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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

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

For the Quarterly Period Ended March 31, 2015

OR

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

For the transition period from             to______

Commission file number 1‑15052

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

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

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  T      No   £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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  T      No   £

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

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

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

The number of shares outstanding of the issuer’s only class of common stock, as of April 27, 2015 was 56,617,292.
 


INDEX

PART I.  FINANCIAL INFORMATION

   
Page Number
Item 1.
3
 
3
 
3
 
4
 
6
 
7
Item 2.
25
 
25
 
32
 
34
 
34
 
35
 
35
Item 3.
37
Item 4.
37

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings 38
Item 1A.
38
Item 2.
38
Item 6.
39
 
40
 
- 2 -

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In Thousands except per share amounts)
(Unaudited)

   
Three Months Ended
March 31,
 
         
   
2015
   
2014
 
         
Operating Revenues
 
$
584,053
   
$
571,162
 
                 
Operating Expenses
               
Operation
               
Purchased power
   
97,102
     
53,130
 
Natural gas purchased
   
174,520
     
214,925
 
Operation and maintenance
   
101,347
     
92,877
 
Transmission wholesale
   
19,709
     
20,911
 
Depreciation and amortization (Note F)
   
43,284
     
40,318
 
Taxes - other than income taxes (Note F)
   
41,315
     
39,536
 
Merger and acquisition-related expenses (Note A)
   
6,702
     
5,051
 
Total Operating Expenses
   
483,979
     
466,748
 
Operating Income
   
100,074
     
104,414
 
                 
Other Income and (Deductions), net
               
Acquisition-related bridge facility fees (Note A)
   
-
     
(6,413
)
Other income and (deductions) (Note F)
   
4,368
     
3,862
 
Total Other Income and (Deductions), net
   
4,368
     
(2,551
)
                 
Interest Charges, net
               
Interest on long-term debt
   
22,225
     
22,452
 
Other interest, net
   
1,232
     
175
 
     
23,457
     
22,627
 
Amortization of debt expense and redemption premiums
   
607
     
607
 
Total Interest Charges, net
   
24,064
     
23,234
 
                 
                 
Income from Equity Investments
   
2,936
     
3,386
 
                 
Income Before Income Taxes
   
83,314
     
82,015
 
                 
Income Taxes (Note E)
   
25,705
     
26,550
 
                 
                 
Net Income
   
57,609
     
55,465
 
Less:
               
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests
   
7
     
13
 
                 
Net Income attributable to UIL Holdings
 
$
57,602
   
$
55,452
 
                 
Average Number of Common Shares Outstanding - Basic
   
56,881
     
56,779
 
Average Number of Common Shares Outstanding - Diluted
   
57,184
     
57,043
 
                 
Earnings Per Share of Common Stock - Basic (Note A)
 
$
1.01
   
$
0.98
 
                 
Earnings Per Share of Common Stock - Diluted (Note A)
 
$
1.01
   
$
0.97
 
                 
Cash Dividends Declared per share of Common Stock
 
$
0.432
   
$
0.432
 
 

UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2015 and 2014
(In Thousands)
(Unaudited)

   
2015
   
2014
 
         
Net Income
 
$
57,609
   
$
55,465
 
Other Comprehensive Income (Loss), net of income taxes
               
Changes in unrealized gains (losses) related to pension and other post-retirement benefit plans
   
273
     
61
 
Other
   
7
     
12
 
Total Other Comprehensive Income (Loss), net of income taxes
   
280
     
73
 
Comprehensive Income
   
57,889
     
55,538
 
Less:
               
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests
   
7
     
13
 
Comprehensive Income Attributable to UIL Holdings
 
$
57,882
   
$
55,525
 

The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
 
- 3 -

UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
(In Thousands)
(Unaudited)

   
March 31,
2015
   
December 31,
2014
 
Current Assets
       
Unrestricted cash and temporary cash investments
 
$
80,120
   
$
115,579
 
Restricted cash
   
910
     
1,051
 
Accounts receivable less allowance of $9,917 and $8,881, respectively
   
297,712
     
232,887
 
Unbilled revenues
   
91,112
     
95,816
 
Current regulatory assets (Note A)
   
87,071
     
92,764
 
Natural gas in storage, at average cost
   
31,437
     
86,428
 
Refundable taxes
   
17,612
     
15,211
 
Current portion of derivative assets (Note A)
   
6,847
     
6,849
 
Prepayments
   
22,510
     
10,696
 
Other
   
12,383
     
12,815
 
Total Current Assets
   
647,714
     
670,096
 
                 
Other investments
               
Equity investment in GenConn (Note A)
   
111,709
     
114,195
 
Other
   
28,418
     
25,777
 
Total Other investments
   
140,127
     
139,972
 
                 
Net Property, Plant and Equipment (Note A)
   
3,316,841
     
3,292,690
 
                 
Regulatory Assets  (Note A)
   
700,321
     
687,198
 
                 
Deferred Charges and Other Assets
               
Unamortized debt issuance expenses
   
13,148
     
13,571
 
Other long-term receivable
   
1,489
     
1,490
 
Derivative assets (Note A)
   
19,583
     
20,421
 
Goodwill
   
266,205
     
266,205
 
Other
   
22,920
     
20,292
 
Total Deferred Charges and Other Assets
   
323,345
     
321,979
 
                 
Total Assets
 
$
5,128,348
   
$
5,111,935
 
 
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
 
- 4 -

UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
(In Thousands)
(Unaudited)

   
March 31,
2015
   
December 31,
2014
 
Current Liabilities
       
Line of credit borrowings
 
$
70,000
   
$
89,000
 
Current portion of long-term debt
   
6,527
     
6,526
 
Accounts payable
   
167,405
     
217,700
 
Dividends payable
   
24,459
     
24,428
 
Accrued liabilities
   
60,237
     
71,182
 
Current regulatory liabilities (Note A)
   
23,557
     
17,026
 
Taxes accrued
   
26,248
     
20,184
 
Interest accrued
   
25,558
     
22,437
 
Deferred income taxes
   
17,466
     
3,767
 
Current portion of derivative liabilities (Note A)
   
23,193
     
23,308
 
Total Current Liabilities
   
444,650
     
495,558
 
                 
Deferred Income Taxes
   
604,160
     
585,335
 
                 
Regulatory Liabilities (Note A)
   
491,155
     
491,896
 
                 
Other Noncurrent Liabilities
               
Pension accrued
   
264,790
     
265,009
 
Other post-retirement benefits accrued
   
85,498
     
85,777
 
Derivative liabilities (Note A)
   
76,008
     
61,766
 
Other
   
48,278
     
46,924
 
Total Other Noncurrent Liabilities
   
474,574
     
459,476
 
                 
Commitments and Contingencies (Note J)
               
                 
Capitalization (Note B)
               
Long-term debt, net of unamortized discount and premium
   
1,710,168
     
1,711,349
 
                 
Preferred Stock, not subject to mandatory redemption
   
119
     
119
 
                 
Common Stock Equity
               
Common stock
   
1,153,251
     
1,149,985
 
Paid-in capital
   
20,218
     
21,587
 
Retained earnings
   
230,050
     
196,907
 
Accumulated other comprehensive income (loss)
   
3
     
(277
)
Net Common Stock Equity
   
1,403,522
     
1,368,202
 
                 
Total Capitalization
   
3,113,809
     
3,079,670
 
                 
Total Liabilities and Capitalization
 
$
5,128,348
   
$
5,111,935
 

The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
 
- 5 -

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

   
Three Months Ended
March 31,
 
   
2015
   
2014
 
Cash Flows From Operating Activities
       
Net income
 
$
57,609
   
$
55,465
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
43,891
     
40,925
 
Deferred income taxes
   
27,556
     
22,854
 
Allowance for funds used during construction (AFUDC) - equity
   
(2,157
)
   
(2,550
)
Stock-based compensation expense (Note A)
   
3,673
     
2,471
 
Pension expense
   
9,258
     
7,835
 
Undistributed (earnings) losses in equity investments
   
(2,935
)
   
(3,388
)
Other regulatory activity, net
   
3,110
     
35,691
 
Other non-cash items, net
   
(1,365
)
   
2,875
 
Changes in:
               
Accounts receivable, net
   
(65,821
)
   
(60,398
)
Unbilled revenues
   
4,704
     
7,576
 
Natural gas in storage
   
54,991
     
47,086
 
Cash distribution received from GenConn
   
2,839
     
3,271
 
Prepayments
   
(11,814
)
   
(6,282
)
Accounts payable
   
(31,028
)
   
9,478
 
Interest accrued
   
3,121
     
3,944
 
Taxes accrued/refundable, net
   
3,663
     
3,278
 
Accrued liabilities
   
(12,765
)
   
(12,768
)
Accrued pension
   
(8,049
)
   
(10,413
)
Accrued other post-employment benefits
   
(1,707
)
   
5,973
 
Other assets
   
(927
)
   
418
 
Other liabilities
   
1,506
     
3,047
 
Total Adjustments
   
19,744
     
100,923
 
Net Cash provided by Operating Activities
   
77,353
     
156,388
 
                 
Cash Flows from Investing Activities
               
Plant expenditures including AFUDC debt
   
(70,648
)
   
(64,692
)
Cash distributions from GenConn
   
2,581
     
2,134
 
Changes in restricted cash
   
141
     
(133
)
Deposits in New England East West Solution (NEEWS) (Note C)
   
(1,451
)
   
(1,044
)
Net Cash provided by (used in) Investing Activities
   
(69,377
)
   
(63,735
)
                 
Cash Flows from Financing Activities
               
Line of credit borrowings (repayments), net
   
(19,000
)
   
-
 
Payment of common stock dividend
   
(24,428
)
   
(24,421
)
Other
   
(7
)
   
(13
)
Net Cash provided by (used in) Financing Activities
   
(43,435
)
   
(24,434
)
                 
Unrestricted Cash and Temporary Cash Investments:
               
Net change for the period
   
(35,459
)
   
68,219
 
Balance at beginning of period
   
115,579
     
69,153
 
Balance at end of period
 
$
80,120
   
$
137,372
 
                 
Non-cash investing activity:
               
Plant expenditures included in ending accounts payable
 
$
16,834
   
$
11,285
 

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, 2014.  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-month period March 31, 2015 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2015.

