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EX-32 - UIL EXHIBIT 32 - CERTIFICATION - UIL HOLDINGS CORPuil_exh32.htm
EX-31.2 - UIL EXHIBIT 31.2 - CERTIFICATION - UIL HOLDINGS CORPuil_exh31-2.htm
EX-31.1 - UIL EXHIBIT 31.1 - CERTIFICATION - UIL HOLDINGS CORPuil_exh31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

OR

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

For the transition period from      to             

Commission file number 1-15052

UIL Logo
(Exact name of registrant as specified in its charter)
Connecticut
 
06-1541045
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
157 Church Street, New Haven, Connecticut
 
06506
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  203-499-2000

None
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  T      No   £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
Yes  £      No   £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

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

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

The number of shares outstanding of the issuer’s only class of common stock, as of April 29, 2010 was 29,982,905.

 
 

 


PART I.  FINANCIAL INFORMATION

   
Page Number
Item 1.
Financial Statements.
 3
 
Consolidated Statement of Income for the three months ended March 31, 2010 and 2009.
 3
 
Consolidated Balance Sheet as of March 31, 2010 and December 31, 2009.
 4
 
Consolidated Statement of Cash Flows for the three months ended March 31, 2010 and 2009.
 6
 
Notes to the Consolidated Financial Statements.
 7
 
-   Statement of Accounting Policies
 7
 
-   Capitalization
 10
 
-   Regulatory Proceedings
 11
 
-   Short-term Credit Arrangements
 16
 
-   Income Taxes
 17
 
-   Supplementary Information
 18
 
-   Pension and Other Benefits
 18
 
-    Related Party Transactions
 19
 
-   Commitments and Contingencies
 20
 
-   Connecticut Yankee Atomic Power Company
 20
 
-   Hydro-Quebec
 21
 
-   Environmental Concerns
 21
 
-   Middletown/Norwalk Transmission Project
 23
 
-   Property Tax Assessment
 23
 
-   Cross-Sound Cable Company, LLC
23
 
-   Xcelecom
24
 
-    Fair Value of Financial Instruments
 24
 
-    Segment Information
 27
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 28
 
-    Major Influences on Financial Condition
 28
 
-   The United Illuminating Company
 28
 
-    Liquidity and Capital Resources
 32
 
-   Financial Covenants
 33
 
-   2010 Capital Resource Projections
 34
 
-   Contractual and Contingent Obligations
 34
 
-    Critical Accounting Policies
 34
 
-    Off-Balance Sheet Arrangements
 34
 
-    New Accounting Standards
 35
 
-    Results of Operations
 35
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 38
Item 4.
Controls and Procedures.
 39


PART II.  OTHER INFORMATION

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
40
Item 6.
Exhibits.
 40
 
SIGNATURES
41


 
 
- 2 -

 


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,
 
   
2010
   
2009
 
             
             
Operating Revenues (Note F)
  $ 220,280     $ 235,509  
Operating Expenses
               
Operation
               
Purchased power (Note F)
    75,348       103,567  
Operation and maintenance
    51,621       52,507  
Transmission wholesale
    15,476       12,467  
Depreciation and amortization (Note F)
    27,251       23,987  
Taxes - other than income taxes (Note F)
    17,704       14,494  
Total Operating Expenses
    187,400       207,022  
Operating Income
    32,880       28,487  
                 
Other Income and (Deductions), net (Note F), (Note H)
    4,056       1,471  
                 
Interest Charges, net
               
Interest on long-term debt
    9,877       8,392  
Other interest, net (Note F)
    281       491  
      10,158       8,883  
Amortization of debt expense and redemption premiums
    393       513  
Total Interest Charges, net
    10,551       9,396  
                 
Income Before Income Taxes and Equity Earnings
    26,385       20,562  
                 
Income Taxes (Note E)
    10,341       8,532  
                 
Income Before Equity Earnings
    16,044       12,030  
Income from Equity Investments
    8       12  
Net Income
  $ 16,052     $ 12,042  
                 
Average Number of Common Shares Outstanding - Basic
    30,013       25,188  
Average Number of Common Shares Outstanding - Diluted
    30,282       25,543  
                 
Earnings Per Share of Common Stock - Basic
  $ 0.53     $ 0.48  
Earnings Per Share of Common Stock - Diluted
  $ 0.53     $ 0.47  
                 
Cash Dividends Declared per share of Common Stock
  $ 0.432     $ 0.432  
                 
The accompanying Notes to the Consolidated Financial
 
Statements are an integral part of the financial statements.
 


 
 
- 3 -


UIL HOLDINGS CORPORATION
 
CONSOLIDATED BALANCE SHEET
 
   
ASSETS
 
(In Thousands)
 
(Unaudited)
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
Current Assets
           
Unrestricted cash and temporary cash investments
  $ 11,413     $ 15,269  
Restricted cash
    1,338       3,695  
Utility accounts receivable less allowance of $4,500 and $4,500, respectively
    89,398       81,861  
Other accounts receivable
    13,979       11,980  
Unbilled revenues
    40,281       48,375  
Current regulatory assets
    48,066       59,040  
Materials and supplies, at average cost
    4,773       4,553  
Deferred income taxes
    4,827       4,410  
Prepayments
    7,696       3,891  
Current portion of derivative assets (Note K)
    3,304       2,738  
Other current assets
    955       882  
Total Current Assets
    226,030       236,694  
                 
Other investments
    10,959       10,659  
                 
Property, Plant and Equipment at original cost
               
In service
    1,421,301       1,408,811  
Less, accumulated depreciation
    389,902       379,951  
      1,031,399       1,028,860  
Construction work in progress
    143,698       124,141  
Net Property, Plant and Equipment
    1,175,097       1,153,001  
                 
Regulatory Assets (future amounts due from customers through
               
the ratemaking process)
    600,321       676,428  
                 
                 
Deferred Charges and Other Assets
               
Unamortized debt issuance expenses
    6,727       6,613  
Related party note receivable (Note H)
    114,423       107,773  
Other long-term receivable
    1,884       2,186  
Derivative assets (Note K)
    27,546       27,956  
Other
    422       450  
Total Deferred Charges and Other Assets
    151,002       144,978  
                 
Total Assets
  $ 2,163,409     $ 2,221,760  
                 
The accompanying Notes to the Consolidated Financial
 
Statements are an integral part of the financial statements.
 


 
 
- 4 -


UIL HOLDINGS CORPORATION
 
CONSOLIDATED BALANCE SHEET
 
   
LIABILITIES AND CAPITALIZATION
 
(In Thousands)
 
(Unaudited)
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
Current Liabilities
           
Line of credit borrowings
  $ 12,000     $ -  
Current portion of long-term debt
    58,712       58,256  
Accounts payable
    69,994       90,470  
Dividends payable
    12,936       12,930  
Accrued liabilities
    35,552       41,740  
Current regulatory liabilities
    13,505       23,624  
Interest accrued
    7,870       8,774  
Taxes accrued
    28,700       4,718  
Current portion of derivative liabilities (Note K)
    3,627       2,822  
Total Current Liabilities
    242,896       243,334  
                 
Noncurrent Liabilities
               
Pension accrued
    142,420       140,454  
Connecticut Yankee contract obligation
    20,081       20,694  
Other post-retirement benefits accrued
    48,052       47,302  
Derivative liabilities (Note K)
    96,263       159,271  
Other
    7,487       6,965  
Total Noncurrent Liabilities
    314,303       374,686  
                 
Deferred Income Taxes (future tax liabilities owed to taxing authorities)
    270,150       273,558  
                 
Regulatory Liabilities (future amounts owed to customers through
the ratemaking process)
    81,803       82,457  
                 
Commitments and Contingencies (Note J)
               
                 
Capitalization (Note B)
               
Long-term debt
    675,457       673,549  
                 
Common Stock Equity
               
Common stock
    423,133       422,008  
Paid-in capital
    15,243       14,859  
Retained earnings
    140,424       137,309  
Net Common Stock Equity
    578,800       574,176  
                 
Total Capitalization
    1,254,257       1,247,725  
                 
Total Liabilities and Capitalization
  $ 2,163,409     $ 2,221,760  
                 
The accompanying Notes to the Consolidated Financial
 
Statements are an integral part of the financial statements.
 


