time after the consummation of the Acquisition to facilitate the integration of the Target Companies. The terms of these arrangements will be governed by a transition agreement to be entered into as of the closing of the Acquisition. If Iberdrola USA fails to perform its obligations under the transition agreement, UIL Holdings may not be able to perform such services or obtain such services from third parties at all or on favorable terms. In addition, upon termination of the transition agreement, if UIL Holdings is unable to perform such services or obtain such services from th ird parties, it could adversely affect UIL Holdings’ business, financial results and financial condition.

The consummation of the Acquisition is subject to numerous closing conditions, including the availability of debt and equity financing on satisfactory terms sufficient to enable UIL Holdings to pay the Acquisition purchase price. If the closing conditions are not satisfied and the Acquisition is not consummated, UIL Holdings would be required to pay Iberdrola USA a termination fee of $50 million under certain circumstances.

The Acquisition is subject to numerous closing conditions, including the availability of debt and equity financing on satisfactory terms sufficient to enable UIL Holdings to pay the Acquisition purchase price, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, receipt of required approvals from the DPUC and the Massachusetts DPU that do not impose certain material conditions or changes, and the absence of injunctions or restraints imposed by governmental entities. While UIL Holdings expects that each of the closing conditions will be satisfied and that the Acquisition will be consummated, there can be no assurances that this will occur. If the closing conditions are not satisfied and the Acquisition is not consummated, UIL Holdings may be required to pay Iberdrola USA a termination fee of $50 million, which could adversely affect UIL Holdings’ business, financial results and financial condition.

The Acquisition will expose UIL Holdings to additional risks and uncertainties with respect to the Target Companies and their operations.

The Target Companies will generally be subject to similar risks that UIL Holdings is subject to in its existing businesses. In addition, the Target Companies will be subject to the following additional risks:

Their natural gas distribution activities involve numerous risks that may result in accidents and other operating costs. There are inherent in natural gas distribution activities a variety of hazards and operating risks which could cause financial losses and exposure, significant damage to property, environmental pollution and impairment of operations.

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·	Environmental costs and liabilities associated with aspects of the acquired businesses may differ from those of UIL Holdings’ existing business.

UIL Holdings will be subject to business uncertainties while the Acquisition is pending.

The preparation required to complete the Acquisition may place a significant burden on management and internal resources. The additional demands on management and any difficulties encountered in completing the Acquisition and with the transition and integration process could adversely affect UIL Holdings’ financial results.

Failure to complete the Acquisition could negatively affect UIL Holding’ stock price as well as its future business and financial results.

If the Acquisition is not completed, UIL will be subject to a number of risks, including:

·	UIL Holdings may be required to pay Iberdrola, under specified circumstances set forth in the Purchase Agreement, a termination fee of $50 million.

·	UIL Holdings must pay costs related to the Acquisition, including legal, accounting, financial advisory, filing and printing costs, whether the Acquisition is completed or not.

·	UIL Holdings could be subject to litigation related to the failure to complete the Acquisition or other factors, which litigation may adversely affect its business, financial results and stock price.

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

UIL Holdings repurchased 23,383 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
April		9,562	$	28.99	None	None
May		6,633	$	30.22	None	None
June		7,188	$	25.26	None	None
Total		23,383	$	28.16	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.

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Item 6. Exhibits.

(a) Exhibits.

Exhibit Table Item Number	Exhibit Number	Description
(2)	2.8	Purchase Agreement, dated as of May 25, 2010 by and between Iberdrola USA, Inc. and UIL Holdings Corporation (pursuant to Item 601(b)(2) of Regulation S-K, schedules to the Purchase Agreement have been omitted; schedules will be provided supplementally to the SEC upon request) (incorporated by reference to Exhibit 2.1 of UIL Holdings’ Current Report on 8-K filed May 25, 2010 (Items 1.01, 8.01, 9.01))
(2)	2.9	Agreement, dated as of July 14, 2010 by and between The United Illuminating Company and The Connecticut Light & Power Company (incorporated by reference to Exhibit 99.1 of UIL Holdings’ Current Report on 8-K filed July 15, 2010 (Items 1.01, 8.01, 9.01))
(31)	31.1	Certification of Periodic Financial Report.
(31)	31.2	Certification of Periodic Financial Report.
(32)	32	Certification of Periodic Financial Report.
(101)	101.INS 101.SCH 101.CAL 101.LAB 101.PRE	The following financial information from UIL Holdings Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed with the SEC on August 4, 2010, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Income for the three and six month periods ended June 30, 2010 and 2009, (ii) the Consolidated Balance Sheet as of June 30, 2010 and December 31, 2009, (iii) the Consolidated Statement of Cash Flows for the six month periods ended June 30, 2010 and 2009 and (iv) Notes to Consolidated Financial Statements (tagged as blocks of text).

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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 08/04/2010	/s/ Richard J. Nicholas
	Richard J. Nicholas
	Executive Vice President
	and Chief Financial Officer

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