Proposed Merger with Iberdrola USA

On February 25, 2015, we announced that UIL Holdings had entered into a definitive merger agreement (the Agreement) with Iberdrola USA and its wholly-owned subsidiary, Green Merger Sub, Inc. (merger sub) under which Iberdrola USA will acquire UIL Holdings through a merger of UIL Holdings with and into merger sub and merger sub being the surviving corporation (the merger).  Merger sub will change its name to UIL Holdings Corporation and remain a direct or indirect wholly-owned subsidiary of Iberdrola USA.  Iberdrola USA will then become a newly listed U.S. publicly-traded company.  In connection with the merger, each issued and outstanding share of the common stock of UIL Holdings will be converted into the right to receive one validly issued share of common stock of the newly listed company and $10.50 in cash.  Immediately following the consummation of the merger, former holders of UIL Holdings’ common stock will own approximately 18.5% of the newly listed company.  The merger is subject to certain closing conditions, including the approval of the shareowners of UIL Holdings and approvals from the Connecticut Public Utilities Regulatory Authority (PURA), the Massachusetts Department of Public Utilities (DPU), the Federal Energy Regulatory Commission (FERC), the Committee on Foreign Investments in the United States and the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act), which period was terminated on April 7, 2015.  For further discussion of the regulatory approval process, see Note (C) “Regulatory Proceedings.”

We currently expect that the merger will close promptly after satisfaction or waiver of all closing conditions, including receipt of shareowner approval and all regulatory approvals, and not later than December 31, 2015.  There are no assurances that the merger will be consummated on the currently expected timetable or at all.  Unless stated otherwise,
 
- 7 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
 
all forward-looking information contained in this report does not take into account or give any effect to the impact of the proposed merger.
 
For the three months ended March 31, 2015, UIL Holdings incurred pre-tax merger-related expenses of approximately $6.7 million which represented legal, investment banking, and other merger-related costs.

Further information concerning the proposed merger will be included in a proxy statement/prospectus contained in a registration statement on Form S-4 to be filed with the SEC in the second quarter of 2015 in connection with the proposed merger.

Philadelphia Gas Works
 
In March 2014, UIL Holdings entered into an Asset Purchase Agreement (the Asset Purchase Agreement) with the City of Philadelphia pursuant to which UIL Holdings, through a wholly-owned subsidiary, was to acquire the operating assets and assume certain liabilities of Philadelphia Gas Works.  The proposed acquisition was subject to the satisfaction or waiver of certain customary and other closing conditions for transactions of this type, including approval from the Philadelphia City Council.  In light of the City Council’s October 2014 announcement to not endorse the proposed acquisition, we exercised our contractual right to terminate the Asset Purchase Agreement in December 2014.

For the three months ended March 31, 2014, UIL Holdings incurred pre-tax acquisition-related expenses of approximately $11.5 million, $5.1 million of which represented legal, investment banking, and due diligence costs that are included in operating expenses and $6.4 million of which is a fee associated with a Bridge Term Loan Agreement that is included in other income and (deductions) in the Consolidated Statement of Income.
 
Derivatives
 
UIL Holdings’ regulated subsidiaries are parties to contracts, and involved in transactions, that are derivatives.

Contracts for Differences (CfDs)

Pursuant to Connecticut’s 2005 Energy Independence Act, 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 March 31, 2015, UI has recorded a gross derivative asset of $26.4 million ($5.4 million of which is related to UI’s portion of the CfD signed by CL&P), a regulatory asset of $78.0 million, a gross derivative liability of $99.2 million ($72.9 million of which is related to UI’s portion of the CfD signed by CL&P) and a regulatory liability of $5.3 million.  See Note (K) “Fair Value of Financial Instruments” for additional CfD information.
 
- 8 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
 
The gross derivative assets and liabilities as of March 31, 2015 and December 31, 2014 were as follows:
 
   
March 31,
2015
   
December 31,
2014
 
   
(In Thousands)
 
Gross derivative assets:
       
Current Assets
 
$
6,847
   
$
6,849
 
Deferred Charges and Other Assets
 
$
19,583
   
$
20,421
 
                 
Gross derivative liabilties:
               
Current Liabilities
 
$
23,193
   
$
23,308
 
Noncurrent Liabilities
 
$
76,008
   
$
61,766
 
 
The unrealized gains and losses from fair value adjustments to these derivatives, which are recorded in regulatory assets or regulatory liabilities, for three-month periods ended March 31, 2015 and 2014 were as follows:

   
Three Months Ended
March 31,
 
   
2015
   
2014
 
   
(In Thousands)
 
         
Regulatory Assets - Derivative liabilities
 
$
13,769
   
$
(71,619
)
                 
Regulatory Liabilities - Derivative assets
 
$
1,197
   
$
(2,942
)

The fluctuations in the balances of the derivatives as well as the related unrealized gains in the three-month period ended March 31, 2015 compared to the three-month period ended March 31, 2014 are primarily due to fluctuations in forward prices for capacity and reserves.

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculations for the three‑month periods ended March 31, 2015 and 2014:

   
2015
   
2014
 
   
(In Thousands, except per share amounts)
 
         
Numerator:
       
Net income attributable to UIL Holdings
 
$
57,602
   
$
55,452
 
Less:  Net income allocated to unvested units
   
33
     
30
 
Net income attributable to common shareholders
 
$
57,569
   
$
55,422
 
                 
Denominator:
               
Basic average number of shares outstanding
   
56,881
     
56,779
 
Effect of dilutive securities (1)
   
303
     
264
 
Diluted average number of shares outstanding
   
57,184
     
57,043
 
                 
Earnings per share:
               
Basic
 
$
1.01
   
$
0.98
 
Diluted
 
$
1.01
   
$
0.97
 

 
(1)
Includes unvested restricted stock and performance shares.
 
- 9 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)
 
Equity Investments

UI is party to a 50-50 joint venture with the 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 $111.7 million and $114.2 million as of March 31, 2015 and December 31, 2014, respectively.  As of March 31, 2015, there was an immaterial amount of undistributed earnings from UI’s equity investment in GenConn.

UI’s pre-tax income from its equity investment in GenConn was $2.9 million and $3.4 million for the three-month periods ending March 31, 2015 and 2014, 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 $5.4 million in each of the three-month periods ending March 31, 2015 and 2014.

Regulatory Accounting

Unless otherwise stated below, all of our regulatory assets earn a return.  Our regulatory assets and liabilities as of March 31, 2015 and December 31, 2014 included the following:

 
Remaining
Period
 
March 31,
2015
   
December 31,
2014
 
      
(In Thousands)
 
Regulatory Assets:
         
Unamortized redemption costs
7 to 19 years
   
10,298
     
10,499
 
Pension and other post-retirement benefit plans
(a)
   
403,358
     
402,700
 
Environmental remediation costs
7 years
   
14,127
     
13,197
 
Hardship programs
(b)
   
19,661
     
24,744
 
Debt premium
2 to 23 years
   
26,229
     
27,498
 
Income taxes due principally to book-tax differences
(c)
   
166,039
     
164,466
 
Unfunded future income taxes
(d)
   
15,555
     
14,859
 
Contracts for differences
(e)
   
78,045
     
64,276
 
Deferred transmission expense
(f)
   
20,981
     
17,387
 
Other
(g)
   
33,099
     
40,336
 
Total regulatory assets
     
787,392
     
779,962
 
Less current portion of regulatory assets
     
87,071
     
92,764
 
Regulatory Assets, Net
   
$
700,321
   
$
687,198
 
                   
Regulatory Liabilities:
                 
Accumulated deferred investment tax credits
29 years
 
$
4,282
   
$
4,319
 
Excess generation service charge
(h)
   
16,825
     
28,692
 
Middletown/Norwalk local transmission network service collections
35 years
   
20,685
     
20,828
 
Pension and other post-retirement benefit plans
(a)
   
8,722
     
9,536
 
Asset retirement obligation
(i)
   
7,247
     
7,248
 
Low income programs
(j)
   
22,253
     
19,065
 
Asset removal costs
(i)
   
340,236
     
336,028
 
Unfunded future income taxes
(d)
   
26,848
     
26,318
 
Contracts for differences
(e)
   
5,274
     
6,472
 
Deferred purchased gas
(k)
   
6,511
     
4,736
 
Non-firm margin sharing credits
9 years
   
13,505
     
8,933
 
Other
(g)
   
42,324
     
36,747
 
Total regulatory liabilities
     
514,712
     
508,922
 
Less current portion of regulatory liabilities
     
23,557
     
17,026
 
Regulatory Liabilities, Net
   
$
491,155
   
$
491,896
 
 
- 10 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(a) 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.
(b) Hardship customer accounts deferred for future recovery to the extent they exceed the amount in rates.
(c) Amortization period and/or balance vary depending on the nature and/or remaining life of the underlying assets/liabilities.
(d) The balance will be extinguished when the asset, which is fully offset by a corresponding liability, or liability has been realized or settled, respectively.
(e) Asset life is equal to delivery term of related contracts (which vary from approximately 5 - 12 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.
(f) Regulatory asset or liability which defers transmission income or expense and fluctuates based upon actual revenues and revenue requirements.
(g) 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 certain amounts that are not currently earning a return; liability amount includes decoupling of $9.6 million.
(h) 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.
(i) The liability will be extinguished simultaneous with the retirement of the assets and settlement of the corresponding asset retirement obligation.
(j) Various hardship and payment plan programs approved for recovery.
(k) Deferred purchased gas costs balances at the end of the rate year are normally recorded/returned in the next year.
 
Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), 94,410 restricted stock units were granted to certain members of management in March 2015; the average of the high and low market prices on the grant date, which approximate fair value, was $49.72 per share.

Also in March 2015, we granted a total of 1,584 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 $49.72 per share.  Such shares vest in equal annual installments over a five-year period.

Total stock-based compensation expense for the three-month periods ended March 31, 2015 and 2014 $3.7 million and $2.5 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 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
 
- 11 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
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 April 2015, the FASB issued Accounting Standards Update (ASU) 2015-03, “Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015 and is to be applied retrospectively.  The effect that adopting this new accounting guidance will have on our consolidated financial statements will be reductions in both Deferred Charges and Other Assets and Long-term debt on the consolidated balance sheet.  This effect is not expected to be material to UIL Holdings’ consolidated financial statements.

In April 2015, the FASB issued a proposal to defer by one year the effective date of ASU 2014-09 which 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.  A final decision is expected in the second quarter of 2015.  We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.

(B) CAPITALIZATION

Common Stock

UIL Holdings had 56,617,292 shares of its common stock, no par value, outstanding at March 31, 2015.

(C)
REGULATORY PROCEEDINGS

Proposed Merger with Iberdrola USA
 
As discussed in Note A “Organization and Statement of Accounting Policies”, on February 25, 2015 we announced that UIL Holdings had entered into a the Agreement with Iberdrola USA and merger sub under which Iberdrola USA will acquire UIL Holdings through a merger of UIL Holdings with and into merger sub and merger sub being the surviving corporation.  The merger is subject to certain closing conditions, including the approval of the shareowners of UIL Holdings and approvals from PURA, the DPU, FERC, and the Committee on Foreign Investments in the United States (CFIUS) and the expiration or early termination of the applicable waiting period under the HSR Act.
 
