SECURITIES AND EXCHANGE COMMISSION
                                              Washington, D.C. 20549


                                                     FORM 10-Q

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

                       FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 1996

                                               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 1-6788

                            THE UNITED ILLUMINATING COMPANY

                  (Exact name of registrant as specified in its charter)

        Connecticut                                     
(State or other jurisdiction of                    06-0571640
 incorporation or organization)        (I.R.S. Employer Identification No.)

157 Church Street, New Haven, Connecticut                      06506
 (Address of principal executive offices)                   (Zip Code)

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


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


   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes X  No
                                    ---   ---

     The  number of shares  outstanding  of the  issuer's  only  class of common
stock, as of September 30, 1996, was 14,101,291.


                                     - 1 -
<PAGE>
<TABLE>





                                                       INDEX

                                               Part I. FINANCIAL INFORMATION
<CAPTION>

                                                                                                          Page
                                                                                                         Number
                                                                                                         ------ 
<S>                                                                                                        <C>
Item 1.  Financial Statements.                                                                              3

         Consolidated Statement of Income for the three and nine months ended
            September 30, 1996 and 1995.                                                                    3
         Consolidated Balance Sheet as of September 30, 1996 and December 31, 1995.                         4
         Consolidated Statement of Cash Flows for the three and nine months ended
            September 30, 1996 and 1995.                                                                    6

         Notes to Consolidated Financial Statements.                                                        7
           -   Statement of Accounting Policies                                                             7
           -   Capitalization                                                                               8
           -   Rate-related Regulatory Proceedings                                                          9
           -   Income Taxes                                                                                11
           -   Short-term Credit Arrangements                                                              12
           -   Supplementary Information                                                                   13
           -   Fuel Financing Obligations and Other Lease Obligations                                      14
           -   Commitments and Contingencies                                                               14
               -  Capital Expenditure Program                                                              14
               -  Other Commitments and Contingencies                                                      14
                  - Hydro-Quebec                                                                           14
                  - Voluntary Early Retirement and Separation Programs                                     14
                  - Site Remediation Costs                                                                 15
                  - Property Taxes                                                                         15
           -   Nuclear Fuel Disposal and Nuclear Plant Decommissioning                                     15

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.            17

           -   Major Influences on Financial Condition                                                     17
           -   Capital Expenditure Program                                                                 19
           -   Liquidity and Capital Resources                                                             20
           -   Results of Operation                                                                        21
           -   Outlook                                                                                     24

                                            Part II. OTHER INFORMATION

Item 5 . Other Events                                                                                      28

           -   Nuclear Generation                                                                          28

Item 6.  Exhibits and Reports on Form 8-K.                                                                 31

         SIGNATURES                                                                                        32
</TABLE>



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<PAGE>
<TABLE>


                          PART I: FINANCIAL INFORMATION
                          ITEM I: FINANCIAL STATEMENTS
                         THE UNITED ILLUMINATING COMPANY
                        CONSOLIDATED STATEMENT OF INCOME
                      (Thousands except per share amounts)
                                   (Unaudited)
<CAPTION>
                                                                         Three Months Ended               Nine Months Ended
                                                                            September 30,                   September 30,
                                                                           1996          1995              1996           1995
                                                                           ----          ----              ----           ----
<S>                                                                      <C>           <C>               <C>            <C>
Operating Revenues (Note G)                                              $209,167      $200,308          $548,817       $529,135
                                                                      ------------  ------------      ------------  -------------
Operating Expenses
  Operation
     Fuel and energy                                                       48,825        36,459           114,220        107,867
     Capacity purchased                                                    11,851        11,600            33,799         35,986
     Early retirement program charges                                      14,946             -            23,033              -
     Other                                                                 36,269        36,171           113,250        106,615
  Maintenance                                                               9,112         7,797            28,054         25,155
  Depreciation                                                             16,866        15,374            49,518         46,086
  Amortization of cancelled nuclear project and deferred return             3,440         3,440            10,319         10,319
  Income taxes (Note E)                                                    18,449        26,319            43,722         49,802
  Other taxes (Note G)                                                     14,943        15,717            43,523         45,204
                                                                      ------------  ------------      ------------  -------------
       Total                                                              174,701       152,877           459,438        427,034
                                                                      ------------  ------------      ------------  -------------
Operating Income                                                           34,466        47,431            89,379        102,101
                                                                      ------------  ------------      ------------  -------------
Other Income and (Deductions)
  Allowance for equity funds used during construction                         165             -               547              -
  Other-net (Note G)                                                          (89)       (1,433)             (555)        (2,671)
  Non-operating income taxes                                                1,669           343             4,487          3,084
                                                                      ------------  ------------      ------------  -------------
       Total                                                                1,745        (1,090)            4,479            413
                                                                      ------------  ------------      ------------  -------------
Income Before Interest Charges                                             36,211        46,341            93,858        102,514
                                                                      ------------  ------------      ------------  -------------
Interest Charges
  Interest on long-term debt                                               16,270        16,137            49,063         46,671
  Other interest (Note G)                                                     483         2,078             1,761          8,264
  Allowance for borrowed funds used during construction                      (286)         (712)           (1,030)        (1,989)
                                                                      ------------  ------------      ------------  -------------
                                                                           16,467        17,503            49,794         52,946
  Amortization of debt expense and redemption premiums                        637         1,100             1,947          3,410
                                                                      ------------  ------------      ------------  -------------
       Net Interest Charges                                                17,104        18,603            51,741         56,356
                                                                      ------------  ------------      ------------  -------------

Minority Interest in Preferred Securities                                   1,203         1,203             3,609          2,379
                                                                      ------------  ------------      ------------  -------------

Net Income                                                                 17,904        26,535            38,508         43,779
Discount on preferred stock redemptions                                       (14)         (191)           (1,840)        (2,183)
Dividends on preferred stock                                                   52           131               279          1,198
                                                                      ------------  ------------      ------------  -------------
Income Applicable to Common Stock                                         $17,866       $26,595           $40,069        $44,764
                                                                      ============  ============      ============  =============

Average Number of Common Shares Outstanding                                14,101        14,087            14,101         14,087

Earnings per share of Common Stock                                          $1.27         $1.89             $2.84          $3.18

Cash Dividends Declared per share of Common Stock                           $0.72        $0.705             $2.16         $2.115
</TABLE>


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


                                     - 3 -
<PAGE>
<TABLE>


                                   THE UNITED ILLUMINATING COMPANY
                                      CONSOLIDATED BALANCE SHEET

                                                ASSETS
                                        (Thousands of Dollars)
<CAPTION>
                                                                 September 30,          December 31,
                                                                      1996                 1995*
                                                                      ----                 ----
                                                                 (Unaudited)
<S>                                                                   <C>                   <C>
Utility Plant at Original Cost
  In service                                                          $1,836,993            $1,809,925
  Less, accumulated provision for depreciation                           571,268               532,015
                                                                -----------------     -----------------
                                                                       1,265,725             1,277,910

Construction work in progress                                             38,142                41,817
Nuclear fuel                                                              23,178                25,967
                                                                -----------------     -----------------
     Net Utility Plant                                                 1,327,045             1,345,694
                                                                -----------------     -----------------


Other Property and Investments                                            34,368                27,388
                                                                -----------------     -----------------

Current Assets
  Cash and temporary cash investments                                     36,186                 5,070
  Accounts receivable
   Customers, less allowance for doubtful
     accounts of $2,600 and $6,300                                        74,549                63,987
   Other                                                                  19,758                14,547
  Accrued utility revenues                                                29,003                28,318
  Fuel, materials and supplies, at average cost                           22,738                22,249
  Prepayments                                                              8,342                 3,051
  Other                                                                      228                    55
                                                                -----------------     -----------------
     Total                                                               190,804               137,277
                                                                -----------------     -----------------

Deferred Charges
  Unamortized debt issuance expenses                                       6,726                 7,577
  Other                                                                    1,750                 2,377
                                                                -----------------     -----------------
     Total                                                                 8,476                 9,954
                                                                -----------------     -----------------

Regulatory Assets (future amounts due from customers
                   through the ratemaking process)
  Income taxes due principally to book-tax differences                   344,940               358,168
  Deferred return - Seabrook Unit 1                                       40,904                50,343
  Unamortized cancelled nuclear projects                                  13,590                24,620
  Unamortized redemption costs                                            21,312                22,244
  Uranium enrichment decommissioning costs                                 1,409                 1,505
  Other                                                                    8,474                 8,424
                                                                -----------------     -----------------
     Total                                                               430,629               465,304
                                                                -----------------     -----------------

                                                                      $1,991,322            $1,985,617
                                                                =================     =================
*Derived from audited financial statements
</TABLE>

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


                                     - 4 -
<PAGE>
<TABLE>


                                    THE UNITED ILLUMINATING COMPANY
                                      CONSOLIDATED BALANCE SHEET

                                    CAPITALIZATION AND LIABILITIES
                                        (Thousands of Dollars)
<CAPTION>
                                                                  September 30,          December 31,
                                                                       1996                 1995*
                                                                       ----                 ----
                                                                   (Unaudited)
<S>                                                                 <C>                  <C>
Capitalization (Note B)
  Common stock equity
    Common stock                                                      $284,579              $284,542
    Paid-in capital                                                        772                   769
    Capital stock expense                                               (2,182)               (2,207)
    Retained earnings                                                  166,463               156,877
                                                                 -----------------     -----------------
                                                                       449,632               439,981
  Preferred stock                                                        4,461               10,539
  Minority interest in preferred securities                             50,000                50,000
  Long-term debt                                                       780,598               845,684
                                                                 -----------------     -----------------
    Total                                                            1,284,691             1,346,204
                                                                 -----------------     -----------------

Noncurrent Liabilities
  Obligations under capital leases                                      17,274                17,508
  Nuclear decommissioning obligation                                    12,074                10,317
  Other                                                                  4,769                 4,090
                                                                 -----------------     -----------------
    Total                                                               34,117                31,915
                                                                 -----------------     -----------------

Current Liabilities
  Current portion of long-term debt                                     95,171                40,800
  Notes payable                                                              -                     -
  Accounts payable                                                      35,749                45,401
  Dividends payable                                                     10,205                10,072
  Taxes accrued                                                         16,972                  5,297
  Pensions accrued                                                      51,466                33,832
  Interest accrued                                                      16,378                14,506
  Obligations under capital leases                                         309                   291
  Other accrued liabilities                                             41,064                26,769
                                                                 -----------------     -----------------
    Total                                                              267,314               176,968
                                                                 -----------------     -----------------

Customers' Advances for Construction                                     1,872                 2,655
                                                                 -----------------     -----------------

Regulatory Liabilities   (future amounts owed to customers
                         through the ratemaking process)
  Accumulated deferred investment tax credits                           17,338                17,909
  Other                                                                  1,811                 1,990
                                                                 -----------------     -----------------
    Total                                                               19,149                19,899
                                                                 -----------------     -----------------

Deferred Income Taxes   (future tax liabilities owed
                         to taxing authorities)                        384,179               407,976

Commitments and Contingencies (Note L)
                                                                 -----------------     -----------------

                                                                    $1,991,322            $1,985,617
                                                                 =================     =================
* Derived from audited financial statements
</TABLE>