 
 
- 5 -


UIL HOLDINGS CORPORATION
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
(In Thousands)
 
(Unaudited)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
Cash Flows From Operating Activities
           
Net income
  $ 16,052     $ 12,042  
Adjustments to reconcile net income
to net cash provided by operating activities:
               
Depreciation and amortization
    27,644       24,501  
Deferred income taxes
    (4,830 )     1,471  
Stock-based compensation expense (Note A)
    1,279       1,297  
Pension expense
    6,018       8,136  
Allowance for funds used during construction (AFUDC) - equity
    (1,019 )     (27 )
Excess generation service charge
    (10,434 )     (5,254 )
Deferred Transmission (income) expense
    5,398       (5,081 )
Decoupling (income) expense
    1,837       1,407  
Other non-cash items, net
    (624 )     (5,880 )
Changes in:
               
Accounts receivable, net
    (9,341 )     (975 )
Unbilled revenues and other accounts receivable
    8,093       7,121  
Prepayments
    (3,805 )     (1,400 )
Accounts payable
    (7,019 )     (10,938 )
Interest accrued
    (905 )     964  
Taxes accrued
    23,982       5,184  
Accrued liabilities
    (6,506 )     (337 )
Other assets
    30       (357 )
Other liabilities
    273       86  
Total Adjustments
    30,071       19,918  
Net Cash provided by Operating Activities
    46,123       31,960  
                 
Cash Flows from Investing Activities
               
    Related party note receivable (Note H)
    (6,650 )     (8,500 )
    Plant expenditures including AFUDC debt
    (46,703 )     (31,641 )
Changes in restricted cash
    2,357       (185 )
Net Cash (used in) Investing Activities
    (50,996 )     (40,326 )
                 
Cash Flows from Financing Activities
               
Issuances of long-term debt
    6,650       25,000  
Payments on long-term debt
    (4,286 )     (4,286 )
Line of credit borrowings (repayments)
    12,000       17,000  
Payment of common stock dividend
    (12,930 )     (10,903 )
Other
    (417 )     (631 )
Net Cash provided by Financing Activities
    1,017       26,180  
                 
Unrestricted Cash and Temporary Cash Investments:
               
Net change for the period
    (3,856 )     17,814  
Balance at beginning of period
    15,269       7,730  
Balance at end of period
  $ 11,413     $ 25,544  
                 
Non-cash investing activity:
               
Plant expenditures included in ending accounts payable
  $ 17,036     $ 19,886  
                 
The accompanying Notes to the Consolidated Financial
 
Statements are an integral part of the financial statements.
 


 
 
- 6 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(A)  STATEMENT OF ACCOUNTING POLICIES

Basis of Presentation

The primary business of UIL Holdings Corporation (UIL Holdings) is ownership of its operating regulated utility.  The utility business consists of the electric transmission and distribution operations of The United Illuminating Company (UI).  UI is also a 50-50 joint venturer with NRG Energy, Inc. (NRG) in GenConn Energy LLC (GenConn), which is building new peaking generation plants chosen by the Connecticut Department of Public Utility Control (DPUC).  UIL Holdings is headquartered in New Haven, Connecticut, where its senior management maintains offices and is responsible for overall planning, operating and financial functions.  UIL Holdings’ Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in UIL Holdings’ Annual Report on Form 10-K for the year ended December 31, 2009.  Such notes are supplemented below.

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

Certain amounts reported in the Consolidated Statement of Income, Consolidated Balance Sheet and the operating section of the Consolidated Statement of Cash Flows in previous periods have been reclassified to conform to the current presentation.  The reclassifications in the Consolidated Statement of Income and Consolidated Balance Sheet relate primarily to the reclass of amounts related to Xcelecom from discontinued operations to continuing.

Earnings per Share

The components of basic and diluted EPS for common shares under the two-class method for each of the three months ended March 31:

 
   
2010
   
2009
 
Numerator:
           
Net income
  $ 16,052     $ 12,042  
Less:  Net income allocated to unvested units
    65       52  
Net income attributable to common shareowners
  $ 15,987     $ 11,990  
                 
Denominator:
               
Basic average number of shares outstanding
    30,013       25,188  
Effect of dilutive securities
    269       355  
Diluted average number of shares outstanding
    30,282       25,543  
                 
Earnings per share:
               
Basic
  $ 0.53     $ 0.48  
Diluted
  $ 0.53     $ 0.47  

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

 
 
- 7 -

UIL HOLDINGS CORPORATION

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

As of March 31, 2010, options to purchase 98,413 shares of common stock were outstanding but not included in the three-month computation of diluted earnings per share, because the options’ exercise prices were greater than the average market price of the common shares during the three months ended March 31, 2010.  Options to purchase 359,152 shares of common stock were outstanding as of March 31, 2009 but not included in the three-month computation of diluted earnings per share, because the options’ exercise prices were greater than the average market price of the common shares during the three months ended March 31, 2009.

Stock-Based Compensation

Certain members of management have the opportunity to earn a pre-determined number of performance shares, the number of which is predicated upon the achievement of various pre-defined performance measures.  These performance shares were issued under the UIL Holdings 1999 Amended and Restated Stock Plan prior to 2009 and are now issued under the UIL Holdings 2008 Stock and Incentive Compensation Plan (the 2008 Stock Plan).  These performance shares vest at the end of the three-year cycle with the actual issuance of UIL Holdings’ common stock in respect of such performance shares following the end of each three-year cycle.  A new three-year cycle begins in January of each year.

UIL Holdings records compensation expense for these performance shares ratably over the three-year period, except in the case of retirement-eligible employees, for whom compensation expense is immediately recognized in accordance with ASC 718 “Compensation-Stock Compensation”, based on the value of the expected payout at the end of each year relative to the performance measures achieved.  An additional $0.6 million of compensation expense was recorded in the first quarter of 2010 with respect to retirement-eligible employees based on the application of ASC 718 retirement-eligible provisions.

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

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

In March 2010, UIL Holdings granted a total of 31,076 shares of restricted stock to non-executive directors under the 2008 Stock Plan; the average of the high and low market price on the date of grant was $28.24 per share.  Compensation expense for this restricted stock is recorded ratably over the three-year vesting period for such restricted stock, except in the case of directors that will reach the mandatory retirement age of 72 prior to the end of the three year vesting period, for whom compensation expense is recognized ratably over the remaining service period in accordance with ASC 718 Compensation-Stock Compensation, based on the value of the expected payout at the end of each year.  In March 2010, 20,307 shares of previously-granted restricted stock grants to directors vested, of which 11,487 shares were issued to directors who had not elected to have their vested shares deferred as stock units.

Total stock-based compensation expense was $1.3 million for each of the three month periods ended March 31, 2010 and 2009.

Income Taxes

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

 
 
- 8 -

UIL HOLDINGS CORPORATION

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

Under ASC 740, UIL Holdings may recognize the tax benefit of an uncertain tax position only if management believes it is more likely than not that the tax position will be sustained on examination by the taxing authority based upon the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based upon the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  UIL Holdings has not recognized any additional liability for unrecognized tax benefits, or accrued any interest or penalties associated with uncertain tax benefits.

UIL Holdings’ policy is to recognize interest accrued and penalties associated with uncertain tax positions as a component of operating expense.  During the periods ended March 31, 2010 and 2009, no interest or penalties associated with uncertain tax positions were recognized and as of March 31, 2010 and December 31, 2009, no accrued interest or penalties are reflected in the Consolidated Balance Sheet.

Regulatory Accounting

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

 
Remaining
 
March 31,
   
December 31,
 
 
Period
 
2010
   
2009
 
     
(In Thousands)
 
Regulatory Assets:
             
Nuclear plant investments – above market
(a)
  $ 308,722     $ 313,833  
Income taxes due principally to book-tax differences
(b)
    37,640       36,635  
Connecticut Yankee
6 years
    20,081       20,695  
Unamortized redemption costs
12 to 24 years
    14,310       14,510  
Stranded cost recovery
(a)
    942       7,874  
Pension and other post-retirement benefit plans
(c)
    165,010       169,234  
Contracts for differences
(d)
    75,274       137,730  
Deferred pension and post-retirement expense
(f)
    8,618       10,232  
Distribution retail revenue decoupling
(g)
    3,449       5,286  
Other
(b)
    14,341       19,439  
Total regulatory assets
      648,387       735,468  
Less current portion of regulatory assets
      48,066       59,040  
Regulatory Assets, Net
    $ 600,321     $ 676,428  
                   
Regulatory Liabilities:
                 
Accumulated deferred investment tax credits
33 years
  $ 5,014     $ 5,051  
Deferred gain on sale of property
(a)
    37,798       37,798  
Middletown/Norwalk local transmission network service collections
41 years
    23,551       23,695  
Pension and other post-retirement benefit plans
      524       -  
Excess generation service charge
(e)
    9,072       19,506  
Asset removal costs
(b)
    1,899       1,993  
Other
(b)
    17,450       18,038  
Total regulatory liabilities
      95,308       106,081  
Less current portion of regulatory liabilities
      13,505       23,624  
Regulatory Liabilities, Net
    $ 81,803     $ 82,457  
                   
(a) Asset/Liability relates to the Competitive Transition Assessment (CTA). Total CTA costs recovery is currently projected to be completed in 2015, with stranded cost amortization expected to end in 2013.
 
(b) Amortization period and/or balance varies depending on the nature, cost of removal and/or remaining life of the underlying assets/liabilities.
 
(c) Asset life is dependent upon timing of final pension plan distribution; balance is recalculated each year in accordance with ASC 715 "Compensation-Retirement Benefits" (Note G).
 
