Document/ExhibitDescriptionPagesSize 1: 10-Q Uil Form 10Q for Period Ended March 31, 2007 HTML 680K
5: EX-10.34 Uil Exhibit 10.34 - Employment Agreement Dated HTML 120K
February 28, 2007 Between Uil Holdings
Corp. and Linda L. Randell
6: EX-10.35 Uil Exhibit 10.35 - Second Amendment to Uil 1999 HTML 24K
Amended and Restated Stock Plan
7: EX-10.36 Uil Exhibit 10.36 - Third Amendment to Uil HTML 35K
Deferred Compensation Plan
2: EX-31.1 Uil Exhibit 31.1 - Certification HTML 15K
3: EX-31.2 Uil Exhibit 31.2 - Certification HTML 16K
4: EX-32 Uil Exhibit 32 - Certification HTML 10K
(Exact
name of registrant as specified in its charter)
Connecticut
06-1541045
(State
or other jurisdiction of incorporation or organization)
(I.R.S.
Employer Identification No.)
157
Church Street, New Haven, Connecticut
06506
(Address
of principal executive offices)
(Zip
Code)
Registrant’s
telephone number, including area code: 203-499-2000
None
(Former
name, former address and former fiscal year, if changed since last
report.)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
T
No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [X]
Accelerated
filer [ ]
Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
number of shares outstanding of the issuer’s only class of common stock, as of
May 1, 2007 was 25,154,691.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(A)STATEMENT
OF ACCOUNTING POLICIES
Basis
of Presentation
UIL
Holdings Corporation (UIL Holdings) primarily operates
its regulated utility business. The utility business consists of the electric
transmission and distribution operations of The United Illuminating Company
(UI). UIL Holdings also has a non-utility business, United
Capital Investments, Inc. (UCI), which primarily holds passive minority
ownership interests in two investment funds. The non-utility businesses also
recently included (1) a minority ownership interest in Bridgeport Energy, LLC
(BE) held by United Bridgeport Energy, Inc. (UBE) until the completion of the
sale of that interest to an affiliate of Duke Energy on March 28, 2006, (2)
UCI’s minority ownership interest in Cross-Sound Cable Company, LLC
(Cross-Sound) until the completion of the sale of that interest to Babcock
&
Brown Infrastructure Ltd. on February 27, 2006, and (3) the
operations of
Xcelecom, Inc. (Xcelecom), until the substantial completion of the sale of
that
business effective December 31, 2006. The remaining Xcelecom businesses are
further described in Note A, “Discontinued Operations / Assets Held for Sale.”
UIL Holdings is headquartered in New Haven, Connecticut, where its senior
management maintains offices and is responsible for overall planning, operating
and financial functions. UIL
Holdings’ Consolidated Financial Statements should be read in conjunction with
the consolidated financial statements and the notes to the consolidated
financial statements included in UIL Holdings’ Annual Report on Form 10-K for
the year ended December 31, 2006. Such notes are supplemented
below.
The
year-end balance sheet data was derived from audited financial statements,
but
does not include all disclosures required by accounting principles generally
accepted in the United States of America (GAAP). Certain information and
footnote disclosures, which are normally included in financial statements
prepared in accordance with GAAP, have been condensed or omitted in accordance
with Securities and Exchange Commission rules and regulations. UIL Holdings
believes that the disclosures made are adequate to make the information
presented not misleading. The information presented in the consolidated
financial statements reflects all adjustments which, in the opinion of UIL
Holdings, are necessary for a fair statement of the financial position and
results of operations for the interim periods described herein. All such
adjustments are of a normal and recurring nature. The results for the three
months ended March 31, 2007 are not necessarily indicative of the results for
the entire fiscal year ending December 31, 2007.
All
earnings per share (EPS) amounts and references to common stock share numbers
reflect a 5 for 3 common stock split, which occurred on July 3, 2006, for
shareowners of record as of June 6, 2006.
Certain
amounts previously reported have been reclassified to conform to the current
presentation, including the reporting of Xcelecom results as discontinued
operations and the impact on EPS and common stock share numbers of the
aforementioned stock split.
Property,
Plant and Equipment
UI
accrues for estimated costs of removal for certain of its plant-in-service.
Such
removal costs are included in the approved rates used to depreciate these
assets. At the end of the service life of the applicable assets, the accumulated
depreciation in excess of the historical cost of the asset provides for the
estimated cost of removal. In accordance with Statement of Financial Accounting
Standard (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” UI’s
accrued costs of removal have been recorded as a regulatory liability. Accrued
costs of removal as of March 31, 2007 and December 31, 2006 totaled $3.9 million
and $4.4 million, respectively.
Restructuring
Charges
SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities,” requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. Costs covered by the standard include lease
termination costs and certain employee severance costs that are associated
with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. In the fourth quarter of 2004, UIL Holdings recorded employee
termination costs associated with the reorganization of its finance organization
amounting to $2 million; the balance in the restructuring reserve as of March31, 2007 is
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
$0.3
million. These accrued restructuring costs are to be settled throughout 2007
in
accordance with the applicable employee’s severance agreement.
Goodwill
and Other Intangible Assets
Effective
January 1, 2002, UIL Holdings adopted SFAS No. 142, “Goodwill and Other
Intangible Assets.” This
statement modified the accounting and reporting of goodwill and intangible
assets.
On April26, 2006, UIL Holdings announced its intention to divest its wholly-owned
subsidiary, Xcelecom, completing its corporate strategic realignment to focus
on
its regulated electric utility, UI. This event required goodwill to be measured
for impairment, and a pretax goodwill impairment charge of $85.0 million was
recorded during the first quarter of 2006, based on UIL Holdings’ intent to
divest, estimates of fair value as determined by an outside advisory firm and
indicative third party bids. In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144) the impairment
is included in discontinued operations. See below, “Note (A) - Discontinued
Operations / Assets Held For Sale.”
Impairment
of Long-Lived Assets and Investments
SFAS
No.
144 also requires that rate-regulated companies recognize an 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 costs allowed.
Under this standard, the probability of recovery and the recognition of
regulatory assets under the criteria of SFAS No. 71, “Accounting for the
Effects of Certain Types of Regulation”, must be assessed on an ongoing basis.
Determination that certain regulatory assets no longer qualify for accounting
as
such could have a material impact on the financial condition of both UI and
UIL
Holdings. At March 31, 2007 and December 31, 2006, UI, as a rate-regulated
entity, did not have any assets that were impaired under this
standard.
Discontinued
Operations / Assets Held for Sale
SFAS
No.
144 also addresses the accounting for, and disclosure of, long-lived assets
to
be disposed of by sale. Under SFAS No. 144, a long-lived asset or group of
assets (disposal group) is classified as discontinued operations when (1) the
company commits to a plan to sell the long-lived asset (disposal group) within
a
12-month period, (2) there will be no significant continuing involvement
following the sale, and (3) certain other criteria set forth in the statement
are satisfied. In such a case:
·
The
long lived-asset (disposal group) will be measured at the lower of
its
carrying value or fair value, less costs to sell, and will be classified
as held for sale on the Consolidated Balance
Sheet.
·
The
long-lived asset (disposal group) shall not be depreciated (amortized)
while it is classified as held for
sale.
·
The
related operations of the long-lived asset (disposal group) will
be
reported as discontinued operations in the consolidated statement
of
operations, with all comparable periods
restated.
·
The
operations and cash flows of the disposal group are expected to be
eliminated from ongoing operations.
UIL
Holdings announced on April 26, 2006, its intention to divest its wholly-owned
subsidiary, Xcelecom. With
the
announcement, Xcelecom
met the
criteria set forth in SFAS No. 144 to be classified as held for sale and is
reported as such in UIL
Holdings’ Form 10-Q for the quarters ended March 31, 2007 and 2006. UIL Holdings
has substantially completed the sale of the Xcelecom subsidiaries, while one
entity, Thermal Energies, Inc. with a current equity value of $2.1 million,
continues to be held for sale and actively marketed. As such, the operating
results and financial position have been included as discontinued operations
held for sale in the accompanying consolidated statements of financial position
and results of operations.
Major
classes of assets and liabilities of Xcelecom consist of current assets of
$11.6
million, property, plant and equipment of $0.4 million, current liabilities
of
$14.3 million and non current liabilities of $0.2 million.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
Earnings
per Share
The
following table presents a reconciliation of the basic and diluted earnings
per
share calculations for the quarters ended March 31, 2007 and March 31,2006:
Income
(Loss) Applicable to
Common
Stock
Average
Number of
Shares
Outstanding
Earnings
per
Share
(In
Thousands, except per share amounts)
2007
Basic
earnings from continuing operations
$
5,423
24,910
$
0.22
Basic
earnings (loss) from discontinued operations
(67
)
24,910
-
Basic
earnings (loss)
5,356
24,910
0.22
Effect
of dilutive stock options (1)
-
320
(0.01
)
Diluted
earnings (loss)
$
5,356
25,230
$
0.21
2006
Basic
earnings from continuing operations
$
16,820
24,325
$
0.69
Basic
earnings (loss) from discontinued operations
(54,608
)
24,325
(2.24
)
Basic
earnings (loss)
(37,788
)
24,325
(1.55
)
Effect
of dilutive stock options (1)
-
205
0.01
Diluted
earnings
$
(37,788
)
24,530
$
(1.54
)
(1)
Reflecting the effect of dilutive stock options, performance shares and
restricted stock. Dilutive
securities diluted the loss by $0.01 per share for the three months ended March31, 2006 and diluted earnings by $0.01 per share for the three months ended
March 31, 2007.
All
stock
options to purchase shares of common stock outstanding were included in the
computation of diluted earnings per share for the period ended March 31,2007. Stock
options to purchase 542,398
shares
of common stock were outstanding but not included in the computation of diluted
earnings per share, for the period ended March 31, 2006, because the options’
exercise prices were greater than the average market price of the common shares
during the first quarter of 2006.
Stock-Based
Compensation
On
January 1, 2006, UIL Holdings adopted SFAS No. 123 (Revised), “Share-Based
Payment” (SFAS No. 123R), which is a revision of SFAS No. 123, “Accounting for
Stock-Based Compensation” (SFAS No. 123) and supersedes Accounting Principles
Board (APB) No. 25, “Accounting for Stock Issued to Employees” (APB No.
25). Under the modified prospective method of adoption, pursuant to SFAS No.
123R, options granted after December 31, 2005 are expensed based on their fair
value at date of grant over the vesting period, following the non-substantive
vesting approach.
In
2004,
UIL Holdings implemented a performance-based long-term incentive arrangement
under the UIL Holdings 1999 Amended and Restated Stock Plan (Plan) pursuant
to
which certain members of management have the opportunity to earn a
pre-determined number of performance shares, the number of which is predicated
upon the achievement of various pre-defined performance measures. These
performance shares vest at the end of the three-year cycle with the actual
issuance of UIL Holdings’ common stock in respect of such shares following the
end of each three-year cycle. A new three-year cycle begins in January of each
year. UIL Holdings records compensation expense for these performance shares
ratably over the three-year period, except in the case of retirement-eligible
employees, for whom compensation expense is immediately recognized in accordance
with SFAS No. 123R, based on the value of the expected payout at the end of
each
year relative to the performance measures achieved. An additional $0.5 million
of compensation expense was recorded in the first quarter of 2007 in regards
to
retirement-eligible employees based on the adoption of SFAS No. 123R retirement
eligible provisions. A target amount of 81,750 performance shares were granted
during the first quarter of 2007; the average of the high and low market price
on the date of grant was $35.585 per share. In March 2007, 84,957 vested shares
were issued to members of
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
management
and 40,883 vested shares were deferred. The ultimate number of deferred shares
that will be issued is subject to the employees’ personal income tax
election.
