UIL (UIL) 10-Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2013

OR

o 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

N/A

(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  x      No   o

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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x      No   o

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	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o           No x

The number of shares outstanding of the issuer’s only class of common stock, as of April 29, 2013 was 50,698,899.

INDEX

PART I.  FINANCIAL INFORMATION

		Page Number
Item 1.	Financial Statements and Supplementary Data.	3
	-  Consolidated Statement of Income for the three months ended March 31, 2013 and 2012.	3
	-  Consolidated Statement of Comprehensive Income for the three months ended March 31, 2013 and 2012.	3
	-  Consolidated Balance Sheet as of March 31, 2013 and December 31, 2012.	4
	-  Consolidated Statement of Cash Flows for the three months ended March 31, 2013 and 2012.	6
	-  Notes to Consolidated Financial Statements.	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24
	-Major Influences on Financial Condition.	24
	-Liquidity and Capital Resources.	29
	-Critical Accounting Policies.	31
	-Off-Balance Sheet Arrangements.	31
	-New Accounting Standards.	31
	-Results of Operations.	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	33
Item 4.	Controls and Procedures.	34

PART II.  OTHER INFORMATION

Item 1A.	Risk Factors.	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	34
Item 6.	Exhibits.	35
	SIGNATURES	36

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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
	March 31,
	2013		2012
Operating Revenues	$	548,039	$	457,818
Operating Expenses
Operation
Purchased power		38,489		40,658
Natural gas purchased		219,267		150,805
Operation and maintenance		89,259		85,687
Transmission wholesale		18,818		16,048
Depreciation and amortization (Note F)		50,107		46,559
Taxes - other than income taxes (Note F)		35,866		30,600
Total Operating Expenses		451,806		370,357
Operating Income		96,233		87,461
Other Income and (Deductions), net (Note F)		5,361		8,917
Interest Charges, net
Interest on long-term debt		21,686		21,102
Other interest, net		1,025		1,535
		22,711		22,637
Amortization of debt expense and redemption premiums		601		609
Total Interest Charges, net		23,312		23,246
Income from Equity Investments		3,812		4,487
Income Before Income Taxes		82,094		77,619
Income Taxes (Note E)		30,287		30,543
Net Income		51,807		47,076
Less:
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests		16		26
Net Income attributable to UIL Holdings	$	51,791	$	47,050
Average Number of Common Shares Outstanding - Basic		50,888		50,686
Average Number of Common Shares Outstanding - Diluted		51,157		50,985
Earnings Per Share of Common Stock - Basic (Note A)	$	1.02	$	0.93
Earnings Per Share of Common Stock - Diluted (Note A)	$	1.01	$	0.92
Cash Dividends Declared per share of Common Stock	$	0.432	$	0.432

UIL HOLDINGS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2013 and 2012

(Thousands of Dollars)

	Three Months Ended
	March 31,
	2013		2012
Net Income	$	51,807	$	47,076
Other Comprehensive Income, net		251		356
Comprehensive Income		52,058		47,432
Less:
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests		16		26
Comprehensive Income attributable to UIL Holdings	$	52,042	$	47,406

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)

	March 31,		December 31,
	2013		2012
Current Assets
Unrestricted cash and temporary cash investments	$	20,847	$	17,857
Restricted cash		1,838		2,805
Accounts receivable less allowance of $11,579 and $11,867, respectively		293,047		238,986
Unbilled revenues		70,088		83,956
Current regulatory assets  (Note A)		128,617		120,935
Natural gas in storage, at average cost		33,660		84,768
Deferred income taxes		36,190		41,605
Refundable taxes		-		1,686
Current portion of derivative assets (Note A)		11,757		12,671
Prepayments		20,616		11,907
Other		11,428		11,507
Total Current Assets		628,088		628,683
Other investments
Equity investment in GenConn (Note A)		128,603		124,799
Other		24,411		23,931
Total Other investments		153,014		148,730
Net Property, Plant and Equipment		2,843,434		2,787,354
Regulatory Assets (future amounts due from customers through the ratemaking process) (Note A)		977,939		1,014,515
Deferred Charges and Other Assets
Unamortized debt issuance expenses		15,985		16,625
Other long-term receivable		1,500		1,501
Derivative assets (Note A)		64,420		67,167
Goodwill		266,205		266,205
Other		12,506		28,587
Total Deferred Charges and Other Assets		360,616		380,085
Total Assets	$	4,963,091	$	4,959,367

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)

	March 31,			December 31,
	2013			2012
Current Liabilities
Line of credit borrowings	$	153,000		$	187,000
Current portion of long-term debt		47,897			48,296
Accounts payable		147,478			189,991
Dividends payable		21,887			21,887
Accrued liabilities		66,080			85,132
Current regulatory liabilities (Note A)		27,049			21,284
Taxes accrued		62,646			18,235
Interest accrued		24,734			22,427
Current portion of derivative liabilities (Note A)		30,860			30,804
Total Current Liabilities		581,631			625,056
Noncurrent Liabilities
Pension accrued		301,386			325,547
Connecticut Yankee contract obligation (Note J)		10,318			11,129
Other post-retirement benefits accrued		97,259			98,147
Derivative liabilities (Note A)		213,733			224,639
Other		50,442			49,506
Total Noncurrent Liabilities		673,138			708,968
Deferred Income Taxes (future tax liabilities owed to taxing authorities)		449,868			462,940
Regulatory Liabilities (future amounts owed to customers through the ratemaking process) (Note A)		510,716			445,156
Commitments and Contingencies (Note J)
Capitalization (Note B)
Long-term debt, net of unamortized discount and premium		1,599,066			1,600,354
Preferred Stock of Subsidiary
Redeemable preferred stock, noncontrolling interests		340			340
Common Stock Equity
Common stock		938,611			936,702
Paid-in capital		20,116			20,400
Retained earnings		189,803			159,900
Accumulated other comprehensive income (loss)		(198	)		(449	)
Net Common Stock Equity		1,148,332			1,116,553
Total Capitalization		2,747,738			2,717,247
Total Liabilities and Capitalization	$	4,963,091		$	4,959,367

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)

	Three Months Ended
	March 31,
	2013			2012
Cash Flows From Operating Activities
Net income	$	51,807		$	47,076
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		50,708			47,168
Deferred income taxes		(12,500	)		6,598
Allowance for funds used during construction (AFUDC) - equity		(2,537	)		(2,248	)
Stock-based compensation expense (Note A)		2,263			2,830
Pension expense		12,041			8,827
Undistributed (earnings) losses in equity investments		(3,812	)		(4,487	)
Deferred purchased gas		59,273			27,052
Other non-cash items, net		1,412			(14,928	)
Changes in:
Accounts receivable, net		(53,701	)		(37,773	)
Unbilled revenues		13,868			4,233
Natural gas in storage		51,108			35,468
Prepayments		(8,709	)		(2,277	)
Accounts payable		(20,850	)		(34,229	)
Cash distributions received from GenConn		-			4,743
Interest accrued		2,308			1,120
Taxes accrued/refundable, net		46,097			58,830
Accrued liabilities		(18,966	)		(13,755	)
Accrued pension		(34,167	)		(30,186	)
Other assets		(1,086	)		(3,457	)
Other liabilities		(2,404	)		(3,801	)
Total Adjustments		80,346			49,728
Net Cash provided by Operating Activities		132,153			96,804
Cash Flows from Investing Activities
Plant expenditures including AFUDC debt		(74,637	)		(74,139	)
Changes in restricted cash		967			842
Deposits in New England East West Solution (NEEWS) (Note C)		-			(1,270	)
Other		39			199
Net Cash (used in) Investing Activities		(73,631	)		(74,368	)
Cash Flows from Financing Activities
Issuances of long-term debt		-			103,500
Payments on long-term debt		-			(103,500	)
Line of credit borrowings (repayments), net		(34,000	)		(21,000	)
Payment of common stock dividend		(21,887	)		(21,836	)
Other		355			1,413
Net Cash (used in) Financing Activities		(55,532	)		(41,423	)
Unrestricted Cash and Temporary Cash Investments:
Net change for the period		2,990			(18,987	)
Balance at beginning of period		17,857			30,999
Balance at end of period	$	20,847		$	12,012
Non-cash investing activity:
Plant expenditures included in ending accounts payable	$	24,619		$	23,853
Plant expenditures funded by deposits in NEEWS	$	(18,469	)	$	-
Deposits in New England East West Solution (NEEWS)	$	18,469		$	-

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 Corporation’s (UIL Holdings) Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

(A) BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

UIL Holdings is headquartered in New Haven, Connecticut, where its senior management maintains offices and is responsible for overall planning, operating and financial functions.  The primary business of UIL Holdings is ownership of its operating regulated utility businesses.  The utility businesses consist of the electric distribution and transmission operations of The United Illuminating Company (UI) and the natural gas transportation, distribution and sales operations of The Southern Connecticut Gas Company (SCG), Connecticut Natural Gas Corporation (CNG), and The Berkshire Gas Company (Berkshire, and together with SCG and CNG,  the Gas Companies).

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

Basis of Presentation

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).  Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted in accordance with Securities and Exchange Commission (SEC) rules and regulations.  UIL Holdings believes that the disclosures made are adequate to make the information presented not misleading.  The information presented in the Consolidated Financial Statements reflects all adjustments which, in the opinion of UIL Holdings, are necessary for a fair statement of the financial position and results of operations for the interim periods described herein.  All such adjustments are of a normal and recurring nature.  The results for the three month period ended March 31, 2013 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2013.

