UIL (UIL) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

OR

£ 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 October 28, 2011 was 50,542,709.

INDEX

PART I.  FINANCIAL INFORMATION

		Page Number
Item 1.	Financial Statements and Supplementary Data.	3
	-  Consolidated Statement of Income for the three and nine months ended September 30, 2011 and 2010.	3
	-  Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010.	3
	-  Consolidated Balance Sheet as of September 30, 2011 and December 31, 2010.	4
	-  Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 and 2010.	6
	-  Notes to Consolidated Financial Statements.	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	29
	-  Major Influences on Financial Condition.	29
	-  Liquidity and Capital Resources.	34
	-  Critical Accounting Policies.	36
	-  Off-Balance Sheet Arrangements.	37
	-   New Accounting Standards.	37
	-   Results of Operations.	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	41
Item 4.	Controls and Procedures.	41
	PART II.  OTHER INFORMATION

Item 1A.	Risk Factors.	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	42
Item 6.	Exhibits.	43
	SIGNATURES	44

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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 September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Operating Revenues (Note F)
Electric distribution and transmission	$	220,820	$	236,274	$	602,482	$	663,663
Gas distribution		100,579		-		594,012		-
Non-utility		28		3		35		10
Total Operating Revenues		321,427		236,277		1,196,529		663,673
Operating Expenses
Operation
Purchased power		52,974		65,616		139,548		194,531
Natural gas purchased		48,714		-		341,594		-
Operation and maintenance		95,539		57,372		284,539		171,360
Transmission wholesale		25,180		23,434		59,809		54,249
Depreciation and amortization (Note F)		38,368		28,383		108,941		82,672
Taxes - other than income taxes (Note F)		26,399		20,238		87,806		54,534
Acquisition-related costs (Note A)		-		6,471		-		13,171
Total Operating Expenses		287,174		201,514		1,022,237		570,517
Operating Income		34,253		34,763		174,292		93,156
Other Income and (Deductions), net (Note F), (Note H)		8,392		5,591		18,661		14,551
Interest Charges, net
Interest on long-term debt		21,052		11,039		65,059		30,844
Other interest, net (Note F)		2,647		171		4,376		590
		23,699		11,210		69,435		31,434
Amortization of debt expense and redemption premiums		644		399		1,979		1,193
Total Interest Charges, net		24,343		11,609		71,414		32,627
Income Before Income Taxes, Equity Earnings		18,302		28,745		121,539		75,080
Income Taxes (Note E)		9,629		12,114		51,347		30,156
Income Before Equity Earnings		8,673		16,631		70,192		44,924
Income (loss) from Equity Investments		3,521		345		8,230		(544	)
Net Income		12,194		16,976		78,422		44,380
Less:
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests		14		-		42		-
Net Income attributable to UIL Holdings	$	12,180	$	16,976	$	78,380	$	44,380
Average Number of Common Shares Outstanding - Basic		50,643		32,176		50,597		30,743
Average Number of Common Shares Outstanding - Diluted		50,927		32,459		50,886		31,067
Earnings Per Share of Common Stock - Basic:	$	0.24	$	0.52	$	1.55	$	1.44
Earnings Per Share of Common Stock - Diluted:	$	0.24	$	0.52	$	1.54	$	1.42
Cash Dividends Declared per share of Common Stock	$	0.432	$	0.432	$	1.296	$	1.296

UIL HOLDINGS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2011 and 2010

(Thousands of Dollars)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Net Income	$	12,194		$	16,976	$	78,422		$	44,380
Other Comprehensive Loss		(1,012	)		-		(866	)		-
Less:
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests		14			-		42			-
Comprehensive Income	$	11,168		$	16,976	$	77,514		$	44,380

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)

	September 30, 2011		December 31, 2010
Current Assets
Unrestricted cash and temporary cash investments	$	26,300	$	90,281
Restricted cash		5,891		2,399
Electric distribution and transmission accounts receivable less allowance of $3,400 and $3,600, respectively		96,256		93,702
Gas distribution accounts receivable less allowance of $8,760 and $6,971, respectively		84,361		112,290
Unbilled revenues		52,734		81,659
Current regulatory assets		87,414		115,848
Natural gas in storage, at average cost		107,098		108,080
Materials and supplies, at average cost		9,030		6,755
Deferred income taxes		24,138		24,039
Refundable taxes, net		30,204		10,165
Prepayments		22,462		16,690
Current portion of derivative assets (Note A), (Note K)		10,375		6,057
Other current assets		8,218		29,456
Total Current Assets		564,481		697,421
Other Investments
Equity investment in Related Party (Note H)		132,860		62,786
Other		21,429		22,931
Total Other Investments		154,289		85,717
Net Property, Plant and Equipment		2,498,825		2,327,450
Regulatory Assets (future amounts due from customers through the ratemaking process)		956,545		925,889
Deferred Charges and Other Assets
Unamortized debt issuance expenses		17,206		19,238
Related party note receivable (Note H)		-		61,983
Other long-term receivable		1,279		1,281
Derivative assets (Note A), (Note K)		74,359		28,131
Goodwill (Note N)		302,184		298,890
Other		13,138		9,433
Total Deferred Charges and Other Assets		408,166		418,956
Total Assets	$	4,582,306	$	4,455,433

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)

	September 30, 2011			December 31, 2010
Current Liabilities
Line of credit borrowings	$	138,000		$	7,000
Current portion of long-term debt		13,802			154,114
Accounts payable		165,947			199,816
Dividends payable		21,846			21,801
Accrued liabilities		70,448			80,488
Current regulatory liabilities		45,743			53,601
Interest accrued		24,599			22,868
Current portion of derivative liabilities (Note A), (Note K)		28,306			13,246
Total Current Liabilities		508,691			552,934
Noncurrent Liabilities
Pension accrued		206,452			265,564
Connecticut Yankee contract obligation		15,030			17,175
Other post-retirement benefits accrued		92,985			89,813
Derivative liabilities (Note A), (Note K)		259,418			129,560
Other		73,324			75,119
Total Noncurrent Liabilities		647,209			577,231
Deferred Income Taxes (future tax liabilities owed to taxing authorities)		418,719			354,164
Regulatory Liabilities (future amounts owed to customers through the ratemaking process)		362,023			382,366
Commitments and Contingencies (Note J)
Capitalization (Note B)
Long-term debt, net of unamortized discount and premium		1,551,478			1,511,768
Preferred Stock of Subsidiary
Redeemable preferred stock, noncontrolling interests		750			828
Common Stock Equity
Common stock		930,662			927,494
Paid-in capital		19,122			17,026
Retained earnings		144,352			131,456
Accumulated other comprehensive income (loss)		(700	)		166
Net Common Stock Equity		1,093,436			1,076,142
Total Capitalization		2,645,664			2,588,738
Total Liabilities and Capitalization	$	4,582,306		$	4,455,433

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)

	Nine Months Ended September 30,
	2011			2010
Cash Flows From Operating Activities
Net income	$	78,422		$	44,380
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		110,920			83,856
Deferred income taxes		53,876			13,475
Stock-based compensation expense (Note A)		4,326			3,086
Pension expense		30,380			20,287
Allowance for funds used during construction (AFUDC) - equity		(7,657	)		(4,716	)
Undistributed (earnings) losses in equity investments		(8,650	)		400
Other non-cash items, net		10,810			7,987
Changes in:
Accounts receivable, net		33,846			(22,598	)
Unbilled revenues		28,955			9,457
Prepayments		(5,708	)		(4,061	)
Accounts payable		(33,133	)		3,193
Interest accrued		2,074			174
Taxes accrued		(18,456	)		7,043
Accrued liabilities		(10,220	)		(3,789	)
Accrued pension		(71,264	)		(4,940	)
Other assets		(1,208	)		(176	)
Other liabilities		(11,755	)		1,582
Total Adjustments		107,136			110,260
Net Cash provided by Operating Activities		185,558			154,640
Cash Flows from Investing Activities
Related party note receivable (Note H)		(1,050	)		(9,200	)
Plant expenditures including AFUDC debt		(226,936	)		(130,545	)
Acquisition of gas companies, net of cash acquired (Note N)		11,211			-
Changes in restricted cash		(3,492	)		2,053
Deposits in New England East West Solution (NEEWS) (Note C)		(1,623	)		-
Other		1,374			144
Net Cash (used in) Investing Activities		(220,516	)		(137,548	)
Cash Flows from Financing Activities
Issuances of common stock		-			501,534
Issuances of long-term debt		51,050			109,000
Payments on long-term debt		(145,118	)		(59,826	)
Line of credit borrowings (repayments)		131,000			-
Payment of common stock dividend		(65,439	)		(38,843	)
Other		(516	)		(846	)
Net Cash provided by (used in) Financing Activities		(29,023	)		511,019
Unrestricted Cash and Temporary Cash Investments:
Net change for the period		(63,981	)		528,111
Balance at beginning of period		90,281			15,269
Balance at end of period	$	26,300		$	543,380
Non-cash investing activity:
Plant expenditures included in ending accounts payable	$	45,553		$	29,336
Related party note receivable (Note H)	$	62,989		$	55,540
Equity investment in Related Party (Note H)	$	(62,989	)	$	(55,540	)

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)

The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in UIL Holdings Corporations’ (UIL Holdings) Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

In July 2011, as a result of Connecticut Public Act 11-80 (PA 11-80), the Department of Energy and Environmental Protection (DEEP) was created by merging the Department of Environmental Protection (DEP) and the Department of Public Utility Control (DPUC).  As part of the reorganization, the DPUC became the Public Utilities Regulatory Authority (PURA) and, as PURA, it will continue to be responsible for the rate review and compliance of regulated utilities in Connecticut, including electric and gas.  The term PURA will be used in this filing to refer to PURA’s future actions as well as the actions of its predecessor organization, the DPUC and the term DEEP will be used in this filing to refer to DEEP’s actions as well as the actions of its predecessor organization, the DEP.

(A)  BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

UIL Holdings is headquartered in New Haven, Connecticut, where its senior management maintains offices and is responsible for overall planning, operating and financial functions.  The primary business of UIL Holdings is ownership of its operating regulated utilities.  The utility businesses consist of the electric distribution and transmission operations of The United Illuminating Company (UI) and the natural gas transportation, distribution and sales operations of The Southern Connecticut Gas Company (SCG), a subsidiary of Connecticut Energy Corporation (CEC), Connecticut Natural Gas Corporation (CNG), a subsidiary of CTG Resources, Inc. (CTG), and The Berkshire Gas Company (Berkshire), a subsidiary of Berkshire Energy Resources (BER, and together with SCG, CNG, Berkshire, CEC and CTG, the Gas Companies).  Each of CEC, CTG and BER is a holding company whose sole business is ownership of its respective operating regulated gas utility.  The Gas Companies were acquired by UIL Holdings on November 16, 2010 for a purchase price of $1.296 billion (the Acquisition).  See Note (N) “Acquisition” for a further discussion of the Acquisition.

UI is also a 50-50 joint venturer with NRG Energy, Inc. (NRG) in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (GenConn) was chosen by PURA to build and operate new peaking generation plants in Devon (GenConn Devon) and Middletown (GenConn Middletown), to help address Connecticut’s need for power generation during the heaviest load periods.

Basis of Presentation

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).  Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted in accordance with Securities and Exchange Commission (SEC) rules and regulations.  UIL Holdings believes that the disclosures made are adequate to make the information presented not misleading.  The information presented in the Consolidated Financial Statements reflects all adjustments which, in the opinion of UIL Holdings, are necessary for a fair statement of the financial position and results of operations for the interim periods described herein.  All such adjustments are of a normal and recurring nature.  The results for the nine month period ended September 30, 2011 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2011.  The comparative results for the nine month period ended September 30, 2010 do not include the operations of the Gas Companies.

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

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UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Derivatives

UIL Holdings’ regulated subsidiaries are party to contracts and involved in transactions that have been determined to be derivatives and are discussed below.

The fair value of the gross derivative assets and liabilities as of September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011
	(In Thousands)
	Current Assets		Deferred Charges and Other Assets		Current Liabilities			Noncurrent Liabilities
Derivative assets/(liabilities), gross	$	10,375	$	74,359	$	(28,306	)	$	(259,418	)
	December 31, 2010
	(In Thousands)
	Current Assets		Deferred Charges and Other Assets		Current Liabilities			Noncurrent Liabilities
Derivative assets/(liabilities), gross	$	6,057	$	28,131	$	(13,246	)	$	(129,560	)

Contracts for Differences (CfDs)

As directed by PURA, UI and CL&P each executed two CfDs.  The cost of the contracts will be paid by customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost is borne by UI customers and approximately 80% by CL&P customers.  As of September 30, 2011, UI has recorded the following amounts in the accompanying Consolidated Balance Sheet related to its CfDs:  a gross derivative asset of $84.7 million, a regulatory asset of $203.0 million and a gross derivative liability of $287.7 million ($181.8 million of which related to its portion of CL&P’s derivative liabilities).  See Note (K) “Fair Value Measurements” for additional CfD information.