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


                                     - 5 -
<PAGE>
<TABLE>


                                           THE UNITED ILLUMINATING COMPANY
                                          CONSOLIDATED STATEMENT OF CASH FLOWS
                                                 (Thousands of Dollars)
                                                      (Unaudited)

<CAPTION>
                                                               Three Months Ended           Nine Months Ended
                                                                  September 30,                September 30,
                                                              1996           1995          1996          1995
                                                              ----           ----          ----          ----
<S>                                                          <C>           <C>            <C>           <C>
Cash Flows from Operating Activities
  Net Income                                                 $17,904       $26,535        $38,508       $43,779
                                                         ------------   -----------   ------------  ------------
  Adjustments  to  reconcile  net  income  to net  cash  provided  by  operating
    activities:
     Depreciation and amortization                            17,915        16,925         52,734        50,646
     Deferred income taxes                                    (1,421)       10,010        (10,569)       11,061
     Deferred investment tax credits - net                      (190)         (190)          (571)         (571)
     Amortization of nuclear fuel                              1,604         3,848          4,090        11,295
     Allowance for funds used during construction               (451)         (712)        (1,577)       (1,989)
     Amortization of deferred return                           3,146         3,146          9,439         9,439
     Changes in:
             Accounts receivable - net                       (11,731)        2,679        (15,773)        2,656
             Fuel, materials and supplies                        815           (27)          (489)       (1,043)
             Prepayments                                      (4,006)       (4,059)        (5,291)        3,278
             Accounts payable                                   (539)      (16,733)        (9,652)      (12,936)
             Interest accrued                                 (8,090)       (9,354)         1,872        (1,819)
             Taxes accrued                                     6,444         4,156         11,675         5,113
             Early retirement costs accrued                   14,946             -         23,033             -
             Other assets and liabilities                     19,745         4,571         13,870           (73)
                                                         ------------   -----------   ------------  ------------
     Total Adjustments                                        38,187        14,260         72,791        75,057
                                                         ------------   -----------   ------------  ------------
Net Cash provided by Operating Activities                     56,091        40,795        111,299       118,836
                                                         ------------   -----------   ------------  ------------

Cash Flows from Financing Activities
   Common stock                                                    -           192             40           192
   Long-term debt                                                  -       150,000          7,500       150,000
   Preferred securities of subsidiary                              -             -              -        50,000
   Notes payable                                             (35,000)     (175,850)             -       (67,000)
   Securities redeemed and retired:
     Preferred stock                                             (33)         (500)        (6,078)      (34,161)
     Long-term debt                                           (7,725)            -        (18,525)     (116,133)
   Discount on preferred stock redemption                         14           191          1,840         2,183
   Expenses of issue                                            (275)            -           (275)       (1,831)
   Lease obligations                                             (74)          (68)          (216)       (1,099)
   Dividends
     Preferred stock                                             (52)         (137)          (358)       (1,813)
     Common stock                                            (10,153)       (9,931)       (30,246)      (29,582)
                                                         ------------   -----------   ------------  ------------
Net Cash provided by (used in) Financing Activities          (53,298)      (36,103)       (46,318)      (49,244)
                                                         ------------   -----------   ------------  ------------

Cash Flows from Investing Activities
    Plant expenditures, including nuclear fuel               (12,331)      (11,111)       (33,865)      (38,428)
                                                         ------------   -----------   ------------  ------------
Net Cash used in Investing Activities                        (12,331)      (11,111)       (33,865)      (38,428)
                                                         ------------   -----------   ------------  ------------

Cash and Temporary Cash Investments:
Net change for the period                                     (9,538)       (6,419)        31,116        31,164
Balance at beginning of period                                45,724        49,015          5,070        11,432
                                                         ------------   -----------   ------------  ------------
Balance at end of period                                     $36,186       $42,596        $36,186       $42,596
                                                         ============   ===========   ============  ============

Cash paid during the period for:
   Interest (net of amount capitalized)                      $24,377       $26,529        $47,960       $54,699
                                                         ============   ===========   ============  ============
   Income taxes                                              $14,200       $11,800        $40,825       $26,450
                                                         ============   ===========   ============  ============
</TABLE>

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


                                     - 6 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

     The consolidated  financial  statements of the Company and its wholly-owned
subsidiary, United Resources, Inc., have been prepared pursuant to the rules and
regulations of the Securities and Exchange  Commission.  The statements  reflect
all  adjustments  that are, in the opinion of  management,  necessary  to a fair
statement of the results for the periods presented.  All such adjustments are of
a normal recurring nature. Certain information and footnote disclosures normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations.  The Company believes that the disclosures are adequate to make the
information  presented not misleading.  These consolidated  financial statements
should be read in conjunction with the consolidated financial statements and the
notes to consolidated financial statements included in the annual report on Form
10-K for the year  ended  December  31,  1995.  Such notes are  supplemented  as
follows:

(A)  STATEMENT OF ACCOUNTING POLICIES

Reclassification of Previously Reported Amounts

     Certain amounts previously  reported have been reclassified to conform with
current year presentations.

Allowance for Funds Used During Construction (AFUDC)

     The weighted  average  AFUDC rates applied in the first nine months of 1996
and 1995 were 8.50% and 7.44%, respectively, on a before-tax basis.

Cash and Cash Equivalents

     For cash flow  purposes,  the  Company  considers  all highly  liquid  debt
instruments  with a maturity of three  months or less at the date of purchase to
be cash equivalents.

Nuclear Decommissioning Trusts

     External  trust  funds  are   maintained  to  fund  the  estimated   future
decommissioning  costs of the nuclear  generating units in which the Company has
an  ownership  interest.  These  costs are  accrued as a charge to  depreciation
expense over the estimated service lives of the units and are recovered in rates
on a current basis.  The Company paid $1.6 million and $1.4 million in the first
nine months of 1996 and 1995, respectively, into the decommissioning trust funds
for Seabrook Unit 1 and Millstone  Unit 3. At September 30, 1996,  the Company's
shares of the trust fund balances,  which included  accumulated  earnings on the
funds, were $8.5 million and $3.6 million for Seabrook Unit 1 and Millstone Unit
3,  respectively.  These fund  balances  are  included  in "Other  Property  and
Investments"  and  the  accrued   decommissioning   obligation  is  included  in
"Noncurrent Liabilities" on the Company's Consolidated Balance Sheet.

Impairment of Long-Lived Assets

     The Financial  Accounting  Standards  Board  recently  issued  Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of". This standard,  which is effective for the
1996 calendar year,  requires the recognition of impairment losses on long-lived
assets when the book value of an asset  exceeds the sum of the  expected  future
undiscounted  cash flows that result from the use of the asset and its  eventual
disposition. This standard also requires that rate-regulated companies recognize
an


                                     - 7 -
<PAGE>

                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

impairment loss when a regulator excludes all or part of a cost from rates, even
if the regulator allows the company to earn a return on the remaining  allowable
costs.  Under this standard,  the probability of recovery and the recognition of
regulatory  assets  under the  criteria  of SFAS No. 71 must be  assessed  on an
ongoing  basis.  Since the Company is recovering all of its costs through rates,
it does not currently have any assets that are impaired under this new standard.
However,  future developments in the utility industry,  including the effects of
deregulation and increasing competition, could change this conclusion.

(B)  CAPITALIZATION

     (a) Common Stock

     The number of shares  outstanding  of the Company's  common  stock,  no par
value, at September 30, 1996 was 14,101,291.

     In 1990, the Company's  Board of Directors and the  shareowners  approved a
stock  option plan for  officers  and key  employees  of the  Company.  The plan
provides  for the  awarding of options to  purchase up to 750,000  shares of the
Company's common stock over periods of from one to ten years following the dates
when the options are granted.  On June 5, 1991,  the  Connecticut  Department of
Public Utility  Control (DPUC)  approved the issuance of 500,000 shares of stock
pursuant to this plan. The exercise price of each option cannot be less than the
market value of the stock on the date of the grant.  Options to purchase  17,799
shares of stock at an exercise  price of $30 per share,  190,600 shares of stock
at an  exercise  price of $30.75 per share,  600 shares of stock at an  exercise
price of  $31.1875  per share,  4,000  shares of stock at an  exercise  price of
$35.625 per share,  34,332 shares of stock at an exercise  price of $39.5625 per
share,  and 5,000 shares of stock at an exercise price of $42.375 per share have
been granted by the Board of Directors and remain  outstanding  at September 30,
1996.  Options to purchase  1,200 shares of stock at an exercise price of $30.75
per share were exercised during the first nine months of 1996.

     In October 1995, the Financial  Accounting  Standards Board issued SFAS No.
123,  "Accounting  for  Stock-Based  Compensation".  This  statement,  which  is
effective for calendar year 1996, establishes financial accounting and reporting
standards for stock-based  employee  compensation  plans, such as stock purchase
plans,  stock options,  restricted  stock, and stock  appreciation  rights.  The
statement  defines  the  methods of  determining  the fair value of  stock-based
compensation  and  requires the  recognition  of  compensation  expense for book
purposes.  However,  the  statement  allows  entities  to  continue  to  measure
compensation expense in accordance with the prior authoritative literature,  APB
No. 25,  "Accounting for Stock Issued to Employees",  but requires pro forma net
income and  earnings  per share be  disclosed  for each year for which an income
statement  is  presented  as if  SFAS  No.  123  were  applied.  The  accounting
requirements  of this statement are effective for  transactions  entered into in
1996.  However,  pro forma  disclosures  must  include the effects of all awards
granted after  January 1, 1995. As of September 30, 1996,  there were no options
granted to which this  statement  would  apply.  The  Company has not elected to
adopt the expense recognition provisions of SFAS No. 123.

     (b) Retained Earnings Restriction

     The indenture under which $250 million principal amount of Notes are issued
places  limitations  on the payment of cash dividends on common stock and on the
purchase or redemption of common stock.  Retained earnings in the amount of $108
million were free from such limitations at September 30, 1996.

     (c) Preferred Stock

     On June 4, 1996,  the Company  purchased  at a discount on the open market,
and canceled,  53,450 shares of its $100 par value preferred  stock.  The shares
purchased consisted of 2,950 shares of its 4.35%, Series A, 12,500



                                     - 8 -
<PAGE>

                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

shares  of its  4.72%,  Series B and  38,000  shares  of its 5 5/8%,  Series  D,
preferred  stock. The shares,  having a par value of $5,345,000,  were purchased
for $3,816,169, creating an after-tax gain of $1,528,831.
     On June 7, 1996,  the Company  purchased  at a discount on the open market,
and  canceled,  7,000  shares of its $100 par value  4.35%,  Series A  preferred
stock. The shares, having a par value of $700,000,  were purchased for $402,730,
creating an after-tax gain of $297,270.

     On August 8, 1996, the Company  purchased at a discount on the open market,
and canceled,  332 shares of its $100 par value 4.72%, Series B preferred stock.
The shares, having a par value of $33,200, were purchased for $19,488,  creating
an after-tax gain of $13,712.

     (e) Long-Term Debt

     On February 15, 1996, the Company repaid $10.8 million  principal amount of
maturing  9.44% First Mortgage Bonds issued by Bridgeport  Electric  Company,  a
wholly-owned subsidiary of the Company that was merged with and into the Company
in September 1994.