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

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

Derivatives

UIL Holdings’ regulated subsidiaries are parties to contracts, and involved in transactions, that are derivatives.  The fair values of the gross derivative assets and liabilities as of March 31, 2013 and December 31, 2012 were as follows:

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UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

	March 31,		December 31,
	2013		2012
	(In Thousands)
Gross derivative assets:
Current Assets	$	11,757	$	12,671
Deferred Charges and Other Assets	$	64,420	$	67,167
Gross derivative liabilties:
Current Liabilities	$	30,860	$	30,804
Noncurrent Liabilities	$	213,733	$	224,639

Contracts for Differences (CfDs)

Pursuant to Connecticut’s 2005 Energy Independence Act, the Connecticut Public Utilities Regulatory Authority (PURA) solicited bids to create new or incremental capacity resources in order to reduce federally mandated congestion charges, and selected four new capacity resources.  To facilitate the transactions between the selected capacity resources and Connecticut electric customers, and provide the commitment necessary for owners of these resources to obtain necessary financing, PURA required that UI and The Connecticut Light and Power Company (CL&P) execute long-term contracts with the selected resources.  In August 2007, PURA approved four CfDs, each of which specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price.  UI executed two of the contracts and CL&P executed the other two contracts.  The costs or benefits of each contract will be paid by or allocated to customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost or benefit is borne by or allocated to UI customers and approximately 80% is borne by or allocated to CL&P customers.

PURA has determined that costs associated with these CfDs will be recoverable by UI and CL&P, and in accordance with ASC 980 “Regulated Operations,” UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability).  The CfDs are marked-to-market in accordance with ASC 815 “Derivatives and Hedging.”  For those CfDs signed by CL&P, UI records its approximate 20% portion, pursuant to the cost-sharing agreement noted above.  As of March 31, 2013, UI has recorded a gross derivative asset of $76.2 million, a regulatory asset of $168.4 million, and a gross derivative liability of $244.6 million ($149.4 million of which is related to UI’s portion of CL&P’s derivative liabilities).  See Note (K) “Fair Value of Financial Instruments” for additional CfD information.

The unrealized gains and losses from fair value adjustments to these derivatives recorded in regulatory assets or regulatory liabilities for the three month periods ended March 31, 2013 and 2012 were as follows:

	Three Months Ended
	March 31,
	2013			2012
	(In Thousands)
Regulatory Assets - Derivative liabilities	$	(8,165	)	$	(7,948	)
Regulatory Liabilities - Derivative assets	$	-		$	(28	)

Weather Insurance Contracts

On an annual basis, SCG and CNG assess the need for weather insurance contracts for the winter period of November 1 through April 30 in order to provide financial protection from significant weather fluctuations.  According to the terms of such contracts, if temperatures are warmer than normal at a prescribed level for the contract period, SCG and CNG each receive a payment; however, if temperatures are colder than normal at a prescribed level for the contract period, SCG and CNG would each be required to make a payment.  The premiums paid are amortized over the terms of the contracts.  The fair value of the contracts is carried on the balance sheet as a derivative with changes in value recorded in the income statement as Other Income and (Deductions).

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UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

In October 2012, SCG and CNG each entered into weather insurance contracts for the winter period of November 1, 2012 through April 30, 2013.  If temperatures are warmer than normal, SCG and CNG will each receive a payment, up to a maximum of $3 million; however, if temperatures are colder than normal, SCG and CNG will each make a payment of up to a maximum of $2 million.  As of March 31, 2013, the variation from normal weather during the contract period for CNG is not projected to reach the prescribed level stated in the contract.   Accordingly, no amount was accrued by CNG.  As of March 31, 2013, SCG recorded a derivative asset of an immaterial amount as the colder than normal temperatures are projected to slightly exceed the prescribed level stated in the contract.

In November 2011, Berkshire entered into a weather insurance contract for 2012 in order to provide financial protection from significant weather fluctuations.  According to the terms of the contract, if temperatures were warmer than normal for the contract period, Berkshire would receive a payment, up to the maximum amount allowed under the contract of $1 million.  The premiums paid were amortized over the term of the contract.  The fair value of the contract is carried on the balance sheet as a derivative with changes in value recorded in the income statement as Other Income and (Deductions).  The derivative asset related to this contract totaled $1 million at December 31, 2012.  On January 8, 2013, Berkshire received a payment of $1 million upon the expiration of the contract.  Berkshire did not enter into a weather insurance contract for 2013.

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculations for the three month periods ended March 31, 2013 and 2012:

	2013		2012
	(In Thousands, except per share amounts)
Numerator:
Net income	$	51,791	$	47,050
Less:  Net income allocated to unvested units		71		97
Net income attributable to common shareholders	$	51,720	$	46,953
Denominator:
Basic average number of shares outstanding		50,888		50,686
Effect of dilutive securities		269		299
Diluted average number of shares outstanding		51,157		50,985
Earnings per share:
Basic	$	1.02	$	0.93
Diluted	$	1.01	$	0.92

All outstanding options to purchase shares of common stock during the three-month periods ending March 31, 2013 and 2012 were included in the computation of diluted earnings per share because the options’ exercise prices were lower than the average market price of UIL Holdings’ common shares during such period.

Equity Investments

UI is party to a 50-50 joint venture with NRG in GenConn, which operates two peaking generation plants in Connecticut.  UI’s investment in GenConn is being accounted for as an equity investment, the carrying value of which was $128.6 million and $124.8 million as of March 31, 2013 and December 31, 2012, respectively.

UI’s pre-tax income from its equity investment in GenConn was $3.8 million and $4.5 million for the three month periods ended March 31, 2013 and 2012, respectively.  The decline in 2013 earnings compared to 2012 is primarily due to the absence in the first quarter 2013 of non-recurring adjustments recorded in the first quarter of 2012 largely relating to 2011.  UI did not receive any cash distributions from GenConn during the three month period ended March 31, 2013.  During the three month period ended March 31, 2012, UI received cash distributions from GenConn of $4.7 million.  As of March 31, 2013, the undistributed earnings from UI’s equity investment in GenConn were approximately $3.9 million.  UI received distributions of $5.3 million from GenConn in April of 2013.

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UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Regulatory Accounting

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

	Remaining	March 31,		December 31,
	Period	2013		2012
		(In Thousands)
Regulatory Assets:
Nuclear plant investments – above market	(a)	$	247,386	$	252,498
Connecticut Yankee	3 years		10,318		11,129
Unamortized redemption costs	8 to 20 years		11,903		12,103
Pension and other post-retirement benefit plans	(b)		452,465		458,019
Environmental remediation costs	4 to 5 years		14,752		14,772
Hardship programs	(c)		22,897		29,852
Debt premium	1 to 24 years		39,251		41,016
Deferred purchased gas	(d)		-		12,444
Unfunded future income taxes	(e)		22,667		17,319
Contracts for differences	(f)		168,432		176,597
Excess generation service charge	(g)		15,344		8,864
Deferred transmission income/expense	(h)		24,989		21,379
Storm costs	(i)		53,333		52,009
Other	(j)		22,819		27,449
Total regulatory assets			1,106,556		1,135,450
Less current portion of regulatory assets			128,617		120,935
Regulatory Assets, Net		$	977,939	$	1,014,515
Regulatory Liabilities:
Accumulated deferred investment tax credits	30 years	$	4,575	$	4,612
Income taxes due principally to book-tax differences	(j)		45,202		41,928
Deferred gain on sale of property	(a)		37,933		37,933
Middletown/Norwalk local transmission network service collections	36 years		21,832		21,975
Pension and other post-retirement benefit plans	1 to 7 years		14,006		15,016
Deferred purchased gas	(d)		46,829		-
Deferred income taxes	(e)		45,778		41,816
Asset retirement obligation	(k)		4,751		4,995
Low income programs	(l)		20,839		17,651
Asset removal costs	(j)		255,149		243,854
Other	(j)		40,871		36,660
Total regulatory liabilities			537,765		466,440
Less current portion of regulatory liabilities			27,049		21,284
Regulatory Liabilities, Net		$	510,716	$	445,156

(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 the fourth quarter of 2013.  The remaining balances will be fully offset by amounts primarily included in income taxes, due principally to book-tax differences.

(b) Asset life is dependent upon timing of final pension plan distribution; balance is recalculated each year in accordance with ASC 715 "Compensation-Retirement Benefits." See Note (G) “Pension and Other Benefits” for additional information.

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UIL HOLDINGS CORPORATION

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

(c) Hardship customer accounts deferred for future recovery to the extent they exceed the amount in rates.

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

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

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

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

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

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

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

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

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

Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), a target amount of 101,150 performance shares was granted to certain members of management in March 2013; the average of the high and low market price on the grant date was $38.73 per share.

Also in March 2013, UIL Holdings granted a total of 2,033 shares of restricted stock to its President and Chief Executive Officer under the 2008 Stock Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant was $38.73 per share.  Such shares vest in equal annual installments over a five year period.

Total stock-based compensation expense for the three month periods ended March 31, 2013 and 2012 was $2.3 million and $2.8 million, respectively.

Variable Interest Entities

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

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

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

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UIL HOLDINGS CORPORATION

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

(B) CAPITALIZATION

Common Stock

UIL Holdings had 50,698,899 shares of its common stock, no par value, outstanding at March 31, 2013.

(C) REGULATORY PROCEEDINGS

In November 2012, pursuant to PA 12-148, PURA opened a docket to investigate UI’s and the Gas Companies’ performance in restoring service following Superstorm Sandy, which passed through Connecticut in October 2012.  Hearings are scheduled for the second quarter of 2013 with a final decision expected in the third quarter of 2013.

Electric Distribution and Transmission

Superstorm Sandy caused extensive damage to the electric system in UI's service territory and resulted in approximately 284,000 customer outages.  In accordance with PURA regulatory decisions and past storm cost guidance, UI has established a regulatory asset for its storm-related expense.  As of March 31, 2013, UI’s estimate of the cost of repairing the damage resulting from the storm and restoring service to customers is approximately $35.2 million, of which approximately $13.4 million has been capitalized as property plant and equipment and the remainder as a regulatory asset.  UI is seeking recovery of these costs in its rate proceeding discussed below.