On February 7, 2010, an explosion occurred at the construction site of a 620-megawatt plant being built by Kleen Energy Systems, LLC (Kleen), one of four capacity resources selected in 2008 by PURA to create new or incremental capacity resources.  CL&P has executed the CfD with the Kleen project which is subject to the cost-sharing agreement between UI and CL&P.  In July 2011, Kleen reported that the rebuilding of its facility is complete and that commercial operation of the facility commenced on July 19, 2011, at which time payments under the CfD began.

The unrealized gains and losses from mark-to-market adjustments to derivatives recorded in regulatory assets or regulatory liabilities for the three and nine month periods ended September 30, 2011 and 2010 were as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011		2010
	(In Thousands)					(In Thousands)
Regulatory Assets - Derivative liabilities	$	17,753		$	21,006	$	88,289	$	(36,547	)
Regulatory Liabilities - Derivative assets	$	(11	)	$	502	$	5,737	$	409

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UIL HOLDINGS CORPORATION

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

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculations for the three and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010			2011		2010
	(In Thousands, except per share amounts)
Numerator:
Net Income attributable to UIL Holdings	$	12,180	$	16,976		$	78,380	$	44,380
Less:  Net income allocated to unvested units		25		51			167		155
Net Income attributable to common shareholders	$	12,155	$	16,925		$	78,213	$	44,225
Denominator:
Basic average number of shares outstanding		50,643		32,176			50,597		30,743
Effect of dilutive securities		284		283			289		324
Diluted average number of shares outstanding		50,927		32,459			50,886		31,067
Earnings per share:
Basic	$	0.24	$	0.52		$	1.55	$	1.44
Diluted	$	0.24	$	0.52		$	1.54	$	1.42

As of September 30, 2011, options to purchase an average amount of 89,336 shares of common stock were outstanding but not included in the three or nine-month 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 nine month periods ended September 30, 2011.  As of September 30, 2010, options to purchase an average amount of 136,945 and 98,079 shares of common stock were outstanding but not included in the three or nine 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 nine month periods ended September 30, 2010.

Equity Investments

In February 2008, UI and an NRG affiliate formed GenConn, a 50-50 joint venture, for the purpose of constructing peaking generation plants in Connecticut.  UI’s investment in GenConn is being accounted for as an equity investment, the carrying value of which was $132.9 million and $62.8 million as of September 30, 2011 and December 31, 2010, respectively.  The loans UI made to GenConn for the construction of GenConn Middletown of approximately $63 million were converted into equity in July 2011.

UI’s income (loss) from its equity investment in GenConn was $8.2 million and ($0.5) million for the nine month periods ended September 30, 2011 and 2010, respectively.  For the three month periods ended September 30, 2011 and 2010, such income was $3.5 million and $0.4 million, respectively.  UI received distributions of $3.1 million and $2.2 million from GenConn in September 2011 and October 2011, respectively.

Income Taxes

Effective as of January 1, 2011, UIL Holdings changed its method of accounting for income taxes for interim reporting periods from the discrete-period approach to the estimated annual effective tax rate approach as defined in ASC 740 “Income Taxes.”  The change conforms the methodology for determining income tax expense for interim periods for UIL Holdings and all of its subsidiaries.  The change in accounting is being reflected in the interim financial statements through retrospective application and does not impact annual reporting.  The impact of this change for the three and nine month periods ended September 30, 2010 was a reduction of income tax expense of $0.7 million and $1.9 million, respectively.

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UIL HOLDINGS CORPORATION

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

Regulatory Accounting

UIL Holdings’ regulatory assets and liabilities as of September 30, 2011 and December 31, 2010 included the following:

	Remaining Period	September 30, 2011		December 31, 2010
		(In Thousands)
Regulatory Assets:
Nuclear plant investments – above market	(a)	$	278,054	$	293,388
Income taxes due principally to book-tax differences	(b)		2,574		11,910
Connecticut Yankee	5 years		15,030		17,175
Unamortized redemption costs	11 to 23 years		13,106		13,708
Pension and other post-retirement benefit plans	(c)		321,378		351,610
Environmental remediation costs	4 to 5 years		17,363		17,285
Customer rate surcharge	(g)		19,038		12,816
Low income program	(h)		37,727		40,674
Debt premium	1 to 27 years		50,124		56,865
Deferred purchased gas	(i)		-		26,650
Deferred income taxes	(j)		11,659		5,859
Unfunded future income taxes	(j)		12,797		25,684
Contracts for differences	(d)		202,997		114,662
Excess generation service charge	(e)		5,957		8,711
Storm costs	(l)		27,080		7,460
Other	(b)		29,075		37,280
Total regulatory assets			1,043,959		1,041,737
Less current portion of regulatory assets			87,414		115,848
Regulatory Assets, Net		$	956,545	$	925,889
Regulatory Liabilities:
Accumulated deferred investment tax credits	33 years	$	4,795	$	4,905
Deferred gain on sale of property	(a)		37,798		37,798
Middletown/Norwalk local transmission network service collections	39 years		22,691		23,121
Pension and other post-retirement benefit plans	4 to 8 years		23,231		33,685
Deferred income taxes	(j)		15,584		29,793
Asset retirement obligation	(k)		7,735		8,451
Deferred purchased gas	(i)		4,024		-
Asset removal costs	(b)		224,405		219,121
Deferred transmission expense	(f)		27,498		27,036
Other	(b)		40,005		52,057
Total regulatory liabilities			407,766		435,967
Less current portion of regulatory liabilities			45,743		53,601
Regulatory Liabilities, Net		$	362,023	$	382,366

(a) Asset/Liability relates to the Competitive Transition Assessment (CTA).  Total CTA costs recovery is currently projected to be completed in 2015, with stranded cost amortization expected to end in 2013.  The remaining balances will be fully offset by amounts primarily included in income taxes due principally to book-tax differences.

(b) Amortization period and/or balance vary 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; this amount fluctuates based upon cash inflows and outflows in a given period.

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UIL HOLDINGS CORPORATION

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

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

(g) Deferral of revenue received for excess refund of overearnings to be recovered over 2 - 3 years.

(h) Various hardship and payment plan programs approved for recovery.

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

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

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

(l) Storm costs include accumulated costs for major storms occurring from January 2009 forward. UI will seek recovery of these costs in future rate proceedings.

Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), target amounts of 111,230, 5,314 and 3,627 performance shares were granted to certain members of management in February, April and May of 2011, respectively; the averages of the high and low market prices on the grant dates were $30.69, $31.76 and $31.85 per share, respectively.

In February 2011, UIL Holdings granted a total of 2,566 shares of restricted stock to its President and Chief Executive Officer under the 2008 Stock Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant was $30.69 per share.  Such shares vest 20% annually for a five year period.

In April 2011, UIL Holdings granted a total of 9,011 shares of restricted stock to non-employee directors under the 2008 Stock Plan as compensation for service from January 2011 to May 2011; the average of the high and low market price on the date of grant was $30.77 per share.  Such shares vested in May 2011.

In May 2011, UIL Holdings granted a total of 23,394 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 $33.51 per share.  Such shares vest in May 2012.

Total stock-based compensation expense for the nine month periods ended September 30, 2011 and 2010 was $4.3 million and $3.1 million, respectively. Total stock-based compensation expense for each of the three month periods ended September 30, 2011 and 2010 was $1.0 million.

Variable Interest Entities

UIL Holdings has identified GenConn as a variable interest entity (VIE), which is accounted for under the equity method.  UIL Holdings is not the primary beneficiary of GenConn, as defined in ASC 810 “Consolidation,” because it shares control of all significant activities of GenConn with its joint venturer, NRG.  As such, GenConn is not subject to consolidation.  GenConn recovers its costs through contract for difference agreements, which are cost of service based and have been approved by PURA.  As a result, with the achievement of commercial operation by GenConn Devon and GenConn Middletown, UIL Holdings’ exposure to loss is primarily related to the potential for unrecovered GenConn operating or capital costs in a regulatory proceeding, of which 50% would be passed through to UIL Holdings.  Such exposure to loss cannot be determined at this time.For further discussion of GenConn, see “–Equity Investments” as well as Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Equity Investment in Peaking Generation.”

Weather Insurance Contracts

On October 20, 2011, SCG and CNG each entered into weather insurance contracts for the winter period of November 1, 2011 through April 30, 2012 in order to provide financial protection from significant weather fluctuations.  According to the terms of each contract, if temperatures are warmer than normal for the contract period, SCG and CNG will each receive a payment, up to the maximum amount allowed under the contract of $3.0 million; however, if temperatures are colder than normal for the contract period, SCG and CNG will each make a payment of up to a maximum of $2.0 million.  The premiums paid are amortized over the terms of the contracts.  The fair value of the contracts will be carried on the balance sheet as appropriate with changes in value recorded to the income statement as Other Income and (Deductions).

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UIL HOLDINGS CORPORATION

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

New Accounting Pronouncements

In May 2011, the FASB issued amendments to ASC 820 “Fair Value Measurements and Disclosures.”  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied on a prospective basis.  UIL Holdings expects that the implementation of this guidance will not have a material impact on its consolidated financial statements.

In June 2011, the FASB issued updated guidance to ASC 220 “Comprehensive Income” which allows entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance, which is to be applied retrospectively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  UIL Holdings expects that the implementation of this guidance will not have an impact on its consolidated financial statements.

In September 2011, the FASB issued amendments to ASC 350 “Intangibles-Goodwill and Other” which allow an entity to assess qualitatively whether it is necessary to perform the current two-step goodwill impairment test.  Performance of the two-step impairment test is required only if an entity determines it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount.  Otherwise, no further testing is required.  This guidance is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted.  UIL Holdings will consider early adoption when the annual goodwill impairment testing is performed in the fourth quarter of 2011.  UIL Holdings expects that the implementation of this guidance will not have a material impact on its consolidated financial statements.

(B)  CAPITALIZATION

Common Stock

UIL Holdings had 50,542,709 shares of its common stock, no par value, outstanding at September 30, 2011.

Long-Term Debt

In February 2011, UIL Holdings repaid, upon maturity, the outstanding balances of its 7.23% Series A Senior Notes totaling $4.3 million and its 7.38% Series B Senior Notes totaling $45 million.

In May 2011, Berkshire repaid, upon maturity, the outstanding balance of its 4.76% unsecured notes totaling $3.0 million.

In July 2011, UI repaid, upon maturity, approximately $63 million of borrowings under its equity bridge loan relating to GenConn (EBL).  The EBL was used by UI to fund its commitments as a 50-50 joint venturer in GenConn.

On August 29, 2011, SCG entered into a note purchase agreement with a group of institutional accredited investors providing for the sale to such investors of (1) secured 3.88% medium-term notes due September 22, 2021 (constituting a series of first mortgage bonds) in the principal amount of $25 million,  and (2) secured  5.39% medium-term notes due September 22, 2041 (constituting a series of first mortgage bonds) in the principal amount of $25 million.  Such notes were issued on September 22, 2011.

In September 2011, SCG repaid, upon maturity, the outstanding balance of its 6.59% senior secured medium term notes totaling $30 million.

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UIL HOLDINGS CORPORATION

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

(C)  REGULATORY PROCEEDINGS

Electric Distribution and Transmission

Tropical Storm Irene, which passed through Connecticut on August 28, 2011, caused extensive damage to the electric system in UI’s service territory and left approximately 158,000 of UI’s estimated 325,000 customers without electricity. PURA has opened an investigation of the service response and communications of UI, among other utilities, following power outages resulting from Tropical Storm Irene.  In accordance with PURA regulatory decisions and past storm cost guidance, UI has established a regulatory asset for its storm-related expenses.  As of September 30, 2011, UI’s estimate of the cost of repairing the damage and restoring service to customers is approximately $20 million, of which approximately $4 million has been capitalized.  UI expects to seek recovery of these costs in future rate proceedings.

