(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
July 31, 2006 was 24,635,521.
INDEX
Part
I. FINANCIAL INFORMATION
Page
Number
Item
1.
Financial
Statements.
3
Consolidated
Statement of Income (Loss) for the three and six months ended June30,2006 and 2005.
3
Consolidated
Statement of Comprehensive Income (Loss) for the three and six months
ended June 30, 2006 and 2005
Purchase power above market fuel expense credit (Note F)
(10,603
)
(10,786
)
Deferred income taxes
(38,069
)
1,647
Stock-based compensation expense (Note A)
2,580
1,506
Excess tax benefits from share-based compensation
(315
)
-
Deferred investment tax credits - net
(73
)
(225
)
Allowance for funds used during construction
(1,642
)
(1,323
)
Undistributed losses of minority interest investments
342
5,082
Changes in:
Accounts receivable - net
16,379
(1,203
)
Materials and supplies
(2,700
)
(109
)
Prepayments
(2,960
)
(2,252
)
Accounts payable
(3,224
)
(6,032
)
Interest accrued
(154
)
64
Taxes accrued
7,161
(2,085
)
Other assets
12,666
(4,724
)
Other liabilities
(22,583
)
(5,975
)
Total Adjustments
58,948
9,310
Net
Cash provided by Operating Activities
24,160
15,897
Cash
Flows from Investing Activities
Repayments from loan receivable Cross-Sound Cable Project
23,787
151
Proceeds from sale of equity investments
100,949
-
Proceeds from sale of assets of discontinued operations held for
sale
2,450
-
Deferred payments in prior acquisitions
(9,382
)
(4,099
)
Non-utility minority interest investments
(153
)
(2,342
)
Plant expenditures
(26,219
)
(20,663
)
Changes in restricted cash
207
(130
)
Net
Cash provided by (used in) Investing Activities
91,639
(27,083
)
Cash
Flows from Financing Activities
Issuances of Common stock
1,511
2,002
Excess tax benefits from share-based compensation
315
-
Payments on long-term debt
(4,286
)
(4,286
)
Notes payable - short-term, net
(25,577
)
8,866
Payments on notes payable - long-term
-
(735
)
Proceeds from notes payable - long-term
-
153
Payment of common stock dividend
(21,046
)
(20,894
)
Bank overdraft
5,919
276
Other
160
(132
)
Net
Cash (used in) Financing Activities
(43,004
)
(14,750
)
Cash
and Temporary Cash Investments:
Net
change for the period
72,795
(25,936
)
Balance
at beginning of period
28,860
40,165
Balance
at end of period
$
101,655
$
14,229
The
accompanying Notes to the Consolidated Financial
Statements
are an integral part of the financial
statements.
-
6
-
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(UNAUDITED)
(A)
STATEMENT OF ACCOUNTING POLICIES
Basis
of Presentation
UIL
Holdings Corporation (UIL Holdings) was formed in July 2000 and was an exempt
public utility holding company under the provisions of the Public Utility
Holding Company Act of 1935 until the effective date of its repeal, at which
time it became a holding company under the provisions of the Public Utility
Holding Company Act of 2005 (PUHCA 2005). Through
its various subsidiaries, UIL Holdings operates in two principal lines of
business: utility and non-utility. The utility business consists of the electric
transmission and distribution operations of The United Illuminating Company
(UI). The non-utility business consists of United
Capital Investments, Inc. (UCI), which holds minority ownership interests in
two
investment funds. The non-utility businesses also included 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, as well as UCI’s minority ownership interest in
Cross-Sound Cable Company, LLC (Cross-Sound) until the completion of the sale
of
that interest to Babcock and Brown Infrastructure Ltd. on February 27, 2006,
as
well as the
operations of
Xcelecom, Inc. (Xcelecom). As discussed further in “Note (P) - Discontinued
Operations” of this Form 10Q, on April 26, 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.
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, 2005. 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 six months
ended June 30, 2006 are not necessarily indicative of the results for the entire
fiscal year ending December 31, 2006.
All
earnings per share (EPS) amounts and references to common stock share numbers
reflect the previously announced 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 June 30, 2006 and December 31, 2005 totaled $5.2 million
and $5.8 million, respectively.
-
7
-
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -
(UNAUDITED) (Continued)
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 UIL Holdings’ Finance
organization amounting to $2 million and the balance in the restructuring
reserve as of June 30, 2006 was approximately $0.9 million. These accrued
restructuring costs are expected to be settled throughout 2006 and 2007 in
accordance with the applicable employee’s severance agreement. A reconciliation
of the changes in the restructuring reserve liability balance since December31,2005 is presented below.
Effective
January 1, 2002, UIL Holdings adopted SFAS No. 142, “Goodwill and Other
Intangible Assets.” This statement modifies the accounting and reporting of
goodwill and intangible assets. On April 26, 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 pre-tax
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,” the impairment is included in discontinued operations as of
June 30, 2006. See below “Note (A) - Impairment of Long-Lived Assets and
Investments and Discontinued Operations.”
Impairment
of Long-Lived Assets and Investments
SFAS
No.