Rates

On February 15, 2013, UI filed an application to amend its existing distribution rate schedules for two rate years.  The changes are designed to produce additional distribution revenues of approximately $69 million in rate year one (from July 1, 2013 through June 30, 2014) and an additional $26 million in rate year two (from July 1, 2014 through June 30, 2015).  For rate year one, these additional revenues represent an increase of approximately 8.7% over the total revenues that would be expected under current rate schedules and projected sales on a total bill basis.  For rate year two, the additional revenues represent an increase of approximately 3.0% over rate year one revenues.  Included in this request is the initiation of the recovery of UI’s storm regulatory asset of approximately $52 million for previously incurred storm costs not included in rates.  UI’s application proposes a six-year recovery period for these costs along with the establishment of a storm reserve of $2 million per year to help address future storm costs, and the ability to defer additional storm costs above the reserve amount as a regulatory asset for recovery in a future proceeding.  UI does not currently have a storm reserve funded in rates.  In addition, UI proposes to use revenue from other sources, such as the 2010 and 2012 earning sharing amounts owed to customers along with anticipated excess CTA revenue collections, to recover increased distribution revenue requirements through the end of 2013, which allows the implementation of the proposed distribution rate increase to be deferred until January 1, 2014 coincident with the expiration of the CTA.  PURA is expected to issue a final decision on August 14, 2013, which would put amended rates into effect on that date.

UI’s allowed distribution return on equity (ROE) established by PURA is 8.75%.   UI has an earnings sharing mechanism in place that allows UI to retain 50% of any distribution earnings above the allowed 8.75% ROE in a calendar year.

UI filed its revised distribution 2011 rate year decoupling results with PURA on June 29, 2012.  The decoupling results included a decoupling adjustment of approximately $4.4 million which was proposed to be collected from customers beginning in the first quarter of 2013, pending PURA approval.  On April 4, 2013, UI filed its 2012 rate year decoupling results.  The 2012 decoupling results included an adjustment of approximately $6.4 million.  As PURA has not issued a decision on the 2011 decoupling results filing, UI has proposed that the results of the 2011 and 2012 decoupling filings be combined into one rate adjustment to be collected from customers over a 12-month period beginning in the fourth quarter of 2013.  PURA is expected to rule on this filing in the third quarter of 2013.  Additionally, PURA approved last resort service Generation Services Charge rates for the period through June 30, 2013.

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UIL HOLDINGS CORPORATION

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

Approval for the Issuance of Debt

UI has PURA approval for the issuance of up to $379 million principal amount of debt securities from 2010 through 2013 (the Proposed Notes).  UI is authorized to use the proceeds from the sale of the Proposed Notes for the following purposes:  (1) to finance capital expenditures; (2) the repayment of an 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 issuance costs related to the Proposed Notes; (6) to repay $103.5 million principal amount outstanding of pollution control revenue bonds, which were remarketed in the municipal bond market in February 2012 and (7) for general corporate purposes.  UI has issued $303.5 million principal amount of senior unsecured notes pursuant to such PURA approval, $100 million of which was issued in July 2010, $103.5 million of which was issued in January 2012 and $100 million of which was issued in April 2012.

Power Supply Arrangements

UI has wholesale power supply agreements in place for the supply of all of its standard service customers for all of 2013, and 30% for the first half of 2014.  Supplier of last resort service is procured on a quarterly basis.  UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and elected the “normal purchase, normal sale” exception under ASC 815 “Derivatives and Hedging.”  UI regularly assesses the accounting treatment for its power supply contracts.  These wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt were to fall below investment grade.  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 March 31, 2013, UI would have had to post an aggregate of approximately $8.7 million in collateral.

New Renewable Source Generation

Under a 2011 Connecticut law (PA 11-80), UI and CL&P are required to enter into long-term contracts to purchase RECs from small renewable generators located on customer premises.  Under this program, UI is required to enter into contracts totaling approximately $200 million in commitments over an approximate 21 year period.  The obligations will phase in over a six year solicitation period, and are expected to peak at an annual commitment level of about $13.6 million per year after six years.  Upon purchase, the RECs will be accounted for as inventory.  UI expects to partially mitigate the cost of the contracts through the resale of the RECs.  PA 11-80 provides that the remaining costs of the contracts, including any gain or loss resulting from the resale of the RECs, are recoverable through electric rates.  In December 2011, UI and CL&P submitted a joint petition to PURA outlining a plan to address these requirements and in April 2012, PURA approved the program.  In October 2012, UI received PURA approval for executed REC purchase contracts totaling up to approximately $1.5 million annually in payments for 15 year delivery terms commencing in 2013.  On January 8, 2013, UI opened a tariff-based application process to procure RECs from small renewable projects, and on March 20, 2013, UI entered into REC purchase contracts totaling approximately $0.5 million annually in payments for 15 year delivery terms commencing in 2013 and 2014. Additionally, UI has offered contracts totaling an immaterial amount to small renewable projects to replace projects that were recently selected, but unable to proceed to contract.

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UIL HOLDINGS CORPORATION

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

PA 11-80 also allows for the development of up to 30 MW of grid-connected renewable energy.  Under PA 11-80, regulated electric utility companies are permitted to submit a proposal to the Connecticut Department of Energy and Environmental Protection (DEEP) to build, own or operate one or more generation facilities up to 10 MWs using Class 1 renewable energy.  In December 2011, DEEP announced that it had selected two 5 MW solar projects in CL&P service territory.  CL&P executed contracts with the developers of the two 5 MW solar projects to purchase energy and associated products from both projects.  These contracts, and the associated cost recovery, have been approved by DEEP and PURA, respectively.  UI and CL&P executed a sharing arrangement, pursuant to which UI will pay 20% of the costs, and receive 20% of the benefits, associated with the projects.  Pursuant to PURA’s approval of the cost recovery, the payments made to projects are recoverable through electric rates.  In January 2012, UI filed a proposal with PURA outlining a framework for approval of UI’s renewable connections program under which UI would develop up to 10 MW of renewable generation for recovery on a cost of service basis.  PURA issued a final decision in July 2012, in which it approved the construction of one solar facility and two fuel cell facilities.  The decision approves an ROE equal to the then currently allowed distribution ROE, which is currently 8.75%, over the life of the facility.  UI had requested an ROE of 9.5% for the renewable connections projects.  In September 2012 PURA reopened the proceeding on its own motion and issued interrogatories, responses to which were filed by UI.  UI’s participation in the program is voluntary.

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 located in Connecticut:  (1) the Greater Springfield Reliability Project, which is currently under construction, (2) the Interstate Reliability Project, which has Connecticut Siting Council approval and (3) the Central Connecticut Reliability Project being studied now  as part of  the "Greater Hartford Central Connecticut Study" (GHCC) due to the expanded scope of ISO-NE’s reassessment.  GHCC transmission solutions are being considered and a set of preferred solutions are expected to be identified by ISO-NE in late 2013 or early 2014.

Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific NEEWS 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 NEEWS 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 effect on the assets previously transferred to UI.

In June 2012, NU, on behalf of CL&P, submitted the operation and maintenance agreement (the O&M Agreement) between UI and CL&P to the Federal Energy Regulatory Commission (FERC), which the FERC accepted.  Under the O&M Agreement, CL&P will serve as a contractor to manage, operate and maintain the NEEWS transmission assets in Connecticut that UI acquires from CL&P pursuant to the Agreement.

As of March 31, 2013, UI has made aggregate deposits of $33.5 million under the Agreement.  In September 2012, CL&P transferred approximately $6.2 million of transmission assets associated with the Greater Springfield Reliability Project to UI, at which time the O&M Agreement became effective.  In February 2013, CL&P transferred approximately $18.4 million of transmission assets, representing the remaining portion of the Greater Springfield Reliability Project, to UI.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $0.6 million and $0.3 million in the three month periods ended March 31, 2013 and 2012, respectively.

Equity Investment in Peaking Generation

UI is party to a 50-50 joint venture with NRG in GenConn, which operates two peaking generation plants in Connecticut.  The two peaking generation plants, GenConn Devon and GenConn Middletown, are both participating in the ISO-New England markets.  PURA has approved revenue requirements for the period from January 1, 2013 through December 31, 2013 of $33.1 million and $40.2 million for GenConn Devon and GenConn Middletown, respectively.  In addition, PURA has ruled that GenConn project costs incurred that were in excess of the proposed costs originally submitted in 2008 were prudently incurred and are recoverable.

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UIL HOLDINGS CORPORATION

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

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 2013, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 12.2% to 12.4%.

In September 2011, several New England governmental entities, including PURA, the Connecticut Attorney General and the Connecticut Office of Consumer Counsel, filed a joint complaint with the FERC against ISO-NE and several New England transmission owners, including UI, claiming that the current approved base ROE used in calculating formula rates for transmission service under the ISO-NE Open Access Transmission Tariff by the New England transmission owners  of 11.14% is not just and reasonable and seeking a proposed reduction of the base ROE to 9.20% to be effective October 1, 2011 through December 31, 2012.  The New England transmission owners filed their response to the complaint in October 2011, opposing any change to the base ROE as unsupported and demonstrating that the base ROE of 11.14% remained just and reasonable.

In May 2012, the FERC issued an order setting the matter for hearing and establishing settlement procedures.  Settlement proceedings have terminated without a settlement, and a hearing is scheduled to begin in May 2013.  Pursuant to the procedural schedule, the ROE submissions of docket participants were updated in April 2013.  In the updates, the state complainants have argued for a base ROE of 8.9%; municipal utilities in Massachusetts have requested a base ROE of 8.5%; and FERC trial staff has submitted testimony to support a base ROE of 8.93%.  The New England transmission owners’ April 2013 update supports the continuation of the base ROE of 11.14%. An initial decision by the hearing judge expected in the third quarter of 2013 and the FERC is expected to issue a final decision in 2014.  UI is unable to predict the outcome at this time.  A 25 basis point change in the weighted-average ROE for UI’s transmission business would change net income by approximately $0.6 million annually, for example.  In the event there is a reduction to the ROE, the May 2012 order established a refund effective date of October 1, 2011, for a period of 15 months.