Rates

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

On April 1, 2010, UI filed its ratemaking proposal and underlying decoupling analysis for the 2009 rate year ended February 3, 2010.  On September 1, 2010, PURA issued its final decision in this matter approving a decoupling charge totaling approximately $1.6 million to be recovered from ratepayers over a twelve month period commencing in October 2010.  In addition to the decoupling charge, PURA also approved a pension and earnings sharing over-recovery credit totaling approximately $3.6 million to be refunded to ratepayers over the same twelve month period commencing in October 2010.  PURA also approved the continuance of the decoupling pilot program beyond the 2010 rate year and until such time that a final decision is reached regarding whether to continue, modify or terminate the decoupling mechanism.  UI filed its 2010 rate year decoupling results with PURA on April 4, 2011 and on August 31, 2011 PURA issued a final decision approving a decoupling adjustment totaling approximately $1.4 million to be credited to ratepayers over a twelve month period beginning in October 2011 and extending the decoupling pilot until UI’s next general rate proceeding.

In December 2010, UI received a letter ruling approving rates effective January 1, 2011 incorporating the 2009 distribution rate changes mentioned above along with previously approved changes to the Generation Services Charges (GSC), Non-Bypassable Federally Mandated Congestion Charges, transmission and systems benefits charges.  Additionally, last resort service GSC rates have been approved for the period through December 31, 2011.  On June 23, 2011, PURA approved revised retail transmission rates, effective July 1, 2011.

Power Supply Arrangements

UI has wholesale power supply agreements in place for the supply of all of its standard service customers for all of 2011 and 2012 and 20% of 2013.  Supplier of last resort service is procured on a quarterly basis.  UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and also qualify for the “normal purchase, normal sale” exception under ASC 815.  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, which take effect if UI’s credit rating on senior debt falls below investment grade.  In October 2011, Moody’s Investor Services released its updated credit opinion for UI and maintained its Baa2 rating with a stable outlook.  In May 2011, Standard & Poor’s released its updated credit opinion for UI, maintaining its BBB rating with a stable outlook.  If UI’s credit rating were to decline one rating and UI were to be placed on negative credit watch, monthly amounts due and payable to the power suppliers would be accelerated to semi-monthly payments.  UI’s credit rating would have to decline two ratings to fall below investment grade at either rating service.  If this were to occur, UI would have to deliver collateral security in an amount equal to the receivables due to the sellers for the thirty day period immediately preceding the default notice.  If such a situation had been in effect as of September 30, 2011, UI would have had to post approximately $12.3 million in collateral.

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UIL HOLDINGS CORPORATION

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

Transmission Return on Equity (ROE)

On September 30, 2011, several New England governmental entities, including PURA, the Connecticut Attorney General and the Connecticut Office of Consumer Counsel (collectively, the complainants), filed a complaint with the Federal Energy Regulatory Commission (the FERC) against ISO-NE and New England transmission owners, including UI, claiming that the current approved base ROE on transmission investments of 11.14% is not just and reasonable and seeking a reduction of the base ROE to 9.20%.  While the FERC has not yet set a refund effective date, complainants have agreed, at ISO-NE’s request, to a refund effective date of October 1, 2011.  The New England transmission owners filed their response to the complaint on October 20, 2011, opposing any change to the base ROE as unsupported.  UI is unable to predict the outcome of this proceeding at this time.

New England East-West Solution

Pursuant to an agreement with CL&P (the Agreement), UIhas the right to invest in, and own transmission assets associated with, the Connecticut portion of CL&P’s New England East West Solution (NEEWS) projects to improve regional energy reliability.  NEEWS consists of four inter-related transmission projects being developed by subsidiaries of Northeast Utilities (NU), the parent company of CL&P, in collaboration with National Grid USA.  Three of the projects have portions sited in Connecticut:  (1) the Greater Springfield Reliability Project, (2) the Interstate Reliability Project and (3) the Central Connecticut Reliability Project.  In May 2011, the FERC issued an order authorizing NU’s recovery of return on 100% of the transmission construction work in progress costs for the NEEWS projects, which resulted in a change in NU’s NEEWS project cost estimate.

Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific transmission assets as they are placed in service.  UI has the right to invest up to the greater of $60 million or an amount equal to 8.4% of CL&P’s costs for the Connecticut portions of the NEEWS projects.  Based upon the current projected costs, this amount is approximately $60 million.  As assets are placed in service, CL&P will transfer title to certain transmission assets to UI in proportion to its investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating and maintenance agreement with UI.  Also, under the terms of the Agreement, there are certain circumstances under which CL&P can terminate the Agreement. Such termination would have no affect on the assets previously transferred to UI.

Through September 30, 2011, UI has made deposits totaling $8.9 million in NEEWS and expects to make the remaining deposits over a period of three to five years, depending on the timing and amount of CL&P’s capital expenditures and the projects’ in service dates.

Equity Investment in Peaking Generation

UI is a 50-50 joint venturer with NRG in GCE Holding LLC, whose wholly owned subsidiary, GenConn, was chosen by PURA to build and operate two new peaking generation plants to help address Connecticut’s need for power generation during the heaviest load periods.  The two new peaking generation projects are located at NRG’s existing Connecticut plant locations in Devon and Middletown and are both operating in the ISO-New England markets.  PURA has approved 2011 revenue requirements for GenConn Devon of $36.8 million for the period of January 1, 2011 through December 31, 2011 and for GenConn Middletown of $22.6 million for the period of June 1, 2011 through December 31, 2011.

GenConn filed a revenue requirements request with PURA on July 29, 2011, seeking approval of 2012 revenue requirements for the period commencing January 1, 2012 for both the GenConn Devon and GenConn Middletown facilities.  A final decision on this request is expected by the end of 2011.

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UIL HOLDINGS CORPORATION

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

Gas Distribution

Rates

SCG and CNG

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

Berkshire

Berkshire’s rates are established by the Massachusetts Department of Public Utilities (DPU).  Berkshire is currently operating under a 10-year rate plan approved by the DPU and which expires on January 31, 2012, pursuant to which Berkshire’s rates can be adjusted annually.  The ROE approved in Berkshire’s rate plan is 10.5%.

Approval for the Issuance of Debt

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

Gas Supply Arrangements

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

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UIL HOLDINGS CORPORATION

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

(D)  SHORT-TERM CREDIT ARRANGEMENTS

As of September 30, 2011, $138 million of borrowings were outstanding under the revolving credit agreement, dated as of November 17, 2010, entered into by and among UIL Holdings, UI, CNG, SCG and Berkshire, together with a group of banks named therein (the Credit Facility).  Under the Credit Facility, UIL Holdings has outstanding standby letters of credit in the aggregate amount of $3.9 million, which expire on January 31, 2012 and June 16, 2012, but can be extended under a provision that automatically extends letters of credit for one year periods from the expiration date (or any future expiration date), unless the issuer bank elects not to extend.  In addition, UI has an outstanding standby letter of credit in the amount of $0.4 million, which expires on December 31, 2011.  Available credit under the Credit Facility at September 30, 2011 totaled $257.7 million for UIL Holdings and its subsidiaries in the aggregate.  UIL Holdings records borrowings under the Credit Facility as short-term debt, but the Credit Facility provides for longer term commitments from banks allowing UIL Holdings to borrow and reborrow funds, at its option, until its expiration on November 17, 2014, thus affording UIL Holdings flexibility in managing its working capital requirements.

As of September 30, 2011, UIL Holdings had no short-term borrowings outstanding under its money market loan arrangement with JPMorgan Chase Bank.

(E) INCOME TAXES

The combined statutory federal and state income tax rate for UIL Holdings for the three and nine month periods ended September 30, 2011 and 2010 was 40.4%.

Differences in the treatment of certain transactions for book and tax purposes occur which cause the rate of UIL Holdings’ reported income tax expense to differ from the statutory tax rate described above.  The effective book income tax rates for the three and nine month periods ended September 30, 2011 were 44.1% and 39.6%, as compared to 41.6% and 40.5% for the three and nine month periods ended September 30, 2010.

- 16 -

UIL HOLDINGS CORPORATION

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

(F) Supplementary Information

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
	(In Thousands)
Operating Revenues
Electric Distribution and Transmission:
Retail	$	181,712		$	212,405	$	511,771		$	573,532
Wholesale		133			270		324			331
Other operating revenue		38,975			23,599		90,387			89,800
Total Electric Distribution and Transmission Revenue		220,820			236,274		602,482			663,663
Gas Distribution:
Retail		80,331			N/A		510,799			N/A
Wholesale		17,596			N/A		55,108			N/A
Other operating revenue		2,652			N/A		28,105			N/A
Total Gas Distribution Revenue		100,579			N/A		594,012			N/A
Non-utility revenues:
Other		28			3		35			10
Total Operating Revenues	$	321,427		$	236,277	$	1,196,529		$	663,673
Depreciation and Amortization
Property, plant and equipment depreciation	$	24,591		$	11,968	$	72,029		$	38,114
Amortization of nuclear plant regulatory assets		13,416			13,055		34,340			35,584
Amortization of intangibles		12			10		35			33
Amortization of other regulatory assets		349			3,350		2,537			8,941
Total Amortization		13,777			16,415		36,912			44,558
Total Depreciation and Amortization	$	38,368		$	28,383	$	108,941		$	82,672
Taxes - Other than Income Taxes
Operating:
Connecticut gross earnings	$	14,525		$	13,897	$	54,322		$	35,849
Local real estate and personal property		9,375			5,177		25,845			14,209
Payroll taxes		2,507			1,164		7,869			4,476
Other		(8	)		-		(230	)		-
Total Taxes - Other than Income Taxes	$	26,399		$	20,238	$	87,806		$	54,534
Other Income and (Deductions), net
Interest income	$	791		$	1,115	$	2,585		$	3,178
Allowance for funds used during construction - equity		2,340			2,000		7,657			4,716
Allowance for funds used during construction - debt		2,303			1,252		6,579			3,228
Conservation & Load Management incentive		271			361		813			1,006
Energy generation and load curtailment incentives		15			-		55			882
ISO load response, net		601			411		509			1,463
Miscellaneous other income and (deductions) - net		2,071			452		463			78
Total Other Income and (Deductions), net	$	8,392		$	5,591	$	18,661		$	14,551
Other Interest, net
Notes Payable	$	-		$	20	$	129		$	84
Other		2,647			151		4,247			506
Total Other Interest, net	$	2,647		$	171	$	4,376		$	590

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UIL HOLDINGS CORPORATION

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

(G)  PENSION AND OTHER BENEFITS

UI Pension Plan

The United Illuminating Company Pension Plan (the UI Pension Plan) covers the majority of employees of UIL Corporate 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.  During the nine months ended September 30, 2011, UIL Holdings contributed $48.1 million to the UI Pension Plan.  Additional contributions during the remainder of 2011 are expected to be approximately $4.1 million.

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

Gas Companies

The Gas Companies have multiple qualified pension plans covering substantially all of their union and management employees.  These entities also have non-qualified supplemental pension plans for certain employees.  The qualified pension plans (Gas Company Plans) are (1) traditional defined benefit plans or (2) cash balance plans for those hired on or after specified dates.

During the nine months ended September 30, 2011, UIL Holdings contributed $18.4 million to the Gas Company Plans.  Additional contributions during the remainder of 2011 are expected to be approximately $3.0 million.

The following tables represent the components of net periodic benefit cost for pension and other postretirement benefits (OPEB) for the three and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010
	(In Thousands)
Components of net periodic benefit cost:
Service cost	$	3,143		$	1,781		$	541		$	340
Interest cost		10,120			5,272			1,659			982
Expected return on plan assets		(10,647	)		(4,767	)		(740	)		(438	)
Amortization of:
Prior service costs		162			162			(25	)		(26	)
Transition obligation  (asset)		-			-			255			265
Actuarial (gain) loss		3,507			3,078			502			488
Net periodic benefit cost	$	6,285		$	5,526		$	2,192		$	1,611
	Nine Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010
	(In Thousands)
Components of net periodic benefit cost:
Service cost	$	9,430		$	5,342		$	1,622		$	1,020
Interest cost		30,362			15,816			4,977			2,947
Expected return on plan assets		(31,941	)		(14,300	)		(2,222	)		(1,315	)
Amortization of:
Prior service costs		483			485			(76	)		(77	)
Transition obligation  (asset)		-			-			765			794
Actuarial (gain) loss		10,523			9,232			1,506			1,463
Net periodic benefit cost	$	18,857		$	16,575		$	6,572		$	4,832

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UIL HOLDINGS CORPORATION

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

The following actuarial weighted-average assumptions were used in calculating net periodic benefit cost for the three and nine month periods ended September 30, 2011 and 2010:

	Three and Nine Months Ended September 30,
	Pension Benefits		Other Postretirement Benefits
	2011	2010	2011	2010
Discount rate	5.10%-5.35%	5.65% - 5.85%	5.15%-5.30%	5.80%
Average wage increase	3.50% -3.80%	3.80%	N/A	N/A
Return on plan assets	8.25%-8.50%	8.50%	6.83%-8.25%	8.50%
Composite health care trend rate (current year)	N/A	N/A	7.80%-8.50%	9.50%
Health care trend rate (2018 forward) (1)	N/A	N/A	4.50%-5.00%	5.00%

(1) For the period ended September 30, 2010, the health care trend rate was applicable for 2019 forward.