On March 25, 2015, UIL Holdings and Iberdrola USA filed joint applications with PURA, the DPU and the FERC seeking the required approvals.  In addition, UIL Holdings and Iberdrola USA each made its respective HSR Act filings on March 25, 2015, and the waiting period was terminated on April 7, 2015.
 
- 12 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
Electric Distribution and Transmission

Rates

Utilities are entitled by Connecticut statutes to charge rates that are sufficient to allow them an opportunity to cover their reasonable operating and capital costs, to attract needed capital and to maintain their financial integrity, while also protecting relevant public interests.

UI’s allowed distribution return on equity established by PURA is 9.15%.  UI is required to return 50% of any distribution earnings over the allowed twelve month level to customers by means of an earnings sharing mechanism.

Power Supply Arrangements

UI has wholesale power supply agreements in place for its entire standard service load for the first half of 2015, 80% of its standard service load for the second half of 2015 and for 20% of its standard service load for the first half of 2016.  Supplier of last resort service is procured on a quarterly basis, however, from time to time there are no bidders in the procurement process for supplier of last resort service and in such cases UI manages the load directly.  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 March 31 2015, UI would have had to post an aggregate of approximately $19.7 million in collateral.  UI would have been and remains able to provide that collateral.

New Renewable Source Generation

Pursuant to Connecticut law (PA 13-303), on September 19, 2013, at the direction of the Connecticut Department of Energy and Environmental Protection, (DEEP), UI entered into two contracts for energy and/or RECs from Class I renewable resources, 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 for such contracts, 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.  This complaint was dismissed in December 2014.  On January 2, 2015 Allco filed an appeal with the United States Court of Appeals for the Second Circuit.

Transmission

PURA decisions do not affect the revenue requirements determination for UI’s transmission business, including the applicable return on equity (ROE), which is within the jurisdiction of the FERC.  For 2015, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 11.3% to 11.4%.  This 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 Council (OCC), 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 of 11.14% used in calculating formula rates for transmission service under the ISO-NE Open Access Transmission
 
- 13 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
Tariff by the New England transmission owners was not just and reasonable and seeking a reduction of the base ROE and a refund to customers for a refund period of October 1, 2011 through December 31, 2012 (refund period).
 
Based on the August 6, 2013 initial decision of the presiding FERC Administrative Law Judge finding that the existing base ROE was unjust and unreasonable and our assessment of the ultimate outcome of the proceeding, we recorded a reserve for the refund period of $2.6 million pre-tax during the third quarter of 2013.

In December 2012, various additional parties filed a complaint with the FERC against several New England transmission owners, including UI, claiming that the current approved base ROE of 11.14% was not just and reasonable and seeking a reduction of the base ROE and a refund to customers for a refund period commencing December 27, 2012 (Second Complaint).

On June 19, 2014, the 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%.  On October 16, 2014 the FERC issued an order (October Order) confirming 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.

On July 31, 2014, certain complainants in the Initial Complaint and the Second Complaint filed a similar additional complaint (Third Complaint) with the FERC against the New England transmission owners, alleging that the then current base ROE of 11.14% was not just and reasonable, and seeking a reduction in the base ROE and refunds to customers for a 15-month refund period beginning July 31, 2014.  The complainants in the Third Complaint also asked for a determination that the top of the zone of reasonableness caps the ROE for each individual project.  The FERC consolidated the Second Complaint and Third Complaint, and stated a presiding judge decision should be rendered within twelve months of the commencement of hearing proceedings, or by December 31, 2015, with an expected decision by the FERC by October 2016.

In 2014, 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 recorded additional pre-tax reserves of $5.6 million relating to potential refunds to customers under the Second and Third Complaint.  We will continue to record additional reserves through the third refund period.

On March 3, 2015, the FERC issued an Order on Rehearing in the First Complaint (the March Order) denying all rehearing requests from the complainants and the New England transmission owners.  UI recorded additional pre-tax reserves of $3.4 million in the first quarter of 2015 relating to the Third Complaint and the March Order.  As of March 31, 2015, cumulative pre-tax reserves relating to refunds and potential refunds to customers under all three claims were approximately $11.6 million, of which $2.9 million has already been refunded to customers.

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 (doing business as Eversource Energy), 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 the fourth quarter 2015 and (3) the Central Connecticut Reliability Project, 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 with UI.  Any termination of the Agreement pursuant to its terms would have no effect on the assets previously transferred to UI.
 
- 14 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
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 February 2015, ISO-NE issued its final GHCC transmission solutions report and, in March 2015, approved the proposed plan applications.  UI and Eversource are evaluating the approved projects 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 March 31, 2015, UI had made aggregate deposits of $45 million under the Agreement since its inception, with assets associated with the GSRP valued at approximately $24.6 million having been transferred to UI.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $0.6 million and $0.3 million in the three‑month periods ended March 31, 2015 and 2014, respectively.

Other Proceedings

On November 12, 2014, PURA issued a decision in a docket addressing UI’s semi-annual Generation Services Charge (GSC), bypassable federally mandated congestion charge and the non-bypassable federally mandated congestion charge (NBFMCC) reconciliations.  PURA’s decision allowed for recovery of $7.7 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.  This resulted in UI recording a pre-tax write-off of approximately $3.8 million during the fourth quarter of 2014, which amount included the disallowed portion of UI’s request as well as additional 2014 carrying charges.

Also on November 12, 2014, PURA issued a final decision in UI’s final Competitive Transition Assessment (CTA) reconciliation proceeding which extinguished all remaining CTA balances.  In addition, the final 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 Atomic Power Company litigation against the U.S. Department of Energy (DOE), against UI’s storm regulatory asset balance.  The final decision required that remaining regulatory liability balance be applied to the GSC “working capital allowance” and be returned to customers through the NBFMCC.

Because the two decisions noted above do not conform to ratemaking principles, UI filed appeals with the State of Connecticut Superior Court in December 2014 for both the GSC/NBFMCC and the CTA final decisions.  On February 3, 2015, PURA filed a motion to dismiss UI’s appeal of the CTA final decision.

Gas Distribution

Rates

Utilities are entitled by Connecticut and Massachusetts statutes to charge rates that are sufficient to allow them an opportunity to cover their reasonable operating and capital costs, to attract needed capital and to maintain their financial integrity, while also protecting relevant public interests.

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 and currently anticipates that a base rate case would likely be filed in 2016, based on a calendar year 2015 test year, for rates to be effective in 2017.  Based
 
- 15 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
on existing tracking mechanisms in place for gas and other costs, discussions with the DPU, and precedence set by other utility companies, Berkshire believes that regulatory assets are recoverable and regulatory liabilities are fairly stated.
 
SCG and CNG each have purchased gas adjustment clauses and Berkshire has a cost of gas adjustment clause, approved by PURA and DPU, respectively, which enable them to pass their reasonably incurred cost of gas purchases through to customers.  These clauses allow utilities to recover costs associated with changes in the market price of purchased natural gas, substantially eliminating exposure to natural gas price risk.  Additionally, Berkshire’s mechanism allows for the recovery of the gas-cost portion of bad debt.

On January 22, 2014, PURA approved new base delivery rates for CNG, 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 upon which PURA subsequently issued comments.  During the first quarter of 2014, the OCC appealed PURA’s 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 engaged in settlement discussions regarding the appeal.  Settlement discussions have now terminated, and CNG has agreed to file a motion with PURA to extend the due date for CNG's response to PURA's comments on the private letter ruling request until June 24, 2015.

Other Proceedings

As discussed above, CNG’s 2013 rate proceeding provides for a decoupling mechanism as well as a rate making mechanism related to its cast iron and bare steel replacement program.  Additionally, a comprehensive joint 10-year natural gas expansion plan (“Expansion Plan”) filed jointly by CNG, SCG and Yankee Gas Services Company in response to the gas expansion goals proposed in the Connecticut Governor’s Comprehensive Energy Strategy and Public Act 13-298 and approved by PURA includes a new business reconciliation mechanism that reconciles the actual new business revenue requirements each year with the revenues received from the new business customers.  The initial filings for these mechanisms are discussed below.

On March 2, 2015, CNG filed its initial decoupling adjustment which includes a $10.8 million credit to customers, which will be credited on customers’ bills during the period of April 1, 2015 through March 31, 2016.

On March 20, 2015, SCG and CNG filed their initial System Expansion (SE) Rate reconciliation for 2014. The proposed SE rate was approved by PURA for implementation as of April 1, 2015, pending final PURA approval following a contested hearing.

On April 1, 2015, CNG filed its initial Distribution Integrity Management Program (DIMP) reconciliation filing, which reconciles actual revenue requirements related to CNG’s cast iron and bare steel replacement program.  The proposed DIMP rate was approved by PURA for implementation as of May 1, 2015.
 
- 16 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(D) SHORT-TERM CREDIT ARRANGEMENTS

As of March 31, 2015, there was $70 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 June 16, 2015 and January 31, 2016.  Available credit under the UIL Holdings Credit Facility at March 31, 2015 totaled $325.6 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 reborrow funds, at our option, until the facility’s expiration, thus affording us flexibility in managing our working capital requirements.

(E) INCOME TAXES

The significant portion of UIL Holdings’ income tax expense, including deferred taxes, is recovered through its regulated subsidiaries’ utility rates.  UIL Holdings’ annual income tax expense and associated effective tax rate is impacted by differences in the treatment of certain transactions for book and tax purposes and by differences between the timing of deferred tax temporary difference activity and deferred tax recovery.  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.  The annualized effective income tax rates for the three-month periods ended March 31, 2015 and 2014 were 31.6% and 33.4%, respectively.  The decrease in the effective rate was due primarily to changes in property related flow through impacts.

(F) SUPPLEMENTARY INFORMATION

   
Three Months Ended
March 31,
 
   
2015
   
2014
 
   
(In Thousands)
 
Depreciation and Amortization
       
Property, plant, and equipment depreciation
 
$
34,741
   
$
31,988
 
Amortization of regulatory assets
   
8,543
     
8,330
 
Total Depreciation and Amortization
 
$
43,284
   
$
40,318
 
                 
Taxes - Other than Income Taxes
               
Operating:
               
Connecticut gross earnings
 
$
22,966
   
$
22,714
 
Local real estate and personal property
   
12,990
     
11,964
 
Payroll taxes
   
4,914
     
3,857
 
Other
   
445
     
1,001
 
Total Taxes - Other than Income Taxes
 
$
41,315
   
$
39,536
 
                 
Other Income and (Deductions), net
               
Interest income
 
$
709
   
$
542
 
Allowance for funds used during construction - equity
   
2,157
     
2,550
 
Allowance for funds used during construction - debt
   
1,046
     
1,410
 
Weather insurance
   
-
     
(1,906
)
Other
   
456
     
1,266
 
Total Other Income and (Deductions), net
 
$
4,368
   
$
3,862
 
 
- 17 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(G) PENSION AND OTHER BENEFITS

In April 2015, we made pension contributions of $5 million.  Additional contributions during the remainder of 2015 are expected to aggregate $10 million.