In December 2012, various additional parties filed a complaint with the FERC against several New England transmission owners, including UI, seeking a proposed reduction of the base ROE to 8.70%, effective January 1, 2013.  The transmission owners filed an answer and request for dismissal in January 2013, including opposition to the establishment of a second 15 month refund period because the complaint seeks substantially the same relief against the same respondents but for a different 15 month period as the pending complaint of governmental entities.  The complainants filed their answer to the transmission owners’ answer in February 2013.  UI is unable to predict the outcome of this proceeding at this time.

Gas Distribution

Rates

The allowed ROEs established by PURA are 9.41% and 9.36% for CNG and SCG, respectively.  Berkshire’s rates are established by the Massachusetts Department of Public Utilities (DPU).  Berkshire’s 10-year rate plan, which was approved by the DPU and included an approved ROE of 10.5%, expired on January 31, 2012.  Berkshire continues to charge the rates that were in effect at the end of the rate plan.

(D) SHORT-TERM CREDIT ARRANGEMENTS

As of March 31, 2013, there was $53 million outstanding under a revolving credit agreement with a group of banks that will expire on November 30, 2016 (the UIL Holdings Credit Facility).  Under the UIL Holdings Credit Facility, UIL Holdings has outstanding standby letters of credit in the aggregate amount of $4.9 million, which expire on June 16, 2013 and January 31, 2014.  Available credit under the UIL Holdings Credit Facility at March 31, 2013 totaled $342.1 million for UIL Holdings and its subsidiaries in the aggregate.  UIL Holdings records borrowings under the UIL Holdings Credit Facility as short-term debt, but the UIL Holdings Credit Facility provides for longer term commitments from banks allowing UIL Holdings to borrow and reborrow funds, at its option, until its expiration, thus affording UIL Holdings flexibility in managing its working capital requirements.

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UIL HOLDINGS CORPORATION

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

As of March 31, 2013, UIL Holdings had $100 million outstanding under a credit agreement that expires on October 31, 2013 and 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 month periods ended March 31, 2013 and 2012 was 40.9%.

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 month periods ended March 31, 2013 and March 31, 2012 were 36.9% and 39.4%, respectively.

(F) SUPPLEMENTARY INFORMATION

	Three Months Ended
	March 31,
	2013			2012
	(In Thousands)
Depreciation and Amortization
Property, plant and equipment depreciation	$	29,351		$	26,587
Amortization of nuclear plant regulatory assets		11,671			10,756
Amortization of other regulatory assets		9,073			9,204
Other amortization		12			12
Total Amortization		20,756			19,972
Total Depreciation and Amortization	$	50,107		$	46,559
Taxes - Other than Income Taxes
Operating:
Connecticut gross earnings	$	21,964		$	19,431
Local real estate and personal property		10,991			9,189
Payroll taxes		2,793			1,898
Other		118			82
Total Taxes - Other than Income Taxes	$	35,866		$	30,600
Other Income and (Deductions), net
Interest income	$	764		$	422
Allowance for funds used during construction - equity		2,537			2,248
Allowance for funds used during construction - debt		2,370			2,170
Weather insurance		24			3,488
Miscellaneous other income and (deductions) - net		(334	)		589
Total Other Income and (Deductions), net	$	5,361		$	8,917

(G) PENSION AND OTHER BENEFITS

During the three months ended March 31, 2013, UIL Holdings made pension contributions of $30 million.  In April 2013, an additional contribution of approximately $8.3 million was made.  Additional contributions during the remainder of 2013 are expected to be approximately $17 million in the aggregate.

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UIL HOLDINGS CORPORATION

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

The following table represents the components of net periodic benefit cost for pension and other postretirement benefits as well as the actuarial weighted-average assumptions used in calculating net periodic benefit cost for the three month periods ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	Pension Benefits						Other Postretirement Benefits
	2013			2012			2013			2012
	(In Thousands)
Components of net periodic benefit cost:
Service cost	$	3,696		$	3,008		$	481		$	401
Interest cost		9,988			10,368			1,384			1,562
Expected return on plan assets		(12,863	)		(11,219	)		(648	)		(626	)
Amortization of:
Prior service costs		151			162			(13	)		(17	)
Transition obligation		-			-			-			98
Actuarial loss		5,208			3,294			444			241
Net periodic benefit cost	$	6,180		$	5,613		$	1,648		$	1,659
Discount rate		4.00%-4.25	%		5.05%-5.30	%		4.00%-4.25	%		5.05%-5.30	%
Average wage increase		3.50%-3.80	%		3.50%-3.80	%		N/A			N/A
Return on plan assets		7.75%-8.00	%		7.75%-8.00	%		5.56%-8.00	%		5.56%-8.00	%
Composite health care trend rate (current year)		N/A			N/A			7.50	%		8.00	%
Composite health care trend rate (2018 forward)		N/A			N/A			5.00	%		5.00	%
N/A – not applicable

(H) RELATED PARTY TRANSACTIONS

A Director of UIL Holdings holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UIL Holdings leases office space.UIL Holdings’ lease payments for this office space for each of the three month periods ended March 31, 2013 and 2012 totaled $0.4 million and $2.6 million, respectively.  The decrease in lease payments in 2013 is due to a reduction in office space utilized by UIL Holdings headquarters.

(J) COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, UIL Holdings and its subsidiaries are involved in various proceedings, including legal, tax, regulatory and environmental matters, which require management’s assessment to determine the probability of whether a loss will occur and, if probable, an estimate of probable loss.  When assessments indicate that it is probable that a liability has been incurred and an amount can be reasonably estimated, UIL Holdings accrues a reserve and discloses the reserve and related matter.  UIL Holdings discloses matters when losses are probable but for which an estimate cannot be reasonably estimated or when losses are not probable but are reasonably possible.  Subsequent analysis is performed on a periodic basis to assess the impact of any changes in events or circumstances and any resulting need to adjust existing reserves or record additional reserves.

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 $0.1 million as of March 31, 2013.  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 groundwater 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 March 31, 2013, UI has regulatory approval to recover in future rates (through the CTA) its $10.3 million regulatory asset for Connecticut Yankee over a term ending in 2015.

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UIL HOLDINGS CORPORATION

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

DOE Spent Fuel Litigation

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

In 1998, Connecticut Yankee filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 contracts by the DOE.  In September 2010, the Court issued its decision and awarded Connecticut Yankee damages of $39.7 million for its spent fuel-related costs through 2001.  In May 2012, the United States Court of Appeals affirmed the September 2010 United States Court of Federal Claims award and in August 2012 the DOE filed a petition for rehearing with the appellate court which was subsequently denied.  Connecticut Yankee has received payment of the damage award and, in light of its ownership share, UI will receive approximately $3.8 million of such award which will be refunded to customers.

In December 2007, Connecticut Yankee filed a second set of complaints with the United States Court of Federal Claims 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.  In light of its ownership share, UI would receive approximately $12.8 million of such award which 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 Matters

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, as well as 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 June 2006, UI executed an agreement with the City of Bridgeport and its Redevelopment Authority (the City) to transfer 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.

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UIL HOLDINGS CORPORATION

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

A former generation site on the Mill River in New Haven owned by UI (English Station) was conveyed in 2000 by UI 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 English Station site into compliance with applicable environmental laws.  As of March 31, 2013, approximately $0.1 million of the escrow fund remained.  In 2006, QE sold the property to Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat).  In January 2012, Evergreen Power and Asnat filed a lawsuit in federal district court in Connecticut against UI seeking, among other things: (i) an order directing UI to reimburse the plaintiffs for costs they have incurred and will incur for the testing, investigating and remediation of hazardous substances at the English Station site and (ii) an order directing UI to investigate and remediate the site.  In May 2012, UI filed an answer and counterclaims, and the plaintiffs filed an answer to UI’s counterclaims.  In July 2012, Evergreen Power and Asnat filed a motion for partial summary judgment with respect to UI’s liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act.  On October 12, 2012, the motion for summary judgment was denied without prejudice.  UI’s knowledge of the current conditions at the English Station site is insufficient to make a reliable update of the original $1.9 million remediation estimate.  Management cannot presently assess the potential financial impact, if any, of the suit, and thus has not recorded a liability related to it.

On April 8, 2013, DEEP issued an administrative order addressed to UI, QE, Evergreen Power, Asnat and others, ordering the parties to take certain actions related to investigating and remediating the English Station site.  UI expects to request a hearing before DEEP on the order in the second quarter of 2013.  At this time, management cannot predict the financial impact on UI of the DEEP order or other matters relating to this site.

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 properties 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 an ownership interest in one of such properties contaminated as a result of MGP-related activities.  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 March 31, 2013.  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.

SCG owns properties on Housatonic Avenue in Bridgeport, CT, and on Chapel Street in New Haven CT, and CNG owns a property located on Columbus Boulevard in Hartford, CT, all of which are former MGP sites.  Costs associated with the remediation of the sites 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 March 31, 2013, no liabilities related to these properties have been recorded.

Berkshire owns property on Mill Street in Greenfield, MA, a former MGP site.  UIL Holdings estimates that expenses associated with the remaining remedial activities, as well as the required ongoing monitoring and reporting to the Massachusetts Department of Environmental Protection will most likely amount to $4.3 million and has recorded a liability and offsetting regulatory asset for such expenses as of March 31, 2013.  Historically, Berkshire has received approval from the DPU for recovery of environmental expenses in its customer rates.  While management cannot predict the exact costs of the ongoing and future remediation and monitoring expenses, Berkshire will seek regulatory rate recovery of these expenses.

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UIL HOLDINGS CORPORATION

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

Berkshire formerly owned a site on East Street (the East Street Site) in Pittsfield, MA, a former MGP site.  The East Street Site is part of a larger site known as the GE–Pittsfield/Housatonic River Site.  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.    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 at the East Street Site.  As of March 31, 2013, UIL Holdings has accrued approximately $2.0 million and established a regulatory asset for these and future costs incurred by GE in responding to releases of hazardous substances at the East Street Site.  Historically, Berkshire has received approval from the DPU for recovery of remediation expenses in its customer rates.  While management cannot predict the exact costs of the ongoing and future remediation and monitoring expenses, Berkshire 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 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, sought 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.  In December 2011, UI settled claims brought by the two subcontractors and their respective lawsuits were dismissed with prejudice.  The claim by the general contractor was not settled and UI is vigorously defending the litigation.  Based on the settlement of the subcontractors’ claims, and after the completion of evidence in the state court trial, UI estimates that the general contractor’s claims have been reduced to approximately $7.7 million, exclusive of the contractor’s claims for interest, costs, and attorneys’ fees.