144 requires the recognition of impairment losses on long-lived assets when
the
book value of an asset exceeds the sum of the expected future undiscounted
cash
flows that result from the use of the asset and its eventual disposition. If
impairment arises, then the amount of any impairment is measured based on
discounted cash flows. This standard 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. At June 30, 2006 and December 31, 2005, UIL Holdings did
not have any assets that were impaired under this standard.
Discontinued
Operations
SFAS
No.
144 also addresses the accounting for, and disclosure of, long-lived assets
to
be disposed of by sale. Under SFAS No. 144, when a long-lived asset or group
of
assets (disposal group) meets certain criteria set forth in the statement,
including a commitment by the company to a plan to sell the long-lived asset
(disposal group) within a twelve month period:
-
8
-
·
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;
and
·
management
will eliminate the operations and cash flows of the disposal group
from
ongoing operations after divestiture and there will be no significant
continuing involvement following the
sale.
UIL
Holdings announced on April 26, 2006, its intentions to divest its wholly-owned
subsidiary, Xcelecom. With
the
announcement, Xcelecom
meets
the criteria set forth in SFAS No. 144 to be classified as held for sale
and is
reported as such in UIL
Holdings’ Form 10Q for the period ending June 30, 2006. The disposal is expected
to be completed within twelve months.
Major
classes of assets and liabilities of Xcelecom consist of current assets of
$142
million, property, plant & equipment of $10.1 million, other assets of $7.3
million, current liabilities of $69.7 million and non current liabilities of
$3.4 million. When the sale is completed, $29.3 million of net deferred tax
assets, including amounts related to the impairment of goodwill will be realized
through the filing of UIL Holdings’ consolidated income tax returns.
-
9 -
UIL
HOLDINGS CORPORATION
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 three and six months ended June 30, 2006 and June30,2005:
Income
Applicable to
Common
Stock
Average
Number of
Shares
Outstanding
Earnings
per
Share
(In
Thousands, except per share amounts)
Six
Months Ended June 30:
2006
Basic
earnings from continuing operations
$
27,071
24,345
$
1.11
Basic
earnings (loss) from discontinued operations
(61,859
)
24,345
(2.54
)
Basic
earnings (loss)
(34,788
)
24,345
(1.43
)
Effect
of dilutive stock options (1)
-
303
0.02
Diluted
earnings (loss)
$
(34,788
)
24,648
$
(1.41
)
2005
Basic
earnings from continuing operations
$
10,441
24,193
$
0.43
Basic
earnings (loss) from discontinued operations
(3,854
)
24,193
(0.16
)
Basic
earnings
6,587
24,193
0.27
Effect
of dilutive stock options (1)
-
169
-
Diluted
earnings
$
6,587
24,362
$
0.27
Three
Months Ended June 30:
2006
Basic
earnings from continuing operations
$
10,251
24,365
$
0.42
Basic
earnings (loss) from discontinued operations
(7,251
)
24,365
(0.30
)
Basic
earnings
3,000
24,365
0.12
Effect
of dilutive stock options (1)
-
318
-
Diluted
earnings
$
3,000
24,683
$
0.12
2005
Basic
earnings from continuing operations
$
6,509
24,214
0.27
Basic
earnings (loss) from discontinued operations
(3,150
)
24,214
(0.13
)
Basic
earnings
3,359
24,214
0.14
Effect
of dilutive stock options (1)
-
172
-
Diluted
earnings
$
3,359
24,386
$
0.14
(1)
Reflecting
the effect of dilutive stock options, performance shares and restricted
stock. Dilutive securities did not impact the earnings from continuing
operations or loss from discontinued operations for the three months
ended
June 30, 2006 or the three or six months ended June 30, 2005. Dilutive
securities diluted earnings from continuing operations by $0.01 per
share
and diluted the loss from discontinued operations by $0.03 per share
for
the six months ended June 30, 2006.
Stock
options to purchase 471,757
and
468,275 shares of common stock were outstanding but not included in the
computation of diluted earnings per share for the three and six months ended
June 30, 2006 and 2005, respectively because the options’ exercise prices were
greater than the average market price of the common shares during such periods.
-
10 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
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. Prior to January 1, 2006, UIL Holdings followed the fair
value
recognition provisions, under the prospective method, of SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS
No. 148), an amendment of SFAS No. 123. Under SFAS No. 148, UIL
Holdings recorded compensation expense related to stock options based on the
most recently available fair-value estimates calculated by an independent party
utilizing the binomial option-pricing model following the nominal vesting
approach. No compensation expense was recorded prior to January 1, 2003, as
UIL
Holdings accounted for employee stock-based compensation in accordance with
APB
No. 25 as permitted by SFAS No. 123.
In
the
first quarter of 2004, UIL Holdings decided to generally cease granting new
stock options, other than new grants pursuant to the reload feature of the
UIL
Holdings 1999 Amended and Restated Stock Plan (Plan). Although new stock options
generally will not be granted, compensation expense related to options granted
after January 1, 2003, including any new stock options granted under the reload
feature of the Plan, will continue to be recorded ratably over the vesting
periods associated with such options. The reload feature provides for an
automatic grant of additional stock options whenever the holder exercises
previously granted stock options and utilizes shares of UIL Holdings stock,
rather than cash, to satisfy the exercise price.