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-month periods ended March 31, 2015 and 2014:
 
   
Three Months Ended March 31,
 
   
Pension Benefits
   
Other Postretirement Benefits
 
   
2015
   
2014
   
2015
   
2014
 
   
(In Thousands)
 
Components of net periodic benefit cost:
               
Service cost
 
$
3,605
   
$
2,896
   
$
393
   
$
404
 
Interest cost
   
10,505
     
11,019
     
1,327
     
1,487
 
Expected return on plan assets
   
(14,120
)
   
(13,560
)
   
(690
)
   
(700
)
Amortization of:
                               
Prior service costs
   
48
     
73
     
75
     
71
 
Actuarial loss
   
4,845
     
3,097
     
176
     
(172
)
Net periodic benefit cost
 
$
4,883
   
$
3,525
   
$
1,281
   
$
1,090
 
                                 
Discount rate
   
4.20%-4.30
%
   
4.90%-5.20
%
   
4.20%-4.30
%
   
4.85%-5.20
%
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
%
   
7.00
%
Composite health care trend rate (2019 forward)
   
N/
A
   
N/
A
   
5.00
%
   
5.00
%

N/A – not applicable

(H) RELATED PARTY TRANSACTIONS

A Director of UIL Holdings holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UIL Holdings leases office space.  UIL Holdings’ lease payments for this office space for each of the three‑month periods ended March 31, 2015 and 2014 totaled $0.4 million.

(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 March 31, 2015. 
 
- 18 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
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 FERC-approved rates from UI and several other New England utilities.  UI recovers these costs from its customers through electric rates.
 
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 an unspecified amount of damages incurred since January 1, 2009 for the DOE’s failure to remove Connecticut Yankee’s spent fuel.

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 January 2012 Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat), subsequent owners of a former generation site in New Haven (English Station) that UI sold in 2000, 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 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 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.

In April 2013, DEEP issued an administrative order addressed to UI, 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 continuing.  At this time, management cannot predict the financial impact on
 
- 19 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
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.
 
UI performed an environmental analysis on transmission-related property adjacent to the New Haven Harbor Generating Station that indicated remediation expenses would be approximately $3.2 million.  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 and are contaminated as a result of MGP-related activities.  Under existing regulations, the cleanup of such sites requires state and at times, federal, regulators’ involvement and approval before cleanup can commence.  In certain cases, such contamination has been evaluated, characterized and remediated.  In other cases, the sites have been evaluated and characterized, but not yet remediated.  Finally, at some of these sites, the scope of the contamination has not yet been fully characterized; no liability was recorded in respect of these sites as of March 31, 2015 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 March 31, 2015, 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 likely amount to approximately $0.9 million and have recorded a liability and offsetting regulatory asset for such expenses as of March 31, 2015.  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 which was sold to the General Electric Company (GE) in the 1970s.  UI 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 March 31, 2015, we had accrued approximately $3.2 million and established a regulatory asset for these and future costs incurred by GE in responding to releases of hazardous substances at the East Street Site.  Historically, Berkshire has received approval from the DPU for recovery of remediation expenses in its customer rates.

Middletown/Norwalk Transmission Project

The general contractor 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 a lawsuit in Connecticut state court on September 22, 2009.  On September 3, 2013, the court found for UI on all claims but one related to certain change orders, and ordered UI to pay the Contractor approximately $1.3 million, which has since been paid.  On October 22, 2013, the general contractor filed an appeal of the Court’s ruling, which remains pending.  UI expects to recover any amounts paid to resolve the contractor and subcontractor claims through UI’s transmission revenue requirements.

In April 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.  In October 2013, the court granted the defendants’ motion to dismiss the complaint, which dismissal was affirmed by the Connecticut Appellate Court in March 2015.
 
- 20 -

UIL HOLDINGS CORPORATION

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

The following tables set forth the fair value of our financial assets and liabilities, other than pension benefits and other postretirement benefits, as of March 31, 2015 and December 31, 2014.

   
Fair Value Measurements Using
 
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   
Significant
Other
Observable
Inputs (Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total
 
March 31, 2015
 
(In Thousands)
 
Assets:
               
Derivative assets
 
$
-
   
$
-
   
$
26,430
   
$
26,430
 
Noncurrent investments
   
12,698
     
-
     
-
     
12,698
 
Deferred Compensation Plan
   
3,667
     
-
     
-
     
3,667
 
Supplemental retirement benefit trust life insurance policies
   
-
     
8,678
     
-
     
8,678
 
   
$
16,365
   
$
8,678
   
$
26,430
   
$
51,473
 
                                 
Liabilities:
                               
Derivative liabilities
 
$
-
   
$
-
   
$
99,201
   
$
99,201
 
Long-term debt
   
-
     
1,985,013
     
-
     
1,985,013
 
   
$
-
   
$
1,985,013
   
$
99,201
   
$
2,084,214
 
                                 
Net fair value assets/(liabilities), March 31, 2015
 
$
16,365
   
$
(1,976,335
)
 
$
(72,771
)
 
$
(2,032,741
)

December 31, 2014
   
Assets:
               
Derivative assets
 
$
-
   
$
-
   
$
27,270
   
$
27,270
 
Noncurrent investments
   
11,387
     
-
     
-
     
11,387
 
Deferred Compensation Plan
   
3,624
     
-
     
-
     
3,624
 
Supplemental retirement benefit trust life insurance policies
   
-
     
8,498
     
-
     
8,498
 
   
$
15,011
   
$
8,498
   
$
27,270
   
$
50,779
 
                                 
Liabilities:
                               
Derivative liabilities
 
$
-
   
$
-
   
$
85,074
   
$
85,074
 
Long-term debt
   
-
     
1,941,711
     
-
     
1,941,711
 
   
$
-
   
$
1,941,711
   
$
85,074
   
$
2,026,785
 
                                 
Net fair value assets/(liabilities), December 31, 2014
 
$
15,011
   
$
(1,933,213
)
 
$
(57,804
)
 
$
(1,976,006
)

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 March 31, 2015 or December 31, 2014 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:
 
- 21 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
Unobservable Input
 
Range at
March 31, 2015
 
 
Range at
December 31, 2014
 
       
Contracts for differences
Risk of non-performance
   
0.00% - 0.64
%
   
0.00% - 0.66
%
Discount rate
   
1.37% - 2.03
%
   
1.65% - 2.25
%
Forward pricing ($ per MW)
 
$
3.15 - $11.19
   
$
3.15 - $14.59
 
 
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, with the exception of long-term incentive plan deferrals which are required to be invested in 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 March 31, 2015 and December 31, 2014 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 three-month period ended March 31, 2015.

   
Three Months Ended
 
   
March 31, 2015
 
   
(In Thousands)
 
     
Net derivative assets/(liabilities), December 31, 2014
 
$
(57,804
)
Unrealized gains and (losses), net
   
(14,967
)
Net derivative assets/(liabilities), March 31, 2015
 
$
(72,771
)
         
         
Change in unrealized gains (losses), net relating to net derivative assets/(liabilities), still held as of March 31, 2015
 
$
(14,967
)

The following table sets forth a reconciliation of changes in the net regulatory asset/(liability) balances that were established to recover any unrealized gains/(losses) associated with the CfDs for the three-month period ended March 31, 2015.  The amounts offset the net CfDs liabilities included in the derivative liabilities detailed above.
 
- 22 -

UIL HOLDINGS CORPORATION

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

   
Three Months Ended
 
   
March 31, 2015
 
   
(In Thousands)
 
     
Net regulatory assets/(liabilities), December 31, 2014
 
$
57,804
 
Unrealized (gains) and losses, net
   
14,967
 
Net regulatory assets/(liabilities), March 31, 2015
 
$
72,771
 
 
(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.

(In Thousands)
              
   
Three months ended March 31, 2015
 
   
Electric Distribution and Transmission
             
   
Distribution
   
Transmission
   
Total
   
Gas Distribution
   
Other
   
Total
 
Operating Revenues
 
$
191,888
   
$
58,082
   
$
249,970
   
$
334,083
   
$
-
   
$
584,053
 
Purchased power and gas
   
97,102
     
-
     
97,102
     
175,737
     
(1,217
)
   
271,622
 
Operation and maintenance
   
47,304
     
13,488
     
60,792
     
45,847
     
(5,292
)
   
101,347
 
Transmission wholesale
   
-
     
19,709
     
19,709
     
-
     
-
     
19,709
 
Depreciation and amortization
   
14,133
     
4,196
     
18,329
     
21,777
     
3,178
     
43,284
 
Taxes - other than income taxes
   
15,042
     
8,381
     
23,423
     
17,562
     
330
     
41,315
 
Merger and acquisition-related expenses
   
-
     
-
     
-
     
-
     
6,702
     
6,702
 
Operating Income
   
18,307
     
12,308
     
30,615
     
73,160
     
(3,701
)
   
100,074
 
                                                 
Other Income and (Deductions), net
   
1,941
     
1,485
     
3,426
     
459
     
483
     
4,368
 
                                                 
Interest Charges, net
   
8,039
     
3,471
     
11,510
     
6,707
     
5,847
     
24,064
 
                                                 
Income from Equity Investments
   
2,936
     
-
     
2,936
     
-
     
-
     
2,936
 
                                                 
Income (Loss) Before Income Taxes
   
15,145
     
10,322
     
25,467
     
66,912
     
(9,065
)
   
83,314
 
                                                 
Income Taxes
   
3,853
     
3,861
     
7,714
     
25,664
     
(7,673
)
   
25,705
 
Net Income (Loss)
   
11,292
     
6,461
     
17,753
     
41,248
     
(1,392
)
   
57,609
 
Less:
                                               
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests
   
-
     
-
     
-
     
7
     
-
     
7
 
Net Income (Loss) attributable to UIL Holdings
 
$
11,292
   
$
6,461
   
$
17,753
   
$
41,241
   
$
(1,392
)
 
$
57,602
 
                                                 
Total Capital Expenditures (1)
 
$
-
   
$
-
   
$
38,082
   
$
23,204
   
$
9,362
   
$
70,648
 

(1)
Capital expenditures are shown on a cash basis.  Information for segmenting total capital expenditures between Distribution and Transmission is not available.
Total Electric Distribution and Transmission capital expenditures are disclosed in the Total Electric Distribution and Transmission column.
 
