Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - UIL HOLDINGS CORPFinancial_Report.xls
EX-32 - EXHIBIT 32 - UIL HOLDINGS CORPex32.htm
EX-31.1 - EXHIBIT 31.1 - UIL HOLDINGS CORPex31_1.htm
EX-31.2 - EXHIBIT 31.1 - UIL HOLDINGS CORPex31_2.htm

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

FORM 10‑Q

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

For the Quarterly Period Ended September 30, 2014
 
OR

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

For the transition period from             to ______
 
Commission file number 1‑15052
 
 
(Exact name of registrant as specified in its charter)

Connecticut
 
06-1541045
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
157 Church Street, New Haven, Connecticut
 
06506
(Address of principal executive offices)
 
(Zip Code)

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

N/A
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x      No   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x      No   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o            No x
 
The number of shares outstanding of the issuer’s only class of common stock, as of October 31, 2014 was 56,546,266.

INDEX

PART I.  FINANCIAL INFORMATION
 
   
Page Number
Item 1.
3
 
3
 
3
 
4
 
6
 
7
Item 2.
29
 
29
 
37
 
40
 
40
 
40
 
40
Item 3.
45
Item 4.
45
     
PART II.  OTHER INFORMATION
 
Item 1A.
46
Item 2.
47
Item 6.
48
 
49

- 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
September 30,
   
Nine Months Ended
September 30,
 
             
   
2014
   
2013
   
2014
   
2013
 
                 
Operating Revenues
 
$
293,026
   
$
316,478
   
$
1,198,982
   
$
1,183,591
 
                                 
Operating Expenses
                               
Operation
                               
Purchased power
   
37,962
     
37,314
     
123,771
     
105,996
 
Natural gas purchased
   
30,814
     
37,343
     
322,296
     
315,520
 
Operation and maintenance
   
95,251
     
89,810
     
290,828
     
273,539
 
Transmission wholesale
   
25,802
     
28,659
     
65,777
     
65,994
 
Depreciation and amortization (Note F)
   
35,578
     
50,761
     
112,408
     
146,537
 
Taxes - other than income taxes (Note F)
   
32,897
     
32,389
     
102,974
     
96,335
 
Rate case disallowances
   
-
     
17,543
     
-
     
17,543
 
Acquisition-related expenses (Note A)
   
570
     
-
     
6,090
     
-
 
Total Operating Expenses
   
258,874
     
293,819
     
1,024,144
     
1,021,464
 
Operating Income
   
34,152
     
22,659
     
174,838
     
162,127
 
                                 
Other Income and (Deductions), net
                               
Acquisition-related bridge facility fees (Note A)
   
(849
)
   
-
     
(15,188
)
   
-
 
Other income and (deductions) (Note F)
   
4,336
     
5,153
     
12,822
     
15,718
 
Total Other Income and (Deductions), net
   
3,487
     
5,153
     
(2,366
)
   
15,718
 
                                 
Interest Charges, net
                               
Interest on long-term debt
   
22,386
     
21,896
     
67,286
     
65,272
 
Other interest, net
   
636
     
(106
)
   
1,203
     
2,442
 
     
23,022
     
21,790
     
68,489
     
67,714
 
Amortization of debt expense and redemption premiums
   
619
     
609
     
1,833
     
1,819
 
Total Interest Charges, net
   
23,641
     
22,399
     
70,322
     
69,533
 
                                 
Income from Equity Investments
   
3,492
     
3,930
     
10,398
     
11,590
 
                                 
Income Before Income Taxes
   
17,490
     
9,343
     
112,548
     
119,902
 
                                 
Income Taxes (Note E)
   
4,986
     
4,186
     
35,276
     
45,004
 
                                 
Net Income
   
12,504
     
5,157
     
77,272
     
74,898
 
Less:
                               
Preferred Stock Dividends of
                               
Subsidiary, Noncontrolling Interests
   
6
     
13
     
(21
)
   
39
 
                                 
Net Income attributable to UIL Holdings
 
$
12,498
   
$
5,144
   
$
77,293
   
$
74,859
 
                                 
Average Number of Common Shares Outstanding - Basic
   
56,855
     
50,989
     
56,827
     
50,956
 
Average Number of Common Shares Outstanding - Diluted
   
57,133
     
51,231
     
57,114
     
51,237
 
                                 
Earnings Per Share of Common Stock - Basic (Note A)
 
$
0.22
   
$
0.10
   
$
1.36
   
$
1.47
 
                                 
Earnings Per Share of Common Stock - Diluted (Note A)
 
$
0.22
   
$
0.10
   
$
1.35
   
$
1.46
 
                                 
Cash Dividends Declared per share of Common Stock
 
$
0.432
   
$
0.432
   
$
1.296
   
$
1.296
 


 
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2014 and 2013
(In Thousands)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
             
   
2014
   
2013
   
2014
   
2013
 
                 
Net Income
 
$
12,504
   
$
5,157
   
$
77,272
   
$
74,898
 
Other Comprehensive Income (Loss), net of deferred income taxes
                               
Changes in unrealized gains (losses) related to pension and other post-retirement benefit plans
   
(104
)
   
247
     
126
     
481
 
Other
   
(6
)
   
3
     
3
     
(25
)
Total Other Comprehensive Income (Loss), net of income taxes
   
(110
)
   
250
     
129
     
456
 
Comprehensive Income
   
12,394
     
5,407
     
77,401
     
75,354
 
Less:
                               
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests
   
6
     
13
     
(21
)
   
39
 
Comprehensive Income Attributable to UIL Holdings
 
$
12,388
   
$
5,394
   
$
77,422
   
$
75,315
 

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)

   
September 30,
2014
   
December 31,
2013
 
Current Assets
       
Unrestricted cash and temporary cash investments
 
$
102,801
   
$
69,153
 
Restricted cash
   
1,651
     
2,046
 
Accounts receivable less allowance of $10,481 and $11,545, respectively
   
212,379
     
245,252
 
Unbilled revenues
   
55,194
     
93,050
 
Current regulatory assets (Note A)
   
69,721
     
332,391
 
Natural gas in storage, at average cost
   
91,306
     
79,917
 
Deferred income taxes
   
-
     
21,742
 
Refundable taxes
   
13,870
     
8,244
 
Current portion of derivative assets (Note A)
   
6,861
     
9,098
 
Prepayments
   
23,437
     
14,989
 
Other
   
10,564
     
12,122
 
Total Current Assets
   
587,784
     
888,004
 
                 
Other investments
               
Equity investment in GenConn (Note A)
   
114,305
     
118,241
 
Other
   
25,333
     
26,348
 
Total Other investments
   
139,638
     
144,589
 
                 
Net Property, Plant and Equipment (Note A)
   
3,185,386
     
3,068,680
 
                 
Regulatory Assets  (Note A)
   
621,605
     
703,739
 
                 
Deferred Charges and Other Assets
               
Unamortized debt issuance expenses
   
13,994
     
15,518
 
Derivative assets (Note A)
   
21,945
     
44,349
 
Goodwill
   
266,205
     
266,205
 
Other
   
21,184
     
13,136
 
Total Deferred Charges and Other Assets
   
323,328
     
339,208
 
                 
Total Assets
 
$
4,857,741
   
$
5,144,220
 

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)

   
September 30,
2014
   
December 31,
2013
 
Current Liabilities
       
Line of credit borrowings
 
$
10,000
   
$
-
 
Current portion of long-term debt
   
6,526
     
11,834
 
Accounts payable
   
111,484
     
164,416
 
Dividends payable
   
24,361
     
24,392
 
Accrued liabilities
   
91,458
     
78,125
 
Current regulatory liabilities (Note A)
   
30,043
     
261,729
 
Taxes accrued
   
17,633
     
23,490
 
Deferred income taxes
   
17,271
     
-
 
Interest accrued
   
25,714
     
21,933
 
Current portion of derivative liabilities (Note A)
   
23,404
     
26,904
 
Total Current Liabilities
   
357,894
     
612,823
 
                 
Deferred Income Taxes
   
569,301
     
540,542
 
                 
Regulatory Liabilities (Note A)
   
513,722
     
445,092
 
                 
Other Noncurrent Liabilities
               
Pension accrued
   
157,934
     
170,853
 
Other post-retirement benefits accrued
   
79,016
     
78,539
 
Derivative liabilities (Note A)
   
59,948
     
169,327
 
Other
   
46,733
     
49,047
 
Total Other Noncurrent Liabilities
   
343,631
     
467,766
 
                 
Commitments and Contingencies (Note J)
               
                 
Capitalization (Note B)
               
Long-term debt, net of unamortized discount and premium
   
1,713,986
     
1,723,842
 
                 
Preferred Stock, not subject to mandatory redemption
   
119
     
340
 
                 
Common Stock Equity
               
Common stock
   
1,149,739
     
1,145,950
 
Paid-in capital
   
19,583
     
22,272
 
Retained earnings
   
189,102
     
185,058
 
Accumulated other comprehensive income (loss)
   
664
     
535
 
Net Common Stock Equity
   
1,359,088
     
1,353,815
 
                 
Total Capitalization
   
3,073,193
     
3,077,997
 
                 
Total Liabilities and Capitalization
 
$
4,857,741
   
$
5,144,220
 

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)

   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
Cash Flows From Operating Activities
       
Net income
 
$
77,272
   
$
74,898
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
114,241
     
148,356
 
Deferred income taxes
   
32,524
     
17,501
 
Allowance for funds used during construction (AFUDC) - equity
   
(6,869
)
   
(8,085
)
Stock-based compensation expense (Note A)
   