In
2004,
UIL Holdings implemented a performance-based long-term incentive arrangement
under the 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. Except in the case of retirement eligible employees, for whom vesting
is immediate in accordance with SFAS No. 123R, these performance shares vest
over a 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 $1.2 million of compensation
expense was recorded in the first six months of 2006 in regards to retirement
eligible employees based on the adoption of SFAS No. 123R retirement eligible
provisions. UIL Holdings records stock compensation expense in the current
period based on quarterly projected performance against formal plans over the
performance period. A target amount of 81,833 performance shares were granted
during the first quarter of 2006; the average of the high and low market price
on the date of grant was $30.55 per share.
In
January 2006, UIL Holdings granted a total of 16,667 shares of restricted stock
to
its
new President, James P. Torgerson, pursuant to his employment
agreement;
the
average of the high and low market price on the date of grant was $29.10 per
share. In March 2006, UIL
Holdings granted another 2,578 shares of restricted stock to Mr. Torgerson
pursuant to his employment agreement; the
high
and low market price on the date of grant was $30.55 per share. Such shares
were
granted pursuant to the Plan. Compensation expense for this restricted stock
is
recorded ratably over the five-year vesting period for such restricted stock.
In
March
2006, UIL Holdings granted a total of 20,000 shares of restricted stock to
directors; the average of the high and low market price on the date of grant
was
$30.55 per share. Such shares were granted pursuant to the Plan. 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 vesting and compensation
expense is accelerated in accordance with SFAS No. 123R.
-
11 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
As
of
December 31, 2005 and June 30, 2006, UIL Holdings had 60,000 and 79,245 shares
of restricted stock which had not vested with a weighted average exercise price
of $26.25 and $29.53, respectively. In March 2006, 20,000 shares of previously
granted restricted stock grants to directors vested,
of which the intrinsic value was $0.2 million.
The
following table sets forth information regarding stock option transactions
for
the
year
ended December 31, 2005 and the quarter ended June 30, 2006.
One-third
of the options granted become exercisable on each of the first three
anniversaries of the grant date, with the exception of reload grants,
for
which the entire grant becomes exercisable six months from the grant
date.
(2)
The
intrinsic value of exercisable stock options at June 30, 2006 was
$1.5
million.
Total
stock-based compensation expenses were $2.6 million, after-tax of $1.5 million,
and $1.5 million, after-tax of $0.9 million, for the six months ended June30,2006 and 2005, respectively, and $1.2 million, after-tax of $0.7 million, and
$0.8 million, after-tax of $0.5 million for the three months ended June 30,2006
and 2005, respectively. No share based compensation costs were capitalized
as
part of the costs of an asset during the six months ended June 30,2006.
As
of
June 30, 2006, total stock option compensation costs, performance-base costs
and
restricted stock costs related to non-vested awards not yet recognized was
an
immaterial amount, $2.3 million and $1.5 million, respectively. The
weighted-average period over which the stock option compensation costs,
performance-base cost and restricted stock cost will be recognized is 12 months,
11 months and 19 months, respectively.
The
non-employee director’s shares issued for services rendered are usually drawn
from the Non-Employee Director Common Stock and Deferred Compensation
Plan. Employee performance shares and options are drawn from the
approved 1999 Amended and Restated UIL Holdings Stock Plan.
-
12 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
The
following table illustrates the effect on net income and earnings per share
of
applying the fair value based method to all outstanding and unvested awards
in
each period.
Comprehensive
income for the three and six months ended June 30, 2006 was
equal
to net income plus an interest rate cap mark-to-market adjustment of
approximately $0.2 million, after-tax, related to the $64.5 million principal
amount of Pollution Control Refunding Revenue Bonds. For further information
regarding this transaction, see “Note (B) - Long-Term Debt.” Comprehensive
income for the three and six month periods ended June 30, 2005, 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 pre-tax
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 Consolidated Statement of Income (loss) for the six
months ended June 30, 2006.
-
13 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
New
Accounting Standards
In
March
2006, the Financial Accounting Standard Board (FASB) issued a Proposed Statement
on Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Benefits. The proposed 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. In
addition, employers must record all unrecognized prior service costs and credits
and unrecognized actuarial gains and losses in accumulated other comprehensive
income. Such amounts will then be reclassified into earnings as components
of
net periodic benefit cost/income pursuant to the current recognition and
amortization provisions of SFAS No. 87, “Employers’ Accounting for Pensions,”
and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than
Pensions.” On July 26, 2006, FASB affirmed this proposal to make the recognition
provisions part of its proposed standard effective for fiscal years ending
after
December 15, 2006. UIL Holdings is currently assessing the impact of this
proposed statement.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, an interpretation of SFAS No. 109, “Accounting for Income Taxes”.
This 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 the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return which has a level of uncertainty of
being sustained on audit by the taxing authority. The interpretation provides
guidance on derecognition of a previously recognized liability for an uncertain
tax position, the classification of liabilities for uncertain tax positions,
and
the potential recognition of interest and penalties by taxing authorities.