- 23 -

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
 
(M)
SEGMENT INFORMATION (Continued)

(In Thousands)
   
   
Three months ended March 31, 2014
 
   
Electric Distribution and Transmission
             
   
Distribution
   
Transmission
   
Total
   
Gas Distribution
   
Other
   
Total
 
Operating Revenues
 
$
145,189
   
$
58,788
   
$
203,977
   
$
367,185
   
$
-
   
$
571,162
 
Purchased power and gas
   
53,130
     
-
     
53,130
     
214,925
     
-
     
268,055
 
Operation and maintenance
   
45,817
     
10,581
     
56,398
     
39,656
     
(3,177
)
   
92,877
 
Transmission wholesale
   
-
     
20,911
     
20,911
     
-
     
-
     
20,911
 
Depreciation and amortization
   
12,063
     
4,225
     
16,288
     
21,748
     
2,282
     
40,318
 
Taxes - other than income taxes
   
12,861
     
8,352
     
21,213
     
17,640
     
683
     
39,536
 
Merger and acquisition-related expenses
   
-
     
-
     
-
     
-
     
5,051
     
5,051
 
Operating Income
   
21,318
     
14,719
     
36,037
     
73,216
     
(4,839
)
   
104,414
 
                                                 
Other Income and (Deductions), net
   
3,186
     
983
     
4,169
     
(981
)
   
(5,739
)
   
(2,551
)
                                                 
Interest Charges, net
   
7,832
     
3,204
     
11,036
     
6,763
     
5,435
     
23,234
 
                                                 
Income from Equity Investments
   
3,386
     
-
     
3,386
     
-
     
-
     
3,386
 
                                                 
Income (Loss) Before Income Taxes
   
20,058
     
12,498
     
32,556
     
65,472
     
(16,013
)
   
82,015
 
                                                 
Income Taxes
   
6,102
     
3,852
     
9,954
     
26,417
     
(9,821
)
   
26,550
 
Net Income (Loss)
   
13,956
     
8,646
     
22,602
     
39,055
     
(6,192
)
   
55,465
 
Less:
                                               
Preferred Stock Dividends of
                                               
Subsidiary, Noncontrolling Interests
   
-
     
-
     
-
     
13
     
-
     
13
 
Net Income (Loss) attributable to UIL Holdings
 
$
13,956
   
$
8,646
   
$
22,602
   
$
39,042
   
$
(6,192
)
 
$
55,452
 
                                                 
Total Capital Expenditures (1)
 
$
-
   
$
-
   
$
33,787
   
$
19,859
   
$
11,046
   
$
64,692
 
                                                 
   
Electric Distribution and Transmission (2)
                         
   
Distribution
   
Transmission
   
Total
   
Gas Distribution (3)
   
Other
   
Total (3)
 
Total Assets at March 31, 2015
 
$
-
   
$
-
   
$
2,859,820
   
$
2,095,806
   
$
172,722
   
$
5,128,348
 
                                                 
Total Assets at December 31, 2014
 
$
-
   
$
-
   
$
2,876,792
   
$
2,087,284
   
$
147,859
   
$
5,111,935
 

(1)
Capital expenditures are shown on a cash basis.  Information for segmenting total capital expenditures between Distribution and Transmission is not available.
Total Electric Distribution and Transmission capital expenditures are disclosed in the Total Electric Distribution and Transmission column.

(2)
Information for segmenting total assets between Distribution and Transmission is not available.  Total Electric Distribution and Transmission assets are disclosed in the Total Electric Distribution and Transmission column.  Net plant in service is segregated by segment and, as of March 31, 2015, was $1,290.4 million and $665.8 million for Distribution and Transmission, respectively.  Net plant in service as of December 31, 2014, was $1,283.6 million and $659.4 million for Distribution and Transmission, respectively.
       
(3)
Includes $266.2 million of goodwill in the Gas Distribution segment as of March 31, 2015 and December 31, 2014.
 
- 24 -

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

Certain statements contained in this Form 10-K, regarding matters that are not historical facts, are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995).  These include statements regarding management’s intentions, plans, beliefs, expectations or forecasts for the future.  Such forward-looking statements are based on our expectations and involve risks and uncertainties; consequently, actual results may differ materially from those expressed or implied in the statements.  Such risks and uncertainties include, but are not limited to, general economic conditions, conditions in the debt and equity markets, legislative and regulatory changes, changes in demand for electricity, gas and other products and services, unanticipated weather conditions, changes in accounting principles, policies or guidelines and other economic, competitive, governmental, and technological factors affecting the operations, markets, products and services of our subsidiaries.  In addition, risks and uncertainties related to the proposed merger with a subsidiary of Iberdrola USA include, but are not limited to, the expected timing and likelihood of completion of the pending merger, including the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the pending merger that could reduce anticipated benefits or cause the parties to abandon the transaction, the ability to successfully integrate the businesses, the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement, the possibility that UIL Holdings’ shareowners may not approve the merger agreement, the risk that the parties may not be able to satisfy the conditions to the proposed merger in a timely manner or at all, risks related to disruption of management time from ongoing business operations due to the proposed merger, the risk that any announcements relating to the proposed merger could have adverse effects on the market price of UIL Holdings’ common stock, and the risk that the proposed transaction and its announcement could have an adverse effect on the ability of UIL Holdings to retain and hire key personnel and maintain relationships with its suppliers, and on its operating results and businesses generally.  All such factors are difficult to predict, contain uncertainties that may materially affect our actual results and are beyond our control.  You should not place undue reliance on the forward-looking statements, each speaks only as of the date hereof and we undertake no obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or circumstances.  New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  The foregoing and other factors are discussed and should be reviewed in our Annual Report on Form 10-K for the year ended December 31, 2014 and other subsequent filings with the Securities and Exchange Commission.

MAJOR INFLUENCES ON FINANCIAL CONDITION

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

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

Pending Merger with Iberdrola USA

On February 25, 2015, we announced that UIL Holdings had entered into a definitive merger agreement (the Agreement) with Iberdrola USA and its wholly-owned subsidiary, Green Merger Sub, Inc. (merger sub), under which Iberdrola USA will acquire UIL Holdings through a merger of UIL Holdings with and into merger sub and merger sub being the surviving corporation (the merger).  Merger Sub will change its name to UIL Holdings Corporation and remain a direct or indirect wholly-owned subsidiary of Iberdrola USA.  Iberdrola USA will then become a newly listed U.S. publicly-traded company.  In connection with the merger, each issued and outstanding share of the common stock of UIL Holdings will be converted into the right to receive one validly issued share of common stock of the newly listed company and $10.50 in cash.  Immediately following the consummation of the merger, former holders of UIL Holdings’ common stock will own approximately 18.5% of the newly listed company.
 
The agreement contains representations, warranties and covenants of UIL Holdings, Iberdrola USA and merger sub which are customary for transactions of this type, many of which are subject to materiality qualifiers. Each of UIL
 
- 25 -

Holdings and Iberdrola USA has agreed to various customary covenants and agreements, including broadly reciprocal covenants to conduct its business in the ordinary course consistent with past practice during the period between the execution of the agreement and the closing of the merger and not to engage in certain kinds of transactions during this period.
 
Each of UIL Holdings and Iberdrola USA may terminate the agreement under certain circumstances, including if the merger is not consummated by December 31, 2015 (subject to two successive three-month extensions by either party if all of the conditions to closing, other than the conditions related to obtaining regulatory approvals, have been satisfied). The agreement also provides for other customary termination rights for both Iberdrola USA (including if the Board of Directors of UIL Holdings changes its recommendation in respect of the merger) and UIL Holdings, and further provides that, upon termination of the agreement under certain specified circumstances (including if Iberdrola USA terminates the agreement due to a change in recommendation of the Board of Directors of UIL Holdings or if UIL Holdings terminates the agreement to accept an acquisition proposal from a third party), UIL Holdings will be required to pay Iberdrola USA a termination fee of $75 million. Upon the termination of the agreement under certain specified circumstances, either UIL Holdings or Iberdrola USA will be required to reimburse the other party’s reasonable and documented out-of-pocket fees and expenses up to $15 million (which amount will be credited toward, and offset against, the payment of the $75 million termination fee, if the termination fee is also payable).
 
The merger is subject to certain closing conditions, including approval by the shareowners of UIL Holdings and approvals from the Connecticut Public Utilities Regulatory Authority (PURA), the Massachusetts Department of Public Utilities (DPU), the Federal Energy Regulatory Commission (FERC), the Committee on Foreign Investments in the United States (CFIUS) and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act), which period was terminated on April 7, 2015, and the absence of injunctions or restraints imposed by governmental entities.  For further discussion of the regulatory approval process, see Part I, Item 1, “Financial Statements – Notes to Consolidated Financial Statements – Note (C) – “Regulatory Proceedings.”
 
We currently expect that the transaction will close promptly after satisfaction or waiver of all closing conditions, including receipt of shareowner and regulatory approvals, and no later than December 31, 2015.  There are no assurances that the proposed merger will be consummated on the currently expected timetable or at all.  Unless stated otherwise, all forward-looking information contained in this report does not take into account or give any effect to the impact of the proposed merger.
 
Further information concerning the proposed merger will be included in a proxy statement/prospectus contained in a registration statement on Form S-4 to be filed with the SEC in connection with the proposed merger.

Electric Distribution and Transmission

UI is an electric distribution and transmission utility whose structure and operations are significantly affected by legislation and regulation.  UI’s rates and authorized return on equity are regulated by PURA and the FERC.  Legislation and regulatory decisions implementing legislation establish a framework for UI’s operations.  Other factors affecting UI’s financial results are operational matters, such as the ability to manage expenses, uncollectibles and capital expenditures, in addition to sales volume and major weather disturbances.  Sales volume is not expected to have an impact on distribution earnings due to the decoupling mechanism in place.  UI expects to continue to make capital investments in its distribution and transmission infrastructure.

Rates

UI’s allowed distribution return on equity (ROE) established by PURA is 9.15%.  UI is required to return 50% of any distribution earnings over the allowed twelve month level to customers by means of an earnings sharing mechanism. 

Power Supply Arrangements

UI has wholesale power supply agreements in place for its entire standard service load for the first half of 2015, 80% of its standard service load for the second half of 2015 and for 20% of its standard service load for the first half of 2016.    Supplier of last resort service is procured on a quarterly basis, however, from time to time there are no bidders in the procurement process for supplier of last resort service and in such cases UI manages the load directly.  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
 
- 26 -

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 March 31, 2015, UI would have had to post an aggregate of approximately $19.7 million in collateral.  UI would have been and remains able to provide that collateral.
 
New Renewable Source Generation

Pursuant to Connecticut law (PA 13-303), on September 19, 2013, at the direction of the Connecticut Department of Energy and Environmental Protection (DEEP), UI entered into two contracts for energy and/or renewable energy credits (RECs) from Class I renewable resources, 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 for such contracts, filed a complaint against DEEP in the United States District Court in Connecticut alleging that DEEP’s direction to UI and The Connecticut Light and Power Company (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.  This complaint was dismissed in December 2014.  On January 2, 2015 Allco filed an appeal with the United States Court of Appeals for the Second Circuit.