In
March
2007, UIL Holdings granted a total of 2,213 shares of restricted stock
to
its
President and Chief Executive Officer, James P. Torgerson, and 4,215
shares of restricted stock to
its
new Senior Vice-President and General Counsel, Linda L. Randell, under the
Plan
and in accordance with their employment agreements;
the
average of the high and low market price on the date of grant was $35.585 per
share. Compensation expense for this restricted stock is recorded ratably over
the five-year vesting period for such restricted stock.
In
March
2007, UIL Holdings granted a total of 22,512 shares of restricted stock to
non-executive directors under the Plan; the average of the high and low market
price on the date of grant was $35.585 per share. Compensation expense for
this
restricted stock is recorded ratably over the three-year vesting period for
such
restricted stock, except
in
the case of retirement - eligible directors, for whom compensation expense
is
accelerated in accordance with SFAS No. 123R.
In
March 2007, 33,333 shares of previously granted restricted stock grants to
directors vested,
of which 8,000 shares were issued to directors who did not elect to have their
vested shares deferred.
Total
stock-based compensation expenses for the quarters ended March 31, 2007 and
2006
were $1.2 million and $1.4 million, respectively.
Comprehensive
Income
Comprehensive
income for the three months ended March 31, 2007 was
equal
to net income plus an
interest rate cap mark-to-market adjustment of an immaterial amount, after-tax,
related to the $64.5 million principal amount of Pollution Control Refunding
Revenue Bonds. For further information regarding this interest rate cap
transaction, see “Note (B) - Capitalization - Long-Term Debt.” Comprehensive
income for the three months ended March 31, 2006 was equal to net income as
reported.
Equity
Investment Sales
On
February 27, 2006, UCI completed the sale of its ownership interest in
Cross-Sound. UCI received proceeds of $29.9 million for its $11.4 million
investment in Cross-Sound. Excluding transaction costs, UCI recognized a pretax
gain on the sale of approximately $18.5 million.
On
March28, 2006, UBE completed the sale of its ownership interest in BE. UBE received
proceeds of $71 million for its $70.6 million investment in BE. Excluding
transaction costs, UBE recognized a pre-tax gain on the sale of approximately
$0.4 million.
These
gains on sale of ownership interests are included in gain on sale of equity
investments on the UIL Holdings’ Consolidated Statement of Income (Loss) for the
three months ended March 31, 2006.
Income
Taxes
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), an interpretation
of SFAS No. 109, “Accounting for Income Taxes.” The interpretation clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with SFAS No. 109. The interpretation prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return that has a level of uncertainty of being sustained on audit by the
taxing authority. Under FIN 48, UIL Holdings may recognize the tax benefit
of an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authority based upon
the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based upon the largest
benefit that has a greater than fifty percent likelihood of being realized
upon
ultimate settlement.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
UIL
Holdings adopted the provisions of FIN 48 on January 1, 2007 and did not
recognize any additional liability for unrecognized tax benefits or accrue
any
interest or penalties associated with uncertain tax benefits as of January1,2007. Prior to the adoption of FIN 48, UIL Holdings recognized interest
associated with uncertain tax positions as interest expense and penalties as
a
component of operation expense and will continue this treatment after the
adoption of FIN 48.
UIL
Holdings and its subsidiaries are subject to the United States federal income
tax statutes administered by the Internal Revenue Service (IRS). UIL Holdings
and its subsidiaries are also subject to the income tax statutes of the State
of
Connecticut and those of other states in which the UIL Holdings subsidiaries
have operated and transacted business. As of January 1, 2007, the tax years
of
2003, 2004, 2005 and 2006 remain open and subject to audit for both federal
income tax and state income tax purposes. Currently, the IRS is conducting
an
examination of the tax years 2004 and 2005. The tax year 2003 has not been
examined by the IRS and the statute of limitations for the 2003 tax year will
lapse on September 15, 2007.
Regulatory
Accounting
UIL
Holdings’ regulatory assets and liabilities as of March 31, 2007 and
December 31,2006 were
comprised of the following:
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” (SFAS No. 159). SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. UIL Holdings has not completed its evaluation of the
impact of the proposed statement at this time.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
(B)
CAPITALIZATION
Common
Stock
UIL
Holdings had 25,154,229 shares of its common stock, no par value, outstanding
at
March 31, 2007, of which (1) 116,418 shares were unallocated shares held by
UI’s 401(k)/Employee Stock Ownership Plan (KSOP), and
(2)
46,270 shares of which were shares of restricted stock. The unallocated shares
held by the KSOP and shares of restricted stock are not recognized as
outstanding for purposes of calculating basic earnings per share.
UI
has an
arrangement under which it loaned $11.5 million to the KSOP. Prior to the
formation of UIL Holdings, the trustee for the KSOP used the funds to purchase
547,167 shares of UI common stock in open market transactions. On July 20,2000, effective with the formation of a holding company structure, unallocated
shares held by the KSOP were converted into shares of UIL Holdings’ common
stock. The shares will be allocated to employees’ KSOP accounts, as the loan is
repaid, to cover a portion of the required KSOP contributions. Compensation
expense is recorded when shares are committed to be allocated based on the
fair
market value of the stock. The loan will be repaid by the KSOP over a 12-year
period ending October 1, 2009, using employer contributions and UIL Holdings’
dividends paid on the unallocated shares of the stock held by the KSOP.
Dividends on allocated shares are charged to retained earnings. As
of
March 31, 2007, 116,418 shares, with a fair market value of $4.1 million, had
been purchased by the KSOP and had not been committed to be released or
allocated to KSOP participants.
Long-Term
Debt
On
March9, 2006, UI entered into an interest rate cap (rate cap) transaction to mitigate
interest rate risk with respect to the $64.5 million principal amount of
Pollution Control Refunding Revenue Bonds, 2003 Series, due October 1,2033, issued by the Business Finance Authority of the State of New Hampshire
(the Bonds). The Bonds are currently in an auction rate mode by which the
interest rate is established at auction every 35 days. As of the last auction
on
April 23, 2007, the interest rate on the bonds was 3.75%. The rate cap was
set
at 3.68% and became effective March 30, 2006. The rate cap will terminate on
August 5, 2009. The rate cap is tied to the U.S. Dollar - Bond Market
Association (USD-BMA) Municipal Swap Index. If the average of the index for
the
calculation period exceeds the rate cap, UI will be paid an amount based on
such
difference. For this calculation period, the index did not exceed the cap.
At
the end of each quarter, the carrying value of interest rate caps on the balance
sheet must be adjusted to reflect their current market values. A portion of
these gains or losses from this adjustment are reported in current earnings,
which resulted in a $0.2 million charge to expense for the period ended March31, 2007 and the remainder is deferred through other comprehensive income.
UI
paid $0.6 million to enter into the rate cap transaction, which is being
amortized over the life of the rate cap based upon quarterly fair market value
analysis. As such, the above transaction constitutes hedge accounting and is
marked-to-market in accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (SFAS No. 133).
(C)
REGULATORY PROCEEDINGS
Department
of Public Utility Control
UI
generally has several regulatory proceedings open and pending at the DPUC at
any
given time. Examples of such proceedings include an annual DPUC review and
reconciliation of UI’s CTA and SBC revenues and expenses, dockets to consider
specific restructuring or electricity market issues, consideration of specific
rate or customer issues, and review of conservation programs.
2007
Rates
On
December 19, 2006, the DPUC issued a decision implementing UI’s 2007 rate
increase resulting from the 2005 Rate Case and established customers’ GSC charge
for the first six months of 2007 to reflect the cost of wholesale power supply
procured by UI to provide standard service and supplier of last resort service.
The decision implements a settlement between UI and the Prosecutorial unit
of
the DPUC staff that, in addition to implementation of new distribution and
GSC
rates, provides short-term measures to mitigate the impact of these rate
increases on
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
residential
customers. These measures consist of the acceleration of certain revenue
requirement reductions and a temporary reduction in the working capital balance
used to manage the monthly dollar amount difference between the GSC retail
price
charged to customers and monthly prices that UI is required to pay to its
wholesale power suppliers. Under
the
settlement and decision, UI
will
recover its power procurement costs and distribution rates in their entirety,
along with the costs associated with these mitigation measures, including
carrying charges calculated at UI’s pre-tax weighted cost of capital, and will
restore the working capital balance to $9.1millionby
the
end of 2007. During the first quarter of 2007, UI has implemented the 2007
rate
increase in accordance with the terms of the final decision. The incremental
increases effective January 1, 2007 and April 1, 2007 have been implemented.
On
April24, 2007, UI filed revised retail rates with the DPUC, including among other
changes, proposed generation services charges (GSC) for standard service and
supplier of last resort, to be effective July 1, 2007. The new GSC rate is
the
result of UI’s most recent power procurement, as described below.
Power
Supply Arrangements
UI
must
procure its standard service power pursuant to a procurement plan approved
by
the DPUC, and that the procurement plan must provide for a portfolio of service
contracts procured in an overlapping pattern over fixed time periods (a
“laddering” approach). In its decision dated June 21, 2006, the DPUC approved a
procurement plan for UI. As required by the statute, a third party consultant
was retained by the DPUC to work closely with UI in the procurement process
and
to provide a joint recommendation to the DPUC as to selected bids. The DPUC’s
decision also provided that UI would receive bids for supplier of last resort
service through a separately conducted auction process, and the supplier of
last
resort service would be bid every six months.
UI
has
now conducted three rounds of solicitation, the most recent in March-April
2007
for standard service and supplier of last resort service. For each round there
was a joint recommendation provided to the DPUC by UI and the DPUC’s consultant,
regarding recommended bids. In the latest round, the DPUC issued a decision
approving the price and material terms of the contracts entered into by UI
with
the winning bidders, and finding that the auction process was conducted in
accordance with the UI procurement plan and in a fair and impartial manner.
As
a
result of these procurements, UI has wholesale power supply agreements in place
for the supply of all of UI’s standard service and supplier of last resort
service to customers for all of 2007, and also has contracted for a portion
of
the standard service requirements 2008.
These
contracts are derivatives under SFAS No. 133 and they qualify for the “normal
purchase, normal sale” exception under SFAS No. 133.
Application
of The United Illuminating Company for the Approval of the Issuance of
Debt
On
April3, 2007, UI filed an application with the DPUC regarding its financing plan
for
the period from 2007 through 2009. UI is seeking approval from the DPUC to
issue
not more than $375 million principal amount of debt securities (the Proposed
Notes). The proceeds from the sales of the Proposed Notes may be used by UI
for
the following purposes: (1) to refinance $225 million principal amount of
maturing existing debt; (2) to finance capital expenditures; (3) for general
corporate purposes; (4) to repay short-term borrowings incurred to temporarily
fund these requirements; and (5) to pay issuance costs related to the Proposed
Notes. The DPUC has not yet issued a schedule for this docket.
Regional
Transmission Organization for New England
UI’s
overall transmission return on equity will be determined by the mix of UI’s
transmission rate base between new and existing transmission assets, and whether
such assets are PTF (Pool Transmission Facilities) or Non-PTF. UI’s transmission
assets are primarily PTF assets. For 2007, UI is estimating an overall
weighted-average return on equity for its transmission business of
11.81%.