In
addition, the interpretation prescribes additional disclosure requirements
including i) a reconciliation of beginning and ending balances of the total
amounts of unrecognized tax benefits from uncertain tax positions for the annual
reporting periods presented, ii) a discussion of the nature of the uncertain
tax
position taken if any of those positions will significantly increase or decrease
in the twelve months following the reporting date, iii) the amount of interest
and penalties recognized in the statement of operations and the total amount
of
interest and penalties recognized in the statement of financial position, and
iv) a description of the tax years that remain subject to examination by major
taxing authorities. The provisions of this interpretation are effective for
UIL
Holdings as of January 1, 2007. The adoption of this interpretation is not
expected to have a material impact on UIL Holdings’ financial position, results
of operations or liquidity.
(B)
CAPITALIZATION
Common
Stock
UIL
Holdings had 24,606,362 shares of its common stock, without par value,
outstanding at June 30, 2006. Of those shares, 151,344 were unallocated shares
held by UI's 401(k)/Employee Stock Ownership Plan (KSOP) and 43,245
were
shares of restricted stock, none of which are
recognized as outstanding for the purpose 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
twelve-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
June 30, 2006, 151,344 shares, with a fair market value of $5.1 million, had
been purchased by the KSOP and had not been committed to be released or
allocated to KSOP participants.
-
14 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
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
July 17, 2006, the interest rate on the bonds was 3.60%. The rate cap was set
at
3.68% and became effective March 30, 2006. The rate cap will terminate on August5, 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.
At the end of each quarter, changes in the market value of the rate cap are
marked-to-market, which resulted in an immaterial amount charged to expense
at
June 30, 2006. 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.”
UIL
Holdings amended its Note Purchase Agreement, dated as of February 15, 2001,
effective March 30, 2006, to define consolidated net income without regard
to
any reduction in net income resulting from any impairment of goodwill in
connection with a decision by UIL Holdings to divest of Xcelecom or its
subsidiaries.
(C)
REGULATORY PROCEEDINGS
2005
Rate Case
On
January 27, 2006, the DPUC issued a final decision in the 2005 Rate Case
proceeding. The DPUC set UI's distribution rates at levels that will increase
revenues by $14.3 million in 2006. The DPUC set incremental distribution rate
increases for 2007, 2008 and 2009, so that revenues will increase a total of
$35.6 million, or 4.9%, by 2009 compared to 2005 rates.
On
February 10, 2006, UI filed a Petition for Reconsideration with the DPUC
requesting that it reconsider the final decision to correct errors in the
decision with respect to employee compensation and the pension/post-retirement
discount rate. On March 1, 2006, the DPUC granted UI’s Petition to reopen the
proceeding for the limited purpose of reconsidering the record with regards
to
employee compensation and denied UI’s request to reconsider the
pension/post-retirement discount rate. Hearings were held on July 7 and July19,2006. On July 28, 2006, a settlement was reached between UI and the
Prosecutorial unit of the DPUC staff. The settlement agreement allows UI to
recover additional distribution revenue requirements of $1.5 million in 2007,
$1.8 million in 2008 and $2.3 million in 2009. The settlement was filed with
the
DPUC on August 1, 2006 and is subject to approval by the DPUC.
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.
-
15 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
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 the
Memorandum of Understanding (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. A MOU among UI, the City of Bridgeport, and the City’s
selected developer for the property was filed with the DPUC. 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. The MOU
provides for the filing of a stipulated judgment incorporating the MOU’s terms
in the eminent domain proceeding currently pending in the Connecticut Superior
Court, and for title to the property to transfer as part of that judgment upon
the City’s payment of $10.3 million, with the remaining $4.6 million to be paid
by June 30, 2007.
Tax
Credits Related to the Sale of Generation
On
December 21, 2005, the Internal Revenue Service (IRS) issued proposed
regulations that would allow public utilities, in certain circumstances, to
return certain tax benefits pertaining to divested or deregulated public utility
property to customers. Specifically, these regulations deal with accumulated
deferred investment tax credits (ADITC) and excess deferred federal income
taxes
(EDFIT) associated with public utility property. These regulations take the
place of previously issued proposed regulations, dated March 3, 2003, which
have
now been withdrawn by the IRS.
UI
had
been previously ordered by the DPUC to seek a Private Letter Ruling (PLR) from
the IRS requesting permission to immediately flow-through to customers $3.2
million of ADITC and $0.2 million of EDFIT relating to fossil-fueled generating
stations formerly owned by UI.
The
proposed regulations would only allow public utilities to return ADITC and
EDFIT
to customers under certain specific and limited circumstances. Under the
proposed guidance provided in these new regulations, none of the ADITC or the
EDFIT related to the generating stations previously sold could be flowed-through
to customers.
On
May17, 2006, UI received the requested PLR from the IRS. The PLR is consistent
with
the proposed regulations and indicates that none of the ADITC or EDFIT relating
to the fossil-fueled generating stations formerly owned by UI could be returned
to customers, either directly or indirectly, without violating the normalization
provisions of the Internal Revenue Code. As required by a DPUC order, UI has
submitted a copy of the PLR to the DPUC. The DPUC is in the process of reviewing
the PLR and has ordered that UI keep the ADITC and EDFIT, which was the subject
of the PLR, in their existing accounts on UI’s books pending the outcome of the
review.