     On June 26, 1996,  the Company  borrowed $7.5 million from the  Connecticut
Development Authority (CDA),  representing the proceeds from the issuance by the
CDA of $7.5 million  principal  amount of tax-exempt  Pollution  Control Revenue
Bonds (PCRBs). The Company is obligated,  under its borrowing agreement with the
CDA, to pay to a trustee for the PCRBs'  bondholders  such  amounts as will pay,
when due, the  principal of and the premium,  if any, and interest on the PCRBs.
The  PCRBs  will  mature  in 2026,  and  their  interest  rate  can be  adjusted
periodically to reflect prevailing market  conditions.  The PCRBs were issued at
an initial interest rate of 3.3%,  which is being adjusted  weekly.  On July 15,
1996, the Company used the proceeds of this $7.5 million  borrowing to cause the
redemption and repayment of $7.5 million principal amount of 9 1/2% PCRBs issued
by the CDA in 1986.

     On October 25, 1996,  the Company  borrowed  $75 million  under a Term Loan
Agreement  with a group  of banks  for a  five-year  period.  The  Company  pays
interest on the  borrowing at a floating  rate equal to the  three-month  London
Interbank  Borrowing Rate plus 0.55%.  The Company has entered into two separate
interest rate swap agreements that effectively  convert the interest rate on $50
million of the Company's floating rate 1996 Term Loan to a fixed annual interest
rate of 7.005% for the five- year period and the interest  rate on the remaining
$25 million to a fixed annual interest rate of 6.675% for a three-year period..

     The Company  used  proceeds  from the $75 million  Term Loan  borrowing  to
purchase $66,847,000  principal amount of Seabrook Lease Obligation Bonds, which
were issued in  connection  with the sale and  leaseback  of Seabrook  Unit 1 in
1990. The Bonds were purchased at a premium  through a tender offer that expired
on October 22, 1996. The Company paid 103.9% of principal amount for $16,997,000
principal amount of 9.76% Seabrook Lease Obligation Bonds (due 2006) and 107.17%
of principal  amount for  $49,850,000  principal  amount of the 10.24%  Seabrook
Lease Obligation Bonds (due 2020). The premiums and other  transaction  expenses
will be amortized over the remaining life of the Bonds.  The Company  intends to
hold the Bonds until  maturity  and will report the  investment  as an offset to
long-term debt on its balance sheet.

(C) RATE-RELATED REGULATORY PROCEEDINGS

     A major factor affecting the Company's  earnings prospects beyond 1996 will
be the success of the  Company's  efforts to  implement a  regulatory  framework
similar to the plan filed with the DPUC in March of 1996,  which  proposed price
stability and incentive regulation. The Company's ability to achieve its goal of
4% annual  earnings  growth from operations is dependent upon having the ability
to earn an  adequate  return in its  utility  business.The 


                                     - 9 -
<PAGE>

                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

DPUC, in its "Draft  Decision" dated October 7, 1996,  approved certain elements
of the Company's  proposal but modified other  elements,  such that the proposed
five-year regulatory plan, which the Company considers is voluntary on its part,
was not  acceptable  to the Company.  On October 23, 1996,  the Company  filed a
counterproposal  with the DPUC that  incorporated  several of the proposals that
are in the Draft Decision, most notably the provision for rate decreases of 3-5%
over the five-year duration of the plan, and reinstated the Company's commitment
to added  Seabrook  depreciation.  The Company also offered an earnings  sharing
mechanism that would benefit  shareowners  and customers alike if actual results
were better than those  forecasted by the Company.  The Company also objected to
the DPUC proposed 11.25%  five-year level of allowed return on utility equity as
being too low  relative to the rest of the  industry and relative to recent DPUC
decisions. The Company offered a counterproposal based on an 11.9% return level.
The DPUC issued a second  draft  decision,  denominated  "Draft  Decision 2," on
November 12, 1996.  Draft  Decision 2, which did not  acknowledge  the Company's
counterproposal, stated that:
 
    "after a detailed review of UI's financial and operational records and
     its proposal to address  expected over earnings,  the Department  concludes
     that for the five-year period from 1997 through 2001, the Company is likely
     to earn  significantly  more  than  its  required  return  on  equity.  The
     Company's total bills to ratepayers  could be reduced an average of 3 to 5%
     and additional  amortizations of regulatory  assets totaling more than $102
     million net of tax could be taken.  The reduction to customer  bills can be
     accomplished  through  implementation  of the following  adjustments to the
     Company's proposed  performance based incentive regulation plan: 1) through
     a reduction  to current  CAM charges of roughly $15 to $24 million  (2.3 to
     3.6%)  annually;  and 2) through a modification to the FAC that shifts more
     risk to the Company and eliminates  expected  charges to ratepayers.  These
     adjustments  are  predicated  on an  11.5%  ROE  found  reasonable  by  the
     Department.   Given  the  Company's  current  and  expected  financial  and
     operating prognosis, the Rate Plan found appropriate in this Decision would
     enable  the  Company  to  operate  successfully,   maintain  its  financial
     integrity,  attract  capital and  compensate  its  investors for the use of
     their money and the risks assumed even as the electric industry transitions
     towards a much more competitive environment."

The  Company  has not  completed  its  review of Draft  Decision  2, but it will
respond to the DPUC prior to November 21, 1996.  The current DPUC schedule calls
for the issuance of a final decision on November 27, 1996.



                                     - 10 -
<PAGE>

<TABLE>


                         THE UNITED ILLUMINATING COMPANY

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)


<CAPTION>
                                                              Three Months Ended              Nine Months Ended
(E) INCOME TAXES                                                 September 30,                 September 30,
                                                               1996          1995            1996          1995
                                                               ----          ----            ----          ----
<S>                                                            <C>           <C>            <C>            <C>    
Income tax expense consists of:                                     (000's)                       (000's)

Income tax provisions:
  Current
             Federal                                           $13,887       $11,107        $37,932        $25,984
             State                                               4,504         5,049         12,443         10,244
                                                           ------------  ------------    -----------   ------------
                Total current                                   18,391        16,156         50,375         36,228
                                                           ------------  ------------    -----------   ------------
  Deferred
             Federal                                              (585)        6,924         (6,265)         9,536
             State                                                (836)        3,086         (4,304)         1,525
                                                           ------------  ------------    -----------   ------------
                Total deferred                                  (1,421)       10,010        (10,569)        11,061
                                                           ------------  ------------    -----------   ------------

  Investment tax credits                                          (190)         (190)          (571)          (571)
                                                           ------------  ------------    -----------   ------------

     Total income tax expense                                  $16,780       $25,976        $39,235        $46,718
                                                           ============  ============    ===========   ============

Income tax components charged as follows:
  Operating expenses                                           $18,449       $26,319        $43,722        $49,802
  Other income and deductions - net                             (1,669)         (343)        (4,487)        (3,084)
                                                           ------------  ------------    -----------   ------------

     Total income tax expense                                  $16,780       $25,976        $39,235        $46,718
                                                           ============  ============    ===========   ============


The following table details the components of the deferred income taxes:
     Pension benefits                                          ($5,298)        ($335)       ($9,302)       ($1,125)
     Seabrook sale/leaseback transaction                         1,575         1,650         (3,669)        (3,706)
     Accelerated depreciation                                    1,374         2,274          4,122          6,822
     Tax depreciation on unrecoverable plant investment          1,244         1,727          3,732          5,181
     Unit overhaul and replacement power costs                    (641)            -         (2,651)             -
     Conservation and load management                             (464)          227           (954)           543
     Deferred fossil fuel costs                                   (263)          (45)           402             22
     Postretirement benefits                                       126          (312)          (671)          (920)
     Alternative minimum tax                                         -         3,661              -          3,661
     Other - net                                                   926         1,163         (1,578)           583
                                                           ------------  ------------    -----------   ------------

Deferred income taxes - net                                    ($1,421)      $10,010       ($10,569)       $11,061
                                                           ============  ============    ===========   ============
</TABLE>



                                     - 11 -
<PAGE>



                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(F) SHORT-TERM CREDIT ARRANGEMENTS

     The Company has a revolving credit  agreement with a group of banks,  which
currently  extends to December 11, 1996. The borrowing limit of this facility is
$75 million.  The facility  permits the Company to borrow funds at a fluctuating
interest  rate  determined  by the prime  lending  market in New York,  and also
permits the Company to borrow money for fixed  periods of time  specified by the
Company at fixed interest rates determined by the Eurodollar interbank market in
London, or by bidding,  at the Company's option. If a material adverse change in
the business, operations,  affairs, assets or condition, financial or otherwise,
or  prospects  of the Company and its  subsidiaries,  on a  consolidated  basis,
should  occur,  the banks may  decline to lend  additional  money to the Company
under this revolving credit agreement,  although  borrowings  outstanding at the
time of such  an  occurrence  would  not  then  become  due and  payable.  As of
September 30, 1996, the Company had no short-term  borrowings  outstanding under
this facility.  The Company expects to replace this revolving  credit  agreement
with a new but similar credit facility by year-end.



                                     - 12 -
<PAGE>
<TABLE>



                                     THE UNITED ILLUMINATING COMPANY

                        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(G)  SUPPLEMENTARY INFORMATION


<CAPTION>
                                                                 Three Months Ended                Nine Months Ended
                                                                    September 30,                    September 30,
                                                                1996            1995             1996            1995
                                                                ----            ----             ----            ----
                                                                       (000's)                          (000's)

<S>                                                          <C>             <C>              <C>             <C>
Operating Revenues

    Retail                                                     $184,450        $188,770         $497,973        $488,424
    Wholesale - capacity                                          1,784           1,560            5,286           4,816
                      - energy                                   22,097           9,257           43,355          33,625
    Other                                                           836             721            2,203           2,270
                                                          --------------  --------------   --------------  --------------
         Total Operating Revenues                              $209,167        $200,308         $548,817        $529,135
                                                          ==============  ==============   ==============  ==============

Sales by Class(MWH's)

    Retail
    Residential                                                 490,460         531,914        1,432,544       1,425,453
    Commercial                                                  609,643         632,603        1,719,858       1,721,186
    Industrial                                                  304,451         300,718          858,926         849,015
    Other                                                        11,931          11,860           35,897          36,188
                                                          --------------  --------------   --------------  --------------
                                                              1,416,485       1,477,095        4,047,225       4,031,842
    Wholesale                                                   759,416         402,154        1,608,917       1,399,761
                                                          --------------  --------------   --------------  --------------
         Total Sales by Class                                 2,175,901       1,879,249        5,656,142       5,431,603
                                                          ==============  ==============   ==============  ==============

Other Taxes

    Charged to:
    Operating:
       State gross earnings                                      $7,608          $8,093          $20,507         $20,926
       Local real estate and personal property                    6,106           6,283           18,637          19,713
       Payroll taxes                                              1,229           1,341            4,379           4,563
       Other                                                          -               -                -               2
                                                          --------------  --------------   --------------  --------------
                                                                 14,943          15,717           43,523          45,204
    Nonoperating and other accounts                                  78             124              474             416
                                                          --------------  --------------   --------------  --------------
         Total Other Taxes                                      $15,021         $15,841          $43,997         $45,620
                                                          ==============  ==============   ==============  ==============