On
October 31, 2006, the FERC issued an
initial order establishing allowable return on equity for various types of
transmission assets (ROE Order). The ROE Order set a base ROE of 10.20% and
approved two ROE adders as follows: (i) a 50 basis point ROE adder for RTO
participation; and (ii) a 100 basis point ROE adder for new
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
transmission
investment. In addition, the FERC approved an ROE adjustment reflecting updated
U.S. Treasury Bond data, applicable prospectively from the date of the order.
Various
state agencies, public officials and electric cooperatives filed requests for
rehearing of the FERC ROE Order. They argue that there was no legitimate basis
for the FERC to use the yield on U.S. Treasury Bonds to increase the New England
Transmission Owners' (TOs) common base ROE from 10.20% to 10.90%. In addition,
they argue that the evidentiary record showed that a 100 basis point ROE adder
for new PTF investment would not change the TOs’ behavior and would produce no
benefit for customers. The TOs also filed a request for rehearing asserting
that
there is no record evidence supporting the FERC’s determination of base ROE of
10.20% (instead of 10.50%). The FERC has not yet issued a substantive order
on
rehearing. On December 29, 2006, the FERC granted rehearing for further
consideration. There is no current deadline for Commission action on the request
for rehearing.
Other
Transmission
On
May31, 2006, Northeast Utilities (NU) filed proposed amendments to its local
transmission service tariff at the FERC. The proposed revisions would have
the
effect of charging UI customers a prorated portion of the construction cost
of
NU’s Bethel to Norwalk 345-kiloVolt
(KV)
transmission line that ISO-NE deems not justified to be included in the New
England regional transmission rate (Localized Costs). On June 21, 2006, UI
protested NU’s proposed allocation of the Localized Costs to UI customers on the
grounds that UI’s customers neither caused nor benefit from these costs. On July28, 2006, the FERC accepted the NU filing. UI filed a request for rehearing,
which was denied by the FERC on December 26, 2006. UI filed a petition for
review of the FERC’s order denying rehearing with the U.S. Court of Appeals on
February 23, 2007. These Localized Costs are included in UI’s local transmission
tariff and, therefore, recovered through rates.
(D)
SHORT-TERM CREDIT ARRANGEMENTS
UIL
Holdings has a money market loan arrangement with JPMorgan Chase Bank. This
is
an uncommitted short-term borrowing arrangement under which JPMorgan Chase
Bank
may make loans to UIL Holdings for fixed periods. The periods may be from one
day up to six months, depending on UIL Holdings’ credit rating. JPMorgan
Securities, Inc. acts as an agent and sells the loans to investors. The fixed
interest rates on the loans are determined based on conditions in the financial
markets at the time of each loan. As of March 31, 2007, UIL Holdings did not
have any short-term borrowings outstanding under this arrangement.
UI
and
UIL Holdings entered into a joint revolving credit agreement with a group of
banks that extends to December 22, 2011. The borrowing limit under the
facility for UI is $175 million, with $50 million of the limit available for
UIL
Holdings. The facility permits borrowings at fluctuating interest rates
determined by reference to Citibank’s New York bank rate and the Federal Funds
Rate (as defined in the facility), and also permits borrowings for fixed periods
of time specified by UI and UIL Holdings at fixed interest rates determined
by
the Eurodollar interbank market in London (LIBOR). The facility also permits
the
issuance of letters of credit up to $50 million. As of March 31 2007, UI had
$38
million outstanding under the facility. UIL Holdings had a standby letter of
credit outstanding in the amount of $2.6 million, as of March 31, 2007. The
standby letter of credit expires on January 31, 2008, but is automatically
extended for one year from the expiration date (or any future expiration date),
unless the issuer bank elects not to extend.
Income
tax expense for continuing operations consists of:
Income
tax provisions (benefit):
Current
Federal
$
2,728
$
14,106
State
(162
)
3,986
Total
current
2,566
18,092
Deferred
Federal
1,722
(4,268
)
State
171
(1,456
)
Total
deferred
1,893
(5,724
)
Investment
tax credits
(37
)
(37
)
Total
income tax expense (benefit)
$
4,422
$
12,331
Income
tax components charged as follows:
Operating
tax expense (benefit)
$
4,889
$
4,474
Non-operating
tax expense (benefit)
(502
)
(88
)
Equity
investments tax expense (benefit)
35
7,945
Total
income tax expense (benefit)
$
4,422
$
12,331
Legislation
enacted in Connecticut in 2005 imposed a 20% surcharge on the corporation
business tax for the year 2006. This surcharge effectively increased the
statutory rate of Connecticut corporation business tax from 7.5% to 9.0% for
the
year 2006. Due to the elimination of the surcharge, the combined statutory
federal and state income tax rate for UIL Holdings’ Connecticut-based entities
decreased from 40.85% for the year 2006 to 39.875% for the year
2007.
Differences
in the treatment of certain transactions for book and tax purposes occur which
cause the rate of UIL Holdings’ reported income tax expense to differ from the
statutory tax rate described above. The effective book income tax rate for
the
quarter ended March 31, 2007 is 44.9% as compared to 42.3% for the quarter
ended
March 31, 2006. The increase in the 2007 effective book income tax rate is
due
primarily to differences in the amount of book depreciation in excess of
non-normalized tax depreciation and a decrease in pre-tax book income from
continuing operations in the first quarter of 2007.
The
effective book income tax rate for the three months ended March 31, 2007 is
higher than the 2007 effective statutory tax rate due primarily to: (1)
non-normalized effect associated with the CTA, and (2) differences in the amount
of book depreciation in excess of non-normalized tax depreciation.
UIL
Holdings was not able to recognize a portion of federal income tax benefits
or
any state income tax benefits for capital losses associated with the divestiture
of Xcelecom and the state income tax benefits associated with operating losses
at Allan/Brite-Way Electrical Contractors, Inc. incurred during the year ended
December 31, 2006. As a result, UIL Holdings has recorded a valuation allowance
of $7.1 million and $12.7 million, respectively, associated with future federal
and state income tax benefits from capital losses in connection with which
the
realization is uncertain as of December 31, 2006. These future federal and
state
income tax benefits may be recognized over the course of the next five years
to
the extent that capital gains are realized by UIL Holdings, with respect to
federal income tax benefits, and by Xcelecom, with respect to the state income
tax benefits. During the first quarter of 2007, UIL Holdings was able to
recognize $0.1 million of federal and state income tax benefits as a result
of
capital gains realized during the quarter resulting from the settlement reached
with the buyer of Terry Electric, Inc. See “Note N - Discontinued
Operations.”
(1)
The amortization of this regulatory asset is a cash neutral item,
as there
is an offsetting liability which is relieved through a credit to
fuel and
energy expense.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
(G)
PENSION AND OTHER BENEFITS
The
United Illuminating Company Pension Plan (the Pension Plan) covers
the majority of employees of UIL Holdings and UI. UI also has a non-qualified
supplemental pension plan for certain employees and a non-qualified retiree-only
pension plan for certain early retirement benefits.
Funding
policy for the Pension Plan is to make annual contributions that satisfy the
minimum funding requirements of ERISA but that do not exceed the maximum
deductible limits of the Internal Revenue Code. These amounts are determined
each year as a result of an actuarial valuation of the Pension Plan. Based
upon
preliminary actuarial calculations,
UI does
not expect to make a contribution to the Pension Plan for 2007. In addition,
UI
did make a cash payout to the recently retired Chief Executive Officer under
the
Supplemental Executive Retirement Plan totaling $4.1 million, of which $2.7
million was paid in January 2007 and $1.4 million was paid in April
2007.
In
addition to providing pension benefits, UI also provides other post-retirement
benefits (OPEB), consisting principally of health care and life insurance
benefits, for retired employees and their dependents. For
funding purposes, UI is establishing Voluntary Employees’ Benefit Association
Trust (VEBA) accounts for the years 2012 through 2020 to fund OPEB for UI’s
non-union employees who retire on or after January 1, 1994. These VEBA’s
are subject to approval by the Internal Revenue Service. Upon approval, UI
is
expected to contribute approximately $3.7 million in 2007 to fund OPEB for
non-union employees.
Union
employees whose sum of age and years of service at the time of retirement is
equal to or greater than 85 (or who are 62 with at least 20 years of service)
are eligible for benefits partially subsidized by UI. UI
does
not expect to make a contribution in 2007 to fund OPEB for union
employees.
UI
adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Benefits an amendment of FASB No. 87, 88, 106 and 132(R)”
(SFAS 158), as of December 31, 2006. The Statement requires an employer that
sponsors one or more defined benefit pension or other postretirement plans
to
recognize an asset or liability for the overfunded or underfunded status of
the
plan. For a pension plan, the asset or liability is the difference between
the
fair value of the plan’s assets and the projected benefit obligation. For any
other postretirement benefit plan, the asset or liability is the difference
between the fair value of the plan’s assets and the accumulated postretirement
benefit obligation. UI will reflect all unrecognized prior service costs and
credits and unrecognized actuarial gains and losses as regulatory assets rather
than in accumulated other comprehensive income, as it is probable that such
items are recoverable through the ratemaking process in future periods.
This
statement was effective for fiscal years ending
after December 15, 2006. UIL Holdings adopted SFAS No. 158 effective December31, 2006 on a prospective basis.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
The
following table represents the components of net periodic benefit cost for
the
pension and OPEB in the 2007 plan projections.
For
the Quarter Ended March 31,
Pension
Benefits
Other
Postretirement Benefits
Q1
2007
Q1
2006
Q1
2007
Q1
2006
(In
Thousands)
Components
of net periodic benefit cost:
Service
cost
$
1,831
$
1,761
$
325
$
318
Interest
cost
5,009
4,635
879
864
Expected
return on plan assets
(6,506
)
(5,966
)
(596
)
(409
)
Amortization
of:
Prior
service costs
221
263
(31
)
(32
)
Transition
obligation (asset)
-
-
265
265
Actuarial
(gain) loss
1,586
1,888
411
564
Net
periodic benefit cost
2,141
2,581
1,253
1,570
Additional
amount recognized due to settlement
776
-
-
-
$
2,917
$
2,581
$
1,253
$
1,570
The
following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount
rate
5.75
%
5.50
%
5.75
%
5.50
%
Average
wage increase
4.40
%
4.40
%
N/A
N/A
Return
on plan assets
8.50
%
8.25
%
8.50
%
8.25
%
Pre-65
health care trend rate (current yr.)
N/A
N/A
10.00
%
11.00
%
Pre-65
health care trend rate (2012+)
N/A
N/A
5.50
%
5.50
%
Post-65
health care trend rate (current yr.)
N/A
N/A
5.50
%
6.00
%
Post-65
health care trend rate (2008+)
N/A
N/A
5.00
%
5.00
%
The
proceeding table reflects $0.8 million of settlement charges resulting from
a
distribution to a former employee upon retirement.
(H)
RELATED PARTY TRANSACTIONS
Arnold
L.
Chase, a Director of UIL Holdings since June 28, 1999, holds a beneficial
interest in the building located at 157 Church Street, New Haven, Connecticut,
where UI leases office space for its corporate headquarters. UI’s lease payments
for this office space totaled $2.5 million and $2.3 million for the three months
ended March 31, 2007 and 2006, respectively.