UI also is pursuing an indemnification claim against the general contractor. The trial on the general contractor’s claims and UI’s indemnification claim concluded in December 2012.  Post-trial briefing and oral argument were completed in February of 2013.  A decision by the judge could be issued in the second quarter of 2013.  UI expects to recover any amounts paid to resolve the contractor and subcontractor claims through UI’s transmission revenue requirements.  In October 2012, the general contractor filed a complaint against UI with the FERC alleging that UI’s inclusion of certain costs incurred by UI in connection with the Middletown/Norwalk Transmission Project were not reasonably and/or prudently incurred and/or were not incurred in good faith by UI, and subsequently filed an amended complaint.  UI vigorously defended against these allegations and, on February 21, 2013, the FERC dismissed the complaint, without prejudice.

On April 30, 2013, UIL Holdings received a copy of a complaint against the UIL Holdings Board of Directors, filed or to be filed in state court in Connecticut by an affiliate of the general contractor on the Middletown/Norwalk Transmission Project, purporting to act as a shareholder on behalf of UIL Holdings, alleging that the directors breached a fiduciary duty by failing to undertake an independent investigation in response to a letter from the affiliate asking for an investigation regarding alleged improper practices by UI in connection with the Middletown/Norwalk Transmission Project, seeking an order for such an investigation, and seeking recovery by the contractor’s affiliate of its expenses and costs in the action.  UIL Holdings believes the claims are without merit.  No amount of loss, if any, can be reasonably estimated.

(K) FAIR VALUE MEASUREMENTS

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.

The following tables set forth UIL Holdings’ financial assets and liabilities, other than pension benefits and other postretirement benefits, at fair value on a recurring basis as of March 31, 2013 and December 31, 2012.

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UIL HOLDINGS CORPORATION

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

	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
March 31, 2013	(In Thousands)
Assets:
Derivative assets	$	-	$	-		$	76,177		$	76,177
Noncurrent investments available for sale		10,335		-			-			10,335
Deferred Compensation Plan		3,525		-			-			3,525
Supplemental retirement benefit trust life insurance policies		-		6,834			-			6,834
	$	13,860	$	6,834		$	76,177		$	96,871
Liabilities:
Derivative liabilities	$	-	$	-		$	244,593		$	244,593
Long-term debt		-		1,876,337			-			1,876,337
	$	-	$	1,876,337		$	244,593		$	2,120,930
Net fair value assets/(liabilities), March 31, 2013	$	13,860	$	(1,869,503	)	$	(168,416	)	$	(2,024,059	)
December 31, 2012
Assets:
Derivative assets	$	-	$	-		$	79,838		$	79,838
Noncurrent investments available for sale		9,902		-			-			9,902
Deferred Compensation Plan		3,745		-			-			3,745
Supplemental retirement benefit trust life insurance policies		-		6,438			-			6,438
	$	13,647	$	6,438		$	79,838		$	99,923
Liabilities:
Derivative liabilities	$	-	$	-		$	255,443		$	255,443
Long-term debt		-		1,886,440			-			1,886,440
	$	-	$	1,886,440		$	255,443		$	2,141,883
Net fair value assets/(liabilities), December 31, 2012	$	13,647	$	(1,880,002	)	$	(175,605	)	$	(2,041,960	)

The derivative assets and liabilities consist primarily of CfDs and weather insurance contracts.  The determination of fair value of the CfDs was based on a probability-based expected cash flow analysis that was discounted at the March 31, 2013 or December 31, 2012 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.  For information regarding the determination of the fair value of the weather insurance contracts, see Note (A) “Business Organization and Statement of Accounting Policies – Derivatives.”  Additional quantitative information about Level 3 fair value measurements is as follows:

	Unobservable Input	Range
Contracts for differences	Risk of non-performance		1.09% - 1.57	%
	Discount rate		1.24% - 2.08	%
	Forward pricing ($ per MW)	$	1.40 - $9.83
Weather insurance contracts	Heating degree days		4,597 - 4,846

Significant isolated changes in the risk of non-performance, the discount rate or the contract term pricing would result in an inverse change in the fair value of the CfDs.  A significant change in heating degree days would result in an inverse change in the fair value of the weather derivative 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 CfDs are fully recoverable.  As a result, such changes have no impact on UIL Holdings’ net income.

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UIL HOLDINGS CORPORATION

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

Fair value of long-term debt is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.

The determination of the fair value of the supplemental retirement benefit trust life insurance policies was based on quoted prices as of March 31, 2013 and December 31, 2012 in the active markets for the various funds within which the assets are held.

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 three month period ended March 31, 2013.

	Three Months Ended
	March 31, 2013
	(In Thousands)
Net derivative assets/(liabilities), December 31, 2012	$	(175,605	)
Unrealized gains and (losses), net
Included in other income and (deductions)		24
Included in regulatory assets/(liabilities)		8,165
Settlements		(1,000	)
Net derivative assets/(liabilities), March 31, 2013	$	(168,416	)
Change in unrealized gains (losses), net relating to net derivative assets/(liabilities), still held as of March 31, 2013	$	8,165

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 CfDs for the three month period ended March 31, 2013.  The amounts offset the net CfDs liabilities included in the derivative liabilities detailed above.

	Three Months Ended
	March 31, 2013
	(In Thousands)
Net regulatory assets/(liabilities), December 31, 2012	$	176,605
Unrealized (gains) and losses, net		(8,165	)
Net regulatory assets/(liabilities), March 31, 2013	$	168,440

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UIL HOLDINGS CORPORATION

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

(M) SEGMENT INFORMATION

UIL Holdings is organized between Electric Distribution, Electric Transmission and Gas Distribution reporting segments based on several factors including, but not limited to, the nature of each segment’s products and services, the sources of operating revenues and expenses and the regulatory environment in which each segment operates.     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 and administrative costs.  Revenues from inter-segment transactions are not material.  All of UIL Holdings’ revenues are derived in the United States.

(In Thousands)
	Three months ended March 31, 2013
	Electric Distribution and Transmission
	Distribution		Transmission		Total		Gas Distribution			Other			Total
Operating Revenues	$	141,506	$	56,208	$	197,714	$	350,291		$	34		$	548,039
Purchased power and gas		38,489		-		38,489		219,267			-			257,756
Operation and maintenance		45,099		10,958		56,057		34,525			(1,323	)		89,259
Transmission wholesale		-		18,818		18,818		-			-			18,818
Depreciation and amortization		22,396		3,927		26,323		22,789			995			50,107
Taxes - other than income taxes		12,139		7,311		19,450		16,196			220			35,866
Operating Income (Loss)		23,383		15,194		38,577		57,514			142			96,233
Other Income and (Deductions), net		4,089		1,415		5,504		(857	)		714			5,361
Interest Charges, net		6,940		3,128		10,068		7,196			6,048			23,312
Income from Equity Investments		3,812		-		3,812		-			-			3,812
Income (Loss) Before Income Taxes		24,344		13,481		37,825		49,461			(5,192	)		82,094
Income taxes		9,898		4,782		14,680		17,984			(2,377	)		30,287
Net Income (Loss)		14,446		8,699		23,145		31,477			(2,815	)		51,807
Less:
Preferred Stock Dividends of
Subsidiary, Noncontrolling Interests		-		-		-		16			-			16
Net Income (Loss) attributable to UIL Holdings	$	14,446	$	8,699	$	23,145	$	31,461		$	(2,815	)	$	51,791

	Three months ended March 31, 2012
	Electric Distribution and Transmission
	Distribution		Transmission		Total		Gas Distribution		Other			Total
Operating Revenues	$	141,113	$	49,393	$	190,506	$	267,271	$	41		$	457,818
Purchased power and gas		40,658		-		40,658		150,805		-			191,463
Operation and maintenance		45,069		11,097		56,166		29,916		(395	)		85,687
Transmission wholesale		-		16,048		16,048		-		-			16,048
Depreciation and amortization		20,479		3,493		23,972		22,141		446			46,559
Taxes - other than income taxes		10,709		5,709		16,418		14,179		3			30,600
Operating Income (Loss)		24,198		13,046		37,244		50,230		(13	)		87,461
Other Income and (Deductions), net		5,056		1,021		6,077		2,646		194			8,917
Interest Charges, net		7,278		3,561		10,839		6,820		5,587			23,246
Income from Equity Investments		4,487		-		4,487		-		-			4,487
Income (Loss) Before Income Taxes		26,463		10,506		36,969		46,056		(5,406	)		77,619
Income taxes		12,233		3,091		15,324		17,596		(2,377	)		30,543
Net Income (Loss)		14,230		7,415		21,645		28,460		(3,029	)		47,076
Less:
Preferred Stock Dividends of
Subsidiary, Noncontrolling Interests		-		-		-		26		-			26
Net Income (Loss) attributable to UIL Holdings	$	14,230	$	7,415	$	21,645	$	28,434	$	(3,029	)	$	47,050

	Electric Distribution and Transmission (1)
	Distribution		Transmission		Total		Gas Distribution		Other		Total (2)
Total Assets at March 31, 2013	$	-	$	-	$	2,902,234	$	2,048,644	$	12,213	$	4,963,091
Total Assets at December 31, 2012	$	-	$	-	$	2,875,765	$	1,993,560	$	90,042	$	4,959,367

(1) Information for segmenting total assets between Distribution and Transmission is not available.  Total Electric Distribution and Transmission assets are disclosed in the Total Electric Distribution and Transmission column.  Net plant in service is segregated by segment and, as of March 31, 2013, was $1,070.9 million and $631.8 million for Distribution and Transmission, respectively.  As of December 31, 2012, net plant in service was $1,058.6 million and $607.8million for Distribution and Transmission, respectively.