Other Income and (Deductions) - net

    Interest and dividend income                                   $283          $1,415             $924          $2,134
    Equity earnings from Connecticut Yankee                         331             359            1,080           1,095
    Loss from subsidiary companies                                 (579)         (1,491)          (2,134)         (3,503)
    Miscellaneous other income and (deductions) - net              (124)         (1,716)            (425)         (2,397)
                                                          --------------  --------------   --------------  --------------
         Total Other Income and (Deductions) - net                 ($89)        ($1,433)           ($555)        ($2,671)
                                                          ==============  ==============   ==============  ==============

Other Interest Charges

    Notes Payable                                                  $167          $1,876             $882          $7,354
    Other                                                           316             202              879             910
                                                          --------------  --------------   --------------  --------------
         Total Other Interest Charges                              $483          $2,078           $1,761          $8,264
                                                          ==============  ==============   ==============  ==============
</TABLE>



                                     - 13 -
<PAGE>



                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(K) FUEL FINANCING OBLIGATIONS AND OTHER LEASE OBLIGATIONS

     The Company has a Fossil Fuel Supply Agreement with a financial institution
providing for financing up to $37.5 million in fossil fuel purchases. Under this
agreement,  the financing  entity may acquire and/or store natural gas, coal and
fuel oil for sale to the  Company,  and the Company may  purchase  these  fossil
fuels from the financing entity at a price for each type of fuel that reimburses
the  financing  entity for the direct  costs it has incurred in  purchasing  and
storing  the  fuel,  plus a charge  for  maintaining  an  inventory  of the fuel
determined  by  reference  to  the  fluctuating  interest  rate  on  thirty-day,
dealer-placed  commercial  paper in New York. The Company is obligated to insure
the  fuel  inventories  and  to  indemnify  the  financing  entity  against  all
liabilities,  taxes and other  expenses  incurred as a result of its  ownership,
storage and sale of fossil fuel to the Company. This agreement currently extends
to November  1997. At September 30, 1996,  approximately  $9.4 million of fossil
fuel purchases were being financed under this agreement.

(L) COMMITMENTS AND CONTINGENCIES

Capital Expenditure Program

     The Company's continuing capital expenditure program is presently estimated
at approximately $299.0 million, excluding AFUDC, for 1996 through 2000.

Other Commitments and Contingencies

                                 Hydro-Quebec

     The Company is a  participant  in the  Hydro-Quebec  transmission  intertie
facility linking New England and Quebec,  Canada. Phase II of this facility,  in
which UI has a 5.45%  participating  share,  has increased the capacity value of
the intertie from 690 megawatts to a maximum of 2000 megawatts.  A ten-year Firm
Energy  Contract,  which provides for the sale of 7 million  megawatt-hours  per
year by Hydro-Quebec  to the New England  participants in the Phase II facility,
became  effective  on July 1,  1991.  The  Company  is  obligated  to  furnish a
guarantee  for its  participating  share of the debt  financing for the Phase II
facility.  As of September 30, 1996, the Company's  guarantee liability for this
debt was approximately $8.2 million.

                  Voluntary Early Retirement and Separation Programs

     On May 22, 1995, the Company and the union  representing  approximately 695
of its  operating,  maintenance  and clerical  employees  agreed on a three-year
contract, effective May 16, 1995. As part of this agreement, the Company offered
a voluntary early retirement program to 74 employees,  who had until January 31,
1996 to accept. The early retirement offer was accepted by 64 employees, and the
Company  recognized a charge to earnings in January  1996 of $7.2 million  ($4.2
million,  after-tax). The employees accepting the offer retired during the first
nine months of 1996. In June 1996, the Company  recognized an additional  charge
to earnings of $0.9  million  ($0.5  million,  after tax) to reflect  additional
early retirement costs.

     In July 1996, the Company offered a Voluntary  Early  Retirement Plan and a
Voluntary  Separation  Plan to virtually  all of its  employees.  A total of 163
employees  accepted  one or the other of these  plans.  In the third  quarter of
1996,  the  Company  recognized  a charge to  earnings  of $14.9  million  ($8.7
million, after-tax) to reflect the cost of these plans.




                                     - 14 -
<PAGE>


                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                               Site Remediation Costs

     The Company has estimated that the cost of environmental remediation of its
decommissioned and demolished Steel Point Station property in Bridgeport will be
approximately  $11.3  million,  of which  approximately  $7.4  million  had been
incurred as of September 30, 1996, and that the value of the property  following
remediation will not exceed $6 million. In its 1992 decision on UI's application
for retail rate  increases,  the DPUC  provided  for  additional  revenues to be
recovered  from  customers,  in the  amount of $4.3  million,  during the period
1993-1996, subject to true-up in the Company's next retail rate proceeding based
on actual remediation costs and actual gain on the Company's  disposition of the
property.

                                 Property Taxes

     On November 2, 1993, the Company received  "updated"  personal property tax
bills  from  the  City of New  Haven  (the  City)  for the tax  year  1991-1992,
aggregating $6.6 million,  based on an audit by the City's tax assessor.  On May
7, 1994,  the Company  received a  "Certificate  of  Correction....to  correct a
clerical  omission  or  mistake"  from the City's tax  assessor  relative to the
assessed value of the Company's  personal  property for the tax year  1994-1995,
which certificate  purports to increase said assessed value by approximately 53%
above the tax assessor's  valuation at February 28, 1994,  generating tax claims
of approximately $3.5 million. On March 1, 1995, the Company received notices of
assessment  changes  relative to the assessed  value of the  Company's  personal
property for the tax year  1995-1996,  which  notices  purport to increase  said
assessed value by approximately 48% over the valuation  declared by the Company,
generating  tax claims of  approximately  $3.5  million.  On May 11,  1995,  the
Company received  notices of assessment  changes relative to the assessed values
of the Company's  personal  property for the tax years  1992-1993 and 1993-1994,
which notices purport to increase said assessed values by approximately  45% and
49%, respectively,  over the valuations declared by the Company,  generating tax
claims of approximately $4.1 million and $3.5 million, respectively. On March 8,
1996,  the  Company  received  notices of  assessment  changes  relative  to the
assessed value of the Company's  personal  property for the tax year  1996-1997,
which notices purport to increase said assessed value by approximately  57% over
the  valuations  declared by the Company and are expected to generate tax claims
of approximately  $3.8 million.  The Company is contesting each of these actions
by the City's tax  assessor  vigorously.  On  January 9, 1996,  the  Connecticut
Superior  Court granted the Company's  motion for summary  judgment  against the
City  relative to the  "updated"  personal  property  tax bills for the tax year
1991-1992.  The City  appealed to the  Appellate  Court from the Superior  Court
decision,  which  decision  would also be applicable to and defeat the valuation
increases  for the tax years  1992-1993  and  1993-1994  if it is  sustained  on
appeal.  In June 1996, the Connecticut  Supreme Court transferred this appeal to
its docket,  and the case has been  scheduled  for  argument  before the Supreme
Court in  December  1996.  It is the  present  opinion of the  Company  that the
ultimate  outcome  of this  dispute  will not have a  significant  impact on the
financial position of the Company.

(M)  NUCLEAR FUEL DISPOSAL AND NUCLEAR PLANT DECOMMISSIONING

     New   Hampshire   has   enacted  a  law   requiring   the   creation  of  a
government-managed  fund to finance the  decommissioning  of nuclear  generating
units  in  that  state.  The New  Hampshire  Nuclear  Decommissioning  Financing
Committee  (NDFC)  has  established  $432  million  (in  1996  dollars)  as  the
decommissioning  cost estimate for Seabrook Unit 1, of which the Company's share
would be approximately $76 million. This estimate assumes the prompt removal and
dismantling  of the Unit at the end of its estimated  36-year  energy  producing
life.  Monthly  decommissioning  payments  are being  made to the  state-managed
decommissioning  trust fund.  UI's share of the  decommissioning  payments  made
during  the nine  months  of 1996 was $1.2  million.  UI's  share of the fund at
September 30, 1996 was approximately $8.5 million.



                                     - 15 -
<PAGE>

                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     Connecticut has enacted a law requiring the operators of nuclear generating
units  to file  periodically  with  the  DPUC  their  plans  for  financing  the
decommissioning  of the  units  in  that  state.  Current  decommissioning  cost
estimates for Millstone Unit 3 and the Connecticut  Yankee Unit are $478 million
(in 1996 dollars) and $375 million (in 1996 dollars), respectively, of which the
Company's   share  would  be   approximately   $18  million  and  $36   million,
respectively.  These estimates assume the prompt removal and dismantling of each
unit  at  the  end of its  estimated  40-year  energy  producing  life.  Monthly
decommissioning  payments,  based on these  cost  estimates,  are being  made to
decommissioning  trust funds managed by Northeast  Utilities.  UI's share of the
Millstone Unit 3  decommissioning  payments made during the first nine months of
1996  was  $365,000.   UI's  share  of  the  fund  at  September  30,  1996  was
approximately  $3.6  million.   For  the  Company's  9.5%  equity  ownership  in
Connecticut  Yankee,  decommissioning  costs of $1.0  million  were funded by UI
during the first nine  months of 1996,  and UI's share of the fund at  September
30, 1996 was $18.7 million.

     The  Financial  Accounting  Standards  Board  (FASB) has issued an exposure
draft related to the  accounting for the closure and removal costs of long-lived
assets,  including  nuclear plant  decommissioning.  If the proposed  accounting
standard  were  adopted,   it  may  result  in  higher  annual   provisions  for
decommissioning  to be recognized earlier in the operating life of nuclear units
and an accelerated recognition of the decommissioning  obligation. The FASB will
be  deliberating  this issue,  and the resulting  final  pronouncement  could be
different from that proposed in the exposure draft.



                                     - 16 -
<PAGE>


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


                          MAJOR INFLUENCES ON FINANCIAL CONDITION

     The  Company's  financial  condition  will  continue to be dependent on the
level of  retail  and  wholesale  sales and the  Company's  ability  to  control
expenses.  The two  primary  factors  that  affect  sales  volume  are  economic
conditions  and  weather.  Since  1990,  annual  growth in total  operation  and
maintenance  expense,   excluding  one-time  items  and  cogeneration   capacity
purchases,  has  averaged  less than 1.0%.  The  Company  hopes to  continue  to
restrict  this  average to less than the rate of  inflation in future years (see
"Outlook").

     The Company's financial status and financing capability will continue to be
sensitive to many other factors, including conditions in the securities markets,
economic conditions,  interest rates, the level of the Company's income and cash
flow,  and  legislative  and  regulatory  developments,  including  the  cost of
compliance with increasingly stringent environmental legislation and regulations
and competition within the electric utility industry.