Based
upon the consistent positions set forth in both the proposed regulations and
the
PLR, if the DPUC rescinds its current order requiring UI to keep the ADITC
and
EDFIT in their existing accounts on the books, UI would record a positive
earnings adjustment of approximately $6.4 million (including $3.0 million
related to UI’s former ownership interest in the Millstone Unit 3 nuclear
generating facility) representing the balance of ADITC and EDFIT related to
the
generating stations previously sold. This adjustment would have no impact on
cash flow.
-
16 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
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 345KV transmission line that ISO-NE deems not justified
to be included in the New England regional transmission rate. On June 21, 2006,
UI filed a motion at the FERC protesting on the grounds that UI’s customers
neither caused nor benefit from these costs. On July 28, 2006, the FERC approved
the NU filing. UI intends to seek rehearing. If the FERC ultimately decides
in
NU’s favor, and FERC’s decision is ultimately upheld, these costs will be
included in UI’s local transmission tariff and will have no impact on UI’s
financial statements.
(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 maturities from one day up to six
months. 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 June 30,2006, UIL Holdings did not have any short-term borrowings outstanding under
this
arrangement.
On
July29, 2004, UIL Holdings entered into a revolving credit agreement with a group
of
banks that extends to July 28, 2007 (Revolving Credit Agreement). The borrowing
limit of this facility is $100 million. The facility permits UIL Holdings to
borrow funds at a fluctuating interest rate determined by the prime lending
market in New York, and also permits UIL Holdings to borrow money for fixed
periods of time specified by UIL Holdings at fixed interest rates determined by
the Eurodollar inter-bank market in London (LIBOR). If a material adverse change
in the business, operations, affairs, assets or condition, financial or
otherwise, or prospects of UIL Holdings and its subsidiaries, on a consolidated
basis, should occur, the banks may decline to lend additional money to UIL
Holdings under this revolving credit agreement, although borrowings outstanding
at the time of such an occurrence would not necessarily then become due and
payable. As of June 30, 2006, UIL Holdings did not have any short-term
borrowings outstanding under this arrangement. UIL Holdings amended its
Revolving Credit Agreement, effective March 30, 2006, to define consolidated
net
income without regard to any reduction in net income resulting from any
impairment of goodwill in connection with a decision by UIL Holdings to divest
of Xcelecom or its subsidiaries.
Xcelecom
has a revolving credit agreement with a bank that extends to the earlier of
June30, 2007 and the date on which UIL Holdings’ divestiture of Xcelecom is
substantially completed. In connection with an amendment of this agreement,
dated as of July 28, 2006, UIL Holdings has guaranteed the obligations under
the
agreement. This agreement provides for a $20 million revolving loan facility
available to meet working capital needs and to support standby letters of credit
issued by Xcelecom in the normal course of its business (such amount to be
reduced as UIL Holdings’ divestiture of Xcelecom is completed), and to meet
capital equipment needs of up to $1 million. Capital equipment loans under
this
facility can be converted to amortizing term loans with a maturity of up to
four
years. This agreement also provides for the payment of interest at a rate,
at
the option of Xcelecom, based on the agent bank’s prime interest rate or LIBOR.
As of June 30, 2006, Xcelecom did not have any borrowings outstanding under
the
revolving working capital balance under this facility. Xcelecom had $0.8 million
of capital equipment funding that had been converted to term notes outstanding
and standby letters of credit of $3.8 million outstanding at June 30, 2006
under
the facility.
-
17 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
Income
tax expense for continuing operations consists of:
Income
tax provisions (benefit):
Current
Federal
$
6,781
$
2,656
$
20,886
$
8,110
State
1,922
609
5,909
1,872
Total
current
8,703
3,265
26,795
9,982
Deferred
Federal
(324
)
2,432
(4,592
)
1,151
State
(459
)
402
(1,915
)
(90
)
Total
deferred
(783
)
2,834
(6,507
)
1,061
Investment
tax credits
(36
)
(112
)
(73
)
(225
)
Total
income tax expense
$
7,884
$
5,987
$
20,215
$
10,818
Income
tax components charged as follows:
Operating
tax expense
$
7,868
$
6,456
$
12,342
$
12,764
Nonoperating
tax expense (benefit)
377
(82
)
289
(35
)
Equity investments tax (benefit)
(361
)
(387
)
7,584
(1,911
)
Total
income tax expense
$
7,884
$
5,987
$
20,215
$
10,818
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 this change, the combined statutory federal and state income
tax rate for UIL Holdings’ Connecticut-based entities increased from 39.875% for
the year 2005 to 40.85% for the year 2006.
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 rates for
the
three and six months ended June 30, 2006 were 43.5% and 42.8%, respectively,
as
compared to 47.9% and 50.9% for the three and six months ended June 30, 2005.
The decrease in the 2006 effective book income tax rates from the rates for
the
2005 periods is primarily due to: (1) differences in the amount of book
depreciation in excess of non-normalized tax depreciation, and (2) non-recurring
adjustments to deferred income tax reserves primarily associated with bond
redemption premiums and expenses that were recorded during the first six months
of 2005.