N/A – not applicable

(H)  RELATED PARTY TRANSACTIONS

UI is a 50-50 joint venturer with NRG in GCE Holding LLC, whose wholly owned subsidiary, GenConn, was chosen by PURA to build and operate new peaking generation plants to help address Connecticut’s need for power generation during the heaviest load periods.  GenConn executed 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 converted to an equity investment in July 2011.  See Note (B) “Capitalization – Long-Term Debt” for further discussion regarding the EBL.  Additionally, $1.2 million and $2.8 million of interest income related to the promissory note are included in “Other Income and (Deductions), net” in the accompanying Consolidated Statements of Income, for the nine month periods ended September 30, 2011 and 2010, respectively, which is offset by the interest expense incurred by UI under the EBL.  For the three month periods ended September 30, 2011 and 2010, such interest income was $0.2 million and $1.0 million, respectively.

A director of UIL Holdings holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UI leases office space.UI’s lease payments for this office space for the nine month periods ended September 30, 2011 and 2010 totaled $7.0 million and $7.8 million, respectively.  For the three month periods ended September 30, 2011 and 2010, such lease payments totaled $2.0 million and $2.6 million, respectively.

(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 $0.2 million as of September 30, 2011.  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.  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 provides UI with a projected recovery schedule depicting annual costs expected to be billed to UI, including a return on investment over the term of the projected recovery period.  The present value of these costs is calculated using UI’s weighted-average cost of capital and, after consideration of recoverability, recorded as a Connecticut Yankee Contract Obligation and a corresponding regulatory asset.  At September 30, 2011, UI has regulatory approval to recover in future rates (through the CTA) its $15.0 million regulatory asset for Connecticut Yankee over a term ending in 2015.

DOE Spent Fuel Litigation

In the Nuclear Waste Policy Act of 1982 (the Act), 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.

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UIL HOLDINGS CORPORATION

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

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 September 2010, the Court issued its decision and awarded Connecticut Yankee damages of $39.7 million for its spent fuel-related costs through 2001.  On November 8, 2010, the DOE appealed the decision to the United States Court of Appeals for the Federal Circuit and on November 19, 2010 Connecticut Yankee filed a notice of cross-appeal.  UI’s 9.5% ownership share would result in a receipt of approximately $3.8 million which, if awarded, would be refunded to customers.

In December 2007, Connecticut Yankee filed a second set of complaints against the DOE 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 DOE 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 receipt 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 independent spent fuel storage installation (ISFSI), utilizing dry-cask storage, on the site of the Connecticut Yankee Unit and completed the transfer of its Nuclear Waste to the ISFSI in 2005.

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.

Site Decontamination, Demolition and Remediation Costs

In November 2010, the EPA made inquiry of UI regarding the storage of PCB materials from the time they were brought to UI’s Shelton, CT facility from the field until their shipment to an authorized disposal facility, during the period from 2006 through June of 2010, and the maintenance of an annual document log in connection with the storage.  The Company filed a response to this inquiry and subsequently received a letter of intent from the EPA to file an administrative complaint and assess a civil penalty.  In October 2011, UI paid a civil penalty of an immaterial amount.

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.  Pursuant to a Memorandum of Understanding (MOU) among UI, the City, and the City’s selected developer for the property, the City and the developer released UI from any further liability with respect to the Steel Point property after title transferred, and the City and/or the 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 MOU provides that there is no indemnity for liability related to contaminated harbor sediments, and 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 PURA’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.  As of September 30, 2011, approximately $0.1 million of the escrow fund remains.  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 remains to be undertaken at the site.  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.   UI could be required by applicable environmental laws to complete the remediation of 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.  UIL Holdings cannot presently assess the potential financial impact, if any, of this claim.  As such, as of September 30, 2011, 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.

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

The Gas Companies own or have previously owned property where Manufactured Gas Plants (MGPs) historically operated.  MGP operations have led to contamination of soil and groundwater with petroleum hydrocarbons, benzene and metals, among other things, at these properties, the regulation and cleanup of which is regulated by the federal Resource Conservation and Recovery Act as well as other federal and state statutes and regulations.  Each of the Gas Companies has or had ownership interest in one of such properties contaminated as a result of MGP-related activities, as discussed below.  Under the existing regulations, the cleanup of such sites requires state and at times, federal, regulators’ involvement and approval before cleanup can commence.  In certain cases, such contamination has been evaluated, characterized and remediated.  In other cases, the sites have been evaluated and characterized, but not yet remediated.  Finally, at some of these sites, the scope of the contamination has not yet been fully characterized; no liability was recorded in respect of these sites as of September 30, 2011.  In the past, the Gas Companies have received approval for the recovery of MGP-related remediation expenses from customers through rates and will seek recovery in rates for ongoing MGP-related remediation expenses for all of their MGP sites.

SCGowns property on Pine Street in Bridgeport, CT, the site of one of its former operations centers and a former MGP operation.  As a result of litigation that was initiated by an abutting property owner, SCG entered into a consent order with DEEP for the cleanup of the site in 1998.  The remediation of the site is being completed in two parts.  Part A addressed ground water, free product and contamination that migrated to an abutting property and is completed.  Part B addresses soil contamination at the site and is to be addressed by an approved engineered cap with a land use restriction.  SCG recently responded to DEEP’s comments on its plan and is awaiting DEEP’s approval to begin Part B.  Property located at 110 Pine Street, part of the original site, was sold in 1983.  SCG may be subject to remediation expenses for this part of the site as a former owner of the property, the amount of which cannot be estimated at this time.  This property is not part of the current remediation plan.  Future remediation costs, for which SCG will seek recovery in rates, are expected to be in the range of $2 to $3 million.  As of September 30, 2011, SCG has recorded a liability of $2 million for this site.

SCG owns property on Housatonic Avenue in Bridgeport, CT, a former MGP site.  The site is currently leased from SCG by a third party for surface storage purposes.  Remediation of waste and contaminants associated with historic use of the site as an MGP, including potential groundwater contamination and soil contamination, has not commenced.  Costs associated with the remediation of the site could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates.  UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability.  As such, as of September 30, 2011, no liability related to this claim has been recorded.

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UIL HOLDINGS CORPORATION

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

SCG owns property located on Chapel Street in New Haven, CT, the site of one of its former operations centers and a former MGP site.  The site is currently leased from SCG by a third party for surface storage purposes.  Some portions of the original site, referred to as East Street, were sold in 1978.  Limited remediation has occurred on two occasions, once in 1995 and again in 2008 to prevent contaminated ground water from migrating into the adjacent waterway.  These remediation activities were prompted by breaks in the underground piping causing releases that required immediate resolution.  Costs associated with the most recent remediation approximated $1.2 million and were disallowed by PURA in the 2009 SCG rate case decision and therefore, will not be recovered in customer rates.  Other parts of the original site, including a parcel located on St. John's Street were sold by SCG prior to 1978.  SCG may be subject to remediation expenses for this part of the site as a former owner of the property, the amount of which cannot be estimated at this time.   Costs associated with the remediation of the site could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates.  UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability.  As such, as of September 30, 2011, no liability related to this claim has been recorded.

A property located on Columbus Boulevard in Hartford, CT is the former Operations Center and Corporate Headquarters of CNG.  The property is also a former MGP site.  Except for the portion of the property that houses and is owned by the Hartford Steam Company, known as 60 Columbus Boulevard, and certain other small non-contiguous portions of this site owned by either TEN Companies, Inc. or CNG, most of the original MGP site was taken by the State of Connecticut for the Adriaen’s Landing project.  This portion was remediated by the state for the project but CNG remains liable for that portion of the property owned or formerly owned by CNG that was not subject to the taking.  Costs associated with the remediation of the site could be significant, but cannot be estimated at this time, and will be subject to a review by PURA as to whether these costs are recoverable in rates.  UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability.  As such, as of September 30, 2011, no liability related to this claim has been recorded.

A site on Mill Street in Greenfield, MA is currently owned by Berkshire and is used as a regional operations center.  This site is on the Massachusetts Department of Environmental Protection (MDEP) list of confirmed disposal sites and investigation and remediation of contamination resulting from disposal of byproducts and wastes generated by the historic coal and water gas manufacturing operations is ongoing.  Extensive soil, and coal tar product non-aqueous phase liquid (NAPL) recovery and remediation work on the land side of the Berkshire property has been completed, and sediments containing NAPL have been removed from the adjoining Green River.  Further evaluation of the NAPL distribution in the river sediments and in the subsurface in stream banks on an adjacent property are ongoing and will involve additional remediation activities.  Future expenses potentially in excess of $5.0 million are anticipated.  Even after completion of the additional remedial activities there will be ongoing monitoring and reporting to the MDEP that will continue on the site for the foreseeable future.  UIL Holdings has accrued $5.0 million for such expenses as of September 30, 2011.

Berkshire formerly owned a site on East Street (the East Street Site) in Pittsfield, MA that was used for coal and water gas manufacturing operations.  The East Street Site is part of a larger site known as the GE–Pittsfield/Housatonic River Site.  The East Street Site is listed on the MDEP list of confirmed disposal sites.  Berkshire sold the East Street Site to the General Electric Company (GE) in the 1970s and was named a potentially responsible party by the EPA in 1990.  GE filed suit against Berkshire in 2000 seeking reimbursement of and contribution toward costs incurred by GE in responding to releases of hazardous substances by Berkshire at the East Street Site.  Berkshire was found liable to GE under the Comprehensive Environmental Response, Compensation and Liability Act and the Massachusetts Oil and Hazardous Materials Release Prevention and Response Act for costs that GE has and will incur in response to Berkshire releases.  In December 2002, Berkshire reached a settlement with GE (the Settlement Agreement) which provides, among other things, a framework for Berkshire and GE to allocate various monitoring and remediation costs.  GE previously made several requests for contribution under the terms of the Settlement Agreement.  On September 9, 2011, GE sent Berkshire a letter demanding approximately $1.1 million which GE believes represents Berkshire’s share of response costs incurred by GE at the East Street Site from January 1, 2006 through December 31, 2010.  Consistent with past practice, Berkshire is undertaking a detailed legal and technical review of the merits of GE’s contribution claim.  Berkshire expects that it and GE will continue to operate under the terms of the Settlement Agreement in connection with the East Street Site.  As of September 30, 2011, UIL Holdings has accrued approximately $2.7 million for these and future costs incurred by GE in responding to releases of hazardous substances by Berkshire at the East Street Site.

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UIL HOLDINGS CORPORATION

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

To date, Berkshire has received approval from the DPU for recovery of its environmental expenses in its customer rates.  While management cannot predict the exact costs of the ongoing and future remediation and monitoring expenses, the company will seek regulatory rate recovery of these expenses.

Middletown/Norwalk Transmission 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 filed lawsuits in the Connecticut state court on September 22, 2009, March 23, 2009 and January 25, 2010, respectively.  The claims, as revised by the general contractor in October 2011, seek payment for change order requests of approximately $33.3 million, a 10% general contractor mark-up on any approved subcontractor change order claims (approximately $2.3 million), interest, costs, and attorneys' fees.   UI is vigorously defending 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.  

GenConn

On July 28, 2011, GenConn Devon and the former general contractor responsible for the construction of the GenConn Devon facility executed and delivered a settlement agreement with respect to change order requests and delay and impact claims and pursuant to which GenConn Devon paid a settlement amount of $10.5 million upon satisfaction of certain conditions performed by the former general contractor.  In April 2011, the parties settled a claim by the general contractor for work at the GenConn Middletown facility and executed and delivered a settlement agreement pursuant to which GenConn Middletown paid a settlement amount of $3.0 million.  GenConn will seek and expects to recover the associated costs through its annual regulatory proceeding.  To the extent that there is any financial impact on GenConn, the effect on UIL Holdings’ Consolidated Financial Statements will be reflected in the carrying value of UIL Holdings’ 50% ownership position in GenConn and through “Income from Equity Investments” in the Consolidated Statement of Income.