     A major factor affecting the Company's  earnings prospects beyond 1996 will
be the success of the  Company's  efforts to  implement a  regulatory  framework
similar to the plan filed with the DPUC in March of 1996,  which  proposed price
stability and incentive regulation. The Company's ability to achieve its goal of
4% annual  earnings  growth from operations is dependent upon having the ability
to earn an  adequate  return in its  utility  business.The  DPUC,  in its "Draft
Decision"  dated  October 7, 1996,  approved  certain  elements of the Company's
proposal  but  modified  other  elements,   such  that  the  proposed  five-year
regulatory plan,  which the Company  considers is voluntary on its part, was not
acceptable  to  the  Company.   On  October  23,  1996,   the  Company  filed  a
counterproposal  with the DPUC that  incorporated  several of the proposals that
are in the Draft Decision, most notably the provision for rate decreases of 3-5%
over the five-year duration of the plan, and reinstated the Company's commitment
to added  Seabrook  depreciation.  The Company also offered an earnings  sharing
mechanism that would benefit  shareowners  and customers alike if actual results
were better than those  forecasted by the Company.  The Company also objected to
the DPUC proposed 11.25%  five-year level of allowed return on utility equity as
being too low  relative to the rest of the  industry and relative to recent DPUC
decisions. The Company offered a counterproposal based on an 11.9% return level.
The DPUC issued a second  draft  decision,  denominated  "Draft  Decision 2," on
November 12, 1996.  Draft  Decision 2, which did not  acknowledge  the Company's
counterproposal,   stated that:

     "after a detailed review of UI's financial and operational records and
     its proposal to address  expected over earnings,  the Department  concludes
     that for the five-year period from 1997 through 2001, the Company is likely
     to earn  significantly  more  than  its  required  return  on  equity.  The
     Company's total bills to ratepayers  could be reduced an average of 3 to 5%
     and additional  amortizations of regulatory  assets totaling more than $102
     million net of tax could be taken.  The reduction to customer  bills can be
     accomplished  through  implementation  of the following  adjustments to the
     Company's proposed  performance based incentive regulation plan: 1) through
     a reduction  to current  CAM charges of roughly $15 to $24 million  (2.3 to
     3.6%)  annually;  and 2) through a modification to the FAC that shifts more
     risk to the Company and eliminates  expected  charges to ratepayers.  These
     adjustments  are  predicated  on an  11.5%  ROE  found  reasonable  by  the
     Department.   Given  the  Company's  current  and  expected  financial  and
     operating prognosis, the Rate Plan found appropriate in this Decision would
     enable  the  Company  to  operate  successfully,   maintain  its  financial
     integrity,  attract  capital and  compensate  its  investors for the use of
     their money and the risks assumed even as the electric industry transitions
     towards a much more competitive environment."

The  Company  has not  completed  its  review of Draft  Decision  2, but it will
respond to the DPUC prior to November 21, 1996.  The current DPUC schedule calls
for the issuance of a final decision on November 27, 1996.

    The electric utility industry is being subjected to increasing competition.
Currently,  the Company's  electric  service rates are subject to regulation and
are based on the Company's  costs.  Therefore,  the Company,  and most regulated
utilities,  are subject to certain accounting  standards (Statement of Financial
Accounting  Standards  No. 71 (SFAS No.  71),  "Accounting  for the  Effects  of
Certain Types of Regulation") that are not applicable to other


                                     - 17 -
<PAGE>

businesses in general.  These accounting rules allow regulated utilities,  where
appropriate,  to defer the income  statement  impact of  certain  costs that are
expected to be  recovered  in future  regulated  service  rates and to establish
regulatory  assets on balance sheets for such costs.  The effects of competition
could  cause the  operations  of the  Company,  or a portion  thereof,  to cease
meeting the  criteria  for  application  of these  accounting  rules.  While the
Company expects to continue to meet these criteria in the foreseeable future, if
the Company were to cease  meeting  these  criteria,  accounting  standards  for
businesses in general would become  applicable and immediate  recognition of any
previously  deferred  costs would be required in the year in which the  criteria
are no longer met. If this change in accounting  were to occur,  it would have a
material adverse effect on the Company's  earnings and retained earnings in that
year and could have a material adverse effect on the Company's ongoing financial
condition as well.

                                     - 18 -
<PAGE>




                                              CAPITAL EXPENDITURE PROGRAM


     The Company's  1996-2000 capital expenditure  program,  excluding allowance
for funds used during  construction  (AFUDC)  and its effect on certain  capital
related items, is presently budgeted as follows:

<TABLE>
<CAPTION>

(In thousands)                      1996         1997        1998        1999         2000        Total
                                    ----         ----        ----        ----         ----        -----

<S>                            <C>          <C>         <C>         <C>          <C>         <C>    
Production (1)                    $16,891      $15,171     $14,077     $32,533      $12,656     $91,328
Distribution                       18,762       19,956      19,236      18,996       20,112      97,062
Transmission                        3,542        3,360       5,436       5,304        5,256      22,898
Conservation and
  Load Management                   9,819        7,224       6,011       5,685        5,685      34,424
Other                               5,145        6,014       4,217       3,976        3,589      22,941
                                   ------       ------      ------      ------       ------     -------
  Subtotal                         54,159       51,725      48,977      66,494       47,298     268,653
Nuclear Fuel                        5,365        8,298       2,943      10,500        3,196      30,302
                                   ------       ------      ------      ------       ------     -------
  Total Expenditures              $59,524      $60,023     $51,920     $76,994      $50,494    $298,955
                                   ======       ======      ======      ======       ======     =======

AFUDC (Pre-tax)                    $2,393       $2,815      $2,606      $2,502       $3,305
Book Depreciation                  63,688       65,883      69,346      72,756       71,749
Nuclear Decommissioning             2,523        2,271       2,364       2,472        2,588
Amortization of Deferred
  Return on Seabrook Unit 1
  Phase-In (after tax)             12,586       12,586      12,586      12,586

Estimated Rate Base
  (end of period)              $1,198,020   $1,167,980  $1,137,109  $1,125,596   $1,094,268


(1)  Steel Point Station environmental remediation costs of $3,793 are included in 1996.
</TABLE>



                                     - 19 -
<PAGE>



                                    LIQUIDITY AND CAPITAL RESOURCES


     At September 30, 1996,  the Company had $36.2 million of cash and temporary
cash investments,  an increase of $31.1 million from the balance at December 31,
1995. The components of this  increase,  which are detailed in the  Consolidated
Statement of Cash Flows, are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  (Millions)

<S>                                                                                   <C>
       Balance, December 31, 1995                                                     $ 5.1

       Net cash provided by operating activities                                      111.3

       Net cash provided by (used in) financing activities:
       -   Financing activities, excluding dividend payments                          (15.7)
       -   Dividend payments                                                          (30.6)

       Cash invested in plant, including nuclear fuel                                 (33.9)
                                                                                       ----
             Net increase                                                              31.1
                                                                                       ----
       Balance,  September 30, 1996                                                   $36.2
                                                                                      =====
</TABLE>

     The Company's capital requirements are presently projected as follows:

<TABLE>
<CAPTION>
                                                                 1996       1997       1998       1999       2000
                                                                 ----       ----       ----       ----       ----
                                                                                    (millions)
<S>                                                               <C>        <C>       <C>      <C>          <C> 
Cash on Hand - Beginning of Year                                  $ 5        $ 31      $ 1      $  -         $ -
Internally Generated Funds less Dividends                         100          95      101         99         84
                                                                  ---         ---      ---         --         --
         Subtotal                                                 105         126      102         99         84

Less:
Capital Expenditures                                               59          60       52         77         50
                                                                  ---         ---      ---         --         --

Cash Available to pay Debt Maturities and Redemptions              46          66       50         22         34

Less:
Maturities and Mandatory Redemptions                               11          65      116        116        156
Optional Preferred Stock Purchases                                  4          -        -          -          -
                                                                  ---         ---      ---        ---        ---   

External Financing Requirements                                  $(31)       $ (1)    $ 66       $ 94       $122
                                                                  ===         ===      ===        ===        ===
</TABLE>

Note:  Internally  Generated  Funds less  Dividends,  Capital  Expenditures  and
       External  Financing  Requirements are estimates based on current earnings
       and cash flow  projections and are subject to change due to future events
       and  conditions  that may be  substantially  different than those used in
       developing the projections.

     All of the Company's  capital  requirements that exceed available cash will
have  to be  provided  by  external  financing.  Although  the  Company  has  no
commitment to provide such financing from any source of funds,  other than a $75
million  revolving credit agreement with a group of banks,  described below, the
Company  expects to be able to satisfy its external  financing  needs by issuing
additional  short-term  and  long-term  debt and by issuing  preferred  stock or
common  stock if  necessary.  The  continued  availability  of these  methods of
financing  will  be



                                     - 20 -
<PAGE>

dependent on many  factors,  including  conditions  in the  securities  markets,
economic conditions, and the level of the Company's income and cash flow.

     The Company has a revolving credit  agreement with a group of banks,  which
currently  extends to December 11, 1996. The borrowing limit of this facility is
$75 million.  The facility  permits the Company to borrow funds at a fluctuating
interest  rate  determined  by the prime  lending  market in New York,  and also
permits the Company to borrow money for fixed  periods of time  specified by the
Company at fixed interest rates determined by the Eurodollar interbank market in
London, or by bidding,  at the Company's option. If a material adverse change in
the business, operations,  affairs, assets or condition, financial or otherwise,
or  prospects  of the Company and its  subsidiaries,  on a  consolidated  basis,
should  occur,  the banks may  decline to lend  additional  money to the Company
under this revolving credit agreement,  although  borrowings  outstanding at the
time of such  an  occurrence  would  not  then  become  due and  payable.  As of
September 30, 1996, the Company had no short-term  borrowings  outstanding under
this facility.  The Company expects to replace this revolving  credit  agreement
with a new but similar credit facility by year-end.

     UI has one wholly-owned  subsidiary,  United  Resources,  Inc. (URI),  that
serves as the parent  corporation for several  unregulated  businesses,  each of
which is incorporated  separately to participate in business  ventures that will
complement and enhance UI's electric utility business and serve the interests of
the  Company  and  its  shareholders  and  customers.   Two  other  wholly-owned
subsidiaries,  United Energy International,  Inc. and Research Center, Inc. were
dissolved in April 1996.

     Four wholly-owned  subsidiaries of URI have been  incorporated.  Souwestcon
Properties,  Inc.  (SPI)  participated  as a 25% partner in the  ownership  of a
medical  hotel  building in New Haven.  The building has been sold;  and SPI was
dissolved  in  April  1996.  Another  wholly-owned  subsidiary  of URI,  Thermal
Energies,  Inc., is  participating  in the  development of district  heating and
cooling  facilities in the downtown New Haven area,  including the energy center
for an office tower and  participation as a 37% partner in the energy center for
a city hall and office tower complex.  A URI subsidiary  named Precision  Power,
Inc. provides  power-related  equipment and services to the owners of commercial
buildings and industrial  facilities.  A URI subsidiary  named American  Payment
Systems,  Inc.  manages agents and equipment for electronic  data  processing of
bill  payments made by customers of  utilities,  including  UI, at  neighborhood
businesses.

     The Board of Directors of the Company has  authorized  the  investment of a
maximum of $27 million,  in the  aggregate,  of the  Company's  assets in all of
URI's ventures, and, at September 30, 1996, $27 million had been so invested.

                               RESULTS OF OPERATIONS

Third Quarter of 1996 Vs. Third Quarter of 1995
-----------------------------------------------

     Earnings  for the third  quarter of 1996 were $17.9  million,  or $1.27 per
share,  down $8.7  million,  or $.62 per share,  from the third quarter of 1995.
Earnings from operations,  which exclude one-time items, were $26.5 million,  or
$1.88 per share,  for the third quarter of 1996, down $1.5 million,  or $.12 per
share,  from the third quarter of 1995.  The one-time item recorded in the third
quarter  of 1996 was a charge of $8.7  million  (after-tax),  or $.61 per share,
from early  retirement and voluntary  severance  programs.  The one-time  items,
recorded in the third quarter of 1995,  were: a one-time  charge of $1.6 million
(after-tax),  or $.12 per share,  reflecting  the effects of  legislated  future
state income tax rate  reductions,  which  reduced  future tax benefits on plant
previously written off, and a minor gain.