3,441
     
4,104
 
Pension expense
   
23,508
     
36,756
 
Undistributed (earnings) losses in equity investments
   
(9,801
)
   
(11,622
)
Rate case disallowances
   
-
     
17,543
 
Regulatory activity, net
   
83,021
     
35,176
 
Other non-cash items, net
   
995
     
2,156
 
Changes in:
               
Accounts receivable, net
   
31,737
     
36,930
 
Unbilled revenues
   
37,856
     
34,474
 
Natural gas in storage
   
(2,484
)
   
(4,023
)
Prepayments
   
(8,391
)
   
(13,615
)
Cash distributions from GenConn
   
10,404
     
7,704
 
Accounts payable
   
(38,298
)
   
(54,889
)
Interest accrued
   
3,781
     
1,962
 
Taxes accrued/refundable, net
   
(11,483
)
   
24,248
 
Accrued liabilities
   
11,080
     
(5,065
)
Accrued pension
   
(32,422
)
   
(69,963
)
Accrued other post-employment benefits
   
(3,528
)
   
(6,106
)
Other assets
   
469
     
(512
)
Other liabilities
   
6,500
     
(22
)
Total Adjustments
   
246,281
     
193,008
 
Net Cash provided by Operating Activities
   
323,553
     
267,906
 
                 
Cash Flows from Investing Activities
               
Plant expenditures including AFUDC debt
   
(196,171
)
   
(224,172
)
Acquisition of Milford LNG
   
(20,110
)
   
-
 
Cash distributions from GenConn
   
3,927
     
2,063
 
Changes in restricted cash
   
395
     
918
 
Deposits in New England East West Solution (NEEWS) (Note C)
   
(5,068
)
   
(982
)
Other
   
690
     
350
 
Net Cash provided by (used in) Investing Activities
   
(216,337
)
   
(221,823
)
                 
Cash Flows from Financing Activities
               
Issuance of common stock
   
-
     
72
 
Payments on long-term debt
   
(10,000
)
   
(20,000
)
Line of credit borrowings (repayments), net
   
10,000
     
40,000
 
Payment of common stock dividend
   
(73,280
)
   
(65,695
)
Other
   
(288
)
   
379
 
Net Cash provided by (used in) Financing Activities
   
(73,568
)
   
(45,244
)
                 
Unrestricted Cash and Temporary Cash Investments:
               
Net change for the period
   
33,648
     
839
 
Balance at beginning of period
   
69,153
     
17,857
 
Balance at end of period
   
102,801
     
18,696
 
                 
Non-cash investing activity:
               
Plant expenditures included in ending accounts payable
 
$
18,461
   
$
21,149
 
Plant expenditures funded by deposits in NEEWS
 
$
-
   
$
(18,469
)
Deposits in New England East West Solution (NEEWS)
 
$
-
   
$
18,469
 

The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
- 6 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in UIL Holdings Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as amended.  References in this Quarterly Report on Form 10-Q to "UIL Holdings” “we,” “our,” and “us” refer to UIL Holdings Corporation and its consolidated subsidiaries.

(A)
BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

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

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

Basis of Presentation

The financial statements of UIL Holdings are prepared on a consolidated basis and therefore include the accounts of UIL Holdings’ majority-owned subsidiaries noted above.  Intercompany accounts and transactions have been eliminated in consolidation.  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.  We believe 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 our opinion, 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- and nine-month periods ended September 30, 2014 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2014.

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

Philadelphia Gas Works
On March 2, 2014, we entered into an asset purchase agreement with the City of Philadelphia (Asset Purchase Agreement) pursuant to which UIL Holdings, through a wholly-owned subsidiary, will acquire the operating assets and assume certain liabilities of Philadelphia Gas Works (PGW) for an initial purchase price of $1.86 billion, subject to adjustment (the Acquisition).

The Acquisition is subject to the satisfaction or waiver of certain customary and other closing conditions for transactions of this type, including approvals from the Philadelphia City Council (City Council) and the Pennsylvania Public Utility Commission.  The Asset Purchase Agreement also contains termination provisions, including the right by either UIL Holdings or the City of Philadelphia to terminate the Asset Purchase Agreement if the Acquisition has not been consummated prior to March 31, 2015, subject to certain extension rights.  Since July 16, 2014, we have had the right to terminate the Asset Purchase Agreement pursuant to its terms because the City Council has not enacted an ordinance approving the Acquisition.  On October 27, 2014, the City Council announced that it would not endorse the sale of PGW.  In light of the City Council’s announcement, we are in the process of determining whether to exercise this contractual right and what future actions, if any, will be taken.   Without future action by either party, the Asset Purchase Agreement provides that it will terminate automatically on December 31, 2014.
- 7 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

As of September 30, 2014, UIL Holdings incurred pre-tax acquisition-related expenses of approximately $21.3 million, $6.1 million of which represents legal, investment banking, and due diligence costs that are included in operating expenses and $15.2 million of which are fees associated with a Bridge Term Loan Agreement (Bridge Facility) that is included in other income and (deductions) in the Consolidated Statement of Income.  See Note (D) “Short-Term Credit Arrangements” for additional information about the Bridge Facility.

Milford LNG Purchase

On July 31, 2014, United Resources, Inc., a wholly owned subsidiary of UIL Holdings, purchased from Iberdrola USA, Inc. and certain of its subsidiaries, all of the outstanding equity of certain entities (the Purchased Entities) owning (a) a 14.6 million gallon liquefied natural gas (LNG) storage tank operated by SCG and located on property owned by SCG in Milford, Connecticut (the Tank), (b) certain equipment, materials and supplies used in or useful for the operation of the Tank (together with the Tank, the Assets) and (c) the LNG inventory for a cash purchase price of approximately $20.2 million.  The structure and the pricing of the transaction are intended to maintain the current regulatory structure of the Purchased Entities and the Assets, and have no impact on customers.  The Assets earn a rate of return equal to SCG’s allowed rate of return.
 
Derivatives
 
Our regulated subsidiaries are parties to contracts, and involved in transactions, that are derivatives.  The fair values of the gross derivative assets and liabilities as of September 30, 2014 and December 31, 2013 were as follows:

   
September 30,
2014
   
December 31,
2013
 
   
(In Thousands)
 
Gross derivative assets:
       
Current Assets
 
$
6,861
   
$
9,098
 
Deferred Charges and Other Assets
 
$
21,945
   
$
44,349
 
                 
Gross derivative liabilities:
               
Current Liabilities
 
$
23,404
   
$
26,976
 
Noncurrent Liabilities
 
$
59,948
   
$
169,327
 

Contracts for Differences (CfDs)

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

PURA has determined that costs associated with these CfDs will be fully recoverable by UI and CL&P through electric rates, and in accordance with ASC 980 “Regulated Operations,” UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability).  The CfDs are marked-to-market in accordance with ASC 815 “Derivatives and Hedging.”  For those CfDs signed by CL&P, UI records its approximate 20% portion pursuant to the cost-sharing agreement noted above.  As of September 30, 2014, UI has recorded a gross derivative asset of $28.8 million ($6.7 million of which is related to UI’s portion of the CfD signed by CL&P), a regulatory asset of $61.2 million, a gross derivative liability of $83.4 million ($55.7 million of which is related to UI’s portion of the CfD signed by CL&P) and a regulatory liability of $6.6 million  See Note (K) “Fair Value of Financial Instruments” for additional CfD information.
- 8 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

The unrealized (gains) and losses from fair value adjustments to these derivatives recorded in regulatory assets or regulatory liabilities for the three- and nine-month periods ended September 30, 2014 and 2013 were as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(In Thousands)
   
(In Thousands)
 
                 
Regulatory Assets - Derivative liabilities
 
$
393
   
$
(5,585
)
 
$
(81,623
)
 
$
(28,849
)
                                 
Regulatory Liabilities - Derivative assets
 
$
5,077
   
$
-
   
$
(6,616
)
 
$
-
 
 
The fluctuations in unrealized gains in the three- and nine-month periods ended September 30, 2014 compared to September 30, 2013 are primarily due to increases in forward prices for capacity and reserves as a result of ISO New England market rule changes.

Weather Insurance Contracts

On an annual basis, SCG and Berkshire each assess the need for weather insurance contracts for the upcoming heating season in order to provide financial protection from significant weather fluctuations.  According to the terms of such contracts, if temperatures are warmer than normal at a prescribed level for the contract period, a payment is received by the gas company; in addition, under certain of the contracts, if temperatures are colder than normal at a prescribed level for the contract period, the gas company is required to make a payment.  The premiums paid are amortized over the terms of the contracts.  The intrinsic value of the contracts is carried on the balance sheet with changes in value recorded in the income statement as Other Income and (Deductions).  As a result of PURA’s approval of a decoupling mechanism for CNG which went into effect in January 2014, CNG does not enter into weather insurance contracts.

In September 2014, SCG and Berkshire entered into weather insurance contracts for the winter period of November 1, 2014 through April 30, 2015.  If temperatures are warmer than normal, SCG and Berkshire will receive payments up to a maximum of $3 million and $1 million, respectively.

In October 2013, Berkshire entered into a weather insurance contract for the winter period of November 1, 2013 through April 30, 2014.  During the contract period, temperatures were colder than normal and Berkshire made a payment of $0.2 million upon expiration of the contract.

In September 2013, SCG entered into a weather insurance contract for the winter period of November 1, 2013 through April 30, 2014.  During the contract period, temperatures were colder than normal and SCG made a payment of $2 million upon expiration of the contract.