Transmission

PURA decisions do not affect the revenue requirements determination for UI’s transmission business, including the applicable ROE, which is within the jurisdiction of the FERC.  For 2015, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 11.3% to 11.4%.  This 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 Council (OCC), 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 of 11.14% used in calculating formula rates for transmission service under the ISO-NE Open Access Transmission Tariff by the New England transmission owners  was not just and reasonable and seeking a reduction of the base ROE and a refund to customers for a refund period of October 1, 2011 through December 31, 2012 (refund period).

Based on the August 6, 2013 initial decision of the presiding FERC Administrative Law Judge finding that the existing base ROE was unjust and unreasonable and our assessment of the ultimate outcome of the proceeding, we recorded a reserve for the refund period of $2.6 million pre-tax during the third quarter of 2013.

In December 2012, various additional parties filed a complaint with the FERC against several New England transmission owners, including UI, claiming that the current approved base ROE of 11.14% was not just and reasonable and seeking a reduction of the base ROE and a refund to customers for a refund period commencing December 27, 2012 (Second Complaint).

On June 19, 2014, the 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%.   On October 16, 2014 the FERC issued an order (October Order) confirming 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.

On July 31, 2014, certain complainants in the Initial Complaint and the Second Complaint filed a similar additional complaint (Third Complaint) with the FERC against the New England transmission owners, alleging that the then current base ROE of 11.14% was not just and reasonable, and seeking a reduction in the base ROE and refunds to customers for a 15-month refund period beginning July 31, 2014.  The complainants in the Third Complaint also asked for a determination that the top of the zone of reasonableness caps the ROE for each individual project.  The FERC
 
- 27 -

consolidated the Second Complaint and Third Complaint, and stated a presiding judge decision should be rendered within twelve months of the commencement of hearing proceedings, or by December 31, 2015, with an expected decision by the FERC by October 2016.
 
In 2014, 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 recorded additional pre-tax reserves of $5.6 million relating to potential refunds to customers under the Second and Third Complaint.  We will continue to record additional reserves through the third refund period.

On March 3, 2015, the FERC issued an Order on Rehearing in the First Complaint (the March Order) denying all rehearing requests from the complainants and the New England transmission owners.  UI recorded additional pre-tax reserves of $3.4 million in the first quarter of 2015 relating to the Third Complaint and the March Order.  As of March 31, 2015, cumulative pre-tax reserves relating to refunds and potential refunds to customers under all three claims were approximately $11.6 million, of which $2.9 million has already been refunded to customers.

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 (doing business as Eversource Energy), 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 the fourth quarter 2015 and (3) the Central Connecticut Reliability Project, 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 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 February 2015, ISO-NE issued its final GHCC transmission solutions report and, in March 2015, approved the proposed plan applications.  UI and Eversource are evaluating the approved projects 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 March 31, 2015, UI had made aggregate deposits of $45 million under the Agreement since its inception, with assets associated with the GSRP valued at approximately $24.6 million having been transferred to UI.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $0.6 million and $0.3 million in the three‑month periods ended March 31, 2015 and 2014, respectively.

Equity Investment in Peaking Generation

UI is party to a 50-50 joint venture with the 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, 2015 through December 31, 2015 of $29.5 million and $36.5 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 2015 approved revenue requirements.
 
- 28 -

As of March 31, 2015, UI’s equity investment in GenConn was $111.7 million and there was an immaterial amount of undistributed earnings.

UI’s pre-tax income from its equity investment in GenConn was $2.9 million and $3.4 million for the three-month periods ended March 31, 2015 and 2014, 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 $5.4 million during each of the three-month periods ended March 31, 2015 and 2014.

Other Proceedings

On November 12, 2014, PURA issued a 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 (NBFMCC) reconciliations.  PURA’s decision allowed for recovery of $7.7 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. This resulted in UI recording a pre-tax write-off of approximately $3.8 million during the fourth quarter of 2014, which amount included the disallowed portion of UI’s request as well as additional 2014 carrying charges.

Also on November 12, 2014, PURA issued a final decision in UI’s final Competitive Transition Assessment (CTA) reconciliation proceeding which extinguished all remaining CTA balances.  In addition, the final 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 Atomic Power Company litigation against the U.S. Department of Energy (DOE), against UI’s storm regulatory asset balance.  The final decision required that remaining regulatory liability balance be applied to the GSC “working capital allowance” and be returned to customers through the NBFMCC.

Because the two decisions noted above do not conform to ratemaking principles, UI filed appeals with the State of Connecticut Superior Court in December 2014 for both the GSC/NBFMCC and the CTA final decisions.  On February 3, 2015, PURA filed a motion to dismiss UI’s appeal of the CTA final decision.

Environmental Matters

In January 2012, Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat), subsequent owners of a former generation site on the Mill River in New Haven (English Station) that UI sold in 2000 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 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 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, 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.
 
- 29 -

Gas Distribution

Rates

Utilities are entitled by Connecticut and Massachusetts statutes to charge rates that are sufficient to allow them an opportunity to cover their reasonable operating and capital costs, to attract needed capital and to maintain their financial integrity, while also protecting relevant public interests.

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 and currently anticipates that a base rate case would likely be filed in 2016, based on a calendar year 2015 test year, for rates to be effective in 2017.  Based on existing tracking mechanisms in place for gas and other costs, discussions with the DPU, and precedence set by other utility companies, Berkshire believes that regulatory assets are recoverable and regulatory liabilities are fairly stated.

SCG and CNG each have purchased gas adjustment clauses and Berkshire has a cost of gas adjustment clause, approved by PURA and DPU, respectively, which enable them to pass their reasonably incurred cost of gas purchases through to customers.  These clauses allow utilities to recover costs associated with changes in the market price of purchased natural gas, substantially eliminating exposure to natural gas price risk.  Additionally, Berkshire’s mechanism allows for the recovery of the gas-cost portion of bad debt.

On January 22, 2014, PURA approved new base delivery rates for CNG, 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 upon which PURA subsequently issued comments.  During the first quarter of 2014, the OCC appealed PURA’s 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 engaged in settlement discussions regarding the appeal.  Settlement discussions have now terminated, and CNG has agreed to file a motion with PURA to extend the due date for CNG's response to PURA's comments on the private letter ruling request until June 24, 2015.

On March 2, 2015, CNG filed its initial decoupling adjustment which includes a $10.8 million credit to customers, which will be credited on customers’ bills during the period of April 1, 2015 through March 31, 2016.

On April 1, 2015, CNG filed its initial Distribution Integrity Management Program (DIMP) reconciliation filing, which reconciles actual revenue requirements related to CNG’s cast iron and bare steel replacement program. The proposed DIMP rate was approved by PURA for implementation as of May 1, 2015.

On June 14, 2013, CNG, SCG and Yankee Gas Services Company, an unrelated regulated gas distribution company, filed a comprehensive joint 10-year natural gas expansion plan (“Expansion Plan”) with PURA and DEEP.  The plan was in response to the gas expansion goals proposed in the Connecticut Governor’s Comprehensive Energy Strategy and Public Act 13-298.  The Expansion Plan included a set of recommendations designed to help meet the statewide
 
- 30 -

goal of adding approximately 280,000 new customers, including providing more flexibility to minimize a new customer’s contribution to the cost to serve them, providing tools to help fund natural gas conversion costs, establishing a process to extend natural gas service for interested customers who are further away from the main gas line, and  allowing utilities to secure additional pipeline capacity coming into Connecticut.  PURA issued its final Decision on November 22, 2013 approving new System Expansion (SE) rates exclusively for new on and off-main customers commencing service on or after January 1, 2014.  These rates include a 10% premium distribution component for on-main customers and a 30% premium for off-main customers.  The SE rates are complemented by new business rules that extend the gas companies’ financial hurdle rate model from a 20-year to a 25-year time horizon, which will reduce the customer’s contributions to any construction costs, and allow the grouping of customers to help reduce or eliminate new customer contributions to system expansion.  A separate new business reconciliation mechanism was also approved that reconciles the actual new business revenue requirements each year with the revenues received from the new business customers.   As a result of the reconciliation, any shortfall or surplus in revenues will be charged or credited to existing firm customers.  This ensures the timely recovery of new business capital investments and any associated expenses.
 
On June 11, 2014, PURA reopened the Expansion Plan Proceedings to modify the assignment of non-firm margin credits to comport with new statutory requirements that change the manner in which non-firm margin credits are allocated between existing customers and proposed gas expansion projects, and to consider a request made by CNG and SCG concerning the aggregating of potential customers when determining possible gas expansion projects.

SCG, CNG, Yankee Gas Services Company, the OCC and the Bureau of Energy & Technology Policy entered into a settlement agreement on these issues which was approved by PURA on January 14, 2015.  The settlement agreement specifically states how non-firm margin credits are to be allocated between existing customers and proposed gas expansion projects, streamlines reporting requirements for gas expansion projects, and among other issues, defines the methodology to be used for aggregating potential gas customers into possible gas expansion projects.

On March 20, 2015, SCG and CNG filed their initial SE rate reconciliation for 2014. The proposed SE rate was approved by PURA for implementation as of April 1, 2015, pending final PURA approval following a contested hearing.

UIL Holdings Corporation

Derivatives

In accordance with FASB ASC 820 “Fair Value Measurements and Disclosures,” we apply fair value measurements to certain assets and liabilities, a portion of which fall into Level 3 of the fair value hierarchy as pricing inputs include significant inputs that are generally less observable from objective sources.  As of March 31, 2015, the assets accounted for at fair value on a recurring basis as Level 3 instruments, which consist primarily of contracts for differences (CfDs), represent 51.3% of the total amount of assets accounted for at fair value on a recurring basis.  In addition, CfDs are the only liability accounted for at fair value on a recurring basis.

Contracts for Differences

Pursuant to Connecticut’s 2005 Energy Independence Act, 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 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.

The determination of fair value of the CfDs is based on a probability-based expected cash flow analysis that is discounted at risk-free interest rates and adjusted for non-performance risk using credit default swap rates.  Certain management assumptions are required, including development of pricing that extended over the term of the contracts. 
 
- 31 -

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.  In addition, we perform an assessment of risks related to obtaining regulatory, legal and siting approvals, as well as obtaining financing resources and ultimately attaining commercial operation.
 