     Retail  operating  revenues  decreased  by about $4.3  million in the third
quarter of 1996 compared to the third quarter of 1995:



                                     - 21 -
<PAGE>

  .  A  retail  kilowatt-hour  sales  decrease  of 4.1%  from  the  prior  year
     decreased  retail  revenues by $7.7 million and sales margin  (revenue less
     fuel  expense  and  revenue-based  taxes) by $6.0  million.  The  Company's
     calculation of the impact of weather on kilowatt-hour  sales indicates that
     sales decreased in the third quarter of 1996, which was cooler than normal,
     compared to the third  quarter of 1995,  which was hotter than  normal,  by
     about  4.9%.  This  would  indicate  that  there  was a  "real"  (i.e.  not
     attributable  to abnormal  weather)  kilowatt-hour  sales increase of about
     0.7% in the third quarter of 1996 compared to the third quarter of 1995.

  .  Other factors increased retail revenues by $3.4 million: $2.0 million from
     the recovery,  through the Conservation Adjustment Mechanism, of previously
     recorded  and  projected   conservation   program  costs  mandated  by  the
     Department  of  Public  Utility   Control  (DPUC),   partially   offset  by
     competitive  pricing and other price reduction  mechanisms,  and a net $1.4
     million  increase from "pass through"  charges for certain expense changes,
     including increases in fuel costs.

     Wholesale  "capacity"  revenues  increased slightly in the third quarter of
1996 compared to the third quarter of 1995.  Wholesale  "energy"  revenues are a
direct offset to wholesale energy expense and do not contribute to sales margin.
These energy revenues, as well as the associated fuel expense,  increased during
the third quarter of 1996 compared to the third quarter of 1995.

     Retail  fuel and energy  expenses  decreased  by a net $0.5  million in the
third quarter of 1996 compared to the third quarter of 1995.  Expenses increased
$2.1 million due to lower nuclear unit  generation.  Lower  generation  from the
Connecticut  Yankee and  Millstone  Unit 3 nuclear  generating  units was partly
offset by higher generation from the Seabrook nuclear  generating unit. For more
on the status of the operation of the  Connecticut  Yankee and Millstone  Unit 3
units,  see the Outlook  section.  Expenses  decreased  by $2.2 million from the
lower cost of nuclear  fuel at the Seabrook  unit.  Decreases in expenses due to
lower sales  volume were  partially  offset by higher  fossil fuel  prices,  the
latter being "pass through" charges to revenue.

     Operating  expenses for  operations,  maintenance  and  purchased  capacity
charges  increased by $1.7 million in the third  quarter of 1996 compared to the
third quarter of 1995:

  .    Purchased capacity expense increased slightly.

  .  Operation and maintenance  expense increased by $1.4 million.  A provision
     for maintenance  expenses  associated  with generating  plant overhauls and
     refueling outages added $1.1 million,  other nuclear unit maintenance costs
     increased  $0.7 million,  other fossil plant costs  increased $0.4 million,
     and general expenses increased $0.7 million.  Employment costs decreased by
     $1.5  million,  due to savings from the  Bargaining  Unit  Voluntary  Early
     Retirement Program  implemented in January of 1996 and also to decreases in
     other employment related costs.

     Other operating  expenses  decreased  slightly in the third quarter of 1996
compared to the third quarter of 1995, from lower taxes, partly offset by higher
depreciation expense.

     Other net income  increased by about $1.3  million in the third  quarter of
1996 compared to the third quarter of 1995  primarily  because of the absence of
expenses,  associated with cancelled construction projects,  which were recorded
in 1995.

     Interest charges  continued their significant  decline,  decreasing by $1.9
million in the third  quarter of 1996 compared to the third quarter of 1995 as a
result of the Company's  refinancing  program and strong cash flow.  Also, total
preferred dividends (net-of-tax) decreased slightly in the third quarter of 1996
compared  to the third  quarter of 1995 as a result of  purchases  of  preferred
stock by the Company.




                                     - 22 -
<PAGE>

Nine Months of 1996 Vs. Nine Months of 1995
-------------------------------------------

     Earnings for the first nine months of 1996 were $40.1 million, or $2.84 per
share, down $4.7 million, or $.34 per share, from the first nine months of 1995.
Earnings from operations,  which exclude one-time items, were $52.4 million,  or
$3.72 per share for the first nine months of 1996, up $8.2 million,  or $.57 per
share,  from the first nine months of 1995.  The one-time  items recorded in the
first nine months of 1996 were: a gain of $1.8 million (after-tax),  or $.13 per
share,  from the purchase of preferred stock by the Company at a discount to par
value,  charges of $23.0 million ($13.4 million  after-tax),  or $.95 per share,
reflecting the estimated costs of early retirements and voluntary separations as
part of the Company's on-going  organization  review and cost reduction program,
and a charge of $1.4 million ($0.8 million  after-tax),  or $.06 per share,  for
the cumulative loss on an office space sublease.  The one-time items recorded in
the first  nine  months of 1995 were:  a charge of $.12 per share,  taken in the
third  quarter of 1995 and  reflecting  the effects of  legislated  future state
income  tax  rate  reductions,  which  reduced  future  tax  benefits  on  plant
previously  written  off,  and  gains of $.15 per  share  from the  purchase  of
preferred stock by the Company at a discount to par value.

     Retail operating revenues increased by about $9.5 million in the first
nine months of 1996 compared to the first nine months of 1995:

 .    A  retail  kilowatt-hour  sales  increase  of 0.4%  from  the  prior  year
     increased  retail  revenues by $0.8 million and sales margin  (revenue less
     fuel  expense  and  revenue-based  taxes) by $0.4  million.  The  Company's
     calculation of the impact of weather on kilowatt-hour  sales indicates that
     sales  decreased by about 1.2% in the first nine months of 1996 compared to
     the first nine months of 1995.  Weather was deemed to be severe compared to
     normal over the first nine months of 1995 and mild  compared to normal over
     the first nine months of 1996. Retail kilowatt-hour sales also increased by
     0.4% due to the leap  year day in 1996.  This  indicates  that  there was a
     "real"  (i.e.  not   attributable   to  abnormal   weather  or  leap  year)
     kilowatt-hour sales increase of about 1.1% in the first nine months of 1996
     compared to the first nine months of 1995.

 .   Other factors increased retail revenues by $8.7 million: $5.1 million from
     the recovery,  through the Conservation Adjustment Mechanism, of previously
     recorded  and  projected   conservation   program  costs  mandated  by  the
     Department  of  Public  Utility   Control  (DPUC),   partially   offset  by
     competitive  pricing and other price reduction  mechanisms,  and a net $3.6
     million  increase from "pass through"  charges for certain expense changes,
     including increases in fuel costs.

     Wholesale  "capacity"  revenues increased slightly in the first nine months
of 1996 compared to the first nine months of 1995.  Wholesale  "energy" revenues
are a direct offset to wholesale  energy  expense and do not contribute to sales
margin. These energy revenues, as well as the associated fuel expense, increased
during the first nine months of 1996 compared to the first nine months of 1995.

     Retail fuel and energy expenses decreased by $3.4 million in the first nine
months of 1996  compared  to the first nine  months of 1995.  A decrease of $7.3
million was due to lower nuclear fuel prices,  primarily at the Seabrook nuclear
generating  unit.  Lower  nuclear unit  generation,  due to the shutdowns at the
Connecticut Yankee and Millstone 3 nuclear generating units,  increased fuel and
energy expense by $1.4 million. For more on the status of the operation of these
units,  see the Outlook section.  Other fuel and energy expenses  increased from
the higher kilowatt-hour  generation to meet sales volume and increases in "pass
through" charges, including fossil fuel costs.

     Operating  expenses for  operations,  maintenance  and  purchased  capacity
charges  increased by $6.0 million in the first nine months of 1996  compared to
the first nine months of 1995:

 .   Purchased capacity expense was $2.2 million lower,  reflecting the absence
     of the added  refueling  outage costs  incurred by the  Connecticut  Yankee
     nuclear generating unit during the first and second quarters of 1995.



                                     - 23 -
<PAGE>

 .   Operation and maintenance  expense increased by $8.2 million.  A provision
     for maintenance  expenses  associated  with generating  plant overhauls and
     refueling  outages  added $4.4  million,  and the  expensing of  previously
     capitalized costs associated with software  purchases and development added
     $1.3 million.  Employment  costs increased by $0.7 million due to increases
     in employee compensation,  not additional employees.  Other costs increased
     by $1.8 million.

     Other  operating  expenses  increased  in the  first  nine  months  of 1996
compared to the first nine months of 1995, from higher depreciation  expense and
income taxes (excluding the income tax effects of one-time items).

     Interest charges  continued their significant  decline,  decreasing by $5.6
million in the first nine  months of 1996  compared  to the first nine months of
1995 as a result of the  Company's  refinancing  program  and strong  cash flow.
Also, total preferred  dividends  (net-of-tax)  decreased  slightly in the first
nine months of 1996 compared to the first nine months of 1995 as a result of the
purchases of preferred stock by the Company.

                               OUTLOOK
(All statements in this Outlook section are "forward looking"  statements within
the meaning of the Securities Exchange Act of 1934.)

     The Company's  long term earnings goal is to achieve growth in earnings per
share from operations of 4% annually from the 1992 level of $3.17 per share. The
Company  exceeded the goal in 1995 and  anticipates  exceeding the goal of about
$3.70  per  share in 1996  (subject  to a number of  factors  described  below).
However,  the  Company has taken  substantial  charges in 1996 to help it reduce
future costs, prepare for expected future competition, and minimize the need for
any  future  layoffs.  One-time  charges,  for early  retirement  and  voluntary
severances (the Plans),  taken in the first nine months of 1996 amounted to $.95
per share.  These were offset by some relatively minor gains, and total one-time
items had a net negative  impact of $.88 per share.  It is possible,  therefore,
that total earnings for the year 1996 could fall below $3.00 per share. The most
recent Plans,  implemented  in the third quarter of 1996,  are likely to produce
annual cost savings of about $8 million,  which may not be fully  realized until
1998.  A total of 163  employees  (of a total  workforce  of 1,233 at the end of
September 1996)  participated  in the Plans  implemented in the third quarter of
1996.

     The 1996 quarterly  earnings from operations has followed a pattern similar
to that of 1995,  with  significantly  higher earnings in the third quarter when
compared to other quarters.  Summer seasonal retail sales and summer pricing are
the predominant factors  contributing to this pattern.  Under normal conditions,
the Company should earn  approximately half of its income from operations in the
third  quarter,  and weather  factors can have a significant  impact on sales in
that quarter, as they did in both the third quarters of 1995 and 1996.

     The Company had  anticipated  that  retail  revenues  for all of 1996 would
increase  by  about  $5  million  as a  result  of  the  recovery,  through  the
Conservation   Adjustment  Mechanism,   of  previously  recorded  and  projected
conservation  costs mandated by the Department of Public Utility  Control (DPUC)
partially  offset by competitive  pricing and other price reduction  mechanisms.
These factors have increased  retail  revenues by $5.1 million in the first nine
months of 1996  compared  to the first  nine  months of 1995.  Increases  in the
fourth  quarter of 1996  compared  to the fourth  quarter of 1995 likely will be
minimal.