(d) Asset life is equal to delivery term of related contracts (which vary from approximately 9 - 16 years); balance fluctuates based upon quarterly market analysis performed on the related derivatives (Note K).
 
(e) Working capital allowance for generation service charge; will fluctuate based upon cash inflows and outflows in a given period.
 
(f) Regulatory asset established for $10.2 million of 2009 pension and OPEB expense which will be recovered in the 2010 rate year.
 
(g) Regulatory asset or liability relating to revenue decoupling; proposed recovery treatment of 2009 decoupling is pending at the DPUC; timing of recovery of 2010 decoupling is to be addressed by DPUC in future proceedings.
 

 
 
- 9 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
New Accounting Standards

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

In June 2009, the FASB issued updated guidance to ASC 810 “Consolidation” on the consolidation of variable interest entities (VIEs) which became effective as of January 1, 2010, for interim and annual reporting periods beginning in 2010.  In the first quarter of 2010, UIL Holdings implemented this new guidance which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE.  UIL Holdings does not currently consolidate any VIEs with which it is associated and therefore, implementation of this guidance did not have an impact on UIL Holdings’ Consolidated Balance Sheet, Consolidated Statement of Income or Consolidated Statement of Cash Flows.  As of March 31, 2010, UIL Holdings had identified Connecticut Yankee Atomic Power Company (Connecticut Yankee) and GenConn as VIEs, which were not subject to consolidation as UIL Holdings is not the primary beneficiary because it does not have a controlling financial interest, as defined in ASC 810, in either VIE.  For further discussion of GenConn, see Note (C) “Regulatory Proceedings – Generation.”  For further discussion of Connecticut Yankee, see Note (J) “Commitments and Contingencies.”

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

(B)  CAPITALIZATION

Common Stock

UIL Holdings had 29,982,905 shares of its common stock, no par value, outstanding at March 31, 2010.

Long-Term Debt

On February 1, 2010, $27.5 million of tax-exempt bonds were refunded with the proceeds from the issuance of $27.5 million of tax-exempt bonds on January 28, 2010, at a fixed interest rate of 4.5%, for a period of five years and five months.

In April 2009, UI closed on a bank financing in the amount of $121.5 million with a syndicate of banks (the Equity Bridge Loan or EBL), the proceeds of which will be used by UI to fund its commitments as a 50% owner of GenConn.  UI expects that GenConn will direct approximately $57 million of such amount to GenConn Devon LLC (GenConn Devon) and approximately $64.5 million to GenConn Middletown LLC (GenConn Middletown), each of which is a wholly owned subsidiary of GenConn, for use in the construction of peaking generation facilities by those entities.  UI will draw on this facility as needed to fund its commitments to GenConn as construction progresses.  UI does not have any further funding commitments to GenConn at this time and does not guarantee any of GenConn’s obligations.  Borrowings under this facility as of March 31, 2010 were $114.4 million.

 
 
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UIL HOLDINGS CORPORATION

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

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

The EBL must be repaid upon the earlier of its maturity date or the attainment of commercial operation, which is expected to be June 2010 for GenConn Devon and June 2011 for GenConn Middletown.  The maturity date of the loan is October 24, 2010, and may be extended to June 1, 2011, as long as on the date of extension, project construction is continuing and the Project Financing is not due and payable.

(C)  REGULATORY PROCEEDINGS

Department of Public Utility Control (DPUC)

Rates

In rulings throughout 2009, the DPUC issued its final decision regarding UI’s application requesting an increase in distribution rates (the “2009 Decisions”), the results of which included a $6.8 million increase in revenue requirements for 2009, compared to 2008.  Because a larger, previously approved increase in revenue requirements for 2009 had gone into effect January 1, 2009, UI returned approximately $0.97 million to ratepayers through a one-time adjustment in April 2009.

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

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

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

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

 
 
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UIL HOLDINGS CORPORATION

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

Approval for the Issuance of Debt

On March 15, 2010, UI filed an application with the DPUC requesting approval of the issuance of not more than $275 million principal amount of debt securities (the Proposed Notes) during 2010 through 2013.  The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes:  (1) to finance capital expenditures; (2) to repay the EBL, the proceeds of which are being used to finance UI’s 50% share of the equity contribution in GenConn Energy LLC for the development and construction of the Devon and Middletown peaking generation plants; (3) funding UI’s pension plan; (4) to partially repay short-term borrowings that are incurred to temporarily fund the preceding needs; (5) to pay for issuance costs related to the Proposed Notes; and (6) for general corporate purposes.  On April 14, 2010 the DPUC approved UI’s application.

In February 2009, the DPUC approved an application filed by UI to afford UI additional flexibility to market outstanding tax-exempt bonds in the municipal bond market.  Specifically, UI requested approval to refund with the proceeds of the issuance of new bonds, without insurance, $25.0 million, $27.5 million and $64.5 million principal amount of tax-exempt bonds outstanding.  In December 2008, UI purchased $25.0 million principal amount of tax-exempt bonds, which were refunded with the proceeds from the issuance, without insurance, of $25.0 million tax-exempt bonds in March 2009.  On January 28, 2010, $27.5 million principal amount of a tax-exempt bonds were issued without insurance, the proceeds of which were used to refund $27.5 million principal amount of insured bonds on February 1, 2010.  UI plans to refund $64.5 million principal amount of tax-exempt bonds, for which the interest rate is periodically reset by auction, at such time and on such terms as municipal bond market conditions allow.

Generation

GenConn is a 50-50 joint venture of UI and NRG.  In 2008, the DPUC selected two projects proposed by GenConn to help address Connecticut’s growing need for more power generation during the heaviest load periods.

Two peaking generation projects, each with a nominal capacity of 200 megawatts (MW), are under construction at NRG’s existing Connecticut plant locations in Devon and Middletown.  GenConn’s Devon plant is scheduled to be in commercial operation by June 2010, and its Middletown plant is scheduled to be in commercial operation by June 2011.  GenConn recovers its costs under a contract for differences (CfD) agreement which is cost of service based.  GenConn has signed CfDs for both projects with CL&P.  The cost of the contracts will be paid by customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost is borne by UI customers and approximately 80% by CL&P customers.

GenConn filed a rate case request with the DPUC in December 2009, seeking approval of 2010 revenue requirements for the period commencing June 1, 2010 for the GenConn Devon facility.  A DPUC decision regarding this request is expected in May 2010.  GenConn has bid the full capacity of the GenConn facility into the ISO New England, Inc. (ISO-NE) locational forward reserve market for the summer 2010 period (June 1, 2010 - September 30, 2010).  If one or more units are delayed and GenConn does not have the capacity of all GenConn units available as of June 1, it will be assessed ISO-NE penalties for the difference between the capacity bid and the capacity available.  GenConn has not determined whether to seek recovery under the contract for differences of these ISO-NE imposed costs, if such penalties are incurred; however management believes that UI’s share of any penalties imposed on GenConn would not materially impact UIL Holdings’ consolidated financial statements.

As a result of changed market conditions and updated cost information, GenConn project costs have increased over the proposal it originally submitted to the DPUC.  The increase was driven primarily by increased financing costs and the cost to build interconnection facilities at the Middletown site.  The DPUC has ruled that prudently incurred financing costs, interconnection costs and taxes will be recoverable and, therefore, GenConn expects to recover such costs in DPUC-approved future revenues.  The CfDs will provide for a true-up of revenue from the ISO New England Markets in which GenConn participates to DPUC approved revenue requirements.

 
 
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UIL HOLDINGS CORPORATION

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

Pension and Postretirement Expenses

In response to the Internal Revenue Service (IRS) mandated change in mortality tables utilized for certain Employee Retirement Income Security Act of 1974 (ERISA)-related liability calculations, effective January 1, 2007, the DPUC allowed regulatory treatment for the change in pension and postretirement expenses resulting from the use of the new mortality tables.  In the 2009 Decisions, the DPUC approved the recovery of these expenses over a four-year period beginning in 2009.  As of March 31, 2010, the remaining regulatory asset was approximately $2.9 million.

The 2009 Decisions also provide for the establishment of an annual regulatory asset to address a portion of the actual increase in pension and postretirement expense for each of 2009 and 2010.  During 2009, UI recorded a regulatory asset of approximately $10.2 million which will be recovered fully in the 2010 rate year.  As of March 31, 2010, the remaining annual pension regulatory asset was approximately $8.6 million.  Additionally, $11.4 million will be recovered in rates in the 2010 rate year for UI’s estimate of 2010 pension and postretirement expense.

Power Supply Arrangements

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

UI must procure its standard service power pursuant to a procurement plan approved by the DPUC.  The procurement plan must provide for a portfolio of service agreements procured in an overlapping pattern over fixed time periods (a “laddering” approach).  In June 2006, the DPUC approved a procurement plan for UI.  As required by Connecticut statute, a third party consultant retained by the DPUC works closely with UI in the procurement process and to provide a joint recommendation to the DPUC as to selected bids.