The
2006
six month effective book income tax rate is higher than the 2006 effective
statutory tax rate due primarily to: (1) non-normalized effects associated
with
CTA, and (2) differences in the amount of book depreciation in excess of
non-normalized tax depreciation.
Any
capital losses that UIL Holdings may incur associated with the planned
divestiture of Xcelecom can be applied against previously incurred capital
gains
totaling approximately $92 million from the prior sales of American Payment
Systems in June 2004 and Cross-Sound in February 2006. By doing so, UIL Holdings
will receive a cash benefit from the tax impacts of approximately 40% of the
capital loss upon completion of the sale of Xcelecom.
-
18 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
(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.
-
19
-
(G)
PENSION AND OTHER BENEFITS
The
United Illuminating Company Pension Plan (the “Pension Plan”) covers
substantially all employees of UIL Holdings and UI and certain management
employees of Xcelecom, in each case other than newly hired employees as
described below in this Note (G). Xcelecom employees no longer accrue benefits
under the Pension Plan, but any benefits accrued to them through December 2003
remain in the Pension Plan. 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.
The
funding policy for the qualified 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 qualified
pension plan. Based upon preliminary actuarial calculations, UI
does
not expect to make a contribution to the Pension Plan for the 2006 plan year.
There
is
potential variability to the pension expense calculation depending on changes
in
certain assumptions: if there is a 0.25% change in the discount rate used,
the
pension expense would increase or decrease inversely by $0.9 million; if there
is a 1% change in the expected return on assets, the pension expense would
increase or decrease inversely by $2.8 million.
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. Employees who are 55
years
of age and whose sum of age and years of service at time of retirement is equal
to or greater than 65 are eligible for benefits partially subsidized by UI.
The
amount of benefits subsidized by UI is determined by age and years of service
at
retirement. In the first six months of 2006, UI
contributed $1.8 million to a 401(h) account in connection with the Pension
Plan
to fund OPEB for UI’s non-union employees. In addition, UI expects to contribute
approximately $3.2 million in 2006, to fund OPEB for non-union employees,
subject to approval by the Internal Revenue Service of the funding
vehicle.
There
is
potential variability in the calculation of OPEB plan expenses depending on
changes in certain assumptions: if there is a 0.25% change in the discount
rate
used, the OPEB plan expenses would increase or decrease inversely by $0.2
million; if there is a 1% change in the expected return on Voluntary Employees’
Benefit Association Trust assets, the OPEB plan expenses would increase or
decrease inversely by $0.2 million.
A
new
retirement plan became effective on April 1, 2005 for new employees hired into
the bargaining unit, and May 1, 2005 for all other new employees. Such new
employees will not participate in the Pension Plan or receive retiree medical
plan benefits. The new retirement plan is a “defined contribution plan”, and
consists of the current provisions of UI's
401(k)/Employee Stock Ownership Plan (KSOP),
plus the following benefits:
·
An
additional cash contribution of 4.0% of total annual compensation
(as
defined in the KSOP Plan) is made to a separate account in the KSOP
for
new hires.
·
An
additional cash contribution of $1,000 per year (pro rata per pay
period)
is made to a separate Retiree Medical Fund account within the KSOP
for new
hires.
·
New
employees do not need to contribute to the KSOP to receive these
additional cash contribution amounts; they only need to enroll in
the KSOP
Plan.
·
Both
types of additional cash contributions to the KSOP vest 100% after
5 years
of service.
-
20 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
The
following tables represent the components of net periodic benefit cost for
pension and OPEB for the three and six months ended June 30, 2006 and
2005:
Three
Months Ended June 30,
Pension
Benefits
Other
Post-retirement Benefits
2006
2005
2006
2005
(In
Thousands)
Components
of net periodic benefit cost:
Service
cost
$
1,761
$
1,572
$
318
$
245
Interest
cost
4,635
4,494
864
782
Expected
return on plan assets
(5,965
)
(5,564
)
(409
)
(379
)
Amortization
of:
Prior
service costs
263
265
(32
)
(45
)
Transition
obligation (asset)
-
(131
)
264
264
Actuarial
(gain) loss
1,888
1,580
563
416
Settlements,
curtailments and special
termination
benefits
-
488
-
37
Net
periodic benefit cost
$
2,582
$
2,704
$
1,568
$
1,320
The
following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount
rate
5.50
%
5.75
%*
5.50
%
5.75
%*
Average
wage increase
4.40
%
4.50
%
N/A
N/A
Return
on plan assets
8.25
%
8.00
%
8.25
%
8.00
%
Pre-65
health care trend rate (current yr)
N/A
N/A
11.00
%
12.00
%
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
6.00
%
6.50
%
Post-65
health care trend rate (2008+)
N/A
N/A
5.00
%
5.00
%
N/A
- not
applicable.
*5%
discount rate used at June 30, 2005 for non-qualified plan.