(2) Includes $266.2 million of goodwill in the Gas Distribution segment as of March 31, 2013.

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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 management’s expectations and involve risks and uncertainties; consequently, actual results may differ materially from those expressed or implied in the statements.  Such risks and uncertainties include, but are not limited to, general economic conditions, 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’ Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission.  Forward-looking statements included herein speak only as of the date hereof and we undertake 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 is ownership of its operating regulated utility businesses.  The utility businesses consist of the electric distribution and transmission operations of The United Illuminating Company (UI) and the natural gas transportation, distribution and sales operations of The Southern Connecticut Gas Company (SCG), Connecticut Natural Gas Corporation (CNG), and The Berkshire Gas Company (Berkshire, and together with SCG and CNG, the Gas Companies).

UI is also party to a 50-50 joint venture with NRG Energy, Inc. (NRG) in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (collectively GenConn), operates two peaking generation plants in Connecticut.

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 (ROE) are regulated by the Connecticut Public Utilities Regulatory Authority (PURA) and the Federal Energy Regulatory Commission (FERC).  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 program established in UI’s 2008 distribution 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 during UI’s current rate proceeding.  UI expects to continue to make capital investments in its distribution and transmission infrastructure as appropriate and necessary.

Rates

On February 15, 2013, UI filed an application to amend its existing distribution rate schedules for two rate years.  The changes are designed to produce additional distribution revenues of approximately $69 million in rate year one (from July 1, 2013 through June 30, 2014) and an additional $26 million in rate year two (from July 1, 2014 through June 30, 2015).  For rate year one, these additional revenues represent an increase of approximately 8.7% over the total revenues that would be expected under current rate schedules and projected sales on a total bill basis.  For rate year two, the additional revenues represent an increase of approximately 3.0% over rate year one revenues.  Included in this request is the initiation of the recovery of UI’s storm regulatory asset of approximately $52 million for previously incurred storm costs not included in rates.  UI’s application proposes a six-year recovery period for these costs along with the establishment of a storm reserve of $2 million per year to help address future storm costs, and the ability to defer additional storm costs above the reserve amount as a regulatory asset for recovery in a future proceeding.  UI does not currently have a storm reserve funded in rates.  In addition, UI proposes to use revenue from other sources, such as the 2010 and 2012 earning sharing amounts owed to customers along with anticipated excess CTA revenue collections, to recover increased distribution revenue requirements through the end of 2013, which allows the implementation of the proposed distribution rate increase to be deferred until January 1, 2014 coincident with the expiration of the CTA.  PURA is expected to issue a final decision on August 14, 2013, which would put amended rates into effect on that date.

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UI’s allowed distribution ROE established by PURA is 8.75%.   UI has an earnings sharing mechanism in place that allows the Company to retain 50% of any distribution earnings above the allowed 8.75% ROE in a calendar year.

UI filed its revised distribution 2011 rate year decoupling results with PURA on June 29, 2012.  The decoupling results included a decoupling adjustment of approximately $4.4 million which was proposed to be collected from customers beginning in the first quarter of 2013, pending PURA approval.  On April 4, 2013, UI filed its 2012 rate year decoupling results.  The 2012 decoupling results included an adjustment of approximately $6.4 million.  As PURA has not issued a decision on the 2011 decoupling results filing, UI has proposed that the results of the 2011 and 2012 decoupling filings be combined into one rate adjustment to be collected from customers over a 12-month period beginning in the fourth quarter of 2013.  PURA is expected to rule on this filing in the third quarter of 2013.  Additionally, PURA approved last resort service Generation Services Charge rates for the period through June 30, 2013.

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 2013, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 12.2% to 12.4%.

In September 2011, several New England governmental entities, including PURA, the Connecticut Attorney General and the Connecticut Office of Consumer Counsel, filed a joint complaint with the FERC against ISO-NE and several New England transmission owners, including UI, claiming that the current approved base ROE used in calculating formula rates for transmission service under the ISO-NE Open Access Transmission Tariff by the New England transmission owners, of 11.14% is not just and reasonable and seeking a proposed reduction of the base ROE to 9.20% to be effective October 1, 2011 through December 31, 2012.  The New England transmission owners filed their response to the complaint in October 2011, opposing any change to the base ROE as unsupported and demonstrating that the base ROE of 11.14 percent remained just and reasonable.

In May 2012, the FERC issued an order setting the matter for hearing and establishing settlement procedures.  Settlement proceedings have terminated without a settlement, and a hearing is scheduled to begin in May 2013.  Pursuant to the procedural schedule, the ROE submissions of docket participants were updated in April 2013.  In the updates, the state complainants have argued for a base ROE of 8.9%; municipal utilities in Massachusetts have requested a base ROE of 8.5%; and FERC trial staff has submitted testimony to support a base ROE of 8.93%.  The New England transmission owners’ April 2013 update supports the continuation of the base ROE of 11.14%. An initial decision by the hearing judge expected in the third quarter of 2013 and the FERC is expected to issue a final decision in 2014.  UI is unable to predict the outcome at this time.  A 25 basis point change in the weighted-average ROE for UI’s transmission business would change net income by approximately $0.6 million annually, for example.  In the event there is a reduction to the ROE, the May 2012 order established a refund effective date of October 1, 2011, for a period of 15 months.

In December 2012, various additional parties filed a complaint with the FERC against several New England transmission owners, including UI, seeking a proposed reduction of the base ROE to 8.70%, effective January 1, 2013.  The transmission owners filed an answer and request for dismissal in January 2013, including opposition to the establishment of a second 15 month refund period because the complaint seeks substantially the same relief against the same respondents but for a different 15 month period as the pending complaint of governmental entities.  The complainants filed their answer to the transmission owners’ answer in February 2013.  UI is unable to predict the outcome of this proceeding at this time.

Power Supply Arrangements

UI has wholesale power supply agreements in place for the supply of all of its standard service customers for all of 2013, and 30% for the first half of 2014.  Supplier of last resort service is procured on a quarterly basis.  UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and elected the “normal purchase, normal sale” exception under ASC 815 “Derivatives and Hedging.”  As such, UI regularly assesses the accounting treatment for its power supply contracts.  These wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt were to fall below investment grade.  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 Moody’s Investor Services or Standard & Poor’s Investor Services 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 March 31, 2013, UI would have had to post an aggregate of approximately $8.7 million in collateral.

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New Renewable Source Generation

Under a 2011 Connecticut law (PA 11-80), UI and The Connecticut Light and Power and Company (CL&P) are required to enter into long-term contracts to purchase Renewable Energy Credits (RECs) from small renewable generators located on customer premises.  Under this program, UI is required to enter into contracts totaling approximately $200 million in commitments over an approximate 21 year period.  The obligations will phase in over a six year solicitation period, and are expected to peak at an annual commitment level of about $13.6 million per year after six years.  Upon purchase, the RECs will be accounted for as inventory.  UI expects to partially mitigate the cost of the contracts through the resale of the RECs.  PA 11-80 provides that the remaining costs of the contracts, including any gain or loss resulting from the resale of the RECs, are recoverable through electric rates.  In October 2012, UI received PURA approval for executed REC purchase contracts totaling up to approximately $1.5 million annually in payments for 15 year delivery terms commencing in 2013.  On January 8, 2013, UI opened a tariff-based application process to procure RECs from small renewable projects, and on March 20, 2013, UI entered into REC purchase contracts totaling approximately $0.5 million annually in payments for 15 year delivery terms commencing in 2013 and 2014. Additionally, UI has offered contracts totaling an immaterial amount to small renewable projects to replace projects that were recently selected, but unable to proceed to contract.

PA 11-80 also allows for the development of up to 30 MW of grid-connected renewable energy.  Under the Act, regulated electric utility companies are permitted to submit a proposal to the Connecticut Department of Energy and Environmental Protection (DEEP) to build, own or operate one or more generation facilities up to 10 MWs using Class 1 renewable energy.  In December 2011, DEEP announced that it had selected two 5 MW solar projects in CL&P service territory.  CL&P executed contracts with the developers of the two 5 MW solar projects to purchase energy and associated products from both projects.  These contracts, and the associated cost recovery, have been approved by DEEP and PURA, respectively.  UI and CL&P executed a sharing arrangement, pursuant to which UI will pay 20% of the costs, and receive 20% of the benefits, associated with the projects.  Pursuant to PURA’s approval of the cost recovery, the payments made to projects are recoverable through electric rates.  In January 2012, UI filed a proposal with PURA outlining a framework for approval of UI’s renewable connections program under which UI would develop up to 10 MW of renewable generation for recovery on a cost of service basis.  PURA issued a final decision in July 2012, in which it approved the construction of one solar facility and two fuel cell facilities.  The decision approves an ROE equal to the then currently allowed distribution ROE, which is currently 8.75%, over the life of the facility.  UI had requested an ROE of 9.5% for the renewable connections program.  In September 2012 PURA reopened the proceeding on its own motion and issued interrogatories, responses to which were filed by UI.  UI’s participation in the program is voluntary.

Competitive Transition Assessment (CTA)

UI’s CTA collection recovers costs that have been prudently incurred, or will be incurred, to meet UI’s 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 ROE portion of unamortized stranded costs in the CTA rate base UI’s after-tax earnings attributable to CTA for the three months ended March 31, 2013 and 2012 were $0.3 million and $0.7 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 $10.0 million and $10.5 million the three months ended March 31, 2013 and 2012, 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 $20.6 million as of March 31, 2013.  Based upon current projections, UI’s earnings generated from the CTA will be complete in the fourth quarter of 2013, as the CTA rate base will be fully amortized.  Cash flow from non-rate base stranded cost recovery is currently projected to be completed in 2015.  Depending upon the outcome of UI’s rate request filing on February 15, 2013, remaining CTA cash flows could end effective January 1, 2014, if PURA approves UI’s proposed rate treatment to recover all remaining CTA stranded costs in 2013.