UI has wholesale power supply agreements in place for the supply of all of UI’s standard service customers for all of 2010, 80% for 2011 and 20% for 2012.  Supplier of last resort service is procured on a quarterly basis.  UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and elected the “normal purchase, normal sale” exception under ASC 815 “Derivatives and Hedging”.  As such, UI regularly assesses the accounting treatment for its power supply contracts.  These wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt was to fall below investment grade.  In October 2009, Moody’s Investor Services (Moody’s) released its updated credit opinion for UI and maintained its Baa2 rating with a stable outlook.   In December 2009, Standard & Poors’ Investor Services (S&P) reinitiated coverage on UI and rated it BBB with a stable outlook.  UI’s credit rating would have to decline two ratings to fall below investment grade at either rating service.  If this were to occur, monthly amounts due and payable to the power suppliers would be accelerated to semi-monthly payments and 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, 2010, UI would have had to post approximately $20.8 million in collateral.

As a result of an April 2008 DPUC decision, UI is permitted to seek long-term contracts for up to 20% of standard service requirements, the goal of which is to obtain long-term energy supply contracts and Connecticut Class I Renewable Energy Certificates for UI’s standard service customers that will result in economic benefit to ratepayers, both in terms of risk and cost mitigation.  UI is exploring long-term contract alternatives.

Derivatives

Pursuant to Connecticut’s 2005 Energy Independence Act (EIA), the DPUC initiated a process to solicit bids to create new or incremental capacity resources in order to reduce federally mandated congestion charges, and selected four new capacity resources.  To facilitate the transactions between selected capacity resources and Connecticut

 
 
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UIL HOLDINGS CORPORATION

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

electric customers, and provide the commitment necessary for owners of these resources to obtain necessary financing, the DPUC required that UI and CL&P execute long-term contracts with the selected resources.  In August 2007, the DPUC approved four CfDs, each of which specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price.  As directed by the DPUC, UI executed two of the contracts and CL&P executed the other two contracts.  In addition, UI has executed a sharing agreement with CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contracts.

The DPUC has determined that costs associated with these CfDs will be recoverable by UI and CL&P, and in accordance with ASC 980 Regulated Operations, UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability).  The above contracts are derivatives and they, along with the contracts for standard service and supplier of last resort service discussed in the Power Supply Arrangement discussion above and the financial transmission rights (FTRs) discussed below, are the Company’s only derivative instruments.  The CfDs are marked-to-market in accordance with ASC 815.  For those CfDs signed by CL&P, UI records its approximate 20% portion of CL&P’s derivative, pursuant to the sharing agreement noted above.  As of March 31, 2010, UI has recorded a gross derivative asset of $30.8 million ($6.2 million related to its portion of CL&P’s derivative assets), a regulatory asset of $75.3 million, a gross derivative liability of $99.9 million ($69.1 million related to its portion of CL&P’s derivative liabilities) and a regulatory liability of $6.2 million in the accompanying Consolidated Balance Sheet.  See Note (K) “Fair Value of Financial Instruments” for additional CfD information.

UI purchases FTRs from the New England Independent System Operator, ISO-NE, to hedge congestion risk resulting from its standard service contracts.  The FTRs are derivatives and are marked-to-market in accordance with ASC 815.  As of March 31, 2010, the fair value of the FTRs was not material.

The unrealized gains and losses from mark-to-market adjustments to derivatives recorded in regulatory assets or regulatory liabilities for the three months ended March 31, 2010 and 2009 were as follows:
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Regulatory Assets - Derivative assets
  $ (62,456 )   $ 13,355  
                 
Regulatory Liabilities - Derivative liabilities
  $ 98     $ (1,112 )

The fair value of the gross derivative assets and liabilities as of March 31, 2010 and December 31, 2009 were as follows:
         
March 31, 2010
       
   
(In Thousands)
 
                         
     
Current Assets
   
Deferred Charges
and Other Assets
   
Current
Liabilities
   
Noncurrent
Liabilities
 
                         
Derivative assets/(liabilities), gross
  $ 3,304     $ 27,546       3,627     $ 96,263  
                                 
                                 
           
December 31, 2009
         
   
(In Thousands)
 
                                 
     
Current Assets
   
Deferred Charges
and Other Assets
   
Current
Liabilities
   
Noncurrent
Liabilities
 
                                 
Derivative assets/(liabilities), gross
  $ 2,738     $ 27,956     $ 2,822     $ 159,271  

 
 
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UIL HOLDINGS CORPORATION

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

On February 7, 2010, an explosion occurred at the construction site of the nearly completed 620-megawatt plant being built by Kleen Energy Systems, LLC (“Kleen”), one of the four capacity resources selected by the DPUC to create new or incremental capacity resources as noted above.  As noted above, CL&P has executed CfDs with two of the selected projects, including the Kleen project.  The CfD with Kleen is subject to the sharing agreement between UI and CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contract.  The extent of damage and any resulting delay in the attainment of commercial operation is currently under review, however, based on information known to date, it appears to be reasonably likely that, at a minimum, there will be a delay in Kleen's attainment of commercial operation.  As such, UIL Holdings adjusted the probability assumption input to the expected cash flow analysis, significantly reducing the fair value of the related regulatory asset and derivative liability on the Consolidated Balance Sheet as of December 31, 2009.  This change did not have an impact on UIL Holdings’ Consolidated Statement of Income.

Pursuant to Connecticut’s 2007 Act Concerning Electricity and Energy Efficiency, the DPUC initiated a process to create new peaking generation resources to address the state’s shortage of fast-start peaking generation that is needed to provide energy reserves.  As with the CfDs entered into pursuant to the EIA, the DPUC required that UI and CL&P execute long-term contracts with the selected peaking resources to facilitate the transactions and provide the commitment necessary for the owners of the peaking resources to obtain financing.  During 2008, CL&P executed three peaking generation CfDs, one with GenConn relating to its Devon facility, one with GenConn relating to its Middletown facility and the other with PSEG Power Connecticut LLC (“PSEG”), to which the sharing agreement between UI and CL&P described above also applies.  These contracts are not considered to be derivatives under ASC 815 and therefore will be accounted for on an accrual basis.

ISO-NE and RTO-NE

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

Transmission Return on Equity (ROE)

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

In May 2008, several public entities, including the DPUC (petitioners), filed a petition with the United States Court of Appeals for the District of Columbia Circuit (U.S. Court of Appeals) challenging the Rehearing Order.  In January 2010, the U.S. Court of Appeals issued a decision upholding the FERC order.  On March 15, 2010, the petitioners requested a rehearing by the full court of the Rehearing Order.  On April 12, 2010, U.S. Court of Appeals denied the petitioners request.

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

In a May 2007 Order, the FERC approved rate incentives for the 345-kilovolt (kV) transmission line from Middletown, Connecticut to Norwalk, Connecticut (the Project).  The Project was allowed to include Construction Work In Progress (CWIP) expenditures in rate base.  For project costs incurred before August 8, 2005, the FERC

 
 
- 15 -

UIL HOLDINGS CORPORATION

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

allowed UI to include 50% of CWIP expenditures in rate base, and for project costs incurred after August 8, 2005, the FERC allowed UI to include 100% of CWIP expenditures in rate base.  The FERC also accepted a 50 basis point adder which will be applied only to costs associated with advanced transmission technologies.

Certain parties requested rehearing of the FERC May 2007 order, but in January 2009, the FERC denied those requests.  Also, in January 2009, the DPUC and the Attorney General of Connecticut filed a petition with the U.S. Court of Appeals seeking judicial review of the FERC’s May 2007 and January 2009 orders.  On March 19, 2010, the U.S. Court of Appeals temporarily set aside this petition pending the outcome of the petition filed in the Rehearing Order described above.  UI is unable to predict the outcome of these appeals at this time.

(D)  SHORT-TERM CREDIT ARRANGEMENTS

UIL Holdings has a money market loan arrangement with JPMorgan Chase Bank.  This is an uncommitted short-term borrowing arrangement under which JPMorgan Chase Bank may make loans to UIL Holdings for fixed periods, depending on UIL Holdings’ credit rating, the Bank’s credit requirements, and conditions in the financial markets.  JPMorgan Securities, Inc. acts as an agent and sells the loans to investors.  As of March 31, 2010, UIL Holdings had no short-term borrowings outstanding under this arrangement.

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

As of March 31, 2010, UI had $7 million outstanding under the facility.  UIL Holdings had $5 million in short-term borrowings outstanding under the facility, as well as a standby letter of credit outstanding in the amount of $1 million that expired on January 31, 2010, but is expected to be automatically extended for one year periods from the expiration date (or any future expiration date), unless the issuer bank elects not to extend.  Available credit under this facility at March 31, 2010 for UI and UIL Holdings in the aggregate was $162 million.  UIL Holdings records borrowings under this facility as short-term debt, but the agreement has longer term commitments from banks allowing the Company to borrow and reborrow funds, at its option, to December 22, 2011, thus affording it flexibility in managing its working capital requirements.