     The Company has dealt with the  possible  loss of  customers as a result of
cogeneration,  relocation  or  discontinuation  of  operations  by  successfully
negotiating  twenty-eight  multi-year contracts with major customers,  including
its largest customer, Yale University, which is constructing a cogeneration unit
that will produce  approximately  one-half of its  electricity  requirements  by
1998.  These  contracts  provide  cost  reduction  and price  stability  for the
customers  while  helping the Company  maintain its  customer  base for the long
term.

     The Company is  considering  alternative  means of providing  for its power
supply  requirements  at a lower  cost.  In this  connection,  the  Company  has
recently  solicited  proposals from qualified  entities that may afford UI lower



                                     - 24 -
<PAGE>

and more certain costs and risk  mitigation  with respect to its power supply by
having the qualified  entity accept an assignment of the electrical  output from
UI's existing  generating  resources for a five-year  period beginning in May of
1997 in  exchange  for the  entity's  commitment  to supply  all of UI's  retail
electric load  requirements at a fixed  wholesale price during that period.  The
Company is unable to predict  whether it will receive any  proposals in response
to this  solicitation  or whether any proposals that it does receive will result
in an arrangement of the sort described or any similar arrangement.

     The Company's  earnings will continue to be very  sensitive to the level of
retail  sales.  The two primary  factors  that affect  sales volume are economic
conditions and weather.  Overall,  1995 weather was severe compared to "normal",
providing  additional sales margin (revenue less fuel expense and  revenue-based
taxes) of about $5.1  million,  of which $3.8  million was  attributable  to the
first nine months of 1995.  Weather  for the last three  months of 1995 was also
severe compared to normal which produced  additional  sales margin of about $1.3
million that would not be expected to recur in 1996. The Company  expects "real"
retail  kilowatt-hour sales growth in a range of 0.5% to 1.5% for the last three
months  of  1996  compared  to the  last  three  months  of  1995.  A 1%  "real"
kilowatt-hour  sales growth in this period would produce additional sales margin
of about $1.2 million over last year.

     The Company had  expected  that higher  generating  output from the nuclear
units (no refueling outages planned for the Seabrook Unit or Millstone Unit 3 in
1996) and lower  nuclear  fuel prices  would have added  $4-$5  million to sales
margin  (through lower retail fuel and energy expense) in 1996 compared to 1995,
if normal operating  assumptions were met. These savings were skewed towards the
first six  months of 1996,  in which  $5.9  million  of  savings  were  actually
realized.  However,  there were virtually no associated  sales margin savings in
the third  quarter of 1996  compared to the third quarter of 1995 because of the
shutdowns of the  Connecticut  Yankee and  Millstone  Unit 3 nuclear  generating
units in 1996.  (See Part II.  Other  Information,  Item 5.  Other  Events.)  On
average,  over a normal operating cycle,  which would include a refueling outage
and other  unscheduled  outages,  the impact on sales  margin of the shutdown of
these  units  would  amount to about  $0.5  million  per  month  for each  unit.
Millstone  Unit 3 was taken out of service on March 30,  1996,  and will  remain
shut down pending a comprehensive  Nuclear Regulatory Commission (NRC) review of
operations.  The  Connecticut  Yankee  Unit was taken out of service on July 23,
1996. As a result of an evaluation being completed by the owners of the unit, it
is possible that a permanent  shutdown of the plant could occur.  If this is the
case,  then UI should  experience cost  reductions in the future.  However,  the
impact in the long run would depend on prices for replacement power, load growth
in the Company's  service  territory,  the cost and timing  associated  with the
decommissioning of the plant, and revenue recovery allowed by the Federal Energy
Regulatory  Commission  and the DPUC. For the fourth quarter of 1996 compared to
the fourth quarter of 1995,  replacement  power costs will likely  increase;  by
about $1.5  million  for the  Millstone  Unit 3, and by about $2 million for the
Connecticut  Yankee Unit,  as both units ran at almost full capacity in the 1995
period.  This would have a negative  earnings impact of $.06 and $.08 per share,
respectively,  but could be partially offset by reductions in replacement  power
costs and nuclear fuel prices of as much as $2.5 million,  or $.10 per share, if
the  Seabrook  Unit runs at normal  generating  levels.  The  Seabrook  Unit was
shutdown  for an eight  week  refueling  outage in the  fourth  quarter of 1995.
Overall,  for the year 1996 compared to 1995,  the impact of  generating  output
from the nuclear units and lower nuclear fuel prices should improve sales margin
within the range originally expected.  It is not possible,  at this time, for UI
to estimate the impact that the Millstone Unit 3 and the Connecticut Yankee Unit
shutdowns may have on fourth quarter operating and maintenance expenses.

     The  DPUC is  currently  investigating  options  regarding  "pass  through"
clauses  related to fossil and nuclear fuel  expenses  that might affect  future
sales margin.

     Another major factor affecting the Company's earnings will be the Company's
ability to control expenses. As part of a labor contract between the Company and
its union employees (the Bargaining Unit) covering the period May 16, 1995 - May
16,  1998,  and in  conjunction  with the  Company's  cost savings  programs,  a
Bargaining Unit Voluntary Early Retirement Program was initiated and resulted in
a  one-time  charge of $.30 per share  taken in the first  quarter  of 1996.  An
additional  one-time charge of $.04 per share was incurred in the second quarter
of 1996 for early  retirement  costs  not  accounted  for in the first  quarter.
Savings from this VERP began  accruing in the


                                     - 25 -
<PAGE>

second  quarter of 1996 and should  amount to at least $1 million  for the year.
The Company's most recent early retirement and severance  plans,  implemented in
the third quarter of 1996, are not expected to reduce expenses  significantly in
the  fourth  quarter of 1996.  It is  anticipated  that,  overall,  and  barring
unforeseen events, operations and maintenance expenses for the fourth quarter of
1996  compared to the fourth  quarter of 1995 will be  approximately  $2 million
higher.

     Depreciation  expense  should  increase by $5-$6  million in 1996 from 1995
levels.  Somewhat more than half of this increase is due to  anticipated  normal
plant  additions,  and  the  rest  to the  recovery  of  conservation  and  load
management  (C&LM) program costs. This estimate is somewhat higher than previous
estimates  because the book  depreciation  lives of 1996 C&LM  programs has been
reduced,  by the Connecticut  Department of Public Utility Control (DPUC),  from
five to three years.  An adjustment to account for the  year-to-date  impact was
made in the third quarter of 1996.

     The Company expects  continued  reductions in interest  expense of about $7
million  from the 1995  level of $77  million  to about $70  million.  This 1996
interest  expense  level  would be 38% below the 1989  level and would  mark the
seventh  consecutive  year of interest  expense  decline.  The Company  recently
completed a tender offer for a portion of the Seabrook  Lease  Obligation  Bonds
that will provide a  going-forward  savings of about $1.5  million per year,  in
addition  to  savings  expected  from  continued  reduction  of debt  due to the
Company's strong cash flow.

     The Company no longer  expects a  significant  improvement  in  unregulated
subsidiary  earnings  compared  to the  results  of  1995,  partly  due to costs
associated  with  the  rapid  growth  of  the  American  Payment  Systems,  Inc.
subsidiary.  In the near term, the Company's  investments in these  subsidiaries
are  unlikely to have a positive  effect on earnings,  but the Company  believes
that these investments will contribute to future earnings growth.

     A major factor affecting the Company's  earnings prospects beyond 1996 will
be the success of the  Company's  efforts to  implement a  regulatory  framework
similar to the plan filed with the DPUC in March of 1996,  which  proposed price
stability and incentive regulation. The Company's ability to achieve its goal of
4% annual  earnings  growth from operations is dependent upon having the ability
to earn an  adequate  return in its  utility  business.The  DPUC,  in its "Draft
Decision"  dated  October 7, 1996,  approved  certain  elements of the Company's
proposal  but  modified  other  elements,   such  that  the  proposed  five-year
regulatory plan,  which the Company  considers is voluntary on its part, was not
acceptable  to  the  Company.   On  October  23,  1996,   the  Company  filed  a
counterproposal  with the DPUC that  incorporated  several of the proposals that
are in the Draft Decision, most notably the provision for rate decreases of 3-5%
over the five-year duration of the plan, and reinstated the Company's commitment
to added  Seabrook  depreciation.  The Company also offered an earnings  sharing
mechanism that would benefit  shareowners  and customers alike if actual results
were better than those  forecasted by the Company.  The Company also objected to
the DPUC proposed 11.25%  five-year level of allowed return on utility equity as
being too low  relative to the rest of the  industry and relative to recent DPUC
decisions. The Company offered a counterproposal based on an 11.9% return level.
The DPUC issued a second  draft  decision,  denominated  "Draft  Decision 2," on
November 12, 1996.  Draft  Decision 2, which did not  acknowledge  the Company's
counterproposal,   stated that:

     "after a detailed review of UI's financial and operational records and
     its proposal to address  expected over earnings,  the Department  concludes
     that for the five-year period from 1997 through 2001, the Company is likely
     to earn  significantly  more  than  its  required  return  on  equity.  The
     Company's total bills to ratepayers  could be reduced an average of 3 to 5%
     and additional  amortizations of regulatory  assets totaling more than $102
     million net of tax could be taken.  The reduction to customer  bills can be
     accomplished  through  implementation  of the following  adjustments to the
     Company's proposed  performance based incentive regulation plan: 1) through
     a reduction  to current  CAM charges of roughly $15 to $24 million  (2.3 to
     3.6%)  annually;  and 2) through a modification to the FAC that shifts more
     risk to the Company and eliminates  expected  charges to ratepayers.  These
     adjustments  are  predicated  on an  11.5%  ROE  found  reasonable  by  the
     Department.   Given  the  Company's  current  and  expected  financial  and
     operating prognosis, the Rate Plan found appropriate in this Decision

                                     - 26 -
<PAGE>

     would enable the Company to operate  successfully,  maintain its  financial
     integrity,  attract  capital and  compensate  its  investors for the use of
     their money and the risks assumed even as the electric industry transitions
     towards a much more competitive environment."

The  Company  has not  completed  its  review of Draft  Decision  2, but it will
respond to the DPUC prior to November 21, 1996.  The current DPUC schedule calls
for the issuance of a final decision on November 27, 1996.

                                     - 27 -
<PAGE>


                             PART II. OTHER INFORMATION

Item 5.  Other Events

     Nuclear Generation

     On March 30, 1996,  Millstone Unit 3, a 1,154-MW  nuclear  generating  unit
located in  Waterford,  Connecticut,  in which the  Company  has a 3.685%  joint
ownership interest, was taken out of service following an engineering evaluation
that  determined  that four  safety-related  valves would not be able to perform
their design function during certain  postulated  events.  On April 4, 1996, the
Nuclear Regulatory Commission ("NRC") issued a letter to the Northeast Utilities
service  company  subsidiary  that operates  Millstone Unit 3,  requesting  that
Northeast Utilities submit, prior to restarting the unit, information describing
the actions  taken to ensure that future  operation of Millstone  Unit 3 will be
conducted in accordance with the terms and conditions of its operating  license,
NRC   regulations,   and  the  plant's  Updated  Final  Safety  Analysis  Report
(collectively, "Applicable Requirements"). The letter also requires that certain
specific  technical  issues  be  resolved  to the  NRC's  satisfaction  prior to
restarting the unit.