(J)
COMMITMENTS AND CONTINGENCIES
Other
Commitments and Contingencies
Connecticut
Yankee Atomic Power Company
UI
has a
9.5% stock ownership share in the Connecticut Yankee Atomic Power Company
(Connecticut Yankee), the carrying value of which was $1.4 million as of March31, 2007. On December 4, 1996, the Board of Directors of Connecticut Yankee
voted unanimously to retire the Connecticut Yankee nuclear plant (the
Connecticut Yankee Unit) from commercial operation. A decision by the FERC
that
became effective on August 1, 2000 allows Connecticut Yankee to collect,
through the power contracts with the unit’s owners, the FERC-approved
decommissioning costs, other costs associated with the permanent shutdown of
the
Connecticut Yankee Unit, the unrecovered investment in the Connecticut Yankee
Unit, and a return on equity of 6%. Connecticut Yankee may recover 9.5% of
these
costs from UI. As of March 31, 2007, the decommissioning project was
substantially
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
complete.
However, Connecticut Yankee will continue to, among other things, monitor ground
water for potential contamination levels and store spent nuclear fuel.
Connecticut
Yankee updates its cost to decommission the unit at least annually, and more
often as needed, and provides UI with a projected recovery schedule depicting
annual costs expected to be billed to UI, including a return on investment
over
the term of the projected recovery period. The present value of these costs
is
calculated using UI’s weighted-average cost of capital and, after consideration
of recoverability, recorded as a Connecticut Yankee Contract Obligation and
a
corresponding regulatory asset. At March 31, 2007, UI has regulatory approval
to
recover in future rates (through the CTA) its $28.1 million regulatory asset
for
Connecticut Yankee over a term ending in 2015.
DOE
Spent Fuel Litigation
In
the
Nuclear Waste Policy Act of 1982, Congress provided for the DOE to dispose
of
spent nuclear fuel and other high-level waste, including greater-than-Class-C
waste (GTCC) (hereinafter Nuclear Waste), from nuclear generating plants. In
1983, Connecticut Yankee and the DOE entered into a standard disposal contract
mandated by the Act. The contract required the DOE to begin disposing of
Connecticut Yankee’s Nuclear Waste by the end of January 1998. The DOE failed to
honor these contract obligations.
In
1998,
Connecticut Yankee, along with Maine Yankee and Yankee Atomic, two other New
England-based owners of shut-down nuclear generating plants, filed claims in
the
United States Court of Federal Claims seeking damages resulting from the breach
of the 1983 contracts by the DOE. In November of 1998, the Court ruled that
the
DOE had breached the contracts and was liable for damages, but left the amount
of damages to be determined after a trial on the evidence. The ruling was
affirmed by the United States Court of Appeals for the Federal Circuit in August
of 2000.
As
an
interim measure until the DOE complies with its contractual obligation to
dispose of Connecticut Yankee’s spent fuel, Connecticut Yankee constructed an
independent spent-fuel storage installation (ISFSI), utilizing dry-cask storage,
on the Plant site and completed the transfer of its Nuclear Waste to the ISFSI
in 2005.
The
consolidated trial to determine damages concluded in August of 2004. At the
trial and in post-trial briefing, the DOE contended that GTCC was not covered
by
Connecticut Yankee’s contract and raised a number of additional issues,
including the rate at which the DOE was required to accept the fuel, whether
Connecticut Yankee’s pre-1983 monetary obligations for fuel disposal should be
treated as an offset to any damages, and whether an exchange program would
have
developed that would change the order in which the fuel would be picked up
from
the various sites by the DOE, among other issues.
As
a
result of decisions issued in other spent fuel cases, plaintiffs were not
allowed to recover future damages. Connecticut Yankee asked the trial court
judge to award it damages incurred through December 31, 2001. On October 4,2006, the Court issued judgment for Connecticut Yankee in the amount of $34.2
million for its spent-fuel-related costs through 2001, ruling in favor of
Connecticut Yankee on substantially all of the major issues. Connecticut Yankee
had sought $37.7 million in damages for the period covered by the decision.
On
December 4, 2006, the DOE appealed the decision to the United States Court
of
Appeals for the Federal Circuit and filed its Opening Brief on April 6,2007.
Hydro-Quebec
UI
is a
participant in the Hydro-Quebec (HQ) transmission tie facility linking New
England and Quebec, Canada. UI has a 5.45% participating share in this facility,
which has a maximum 2000-megawatt equivalent generation capacity value. UI
furnished a guarantee for its participating share of the debt financing for
one
phase of this facility in April 1991, ending in August 2015, in the amount
of
$11.7 million. The amount of this guarantee is reduced monthly, proportionate
with principal paid on the underlying debt. As of March 31, 2007, the amount
of
UI’s guarantee for this debt totaled approximately $2.6 million.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
Environmental
Concerns
In
complying with existing environmental statutes and regulations and further
developments in areas of environmental concern, including legislation and
studies in the fields of water quality, hazardous waste handling and disposal,
toxic substances, and electric and magnetic fields, UIL Holdings and its wholly
- owned direct and indirect subsidiaries may incur substantial capital
expenditures for equipment modifications and additions, monitoring equipment
and
recording devices, and it may incur additional operating expenses. The total
amount of these expenditures is not now determinable. Environmental damage
claims may also arise from the operations of UIL Holdings’ subsidiaries.
Significant environmental issues known to UIL Holdings at this time are
described below.
Middletown/Norwalk
In
April
2007, during construction of the Middletown/Norwalk project in Bridgeport,
Connecticut, UI encountered soil contaminated with polychlorinated biphenyls
(PCBs). UI stopped construction at the location, which was a road not owned
by
UI, and notified the Connecticut Department of Environmental Protection (CDEP).
At the CDEP’s request, UI is determining the extent of the contamination within
the limits of the Project, and no estimate of costs relating to this matter
can
be made at this time.
Site
Decontamination, Demolition and Remediation Costs
On
June16, 2006, UI announced its agreement with the City of Bridgeport and its
Redevelopment Authority (the City) for the transfer of title to UI’s Steel Point
property to the City and settlement of all claims against the City with respect
to relocation of a substation and repair/replacement of a bulkhead, in exchange
for payment to UI of $14.9 million, which represents the commercial value of
the
property and cost to replace the bulkhead. Pursuant to a Memorandum of
Understanding among UI, the City of Bridgeport, and the City’s selected
developer for the property (MOU), the City must also provide to UI, within
one
year and free of charge, a substation site within a reasonable proximity to
the
Steel Point property. On July 12, 2006, the DPUC approved the proposed transfer
of property and all of the terms of the MOU. The DPUC also accepted the proposed
ratemaking treatment submitted by UI with respect to the property, the
substation, and the bulkhead, which provides for UI to recover costs related
to
the Steel Point property through the CTA, subject to DPUC approval in the annual
CTA/SBC reconciliation filing. Pursuant to the terms of the MOU, title
transferred to the City on or about December 13, 2006 upon payment to UI of
the
first $10.3 million, of the $14.9 million total required payment. The remaining
$4.6 million is due to be paid by June 30, 2007. If the City does not pay this
remaining amount by June 30, 2007, the MOU permits UI to withhold certain
property tax payments up to the amount remaining.
Under
the
MOU, the City and developer released UI from any further liability with respect
to the Steel Point property after title transferred, and the City and/or
developer must now indemnify UI for environmental matters related to the Steel
Point property. However, UI may be required to remove additional soil on the
Steel Point property to achieve environmental compliance to remedy conditions
that were discovered before title transferred. The City and the developer have
subsequently claimed that there is additional remediation that may be necessary.
UI will investigate the claim, but cannot determine the financial impact of
any
such additional remediation, if any, at this time. The sole exception to the
indemnity is for personal injury claims brought against UI by UI employees
or
contractors hired by UI relating to incidents that occurred on the site before
title transfers to the City. UI is not aware of any such claims. In addition,
the MOU provides that there is no indemnity for liability related to
contaminated harbor sediments. UI would seek to recover all costs related to
such sediments that are UI’s responsibility, to the extent incurred, through the
CTA in accordance with the ratemaking treatment approved in the DPUC’s July 12,2006 decision.
Subsequent
to the demolition of Steel Point Station, the adjacent East Main Street
Substation was removed at the request of the City of Bridgeport
and UI
expanded the Congress Street Substation to replace it. Such removal and
expansion costs totaled $10.3 million of which UI was entitled to $8.9 million.
As a result of the approved ratemaking described above, $8.5 million of the
expansion costs were added to UI’s distribution rate base and the remaining $0.4
in removal costs will be recovered through the annual CTA/SBC reconciliation
filing. The remaining $1.4 million of costs related to the Substation are
transmission assets recoverable through regional transmission rates.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
A
site on
the Mill River in New Haven was conveyed by UI to an unaffiliated entity in
2000, Quinnipiac Energy LLC (QE), reserving to UI permanent easements for the
operation of its transmission facilities on the site. At the time of the sale,
a
fund of approximately $1.9 million, an amount equal to the then-current estimate
for remediation, was placed in escrow for purposes of bringing soil and
groundwater on the site into compliance with applicable environmental laws.
Approximately $0.5 million of the escrow fund remains unexpended. QE’s
environmental consultant reports that approximately $2 million of remediation
remains to be performed. QE has entered into a long-term agreement to lease
the
property to a Long Island developer (Evergreen Power). UI could be required
by
applicable environmental laws to finish remediating any subsurface contamination
at the site if it is determined that QE and/or Evergreen Power has not completed
the appropriate environmental remediation at the site.
On
April 16, 1999, UI completed the sale of its Bridgeport Harbor Station and
New Haven Harbor Station generating plants in compliance with Connecticut’s
electric utility industry restructuring legislation. Environmental assessments
performed in connection with the marketing of these plants indicate that
substantial remediation expenditures will be required in order to bring the
plant sites into compliance with applicable minimum Connecticut environmental
standards. The purchaser of the plants agreed to undertake and pay for the
remediation of the purchased properties.
With
respect to the portion of the New Haven Harbor Station site that UI retained,
UI
has performed an additional environmental analysis, indicating that
approximately $3.2 million in remediation expenses will be incurred. Actual
remediation costs may be higher or lower than what is currently estimated.
The
required remediation is virtually all on transmission-related property and
UI
has accrued these estimated expenses.
UI
sold
property to Bridgeport Energy LLC (BE) on April 16, 1999. UIL Holdings, through
its subsidiary United Bridgeport Energy, Inc. (UBE), held a minority ownership
interest in BE at that time and until the sale of that interest to the majority
owner in March 2006. In connection with the sale of the property, UI entered
into an environmental indemnity agreement with BE to provide indemnification
related to certain environmental conditions specific to the site where BE’s
generation facilities were constructed. This environmental indemnification
remains in place following the sale of UBE’s interest in BE. Because of soil
management and other environmental remediation activities that were performed
during construction of the generation facilities, UI does not regard its
exposure under the environmental indemnity agreement as material.
From
1961
to 1976, UI owned a parcel of property in Derby, Connecticut, on which it
operated an oil-fired electric generating unit. For several years, the
Connecticut Department of Environmental Protection (CDEP) has been monitoring
and remediating a migration of fuel oil contamination from a neighboring parcel
of property into the adjacent Housatonic River. Although, based on its own
investigation to date, UI believes it has no responsibility for this
contamination, if regulatory agencies determine that UI is responsible for
the
cost of these remediation activities, UI may incur substantial costs, no
estimate of which is currently available.
Electric
System Work Center
UI’s
January 2004 purchase of its Electric System Work Center property, located
in
Shelton, Connecticut, caused a review under the CDEP’s Transfer Act Program.