 
 
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UIL HOLDINGS CORPORATION

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

(E) INCOME TAXES

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
             
Income tax expense consists of:
           
Income tax provisions (benefit):
           
Current
           
Federal
  $ 12,626     $ 6,011  
State
    2,582       1,087  
Total current
    15,208       7,098  
  Deferred
               
Federal
    (3,186 )     1,843  
State
    (1,644 )     (372 )
Total deferred
    (4,830 )     1,471  
                 
Investment tax credits
    (37 )     (37 )
                 
Total income tax expense
  $ 10,341     $ 8,532  
                 
Income tax components charged as follows:
               
Operating tax expense
  $ 10,464     $ 9,433  
Nonoperating tax benefit
    (126 )     (856 )
Equity Investments tax expense (benefit)
    3       (45 )
Total income tax expense
  $ 10,341     $ 8,532  
 
The combined statutory federal and state income tax rates for UIL Holdings for the first quarter of 2010 and 2009 were 40.4% and 39.9%, respectively. The increase in the combined statutory federal and state income tax rate was due to legislation enacted in Connecticut in the third quarter of 2009 which imposed a 10% surcharge on the corporation business tax. This surcharge increased the statutory rate of Connecticut corporation business tax rate from 7.5% to 8.3%.

Differences in the treatment of certain transactions for book and tax purposes occur which cause the rate of UIL Holdings’ reported income tax expense to differ from the statutory tax rate described above.  The effective book income tax rate for the three months ended March 31, 2010 is 39.2% as compared to 41.5% for the three months ended March 31, 2009.  The decrease in the 2010 effective book income tax rate was due primarily to higher state income tax credits recorded in the 2010 period.

UIL Holdings and its subsidiaries are subject to the United States federal income tax statutes administered by the IRS.  UIL Holdings and its subsidiaries are also subject to the income tax statutes of the State of Connecticut and those of other states in which UIL Holdings’ subsidiaries have operated and transacted business in the past.  As of March 31, 2010, the tax years 2006, 2007, and 2008 remain open and subject to audit for Connecticut state income tax purposes.  As of March 31, 2010, the tax year 2008 is open and subject to audit for federal income tax purposes.

 
 
- 17 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(F)  SUPPLEMENTARY INFORMATION
           
             
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
Operating Revenues
           
Retail
  $ 186,820     $ 212,162  
Wholesale
    -       202  
Other
    33,460       23,145  
      Total Operating Revenues
  $ 220,280     $ 235,509  
                 
Depreciation and Amortization
               
Utility property, plant, and equipment depreciation
  $ 12,955     $ 12,023  
Non-utility property, plant, and equipment depreciation
    -       46  
Total Depreciation
    12,955       12,069  
Amortization of nuclear plant regulatory assets (CTA)
    12,044       11,650  
Amortization of intangibles
    10       9  
Amortization of other regulatory assets
    2,242       259  
Total Amortization
    14,296       11,918  
Total Depreciation and Amortization
  $ 27,251     $ 23,987  
                 
Taxes - Other than Income Taxes
               
Operating:
               
Connecticut gross earnings
  $ 11,084     $ 8,746  
Local real estate and personal property
    4,547       3,818  
Payroll taxes
    2,073       1,930  
Total Taxes - Other than Income Taxes
  $ 17,704     $ 14,494  
                 
Other Income and (Deductions), net
               
Interest income
  $ 995     $ 661  
Allowance for funds used during construction
    1,951       404  
Conservation & Load Management incentive
    284       289  
Energy generation and load curtailment incentives
    19       191  
ISO load response, net
    507       349  
Miscellaneous other income and (deductions) - net
    300       (423 )
Total Other Income and (Deductions), net
  $ 4,056     $ 1,471  
                 
Other Interest, net
               
Notes Payable
  $ 26       399  
Other
    255       92  
Total Other Interest, net
  $ 281     $ 491  

(G)  PENSION AND OTHER BENEFITS

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

 
 
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UIL HOLDINGS CORPORATION

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

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

The following tables represent the components of net periodic benefit cost for pension and other postretirement benefits (OPEB) for the three months ended March 31, 2010 and 2009:
   
Three Months Ended March 31,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2010
   
2009
   
2010
   
2009
 
   
(In Thousands)
 
Components of net periodic benefit cost:
                       
Service cost
  $ 1,780     $ 1,533     $ 340     $ 334  
Interest cost
    5,272       5,232       982       1,034  
Expected return on plan assets
    (4,767 )     (4,278 )     (438 )     (410 )
Amortization of:
                               
Prior service costs
    162       175       (26 )     (25 )
Transition obligation  (asset)
    -       -       265       265  
Actuarial (gain) loss
    3,078       3,606       488       671  
Net periodic benefit cost (1)
  $ 5,525     $ 6,268     $ 1,611     $ 1,869  
                                 
 
(1) For the three month period ended March 31, 2009, UI recorded $1.5 million of pension expense and $0.3 million of OPEB expense as a regulatory asset.  These amounts were recorded as a regulatory asset to reflect the establishment of an annual regulatory asset, as approved by the DPUC, to address the actual increase in pension and post-retirement expense for 2009 (see Note (C), Regulatory Proceedings). 
 
The following actuarial weighted-average assumptions were used in calculating net periodic benefit cost for the three months ended March 31, 2010 and 2009:
   
Three Months Ended March 31,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2010
   
2009
   
2010
   
2009
 
Discount rate - Qualified Pension Benefits
    5.85 %     6.20 %     N/A       N/A  
Discount rate - Non-Qualified Pension Benefits
    5.65 %     6.10 %     N/A       N/A  
Discount rate - Other Post Retirement Benefits
    N/A       N/A       5.80 %     6.10 %
Average wage increase
    3.80 %     3.80 %     N/A       N/A  
Return on plan assets
    8.50 %     8.50 %     8.50 %     8.50 %
Composite health care trend rate (current year)
    N/A       N/A       9.50 %     10.00 %
Composite health care trend rate (2019 forward)
    N/A       N/A       5.00 %     5.00 %
                                 
N/A – not applicable
                               
 
Asset values of funded pension and postretirement plans as of March 31, 2010 and December 31, 2009 were approximately $234.6 million and $231.3 million, respectively.  While there was no minimum required pension contribution for the 2009 plan year, UI currently expects to make total contributions of approximately $8 million in 2010 and $21 million in 2011, subject to proposals that are pending before the United States Congress and true-ups of actuarial data.

(H)  RELATED PARTY TRANSACTIONS

Arnold L. Chase, a Director of UIL Holdings since 1999, holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UI leases office space for its corporate headquarters.  UI’s lease payments for this office space totaled $2.7 million for each of the three month periods ended March 31, 2010 and 2009.

 
 
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UIL HOLDINGS CORPORATION

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

GenConn, of which UI is a 50-50 joint-venturer, had signed a promissory note (the “Loan”) with UI under which UI advanced up to an aggregate principal amount of $48.5 million to fund GenConn’s construction and other cash needs until permanent financing was arranged.  In connection with the EBL obtained by UI and the Project Financing obtained by GenConn on April 27, 2009, all outstanding balances on the Loan were replaced by a new promissory note, the balance of which was $114.4 million as of March 31, 2010.  See “Note (B) – Capitalization – Long-Term Debt” for further discussion regarding the EBL.  Additionally, $0.9 million of interest income related to the promissory note is included in other income and (deductions), net in the accompanying Consolidated Statement of Income, which is fully offset by the interest expense incurred by UI under the EBL.

(J)  COMMITMENTS AND CONTINGENCIES

Connecticut Yankee Atomic Power Company

UI has a 9.5% stock ownership share in the Connecticut Yankee Atomic Power Company (Connecticut Yankee), the carrying value of which was $0.3 million as of March 31, 2010.  In 1996, the Board of Directors of Connecticut Yankee voted unanimously to retire the Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial operation.  A settlement agreement approved by the FERC that became effective in 2000 allows Connecticut Yankee to collect, through the power contracts with the unit’s owners, the FERC-approved decommissioning costs, other costs associated with the permanent shutdown of the Connecticut Yankee Unit, the unrecovered investment in the Connecticut Yankee Unit, and a return on equity of 6%.  The decommissioning project was completed in 2007.  In October 2007, the Connecticut Department of Environmental Protection (CDEP) approved Connecticut Yankee’s application for a Stewardship Permit which states that all corrective action measures required at the Connecticut Yankee site pursuant to Connecticut law have been completed subject to post-remediation groundwater monitoring.  In November 2007, the Nuclear Regulatory Commission (NRC) issued a license reduction for the Connecticut Yankee site limiting it to the independent spent-fuel storage installation (ISFSI) (see DOE Spent Fuel Litigation below).