In September 2010, UIL Holdings entered into a Sponsor Guaranty and Payment Agreement (Sponsor Guaranty) in favor of the Royal Bank of Scotland PLC, as Administrative Agent under GenConn’s project financing arrangement, whereby UIL Holdings guaranteed to pay an amount up to $6.0 million in respect of amounts related to the former general contractor’s claims and litigation expenses as they relate to such claims described above.  The settlements described above do not require the Sponsor Guaranty to be drawn upon and the Sponsor Guaranty terminated following payment of the settlement amounts and release of all associated liens.  Given the settlements of the claims as described above, no liability has been recorded as of September 30, 2011.

Purchase and Sale Agreement

As part of its plan to consolidate operations and office personnel, on July 7, 2011, UI entered into a Purchase and Sale Agreement for the sale of the Electric System Work Center (ESWC) located at 801 Bridgeport Avenue in Shelton, CT for approximately $10.2 million.  UI acquired the ESWC for approximately $16 million and expects to recover any loss resulting from the sale of the property through the regulatory process.  The transaction is expected to close by the first quarter of 2014 and requires PURA approval.  UI has submitted its request to PURA for approval and a decision is expected before the end of 2011.

(K) FAIR VALUE MEASUREMENTS

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 “Fair Value Measurements and Disclosures,” 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 UIL Holdings’ financial assets and liabilities, other than pension benefits and OPEB, which were accounted for at fair value on a recurring basis as of September 30, 2011 and December 31, 2010.

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total
September 30, 2011	(In Thousands)
Assets:
Derivative assets	$	-	$	-	$	84,734		$	84,734
Noncurrent investments available for sale		9,165		-		-			9,165
Deferred Compensation Plan		3,553		-		-			3,553
Supplemental retirement benefit trust life insurance policies (Note G)		5,153		-		-			5,153
	$	17,871	$	-	$	84,734		$	102,605
Liabilities:
Derivative liabilities	$	-	$	-	$	287,724		$	287,724
Net fair value assets/(liabilities), June 30, 2011	$	17,871	$	-	$	(202,990	)	$	(185,119	)

December 31, 2010
Assets:
Derivative assets	$	-	$	-	$	34,188		$	34,188
Noncurrent investments available for sale		9,774		-		-			9,774
Deferred Compensation Plan		3,725		-		-			3,725
Supplemental retirement benefit trust life insurance policies (Note G)		5,665		-		-			5,665
	$	19,164	$	-	$	34,188		$	53,352
Liabilities:
Derivative liabilities	$	-	$	-	$	142,806		$	142,806
Net fair value assets/(liabilities), December 31, 2010	$	19,164	$	-	$	(108,618	)	$	(89,454	)

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 September 30, 2011 or December 31, 2010 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.   PURA 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.

The fair value of the noncurrent investments available for sale is determined using quoted market prices in active markets for identical assets.  The investments primarily consist of money market funds.

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.

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UIL HOLDINGS CORPORATION

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

The following tables set forth a reconciliation of changes in the fair value of the assets and liabilities above that are classified as Level 3 in the fair value hierarchy for the nine month period ended September 30, 2011.

	Nine Months Ended September 30,2011
Net derivative assets/(liabilities), December 31, 2010	(108,618		)
Unrealized gains and (lossess), net
Include in earnings		(422	)
Include in other cimprehensive income		64
Include in regulatory assets/(liabilites)		(94,014	)
Net derivate assets/(liabilities), September 30, 2011	$	202,990
Change in unrealized gains(losses),net relating to net derivative assets/(liabilites), still held as of  September 30, 2011	$	94,372

The following table sets forth a reconciliation of changes in the net regulatory asset/(liability) balances that were established to recover any unrealized gains/(losses) associated with the contracts for differences for the nine month period ended September 30, 2011.  The amounts offset the net contract for differences liabilities included in the derivative liabilities detailed above.

	Nine Months Ended September 30,2011
Net regulatory assets/(liabilities), December 31, 2010	$	108,976
Unrealized gains and (lossess), net		94,014,
Net regulatory assets/(liabilities),September 31, 2010	$	202,990

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UIL HOLDINGS CORPORATION

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

(M)  SEGMENT INFORMATION

UIL Holdings has three reporting segments:  Electric Distribution, Electric Transmission and Gas Distribution.  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 to make 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 electric 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, administrative costs and interest expense.

(In Thosands)
	Three months ended September 30, 2011
	Electric Distribution and Transmission
	Distribution		Transmission		Total		Gas Distribution			Other (1)			Total
Operating Revenues	$	165,528	$	55,292	$	220,820	$	100,579		$	28		$	321,427
Purchased power and gas		52,974		-		52,974		48,714			-			101,688
Operation and maintenance		51,699		7,535		59,234		36,492			(187	)		95,539
Transmission wholesale		-		25,180		25,180		-			-			25,180
Depreciation and amortization		22,899		3,182		26,081		12,188			99			38,368
Taxes - other than income taxes		13,040		6,086		19,126		7,266			7			26,399
Acquisition-related expenses		-		-		-		-			-			-
Operating Income		24,916		13,309		38,225		(4,081	)		109			34,253
Other Income and (Deductions), net		3,159		1,598		4,757		3,237			398			8,392
Interest Charges, net		7,834		3,752		11,586		7,251			5,506			24,343
Income Before Income Taxes and Equity Earnings		20,241		11,155		31,396		(8,095	)		(4,999	)		18,302
Income Taxes		10,660		3,560		14,220		(1,865	)		(2,726	)		9,629
Income Before Equity Earnings		9,581		7,595		17,176		(6,230	)		(2,273	)		8,673
Income from Equity Investments		3,521		-		3,521		-			-			3,521
Net Income		13,102		7,595		20,697		(6,230	)		(2,273	)		12,194
Less:
Preferred Stock Dividends of
Subsidiary, Noncontrolling Interests		-		-		-		14			-			14
Net Income attributable to UIL Holdings	$	13,102	$	7,595	$	20,697	$	(6,244	)	$	(2,273	)	$	12,180

	Three months ended September 30, 2010
	Electric Distribution and Transmission
	Distribution		Transmission		Total		Other (1)			Total
Operating Revenues	$	181,816	$	54,458	$	236,274	$	3		$	236,277
Purchased power		65,616		-		65,616		-			65,616
Operation and maintenance		50,644		6,649		57,293		79			57,372
Transmission wholesale		-		23,434		23,434		-			23,434
Depreciation and amortization		25,367		3,005		28,372		11			28,383
Taxes - other than income taxes		12,005		8,226		20,231		7			20,238
Acquisition-related expenses		-		-		-		6,471			6,471
Operating Income		28,184		13,144		41,328		(6,565	)		34,763
Other Income and (Deductions), net		4,805		757		5,562		29			5,591
Interest Charges, net		7,823		2,859		10,682		927			11,609
Income Before Income Taxes and Equity Earnings		25,166		11,042		36,208		(7,463	)		28,745
Income Taxes		10,624		4,598		15,222		(3,108	)		12,114
Income Before Equity Earnings		14,542		6,444		20,986		(4,355	)		16,631
Income (Loss) from Equity Investments		345		-		345		-			345
Net Income	$	14,887	$	6,444	$	21,331	$	(4,355	)	$	16,976

(1) Includes UIL Holdings Corporate and UIL Holdings' non-utility activities, and the elimination of intercompany accounts and notes receivable.

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UIL HOLDINGS CORPORATION

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

(In Thousands)
	Nine months ended September 30, 2011
	Electric Distribution and Transmission
	Distribution		Transmission		Total		Gas Distribution		Other (1)			Total
Operating Revenues	$	452,594	$	149,888	$	602,482	$	594,012	$	35		$	1,196,529
Purchased power and gas		139,548		-		139,548		341,594		-			481,142
Operation and maintenance		147,298		22,513		169,811		114,452		276			284,539
Transmission wholesale		-		59,809		59,809		-		-			59,809
Depreciation and amortization		63,641		9,346		72,987		35,761		193			108,941
Taxes - other than income taxes		35,338		19,610		54,948		32,850		8			87,806
Acquisition-related expenses		-		-		-		-		-			-
Operating Income		66,769		38,610		105,379		69,355		(442	)		174,292
Other Income and (Deductions), net		10,691		4,736		15,427		2,787		447			18,661
Interest Charges, net		22,609		9,733		32,342		22,052		17,020			71,414
Income Before Income Taxes and Equity Earnings		54,851		33,613		88,464		50,090		(17,015	)		121,539
Income Taxes		28,151		10,436		38,587		20,359		(7,599	)		51,347
Income Before Equity Earnings		26,700		23,177		49,877		29,731		(9,416	)		70,192
Income from Equity Investments		8,230		-		8,230		-		-			8,230
Net Income		34,930		23,177		58,107		29,731		(9,416	)		78,422
Less:
Preferred Stock Dividends of
Subsidiary, Noncontrolling Interests		-		-		-		42		-			42
Net Income attributable to UIL Holdings	$	34,930	$	23,177	$	58,107	$	29,689	$	(9,416	)	$	78,380

	Nine months ended September 30, 2010
	Electric Distribution and Transmission
	Distribution			Transmission		Total			Other (1)			Total
Operating Revenues	$	519,048		$	144,615	$	663,663		$	10		$	663,673
Purchased power		194,531			-		194,531			-			194,531
Operation and maintenance		150,341			20,606		170,947			413			171,360
Transmission wholesale		-			54,249		54,249			-			54,249
Depreciation and amortization		73,224			9,415		82,639			33			82,672
Taxes - other than income taxes		33,849			20,678		54,527			7			54,534
Acquisition-related expenses		-			-		-			13,171			13,171
Operating Income		67,103			39,667		106,770			(13,614	)		93,156
Other Income and (Deductions), net		12,384			1,796		14,180			371			14,551
Interest Charges, net		21,091			8,711		29,802			2,825			32,627
Income Before Income Taxes and Equity Earnings		58,396			32,752		91,148			(16,068	)		75,080
Income Taxes		23,406			13,251		36,657			(6,501	)		30,156
Income Before Equity Earnings		34,990			19,501		54,491			(9,567	)		44,924
Income (Loss) from Equity Investments		(544	)		-		(544	)		-			(544	)
Net Income	$	34,446		$	19,501	$	53,947		$	(9,567	)		44,380

	Electric Distribution and Transmission
	Distribution		Transmission		Total		Gas Distribution		Other (1)		Total (3)
Total Assets at September 30, 2011	$	-	$	-	$	2,628,282	$	1,915,613	$	38,411	$	4,582,306
Total Assets at December 31, 2010	$	-	$	-	$	2,371,621	$	2,033,576	$	50,236	$	4,455,433

(1) Includes UIL Holdings Corporate and UIL Holdings' non-utility activities, and the elimination of intercompany accounts and notes receivable.

(2) Information for segmenting total assets between Distribution and Transmission is not available. Total UI assets are disclosed in theTotal UI column. Net plant in service is segregated by segment and, as of September 30, 2011, was $982.3 million and $484.6 million for Distribution and Transmission, respectively. As of December 31, 2010, net plant in service was $820.9 million and $512.2 million for Distribution and Transmission, respectively.

(3) Includes $302.2 million and $298.9 million of goodwill in the Gas Distribution segment as of September 30, 2011 and December 31, 2010, respectively.

(N) ACQUISITION

On November 16, 2010, UIL Holdings completed its acquisition (the Acquisition) of the Gas Companies from Iberdrola USA, Inc.  PURA approved the Acquisition on November 10, 2010.  The DPU ruled that it would not review UIL Holdings’ acquisition of Berkshire, and on May 5, 2011, the DPU denied a petition from the Massachusetts Attorney General to reconsider its ruling.  The Gas Companies contributed $100.6 million and $594.0 million in operating revenues and $(6.2) million and $29.7 million in net income (loss) to UIL Holdings’ results of operations for the three and nine month periods ended September 30, 2011, respectively.