- 9 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculations for the three- and nine‑month periods ended September 30, 2014 and 2013:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(In Thousands, except per share amounts)
 
                 
Numerator:
               
Net income attributable to UIL Holdings
 
$
12,498
   
$
5,144
   
$
77,293
   
$
74,859
 
Less:  Net income allocated to unvested units
   
7
     
5
     
45
     
83
 
Net income attributable to common shareholders
 
$
12,491
   
$
5,139
   
$
77,248
   
$
74,776
 
                                 
Denominator:
                               
Basic average number of shares outstanding
   
56,855
     
50,989
     
56,827
     
50,956
 
Effect of dilutive securities (1)
   
278
     
242
     
287
     
281
 
Diluted average number of shares outstanding
   
57,133
     
51,231
     
57,114
     
51,237
 
                                 
Earnings per share:
                               
Basic
 
$
0.22
   
$
0.10
   
$
1.36
   
$
1.47
 
Diluted
 
$
0.22
   
$
0.10
   
$
1.35
   
$
1.46
 
 
 
(1)
Includes unvested restricted stock and performance shares.

Equity Investments

UI is party to a 50-50 joint venture with NRG affiliates in GenConn, which operates two peaking generation plants in Connecticut.  UI’s investment in GenConn is being accounted for as an equity investment, the carrying value of which was $114.3 million and $118.2 million as of September 30, 2014 and December 31, 2013, respectively.  As of September 30, 2014, there was approximately $0.1 million of undistributed earnings from UI’s equity investment in GenConn.

UI’s pre-tax income from its equity investment in GenConn was $3.5 million and $3.9 million for the three‑month periods ended September 30, 2014 and 2013, respectively.  UI’s pre-tax income from its equity investment in GenConn was $10.4 million and $11.6 million for the nine-month periods ending September 30, 2014 and 2013, respectively.

Cash distributions from GenConn are reflected as either distributions of earnings or as returns of capital in the operating and investing sections of the Consolidated Statement of Cash Flows, respectively.  UI received cash distributions from GenConn of $5.5 million during the three-month period ended September 30, 2014.  Due to timing, UI did not receive any cash distributions from GenConn during the three‑month period ended September 30, 2013.  During the nine-month periods ending September 30, 2014 and 2013, UI received cash distributions from GenConn of approximately $14.3 million and $9.8 million, respectively.

- 10 -

UIL HOLDINGS CORPORATION

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

Regulatory Accounting

Unless otherwise stated below, all of our regulatory assets earn a return.  Our regulatory assets and liabilities as of September 30, 2014 and December 31, 2013 included the following:

 
Remaining
Period
September 30,
2014
December 31,
2013
 
(In Thousands)
Regulatory Assets:
         
Nuclear plant investments – above market
(a)
 
$
-
   
$
238,868
 
Unamortized redemption costs
7 to 19 years
   
10,700
     
11,301
 
Pension and other post-retirement benefit plans
(b)
   
311,033
     
316,076
 
Environmental remediation costs
6 years
   
14,757
     
14,953
 
Hardship programs
(c)
   
27,119
     
25,019
 
Debt premium
1 to 24 years
   
28,763
     
34,178
 
Deferred purchased gas
(d)
   
-
     
2,556
 
Income taxes due principally to book-tax differences
(m)
   
155,191
     
149,015
 
Deferred income taxes
(e)
   
46,734
     
32,517
 
Contracts for differences
(f)
   
61,163
     
142,743
 
Excess generation service charge
(g)
   
-
     
6,909
 
Deferred transmission expense
(h)
   
3,272
     
9,615
 
Storm Costs
(i)
   
-
     
14,752
 
Other
(j)
   
32,594
     
37,628
 
Total regulatory assets
     
691,326
     
1,036,130
 
Less current portion of regulatory assets
     
69,721
     
332,391
 
Regulatory Assets, Net
   
$
621,605
   
$
703,739
 
                   
Regulatory Liabilities:
                 
Accumulated deferred investment tax credits
29 years
 
$
4,355
   
$
4,465
 
Income taxes due principally to book-tax differences
(m)
   
-
     
200,673
 
Deferred gain on sale of property
(a)
   
-
     
37,933
 
Excess generation service charge
(g)
   
25,296
     
-
 
Middletown/Norwalk local transmission network service collections
35 years
   
20,972
     
21,402
 
Pension and other post-retirement benefit plans
6 years
   
24,465
     
27,686
 
Asset retirement obligation
(k)
   
6,604
     
5,593
 
Low income programs
(l)
   
30,158
     
25,300
 
Asset removal costs
(j)
   
333,712
     
319,530
 
Deferred income taxes
(e)
   
26,247
     
43,421
 
Contracts for differences
(f)
   
6,608
     
-
 
Deferred purchased gas
(d)
   
6,596
     
-
 
Non-firm margin sharing credits
10 years
   
29,339
     
-
 
Other
(j)
   
29,413
     
20,818
 
Total regulatory liabilities
     
543,765
     
706,821
 
Less current portion of regulatory liabilities
     
30,043
     
261,729
 
Regulatory Liabilities, Net
   
$
513,722
   
$
445,092
 
 
a) Asset/Liability relates to the Competitive Transition Assessment (CTA).  Balances are fully offset by amounts primarily included in income taxes, due principally to book-tax differences.  Total CTA costs recovery and stranded cost amortization are complete.  As a result of the outcome of UI’s 2013 distribution rate request, PURA approved UI’s proposed rate treatment to leave CTA rates unchanged until January 1, 2014 at which point the charge ended.  The remaining balances were eliminated.  See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Other Proceedings” for additional information.
(b) Life is dependent upon timing of final pension plan distribution; balance, which is fully offset by a corresponding asset/liability, is recalculated each year in accordance with ASC 715 "Compensation-Retirement Benefits." See Note (G) “Pension and Other Benefits” for additional information.
(c) Hardship customer accounts deferred for future recovery to the extent they exceed the amount in rates.
- 11 -

UIL HOLDINGS CORPORATION

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

(d) Deferred purchase gas costs balances at the end of the rate year are normally recorded/returned in the next year.
(e) The balance will be extinguished when the asset, which is fully offset by a corresponding liability, or liability has been realized or settled, respectively.
(f) Asset life is equal to delivery term of related contracts (which vary from approximately 6 - 13 years); balance fluctuates based upon quarterly market analysis performed on the related derivatives (Note K); amount, which does not earn a return, is fully offset by corresponding derivative asset/liability.  See “-Contracts for Differences” discussion above for additional information.
(g) Regulatory asset or liability which defers generation-related and nonbypassable federally mandated congestion costs or revenues for future recovery from or return to customers.  Amount fluctuates based upon timing differences between revenues collected from rates and actual costs incurred.
(h) Regulatory asset or liability which defers transmission income or expense and fluctuates based upon actual revenues and revenue requirements.
(i) Storm costs include accumulated costs for major storms occurring from January 2009 forward. See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Rates” for a discussion of the recovery of these costs.
(j) Amortization period and/or balance vary depending on the nature, cost of removal and/or remaining life of the underlying assets/liabilities; asset amount includes decoupling ($5.5 million) and certain other amounts that are not currently earning a return. See Note (C) “Regulatory Proceedings for a discussion of the decoupling recovery period.
(k) The liability will be extinguished simultaneous with the retirement of the assets and settlement of the corresponding asset retirement obligation.
(l) Various hardship and payment plan programs approved for recovery.
(m) Amortization period and/or balance vary depending on the nature and/or remaining life of the underlying assets/liabilities; balances contain regulatory liabilities related to the CTA as well as regulatory assets not related to the CTA.  Due to the end of the CTA charge, the CTA regulatory liabilities are classified as current regulatory liabilities as of December 31, 2013 and the regulatory assets not related to the CTA are reclassified as long-term regulatory assets.
 
Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), target amounts of 123,940, 2,430, and 2,340 performance shares were granted to certain members of management in March 2014, May 2014 and August 2014; the averages of the high and low market prices on the grant dates, which approximate fair value, were $35.87 per share, $36.23 per share, and $34.90 per share respectively.

Also in March 2014, we granted a total of 2,196 shares of restricted stock to our President and Chief Executive Officer under the 2008 Stock Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant, which approximates fair value, was $35.87 per share.  Such shares vest in equal annual installments over a five-year period.

In May 2014, UIL Holdings granted a total of 25,160 shares of restricted stock to non-employee directors under the 2008 Stock Plan; the average of the high and low market price on the date of grant, which approximates fair value, was $35.90 per share.  Such shares vest in May 2015.

In June 2014, 9,540 shares of previously-granted performance shares and 2,177 shares of previously-granted restricted stock were forfeited.

Total stock-based compensation expense for the three-month periods ended September 30, 2014 and 2013 was an immaterial amount and $1.1 million, respectively.  Total stock-based compensation expense for the nine-month periods ended September 30, 2014 and 2013 was $3.4 million and $4.1 million, respectively.

Variable Interest Entities

We have identified GenConn as a variable interest entity (VIE), which is accounted for under the equity method.  UIL Holdings is not the primary beneficiary of GenConn, as defined in ASC 810 “Consolidation,” because it shares control of all significant activities of GenConn with its joint venturer, NRG affiliates.  As such, GenConn is not subject to consolidation.  GenConn recovers its costs through CfDs, which are cost of service-based and have been approved by PURA.  As a result, with the achievement of commercial operation by GenConn Devon and GenConn Middletown, our exposure to loss is primarily related to the potential for unrecovered GenConn operating or capital costs in a regulatory proceeding, the effect of which would be reflected in the carrying value of our 50% ownership position in GenConn and
- 12 -

UIL HOLDINGS CORPORATION

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

through “Income from Equity Investments” in UIL Holdings’ Consolidated Financial Statements.  Such exposure to loss cannot be determined at this time.  For further discussion of GenConn, see “–Equity Investments” as well as Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Equity Investment in Peaking Generation.”