PURA has determined that costs associated with the CfDs are fully recoverable through electric rates.  As a result, there is no impact on our net income, because any unrealized gains/(losses) resulting from quarterly mark-to-market adjustments are offset by the establishment of regulatory assets/(liabilities) that have been recognized for the purpose of such recovery.  During the first quarter of 2015, the fluctuations in the fair value of the CfDs were due to fluctuations in forward prices for capacity and reserves as a result of ISO New England market rule changes.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2015, UIL Holdings had $80.1 million of unrestricted cash and temporary cash investments.  This represents a decrease of $35.5 million from the corresponding balance at December 31, 2014.  The components of this decrease, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows:

   
(In Millions)
 
     
Unrestricted cash and temporary cash investments, December 31, 2014
 
$
115.6
 
         
Net cash provided by operating activities
   
77.3
 
         
Net cash provided by (used in) investing activities:
       
Cash invested in plant - including AFUDC debt
   
(70.6
)
Deposits in NEEWS
   
(1.5
)
Cash distributions from GenConn
   
2.6
 
Restricted cash (1)
   
0.1
 
     
(69.4
)
         
Net cash provided by (used in) financing activities:
       
Line of credit borrowings (repayments), net
   
(19.0
)
Dividend payments
   
(24.4
)
     
(43.4
)
         
Net change in cash
   
(35.5
)
         
Unrestricted cash and temporary cash investments, March 31, 2015
 
$
80.1
 
 
  (1) As of March 31, 2015, we had $0.9 million in restricted cash, which primarily relates to Electric Distribution and Transmission capital projects, and which has been withheld by UI and will remain in place until the verification of fulfillment of contractor obligations.
                                                         
Cash Flows

Cash flows provided by operating activities totaled $77.3 million in the first three months of 2015, compared with $156.3 million in the first three months of 2014.  The decrease in operating cash flows is related primarily to changes in cash flows from other regulatory activity and accounts payable.  The decrease in changes in other regulatory activity is primarily related to the net activity of the “working capital allowance” of the GSC due to timing differences driven by increased costs to procure power and increases in sales volume.  The decrease in cash flows from changes in accounts payable is primarily related to increases in payments in the first quarter of 2015 as compared to the first quarter of 2014 as a result of the January 1, 2014 effective date of the implementation of an enterprise resource planning system.

Cash capital expenditures totaled $70.6 million in the first three months of 2015, compared with $64.7 million in the first three months of 2014.  The increase is primarily attributable to increases in renewable projects as well as programs relating to gas distribution system replacement and expansion of the gas distribution system due to customer growth.
 
- 32 -

UI received distributions of $5.4 million from GenConn in the first three months of 2015 and 2014.

UIL Holdings paid common dividends of $24.4 million in the first three months of 2015 and in the first three months of 2014.

We expect to fund capital requirements that exceed available cash through external financings.  Although there is currently no commitment to provide such financing from any source of funds, other than from the financings and credit facilities discussed below, we expect to satisfy future external financing needs by the issuance of additional equity and/or short-term and long-term debt.  The continued availability and timing of such financings will be dependent on many factors, including conditions in the bank and capital markets, general economic conditions and our future income and cash flow.

In addition to the covenants described in “– Liquidity and Capital Resources – Financial Covenants”, the following potential restrictions on the payment of dividends by UIL Holdings’ subsidiaries exist under law, contractual provisions and a charter provision:

The Federal Power Act declares it to be unlawful for any officer or director of any public utility “to participate” in the making or paying of any dividends of such public utility from any funds properly included in capital account.  This restriction would apply to UI.  FERC has consistently interpreted the provision to allow dividends to be paid as long as (1) the source of the dividends is clearly disclosed, (2) the dividend is not excessive and (3) there is no self-dealing on the part of corporate officials.

Corporate laws in the states in which we operate, Connecticut and Massachusetts, authorize distributions to the extent they are not limited by corporate documents such as charters and bylaws and do not result in insolvency.

Provisions in the Certificate of Incorporation of CNG require that dividends on its $3.125 Par Preferred Stock be paid before dividends may be paid on its common stock.

Other Sources of Funding

UIL Holdings, UI, CNG, SCG, and Berkshire are parties to a revolving credit agreement with a group of banks that will expire on November 30, 2016 (the UIL Holdings Credit Facility).  The aggregate borrowing limit under the UIL Holdings Credit Facility is $400 million, all of which is available to UIL Holdings, $250 million of which is available to UI, $150 million of which is available to each of CNG and SCG, and $25 million of which is available to Berkshire, all subject to the aggregate limit of $400 million.  The UIL Holdings Credit Facility permits borrowings at fluctuating interest rates and also permits borrowings for fixed periods of time specified by each borrower at fixed interest rates determined by the Eurodollar interbank market in London (LIBOR).  The UIL Holdings Credit Facility also permits the issuance of letters of credit of up to $50 million.

As of March 31, 2015, there were $70 million borrowings outstanding 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 June 16, 2015 and January 31, 2016.  Available credit under the UIL Holdings Credit Facility at March 31, 2015 totaled $325.6 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 reborrow funds, at our option, until the facility’s expiration, thus affording us flexibility in managing our working capital requirements.

UIL Holdings filed a shelf registration statement with the Securities and Exchange Commission (SEC) in March 2015 under which we may, from time to time, sell debt, equity or other securities in one or more transactions.

On February 4, 2015, PURA approved UI’s application to issue long term debt in the aggregate amount of $400 million from time to time through December 31, 2017, including approximately (i) $70 million to refinance its outstanding 6.06% Senior Notes, which mature in 2017, (ii) $27.5 million to refinance its Pollution Control Revenue Bonds (PCRBs) issued by the Business Finance Authority of New Hampshire that mature in 2027 and are due to be re-priced in July 2015, and (iii) $64.46 million of PCRBs which mature in 2033 and have a floating interest rate that resets based on an auction that takes place every 35 days.  The debt authorized to be issued to refinance the PCRBs may be issued in either the taxable private placement market or the bank market as an alternative to financing the bonds in the tax-exempt
 
- 33 -

market.  UI monitors conditions in the bond markets and plans to refund the $64.5 million of PCRBs at such time market conditions and financing terms are economically favorable.
 
UI expects to continue to receive periodic cash distributions from GenConn similar to those discussed in “– Cash Flows” above.  Future cash distributions, however, are subject to GenConn generating sufficient cash flows to fund operations as well as continued compliance with the terms and conditions of its project financing documents.

Long-term debt issuances require regulatory authorization which is typically obtained for a specified amount of debt to be issued during a specified period of time.

Uses of Funds

In April 2015, we made pension contributions of $5 million.  Additional contributions during the remainder of 2015 are expected to aggregate $10 million.

Financial Covenants

UIL Holdings and its subsidiaries are required to comply with certain covenants in connection with their respective loan agreements.  The covenants are standard and customary in bank and loan agreements, and UIL Holdings and its subsidiaries were in compliance with such covenants as of March 31, 2015.

2015 Capital Resource and Expenditure Projections

There have been no material changes in UIL Holdings’ 2015 capital resource projections from those reported in UIL Holdings’ Annual Report on Form 10‑K for the fiscal year ended December 31, 2014.

Contractual and Contingent Obligations

There have been no material changes in UIL Holdings’ 2015 contractual and contingent obligations from those reported in UIL Holdings’ Annual Report on Form 10‑K for the fiscal year ended December 31, 2014.

CRITICAL ACCOUNTING POLICIES

UIL Holdings’ Consolidated Financial Statements are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty.  Investors need to be aware of these policies and how they impact our financial reporting to gain a more complete understanding of our Consolidated Financial Statements as a whole, as well as management’s related discussion and analysis presented herein.  While we believe that these accounting policies are grounded on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts.  The accounting policies and related risks described in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2014 are those that depend most heavily on these judgments and estimates.  As of March 31, 2015, there have been no material changes to any of the Critical Accounting Policies described therein.

OFF-BALANCE SHEET ARRANGEMENTS

UIL Holdings occasionally enters into guarantee contracts in the ordinary course of business.  At the time a guarantee is provided, we perform an analysis to assess the expected financial impact, if any, based on the likelihood of certain events occurring that would require us to perform under such guarantee.  We perform subsequent analyses on a periodic basis to assess the impact of any changes in events or circumstances.

As of March 31, 2015, we had certain immaterial guarantees outstanding for which no liability has been recorded in the Consolidated Financial Statements.
 
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NEW ACCOUNTING STANDARDS

We review new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have.  There have been no new accounting standards issued since the filing of our Annual Report on Form 10‑K for the fiscal year ended December 31, 2014, that we expect to have a material impact on our consolidated financial position, results of operations or liquidity.

RESULTS OF OPERATIONS

Use of Non-GAAP Measures

Within the “Results of Operations” section of this Form 10-Q, we provide narrative and tabular presentations showing a comparison of our net income and earnings per share (EPS) for the three-month periods ended March 31, 2015 and 2014, along with reconciliations for certain non-GAAP measures.  The presentations include EPS for each of our lines of business as well as Net Income and EPS excluding the impact of certain nonrecurring items and the impact of such items on EPS.  Such EPS amounts are calculated by dividing the income of each line of business, as well as the amount of certain nonrecurring items by the average number of shares of UIL Holdings’ common stock outstanding for the periods presented.  We believe this information is useful in understanding the fluctuations in EPS between the current and prior year periods.

First Quarter 2015 vs. First Quarter 2014

UIL Holdings’ net income was $57.6 million, or $1.01 per share, for the first quarter of 2015, an increase of $2.1 million, or $0.03 per share, compared to the first quarter of 2014.  UIL Holdings’ net income excluding nonrecurring items was $63.8 million, or $1.12 per share, an increase of $1.4 million, or $0.02 per share, compared to the first quarter of 2014.  The table below presents a comparison of UIL Holdings’ net income and EPS for the first quarter of 2015 and the first quarter of 2014.