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UIL HOLDINGS CORPORATION

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

Upon completion of the final indebtedness and working capital adjustment of $11.2 million in May 2011, the net purchase price amounted to $906.7 million.  UIL Holdings accounted for the Acquisition in accordance with ASC 805 “Business Combinations,” whereby the purchase price paid was allocated to tangible assets acquired and liabilities assumed as well as goodwill based upon their fair values as of the closing date of the Acquisition.  UIL Holdings determined that the historical book value of the assets and liabilities of the Gas Companies approximates their fair value given the regulation under which they operate in the states of Connecticut and Massachusetts.  Additional adjustments to the values of assets and liabilities recognized in the Acquisition may occur as the allocation of the consideration transferred is finalized during 2011.  Under business combination accounting guidance, UIL Holdings has up to one year from the closing date of the Acquisition to finalize the allocation of consideration transferred.  The following table summarizes the allocation of the purchase price:

	Amount (In Millions)
Current assets	$	310.8
Noncurrent assets		1,418.9
Current liabilities		(167.9	)
Long-term debt		(397.4	)
Other noncurrent liabilities		(559.1	)
Preferred stock		(0.8	)
Total identifiable net assets		604.5
Goodwill		302.2
Total Purchase Price, Net	$	906.7

Goodwill is calculated as the excess of the purchase price over the value of the net assets acquired and the contributing factors to the amount recorded include expected future cash flows, potential operational synergies, the utilization of technology, and cost savings opportunities in the delivery of certain shared administrative and other services.  As of September 30, 2011, goodwill is $302.2 million, an increase of $3.3 million over the December 31, 2010 balance.  The increase is a result of $1.6 million due to the working capital adjustment noted above and $1.7 million due to adjustments to the values of assets and liabilities recognized in the Acquisition.

The estimated fair values of assets acquired and liabilities assumed are based upon the information that was available as of the closing date of the Acquisition, which management believes provides a reasonable basis for the estimated values.  Management is analyzing additional data necessary to finalize these fair values, and therefore they remain subject to change.  While such changes could be significant, management does not expect them to be so, based upon the information provided to date.  The valuation, and thus the purchase price allocation, is expected to be completed in the fourth quarter of 2011, but no later than one year from the closing date of the Acquisition.

Supplemental Pro Forma Data (unaudited)

The supplemental pro forma data below has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or the future consolidated results of operations of the combined company.

	Three Months Ended September 30, 2010		Nine Months Ended  September 30, 2010
	(Thousands, except per share amounts)
Pro forma operating revenues	$	342,547		$	1,216,976
Pro forma operating expenses	$	308,329		$	1,316,593
Pro forma net income (loss)	$	12,634		$	(197,073	)
Pro forma earnings per share of common stock - basic	$	0.25		$	(3.90	)

For the nine month period ended September 30, 2010, excluding goodwill impairment charges, pro forma net income and earnings per share would have been $74.1 million and $1.47, respectively. For the three month period ended September 30, 2010 such pro forma net income and earnings per share would have been $12.6 million and $0.25, respectively.

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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’ expectations and involve risks and uncertainties; consequently, actual results may differ materially from those expressed or implied in such statements.  Such risks and uncertainties include, but are not limited to, general economic conditions, conditions in the debt and equity markets, legislative and regulatory changes, changes in demand for electricity, gas and other products and services, unanticipated weather conditions, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental, and technological factors affecting the operations, markets, products and services of UIL Holdings’ subsidiaries.  The foregoing and other factors are discussed and should be reviewed in UIL Holdings’ 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 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

The primary business of UIL Holdings Corporation (UIL Holdings) is ownership of its operating regulated utility businesses.  The utility businesses consist of the electric distribution and transmission operations of The United Illuminating Company (UI) and the natural gas transportation, distribution and sales operations of The Southern Connecticut Gas Company (SCG), a subsidiary of Connecticut Energy Corporation (CEC), Connecticut Natural Gas Corporation (CNG), a subsidiary of CTG Resources, Inc. (CTG), and The Berkshire Gas Company (Berkshire), a subsidiary of Berkshire Energy Resources (BER, and together with SCG, CNG, Berkshire, CEC and CTG, the Gas Companies).

UIL Holdings Corporation

UIL Holdings’ financial condition and financing capability are 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 of UIL Holdings and its subsidiaries.  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.

Legislation and Regulation

Connecticut Public Act 11-80 (PA 11-80)  In July 2011, as a result of PA 11-80, the Connecticut Department of Energy and Environmental Protection (DEEP) was created by merging the Department of Environmental Protection and the Connecticut Department of Public Utility Control (DPUC).  As part of the reorganization, the DPUC has become the Public Utilities Regulatory Authority (PURA) and three of the five former DPUC commissioners are now PURA directors.  PA 11-80 also gives DEEP new energy-related planning and oversight responsibilities and transfers various energy-related responsibilities and powers from the Office of Policy and Management to DEEP.  This has resulted in the reorganization and reassignment of some existing DPUC staff.  Implementation of the provisions of PA 11-80 is expected to require numerous regulatory proceedings as the reorganization moves forward.

PA 11-80 also allows each electric distribution company to develop and own up to 10 MW of renewable source generation if DEEP finds that it is in the long term interest of customers and modifies the current power procurement process that the electric distribution companies perform to allow for more flexibility, possibly resulting in lower generation costs for standard service customers.

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Derivatives

In accordance with FASB ASC 820 “Fair Value Measurements and Disclosures,”  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 September 30, 2011, the assets and liabilities that are accounted for at fair value on a recurring basis as Level 3 instruments, which consist primarily of contracts for differences, represent 82.6% 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 contracts for differences is based on a probability-based expected cash 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.

PURA 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 because 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.

Electric Distribution and Transmission

UI is an electric distribution and transmission 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 PURA.  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 manage expenses, uncollectibles and capital expenditures, in addition to sales volume and major weather disturbances.  Sales volume is not expected to have an impact on distribution earnings during the decoupling pilot established in the 2008 Rate Case final decision.  The extent to which sales volume will have an impact on UI’s financial results beyond such period will depend upon the nature and extent of decoupling implemented by PURA upon its review of the pilot program in UI’s next general rate proceeding.  UI expects to continue to make capital investments in its distribution and transmission infrastructure.

Tropical Storm Irene, which passed through Connecticut on August 28, 2011, caused extensive damage to the electric system in UI’s service territory and left approximately 158,000 of UI’s estimated 325,000 customers without electricity.  PURA has opened an investigation of the service response and communications of UI, among other utilities, following power outages resulting from Tropical Storm Irene.  In accordance with PURA regulatory decisions and past storm cost guidance, UI has established a regulatory asset for its storm-related expenses.  As of September 30, 2011, UI’s estimate of the cost of repairing the damage and restoring service to customers is approximately $20 million, of which approximately $4 million has been capitalized.  UI expects to seek recovery of these costs in future rate proceedings.

Rates

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

On April 1, 2010, UI filed its ratemaking proposal and underlying decoupling analysis for the 2009 rate year ended February 3, 2010.  On September 1, 2010, PURA issued its final decision in this matter approving a decoupling charge totaling approximately $1.6 million to be recovered from ratepayers over a twelve month period commencing in October 2010.  In addition to the decoupling charge, PURA also approved a pension and earnings sharing over-recovery credit totaling approximately $3.6 million to be refunded to ratepayers over the same twelve month period commencing in October 2010.  PURA also approved the continuance of the decoupling pilot program beyond the 2010 rate year and until such time that a final decision is reached regarding whether to continue, modify or terminate the decoupling mechanism.  UI filed its 2010 rate year decoupling results with PURA on April 4, 2011 and on August 31, 2011 PURA issued a final decision approving a decoupling adjustment totaling approximately $1.4 million to be credited to ratepayers over a twelve month period beginning in October 2011 and extending the decoupling pilot until UI’s next general rate proceeding.

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In December 2010, UI received a letter ruling approving rates effective January 1, 2011 incorporating the 2009 distribution rate changes mentioned above along with previously approved changes to the Generation Services Charges (GSC), Non-Bypassable Federally Mandated Congestion Charges, transmission and systems benefits charges.  Additionally, last resort service GSC rates have been approved for the period through December 31, 2011.  On June 23, 2011, the DPUC approved revised retail transmission rates, effective July 1, 2011.

Transmission Return on Equity (ROE)

PURA decisions do not affect the revenue requirements determination for transmission, including the applicable ROE, which are within the jurisdiction of the FERC.  For 2011, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 12.3% to 12.5%.

On September 30, 2011, several New England governmental entities, including PURA, the Connecticut Attorney General and the Connecticut Office of Consumer Counsel (collectively, the complainants), filed a complaint with the FERC against ISO-NE and New England transmission owners, including UI, claiming that the current approved base ROE on transmission investments of 11.14% is not just and reasonable and seeking a reduction of the base ROE to 9.2%.  While the FERC has not yet set a refund effective date, complainants have agreed, at ISO-NE’s request, to a refund effective date of October 1, 2011.  The New England transmission owners filed their response to the complaint on October 20, 2011, opposing any change to the base ROE as unsupported.  UI is unable to predict the outcome of this proceeding at this time; however, a 10 basis point reduction in the ROE would result in a $0.2 million reduction in net income on an annualized basis based on approximately $400 million of transmission rate base.

Power Supply Arrangements

UI has wholesale power supply agreements in place for the supply of all of its standard service customers for all of 2011 and 2012, and 20% of 2013.  Supplier of last resort service is procured on a quarterly basis.  UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and elected the “normal purchase, normal sale” exception under ASC 815.  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, which take effect if UI’s credit rating on senior debt falls below investment grade.  In October 2011, Moody’s Investor Services released its updated credit opinion for UI and maintained its Baa2 rating with a stable outlook.   In May 2011, Standard & Poor’s released its updated credit opinion for UI, maintaining its BBB rating with a stable outlook.  If UI’s credit rating were to decline one rating and UI were to be placed on negative credit watch, monthly amounts due and payable to the power suppliers would be accelerated to semi-monthly payments.  UI’s credit rating would have to decline two ratings to fall below investment grade at either rating service.  If this were to occur, UI would have to deliver collateral security in an amount equal to the receivables due to the sellers for the thirty day period immediately preceding the default notice.  If such a situation was in effect as of September 30, 2011, UI would have had to post approximately $12.3 million in collateral.

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 portion of UI’s earnings is generated by the authorized return on the equity portion of unamortized stranded costs in the CTA rate base.  UI’s after-tax earnings attributable to CTA for the nine months ended September 30, 2011 and 2010 were $3.1 million and $4.3 million, respectively.  A 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 $31.8 million and $32.0 million for the nine months ended September 30, 2011 and 2010, 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 PURA review process.  The original rate base component of stranded costs, as of January 1, 2000, was $433 million.  It has since declined to $78.3 million as of September 30, 2011.  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 amortization expected to end in 2013.  The date by which stranded costs are fully amortized depends primarily upon PURA’s future decisions and potential legislative activities, which could affect future rates of stranded cost amortization.

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New England East-West Solution

Pursuant to an agreement with CL&P (the Agreement), UIhas the right to invest in, and own transmission assets associated with, the Connecticut portion of CL&P’s New England East West Solution (NEEWS) projects to improve regional energy reliability.  NEEWS consists of four inter-related transmission projects being developed by subsidiaries of Northeast Utilities (NU), the parent company of CL&P, in collaboration with National Grid USA.  Three of the projects have portions sited in Connecticut:  (1) the Greater Springfield Reliability Project, (2) the Interstate Reliability Project and (3) the Central Connecticut Reliability Project.  In May 2011, the FERC issued an order authorizing NU’s recovery of return on 100% of the transmission construction work in progress costs for the NEEWS projects, which resulted in a change in NU’s NEEWS project cost estimate.

Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific transmission assets as they are placed in service.  UI has the right to invest up to the greater of $60 million or an amount equal to 8.4% of CL&P’s costs for the Connecticut portions of the NEEWS projects.  Based upon the current projected costs, this amount is approximately $60 million.  As assets are placed in service, CL&P will transfer title to certain transmission assets to UI in proportion to its investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating and maintenance agreement with UI.  Also, under the terms of the Agreement, there are certain circumstances under which CL&P can terminate the Agreement. Such termination would have no affect assets previously transferred to UI.

Through September 30, 2011, UI has made deposits totaling $8.9 million in NEEWS and expects to make the remaining deposits over a period of three to five years, depending on the timing and amount of CL&P’s capital expenditures and the projects’ in service dates.

Equity Investment in Peaking Generation

UI is a 50-50 joint venturer with NRG Energy, Inc. in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (GenConn), was chosen by PURA to build and operate two new peaking generation plants in Devon (GenConn Devon) and Middletown (GenConn Middletown) to help address Connecticut’s need for power generation during the heaviest load periods.  PURA has approved 2011 revenue requirements for the period from January 1, 2011 through December 31, 2011 for GenConn Devon of $36.8 million and from June 1, 2011 through December 31, 2011 for GenConn Middletown of $22.6 million.

GenConn filed a revenue requirements request with PURA on July 29, 2011, seeking approval of 2012 revenue requirements for the period commencing January 1, 2012 for both the GenConn Devon and GenConn Middletown facilities.  A final decision on this request is expected by the end of 2011.