Connecticut Yankee updates the cost of its remaining decommissioning activity, which consists primarily of ground water monitoring and nuclear fuel storage, at least annually, and more often as needed, and provides UI with a projected recovery schedule depicting annual costs expected to be billed to UI, including a return on investment over the term of the projected recovery period.  The present value of these costs is calculated using UI’s weighted-average cost of capital and, after consideration of recoverability, recorded as a Connecticut Yankee Contract Obligation and a corresponding regulatory asset.  At March 31, 2010, UI has regulatory approval to recover in future rates (through the CTA) its $20.1 million regulatory asset for Connecticut Yankee over a term ending in 2015.

Stock Redemption

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

DOE Spent Fuel Litigation

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

In 1998, Connecticut Yankee filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 contracts by the DOE.  In November 1998, the Court ruled that the DOE had breached the contracts and was liable for damages, but left the amount of damages to be determined after a trial on the evidence.  In October 2006, the Court issued judgment for Connecticut Yankee in the amount of $34.2 million for its spent-fuel-related costs through 2001, ruling in favor of Connecticut Yankee on substantially all of the major issues.  UI’s 9.5% ownership share would result in a payment of approximately $3.2 million which, if awarded, would be

 
 
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UIL HOLDINGS CORPORATION

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

refunded to customers.  In August 2008, the United States Court of Appeals for the Federal Circuit vacated the lower court's $34.2 million damage award, and remanded the case for a re-calculation of damages.  UI cannot determine what damages the court will now award, but expects that when the court applies the rates as ordered by this ruling, the damage award will be comparable to the prior award.

In December 2007, Connecticut Yankee filed a second set of complaints against the government seeking unspecified damages incurred since January 1, 2002 for the DOE’s failure to remove Connecticut Yankee’s spent fuel.  In July 2009, Connecticut Yankee provided the government with a second set of damage claims totaling approximately $135 million for damages incurred from January 1, 2002 through December 31, 2008.  UI’s 9.5% ownership share would result in a payment of approximately $12.8 million which, if awarded, would be refunded to customers.  As an interim measure until the DOE complies with its contractual obligation to dispose of Connecticut Yankee’s spent fuel, Connecticut Yankee constructed an ISFSI, utilizing dry-cask storage, on the site of the Connecticut Yankee Unit and completed the transfer of its Nuclear Waste to the ISFSI in 2005.

Hydro-Quebec

UI is a participant in the Hydro-Quebec (HQ) transmission tie facility linking New England and Quebec, Canada.  UI has a 5.45% participating share in this facility, which has a maximum 2000-megawatt equivalent generation capacity value.  In April 1991, UI furnished a guarantee in the amount of $11.7 million, for its participating share of the debt financing for one phase of this facility.  The amount of this guarantee, which expires in August 2015, is reduced monthly, proportionate with principal paid on the underlying debt.  As of March 31, 2010, the amount of UI’s guarantee for this debt totaled approximately $1.6 million.

Environmental Concerns

In complying with existing environmental statutes and regulations and further developments in areas of environmental concern, including legislation and studies in the fields of water quality, hazardous waste handling and disposal, toxic substances, climate change and electric and magnetic fields, UIL Holdings and its wholly-owned direct and indirect subsidiaries may incur substantial capital expenditures for equipment modifications and additions, monitoring equipment and recording devices, and it may incur additional operating expenses.  The total amount of these expenditures is not now determinable.  Environmental damage claims may also arise from the operations of UIL Holdings’ subsidiaries.  Significant environmental issues known to UIL Holdings at this time are described below.

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

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

UI also received a letter in September 2007 (also addressed to Raytheon Corporation (Raytheon), successor to the building contractor for the New Haven Harbor Station facility, United Engineers and Constructors) in which the current property owner, Shoreline Trailer Court Mobile Homes, states its intent to file suit against UI and Raytheon under federal law for compensation relating to its remediation costs at the subject site which is adjacent to East Main Street Disposal Superfund Site noted above.  The owner claims to have remediated the site at a cost of $0.8 million and seeks compensation for that amount from UI and Raytheon.  After a preliminary investigation of the owner’s

 
 
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UIL HOLDINGS CORPORATION

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

claims, UI informed the owner that it will not address the claims until the owner provides information supporting the claims.  UI has not received a response and, therefore, cannot presently assess the potential financial impact, if any, of this claim.

Site Decontamination, Demolition and Remediation Costs

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

The City and developer released UI from any further liability with respect to the Steel Point property after title transferred, and the City and/or developer has indemnified UI for environmental matters related to the Steel Point property.  The Steel Point property includes the land up to the bulkhead.  The sole exception to the indemnity regarding the Steel Point property is for personal injury claims brought against UI by UI employees or contractors hired by UI relating to incidents that occurred on the site before title transferred to the City.  UI is not aware of any such claims. In addition, the MOU provides that there is no indemnity for liability related to contaminated harbor sediments.  UI would seek to recover any uninsured costs related to such sediments that are UI’s responsibility, to the extent incurred, through the CTA, in accordance with the ratemaking treatment approved in the DPUC’s July 2006 decision.

A site on the Mill River in New Haven was conveyed by UI in 2000 to an unaffiliated entity, Quinnipiac Energy LLC (QE), reserving to UI permanent easements for the operation of its transmission facilities on the site.  At the time of the sale, a fund of approximately $1.9 million, an amount equal to the then-current estimate for remediation, was placed in escrow for purposes of bringing soil and groundwater on the site into compliance with applicable environmental laws.  Approximately $0.1 million of the escrow fund remains unexpended.  QE has since sold the property to Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat).  UI is unaware of what agreement was reached between QE and Evergreen Power and Asnat regarding future environmental liability or what remediation activity remains to be undertaken at the site.  UI could be required by applicable environmental laws to finish remediating any subsurface contamination at the site if it is determined that QE and/or Evergreen Power and Asnat have not completed the appropriate environmental remediation at the site.  UI  has not updated remediation estimates to date, and does not have specific knowledge of any remediation work done, or remaining to be done, to date on behalf of QE or any subsequent owner.  In July 2008, Evergreen Power and Asnat submitted a claim to UI seeking compensation for environmental remediation on the property, including the existing building which remains on the site.   UIL Holdings cannot presently assess the potential financial impact, if any, of this claim.  As such, as of March 31, 2010, no liability related to this claim has been recorded.

In April 1999, UI completed the sale of its Bridgeport Harbor Station and New Haven Harbor Station generating plants in compliance with Connecticut’s electric utility industry restructuring legislation.  With respect to the portion of the New Haven Harbor Station site that UI retained, UI has performed an additional environmental analysis, indicating that approximately $3.2 million in remediation expenses will be incurred.  Actual remediation costs may be higher or lower than what is currently estimated.  The required remediation is virtually all on transmission-related property and UI has accrued these estimated expenses, which were recovered in transmission rates.

In April 1999, UI also sold property to Bridgeport Energy LLC (BE).  UIL Holdings, through its subsidiary, United Bridgeport Energy, Inc. (UBE), held a minority ownership interest in BE at that time and until the sale of that interest to the majority owner in March 2006.  In connection with the sale of the property, UI entered into an environmental indemnity agreement with BE to provide indemnification related to certain environmental conditions specific to the site where BE’s generation facilities were constructed.  This environmental indemnification remains

 
 
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UIL HOLDINGS CORPORATION

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

in place following the sale of UBE’s interest in BE.  Because of soil management and other environmental remediation activities that were performed during construction of the generation facilities, UI does not regard its exposure under the environmental indemnity agreement as material.

From 1961 to 1976, UI owned a parcel of property in Derby, Connecticut, on which it operated an oil-fired electric generating unit.  For several years, CDEP has been monitoring and remediating a migration of fuel oil contamination from a neighboring parcel of property into the adjacent Housatonic River.  Based on its own investigation to date, UI believes it has no responsibility for this contamination.  If regulatory agencies determine that UI is responsible for the cost of these remediation activities, UI may incur substantial costs, no estimate of which is currently available.

Middletown/Norwalk Transmission Project (the Project)

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

In 2008, UI funded escrow accounts for certain retention amounts withheld by UI which will remain in place until the completion of the verification of fulfillment of contractor obligations.  As of March 31, 2010, the balance of these escrow accounts was zero as all remaining withheld retention amounts were paid to the contractors during the first quarter of 2010.

Property Tax Assessment

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

Cross-Sound Cable Company, LLC

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

The $2.5 million guarantee supports an HQ guarantee to the Long Island Power Authority to provide for damages in the event of a delay in the date of achieving commercial operation of the Cross-Sound cable.  UIL Holdings expects commercial operating status to be maintained and, accordingly, it has not recorded a liability related to this guarantee in its Consolidated Balance Sheet as of March 31, 2010.