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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 located in Connecticut:  (1) the Greater Springfield Reliability Project, which is currently under construction, (2) the Interstate Reliability Project, which has Connecticut Siting Council approval and (3) the Central Connecticut Reliability Project being studied now as part of  the "Greater Hartford Central Connecticut Study" (GHCC) due to the expanded scope of ISO-NE’s reassessment.  GHCC transmission solutions are being considered and a set of preferred solutions are expected to be identified by ISO-NE in late 2013 or early 2014.

Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific NEEWS 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 NEEWS 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 effect on the assets previously transferred to UI.

In June 2012, NU, on behalf of CL&P, submitted the operation and maintenance agreement (the O&M Agreement) between UI and CL&P to the Federal Energy Regulatory Commission (FERC), which the FERC accepted.  Under the O&M Agreement, CL&P will serve as a contractor to manage, operate and maintain the NEEWS transmission assets in Connecticut that UI acquires from CL&P pursuant to the Agreement.

As of March 31, 2013, UI has made aggregate deposits of $33.5 million under the agreement.  In September 2012, CL&P transferred approximately $6.2 million of transmission assets associated with the Greater Springfield Reliability Project to UI, at which time the O&M Agreement became effective.  In February 2013, CL&P transferred approximately $18.4 million of transmission assets, representing the remaining portion of the Greater Springfield Reliability Project, to UI.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $0.6 million and $0.3 million in the three month periods ended March 31, 2013 and 2012, respectively.

Equity Investment in Peaking Generation

UI is party to a 50-50 joint venture with NRG in GenConn, which operates two peaking generation plants in Connecticut.  The two peaking generation plants, GenConn Devon and GenConn Middletown, are both participating in the ISO-New England markets.  PURA has approved revenue requirements for the period from January 1, 2013 through December 31, 2013 of $33.1 million and $40.2 million for GenConn Devon and GenConn Middletown, respectively.  In addition, PURA has ruled that GenConn project costs incurred that were in excess of the proposed costs originally submitted in 2008 were prudently incurred and are recoverable.  Such costs are included in the determination of the 2013 approved revenue requirements.  The increase in project costs was driven primarily by increased financing costs and the cost to build interconnection facilities at GenConn Middletown.

As of March 31, 2013, UI’s equity investment in GenConn was $128.6 million.  UI’s income from its equity investment in GenConn was $3.8 million and $4.5 million for the three month periods ended March 31, 2013 and 2012, respectively.  The decline in 2013 earnings compared to 2012 is primarily due to the absence in the first quarter of 2013 of non-recurring adjustments recorded in the first quarter of 2012 largely relating to 2011.  UI did not receive any cash distributions from GenConn during the three month period ended March 31, 2013.  During the three month period ended March 31, 2012, UI received cash distributions from GenConn of $4.7 million.  As of March 31, 2013, the undistributed earnings from UI’s equity investment in GenConn were approximately $3.9 million.  UI received distributions of $5.3 million from GenConn in April of 2013.

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Environmental Matters

A former generation site on the Mill River in New Haven owned by (English Station) was conveyed in 2000 by UI 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 English Station site into compliance with applicable environmental laws.  As of March 31, 2013, approximately $0.1 million of the escrow fund remained.  In 2006, QE sold the property to Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat).  In January 2012, Evergreen Power and Asnat filed a lawsuit in federal district court in Connecticut against UI seeking, among other things: (i) an order directing UI to reimburse the plaintiffs for costs they have incurred and will incur for the testing, investigating and remediation of hazardous substances at the site and (ii) an order directing UI to investigate and remediate the site.  In May 2012, UI filed an answer and counterclaims, and the plaintiffs filed an answer to UI’s counterclaims.  In July 2012, Evergreen Power and Asnat filed a motion for partial summary judgment with respect to UI’s liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act.  On October 12, 2012, the motion for summary judgment was denied without prejudice.  UI’s knowledge of the current conditions at the site is insufficient to make a reliable update of the original $1.9 million remediation estimate.  Management cannot presently assess the potential financial impact, if any, of the suit, and thus has not recorded a liability related to it.

On April 8, 2013, DEEP issued an administrative order addressed to UI, QE, Evergreen Power, Asnat and others, ordering the parties to take certain actions related to investigating and remediating the English Station site.  UI expects to request a hearing before DEEP on the order in the second quarter of 2013. At this time, management cannot predict the financial impact on UI of the DEEP order or other matters relating to this site.  For more information, see “Contractual and Contingent Obligations” set forth in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and UIL Holdings’ Form 8-K filed April 19, 2013.

Gas Distribution

Rates

The allowed ROEs established by PURA are 9.41% and 9.36% for CNG and SCG, respectively.  Berkshire’s rates are established by the Massachusetts Department of Public utilities (DPU).  Berkshire’s 10-year rate plan, which was approved by the DPU and included an approved ROE of 10.5%, expired on January 31, 2012.  Berkshire continues to charge the rates that were in effect at the end of the rate plan.

UIL Holdings Corporation

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 as pricing inputs include significant inputs that are generally less observable from objective sources.  As of March 31, 2013, 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 (CfDs), represent 78.6% of the total amount of assets, and 11.5 % of the total amount of liabilities accounted for at fair value on a recurring basis.  The determination of fair value of the CfDs 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 Holdings 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 CFDs 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.

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LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2013, UIL Holdings had $20.8 million of unrestricted cash and temporary cash investments.  This represents an increase of $2.9 million from the corresponding balance at December 31, 2012.  The components of this increase, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows:

	(In Millions)
Unrestricted cash and temporary cash investments, December 31, 2012	$	17.9
Net cash provided by operating activities		132.2
Net cash provided by (used in) investing activities:
Cash invested in plant - including AFUDC debt		(74.6	)
Restricted cash (1)		1.0
Other		(0.1	)
		(73.7	)
Net cash provided by (used in) financing activities:
Line of credit borrowings (repayments), net		(34.0	)
Dividend payments		(21.9	)
Other financing activities		0.3
		(55.6	)
Net change in cash		2.9
Unrestricted cash and temporary cash investments, March 31, 2013	$	20.8

(1) As of March 31, 2013, UIL Holdings had $1.8 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

UIL Holdings expects to fund capital requirements that exceed available cash through external financings.  Although there is currently no commitment to provide such financing from any source of funds, other than from the credit facilities discussed below, UIL Holdings expects to satisfy future external financing needs by the issuance of additional equity and/or 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.

UI did not receive any cash distributions from GenConn during the three month period ended March 31, 2013.  However, UI received distributions of $5.3 million from GenConn in April of 2013.

Other Sources of Funding

UIL Holdings, UI, CNG, SCG, and Berkshire are parties to a revolving credit agreement with a group of banks that will expire on November 30, 2016 (the UIL Holdings Credit Facility).  The aggregate borrowing limit under the UIL Holdings Credit Facility is $400 million, all of which is available to UIL Holdings, $250 million of which is available to UI, $150 million of which is available to each of CNG and SCG, and $25 million of which is available to Berkshire.  The UIL Holdings 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 UIL Holdings Credit Facility also permits the issuance of letters of credit of up to $50 million.

As of March 31, 2013, there was $53 million outstanding under the UIL Holdings Credit Facility.  UIL Holdings also has outstanding standby letters of credit in the aggregate amount of $4.9 million, which expire on June 16, 2013 and January 31, 2014 .  Available credit under the UIL Holdings Credit Facility at March 31, 2013 totaled $342.1 million for UIL Holdings and its subsidiaries in the aggregate.  UIL Holdings records borrowings under the UIL Holdings Credit Facility as short-term debt, but the UIL Holdings Credit Facility provides for longer term commitments from banks allowing UIL Holdings to borrow and reborrow funds, at its option, until its expiration, thus affording UIL Holdings flexibility in managing its working capital requirements.

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UIL Holdings filed a shelf registration statement with the SEC in March 2012.  UIL Holdings may, from time to time, sell debt, equity or other securities under the registration statement in one or more transactions.  The registration statement expires in March 2015.

UI has PURA approval for the issuance of up to $379 million principal amount of debt securities from 2010 through 2013 (the Proposed Notes).  UI was authorized to use the proceeds from the sale of the Proposed Notes for the following purposes:  (1) to finance capital expenditures; (2) the repayment of an 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 issuance costs related to the Proposed Notes; (6) to repay $103.5 million principal amount outstanding of pollution control revenue bonds, which were repaid with the issuance of $103.5 million of senior unsecured notes in January 2012, and (7) for general corporate purposes.  UI has issued $303.5 million principal amount of senior unsecured notes pursuant to such PURA approval, $100 million of which were issued in July 2010, $103.5 million of which were issued in January 2012 and $100 million of which were issued in April 2012.

To afford UI additional flexibility to market outstanding tax-exempt bonds in the municipal bond market, PURA has also 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 continuously monitors conditions in the municipal bond market and plans to refund these bonds at such time market conditions and financing terms are economically favorable.

UI expects to receive periodic cash distributions from GenConn similar to those discussed in “– Cash Flows” above.  Future cash distributions, however, are subject to GenConn generating sufficient cash flows to fund operations and the reserves required by its project financing as well as continued compliance with the terms and conditions of its project financing documents.

CNG has PURA approval for the issuance of up to $110 million principal amount of debt securities through October 2013 as part of an unsecured medium-term notes program for issuances of incremental amounts up to $50 million.  CNG is authorized to use the proceeds from the sale of the debt securities for the refinancing of maturing debt securities, and for funding various capital expenditures and working capital associated with gas supply costs.  Any debt issuances under the approved program are subject to further PURA approval of the terms and conditions at the time of issuance.  CNG issued $20 million of medium term notes in December 2008 pursuant to such PURA approval.