-
21 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
Six
Months Ended June 30,
Pension
Benefits
Other
Post-retirement Benefits
2006
2005
2006
2005
(In
Thousands)
Components
of net periodic benefit cost:
Service
cost
$
3,522
$
3,146
$
636
$
490
Interest
cost
9,270
8,990
1,728
1,564
Expected
return on plan assets
(11,931
)
(11,129
)
(818
)
(759
)
Amortization
of:
Prior
service costs
526
530
(64
)
(90
)
Transition
obligation (asset)
-
(262
)
529
529
Actuarial
(gain) loss
3,776
3,159
1,127
831
Settlements,
curtailments and special
termination
benefits
-
488
-
37
Net
periodic benefit cost
$
5,163
$
4,922
$
3,138
$
2,602
The
following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount
rate
5.50
%
5.75
%*
5.50
%
5.75
%*
Average
wage increase
4.40
%
4.50
%
N/A
N/A
Return
on plan assets
8.25
%
8.00
%
8.25
%
8.00
%
Pre-65
health care trend rate (current yr)
N/A
N/A
11.00
%
12.00
%
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
6.00
%
6.50
%
Post-65
health care trend rate (2008+)
N/A
N/A
5.00
%
5.00
%
N/A
- not
applicable.
*5%
discount rate used at June 30, 2005 for non-qualified plan.
The
preceding tables reflect curtailment and special termination benefits charges
resulting from the departure of an employee as part of the reorganization
of UIL Holdings’ Finance organization. Approximately $0.4 million of these
charges were previously recognized as employee termination costs and have now
been reclassified to the pension and other post-retirement benefits accounts
due
to the employee’s election to receive enhanced retirement benefits rather than a
lump sum termination payment. See “Note (A) - Statement of Accounting Policies -
Restructuring Charges” for additional information.
(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 $3.6 million as of June30, 2006. 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.
-
22 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
There
are
currently two significant unresolved legal and regulatory matters regarding
the
decommissioning of the Connecticut Yankee Unit which could have an impact on
the
results of operations and financial condition of UI: (1) the review and approval
process by the FERC of the request by Connecticut Yankee to recover increased
decommissioning costs, and (2) litigation between the U.S. Department of Energy
(DOE) and Connecticut Yankee, together with two other New England-based owners
of retired nuclear generating plants, regarding disposal of spent nuclear fuel.
Each of these items is discussed in further detail below.
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 June 30, 2006, UI has regulatory approval
to
recover in future rates (through the CTA) $9.1 million of its regulatory asset
for Connecticut Yankee over a term ending in 2007. The remaining portion of
the
regulatory asset, as of June 30, 2006, was $28.1 million, which consists of
costs subject to a regulatory review and approval process and reflects the
present value of the revenue requirements to fund the increased costs described
in the following paragraphs. The regulatory review and approval process may
extend the recovery period beyond 2007. Although UI believes full regulatory
recovery is probable, because these costs are similar in nature to the costs
for
which UI already has regulatory approval to recover in future rates, the actual
amounts subject to recovery may be different.
Current
Cost Estimate
As
part
of Connecticut Yankee’s April 2000 rate case settlement with the FERC (2000 FERC
Settlement), remaining decommissioning costs were estimated at $436 million.
The
original estimate was updated in November 2002 to increase the estimated
decommissioning costs by approximately $130 million. The $130 million increase
stemmed primarily from additional security costs, increased insurance costs
and
other factors. In December 2003, the estimate was increased by an additional
$265 million, reflecting the fact that Connecticut Yankee is now directly
managing the work necessary to complete decommissioning of the plant following
termination in July 2003 of the contractor that had been managing such work.
Consequently, the total current cost estimate of approximately $831 million
(2003 Estimate) represents an aggregate increase of approximately $395 million
over the 2000 FERC Settlement amount. The above financial information has been
adjusted to 2003 dollars. UI’s share of the estimated increased cost of $395
million over the 2000 FERC Settlement amount is approximately $37.5 million.
The
2000 FERC Settlement specified that if Connecticut Yankee’s costs for the
physical decommissioning of the plant exceeded a specified level, then, subject
to certain conditions, Connecticut Yankee would not bill its wholesale
purchasers for 10 percent of the overage, up to a maximum of $10 million, even
if the higher costs were prudently incurred. Connecticut Yankee has determined
that although neither the regulatory proceeding nor the physical decommissioning
of the plant are complete, it can no longer conclude that it is probable that
it
will recover this portion of the decommissioning costs in its wholesale
decommissioning charges. Connecticut Yankee has recognizing the after-tax impact
of $6 million as a reduction in its equity. UI’s share of this write-off is
approximately $0.6 million on an after tax basis. The balance of the increased
costs will not impact current period earnings, because the amounts will be
deferred on UI’s balance sheet pending resolution of the litigation and
regulatory proceedings described herein. Ultimately, if this issue is resolved
favorably, the costs will be recovered in rates and therefore would not have
a
financial impact on UI’s results of operations. If the outcome is not favorable,
there could be a material negative impact to UI’s results of
operations.