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

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

New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition.  ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and is to be applied retrospectively.  We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.

In June 2014, the FASB issued updated guidance to ASC 718 “Compensation – Stock Compensation” which prescribes the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period.  This guidance is effective during interim and annual periods beginning after December 15, 2015 and can be applied on a prospective basis to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter.  This guidance is not expected to have a material impact on UIL Holdings’ consolidated financial statements.

(B)
CAPITALIZATION

Common Stock

UIL Holdings had 56,546,266 shares of its common stock, no par value, outstanding at September 30, 2014.

Long‑Term Debt

In August 2014, CNG repaid, upon maturity, all of its outstanding 8.12% Medium Term Notes, Series B, totaling $5 million.  Also in August 2014, CNG redeemed all of its outstanding 8.49% Medium Term Notes, Series B, totaling $5 million.

Preferred Stock of Subsidiaries, Noncontrolling Interests

The preferred stock of subsidiaries is a noncontrolling interest because it contains a feature that allows the holders to elect a majority of the subsidiary’s board of directors if preferred stock dividends are in default in an amount equivalent
- 13 -

UIL HOLDINGS CORPORATION

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

to four full quarterly dividends.  Such a potential redemption-triggering event is not solely within the control of the subsidiary.

CNG has authorized 884,315 shares of its 8.00% non-callable cumulative preferred stock with a par value of $3.125 per share.  As of September 30, 2014, there were 108,706 shares issued and outstanding with a value of approximately $0.3 million, including 70,699 shares that were acquired by CNG’s parent, CTG Resources, Inc. on June 5, 2014, at a purchase price of $10.25 per share, or an aggregate amount of $0.7 million, pursuant to a tender offer.

(C)  REGULATORY PROCEEDINGS

Electric Distribution and Transmission

Rates

On February 15, 2013, UI filed an application to amend its existing distribution rate schedules for two rate years.  On August 14, 2013, PURA issued a decision (the August Decision) which became effective on that date and which, among other things, increased the UI distribution and CTA allowed return on equity (ROE) from 8.75% to 9.15%, continued UI’s existing earnings sharing mechanism by which UI and customers share on a 50/50 basis all distribution earnings above the allowed ROE in a calendar year, continued the existing decoupling mechanism, and approved the establishment of the requested storm reserve.  Additionally, the August Decision disallowed approximately $22 million related to deferred storm costs and capital costs related to UI’s recently constructed administrative and operations buildings.  As a result of these disallowances and other adjustments related to the rate proceeding, we recorded a one-time pre-tax write off of $17.5 million related to UI in the third quarter of 2013.
 
On December 16, 2013, PURA issued a final decision on UI’s Petition for Reconsideration of the August Decision.  The final decision on the reconsideration restored approximately $6.8 million of deferred storm costs and approximately $2.7 million of capital costs related to UI’s recently constructed administrative and operations buildings which had been disallowed in the August Decision.  As a result, we recorded a one-time pre-tax adjustment of approximately $9.2 million in the fourth quarter of 2013 to reverse such amounts written off in the third quarter of 2013 as a result of the August Decision.  The resulting storm regulatory asset allowed for recovery totaled approximately $45 million.  As a result of PURA’s final decision in UI’s final CTA reconciliation proceeding, the remaining storm regulatory asset was offset against the remaining CTA and Connecticut Yankee DOE litigation regulatory liabilities.  See Note “–Electric Distribution and Transmission – Other Proceedings” for additional information.
 
Power Supply Arrangements

UI has wholesale power supply agreements in place for its entire standard service load for all of 2014, for 70% of its standard service load for the first half of 2015 and 30% for the second half of 2015.  UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and elected the “normal purchase, normal sale” exception under ASC 815 “Derivatives and Hedging.”  UI regularly assesses the accounting treatment for its power supply contracts.  These wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt were to fall below investment grade.  If UI’s credit rating were to decline one rating at Standard & Poor’s or two ratings at Moody’s and UI were to be placed on negative credit watch, monthly amounts due and payable to the power suppliers would be accelerated to semi-monthly payments.  UI’s credit rating would have to decline two ratings at Standard & Poor’s and three ratings at Moody’s to fall below investment grade.  If this were to occur, UI would have to deliver collateral security in an amount equal to the receivables due to the sellers for the thirty-day period immediately preceding the default notice.  If such an event had occurred as of September 30, 2014 UI would have had to post an aggregate of approximately $9.7 million in collateral.

New Renewable Source Generation

Under Connecticut Public Act No. 11-80, “An Act Concerning the Establishment of the Department of Energy and Environmental Protection and Planning for Connecticut's Energy Future” (PA 11-80), Connecticut electric utilities are required to enter into long-term contracts to purchase Renewable Energy Credits (RECs) from renewable generators
- 14 -

UIL HOLDINGS CORPORATION

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

located on customer premises.  Under this program, UI is required to enter into contracts totaling approximately $200 million in commitments over an approximate 21-year period.  The obligations will phase in over a six-year solicitation period, and are expected to peak at an annual commitment level of about $13.6 million per year after all selected projects are online.  Upon purchase, UI accounts for the RECs as inventory.  UI expects to partially mitigate the cost of these contracts through the resale of the RECs.  PA 11-80 provides that the remaining costs (and any benefits) of these contracts, including any gain or loss resulting from the resale of the RECs, are fully recoverable from (or credited to) customers through electric rates.

On October 23, 2013, PURA approved UI’s renewable connections program filed in accordance with PA 11-80, through which UI would develop up to 10 MW of renewable generation.  UI’s proposed budget of $35.0 million to develop the initial 7.8 MW has been approved by PURA.  The costs for this program would be recovered on a cost of service basis.  In its approval, PURA established a base ROE to be calculated as the greater of:  (A) the current UI authorized distribution ROE plus 25 basis points and (B) the current authorized distribution ROE for CL&P, less target equivalent market revenues (reflected as 25 basis points).  In addition, UI will retain a percentage of the market revenues from the project, which percentage is expected to equate to approximately 25 basis points on a levelized basis over the life of the project.

Section 6 of Connecticut Public Act 13-303, “An Act Concerning Connecticut’s Clean Energy Goals,” (PA 13-303), authorized DEEP to direct Connecticut’s electric distribution companies, including UI, to enter into contracts for energy and/or RECs from Class I renewable resources in a quantity of up to 4% of the electric distribution companies’ distribution load.  On July 8, 2013, DEEP issued a request for proposals (RFP), and directed UI and CL&P to enter into power purchase agreements with the winning bidders.  On September 19, 2013, UI entered into contracts with two of the winning bidders, totaling approximately 3.5% of UI’s distribution load, which were subsequently approved by PURA.  Costs of each of these agreements will be fully recoverable through electric rates.  On December 18, 2013, Allco Finance Limited, an unsuccessful bidder in the RFP, filed a complaint against DEEP in the United States District Court in Connecticut alleging that DEEP’s direction to UI and CL&P to enter into the contracts violated the Supremacy Clause of the U.S. Constitution and the Federal Power Act by setting wholesale electricity rates.  UI is not a party to the litigation.

Section 8 of PA 13-303 authorized DEEP to direct Connecticut’s electric distribution companies, including UI, to enter into contracts for energy and/or RECs from biomass, landfill gas and small hydro projects that qualify as Connecticut Class I renewable resources in a quantity up to 4% of the electric distribution companies’ distribution load.  At the direction of DEEP, in January 2014, UI entered into three contracts for the purchase of RECs associated with an aggregate of 5.7 MW of energy production from biomass plants in New England, which were subsequently approved by PURA.  PA 13‑303 provides that costs of any such agreements will be fully recoverable through electric rates.

Transmission

PURA decisions do not affect the revenue requirements determination for transmission, including the applicable return on equity (ROE), which are within the jurisdiction of the FERC.  For 2014, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 12.0% to 12.2%.  This range includes the impact of the FERC order issued on October 16, 2014 and excludes any impacts of the reserve adjustment, both of which are discussed below.

In September 2011, several New England governmental entities, including PURA, the Connecticut Attorney General and the Connecticut Office of Consumer Counsel, filed a joint complaint (Initial Complaint) with the FERC against ISO-NE and several New England transmission owners, including UI, claiming that the current approved base ROE used in calculating formula rates for transmission service under the ISO-NE Open Access Transmission Tariff by the New England transmission owners  of 11.14% is not just and reasonable and seeking a proposed reduction of the base ROE to 9.20% to be effective October 1, 2011.  A refund period of October 1, 2011 through December 31, 2012 (refund period) was established.

On August 6, 2013, the presiding Administrative Law Judge issued an initial decision finding that the existing base ROE was unjust and unreasonable, and that the just and reasonable base ROE is 10.6% for the refund period and 9.7% for the period after a final opinion is issued by the FERC, prior to any adjustments that may be applied by the FERC in
- 15 -

UIL HOLDINGS CORPORATION

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

a final order based on the change in 10-year U.S. Treasury Bond rates from the date hearings closed to the date of the FERC’s order.  We recorded a reserve for the refund period related to the Initial Complaint of $2.6 million pre-tax during the third quarter of 2013 based upon our assessment of the ultimate outcome of the proceeding.

In December 2012, various additional parties filed a complaint with the FERC against several New England transmission owners, including UI, seeking a proposed reduction of the base ROE to 8.70%, effective December 27, 2012 (Second Complaint).