SCG has PURA approval for the issuance of up to $200 million principal amount of debt securities through October 2013 as part of a secured medium-term notes program for issuances of incremental amounts up to $50 million.  SCG is authorized to use the proceeds from the sale of the debt securities for the following purposes:  (1) to refinance maturing debt securities; (2) to finance a potential put option on an outstanding debt security; and (3) to fund various capital expenditures and working capital associated with gas costs.  Any debt issuance under the approved program is subject to further PURA approval of the terms and conditions at the time of issuance.  SCG issued $50 million of medium-term notes in December 2008 and $50 million of medium-term notes in September 2011 pursuant to such PURA approval.

Berkshire has DPU approval to issue, from time to time, long-term debt in an aggregate principal amount not to exceed $20 million through December 14, 2014.  Berkshire is authorized to use the proceeds from any such debt issuances for the following purposes: (1) to finance capital expenditures; (2) to refinance short-term debt; (3) to pay anticipated environmental expenditures; (4) to provide general working capital; and (5) any other purposes as the DPU may authorize.

Uses of Funds

During the three months ended March 31, 2013, UIL Holdings made pension contributions of $30 million.  In April 2013, an additional contribution of approximately $8.3 million was made.  Additional contributions during the remainder of 2013 are expected to aggregate approximately $17 million.  Such contribution levels will be adjusted if necessary, based on final actuarial calculations.

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Financial Covenants

UIL Holdings and its subsidiaries are required to comply with certain covenants in connection with their respective loan agreements.  The covenants are standard and customary in bank and loan agreements, and UIL Holdings and its subsidiaries were in compliance with such covenants as of March 31, 2013.

2013 Capital Resource Projections

There have been no material changes in UIL Holdings’ 2013 capital resource projections from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Contractual and Contingent Obligations

There have been no material changes in UIL Holdings’ 2013 contractual and contingent obligations from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

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, 2012 are those that depend most heavily on these judgments and estimates.  As of March 31, 2013, there have been no material changes to any of the Critical Accounting Policies described therein.

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 March 31, 2013, UIL Holdings had certain immaterial guarantee contracts outstanding for which no liability has been recorded in the Consolidated Financial Statements.

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, 2012 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 Form 10-Q, tabular presentations showing a comparison of UIL Holdings’ net income and earnings per share (EPS) for three month periods ended March 31, 2013 and 2012, are provided, along with reconciliations for certain non-GAAP measures.  The amounts presented show the EPS for each of UIL Holdings’ lines of business calculated by dividing the income of each line of business by the average number of shares of UIL Holdings’ common stock outstanding for the periods presented.  UIL Holdings believes this information is useful in understanding the fluctuations in EPS between the current and prior year periods.

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First Quarter 2013 vs. First Quarter 2012

	Quarter Ended			Quarter Ended			2013 More (Less)
	March 31, 2013			March 31, 2012			than 2012
Net Income (Loss) (In Millions except per share amounts)
Electric Distribution and Transmission	$	23.1		$	21.6		$	1.5
Gas Distribution		31.4			28.5			2.9
Non-Utility		(2.7	)		(3.0	)		0.3
Net Income attributable to UIL Holdings	$	51.8		$	47.1		$	4.7
EPS
Electric Distribution and Transmission	$	0.45		$	0.43		$	0.02
Gas Distribution		0.62			0.56			0.06
Non-Utility		(0.05	)		(0.06	)		0.01
Total EPS - Basic	$	1.02		$	0.93		$	0.09
Total EPS - Diluted	$	1.01		$	0.92		$	0.09

Electric Distribution and Transmission

Overall, UI’s operating revenue increased by $7.2 million, from $190.5 million in the first quarter of 2012 to $197.7 million in the first quarter of 2013.  Retail revenue increased $4.7 million, which was primarily attributable to increases in distribution sales volume resulting from colder temperatures in the first quarter of 2013 compared to the first quarter of 2012.  Retail sales increased by 15 million kWh, from 1,298 million kWh in the first quarter of 2012, to 1,313 million kWh in the first quarter of 2013.  Retail sales normalized for the weather impact decreased 24 million kWh, from 1,340 million kWh in the first quarter of 2012, to 1,316 million kWh in the first quarter of 2013.  Other revenues increased $2.5 million, which was primarily attributable to higher transmission revenue as well as the net activity of the GSC “working capital allowance” due to timing difference.

Purchased power expense decreased by $2.2 million, from $40.7 million in the first quarter of 2012 to $38.5 million in the first quarter of 2013.  The decrease was primarily attributable to decreased costs of procured power partially offset by an increased sales volume, as discussed above.

UI’s transmission wholesale expenses increased by $2.8 million, from $16.0 million in the first quarter of 2012 to $18.8 million in the first quarter of 2013.  The increase was primarily attributable to higher regional transmission expenses, of which UI pays a portion based upon its relative load and which are recoverable through rates.

Depreciation and amortization expense increased by $2.3 million, from $24.0 million in the first quarter of 2012 to $26.3 million in the first quarter of 2013. The increase was primarily attributable to increased depreciation due to increases in plant and equipment.

Taxes other than income taxes increased by $3.1 million, from $16.4 million in the first quarter of 2012 to $19.5 million in the first quarter of 2013.  The increase was primarily attributable to higher gross receipts tax as well as an increase in property taxes due to increases in plant and equipment.

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.  The following discussion details variances which have the most significant impact on net income in the periods presented.

Distribution

The distribution business had total net income of $14.4 million in the first quarter of 2013, an increase of $0.2 million, compared to the first quarter of 2012.  The increase was primarily attributable to increased retail revenue partially offset by increased depreciation and amortization expense and increased taxes other than income taxes.

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Transmission

The transmission business had total net income of $8.7 million in the first quarter of 2013, an increase of $1.3 million, compared to the first quarter of 2012.  The increase was primarily attributable to an increase in the income earned on an increase in rate base and increased total deposits in NEEWS.

Gas Distribution

The Gas Companies’ operating revenue increased by $83.0 million, from $267.3 million in the first quarter of 2012 to $350.3 million in the first quarter of 2013.  The increase was primarily attributable to higher sales volume from off-system sales, which is fully offset by increased purchased gas expense, as well as the impact of colder weather, increased per customer usage in the first quarter of 2013 compared to the first quarter of 2012, and customer growth. ��Temperatures were 2.2% warmer than normal in the first quarter of 2013 compared to 20.5% warmer than normal in the first quarter of 2012 which resulted in a 21.6% increase in heating degree days in the first quarter of 2013.  The colder temperatures and increased per customer usage in the first quarter of 2013 compared to the first quarter of 2012 resulted in a $10.0 million increase, pre-tax, in gross margin (operating revenues less natural gas purchased) in first quarter of 2013.  Retail sales increased by 3.7 million mcf, from 28.9 million mcf in the first quarter of 2012, to 32.6 million mcf in the first quarter of 2013.  The customer growth in the first quarter of 2013 compared to the first quarter of 2012 resulted in a $2.4 million increase, pre-tax, in gross margin in the first quarter of 2013.

Purchased gas expense increased by $68.5 million, from $150.8 million in the first quarter of 2012 to $219.3 million in the first quarter of 2013.  The increase was primarily attributable to higher sales volume from off-system sales, which is fully offset by increased operating revenue, and colder weather in the first quarter of 2013 compared to the first quarter of 2012.

The Gas Companies’ O&M expense increased by $4.6 million, from $29.9 million in the first quarter of 2012 to $34.5 million in the first quarter of 2013.  The increase was primarily attributable to increased payroll and benefits expense as well as higher uncollectible expense primarily due to increased customer account write-off activity.

The Gas Companies’ taxes other than income taxes increased by $2.0 million, from $14.2 million in the first quarter of 2012 to $16.2 million in the first quarter of 2013.  The increase was primarily attributable to higher gross receipts tax due to the increase in operating revenues.

The Gas Companies’ other income and deductions decreased by $3.5 million, from $2.6 million of income in the first quarter of 2012 to $0.9 million of deductions in the first quarter of 2013.  The decrease was primarily attributable to the decrease in the fair value of the weather insurance contracts due to colder temperatures in the first quarter of 2013 compared to the first quarter of 2012.

Non-Utility

UIL Holdings retains certain costs, primarily interest expense on holding company debt, at the holding company, or UIL Holdings Corporate level, which are not allocated to its subsidiaries.  UIL Corporate incurred net after-tax costs of $2.7 million, or $0.05 per share, in the first quarter of 2013 compared to net after-tax costs of $3.0 million, or $0.06 per share, in the first quarter of 2012.

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, 2012.

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Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure 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 Exchange Act.  Management designed its disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

UIL Holdings carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of UIL Holdings’ disclosure controls and procedures as of March 31, 2013.  As of March 31, 2013, 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 quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, UIL Holdings’ internal control over financial reporting.

PART II.  OTHER INFORMATION

Item1A. Risk Factors.

Shareowners and prospective investors should carefully consider the risk factors disclosed in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2012.  There have been no material changes to such risk factors.

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

UIL Holdings repurchased 16,809 shares of common stock in open market transactions to satisfy matching contributions for participants’ contributions into UIL Holdings 401(k) in the form of UIL Holdings stock as follows:

					Total Number of	Maximum Number
					Shares Purchased	of Shares that May
					as Part of Publicly	Yet Be Purchased
	Total Number of		Average Price Paid		Announced Plans or	Under the Plans or
Period	Shares Purchased*		Per Share		Programs	Programs
January 1-31		11,302		37.00	None	None
February 1-28		2,957		39.00	None	None
March 1-31		2,550		39.72	None	None
Total		16,809		37.76	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
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 period ended March 31, 2013, filed with the SEC on May 2, 2013, is formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Income for the three month periods ended March 31, 2013 and 2012, (ii) the Consolidated Statement of Comprehensive Income (Loss) for the three month periods ended March 31, 2013 and 2012, (iii) the Consolidated Balance Sheet as of March 31, 2013 and December 31, 2012, (iv) the Consolidated Statement of Cash Flows for the three month periods ended March 31, 2013 and 2012 and (v) 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	5/2/2013	/s/ Richard J. Nicholas
		Richard J. Nicholas
		Executive Vice President
		and Chief Financial Officer

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