As of September 30, 2011, UI’s equity investment in GenConn was $132.9 million.  In July 2011, upon the repayment of the equity bridge loan (EBL), UI made its final equity investment in GenConn Middletown in an amount of approximately $63 million.  UI’s income (loss) from its equity investment in GenConn was $8.2 million and ($0.5) million for the nine month periods ended September 30, 2011 and 2010, respectively.  For the three month periods ended September 30, 2011 and 2010, such income was $3.5 million and $0.4 million, respectively.  UI received distributions of $3.1 million and $2.2 million from GenConn in September 2011 and October 2011, respectively.

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Gas Distribution

Rates

SCG and CNG

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

Berkshire

Berkshire’s rates are established by the Massachusetts Department of Public Utilities (DPU).  Berkshire is currently operating under a 10-year rate plan approved by the DPU and which expires on January 31, 2012, pursuant to which Berkshire’s rates can be adjusted annually.  The ROE approved in Berkshire’s rate plan is 10.5%.

Approval for the Issuance of Debt

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

Gas Supply Arrangements

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

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LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2011, UIL Holdings had $26.3 million of unrestricted cash and temporary cash investments.  This represents a decrease of $63.9 million from the corresponding balance at December 31, 2010.  The components of this decrease, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows:

	(In Millions)
Unrestricted cash and temporary cash investments, December 31, 2010	$	90.3
Net cash provided by operating activities		185.6
Net cash provided by (used in) investing activities:
Cash invested in plant - including AFUDC debt		(226.9	)
Acquisition of Gas Companies, net of cash acquired		11.2
Restricted cash (1)		(3.5	)
Other investing activities		(1.3	)
		(220.5	)
Net cash provided by (used in) financing activities:
Issuances of (Payments) long-term debt, net		(94.1	)
Line of credit borrowings (repayments)		131.0
Dividend payments		(65.4	)
Other financing activities		(0.5	)
		(29.0	)
Net change in cash		(63.9	)
Unrestricted cash and temporary cash investments, September 30, 2011	$	26.3

(1)As of September 30, 2011, UIL Holdings had $5.9 million in restricted cash, which primarily relates to Electric Distribution and Transmission capital projects, and which has been withheld by UI and will remain in place until the verification of fulfillment of contractor obligations.

Cash Flows

All capital requirements that exceed available cash will be funded through external financings.  Although there is currently no commitment to provide such financing from any source of funds, other than from the Credit Facility discussed below, future external financing needs are expected to be satisfied by the issuance of additional equity and short-term and long-term debt.  The continued availability and timing of such financings will be dependent on many factors, including conditions in the securities markets, general economic conditions, and UIL Holdings’ future income and cash flow.

In February 2011, UIL Holdings repaid, upon maturity, the outstanding balances of its 7.23% Series A Senior Notes totaling $4.3 million and its 7.38% Series B Senior Notes totaling $45 million.

In May 2011, Berkshire repaid, upon maturity, the outstanding balance of its 4.76% unsecured notes totaling $3.0 million.

In July 2011, borrowings under the EBL used by UI to fund its commitments as a 50-50 joint venturer in GenConn of approximately $63 million were repaid upon maturity.

On August 29, 2011, SCG entered into a note purchase agreement with a group of institutional accredited investors providing for the sale to such investors of secured 3.88% medium-term notes due September 22, 2021 (constituting a series of first mortgage bonds) in the principal amount of $25 million, and secured  5.39% medium-term notes due September 22, 2041 (constituting a series of first mortgage bonds) in the principal amount of $25 million.  Such notes were issued on September 22, 2011.

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In September 2011, SCG repaid, upon maturity, the outstanding balance of its 6.59% senior secured medium term notes totaling $30 million.

UI received distributions of $3.1 million and $2.2 million from GenConn in September 2011 and October 2011, respectively.

Other Sources of Funding

On November 17, 2010, UIL Holdings, UI, CNG, SCG and Berkshire entered into a revolving credit agreement with a group of banks named therein that will expire on November 17, 2014 (the Credit Facility).  The borrowing limit under the Credit Facility is $400 million, all of which is available to UIL Holdings, $250 million is available to UI, $150 million is available to each of CNG and SCG, and $50 million is available to Berkshire.  The Credit Facility permits borrowings at fluctuating interest rates and also permits borrowings for fixed periods of time specified by each borrower at fixed interest rates determined by the Eurodollar interbank market in London (LIBOR).  The Credit Facility also permits the issuance of letters of credit of up to $50 million.

As of September 30, 2011, there was $138 million outstanding under the Credit Facility.  UIL Holdings has outstanding standby letters of credit in the aggregate amount of $3.9 million, which will expire on January 31, 2012 and June 16, 2012, but can be extended under a provision that automatically extends letters of credit for one year periods from the expiration date (or any future expiration date), unless the issuer bank elects not to extend.  In addition, UI has an outstanding standby letter of credit in the amount of $0.4 million, which expires on December 31, 2011.  Available credit under the Credit Facility at September 30, 2011 totaled $257.7 million for UIL Holdings and its subsidiaries in the aggregate.  UIL Holdings records borrowings under the Credit Facility as short-term debt, but the Credit Facility provides for longer term commitments from banks allowing UIL Holdings to borrow and reborrow funds, at its option, until the Credit Facility expires, thus affording UIL Holdings flexibility in managing its working capital requirements.

UIL Holdings filed a registration statement with the SEC using a shelf registration process in March 2009. As permitted by the registration statement, UIL Holdings may, from time to time, sell debt, equity or other securities in one or more transactions.  The registration statement expires on March 11, 2012.

UI has PURA approval for the issuance of up to $275 million principal amount of debt securities during 2010 through 2013 (the Proposed Notes), of which $100 million has been issued in the form of senior unsecured notes.  The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes:  (1) to finance capital expenditures; (2) to repay the equity bridge loan, the proceeds of which were used to finance UI’s equity contribution in GenConn for the development and construction of  GenConn Devon and GenConn Middletown; (3) to fund UI’s pension plan; (4) to partially repay short-term borrowings that are incurred to temporarily fund the preceding needs; (5) to pay for issuance costs related to the Proposed Notes; and (6) for general corporate purposes.

To afford UI additional flexibility to market outstanding tax-exempt bonds in the municipal bond market, PURA has approved UI’s request to refund $64.5 million principal amount of tax-exempt bonds outstanding with the proceeds of the issuance of new bonds, without insurance.  UI continues to review conditions in the municipal bond market and plans to refund these bonds at such time when market conditions and financing terms are economically favorable.

UI expects to receive periodic distributions from GenConn, similar to those discussed in “– Cash Flows” above; however, future distributions are subject to certain requirements related to GenConn’s project financing.

Uses of Funds

During the nine month period ended September 30, 2011, UIL Holdings made total pension contributions of $66.5 million.  Additional contributions during the remainder of 2011 are expected to be approximately $7.1 million.

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As of September 30, 2011, UI’s equity investment in GenConn was $132.9 million.  In July 2011, UI accessed the Credit Facility to repay its EBL associated with GenConn Middletown, and make its remaining equity investment in GenConn Middletown in an amount of approximately $63 million.

The former general contractor responsible for the construction at the GenConn Devon facility was seeking alleged scope and rework changes and submitted a delay and impact claim under the terms of its contract with GenConn.  In September 2010, UIL Holdings entered into a Sponsor Guaranty and Payment Agreement (Sponsor Guaranty) in favor of the Royal Bank of Scotland PLC, as Administrative Agent under the Project Financing arrangement, whereby UIL Holdings guaranteed to pay an amount up to $6.0 million in respect of amounts related to the former general contractor claims and litigation expenses as they relate to such claims.  On July 28, 2011, the parties executed a settlement agreement.  The settlement does not require the Sponsor Guaranty to be drawn upon and the Sponsor Guaranty terminated following payment of the settlement amount and release of all associated liens.

As of September 30, 2011, UI would have had to post approximately $12.3 million in collateral pursuant to its wholesale power supply arrangements if certain conditions existed at that time.  See “– Major Influences on Financial Condition – Electric Distribution and Transmission – Power Supply Arrangements” for additional information.

Financial Covenants

UIL Holdings and its subsidiaries 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 its subsidiaries were in compliance with such covenants as of September 30, 2011.

2011 Capital Resource Projections

There have been no material changes in UIL Holdings’ 2011 capital resource projections from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Contractual and Contingent Obligations

There have been no material changes in UIL Holdings’ 2011 contractual and contingent obligations from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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.  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 described in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2010 are those that depend most heavily on these judgments and estimates.  At September 30, 2011, there have been no material changes to any of the Critical Accounting Policies described therein.

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OFF-BALANCE SHEET ARRANGEMENTS

UIL Holdings occasionally enters 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.

As of September 30, 2011, UIL Holdings had certain guarantee contracts outstanding for which no liability has been recorded in the Consolidated Financial Statements.  Refer to Part I, Item 1, “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note (J), Commitments and Contingencies,” of this Quarterly Report on 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.  There have been no new accounting standards issued since the filing of UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2010 that UIL Holdings expects to have a material impact on its consolidated financial position, results of operations or liquidity.

RESULTS OF OPERATIONS

Use of Non-GAAP Measures

Within the “Results of Operations” section of this Quarterly Report on Form 10-Q, tabular presentations are provided showing a comparison of UIL Holdings’ net income and earnings per share (EPS) for the three and nine month periods ended September 30, 2011 and 2010.  The amounts presented show the EPS for each of UIL Holdings’ lines of business, as well as non-utility activities and acquisition and closing related expenses, calculated by dividing the income of each line of business by the average number of shares of UIL Holdings’ common stock outstanding for the quarterly periods presented.  UIL Holdings believes this information is useful in understanding the fluctuations in earnings per share between the current and prior year periods.

Third Quarter 2011 vs. Third Quarter 2010

UIL Holdings’ net income was $12.2 million, or $0.24 per share, a decrease of $4.8 million, or $0.28 per share, compared to the third quarter of 2010.  Excluding the after-tax impact of the Acquisition and the impact of the earnings dilution associated with the September 2010 equity issuance, net income for the third quarter 2011 was $0.67 per share.  The table below presents a comparison of UIL Holdings’ net income and EPS for the third quarters of 2011 and 2010.

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The gas distribution business had a net loss of $6.2 million for the quarter, consistent with the seasonal nature of the gas business.  The financial results for the third quarter of 2010 do not include the operations of the Gas Companies which were acquired in the fourth quarter of 2010.

	Quarter Ended September 30, 2011			Quarter Ended September 30, 2010			2011 More (Less) than 2010
Net Income (Loss) (In Millions except per share amounts)
Electric Distribution and Transmission	$	20.7		$	21.3		$	(0.6	)
Non-Utility excluding the impact of the Acquisition		0.9			(0.2	)		1.1
Net Income excluding the impact of the Acquisition		21.6			21.1			0.5
Gas Distribution		(6.2	)		-			(6.2	)
Non-Utility impact of the Acquisition (1)		(3.2	)		(4.1	)		0.9
Total Net Income	$	12.2		$	17.0		$	(4.8	)
EPS
Electric Distribution and Transmission	$	0.41		$	0.66		$	(0.25	)
Non-Utility excluding the impact of the Acquisition		0.01			(0.01	)		0.02
Net Income excluding the impact of the Acquisition		0.42			0.65			(0.23	)
Gas Distribution		(0.12	)		-			(0.12	)
Non-Utility impact of the Acquisition (1)		(0.06	)		(0.13	)		0.07
Total EPS - Basic	$	0.24		$	0.52		$	(0.28	)
Total EPS - Diluted	$	0.24		$	0.52		$	(0.28	)
EPS - Basic: Equity Issuance Impact
Net Income excluding the impact of the Acquisition	$	0.42		$	0.65		$	(0.23	)
September 2010 equity issuance		0.25			0.04			0.21
EPS excluding the impact of the Acquisition and September 2010 equity issuance	$	0.67		$	0.69		$	(0.02	)

(1)For the quarter ended September 30, 2011, the non-utility impact of the Acquisition includes interest expense related to the October 2010 issuance of $450 million of debt used to partially fund the Acquisition.  For the quarter ended September 30, 2010, the non-utility impact of the Acquisition includes acquisition related costs

Electric Distribution and Transmission

Many of the changes in UI’s unbundled revenue and expense components impact line items in its Consolidated Statement of Income, 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 net income in the discussion of UI’s distribution business below.