On June 19, 2014, FERC issued an order (June Order) in the Initial Complaint, tentatively finding that the just and reasonable base ROE for the New England transmission owners’ tariff is 10.57%.  In the June Order, FERC adopted a new method for determining cost of equity, changing from a one-step discounted cash flow (DCF) methodology to a two-step DCF, which includes a long-term growth component.  FERC also discontinued its past practice of adjusting the ROE to reflect changes in U.S. Treasury bond yields from the date of closing of the evidentiary record to the date of FERC decision.  In addition, FERC determined that it was inappropriate for the Administrative Law Judge to establish two separate ROEs, ordering that the final ROE, once determined, would apply to the refund period and prospectively.

The June Order applied the two-step DCF methodology, using an assumed long-term growth rate based on the Gross Domestic Product, to tentatively find that the zone of reasonableness for the New England transmission owners is 7.03% to 11.74%.  Within that tentative zone of reasonableness, FERC found that, taking into account the unusual capital market conditions, the just and reasonable base ROE for the New England transmission owners’ tariff should be set halfway between the midpoint of the zone of reasonableness and the top of the zone of reasonableness, which, based on the record thus far in the proceeding, is 10.57%.   In connection with the application of the two-step DCF method, FERC established a paper hearing process following which FERC confirmed in its order on October 16, 2014 (October Order) that the Gross Domestic Product was the appropriate long-term growth rate to be used when calculating the base ROE.  Also in the October Order, the FERC set the New England transmission owners base ROE at 10.57% with a total or maximum ROE including incentives not to exceed 11.74%, for both the refund period and going forward effective on October 16, 2014.

Also on June 19, 2014, FERC announced it would institute hearing and settlement judge procedures in the Second Complaint.   FERC determined there would be a 15-month refund period beginning December 27, 2012.  If settlement procedures are unsuccessful and this complaint is litigated, a final FERC order would likely be issued in 2016.  On October 21, 2014, the Settlement Judge recommended termination of settlement proceedings as the parties had indicated that they are at an impasse.

On July 21, 2014, the New England transmission owners filed a request for clarification or rehearing, and the state complainants and others filed a request for rehearing, of various issues in the FERC order on the Initial Complaint, and the New England transmission owners filed a request for clarification or rehearing of the order on the Second Complaint.

On July 31, 2014, complainants in the Initial Complaint and the Second Complaint filed an additional complaint (Third Complaint) with the FERC against the New England transmission owners, alleging that the current base ROE of 11.14% is not just and reasonable, and that under the new FERC two-step DCF methodology, the base ROE should be set at 8.84% or no more than 9.44%, the midpoint of the zone of reasonableness calculated by their consultant.  The Third Complaint argues that the FERC should not follow its June 19, 2014 Order setting the ROE at halfway between the midpoint and the top of the zone of reasonableness because financial market conditions are not anomalous.  The complainants have requested a 15-month refund period beginning July 31, 2014, and also ask for a determination that the top of the zone of reasonableness caps the ROE for each individual project.

During the third quarter, we updated our assessment based upon the most recent information available.  Although we cannot predict the outcome of the proceedings involving the Second and Third Complaints, we have recorded reserves relating to potential refunds to customers, recording an additional pre-tax reserve of $5.3 million during the third quarter of 2014.

- 16 -

UIL HOLDINGS CORPORATION

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

New England East-West Solution

Pursuant to an agreement with CL&P (the Agreement), UI has the right to invest in, and own transmission assets associated with, the Connecticut portion of CL&P’s New England East West Solution (NEEWS) projects to improve regional energy reliability.  NEEWS consists of four inter-related transmission projects being developed by subsidiaries of Northeast Utilities (NU), the parent company of CL&P, in collaboration with National Grid USA.  Three of the projects have portions located in Connecticut:  (1) the Greater Springfield Reliability Project (GSRP), which was fully energized in November 2013, (2) the Interstate Reliability Project (IRP), which is expected to be placed in service in late 2015 and (3) the Central Connecticut Reliability Project (CCRP), which is being reassessed as part of the Greater Hartford Central Connecticut Study (GHCC). As CL&P places assets in service, it will transfer title to certain NEEWS transmission assets to UI in proportion to UI’s investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating and maintenance agreement (O&M Agreement) with UI.  Any termination of the Agreement pursuant to its terms would have no effect on the assets previously transferred to UI.

Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific NEEWS transmission assets as they are placed in service.  UI has the right to invest up to the greater of $60 million or an amount equal to 8.4% of CL&P’s costs for the originally proposed Connecticut portions of the NEEWS projects.  Based upon the current projected costs, UI’s investment rights in GSRP and IRP would be approximately $45 million.  In July 2014, ISO-NE presented the preferred GHCC transmission solutions to its Planning Advisory Committee.   UI is awaiting the final ISO-NE GHCC transmission solution report, expected in the fourth quarter of 2014, to determine the impact on UI’s aggregate investment in NEEWS.

Deposits associated with NEEWS are recorded as assets at the time the deposit is made and they are reported in the ‘Other’ line item within the Deferred Charges and Other Assets section of the consolidated balance sheet.   When title to the assets is transferred to UI, the amount of the corresponding deposit is reclassified from other assets to plant-in-service on the balance sheet and shown as a non-cash investing activity in the consolidated statement of cash flows.

As of September 30, 2014, UI had made aggregate deposits of $40.2 million under the Agreement since its inception, with assets valued at approximately $24.6 million having been transferred to UI, as follows:  In September 2012, CL&P transferred approximately $6.2 million of transmission assets associated with the GSRP, and in February 2013, CL&P transferred approximately $18.4 million of transmission assets, representing the remaining portion of the GSRP.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $0.5 million and $0.3 million in the three-month periods ended September 30, 2014 and 2013, respectively.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $1.2 million in each of the nine-month periods ended September 30, 2014 and 2013.

Equity Investment in Peaking Generation

UI is party to a 50-50 joint venture with NRG affiliates in GenConn, which operates two peaking generation plants in Connecticut.  The two peaking generation plants, GenConn Devon and GenConn Middletown, are both participating in the ISO-New England markets.  PURA has approved revenue requirements for the period from January 1, 2014 through December 31, 2014 of $30.8 million and $37.5 million for GenConn Devon and GenConn Middletown, respectively.  In addition, PURA has ruled that GenConn project costs incurred that were in excess of the proposed costs originally submitted in 2008 were prudently incurred and are recoverable.  Such costs are included in the determination of the 2014 approved revenue requirements.

GenConn filed a revenue requirements request with PURA on June 25, 2014, seeking approval of its 2015 revenue requirements for the period commencing January 1, 2015 for both the GenConn Devon and GenConn Middletown facilities.  A final decision on this request is expected by the end of 2014.

Other Proceedings

On October 2, 2014, PURA issued a draft decision in a docket addressing UI’s semi-annual Generation Service Charge (GSC), bypassable federally mandated congestion charge and the nonbypassable federally mandated congestion charge reconciliations.  PURA’s draft decision, for which UI has filed written exceptions and will present oral arguments, if adopted without change as the final
- 17 -

UIL HOLDINGS CORPORATION

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

decision, would allow for recovery of $8.3 million of the $11.3 million request included in UI’s filing for the reconciliation of certain revenues and expenses relating to the period from 2004 through 2013 and result in UI recording a pre-tax write-off of approximately $3.1 million during the fourth quarter of 2014.

On October 20, 2014, PURA issued a draft decision in UI’s final CTA reconciliation proceeding. Based upon our assessment, we believe that it is probable that the final decision will result in the extinguishment of all remaining CTA balances and, as such, we have eliminated the CTA balances as of September 30, 2014. In addition, the draft decision allowed for the application of an approximate $8.2 million remaining CTA regulatory liability as well as an approximate $12.0 million regulatory liability related to the Connecticut Yankee DOE litigation against the storm regulatory asset balance.   The remaining regulatory liability balance was applied to the GSC “working capital allowance” and will be returned to customers through the nonbypassable federally mandated congestion charge.

Gas Distribution

Rates

The allowed returns on equity established by PURA are 9.18% and 9.36% for CNG and SCG, respectively.  Berkshire’s rates are established by the DPU.  Berkshire’s 10-year rate plan, which was approved by the DPU and included an approved ROE of 10.5%, expired on January 31, 2012.  Berkshire continues to charge the rates that were in effect at the end of the rate plan.  In response to a letter from the DPU requesting that Berkshire notify the DPU when Berkshire expected to file its next base distribution rate case and the test year for the filing, Berkshire responded that calendar year 2014 would be the earliest test year for a base rate case, and with such a test year a case would be filed by approximately May 15, 2015 with rates to be effective April 1, 2016.

On July 8, 2013, CNG filed an application to amend its existing base delivery rate.  On January 22, 2014, PURA issued a final decision, with an effective date of January 10, 2014, which, among other things, approved an allowed ROE of 9.18%, a decoupling mechanism, and two separate ratemaking mechanisms that reconcile actual revenue requirements related to CNG’s cast iron and bare steel replacement program and system expansion.  Additionally, the final decision requires the establishment of an earnings sharing mechanism by which CNG and customers share on a 50/50 basis all earnings above the allowed ROE in a calendar year.  The decision also allows CNG, on a provisional basis, to reflect the increased rate base resulting from the accumulated deferred income tax (ADIT) impacts of the election of Section 338(h)(10) of the Internal Revenue Code upon its acquisition by UIL Holdings.   The decision requires CNG to seek a private letter ruling from the Internal Revenue Service with regard to the specific question of whether, after extinguishment of an ADIT balance, a directive by a public utility commission to institute a ratemaking mechanism to reflect a credit to ratepayers of ADIT benefits lost through a Section 338(h)(10) election would result in a normalization violation.  The decision states that in the event of a ruling from the Internal Revenue Service stating that imposing such a ratemaking mechanism would not create a normalization violation, PURA would adjust rates to offset the ratemaking impacts of the 338(h)(10) election on rate base.  We estimate the impact to be an approximate $2.5 to $3.5 million decrease in annual revenue requirements.  In March 2014, CNG filed a draft of its private letter ruling request with PURA for approval.  During the first quarter of 2014, the Office of Consumer Counsel (OCC) appealed the decision to the Connecticut Superior Court with regard to the establishment of an adjustment mechanism for incremental cast iron and bare steel replacement as well as PURA’s directive to seek a private letter ruling with respect to the extinguishment of ADITs rather than ordering a rate credit to hold customers harmless from the ratemaking effect of extinguishing the ADITs.  At the request of PURA, the OCC and CNG have entered into settlement discussions regarding the appeal and CNG requested from PURA, and was granted, an extension of time for submitting the private letter ruling request to the Internal Revenue Service.