     The NRC's April 4, 1996 letter  concerning  Millstone  Unit 3 superseded an
earlier  letter,  dated March 7, 1996,  pursuant to which the NRC had  requested
information  regarding  the plans and  schedule  for  ensuring  that the  future
operation  of the unit would be  conducted  in  accordance  with the  Applicable
Requirements.  The NRC's April 4, 1996  letter  stated  that,  since the earlier
letter,  programmatic  issues and design  deficiencies  had been  identified  at
Millstone  Unit 3 that are similar in nature to those  previously  identified at
Millstone  Units 1 and 2, two other  nuclear  generating  units at the Millstone
Station that are owned by operating  subsidiaries of Northeast Utilities and are
also operated by a service company subsidiary of Northeast  Utilities.  Although
Millstone Unit 3 was designed and constructed more recently than Millstone Units
1 and 2,  under  more  stringent  licensing  requirements,  the  NRC  has  since
indicated,  in a letter dated May 21, 1996, that it plans to monitor closely the
actions taken to address the concerns at each of the Millstone units.

     The NRC's May 21,  1996 letter also  requested  that it be provided  with a
comprehensive  list of  design  and  configuration  deficiencies  identified  at
Millstone Unit 3, together with a description of corrective actions to be taken,
or planned to be taken,  in response  thereto and a detailed  description of the
plan for  completion  of the work required to respond to the NRC's April 4, 1996
request.

     On June 6, 1996, the NRC issued a letter stating that it had concluded that
the corrective action program at Millstone Station is not currently effective in
resolving  identified  deficiencies and that none of the generating units at the
Station  may  be  restarted   until  the   effectiveness   of  this  program  is
demonstrated.  This letter also outlined certain inspection  activities that the
NRC plans to undertake before any of the units are restarted.

     On June 28, 1996, the NRC issued a letter  stating that  Millstone  Station
had been  placed on the NRC's  "watch  list" as a Category 3  facility.  The NRC
deems  Category  3  plants  as  having   significant   weaknesses  that  warrant
maintaining  the  plant in  shutdown  condition  until it is  demonstrated  that
adequate  programs have been  established and implemented to ensure  substantial
improvement.

     On July 2, 1996,  the service  company  subsidiary  of Northeast  Utilities
filed an 800-page  document with the NRC,  responding to the NRC's April 4, 1996
request and  outlining a revised  corrective  action  program in response to the
criticism in the NRC's June 6, 1996 letter.

     On August 15, 1996,  Northeast Utilities announced the appointment of Bruce
Kenyon as President and Chief Executive Officer of Northeast  Utilities' Nuclear
Operations,  effective September 3, 1996. Mr. Kenyon, who had been President and
Chief Operating Officer of South Carolina  Electric & Gas Company,  announced on
September  18,  1996 that three  executives  loaned  from  unaffiliated  utility
companies would lead the recovery of the three Millstone  Station units. Each of
the  three   executives,   including   Mr.  John  Paul  Cowan  who  has  assumed



                                     - 28 -
<PAGE>


responsibility for Millstone Unit 3, has been loaned to Northeast  Utilities for
a six-month period,  which can be extended by mutual agreement.  This management
reorganization  will likely impact the  corrective  action program for Millstone
Unit 3 outlined in Northeast  Utilities' July 2, 1996 response to the NRC, since
Mr.  Kenyon  made it the first  priority  of the  loaned  recovery  officers  to
reassess the activities then underway and related scheduling issues.

     On October 24, 1996, the NRC announced  that an independent  NRC review had
concluded that the work environment and management failures were the source of a
high  volume of employee  concerns  and  allegations  related to safety of plant
operations and harassment and  intimidation  of employees at Millstone  Station.
Concurrently,  the NRC issued an order directing  Northeast  Utilities to devise
and implement a compliance plan for handling safety concerns raised by Millstone
Station  employees,  and for assuring an environment  free from  retaliation and
discrimination,  and ordering Northeast Utilities to contract for an independent
third party to oversee its corrective  action program for the employee  concerns
program.  Admiral David Goebel,  who has been selected by Mr. Kenyon to serve as
Vice President for Nuclear Oversight, will have responsibility for NU's response
to this NRC order.

     Although  UI's  management  anticipates  that  all of  the  above-described
problems  with  respect to Millstone  Unit 3 will be  resolved,  and although UI
cannot, at this time, predict how long it will take to resolve them, or when the
NRC will allow the unit to return to service, a protracted delay seems likely.

     While  Millstone  Unit  3 is out  of  service,  the  Company  is  incurring
incremental  replacement  power costs  estimated at  approximately  $500,000 per
month,  and  experiencing  an  adverse  impact  on net  earnings  per  share  of
approximately  $.02 per month.  In addition to the costs of  replacement  power,
incremental  direct costs will be incurred to address  issues  raised by the NRC
relative to Millstone Unit 3, and the Company may be responsible  for its 3.685%
joint ownership share of these costs.

     On March 7, 1996,  the NRC  requested  information  regarding the plans and
schedule for ensuring  that the future  operation of  Connecticut  Yankee Atomic
Power  Company's  582-MW  nuclear  generating  unit  ("CY")  located  in Haddam,
Connecticut,  will be conducted in accordance with the Applicable  Requirements.
Connecticut  Yankee Atomic Power Company is owned in part by the Company (9.5%),
and the  Company is  entitled  to 9.5% of CY's  generating  capacity  and energy
output. CY is operated by a service company  subsidiary of Northeast  Utilities,
the largest owner (49%) of  Connecticut  Yankee Atomic Power  Company.  A timely
response to the NRC request was filed by CY.

     On May 17, 1996, the NRC issued a letter stating that recent inspections of
CY revealed issues that were similar to those previously identified at Millstone
Station,  and  requested  that CY  submit a  comprehensive  list of  design  and
configuration  deficiencies identified at CY, together with a description of the
actions  taken in response to the  deficiencies.  On May 30, 1996, CY filed with
the NRC the information requested. On July 23, 1996, CY was taken out of service
following an engineering  evaluation  that determined  that  safety-related  air
cooling  system pipes could crack if the plant should lose its outside source of
electric  power.  On August 1, 1996, an NRC inspection team issued a report that
confirmed the  deficiencies  identified by CY in its May 30, 1996  submittal and
"identified a number of significant deficiencies in the engineering calculations
and analyses  which were relied upon to ensure the adequacy of the design of key
safety  systems" at the plant;  and on August 12, 1996, the NRC asked  Northeast
Utilities  to respond  within 30 days to new concerns  raised by the  inspection
team. On August 8, 1996,  Northeast Utilities  management had announced that, in
order  to  avail  itself  of  additional  time  to  resolve  all of the  plant's
safety-related   issues   permanently,   CY  would  advance  by  six  weeks  the
commencement of a refueling outage that had been scheduled to begin in September
of 1996.  CY has not been  refueled  and it remains out of service.  An economic
study by the owners  comparing  the costs of  continuing  to operate CY over the
remaining period of its operating  license,  which expires in 2007, to the costs
of shutting down the unit permanently and incurring  replacement power costs for
the same period has been  completed  and  additional  evaluations  regarding the
effects of shutting down the unit are ongoing.  It is possible that the economic
study and additional evaluations


                                     - 29 -
<PAGE>

will result in a decision to retire the unit; a final decision is expected to be
made by Connecticut  Yankee Atomic Power Company's Board of Directors during the
fourth quarter of 1996.

     UI's equity  investment  in  Connecticut  Yankee  Atomic  Power  Company is
approximately $10 million, and the purchased capacity from CY represents 3.7% of
the Company's 1995 total generating  resources.  The preliminary estimate of the
sum of future  payments  for the  closing,  decommissioning  and recovery of the
remaining  investment in CY, assuming permanent shutdown,  is approximately $800
million,  of which UI's 9.5% ownership share would be approximately $76 million.
The power  purchase  contract  under which UI purchases its 9.5%  entitlement to
CY's power output will permit Connecticut Yankee Atomic Power Company to recover
UI's  share of these  costs  from UI. If the  Connecticut  Yankee  Atomic  Power
Company's  Board of Directors  decision  results in a permanent  shutdown of CY,
Connecticut Yankee Atomic Power Company will likely file revised decommissioning
cost estimates and amendments to the power contracts with its owners,  including
UI, with the Federal Energy Regulatory  Commission  (FERC).  Based on regulatory
precedent,  Connecticut Yankee Atomic Power Company believes it will continue to
collect  from its  power  purchasers  its  decommissioning  costs,  the  owners'
unrecovered  investments  in  Connecticut  Yankee Atomic Power Company and other
costs  associated  with the  permanent  shutdown of CY. UI expects  that it will
continue to be allowed to recover  all  FERC-approved  costs from its  customers
through retail rates.

     As a  result  of CY's  being  out of  service,  the  Company  is  incurring
incremental  replacement  power costs  estimated at  approximately  $500,000 per
month,  and  experiencing  an  adverse  impact  on net  earnings  per  share  of
approximately  $.02 per month.  In addition,  if the owners decide not to retire
CY,   incremental   direct  costs  will  be  incurred  to  correct  the  plant's
safety-related  problems,  and the Company will be responsible for 9.5% of these
costs.




                                     - 30 -
<PAGE>




Item 6.  Exhibits and Reports on Form 8-K.

<TABLE>

     (a) Exhibits.

<CAPTION>
           Exhibit
          Table Item            Exhibit
           Number               Number                                   Description
          ----------            -------                                  -----------

            <C>                  <C>          <C>                                                                           
            (12), (99)           12           Statement  Showing  Computation  of Ratios of  Earnings  to Fixed
                                              Charges  and Ratios of Earnings  to  Combined  Fixed  Charges and
                                              Preferred  Stock  Dividend   Requirements  (Twelve  Months  Ended
                                              September  30, 1996 and Twelve  Months Ended  December 31,  1995,
                                              1994, 1993, 1992 and 1991).

            (27)                 27           Financial Data Schedule
</TABLE>


     (b) Reports on Form 8-K.

          None



                                     - 31 -
<PAGE>



                                        SIGNATURES

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

                             THE UNITED ILLUMINATING COMPANY




Date    11/l4/96                    Signature         /s/ Robert L. Fiscus
    ---------------                          ----------------------------------
                                                          Robert L. Fiscus
                                                          President and
                                                        Chief Financial Officer



                                     - 32 -
<PAGE>

                                                       EXHIBIT INDEX


<TABLE>
<CAPTION>
        Exhibit
      Table Item    Exhibit
        Number      Number                                       Description              Page No.
      ----------    -------                                      -----------              --------

      <C>              <C>        <C>                                       
      (12),(99)        12         Statement Showing Computation of Ratios
                                  of  Earnings  to Fixed  Charges  and Ratios of
                                  Earnings   to  Combined   Fixed   Charges  and
                                  Preferred Stock Dividend  Requirements (Twelve
                                  Months  Ended  September  30,  1996 and Twelve
                                  Months Ended  December 31, 1995,  1994,  1993,
                                  1992 and 1991).

      (27)             27         Financial Data Schedule
</TABLE>