Overall, UI’s operating revenue decreased by $15.5 million, from $236.3 million in the third quarter of 2010 to $220.8 million in the third quarter of 2011.  Retail revenue decreased $30.7 million, which was primarily attributable 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.  During the third quarter of 2011, there was a 5.3% increase in kWh provided by alternate suppliers compared to the third quarter of 2010 which was primarily attributable to an average increase of 34,661 alternate supplier customers in the third quarter of 2011 compared to third quarter of 2010.  Decreases in distribution rates and sales volume also contributed to the decrease in retail revenue.  Retail sales decreased by 34 million kWh, from 1,646 million kWh in third quarter of 2010, to 1,612 million kWh in the third quarter of 2011.  Retail sales normalized for the weather impact decreased 16 million kWh, from 1,529 million kWh in the third quarter of 2010, to 1,513 million kWh in the third quarter of 2011.  Other revenues increased $15.4 million, which was primarily attributable to the net activity of the GSC “working capital allowance” due to timing differences, partially offset by higher transmission revenue as well as the distribution revenue decoupling adjustment.

Purchased power expense decreased by $12.6 million, from $65.6 million in the third quarter of 2010 to $53.0 million in the third quarter of 2011.  The decrease was primarily attributable to the impact of customers switching to alternate suppliers to supply the generation portion of their customer bill, as discussed above, 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.  The variance does not impact net income as these costs are recovered through the GSC and Bypassable Federally Mandated Congestion Charges portion of UI’s unbundled retail customer rates.

UI’s O&M expenses increased by $1.9 million, from $57.3 million in the third quarter of 2010, to $59.2 million in the third quarter of 2011.  The increase was primarily attributable to higher uncollectible expenses.

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UI’s transmission wholesale expenses increased by $1.8 million, from $23.4 million in the third quarter of 2010 to $25.2 million in the third quarter of 2011.  The increase was primarily attributable to higher regional transmission expenses, of which UI pays a portion based upon its relative load and which are recovered through rates.

UI’s depreciation and amortization decreased by $2.2 million, from $28.3 million for the third quarter of 2010 to $26.1 million in the third quarter of 2011.  The decrease was primarily attributable to decreased amortization of the 2009 pension regulatory asset, which has been recovered through rates.

UI’s taxes, other than income taxes, decreased $1.1 million, from $20.2 million in the third quarter of 2010 to $19.1 million in the third quarter of 2011.  The decrease was primarily attributable to a decrease in gross earnings tax, partially offset by increases in property taxes due to increases in plant and equipment.

UI’s other income and deductions decreased by $0.9 million, from $5.6 million in the third quarter of 2010 to $4.7 million in the third quarter of 2011.  The decrease was primarily attributable to mark-to-market adjustments to non-qualified pension investments.

UI’s income from equity investments increased by $3.1 million, from $0.4 million in the third quarter of 2010 to $3.5 million in the third quarter of 2011.  The increase was primarily attributable to income from the investment in GenConn.

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

Distribution

The distribution business had total net income of $13.1 million, a decrease of $1.8 million, compared to the third quarter of 2010.  The decrease in net income was primarily attributable to lower CTA rate base and mark-to-market adjustments to non-qualified pension investments, partially offset by increased income from the investment in GenConn.

Transmission

The transmission business had total net income of $7.6 million, an increase of $1.2 million, compared to the third quarter of 2010.  The increase was primarily attributable to an increase in the allowance for funds used during construction (AFUDC).

Non-Utility

UIL Holdings retains certain costs, primarily interest expense on holding company debt, at the holding company, or “corporate” level which are not allocated to its various subsidiaries.  UIL Corporate incurred net after-tax costs of $2.3 million, or $0.05 per share, in the third quarter of 2011 compared to net after-tax costs of $4.3 million, or $0.14 per share, in the third quarter of 2010.  The decrease was primarily attributable to the absence in 2011 of acquisition related expenses incurred in the third quarter of 2010, partially offset by interest expense related to the October 2010 issuance of $450 million of public debt, the proceeds of which were used to partially fund the Acquisition.

First Nine Months 2011 vs. First Nine Months 2010

UIL Holdings’ net income was $78.4 million, or $1.55 per share, an increase of $34.0 million, or $0.11 per share, compared to the first nine months of 2010.  Excluding the after-tax impact of the Acquisition and the impact of the earnings dilution associated with the September 2010 equity issuance, net income for the first nine months of 2011 was $1.88 per share.  The table below presents a comparison of UIL Holdings’ net income and EPS for the first nine months of 2011 and 2010.

The gas distribution business had net income of $29.7 million, primarily reflecting the colder than normal temperatures in the first quarter of 2011.  The financial results for the first nine months of 2010 do not include the operations of the Gas Companies which were acquired in the fourth quarter of 2010.
 

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	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010			2011 More (Less) than 2010
Net Income (Loss) (In Millions except per share amounts)
Electric Distribution and Transmission	$	58.1		$	53.9		$	4.2
Non-Utility excluding the impact of the Acquisition		0.1			(1.1	)		1.2
Net Income excluding the impact of the Acquisition		58.2			52.8			5.4
Gas Distribution		29.7			-			29.7
Non-Utility impact of the Acquisition (1)		(9.5	)		(8.4	)		(1.1	)
Total Net Income	$	78.4		$	44.4		$	34.0
EPS
Electric Distribution and Transmission	$	1.15		$	1.76		$	(0.61	)
Non-Utility excluding the impact of the Acquisition		-			(0.05	)		0.05
Net Income excluding the impact of the Acquisition		1.15			1.71			(0.56	)
Gas Distribution		0.59			-			0.59
Non-Utility impact of the Acquisition (1)		(0.19	)		(0.27	)		0.08
Total EPS - Basic	$	1.55		$	1.44		$	0.11
Total EPS - Diluted	$	1.54		$	1.42		$	0.12
EPS - Basic: Equity Issuance Impact
Net Income excluding the impact of the Acquisition	$	1.15		$	1.71		$	(0.56	)
September 2010 equity issuance		0.73			0.03			0.70
EPS excluding the impact of the Acquisition and September 2010 equity issuance	$	1.88		$	1.74		$	0.14

(1)For the nine months ended September 30, 2011, the non-utility impact of the Acquisition includes interest expense related to the October 2010 issuance of $450 million of debt used to partially fund the Acquisition. For the nine months ended September 30, 2010, the non-utility impact of the Acquisition includes acquisition related costs

Electric Distribution and Transmission

Many of the changes in UI’s unbundled revenue and expense components impact line items in its Consolidated Statement of Income, 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 net income in the discussion of UI’s distribution business below.

Overall, UI’s operating revenue decreased by $61.2 million, from $663.7 million in the first nine months of 2010 to $602.5 million in the first nine months of 2011.  Retail revenue decreased $61.7 million, which was primarily attributable 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.  During the first nine months of 2011, there was a 13.4% increase in kWh provided by alternate suppliers, compared to the first nine months of 2010 which was primarily attributable to an average increase of 50,423 alternate supplier customers in the first nine months of 2011, compared to the first nine months of 2010.  The decrease in retail revenue was partially offset by increases in distribution rates and sales volume.  Retail sales decreased by 58 million kWh, from 4,236 million kWh in first nine months of 2010, to 4,178 million kWh in the first nine months of 2011.  Retail sales normalized for the weather impact decreased 82 million kWh, from 4,380 million kWh in the first nine months of 2010, to 4,298 million kWh in the first nine months of 2011.

Purchased power expense decreased by $55.0 million, from $194.5 million in the first nine months of 2010 to $139.5 million in the first nine months of 2011.  The decrease was primarily attributable to the impact of customers switching to alternate suppliers to supply the generation portion of their customer bill, as discussed above, 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.  The variance does not impact net income as these costs are recovered through the GSC and Bypassable Federally Mandated Congestion Charges portion of UI’s unbundled retail customer rates.

UI’s O&M expenses decreased by $1.1 million, from $170.9 million in the first nine months of 2010, to $169.8 million in the first nine months of 2011.  The decrease was primarily attributable to decreases in payments to customers related to distributed generation grants which are recovered through rates, partially offset by increases in outside services expenses.

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UI’s transmission wholesale expenses increased by $5.6 million, from $54.2 million in the first nine months of 2010 to $59.8 million in the first nine months of 2011.  The increase was primarily attributable to higher regional transmission expenses, of which UI pays a portion based upon its relative load and which are recovered through rates.

UI’s depreciation and amortization decreased by $9.6 million, from $82.6 million for the first nine months of 2010 to $73.0 million in the first nine months of 2011.  The decrease was primarily attributable to decreased amortization of software and decreased amortization of the 2009 pension regulatory asset, which has been recovered through rates.

UI’s other income and deductions increased by $1.2 million, from $14.2 million in the first nine months of 2010 to $15.4 million in the first nine months of 2011.  The increase was primarily attributable to an increase in the AFUDC.
 

UI’s interest expense increased by $2.5 million, from $29.8 million in first nine months 2010 to $32.3 million in first nine months 2011.  The increase was primarily attributable to increased long-term borrowings.

UI’s income from equity investments increased by $8.7 million, from a loss of $0.5 million in the first nine months of 2010 to income of $8.2 million in the first nine months of 2011.  The increase was primarily attributable to income from the investment in GenConn.

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

Distribution

The distribution business had total net income of $34.9 million, an increase of $0.5 million, compared to the first nine months of 2010.  The increase in net income was primarily attributable to increased income from the investment in GenConn, partially offset by lower CTA rate base.

Transmission

The transmission business had total net income of $23.2 million, an increase of $3.7 million, compared to the first nine months of 2010.  The increase was primarily attributable to an increase in the AFUDC.

Non-Utility

UIL Holdings retains certain costs, primarily interest expense on holding company debt, at the holding company, or “corporate” level which are not allocated to its various subsidiaries.  UIL Corporate incurred net after-tax costs of $9.4 million, or $0.19 per share, in the first nine months of 2011 compared to net after-tax costs of $9.5 million, or $0.32 per share, in the first nine months of 2010.  The decrease was primarily attributable to the absence in 2011 of acquisition related expenses incurred in the first nine months of 2010, partially offset by interest expense related to the October 2010 issuance of $450 million of public debt, the proceeds of which were used to partially fund the Acquisition.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

There have been no additional risks identified and no material changes with regard to items previously disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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, as amended (the Exchange Act).  Management designed its disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

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UIL Holdings carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of UIL Holdings’ disclosure controls and procedures as of September 30, 2011.  As of September 30, 2011, 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.

Changes in Internal Control Over Financial Reporting

There have been no changes in UIL Holdings’ internal control over financial reporting during the three month period ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, UIL Holdings’ internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1A. – Risk Factors.

Shareowners and prospective investors should carefully consider the risk factors that were previously disclosed in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2010.  There have been no material changes to such risk factors, except as follows:

UIL Holdings is dependent upon Iberdrola USA for certain transitional services being 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 is 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 to facilitate the integration of the Gas Companies.  The terms of these arrangements are governed by a transition agreement entered into on November 16, 2010, with an initial term of one year.  UIL Holdings has exercised its right to extend the agreement, to May 16, 2012.  The agreement allows for two additional extension periods of ninety days each, at UIL Holdings’ election.  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.

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

UIL Holdings repurchased 16,200 shares of common stock in open market transactions to satisfy matching contributions for participants’ contributions into UI’s 401(k)/Employee Stock Ownership Plan in the form of UIL Holdings common 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 or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
July		5,400	$	32.89	None	None
August		4,900	$	29.94	None	None
September		5,900	$	33.26	None	None
Total		16,200	$	32.03	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       No.	Description
4.10	Note Purchase Agreement, dated August 29, 2011, for 3.88% and 5.39% Medium-Term Notes (incorporated herein by reference to Form 8-K filed with the Securities and Exchange Commission on September 1, 2011).
4.11	Thirty-First Supplemental Indenture, dated November 1, 2008 (incorporated herein by reference to Form 8-K filed with the Securities and Exchange Commission on September 1, 2011).
31.1	Certification of Periodic Financial Report.
31.2	Certification of Periodic Financial Report.
32	Certification of Periodic Financial Report.
101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF	The following financial information from the UIL Holdings Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the SEC on October 3, 2011, is formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Income for the three and nine month periods ended September 30, 2011 and 2010, (ii) the Consolidated Balance Sheet as of September 30, 2011 and December 31, 2010, (iii) the Consolidated Statement of Cash Flows for the nine month periods ended September 30, 2011 and 2010 and (iv) the Notes to Consolidated Financial Statements.

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SIGNATURES

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

		UIL HOLDINGS CORPORATION
Date	11/3/2011	/s/ Richard J. Nicholas
		Richard J. Nicholas
		Executive Vice President
		and Chief Financial Officer

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