   
Quarter Ended
March 31, 2015
   
Quarter Ended
March 31, 2014
   
2015 More (Less)
than 2014
 
             
Net Income (Loss) (In Millions except per share amounts)
           
             
Electric Distribution and Transmission
 
$
20.0
   
$
22.6
   
$
(2.6
)
FERC ROE reserves
   
(2.2
)
   
-
     
(2.2
)
Total Electric Distribution and Transmission
   
17.8
     
22.6
     
(4.8
)
Gas Distribution
   
41.2
     
39.0
     
2.2
 
Non-Utility excluding merger and acquisition-related expenses
   
2.6
     
0.8
     
1.8
 
Net Income attributable to UIL Holdings excluding merger and acquisition-related expenses
   
61.6
     
62.4
     
(0.8
)
Non-Utility merger and acquisition-related expenses
   
(4.0
)
   
(6.9
)
   
2.9
 
Net Income attributable to UIL Holdings
 
$
57.6
   
$
55.5
   
$
2.1
 
                         
EPS
                       
Electric Distribution and Transmission
 
$
0.35
   
$
0.40
   
$
(0.05
)
FERC ROE reserves
   
(0.04
)
   
-
     
(0.04
)
Total Electric Distribution and Transmission
   
0.31
     
0.40
     
(0.09
)
Gas Distribution
   
0.72
     
0.69
     
0.03
 
Non-Utility excluding merger and acquisition-related expenses
   
0.05
     
0.01
     
0.04
 
Net Income attributable to UIL Holdings excluding merger and acquisition-related expenses
   
1.08
     
1.10
     
(0.02
)
Non-Utility merger and acquisition-related expenses
   
(0.07
)
   
(0.12
)
   
0.05
 
Net Income attributable to UIL Holdings
 
$
1.01
   
$
0.98
   
$
0.03
 
                         
Total EPS - Diluted
 
$
1.01
   
$
0.97
   
$
0.04
 
                         
EPS - Basic - Excluding impact of nonrecurring items (1)
 
$
1.12
   
$
1.10
   
$
0.02
 
EPS - Diluted - Excluding impact of nonrecurring items (1)
 
$
1.12
   
$
1.09
   
$
0.03
 
                           

(1)
Nonrecurring items include FERC ROE reserves and non-utility merger and acquisition related expenses.

Electric Distribution and Transmission

Overall, UI’s operating revenue increased by $46.0 million, from $204.0 million in the first quarter of 2014 to $250.0 million in the first quarter of 2015.  Retail revenue increased by $44.2 million, which was primarily attributable to
 
- 35 -

increases in sales volume in the first quarter of 2015 compared to the first quarter of 2014.  Retail sales increased by 5 million kWh, from 1,366 million kWh in the first quarter of 2014, to 1,371 million kWh in the first quarter of 2015.  Retail sales normalized for the weather impact decreased by 12 million kWh, from 1,338 million kWh in the first quarter of 2014, to 1,326 million kWh in the first quarter of 2015.  Other revenues increased by $1.8 million, which was primarily attributable to the net activity of the “working capital allowance” of the GSC due to timing differences as well as higher transmission revenue requirements, as required to achieve the authorized return, partially offset by the distribution revenue decoupling adjustment, none of which directly impact net income.
 
Purchased power expense increased by $44.0 million, from $53.1 million in the first quarter of 2014 to $97.1 million in the first quarter of 2015.  The increase was primarily attributable to increased costs of procured power as well as increases in sales volume.  UI procures electricity to satisfy its standard service and supplier of last resort requirements through fixed‑price purchased power agreements.  The variance does not impact net income as these costs are recovered through the GSC and Bypassable Federally Mandated Congestion Charges portions of UI’s unbundled retail customer rates.

UI’s O&M expense increased by $4.4 million, from $56.4 million in the first quarter of 2014 to $60.8 million in the first quarter of 2015.  The increase was primarily attributable to increases in payroll and employee benefits expense as well as outside services expense.

UI’s transmission wholesale expenses decreased by $1.2 million, from $20.9 million in the first quarter of 2014 to $19.7 million in the first quarter of 2015.  The decrease was primarily attributable to lower regional transmission expenses, of which UI pays a portion based upon its relative load and which are recoverable through rates.

UI’s depreciation and amortization expense increased by $2.0 million, from $16.3 million in the first quarter of 2014 to $18.3 million in the first quarter of 2015.  The increase was primarily attributable to increased depreciation expense due to increases in plant and equipment.

UI’s taxes other than income taxes increased $2.2 million, from $21.2 million in the first quarter of 2014 to $23.4 million in the first quarter of 2015.  The increase is primarily related to increased property taxes resulting from increased plant and equipment as well as increased gross receipts taxes resulting from increased operating revenues.

UI’s income tax expense decreased $2.3 million, from $10.0 million in the first quarter of 2014 to $7.7 million in the first quarter of 2015.  The decrease was primarily attributable to lower pre-tax income.

Many of the changes in UI’s unbundled revenue and expense components impact line items in its Consolidated Statement of Income, but do not affect net income, because the costs associated with those components are passed through to customers.  The following discussion details variances which have the most significant impact on net income in the periods presented.

Distribution

The distribution business had total net income of $11.3 million in the first quarter of 2015, a decrease of $2.6 million, compared to the first quarter of 2014.  The decrease was primarily attributable to increases in O&M expense, depreciation and amortization and taxes other than income taxes.

Transmission

The transmission business had total net income of $6.5 million in the first quarter of 2015, a decrease of $2.2 million, compared to the first quarter of 2014.  The decrease was primarily attributable to a $3.4 million pre-tax reserve recorded in the first quarter of 2015 related to a FERC ROE claim.

Gas Distribution

The Gas Companies’ operating revenue decreased by $33.1 million, from $367.2 million in the first quarter of 2014 to $334.1 million in the first quarter of 2015.  The decrease was primarily attributable to lower purchased gas rates and lower revenues associated with non-firm customers due to lower volume partially offset by higher sales volume due to colder weather and increased customer growth.  The decrease in non-firm customer revenues is largely offset by lower
 
- 36 -

purchased gas expense.  Retail sales increased by 1.9 million mcf, from 38.1 million mcf in the first quarter of 2014, to 40 million mcf in the first quarter of 2015.  The increase in sales volume resulted from the impact of colder weather and increased customer growth in the first quarter of 2015 compared to the first quarter of 2014.  Temperatures were colder in the first quarter of 2015 compared to the first quarter of 2014 which resulted in a 5.6% increase in heating degree days and a $6.7 million increase, pre-tax, in gross margin in the first quarter of 2015.  The customer growth in the first quarter of 2015 compared to the first quarter of 2014 resulted in a $2.0 million increase, pre-tax, in gross margin in the first quarter of 2015 compared to the first quarter of 2014.  Fluctuations in natural gas prices have no impact on net income because the cost associated with such variances is passed through to customers.
 
Purchased gas expense decreased by $39.2 million, from $214.9 million in the first quarter of 2014 to $175.7 million in the first quarter of 2015.  The decrease was primarily attributable to lower purchased gas rates and lower gas costs associated with non-firm customers as discussed above partially offset by higher sales volume due to colder weather, and increased customer growth. Fluctuations in natural gas costs have no impact on net income because the cost associated with such variances is passed through to customers.

The Gas Companies’ O&M expense increased by $6.1 million, from $39.7 million in the first quarter of 2014 to $45.8 million in the first quarter of 2015.  The increase was primarily attributable to increases in conservation expense, corporate capital charges, outside services expense and payroll expense partially offset by lower uncollectible expense.  Conservation expenses are fully offset by operating revenues.

The Gas Companies’ other income and deductions increased by $1.4 million, from $1.0 million of other deductions in the first quarter of 2014 to $0.4 million of other income in the first quarter of 2015.  The increase was primarily attributable to the absence in the first quarter of 2015 of weather insurance losses recorded in the first quarter of 2014.

Non-Utility

We retain certain costs, such as acquisition-related expenses and interest expense on holding company debt, at the holding company, or UIL Corporate level, which are not allocated to its subsidiaries.  UIL Corporate incurred net after-tax costs of $1.4 million, or $0.02 per share, compared to net after-tax costs of $6.2 million, or $0.11 per share, in the first quarter of 2014.  The increase in net income and decrease in costs was primarily due to decreased after-tax merger and acquisition-related expenses in the first quarter of 2015 compared to the first quarter of 2014 as well as increased corporate capital charges.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

In addition to the risks identified and items previously disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, we face additional market risks in connection with the Acquisition and our ability to obtain permanent financing on terms acceptable to us.  When accessing the debt and equity capital markets, we face risks such as insufficient market capacity to raise amounts expected, issuance at higher than expected interest rates, decline in stock price after issuance, and earnings per share dilution.

Item 4.
Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.  Management designed its disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015.  As of March 31, 2015, our Chief
 
- 37 -

Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective and provide reasonable assurance that the disclosure controls and procedures accomplish their objectives.
 
Changes in Internal Control Over Financial Reporting

There have been no changes in UIL Holdings’ internal control over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, UIL Holdings’ internal control over financial reporting.

PART II.  OTHER INFORMATION
 
Item 1.  Legal Proceedings.

UIL Holdings Shareholder Litigation—Proposed UIL Holdings and Iberdrola USA merger.   Following the February 25, 2015 announcement that UIL Holdings had entered into a definitive agreement to combine with a subsidiary of Iberdrola USA, five shareholder putative class action lawsuits were filed in Connecticut Superior Court, beginning on February 27, 2015, against UIL Holdings, its directors, Iberdrola USA and merger sub, alleging breach of fiduciary duties in connection with the proposed transaction.  The complaints generally and collectively assert that defendants failed to maximize the value of UIL Holdings, and seek to enjoin the proposed transaction as well as unspecified damages, costs and fees.  Service has been accepted by UIL Holdings and its directors in all pending cases.  Insofar as the allegations in these lawsuits can be analyzed by us at this early stage, we believe the claims are without merit and intend to defend the actions vigorously.
 
Item 1A. Risk Factors.

Shareowners and prospective investors should carefully consider the risk factors disclosed in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  There have been no material changes to such risk factors.

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

UIL Holdings repurchased 19,320 shares of common stock in open market transactions to satisfy matching contributions for participants’ contributions into UIL Holdings’ 401(k) plans in the form of UIL Holdings stock as follows:

Period
 
Total Number of
Shares Purchased*
   
Average Price Paid
Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
January 1-31
   
11,910
   
$
44.31
 
None
None
February 1-28
   
3,160
   
$
42.53
 
None
None
March 1-31
   
4,250
   
$
50.02
 
None
None
Total
   
19,320
   
$
45.28
 
None
None

* All shares were purchased in open market transactions.  The effects of these transactions did not change the number of outstanding shares of UIL Holdings’ common stock.
 
- 38 -

Item 6. Exhibits.
 
 
(a)
Exhibits:
 
Exhibit
No.
Description
Certification of Periodic Financial Report.
 
Certification of Periodic Financial Report.
 
Certification of Periodic Financial Report.
 
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
The following financial information from the UIL Holdings Quarterly Report on Form 10-Q for the period ended March 31, 2015, filed with the SEC on April 30, 2105, is formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Income for the three-month periods ended March 31, 2015 and 2014, (ii) the Consolidated Statement of Comprehensive Income (Loss) for the three-month periods ended March 31, 2015 and 2014, (iii) the Consolidated Balance Sheet as of March 31, 2015 and December 31, 2014, (iv) the Consolidated Statement of Cash Flows for the three-month periods ended March 31, 2015 and 2014 and (v) the Notes to Consolidated Financial Statements.
 
- 39 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
UIL HOLDINGS CORPORATION
   
Date
4/30/15
/s/ Richard J. Nicholas
 
Richard J. Nicholas
 
Executive Vice President
 
and Chief Financial Officer
 
- 40 -