(D)
SHORT‑TERM CREDIT ARRANGEMENTS

As of September 30, 2014, there was $10 million in borrowings outstanding under the existing revolving credit agreement among UIL Holdings, certain of its subsidiaries and a group of banks, that expires on November 30, 2016 (the UIL Holdings Credit Facility).  Under the UIL Holdings Credit Facility, UIL Holdings has outstanding standby letters of credit in the aggregate amount of $4.4 million, which expire on January 31, 2015 and June 16, 2015.  Available credit under the UIL Holdings Credit Facility at September 30, 2014 totaled $385.6 million for UIL Holdings and its subsidiaries in the aggregate.  We record borrowings under the UIL Holdings Credit Facility as short‑term debt, but the UIL Holdings Credit Facility provides for longer term commitments from banks allowing us to borrow and
- 18 -

UIL HOLDINGS CORPORATION

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

reborrow funds, at our option, until the facility’s expiration, thus affording us flexibility in managing its working capital requirements.

In connection with the Acquisition, on March 17, 2014, UIL Holdings and certain of its subsidiaries entered into an Amendment No. 1 to the UIL Holdings Credit Facility.  The purpose of the Amendment No. 1 was to address provisions that would be impacted by the Acquisition, including (i) amending the lien provisions to allow the existence of liens related to the Acquisition, (ii) amending the debt restrictions to allow UIL Holdings  to incur debt of up to $1.6 billion, subject to conditions and (iii) amending the debt covenant provisions to allow UIL Holdings and certain of its subsidiaries to maintain a ratio of Consolidated Debt to Consolidated Capital of not greater than 0.77 to 1.00, in connection with the Acquisition, subject to conditions.

On March 28, 2014, in connection with the Acquisition, UIL Holdings and its subsidiary, WGP Acquisition LLC (WGP), entered into a 364-day Bridge Term Loan Agreement (Bridge Facility) with a group of banks and Morgan Stanley Senior Funding, Inc., as administrative agent in an aggregate principal amount of up to $1.9 billion.  Under the Bridge Facility, UIL Holdings may borrow the full amount and WGP may borrow up to $950 million, subject to the aggregate limit of $1.9 billion.  UIL Holdings and WGP will be severally liable for their respective borrowings.  Any undrawn commitments under the Bridge Facility will automatically be terminated on the date of the closing of the Acquisition.  As of September 30, 2014, there were no amounts outstanding under the Bridge Facility.

(E)
INCOME TAXES

Differences in the treatment of certain transactions for book and tax purposes cause UIL Holdings’ overall effective tax rate to differ from the statutory tax rate.  In accordance with ASC 740, we use an estimated annual effective tax rate approach to calculate interim period income tax expense for ordinary income.   We also record separate income tax effects for significant unusual or infrequent items such as the Acquisition.

Consolidated income tax expense decreased $9.7 million for the first nine months of 2014, as compared to the first nine months of 2013 due primarily to a lower annualized effective tax rate and the Acquisition.  The annualized effective tax rate decreased from 37.9% for the nine months ended September 30, 2013 to 32.9% for the nine months ended September 30, 2014 due primarily to the absence in 2014 of non-normalized CTA amortization as well as favorable changes in state flow through depreciation.

- 19 -

UIL HOLDINGS CORPORATION

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

(F)
SUPPLEMENTARY INFORMATION

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(In Thousands)
   
(In Thousands)
 
Depreciation and Amortization
               
Property, plant, and equipment depreciation
 
$
32,860
   
$
30,870
   
$
97,208
   
$
89,788
 
Amortization of regulatory assets
   
2,718
     
19,891
     
15,200
     
56,749
 
Total Depreciation and Amortization
 
$
35,578
   
$
50,761
   
$
112,408
   
$
146,537
 
                                 
Taxes - Other than Income Taxes
                               
Operating:
                               
Connecticut gross earnings
 
$
16,199
   
$
17,780
   
$
54,671
   
$
54,873
 
Local real estate and personal property
   
13,310
     
12,417
     
37,399
     
34,416
 
Payroll taxes
   
3,046
     
2,069
     
9,877
     
6,584
 
Other
   
342
     
123
     
1,027
     
462
 
Total Taxes - Other than Income Taxes
 
$
32,897
   
$
32,389
   
$
102,974
   
$
96,335
 
                                 
Other Income and (Deductions)
                               
Interest income
 
$
666
   
$
243
   
$
1,731
   
$
1,449
 
Allowance for funds used during construction - equity
   
1,949
     
2,751
     
6,869
     
8,085
 
Allowance for funds used during construction - debt
   
1,201
     
1,533
     
4,032
     
5,869
 
Weather insurance
   
-
     
-
     
(2,437
)
   
-
 
Other
   
520
     
626
     
2,627
     
315
 
Total Other Income and (Deductions)
 
$
4,336
   
$
5,153
   
$
12,822
   
$
15,718
 

(G)
PENSION AND OTHER BENEFITS

During the nine months ended September 30, 2014, we made pension contributions of $23.0 million.  No further contributions are expected during the remainder of 2014.

The following tables represent the components of net periodic benefit cost for pension and other postretirement benefits as well as the actuarial weighted-average assumptions used in calculating net periodic benefit cost for the three- and nine‑month periods ended September 30, 2014 and 2013:

   
Three Months Ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2014
   
2013
   
2014
   
2013
 
   
(In Thousands)
 
Components of net periodic benefit cost:
               
Service cost
 
$
2,896
   
$
3,696
   
$
404
   
$
481
 
Interest cost
   
11,019
     
9,988
     
1,487
     
1,384
 
Expected return on plan assets
   
(13,560
)
   
(12,863
)
   
(700
)
   
(648
)
Amortization of:
                               
Prior service costs
   
73
     
151
     
71
     
(13
)
Actuarial loss
   
3,097
     
5,208
     
(172
)
   
444
 
Settlements (1)
   
-
     
632
     
-
     
-
 
Net periodic benefit cost
 
$
3,525
   
$
6,812
   
$
1,090
   
$
1,648
 

- 20 -

UIL HOLDINGS CORPORATION

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

   
Nine Months Ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2014
   
2013
   
2014
   
2013
 
   
(In Thousands)
 
Components of net periodic benefit cost:
               
Service cost
 
$
8,688
   
$
11,088
   
$
1,212
   
$
1,443
 
Interest cost
   
33,057
     
29,964
     
4,461
     
4,152
 
Expected return on plan assets
   
(40,680
)
   
(38,589
)
   
(2,100
)
   
(1,944
)
Amortization of:
                               
Prior service costs
   
219
     
453
     
213
     
(39
)
Actuarial loss
   
9,291
     
15,624
     
(516
)
   
1,332
 
Settlements (1)
   
-
     
632
     
-
     
-
 
Net periodic benefit cost
 
$
10,575
   
$
19,172
   
$
3,270
   
$
4,944
 
                                 
   
Three and Nine Months Ended September 30,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
     
2014
     
2013
     
2014
     
2013
 
                                 
Discount rate
   
4.90%-5.20
%
   
4.00%-4.25
%
   
4.85%-5.20
%
   
4.00%-4.25
%
Average wage increase
   
3.50%-3.80
%
   
3.50%-3.80
%
   
N/A
 
   
N/A
 
Return on plan assets
   
7.75%-8.00
%
   
7.75%-8.00
%
   
5.56%-8.00
%
   
5.56%-8.00
%
Composite health care trend rate (current year)
   
N/A
   
N/A
 
   
7.00
%
   
7.50
%
Composite health care trend rate (2018 forward)
   
N/A
 
   
N/A
 
   
5.00
%
   
5.00
%

(1)
Reflects settlement charges resulting from a distribution to a former employee upon retirement
N/A – not applicable
 
(H)  RELATED PARTY TRANSACTIONS

A Director of UIL Holdings holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UIL Holdings leases office space.  UIL Holdings’ lease payments for this office space for each of the three‑month periods ended September 30, 2014 and 2013 totaled $0.4 million.  UIL Holdings’ lease payments for this office space for each of the nine-month periods ended September 30, 2014 and 2013 totaled $1.4 million and $1.1 million, respectively.

(J)  COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, we are involved in various proceedings, including legal, tax, regulatory and environmental matters, which require management’s assessment to determine the probability of whether a loss will occur and, if probable, an estimate of probable loss.  When assessments indicate that it is probable that a liability has been incurred and an amount can be reasonably estimated, we accrue a reserve and disclose the reserve and related matter.  We disclose material matters when losses are probable but for which an estimate cannot be reasonably estimated or when losses are not probable but are reasonably possible.  Subsequent analysis is performed on a periodic basis to assess the impact of any changes in events or circumstances and any resulting need to adjust existing reserves or record additional reserves.  However, given the inherent unpredictability of these legal and regulatory proceedings, we cannot assure you that our assessment of such proceedings will reflect the ultimate outcome, and an adverse outcome in certain matters could have a material adverse effect on our results of operations or cash flows.