The $1.3 million guarantee supports an agreement under which Cross-Sound is providing compensation to shell fishermen for their losses, including loss of income, incurred as a result of the installation of the cable.  The payments to the fishermen are being made over a 10-year period, ending October 2013, and the obligation under this


 
 
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UIL HOLDINGS CORPORATION

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

guarantee reduces proportionately with each payment made. As of March 31, 2010, the remaining amount of the guarantee was $0.9 million.  UIL Holdings believes there is a low probability that it would be required to fund this guarantee and, as such, has not recorded a liability related to this guarantee in its Consolidated Balance Sheet as of March 31, 2010.

Xcelecom

UIL Holdings also has exposure relating to its indemnification obligations to the buyers of the former Xcelecom companies under the agreements relating to the sales of those companies and to the sureties that have provided performance bonds to certain former Xcelecom companies related to projects bid or awarded prior to the sales of those companies.  As of March 31, 2010, sureties had issued bonds for the account of Xcelecom in the aggregate amount of approximately $4.8 million, but there are no remaining costs to complete the projects covered by such surety bonds as of March 31, 2010 and UIL Holdings does not expect to be required to make any payments to sureties.  As such, UIL Holdings has not recorded a liability in its Consolidated Balance Sheet as of March 31, 2010.

The buyer of the former Xcelecom companies comprising its systems integration business signed a promissory note payable to Xcelecom or UIL Holdings in connection with the sale of that business, which totals $1.5 million as of March 31, 2010.  The promissory note calls for principal payments beginning in July 2010 with full payment in September 2011.  The buyer is currently paying interest on a monthly basis.

(K) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 outlines three valuation techniques, including: 1) the market approach, which utilizes prices and other relevant information generated by market transactions; 2) the income approach, which converts future amounts, including cash flows, to a discounted present value; and 3) the cost approach, which is based on the amount that currently would be required to replace the asset.  Inputs into these valuation techniques can be readily observable, market corroborated, or generally unobservable.  ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The three levels of the fair value hierarchy are as follows:

Level 1 -
Quoted prices are available in active markets for identical assets and liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 -
Pricing inputs are not quoted prices but are either directly or indirectly observable as of the reporting date, including those financial instruments that are valued using models or other valuation methodologies.  These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, which can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 -
Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally-developed methodologies that result in management’s best estimate of fair value.  Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs.  At each balance sheet date, UIL Holdings performs an analysis of all instruments subject to ASC 820 and includes in Level 3 all of those whose fair value is based on significant unobservable inputs.

 
 
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UIL HOLDINGS CORPORATION

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

UIL Holdings utilizes an income approach valuation technique to value the majority of its assets and liabilities measured and reported at fair value.  As required by ASC 820, financial assets and liabilities are classified in their entirety, based on the lowest level of input that is significant to the fair value measurement.  UIL Holdings’ assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following tables set forth, by level within the fair value hierarchy, UIL Holdings’ financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010 and December 31, 2009.
   
March 31, 2010
 
                         
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In Thousands)
 
                         
Assets:
                       
Derivative assets
  $ -     $ -     $ 30,850     $ 30,850  
Deferred Compensation Plan
    3,483       -       -       3,483  
Supplemental retirement benefit trust life insurance policies (Note G)
    5,257       -       -       5,257  
    $ 8,740     $ -     $ 30,850     $ 39,590  
                                 
Liabilities:
                               
Derivative liabilities
  $ -     $ -     $ 99,890     $ 99,890  
                                 
Net fair value assets/(liabilities), March 31, 2010
  $ 8,740     $ -     $ (69,040 )   $ (60,300 )

 
   
December 31, 2009
 
                         
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In Thousands)
 
                         
Assets:
                       
Derivative assets
  $ -     $ -     $ 30,694     $ 30,694  
Deferred Compensation Plan
    3,367       -       -       3,367  
Supplemental retirement benefit trust life insurance policies (Note G)
    5,071       -       -       5,071  
    $ 8,438     $ -     $ 30,694     $ 39,132  
                                 
Liabilities:
                               
Derivative liabilities
  $ -     $ -     $ 162,093     $ 162,093  
                                 
Net fair value assets/(liabilities), December 31, 2009
  $ 8,438     $ -     $ (131,399 )   $ (122,961 )
  
The determination of fair value of the derivative assets and liabilities, which primarily consist of contracts for differences, was based on a probability-based expected cash flow analysis that was discounted at the March 31, 2010 or December 31, 2009 risk-free interest rates, as applicable, and an adjustment for non-performance risk using credit default swap rates.  Certain management assumptions were required, including development of pricing that extended over the term of the contracts.  In addition, UIL performed an assessment of risks related to obtaining regulatory, legal and siting approvals, as well as obtaining financing resources and ultimately attaining commercial operation.   The DPUC has determined that changes in fair value associated with the contracts for differences are fully recoverable.  As a result, such changes have no impact on UIL Holdings’ net income.

On February 7, 2010, an explosion occurred at the construction site of the nearly completed 620-megawatt plant being built by Kleen Energy Systems, LLC (“Kleen”), one of the four capacity resources selected by the DPUC to create new or incremental capacity resources as noted above.  CL&P has executed CfDs with two of the selected projects, including the Kleen project.  The CfD with Kleen is subject to the sharing agreement between UI and CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contract.  The extent of damage and any resulting delay in the attainment of commercial operation is currently under review, however, based on information known to date, it appears to be reasonably likely that, at a minimum, there will be a delay in Kleen's attainment of commercial operation.  As such, UIL Holdings adjusted the probability assumption input to the

 
 
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UIL HOLDINGS CORPORATION

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

expected cash flow analysis, significantly reducing the fair value of the related regulatory asset and derivative liability on the Consolidated Balance Sheet as of December 31, 2009.  This change did not have an impact on UIL Holdings’ Consolidated Statement of Income.

UI purchases FTRs from the New England Independent System Operator (ISO) to hedge congestion risk resulting from its standard service contracts.  The FTRs are derivatives and are marked-to-market in accordance with ASC 815.  As of March 31, 2010, the fair value of the FTRs was not material.

Under the UIL Deferred Compensation Plan (DCP), named executive officers and certain other executives may elect to defer certain elements of compensation.  Participants in the DCP are permitted to direct investments of their elective deferral accounts into ‘deemed’ investments consisting of non-publicly traded mutual funds available through variable insurance products, and Company common stock equivalents.  These investments, which are actively traded in sufficient frequency and volume to provide pricing information on an ongoing basis, are marked-to-market in accordance with ASC 815 based upon such pricing information.

The following tables set forth a reconciliation of changes in the fair value of the assets and liabilities above that are classified as Level 3 in the fair value hierarchy for the three month period ended March 31, 2010.  The reduction in the probability of Kleen’s attainment of commercial operation, as discussed above, resulted in the reduction of UI’s projected derivative liability relating to UI’s CfD with Kleen.  The reduction of this derivative liability was the primary reason for the increase in the net fair value of the net derivative assets/(liabilities) during the three month period ended March 31, 2010 .

 
   
Three Months Ended
 
   
March 31, 2010
 
   
(In Thousands)
 
       
Net derivative assets/(liabilities), December 31, 2009
  $ (131,399 )
Unrealized gains and (losses), net
    62,359  
Purchases, issuances, and settlements
    -  
Transfers in and/or out of Level 3
    -  
Net derivative assets/(liabilities), March 31, 2010
  $ (69,040 )
         
         
Change in unrealized gains (losses), net relating to net derivative assets/(liabilities), still held as of March 31, 2010
  $ 62,359  
The unrealized loss relating to net derivative assets/(liabilities) for the comparable prior year period, the three months ended March 31, 2009, was $12.2 million which was primarily due to an increase in the probability of one of the contract for differences projects attaining commercial operation.

The following table sets forth a reconciliation of changes in the net regulatory asset/(liability) balances that were established to recover any unrealized gains/(losses) associated with the derivative assets/(liabilities) for the three month period ended March 31, 2010.  The amounts offset the net derivative assets/(liabilities) detailed above.
   
Three Months Ended
 
   
March 31, 2010
 
   
(In Thousands)
 
       
Net regulatory assets/(liabilities), December 31, 2009
  $ 131,399  
Unrealized (gains) and losses, net
    (62,359 )
Net regulatory assets/(liabilities), March 31, 2010
  $ 69,040  

 
 
- 26 -

UIL HOLDINGS CORPORATION

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

(M)  SEGMENT INFORMATION

UIL Holdings has two reporting segments related to UI: distribution of electricity and transmission of electricity.  Revenues from inter-segment transactions are not material.  All of UIL Holdings’ revenues are derived in the United States.  The following measures of segment profit and loss are utilized by management for purposes of making decisions about allocating resources to the segments and assessing performance.  The following table reconciles certain segment information with that provided in UIL Holdings’ Consolidated Financial Statements.  In the table, distribution includes all utility revenue and expenses except for transmission, which is provided in a separate column.  “Other” includes the information for the remainder of UIL Holdings’ non-utility activities and unallocated corporate costs, including minority interest investments and administrative costs.
 