Under this review, the CDEP had an opportunity to examine the current
environmental conditions at the site and direct remediation, or further
remediation, of any areas of concern. At the conclusion of its review, the
CDEP
elected not to oversee any further site investigation or remediation at the
site
and directed UI to undertake any necessary evaluation and/or remediation
(verification work) using an independent Licensed Environmental Professional
(LEP). UI hired an LEP and submitted a schedule to the CDEP for the verification
work. The
schedule was approved by the CDEP and implementation of the verification work
is
on-going. Implementation
of the verification work is not expected to have a material impact on the
financial position or results of operations of UI.
Claim
of Dominion Energy Marketing, Inc.
On
December 28,
2001, UI
entered into an agreement with Virginia Electric and Power Company, which was
subsequently assigned to its affiliate Dominion Energy Marketing, Inc. (DEMI),
for the supply of all of UI’s standard offer generation service needs from
January 1, 2002 through December 31, 2003, and for the supply of all
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
of
UI’s
generation service requirements for special contract customers through 2008
(Power Supply Agreement or PSA). In December 2004, UI received a letter from
DEMI claiming that under the terms of this agreement, DEMI should not have
been
allocated “CT Reliability COS” charges related to reliability-must-run
agreements between ISO-NE and NRG (the owner of power plants located in
Connecticut that were formerly owned by Northeast Utilities) in an amount
currently estimated at $8.2 million, plus interest. DEMI claims that such
charges are fixed operation and maintenance costs, rather than “Transmission
Congestion Costs” for which DEMI is responsible under the terms of the PSA. UI
filed a complaint with the FERC requesting that it exercise jurisdiction and
order DEMI to abide by the terms and conditions of the PSA and on May 13, 2005,
the FERC issued an order granting UI’s request, finding that DEMI is responsible
for the “CT Reliability COS” charges. DEMI filed a request for rehearing with
the FERC, and on May 26, 2006, a FERC administrative law judge (ALJ) issued
an
initial decision finding DEMI responsible for the “CT Reliability COS” charges.
DEMI subsequently took exception to the ALJ’s initial decision and requested
that the Commission reconsider the initial decision. The Commission unanimously
adopted the ALJ’s initial decision and held that DEMI is responsible for the “CT
Reliability COS” charges. On March 22, 2007, DEMI filed a request for rehearing
of the Commission’s order, and on April 23, 2007, the FERC granted DEMI’s
request.
Gross
Earnings Tax Assessment
On
September 20, 2005, the Appellate Division of the Connecticut Department of
Revenue Services (DRS) ruled against UI’s appeal of a gross earnings tax
assessment made by the DRS as the result of an audit examination that covered
the period July 1, 1998 through December 31, 2000. The assessment, in the amount
of $0.1 million (including interest), is entirely attributable to activity
within the year 2000 and arose as a result of changes to the gross earnings
tax
statutes enacted pursuant to Connecticut’s 1998 electric industry restructuring
legislation. UI believes that the DRS has erroneously determined that the gross
earnings tax statutes, as amended, apply to the following three specific
categories of revenues: (1) late payment fees imposed on customers that do
not
pay their bills within the time specified in their terms of service; (2)
returned check fees imposed on customers whose checks were returned to UI due
to
insufficient funds; and (3) reconnection fees paid by customers who request
to
have their premises reconnected to UI’s system.
UI
has
not paid the assessment and, on October 18, 2005, filed a lawsuit with the
Superior Court for the State of Connecticut in order to appeal the DRS’s ruling.
Because this issue has not been previously adjudicated, UI has recorded a
reserve of $1.3 million, of which $0.1 million was recorded in 2007,
representing UI’s total estimated liability for additional tax and interest
covering: (1) the original audit period of July 1, 1998 through
December 31, 2000; (2) a subsequent audit period of July 1, 2001 through
June 30, 2004; and (3) the unaudited period of July 1, 2004 through March 31,2007.
On
April17, 2006, the DRS filed a petition with the DPUC with respect to this matter,
specifically seeking a declaratory ruling from the DPUC as to its position
regarding the applicability of the gross earnings tax statutes for periods
on
and after January 1, 2000 to the three specific categories of revenue in
question noted above. On August 30, 2006, the DPUC issued its final
decision, which stated that although the applicable tax statute does not fall
within the DPUC’s jurisdiction, the DPUC reads the language of the applicable
tax statute as referring to “all income of an electric distribution company that
is subject to being regulated by the Department for the purposes of setting
rates,” in which the specific categories of revenue would be included as being
taxable for gross earnings tax purposes. UI disagrees with this interpretation
of the applicable tax statute and, as mentioned above, is contesting the DRS’s
ruling in the Superior Court of the State of Connecticut.
Property
Tax Assessment
In
the
first quarter of 2007, UI received notice from the City of Bridgeport (the
City)
that the personal property tax assessment for October 1, 2006 had been increased
from the amount declared by UI of $55,736,214 to $69,670,268, based upon the
assertion by the City that UI’s property tax declaration was not timely filed.
UI mailed the declarations prior to the November 1, 2006 filing deadline, but
the assessor asserts that the declarations were received after November 1,2006
and were thus not timely filed. UI appealed the increased assessment to the
Bridgeport Board of Assessment Appeal which denied the appeal. The increase
in
the personal property tax assessment levied by the City of Bridgeport equates
to
approximately $0.6 million. UI believes that its property tax
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
declaration
was filed on a timely basis under Connecticut law and intends to contest the
increased assessment in the Superior Court of the State of
Connecticut.
Cross-Sound
Cable Company, LLC
UIL
Holdings and UCI continue to provide two guarantees, in original amounts of
$2.5
million and $1.3 million, in support of guarantees by Hydro-Quebec (HQ), the
former majority owner of Cross-Sound, to third parties in connection with the
construction of the project.
The
$2.5
million guarantee supports an HQ guarantee to the Long Island Power Authority
to
provide for damages in the event of a delay in the date of achieving commercial
operation of the Cross-Sound Cable. UIL Holdings expects commercial operating
status to be maintained and, accordingly, it has not recorded a liability
related to this guarantee in its Consolidated Balance Sheet as of March 31,2007.
The
$1.3
million guarantee supports an agreement under which Cross-Sound is providing
compensation to shell fishermen for their losses, including loss of income,
incurred as a result of the installation of the cable. The payments to the
fishermen are being made over a 10-year period, ending October 2013, and the
obligation under this guarantee reduces proportionately with each payment made.
As of March 31, 2007, the remaining amount of the guarantee was $1 million.
Based upon a management assessment, UIL Holdings has not recorded a liability
related to this guarantee in its Consolidated Balance Sheet as of March 31,2007.
(M)
SEGMENT INFORMATION
UIL
Holdings has two reporting segments related to UI: distribution sale of
electricity and transmission sale of electricity. Revenues from inter-segment
transactions are not material. All of UIL Holdings’ revenues are derived in the
United States. The following measures of segment profit and loss are utilized
by
management for purposes of making decisions about allocating resources to the
segments and assessing performance.
The
following table reconciles certain segment information with that provided in
UIL
Holdings’ Consolidated Financial Statements. In the table, “Other” includes the
information for the remainder of UIL Holdings’ non-utility businesses, including
minority interest investments and administrative costs.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
(N)
DISCONTINUED OPERATIONS
On
April26, 2006, UIL Holdings announced its intention to divest its wholly-owned
subsidiary, Xcelecom, completing its corporate strategic realignment to focus
on
its regulated electric utility, UI. As a result, a pre-tax goodwill impairment
charge of $85.0 million was recorded during the first quarter of 2006 to reflect
Xcelecom at its estimated fair value. UIL Holdings substantially completed
its
sale of this business effective December 31, 2006.
In
accordance with the provisions of SFAS No. 144, the results of Xcelecom for
the
period ended March 31, 2007 and 2006 have been reported as discontinued
operations in the accompanying Consolidated Statement of Income (Loss), and
as
discontinued operations held for sale in the Consolidated Balance Sheet as
of
March 31, 2007 and December 31, 2006.
A
summary
of the discontinued operations of Xcelecom follows:
UIL
Holdings is contingently liable to sureties on performance and payment bonds
issued by those sureties, relating to construction projects entered into by
Xcelecom and its subsidiaries in the normal course of business. These
bonds provide a guarantee to the customer that Xcelecom or its subsidiaries
will
perform under the terms of a contract and that it will pay subcontractors and
vendors. Surety
bonds remain outstanding on certain projects being completed by Xcelecom’s
former companies. The
majority of these contingent commitments will expire within the next 9 months.
If
Xcelecom’s former companies and the buyers of those companies fail
to
perform under a contract or to pay subcontractors or vendors, the customer
may
demand that the surety make payments or provide services under the bond. UIL
Holdings must reimburse the surety for any expenses or outlays it incurs
and
seek
recoupment of those expenses from the buyers of Xcelecom’s former companies.
Sureties were never required to make payments on Xcelecom’s behalf under the
bonds, and UIL Holdings believes that the buyers of Xcelecom’s former companies
have every incentive to continue to perform their obligations on the
construction projects and have adequate management and other resources to do
so.
Accordingly, UIL Holdings concluded that it need not record a liability in
connection with these obligations in its Consolidated Balance Sheet as of March31, 2007. As of March 31, 2007, sureties had issued bonds for the account of
Xcelecom in the aggregate amount of approximately $196.7 million. The expected
cost to complete projects covered by such surety bonds was approximately $59.6
million as of March 31, 2007.
Xcelecom
recognizes certain significant claims for recovery of incurred costs when (1)
it
is probable that the claim will result in additional contract revenue, (2)
when
the amount of the claim can be reliably estimated, and (3) when it is determined
that there is legal basis for the claim. Such amounts are recorded at estimated
net realizable value and take into account factors that may affect Xcelecom’s
ability to bill unbilled revenues and collect amounts after billing. Costs,
related to claims, of $1.2 million are included in current assets of
discontinued operations held for sale as of March 31, 2007 and December 31,2006. In addition, UIL Holdings has the right to certain claims related to
the
sales of the Xcelecom businesses that are not included in the accompanying
statement of financial position as of March 31, 2007.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
Financial
results could be positively or negatively impacted by the following Xcelecom
contractual divestiture issues: (1) the completion of certain outstanding
projects for which UIL Holdings retained financial responsibility, (2) the
collection of certain accounts receivables and promissory notes related to
the
sales of certain Xcelecom companies, and (3) resolution of certain transitional
financial issues. UIL Holdings also has exposure (a) relating to its
indemnification obligations to the buyers of the former Xcelecom companies
under
the agreements relating to the sales of those companies, and (b) to the sureties
that have provided performance bonds to certain former Xcelecom companies
related to projects bid or awarded prior to the sales of those
companies.
In
March
2007, UIL Holdings and Xcelecom entered into a prepayment agreement with the
buyer of Terry’s Electric, Inc., (Terry’s) which was purchased from Xcelecom in
November 2006. Under the terms of the agreement, UIL Holdings received $2.5
million in settlement of all obligations of the buyer under the agreement
pursuant to which Terry’s was sold. This resulted in a pretax gain of $0.6
million, which is reported as discontinued operations in the accompanying
Consolidated Statement of Income (Loss) for the three months ended March 31,2007.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Certain
statements contained herein, regarding matters that are not historical facts,
are forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These include statements regarding management’s intentions,
plans, beliefs, expectations or forecasts for the future. Such forward-looking
statements are based on UIL Holdings’ expectations and involve risks and
uncertainties; consequently, actual results may differ materially from those
expressed or implied in the statements. Such risks and uncertainties include,
but are not limited to, general economic conditions, legislative and regulatory
changes, changes in demand for electricity and other products and services,
unanticipated weather conditions, changes in accounting principles, policies
or
guidelines, and other economic, competitive, governmental, and technological
factors affecting the operations, markets, products and services of UIL
Holdings’ subsidiary, The United Illuminating Company. The foregoing and other
factors are discussed and should be reviewed in UIL Holdings’ most recent Annual
Report on Form 10-K and other subsequent periodic filings with the Securities
and Exchange Commission. Forward-looking statements included herein speak only
as of the date hereof and UIL Holdings undertakes no obligation to revise or
update such statements to reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events or
circumstances.