Connecticut Yankee Atomic Power Company

UI has a 9.5% stock ownership share in the Connecticut Yankee Atomic Power Company, an inactive nuclear generating company (Connecticut Yankee), the carrying value of which was $0.2 million as of September 30, 2014.  Connecticut Yankee has completed the physical decommissioning of its generation facilities and is now engaged primarily in the long-term storage of its spent nuclear fuel. Connecticut Yankee collects its costs through wholesale
- 21 -

UIL HOLDINGS CORPORATION

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

FERC-approved rates from UI and several other New England utilities.  UI recovers these costs from its customers through electric rates.

On May 1, 2013, Connecticut Yankee filed an application with FERC to, among other things, reduce its rates and eliminate future decommissioning funding requirements for its owners, using the United States Department of Energy (DOE) damage award, discussed below.  On June 27, 2013, FERC issued a final decision which approved both the proposed rate reduction and the elimination of future decommissioning funding requirements.  As a result, UI’s obligation and corresponding regulatory asset were eliminated at that time.

DOE Spent Fuel Litigation

In 1998, Connecticut Yankee filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 spent fuel and high level waste disposal contract between Connecticut Yankee and the DOE.  In September 2010, the court issued its decision and awarded Connecticut Yankee damages of $39.7 million for its spent fuel-related costs through 2001, which was affirmed in May 2012.  Connecticut Yankee received payment of the damage award and, in light of its ownership share, in July 2013 UI received approximately $3.8 million of such award which was credited back to customers through the CTA.
 
In December 2007, Connecticut Yankee filed a second set of complaints with the United States Court of Federal Claims against the DOE seeking damages incurred since January 1, 2002 for the DOE’s failure to remove Connecticut Yankee’s spent fuel.  In November 2013, the court issued a final judgment, which was not appealed, awarding Connecticut Yankee damages of $126.3 million.  In light of its ownership share, in June 2014, UI received approximately $12.0 million of such award which was applied, in part, against the remaining storm regulatory asset balance.  The remaining regulatory liability balance was applied to the GSC “working capital allowance” and will be returned to customers through the nonbypassable federally mandated congestion charge.  See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Other Proceedings” for additional information.
 
In August 2013, Connecticut Yankee filed a third set of complaints with the United States Court of Federal Claims against the DOE seeking unspecified damages incurred since January 1, 2009.

Environmental Matters

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

Site Decontamination, Demolition and Remediation Costs

In 2000, UI conveyed a former generation site on the Mill River in New Haven (English Station) 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, approximately $1.9 million, an amount equal to the then-current estimate for remediation, was placed in escrow for purposes of bringing soil and groundwater on the English Station site into compliance with applicable environmental laws.  As of September 30, 2014, approximately $0.1 million of the escrow fund remained.  In 2006, QE sold the property to Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat).  In January 2012, Evergreen Power and Asnat filed a lawsuit in federal district court in Connecticut against UI seeking, among other things: (i) an order directing UI to reimburse the plaintiffs for costs they have incurred and will incur for the testing, investigating and remediation of hazardous substances at the English Station site and (ii) an order directing UI to investigate and remediate the site.  In May 2012, UI filed an answer and counterclaims.  In July 2012, Evergreen Power and Asnat filed a motion for partial summary judgment with respect to UI’s liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act, which was denied without prejudice.  In
- 22 -

UIL HOLDINGS CORPORATION

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

December 2013, Evergreen and Asnat filed a subsequent lawsuit in Connecticut state court seeking among other things: (i) remediation of the property; (ii) reimbursement of remediation costs; (iii) termination of UI’s easement rights; (iv) reimbursement for costs associated with securing the property; and (v) punitive damages.  UI believes the claims are without merit.  UI’s knowledge of the current conditions at the English Station site is insufficient for it to make a reliable update of the original $1.9 million remediation estimate.  Management cannot presently assess the potential financial impact, if any, of the suits, and thus has not recorded a liability related to it and no amount of loss, if any, can be reasonably estimated at this time.

On April 8, 2013, DEEP issued an administrative order addressed to UI, QE, Evergreen Power, Asnat and others, ordering the parties to take certain actions related to investigating and remediating the English Station site.  Mediation of the matter began in the fourth quarter of 2013 and is on-going.  At this time, management cannot predict the financial impact on UI of the DEEP order or other matters relating to this site and no amount of loss, if any, can be reasonably estimated at this time.

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.

The Gas Companies own or have previously owned properties where Manufactured Gas Plants (MGPs) had historically operated.  MGP operations have led to contamination of soil and groundwater with petroleum hydrocarbons, benzene and metals, among other things, at these properties, the regulation and cleanup of which is regulated by the federal Resource Conservation and Recovery Act as well as other federal and state statutes and regulations.  Each of the Gas Companies has or had an ownership interest in one of such properties contaminated as a result of MGP-related activities.  Under the existing regulations, the cleanup of such sites requires state and at times, federal, regulators’ involvement and approval before cleanup can commence.  In certain cases, such contamination has been evaluated, characterized and remediated.  In other cases, the sites have been evaluated and characterized, but not yet remediated.  Finally, at some of these sites, the scope of the contamination has not yet been fully characterized; no liability was recorded in respect of these sites as of September 30, 2014 and no amount of loss, if any, can be reasonably estimated at this time.  In the past, the Gas Companies have received approval for the recovery of MGP-related remediation expenses from customers through rates and will seek recovery in rates for ongoing MGP-related remediation expenses for all of their MGP sites.

SCG owns properties on Housatonic Avenue in Bridgeport, and on Chapel Street in New Haven, and CNG owns a property located on Columbus Boulevard in Hartford, all of which are former MGP sites.  Costs associated with the remediation of the sites could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates.  We cannot presently reasonably estimate the costs or range of costs of remediation or the likelihood of recoverability.  As a result, as of September 30, 2014, we have not recorded any liabilities related to these properties.

Berkshire owns property on Mill Street in Greenfield, Massachusetts, a former MGP site.  We estimate that expenses associated with the remaining remedial activities, as well as the required ongoing monitoring and reporting to the Massachusetts Department of Environmental Protection will amount to approximately $2.9 million and have recorded a liability and offsetting regulatory asset for such expenses as of September 30, 2014.  Historically, Berkshire has received approval from the DPU for recovery of environmental expenses in its customer rates.

Berkshire formerly owned a site on East Street (the East Street Site) in Pittsfield, Massachusetts, a former MGP site.  The East Street Site is part of a larger site known as the GE–Pittsfield/Housatonic River Site.  Berkshire sold the East Street Site to the General Electric Company (GE) in the 1970s and was named a potentially responsible party for the site by the EPA in 1990.  In December 2002, Berkshire reached a settlement with GE which provides, among other things, a framework for Berkshire and GE to allocate various monitoring and remediation costs at the East Street Site.  As of September 30, 2014, we had accrued approximately $1.2 million and established a regulatory asset for these and future
- 23 -

UIL HOLDINGS CORPORATION

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

costs incurred by GE in responding to releases of hazardous substances at the East Street Site.  Historically, Berkshire has received approval from the DPU for recovery of remediation expenses in its customer rates.

Middletown/Norwalk Transmission Project

The general contractor and two subcontractors responsible for civil construction work in connection with the installation of UI’s portion of the Middletown/Norwalk Transmission Project’s underground electric cable system filed lawsuits in Connecticut state court on September 22, 2009, March 23, 2009 and January 25, 2010, respectively.  The claims, as revised by the general contractor in October 2011, sought payment for change order requests of approximately $33.3 million, a 10% general contractor mark-up on any approved subcontractor change order claims (approximately $2.3 million), interest, costs, and attorneys' fees.  In December 2011, UI settled claims brought by the two subcontractors and their respective lawsuits were dismissed with prejudice, reducing UI’s estimate of the general contractor’s claims to approximately $7.7 million, exclusive of the contractor’s claims for interest, costs, and attorneys’ fees.    UI also pursued an indemnification claim against the general contractor for the payments made in settlement to the two subcontractors.

On September 3, 2013, a Memorandum of Decision was issued by the court finding for UI on all claims but one related to certain change orders, and ordering UI to pay the Contractor approximately $1.3 million.  The decision also found against UI on the indemnification claims.  On October 22, 2013, the general contractor filed an appeal of the Court’s ruling.  UI expects to recover any amounts paid to resolve the contractor and subcontractor claims through UI’s transmission revenue requirements.

On April 30, 2013, an affiliate of the general contractor for the Middletown/Norwalk Transmission Project, purporting to act as a shareholder on behalf of UIL Holdings, filed a complaint against the UIL Holdings Board of Directors alleging that the directors breached a fiduciary duty by failing to undertake an independent investigation in response to a letter from the affiliate asking for an investigation regarding alleged improper practices by UI in connection with the Middletown/Norwalk Transmission Project.  On October 25, 2013, the court granted the defendants’ motion to dismiss the complaint. On November 15, 2013, the plaintiff filed an appeal of the court order in the Connecticut Appellate Court, which remains pending.

(K)
FAIR VALUE MEASUREMENTS

As required by ASC 820 “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety, based on the lowest level of input that is significant to the fair value measurement.  Our 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.

- 24 -

UIL HOLDINGS CORPORATION

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

The following tables set forth the fair value of our financial assets and liabilities, other than pension benefits and other postretirement benefits, as of September 30, 2014 and December 31, 2013.