   
Three months ended March 31, 2010
 
   
(In Thousands)
 
   
UI
             
   
Distribution
   
Transmission
   
Total UI
   
Other (1)
   
Total
 
Operating Revenues
  $ 175,090     $ 45,186     $ 220,276     $ 4     $ 220,280  
Purchased power
    75,348       -       75,348       -       75,348  
Operation and maintenance
    44,315       7,087       51,402       219       51,621  
Transmission wholesale
    -       15,476       15,476       -       15,476  
Depreciation and amortization
    24,069       3,172       27,241       10       27,251  
Taxes - other than income taxes
    11,436       6,268       17,704       -       17,704  
Operating Income
    19,922       13,183       33,105       (225 )     32,880  
                                         
Other Income and (Deductions), net
    3,455       391       3,846       210       4,056  
                                         
Interest Charges, net
    6,658       2,937       9,595       956       10,551  
                                         
Income Before Income Taxes and Equity Earnings
    16,719       10,637       27,356       (971 )     26,385  
Income Taxes
    6,800       3,917       10,717       (376 )     10,341  
Income Before Equity Earnings
    9,919       6,720       16,639       (595 )     16,044  
Income (Loss) from Equity Investments
    8       -       8       -       8  
Net Income
  $ 9,927     $ 6,720     $ 16,647     $ (595 )   $ 16,052  
                                         
                                         
   
Three months ended March 31, 2009
 
   
(In Thousands)
 
   
UI
                 
   
Distribution
   
Transmission
   
Total UI
   
Other (1)
   
Total
 
Operating Revenues
  $ 196,707     $ 38,565     $ 235,272     $ 237     $ 235,509  
Purchased power
    103,567       -       103,567       -       103,567  
Operation and maintenance
    45,316       6,754       52,070       437       52,507  
Transmission wholesale
    -       12,467       12,467       -       12,467  
Depreciation and amortization
    20,983       2,948       23,931       56       23,987  
Taxes - other than income taxes
    10,540       3,951       14,491       3       14,494  
Operating Income
    16,301       12,445       28,746       (259 )     28,487  
                                         
Other Income and (Deductions), net
    1,406       60       1,466       5       1,471  
                                         
Interest Charges, net
    5,534       2,738       8,272       1,124       9,396  
                                         
Income Before Income Taxes and Equity Earnings
    12,173       9,767       21,940       (1,378 )     20,562  
Income Taxes
    5,399       3,665       9,064       (532 )     8,532  
Income Before Equity Earnings
    6,774       6,102       12,876       (846 )     12,030  
Income (Loss) from Equity Investments
    12       -       12       -       12  
Net Income
  $ 6,786     $ 6,102     $ 12,888     $ (846 )   $ 12,042  
                                         
                                         
   
UI (2)
                 
   
Distribution
   
Transmission
   
Total UI
   
Other (1)
   
Total
 
Total Assets at March 31, 2010
  $ -     $ -     $ 2,149,511     $ 13,898     $ 2,163,409  
                                         
Total Assets at December 31, 2009
  $ -     $ -     $ 2,203,062     $ 18,698     $ 2,221,760  
 
(1) Includes UIL Holdings Corporate and UIL Holdings' non-utility activities.
(2) Information for segmenting total assets between Distribution and Transmission is not available. Total UI assets are disclosed in the Total UI column.  Net plant in service is segregated by segment and, as of March 31, 2010, was $704.3 million and $470.7 million for Distribution and Transmission, respectively.  As of December 31, 2009, net plant in service was $691.1 million and $461.8 million for Distribution and Transmission, respectively.
 
 
 
 
- 27 -


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

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

MAJOR INFLUENCES ON FINANCIAL CONDITION

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

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

The United Illuminating Company

UI is an electric transmission and distribution utility whose structure and operations are significantly affected by legislation and regulation.  UI’s rates and authorized return on equity are regulated by the Federal Energy Regulation Commission (FERC) and the Connecticut Department of Public Utility Control (DPUC).  Legislation and regulatory decisions implementing legislation establish a framework for UI’s operations.  Other factors affecting UI’s financial results are operational matters, such as the ability to control expenses, manage uncollectibles and capital expenditures, in addition to major weather disturbances.  Sales volume is not expected to have an impact on distribution earnings during the two-year decoupling pilot program established in the DPUC’s 2008 Rate Case final decision.  The extent to which sales volume will have an impact on UI’s financial results beyond the two-year decoupling trial period will depend upon the nature and extent of decoupling implemented by the DPUC after the expiration of the pilot period. UI expects to continue to make capital investments in its distribution and transmission infrastructure.

Generation

GenConn is a 50-50 joint venture of UI and NRG.  In 2008, the DPUC selected two projects proposed by GenConn to help address Connecticut’s growing need for more power generation during the heaviest load periods.

Two peaking generation projects, each with a nominal capacity of 200 megawatts (MW), are under construction at NRG’s existing Connecticut plant locations in Devon and Middletown.  GenConn’s Devon plant is scheduled to be in commercial operation by June 2010, and its Middletown plant is scheduled to be in commercial operation by June 2011.  GenConn recovers its costs under a contract for differences (CfD) agreement which is cost of service based.  GenConn has signed CfDs for both projects with CL&P.  The cost of the contracts will be paid by customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost is borne by UI customers and approximately 80% by CL&P customers.

 
 
- 28 -


GenConn filed a rate case request with the DPUC in December 2009, seeking approval of 2010 revenue requirements for the period commencing June 1, 2010 for the GenConn Devon facility.  A DPUC decision regarding this request is expected in May 2010.  GenConn has bid the full capacity of the GenConn facility into the ISO New England, Inc. (ISO-NE) locational forward reserve market for the summer 2010 period (June 1, 2010 - September 30, 2010).  If one or more units are delayed and GenConn does not have the capacity of all GenConn units available as of June 1, it will be assessed ISO-NE penalties for the difference between the capacity bid and the capacity available.  GenConn has not determined whether to seek recovery under the contract for differences of these ISO-NE imposed costs, if such penalties are incurred; however management believes that UI’s share of any penalties imposed on GenConn would not materially impact UIL Holdings’ consolidated financial statements.
 
As a result of changed market conditions and updated cost information, GenConn project costs have increased over the proposal it originally submitted to the DPUC.  The increase was driven primarily by increased financing costs and the cost to build interconnection facilities at the Middletown site.  The DPUC has ruled that prudently incurred financing costs, interconnection costs and taxes will be recoverable and, therefore, GenConn expects to recover such costs in DPUC-approved future revenues.  The CfDs will provide for a true-up of revenue from the ISO New England Markets in which GenConn participates to DPUC approved revenue requirements.

Derivatives

In accordance with FASB ASC 820 “Fair Value Measurements and Disclosures” (ASC 820), UIL Holdings applies fair value measurements to certain assets and liabilities, a portion of which fall into Level 3 of the fair value hierarchy defined by ASC 820 as pricing inputs that include significant inputs that are generally less observable from objective sources.  As of March 31, 2010, the assets and liabilities that are accounted for at fair value on a recurring basis as Level 3 instruments include contracts for differences and financial transmission rights (FTRs), which represent 77.9% of the total amount of assets, and 100% of the total amount of liabilities accounted for at fair value on a recurring basis.  The determination of fair value of the Level 3 instruments is based on a probability-based expected cash flow analysis that is discounted at risk-free interest rates and an adjustment for non-performance risk using credit default swap rates.  Certain management assumptions were made in this valuation process, including development of pricing that extended over the term of the contracts.  In addition, UIL performs an assessment of risks related to obtaining regulatory, legal and siting approvals, as well as obtaining financing resources and ultimately attaining commercial operation.  The DPUC has determined that costs associated with the contracts for differences are fully recoverable.  In addition, any unrealized gains/(losses) related to the FTRs are credited to or recoverable from customers through the GSC.  As a result, there is no impact on UIL Holdings’ net income as any unrealized gains/(losses) resulting from quarterly mark-to-market adjustments are offset by the establishment of regulatory assets/(liabilities) that have been recognized for the purpose of such recovery.

Legislation & Regulation

Rates

In rulings throughout 2009, the DPUC issued its final decision regarding UI’s application requesting an increase in distribution rates (the “2009 Decisions”), the results of which included a $6.8 million increase in revenue requirements for 2009, compared to 2008.  Because a larger, previously approved increase in revenue requirements for 2009 had gone into effect January 1, 2009, UI returned approximately $0.97 million to ratepayers through a one-time adjustment in April 2009.

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

 
 
- 29 -


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

On April 1, 2010, UI filed its ratemaking proposal and underlying decoupling analysis for the 2009 rate year ended February 3, 2010, identifying a net regulatory liability of approximately $0.5 million, which would be applied against the 2010 rate year ended February 3, 2011 decoupling adjustment under the Company’s proposal.  The proposal seeks to n