MAJOR
INFLUENCES ON FINANCIAL CONDITION
UIL
Holdings Corporation
UIL
Holdings’ financial condition and financing capability will be dependent on many
factors, including the level of income and cash flow of UIL Holdings’
subsidiaries, conditions in the securities markets, economic conditions,
interest rates, legislative and regulatory developments, and its ability to
retain key personnel.
The
loss
of key personnel or the inability to hire and retain qualified employees could
have an adverse effect on the business, financial condition and results of
operations for UIL Holdings and its operating subsidiary, UI. These operations
depend on the continued efforts of UI’s current and future executive officers,
senior management and management personnel. UIL Holdings cannot guarantee that
any member of management will continue to serve in any capacity for any
particular period of time. In an effort to enhance UIL Holdings’ ability to
attract and retain qualified personnel, UIL Holdings regularly evaluates the
overall compensation packages offered to employees at all levels of the
organization.
The
United Illuminating Company
UI
is an
electric transmission and distribution utility whose structure and operations
are significantly affected by legislation and regulation. UI’s rates and
authorized return on equity are regulated by the Federal Energy Regulation
Commission (FERC) and the Connecticut Department of Public Utility Control
(DPUC). Legislation and regulatory decisions implementing legislation establish
a framework for UI’s operations. Other factors affecting UI’s financial results
are operational matters such as sales volume and ability to control expenses,
major weather disturbances, and capital expenditures. UI expects significant
growth in its capital investment in its distribution and transmission
infrastructure. UI is constructing its portion of a major transmission line
in
southwest Connecticut. UI has received Connecticut Siting Council approval
to
construct a substation in Trumbull, Connecticut, although UI has received a
copy
of an appeal of the approval from the Town of Trumbull and members of a citizens
group.
Legislation
& Regulation
Background
State
legislation significantly restructured the electric utility industry in
Connecticut between 1998 and 2005, commencing with Public Act 98-28, continuing
with Public Act 03-135, as amended in part by Public Act 03-221, and most
recently with Public Act 05-1 (June Special Session) (collectively, the
Restructuring Legislation). Since 2000, UI’s retail customers have been able to
choose their electricity suppliers. On
and
after January 1, 2007, UI is required to provide standard service to customers
who do not purchase power from an alternate retail electric supplier and who
do
not have demand meters or whose maximum demand is less than 500 kilowatts,
and
supplier
of last resort service
to customers who are not eligible for standard service and who do not choose
an
alternate electric supplier.
UI has
procured power to serve its standard service requirements for all of 2007,
and a
portion of its standard service requirements for 2008. UI has procured supplier
of last resort service for all of 2007. The
procurement
and availability of these services was undertaken in accordance with statutory
and DPUC requirements. The Restructuring Legislation provides for UI to recover
its costs of acquiring and providing generation services to customers who do
not
choose an alternate electric supplier. Electric suppliers must meet renewable
portfolio standards.
Connecticut
Public Act 05-01 (the Energy Independence Act or EIA) became law on July22,2005.
The EIA adds to the items included in the definition of Federally
Mandated Congestion Charges (FMCCs);
provides for incentives to promote the development of projects and resources
that are intended to reduce FMCCs; provides for the recovery by UI of the costs
of such incentives through the FMCC rate component on retail customers’ bills;
makes certain changes to the prior electric restructuring legislation in the
state; and makes other changes to the statutes administered by the DPUC.
In
general, the DPUC is authorized by the EIA to identify and implement measures
intended to reduce FMCCs,
both in
the near- and long-term.
These
measures can include incentives
for the development of distributed
resources, new generation, and contracts for capacity rights from generation,
conservation and energy efficiency measures to be entered into by electric
distribution companies such as UI after a request for proposal process
administered by the DPUC. The EIA establishes Class III renewable energy
resources and related portfolio standards for generation services, in addition
to the existing Class I and Class II renewable energy resources and portfolio
standards. The EIA provides for the waiving of electric back-up rates and gas
delivery charges for qualifying customer-side distributed resources, with
recovery of electric distribution company costs through the FMCC rate component
of bills.
2007
Rates
On
December 19, 2006, the DPUC issued a decision implementing UI’s 2007 rate
increase resulting from the 2005 Rate Case and established customers’
generation
services charge (GSC)
for
the first six months of 2007 to reflect the cost of wholesale power supply
procured by UI to provide standard service and supplier of last resort service.
The decision implements a settlement between UI and the Prosecutorial unit
of
the DPUC staff that, in addition to implementation of new distribution and
GSC
rates, provides short-term measures to mitigate the impact of these rate
increases on residential customers. Under
the
settlement and decision, UI
will
recover its power procurement costs and distribution rates in their entirety,
along with the costs associated with these mitigation measures. During the
first
quarter of 2007, UI has implemented the 2007 rate increase in accordance with
the terms of the final decision. The incremental increases effective January1,2007 and April 1, 2007 have been implemented. On
April24, 2007, UI filed revised retail rates with the DPUC, including among other
changes, proposed GSC for standard service and supplier of last resort, to
be
effective July 1, 2007. The new GSC rate is the result of UI’s most recent power
procurement, as described below.
Other
Regulation
UI
filed
a revised local network service transmission tariff which was approved by the
FERC in the fourth quarter of 2005. The revised transmission tariff will allow
UI to recover its transmission revenue requirements on a prospective basis,
subject to reconciliation with actual revenue requirements. Under UI’s previous
transmission tariff, the annual period during which wholesale transmission
rates
were effective began after the annual period used to calculate the required
transmission rates. The revised tariff will reduce the lag between the time
transmission-related costs are incurred and the period in which rates are
effective. In addition, UI received approval to include in the transmission
rate
base 50% of new construction work in progress related to new transmission
facilities, which include the project to construct a 345-kV transmission line
from Middletown, Connecticut, to Norwalk, Connecticut, and which will improve
cash flow during design and construction of that transmission
facility.
On
March23, 2007, UI filed with the FERC to obtain incentive rate treatment for costs
associated with the Middletown/Norwalk project. In particular, UI is seeking
approval for (1) the inclusion of 100% of construction work in progress in
the
transmission rate base, as opposed to the 50% currently approved, and (2) a
50
basis point ROE adder for the project’s use of advanced transmission
technologies. UI has requested an effective date of March 26, 2007. On
April 13, 2007, the DPUC and other parties made filings with the FERC
challenging UI’s filing. A FERC order is expected to be issued not more than 60
days from the filing date.
In
implementing the Restructuring Legislation, UI established a Distribution
Division and other “unbundled” components for accounting purposes, to reflect
the various unbundled components on customer bills. Initially, the Distribution
Division included both transmission and distribution. For regulatory and
accounting purposes, UI has now separated transmission and distribution into
separate divisions. Changes to income and expense items related to transmission
and distribution have a direct impact on net income and earnings per share,
while changes to items in “other unbundled utility components” do not have such
an impact. The other unbundled utility components are the CTA, the SBC, the
GSC,
the C&LM charge, and the REI charge. The CTA earned a 10.45% return on the
equity portion of its rate base until the January 13, 2006 effective date of
the
2005 Rate Case decision, at which time the authorized return on equity became
9.75%. The return is achieved either by accruing additional amortization
expenses, or by deferring such expenses, as required to achieve the authorized
return. Amortization expenses in the CTA component impact earnings indirectly
as
a result of changes to the CTA rate base. The GSC, C&LM and REI are
essentially pass-through components (revenues are matched to recover costs).
The
SBC does not generate any net income or earnings, because any difference between
the income and expense items in the SBC are funded through a revenue transfer
from the CTA. Except for a small management fee earned in the C&LM
component, expenses are either accrued or deferred, or revenues are transferred,
such that there is no net income associated with these three unbundled
components.
Power
Supply Arrangements
UI
must
procure its standard service power pursuant to a procurement plan approved
by
the DPUC, and that the procurement plan must provide for a portfolio of service
contracts procured in an overlapping pattern over fixed time periods (a
“laddering” approach). In its decision dated June 21, 2006, the DPUC approved a
procurement plan for UI. As required by the statute, a third party consultant
was retained by the DPUC to work closely with UI in the procurement process
and
to provide a joint recommendation to the DPUC as to selected bids. The DPUC’s
decision also provided that UI would receive bids for supplier of last resort
service through a separately conducted auction process, and the supplier of
last
resort service would be bid every six months.
UI
has
now conducted three rounds of solicitation, the most recent in March-April
2007
for standard service and supplier of last resort service. For each round there
was a joint recommendation provided to the DPUC by UI and the DPUC’s consultant,
regarding recommended bids. In the latest round, the DPUC issued a decision
approving the price and material terms of the contracts entered into by UI
with
the winning bidders, and finding that the auction process was conducted in
accordance with the UI procurement plan and in a fair and impartial manner.
As
a
result of these procurements, UI has wholesale power supply agreements in place
for the supply of all of UI’s standard service and supplier of last resort
service to customers for all of 2007 and also has contracted for a portion
of
the standard service requirements for 2008.
Competitive
Transition Assessment
UI’s
CTA
collection recovers costs that have been reasonably incurred, or will be
incurred, to meet its public service obligations and that will likely not
otherwise be recoverable in a competitive market. These “stranded costs” include
above-market long-term purchased power contract obligations, regulatory asset
recovery and above-market investments in power plants. A significant amount
of
UI’s earnings is generated by the authorized return on the equity portion of
unamortized stranded costs in the CTA rate base. UI’s after-tax earnings
attributable to CTA for the three months ended March 31, 2007 and 2006 were
$2.8
million and $3 million, respectively. A significant portion of UI’s cash flow
from operations is also generated from those earnings and from the recovery
of
the CTA rate base. Cash flow from operations related to CTA amounted to $6.7
million and $6 million for the three months ended March 31, 2007 and 2006,
respectively. The CTA rate base has declined from year to year for a number
of
reasons, including: amortization of stranded costs, the sale of UI’s nuclear
units, and adjustments made through the annual DPUC review process. The original
rate base component of stranded costs, as of January 1, 2000, was $433
million. It has since declined to $233 million at March 31, 2007. In the future,
UI’s CTA earnings will decrease while, based on UI’s current projections, cash
flow will remain fairly constant until stranded costs are fully amortized by
2015. The date by which stranded costs are fully amortized depends primarily
upon the DPUC’s future decisions which could affect future rates of stranded
cost amortization.
In
order
to maintain and improve its electricity delivery system and to provide quality
customer service, UI is required to spend a significant amount each year on
capital projects in the Distribution and Transmission Divisions. A large portion
of the funds required for capital projects is provided by operating activities,
and the remainder must be financed externally.
In
April
2005, the Connecticut Siting Council (CSC) approved a project to construct
a
345-kV transmission line from Middletown, Connecticut, to Norwalk, Connecticut,
which was jointly proposed by UI and The Connecticut Light and Power Company
(CL&P). This project is expected to improve the reliability of the
transmission system in southwest Connecticut. The two companies have been
working together on certain siting and permitting issues, and are each
constructing, and will own and operate its respective portion of the
transmission line and related facilities.