   
Fair Value Measurements Using
 
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   
Significant
Other
Observable
Inputs (Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total
 
September 30, 2014
 
(In Thousands)
 
Assets:
               
Derivative assets
 
$
-
   
$
-
   
$
28,806
   
$
28,806
 
Noncurrent investments
   
11,249
     
-
     
-
     
11,249
 
Deferred Compensation Plan
   
3,502
     
-
     
-
     
3,502
 
Supplemental retirement benefit trust life insurance policies
   
-
     
8,259
     
-
     
8,259
 
   
$
14,751
   
$
8,259
   
$
28,806
   
$
51,816
 
                                 
Liabilities:
                               
Derivative liabilities
 
$
-
   
$
-
   
$
83,352
   
$
83,352
 
Long-term debt
   
-
     
1,915,475
     
-
     
1,915,475
 
   
$
-
   
$
1,915,475
   
$
83,352
   
$
1,998,827
 
                                 
Net fair value assets/(liabilities), September 30, 2014
 
$
14,751
   
$
(1,907,216
)
 
$
(54,546
)
 
$
(1,947,011
)

December 31, 2013
   
Assets:
               
Derivative assets
 
$
-
   
$
-
   
$
53,447
   
$
53,447
 
Noncurrent investments
   
11,148
     
-
     
-
     
11,148
 
Deferred Compensation Plan
   
3,775
     
-
     
-
     
3,775
 
Supplemental retirement benefit trust life insurance policies
   
-
     
7,898
     
-
     
7,898
 
   
$
14,923
   
$
7,898
   
$
53,447
   
$
76,268
 
                                 
Liabilities:
                               
Derivative liabilities
 
$
-
   
$
-
   
$
196,233
   
$
196,233
 
Long-term debt
   
-
     
1,846,867
     
-
     
1,846,867
 
   
$
-
   
$
1,846,867
   
$
196,233
   
$
2,043,100
 
                                 
Net fair value assets/(liabilities), December 31, 2013
 
$
14,923
   
$
(1,838,969
)
 
$
(142,786
)
 
$
(1,966,832
)

Fair value measurements categorized in Level 3 of the fair value hierarchy are prepared by individuals with expertise in valuation techniques, pricing of energy and energy-related products, and accounting requirements.  The derivative assets consist primarily of CfDs.  The determination of fair value of the CfDs was based on a probability-based expected cash flow analysis that was discounted at the September 30, 2014 or December 31, 2013 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.  We believe this methodology provides the most reasonable estimates of the amount of future discounted cash flows associated with the CfDs.  Additionally, on a quarterly basis, we perform analytics to ensure that the fair value of the derivatives is consistent with changes, if any, in the various fair value model inputs.  Additional quantitative information about Level 3 fair value measurements is as follows:

       
 Range at
 
 Range at
   
 Unobservable Input
 
September 30, 2014
 
December 31, 2013
             
Contracts for differences
Risk of non-performance
 
0.00% - 0.64%
 
0.00% - 0.62%
   
Discount rate
 
1.78% - 2.64%
 
1.75% - 3.21%
   
Forward pricing ($ per MW)
  
$3.15 - $14.59
 
$1.40 - $9.83

- 25 -

UIL HOLDINGS CORPORATION

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

Significant isolated changes in the risk of non-performance, the discount rate or the contract term pricing would result in an inverse change in the fair value of the CfDs.

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

Under the UIL Deferred Compensation Plan (DCP), directors, named executive officers and certain other executives may elect to defer certain elements of compensation.  Participants in the DCP are permitted to direct investments of their elective deferral accounts into “deemed” investments consisting of mutual funds and UIL Holdings 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 based upon such pricing information.

The determination of the fair value of the supplemental retirement benefit trust life insurance policies was based on quoted prices as of September 30, 2014 and December 31, 2013 in the active markets for the various funds within which the assets are held.

Long-term debt is carried at cost on the consolidated balance sheet.  The fair value of long-term debt as displayed in the table above is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.

The following tables set forth a reconciliation of changes in the fair value of the assets and liabilities above that are classified as Level 3 in the fair value hierarchy for the nine-month period ended September 30, 2014.

   
Nine Months Ended
September 30, 2014
 
   
(In Thousands)
 
     
Net derivative assets/(liabilities), December 31, 2013
 
$
(142,786
)
Unrealized gains and (losses), net
   
88,240
 
Net derivative assets/(liabilities), September 30, 2014
 
$
(54,546
)
         
Change in unrealized gains (losses), net relating to net derivative assets/(liabilities), still held as of September 30, 2014
 
$
88,240
 

The following table sets forth a reconciliation of changes in the net regulatory asset/(liability) balances that were established to recover any unrealized gains/(losses) associated with the CfDs for the nine-month period ended September 30, 2014.  The amounts offset the net CfDs liabilities included in the derivative liabilities detailed above.

   
Nine Months Ended
September 30, 2014
 
   
(In Thousands)
 
     
Net regulatory assets/(liabilities), December 31, 2013
 
$
142,786
 
Unrealized (gains) and losses, net
   
(88,240
)
Net regulatory assets/(liabilities), September 30, 2014
 
$
54,546
 

- 26 -

UIL HOLDINGS CORPORATION

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

(M)
SEGMENT INFORMATION

UIL Holdings is organized into Electric Distribution, Electric Transmission and Gas Distribution reporting segments based on several factors including, but not limited to, the nature of each segment’s products and services, the sources of operating revenues and expenses and the regulatory environment in which each segment operates.  The following measures of segment profit and loss are utilized by management to make decisions about allocating resources to the segments and assessing performance.  The following table reconciles certain segment information with that provided in our Consolidated Financial Statements.  In the table, distribution includes all electric utility revenue and expenses except for transmission, which is provided in a separate column.  “Other” includes the information for the remainder of our non‑utility activities and unallocated corporate costs, including minority interest investments and administrative costs.  Revenues from inter‑segment transactions are not material.  All of our revenues are derived in the United States.

   
Three months ended September 30, 2014
 
   
Electric Distribution and Transmission
             
   
Distribution
   
Transmission
   
Total
   
Gas Distribution
   
Other
   
Total
 
Operating Revenues
 
$
134,289
   
$
62,926
   
$
197,215
   
$
94,708
   
$
1,103
   
$
293,026
 
Purchased power and gas
   
37,962
     
-
     
37,962
     
30,504
     
310
     
68,776
 
Operation and maintenance
   
42,819
     
11,456
     
54,275
     
44,950
     
(3,974
)
   
95,251
 
Transmission wholesale
   
-
     
25,802
     
25,802
     
-
     
-
     
25,802
 
Depreciation and amortization
   
11,943
     
4,208
     
16,151
     
16,477
     
2,950
     
35,578
 
Taxes - other than income taxes
   
14,244
     
10,441
     
24,685
     
9,082
     
(870
)
   
32,897
 
Acquisition-related expenses
   
-
     
-
     
-
     
-
     
570
     
570
 
Operating Income
   
27,321
     
11,019
     
38,340
     
(6,305
)
   
2,117
     
34,152
 
                                                 
Other Income and (Deductions), net
   
2,877
     
881
     
3,758
     
702
     
(973
)
   
3,487
 
                                                 
Interest Charges, net
   
7,590
     
3,375
     
10,965
     
7,116
     
5,560
     
23,641
 
                                                 
Income from Equity Investments
   
3,492
     
-
     
3,492
     
-
     
-
     
3,492
 
                                                 
Income (Loss) Before Income Taxes
   
26,100
     
8,525
     
34,625
     
(12,719
)
   
(4,416
)
   
17,490
 
                                                 
Income Taxes
   
8,173
     
3,048
     
11,221
     
(6,229
)
   
(6
)
   
4,986
 
Net Income (Loss)
   
17,927
     
5,477
     
23,404
     
(6,490
)
   
(4,410
)
   
12,504
 
Less:
                                               
Preferred Stock Dividends of
                                               
Subsidiary, Noncontrolling Interests
   
-
     
-
     
-
     
6
     
-
     
6
 
Net Income (Loss) attributable to UIL Holdings
 
$
17,927
   
$
5,477
   
$
23,404
   
$
(6,496
)
 
$
(4,410
)
 
$
12,498
 
                                                 
Total Capital Expenditures (1)
 
$
-
   
$
-
   
$
31,523
   
$
32,926
   
$
6,181
   
$
70,630
 
                                                 
   
Three months ended September 30, 2013
 
   
Electric Distribution and Transmission
                         
   
Distribution
   
Transmission
   
Total
   
Gas Distribution
   
Other
   
Total
 
Operating Revenues
 
$
151,369
   
$
67,830
   
$
219,199
   
$
97,244
   
$
35
   
$
316,478
 
Purchased power and gas
   
37,314
     
-
     
37,314
     
37,343
     
-
     
74,657
 
Operation and maintenance
   
43,387
     
11,532
     
54,919
     
36,271
     
(1,380
)
   
89,810
 
Transmission wholesale
   
-
     
28,659
     
28,659
     
-
     
-
     
28,659
 
Depreciation and amortization
   
28,397
     
4,152
     
32,549
     
17,202
     
1,010
     
50,761
 
Taxes - other than income taxes
   
13,390
     
10,466
     
23,856
     
8,410
     
123
     
32,389
 
Rate case disallowances
   
17,543
     
-
     
17,543
     
-
     
-
     
17,543
 
Operating Income
   
11,338
     
13,021
     
24,359
     
(1,982
)
   
282
     
22,659
 
                                                 
Other Income and (Deductions), net
   
3,534
     
746
     
4,280
     
234
     
639
     
5,153
 
                                                 
Interest Charges, net
   
6,088
     
2,763
     
8,851
     
7,507
     
6,041
     
22,399
 
                               </