UI
will
construct, own, and operate transmission and substation facilities comprising
approximately 20% of the total project cost. UI’s current estimate for its share
of the project cost is approximately $240 million to $270 million (excluding
allowance for funds used during construction). Based on the current projected
schedule of construction, the project is expected to be complete in 2009. Upon
project completion, UI’s transmission rate base will have increased by
approximately $265 million to $295 million, an increase of more than 200%
relative to UI’s current net transmission assets. The FERC approved UI’s request
to include 50% of construction work in progress (CWIP) expenditures in the
rate
base, allowing a return to be earned on a portion of UI’s investment before the
project is completed. UI will commence earning a return on the remaining 50%
of
CWIP when it is added to the rate base in conjunction with the improvements
being placed in service. UI’s costs for the project are expected to be included
in and recovered through transmission revenues requirements, which are under
FERC jurisdiction.
Procurement
of most of the major project components is now complete. In April 2006, UI
executed a major turn-key contract for the construction of Singer Substation,
which will be the largest 345-kV gas insulated substation (GIS) in North
America. In September 2006, UI executed a contract for the civil construction
associated with the 345-kV underground cable system. In December 2006 and
January 2007, UI executed contracts with two suppliers for the design, supply
and installation of the 345-kV underground electric cable.
All
significant approvals for this project have been received. Appeals to the
Connecticut Superior Court were taken by three groups of entities, each of
whom
contested the CSC’s decision with respect to the location and construction of
the line in two areas along the project route but did not contest the need
for
the project and did not seek a stay of the CSC decision. Two of these appeals
have been resolved and withdrawn and a settlement agreement has been executed
with the third group of entities. Two more recent appeals, which were filed
by
property owners along one portion of the line, were dismissed by the Superior
Court. As of April 30, 2007, one of the appellants has appealed that dismissal.
Other governmental permitting, together with additional approvals from ISO-NE,
will be required for the project. The total project cost and timing of
completion could change depending on other permit requirements.
Xcelecom,
Inc.
With
the
substantial completion of the divestiture of Xcelecom, UIL Holdings is no longer
subject to the same level of operating risk factors that affected the financial
results of Xcelecom in prior reporting periods. Financial results could be
positively or negatively impacted by the following Xcelecom contractual
divestiture issues: (1) the completion of certain outstanding projects for
which
UIL Holdings retained financial responsibility, (2) the collection of certain
accounts receivables and promissory notes related to the sales of certain
Xcelecom companies, and (3) resolution of certain transitional financial issues.
UIL Holdings also has exposure (a) relating to its indemnification obligations
to the buyers of the former Xcelecom companies under the agreements relating
to
the sales of those companies, and (b) to the sureties that have provided
performance bonds to certain former Xcelecom companies related to projects
bid
or awarded prior to the sales of those companies.
UIL
Holdings generates its capital resources primarily through operations. At
March 31, 2007, UIL Holdings had $41.7 million of unrestricted cash and
temporary cash investments. This represents a decrease of $21.7 million from
the
corresponding balance at December 31, 2006. The components of this
decrease, which are detailed in the Consolidated Statement of Cash Flows, are
summarized as follows:
The
unrestricted cash position of UIL Holdings decreased by $21.7 million from
December 31, 2006 to March 31, 2007, as cash used in investing activities
consisted primarily of capital expenditures of $41.2 million. Cash provided
by
financing activities during the first quarter included $38 million from
short-term borrowings, partially offset by a $4.3 million principal payment
on
UIL Holdings’ long-term debt.
UIL
Holdings also accesses capital through both long-term and short-term financing
arrangements. Total current and long-term debt outstanding as of March 31,2007
was $482.6 million, as compared to $486.9 million at year-end December 31,2006.
UIL
Holdings and UI have a joint short-term credit facility under which UI and
UIL
have aggregate borrowing capacity totaling $175 million, with $50 million of
the
limit available for UIL Holdings. UI had $38 million outstanding under the
facility and UIL Holdings had a standby letter of credit outstanding in the
amount of $3 million as of March 31, 2007. The standby letter of credit also
reduces the amount of credit available for UI. Available credit at March 31,2007 for UI was $134 million, of which $47 million of that amount is available
for UIL Holdings.
All
capital requirements that exceed available cash will have to be provided by
external financing. Although there is no commitment to provide such financing
from any source of funds, other than the short-term credit facilities discussed
above, future external financing needs are expected to be satisfied by the
issuance of additional short-term and long-term debt. The continued availability
of these methods of financing will be dependent on many factors, including
conditions in the securities markets, economic conditions, and future income
and
cash flow. See Part
I,
Item
1,
“Financial Statements - Notes to Consolidated Financial Statements -
Note (B), Capitalization and Note (D), Short-Term Credit Arrangements”
of this Form 10-Q and UIL Holdings’ Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 for a discussion of UIL Holdings’ financing
arrangements.
Financial
Covenants
UIL
Holdings and its operating subsidiary, UI, are required to comply with certain
covenants in connection with their respective loan agreements. The covenants
are
normal and customary in bank and loan agreements.
There
have been no material changes in UIL Holdings’ 2007 capital resource projections
from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal
year ended December 31, 2006.
Contractual
and Contingent Obligations
There
have been no material changes in UIL Holdings’ 2007 contractual
and contingent obligations from those reported in UIL Holdings’ Annual Report on
Form 10-K for the fiscal year ended December 31, 2006.
CRITICAL
ACCOUNTING POLICIES
UIL
Holdings’ Consolidated Financial Statements are prepared based on certain
critical accounting policies that require management to make judgments and
estimates that are subject to varying degrees of uncertainty. UIL Holdings
believes that investors need to be aware of these policies and how they impact
UIL Holdings’ financial reporting to gain a more complete understanding of UIL
Holdings’ Consolidated Financial Statements as a whole, as well as management’s
related discussion and analysis presented herein. While UIL Holdings believes
that these accounting policies are grounded on sound measurement criteria,
actual future events can and often do result in outcomes that can be materially
different from these estimates or forecasts. The accounting policies and related
risks described in UIL Holdings’ Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 are those that depend most heavily on these
judgments and estimates. At March 31, 2007, there have been no material
changes to any of the Critical Accounting Policies described therein, except
for
the adoption of FIN 48. See “Note (A) - Income Taxes.”
OFF-BALANCE
SHEET ARRANGEMENTS
UIL
Holdings and its subsidiaries occasionally enter into guarantee contracts in
the
ordinary course of business. At the time a guarantee is provided, an analysis
is
performed to assess the expected financial impact, if any, based on the
likelihood of certain events occurring that would require UIL Holdings to
perform under such guarantee. Subsequent analysis is performed on a periodic
basis to assess the impact of any changes in events or circumstances. If such
an
analysis results in an amount that is inconsequential, no liability is recorded
on the balance sheet related to the guarantee. As of March 31, 2007, UIL
Holdings had certain guarantee contracts outstanding for which no liability
has
been recorded in the Consolidated Financial Statements. See
Part
I, Item 1, “Financial Statements - Notes to Consolidated Financial
Statements - Note (J), Commitments and Contingencies,” of this Form 10-Q for
further discussion of such guarantees.
NEW
ACCOUNTING STANDARDS
UIL
Holdings reviews new accounting standards to determine the expected financial
impact, if any, that the adoption of each such standard will have. As of the
filing of this Quarterly Report on Form 10-Q, there were no new accounting
standards issued that were projected to have a material impact on UIL Holdings’
consolidated financial position, results of operations or liquidity. Refer
to
Part I, Item 1,
“Financial Statements - Notes to Consolidated Financial Statements - Note (A),
Statement of Accounting Policies - New Accounting Standards,” for further
discussion regarding new accounting standards.
Within
the “Results of Operations” section of this Quarterly Report on Form 10-Q,
tabular presentations showing a comparison of UIL Holdings’ net income and
earnings per share (EPS) for the first quarter of each of 2007 and 2006 are
provided. UIL Holdings believes this information is useful in understanding
the
fluctuations in earnings per share between the current and prior year periods.
The amounts presented show the earnings per share from continuing operations
for
each of UIL Holdings’ lines of business, calculated by dividing the income from
continuing operations of each line of business by the average number of shares
of UIL Holdings common stock outstanding for the periods presented. The earnings
per share tables presented in “The United Illuminating Company Results of
Operations” and “Non-Utility Results of Operations” for all periods presented
are calculated on the same basis and reconcile to the amounts presented in
the
table under the heading “UIL Holdings Corporation Results of Operations.” The
total earnings per share from continuing operations and discontinued operations
in the table presented under the heading “UIL Holdings Corporation Results of
Operations” are presented on a GAAP basis.
In
discussing the results of operations, UIL Holdings also believes that a
breakdown, presented on a per share basis, of how particular significant items
contributed to the change in income from continuing operations by line of
business (Item Variance EPS Presentation) is useful in understanding the overall
change in the consolidated results of operations for UIL Holdings from one
reporting period to another. UIL Holdings presents such per share amounts by
taking the dollar amount of the applicable change for the revenue or expense
item, booked in accordance with GAAP, and applying UIL Holdings’ combined
effective statutory federal and state tax rate. See Item 1, “Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
-
Note (E), Income Taxes” of this Form 10-Q for details of UIL Holdings’ combined
effective statutory tax rate to obtain the after-tax impact of the item. The
after-tax amount is then divided by the average number of shares of UIL
Holdings’ common stock outstanding for the period presented. Any amounts
provided as Item Variance EPS Presentation are provided for informational
purposes only and are not intended to be used to calculate “Pro-Forma”
amounts.
First
Quarter 2007 vs. First Quarter 2006
UIL
Holdings Corporation Results of Operations: First Quarter 2007 vs. First Quarter
2006
UIL
Holdings’ earnings from continuing operations were $5.4 million, or $0.22 per
share, for the first quarter of 2007, a decrease of $11.4 million or $0.47
per
share, compared to the first quarter of 2006. Earnings from discontinued
operations were a minimal amount for the first quarter of 2007, an increase
of
$54.6 million or $2.24 per share, compared to the first quarter of 2006. Total
earnings, including discontinued operations, were $5.4 million, or $0.22 per
share, an increase of $43.2 million, or $1.77 per share, compared to the first
quarter of 2006.
The
table
below represents a comparison of UIL Holdings’ Net Income (Loss) and Earnings
per Share (EPS) for the first quarter of 2007 and the first quarter of
2006.
(In
Millions except Percents and Per Share Amounts)
Net
Income (Loss)
UI
$
5.5
$
7.6
$
(2.1
)
(28
)%
Non-Utility
(0.1
)
9.2
(9.3
)
(101
)%
Total
Net Income from Continuing Operations
$
5.4
$
16.8
$
(11.4
)
(68
)%
Discontinued
Operations
-
(54.6
)
54.6
100
%
Total
Net Income (Loss)
$
5.4
$
(37.8
)
$
43.2
114
%
EPS
UI
$
0.22
$
0.31
(0.09
)
(29
)%
Non-Utility
-
0.38
(0.38
)
(100
)%
Total
EPS from Continuing Operations - Basic
0.22
0.69
(0.47
)
(68
)%
Discontinued
Operations
-
(2.24
)
2.24
100
%
Total
EPS - Basic
$
0.22
$
(1.55
)
$
1.77
114
%
Total
EPS - Diluted (Note A)
$
0.21
$
(1.54
)
$
1.75
114
%
Note
A: Reflecting
the effect of dilutive stock options, performance shares and restricted stock.
Dilutive securities diluted earnings by $0.01 per share for the three months
ended March 31, 2007, and diluted the loss by $0.01 per share for the three
months ended March 31, 2006.
The
following table presents a line-by-line breakdown of revenue and expenses from
UIL Holdings’ Consolidated Statement of Income by subsidiary, including
comparisons between the first quarter of 2007 and the first quarter of 2006.
Significant variances are explained in the discussion and analysis of individual
subsidiary results that follow.
Gain
on Sale of Equity Investments -Minority Interest & Other (1)
$
-
$
18.9
$
(18.9
)
Income
Taxes
UI
$
4.5
$
5.9
$
(1.4
)
Minority
Interest Investment & Other (1)
(0.1
)
6.4
(6.5
)
Total
Income Taxes
$
4.4
$
12.3
$
(7.9
)
Income
from Equity Investment
UI
$
0.1
$
0.1
$
-
Minority
Interest Investment (2)
-
0.5
(0.5
)
Total
Income from Equity Investment
$
0.1
$
0.6
$
(0.5
)
Net
Income
UI
$
5.5
$
7.6
$
(2.1
)
Minority
Interest Investment & Other (1) (2)
(0.1
)
9.2
(9.3
)
Subtotal
Income from Continuing Operations
$
5.4
$
16.8
$
(11.4
)
Discontinued
Operations
-
(54.6
)
54.6
Total
Net Income (Loss)
$
5.4
$
(37.8
)
$
43.2
(1)
The
category "Minority Interest Investment and Other" includes amounts
recognized at the non-utility businesses in relation to their minority
interest investments, as well as unallocated holding company
costs.
(2)
Includes
income (losses) recognized at the non-utility businesses in relation
to
their minority interest
investments.
Note
A: Reflecting
the effect of dilutive stock options, performance shares and restricted stock.
Dilutive
securities diluted the earnings by $0.01 per share for the three months ended
March 31, 2007, but did not dilute earnings for the three months ended March31,2006.
Note
B: Percentage
change reflects impact to total retail sales.
UI’s
net
income was $5.5 million, or $0.22 per share, in the first quarter of 2007,
compared to $7.6 million, or $0.31 per share, in the first quarter of 2006.
The
decrease in earnings was primarily due to a revised estimate of transmission
revenue requirements, higher depreciation and the elimination in 2007 of the
power procurement fee, partially offset by higher retail volume and higher
retail price.
Overall,
UI’s operating revenue increased by $74.3 million, from $200.3 million in the
first quarter of 2006 to $274.6 million in the first quarter of 2007. Retail
revenue increased $56.6 million due mainly to increases in customer prices.
The
price increase allowed UI to collect from customers amounts to offset the higher
costs of procuring energy (see fuel and energy expense discussion below).
Wholesale revenue increased by $1.1 million primarily due to higher wholesale
market prices. Other revenues increased $16.6 million, largely due to the net
activity of the GSC “working capital allowance.”
Fuel
and
energy expense increased by $73 million, from $103.1 million in the first
quarter of 2006 to $176.1 million in the first quarter of 2007. Retail fuel
expense increased by $74.4 million in the first quarter of 2007, primarily
due
to higher costs to procure power. UI receives electricity to satisfy its
standard service and supplier of last resort requirements through a fixed-price
purchased power agreement. These costs are recovered through the GSC and BFMCC
portion of UI’s unbundled retail customer rates. UI’s wholesale energy expense
in the first quarter of 2007 decreased by $1.4 million primarily due to
decreased volume at the Bridgeport RESCO generating plant.
UI’s
operation and maintenance (O&M) expenses increased by $0.9 million, from
$53.9 million in the first quarter of 2006 to $54.8 million in the first quarter
of 2007. The increase was primarily attributable to increases in transmission
expenses, mainly due to higher regional power pool costs allocated to UI,
partially offset by lower decommissioning costs incurred at Connecticut
Yankee.
UI’s
depreciation and amortization of regulatory assets increased by $3.1 million,
from $16.5 million in the first quarter of 2006 to $19.6 million in the first
quarter of 2007. The increase was primarily attributable to higher depreciation
related to software costs and increased CTA amortization. UI accrues or defers
additional amortization to achieve the authorized return on equity of 9.75%
on
unamortized CTA rate base.
UI’s
other income and deductions decreased by $0.6 million, from $2.5 million in
the
first quarter of 2006 to $1.9 million in the first quarter of 2007. The decrease
was primarily attributable to the elimination in 2007 of the fee associated
with
power procurement.
Includes
interest charges and strategic and administrative costs of the non-utility
holding company.
Note
B:
Reflecting
the effect of dilutive stock options, performance shares and restricted
stock. Dilutive
securities did not dilute earnings for the three months ended March31,2007, but diluted the loss by $0.01 per share for the three months
ended
March 31, 2006.
The
consolidated non-utility businesses reported a minimal loss from continuing
operations in the first quarter of 2007, compared to net income of $9.2 million,
or $0.38 per share, in the first quarter of 2006. The decrease in earnings
was
mainly due to the absence of the gain on sale
of
Cross-Sound Cable.
The
following is a detailed explanation of the quarterly variances for each of
UIL
Holdings’ non-utility businesses.
Non-Utility
Businesses
Minority
Interest Investments
United
Bridgeport Energy, Inc. (UBE)
With
the
completion of the sale of UBE’s 33 1/3% interest in Bridgeport Energy, LLC,
no results were reported in the first quarter of 2007. UBE lost $0.2 million,
or
$0.01 per share, in the first quarter of 2006.
United
Capital Investments, Inc. (UCI)
UCI
earned a minimal amount in the first quarter of 2007 compared to income of
$10.7
million, or $0.44 per share, in the first quarter of 2006. The decrease in
earnings was mainly due
to
the absence
of gain on the
sale
of Cross-Sound Cable.
UIL
Corporate
UIL
Holdings retains certain costs at the holding company, or “corporate” level
which are not allocated to the various non-utility subsidiaries. UIL Corporate
incurred a loss of $0.1 million compared to a loss of $1.3 million, or $0.05
per
share, in the first quarter of 2006. The improvement in 2007 earnings was
primarily due to lower general and administrative expenses and increased
interest income earned on short-term investments.
Xcelecom
lost a minimal amount in the first quarter of 2007, compared to a loss of $54.6
million, or $2.24 per share, in the first quarter of 2006. The increase in
earnings was primarily due to the absence of an after-tax goodwill impairment
charge of $50.5 million recorded during the first quarter of 2006.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
UIL
Holdings’ and UI’s primary market risk is the interest rate risk associated with
the need to refinance fixed rate debt at maturity and the remarketing of
multi-annual tax-exempt bonds. The weighted-average remaining fixed rate period
of outstanding long-term debt obligations of UIL Holdings and UI is 2 years,
at
an average interest rate of 4.5%.
On
April3, 2007, UI filed an application with the DPUC regarding its financing plan
for
the period from 2007 through 2009. UI is seeking approval from the DPUC to
issue
not more than $375 million principal amount of debt securities (the Proposed
Notes). The proceeds from the sales of the Proposed Notes may be used by UI
for
the following purposes: (1) to refinance $225 million principal amount of
maturing existing debt; (2) to finance capital expenditures; (3) for general
corporate purposes; (4) to repay short-term borrowings incurred to temporarily
fund these requirements; and (5) to pay issuance costs related to the Proposed
Notes. The DPUC has not yet issued a schedule for this docket.
Item
4. Controls and Procedures.
UIL
Holdings maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its periodic reports to
the
Securities and Exchange Commission (SEC) is recorded, processed, summarized
and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to UIL Holdings’
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure based
on
the definition of “disclosure controls and procedures” in Rule 13a-15(e) and
Rule 15d-15(e) under the Securities Exchange Act of 1934. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating
the
cost-benefit relationship of possible controls and procedures.
UIL
Holdings carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and
its
Chief Financial Officer, of the effectiveness of the design and operation of
UIL
Holdings’ disclosure controls and procedures as of March 31, 2007. Based on the
foregoing, UIL Holdings’ Chief Executive Officer and Chief Financial Officer
concluded that its disclosure controls and procedures were effective as of
March31, 2007.
There
have been no changes in UIL Holdings’ internal control over financial reporting
during the quarter ended March 31, 2007 that have materially affected, or are
reasonably likely to materially affect UIL Holdings’ internal control over
financial reporting. During the quarter ended March 31, 2007, in connection
with
its evaluation of internal controls over financial reporting as of December31,2006 and as reported in its Annual Report on Form 10K for the fiscal year then
ended, UIL Holdings further enhanced its internal controls and procedures
through the implementation of a more rigorous review process of M&A and
divestitures and their financial impacts. These changes were applied in
preparing the financial statements for the quarter ended March 31,2007.
The
financial condition and results of operations of UIL Holdings are subject to
various risks, uncertainties and other factors, as described in UIL Holdings’
Annual Report on Form 10K for the year ended December 31, 2006. The following
risk factors included in that report have been updated to reflect activity
as of
March 31, 2007:
The
inability to collect certain accounts receivable of the divested Xcelecom
companies and amounts due under promissory notes from the buyers of those
companies could adversely impact UIL Holdings’ financial
condition.
The
buyers of the former Xcelecom companies
are
responsible for the collection of certain outstanding accounts receivable on
behalf of UIL Holdings, which total $9.7 million as of March 31, 2007. If those
accounts receivable are not collected, UIL Holdings will recognize additional
losses (to the extent existing reserves related to those accounts are
insufficient) and weaker than expected cash flows.
The
buyers of certain former Xcelecom companies have signed promissory notes payable
to Xcelecom or UIL Holdings, which total $11 million as of March 31, 2007.
If
those notes payable are not collected, UIL Holdings could recognize additional
losses and weaker than expected cash flows.
UIL
Holdings could suffer additional losses from the completion of certain
outstanding projects by Xcelecom’s former operating
companies.
UIL
Holdings has financial responsibility for outstanding projects being completed
by certain of Xcelecom’s former operating companies, whose costs to complete
total approximately $27 million as of March 31, 2007. The buyers of those
companies are responsible for the management and completion of outstanding
projects and are operating based on estimates of the cost to complete those
projects. Variations from the estimated contract costs, along with other risks
inherent in performing fixed price and unit price contracts, may result in
actual costs and billings differing from those estimated and could result in
additional losses and negatively impact UIL Holdings’ cash flow. Cost overruns
on these projects could also reduce the potential return of escrowed funds
deposited to cover such overruns.
Item
6. Exhibits.
(a) Exhibits.
Exhibit
Table
Item
Number
Exhibit
Number
Description
(10)
10.34
Copy
of Employment Agreement, dated February 28, 2007, between UIL Holdings
Corporation and Linda L. Randell.
(10)
10.35
Copy
of Second Amendment to the UIL Holdings Corporation 1999 Amended
and
Restated Stock Plan, dated March 27, 2007.
(10)
10.36
Copy
of Third Amendment to the UIL Holdings Corporation Deferred Compensation
Plan, dated March 27, 2007.
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.
UIL
HOLDINGS CORPORATION
Date 05/03/2007
/s/
Richard J.
Nicholas
Richard
J.
Nicholas
Executive
Vice
President
and
Chief Financial
Officer
40
Dates Referenced Herein and Documents Incorporated by Reference