FERC
Matters
2004
Rate Case Filing
Connecticut
Yankee filed the 2003 Estimate with the FERC as part of a July 1, 2004 rate
application (the “Filing”) seeking additional funding to complete the
decommissioning project and for storage of spent fuel through 2023. The Filing
was required as part of the terms of the 2000 FERC Settlement and requests
that
new rates take effect on January 1, 2005. The Filing includes proposed increased
decommissioning charges, based on the 2003 Estimate, as well as $4.0 million
and
$2.4 million of new charges for pension and post-retirement benefits (other
than
pensions), respectively. The proposed $93 million annual decommissioning
collection represents a significant increase in
-
23 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
annual
charges compared to the existing FERC-approved decommissioning collection rate
of $16.7 million per year that had been approved as part of the 2000 FERC
Settlement. The Filing proposes extending the collection period for
decommissioning from June 30, 2007 to December 31, 2010.
Notices
of intervention or protest were filed in July and August 2004 at the FERC by
several utility parties and by non-utility parties, including the DPUC, the
Office of Consumer Counsel (OCC), the Massachusetts Attorney General, the
Massachusetts Department of Telecommunications and Energy, the Rhode Island
Attorney General, and the Maine Public Advocate. Bechtel Power Corporation
also
filed a motion to intervene and protest.
On
August30, 2004, FERC issued an order: (1) accepting for filing Connecticut Yankee’s
proposed new charges for decommissioning, pension expense and post-retirement
benefits (other than pensions) expense; (2) suspending the revised charges
for a
period of five months, to February 1, 2005, at which time the proposed rates
went into effect subject to refund; (3) establishing hearing procedures, which
commenced with a pre-hearing conference before an administrative law judge
(ALJ)
in September 2004; (4) denying the request of the DPUC and OCC for an
accelerated hearing schedule and for a bond or other security for potential
refunds; (5) denying the declaratory ruling requested by the DPUC and OCC (see
paragraph below); and (6) granting Bechtel’s motion to intervene as well as
allowing the interventions by the other applying parties, including UI and
the
other Connecticut Yankee power purchasers. The evidentiary hearings concluded
on
June 22, 2005.
Following
post-hearing briefs, the ALJ issued an Initial Decision on November 22, 2005.
The Initial Decision found that Connecticut Yankee acted prudently in all
respects and denied all prudence-related claims for disallowance of
decommissioning costs. The only adjustment to Connecticut Yankee’s
decommissioning charges required by the Initial Decision relates to the
escalation rate, which is the factor used to translate the 2003 Estimate, which
is stated in constant 2003 dollars, into spending projections and
decommissioning charges. The Initial Decision found that Connecticut Yankee
should recalculate its decommissioning charges to reflect a lower escalation
rate.
The
Initial Decision is subject to review by the FERC and no adjustments to
Connecticut Yankee’s decommissioning charges are required at the present time.
Briefing with the FERC has concluded and the FERC must now issue a decision
on
the contested issues, which decision will be subject to rehearing by the FERC
and to judicial review.
FERC
Order on Request for Declaratory Order
On
June10, 2004, the DPUC and the OCC filed a petition (Petition) with the FERC seeking
a declaratory order that Connecticut Yankee can recover all decommissioning
costs from its wholesale purchasers, but that those purchasers may not recover
in their retail rates any costs that the FERC might determine to have been
imprudently incurred. Connecticut Yankee, as well as its wholesale purchasers,
responded in opposition to the Petition, indicating that the order sought by
the
DPUC and OCC would violate the Federal Power Act and decisions of the U.S.
Supreme Court, other federal and state courts, and the FERC. As noted above,
the
ALJ rejected this Petition as part of its initial ruling on Connecticut Yankee’s
rate filing. The DPUC and OCC filed a petition for rehearing on the matter
which
was denied by the FERC on October 20, 2005. On December 12, 2005, the DPUC
and
OCC filed a petition for review of the FERC’s orders on the Petition with the
U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit). On January 12, 2006,
FERC responded to the DPUC petition arguing that the D.C. Circuit should dismiss
or hold the matter in abeyance until the completion of the FERC proceeding
and
FERC’s orders become final. The matter remains pending before the D.C.
Circuit.
-
24 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
DOE
Litigation
The
new
estimates described above relate in part, to spent fuel storage, and could
be
affected by the outcome of an ongoing dispute between the DOE and several
utilities and states. Under the Nuclear Waste Policy Act of 1982 (the “Act”),
the DOE is required to design, license, construct and operate a permanent
repository for high-level radioactive waste and spent nuclear fuel. The Act
requires the DOE to provide for the disposal of spent nuclear fuel and
high-level waste from commercial nuclear plants through contracts with the
owners. In return for payment of established disposal fees, the federal
government was required to take title to and dispose of the utilities’
high-level waste and spent nuclear fuel beginning no later than
January 1998. After the DOE announced that its first high-level waste
repository will not be in operation earlier than 2010, several utilities and
states obtained a judicial declaration that the DOE has a statutory
responsibility to take title to and dispose of high-level waste and spent
nuclear fuel beginning in January 1998. Although the federal government now
concedes that its failure to begin disposing of high-level waste and spent
nuclear fuel in January 1998 constituted a breach of contract, it continues
to
dispute that the entities with which it had contracts are entitled to damages.
Connecticut Yankee, together with two other New England-based owners of retired
nuclear generating plants, is seeking recovery of damages stemming from the
breach by the DOE under the 1983 contracts that were mandated by the U.S.
Congress under the High Level Waste Act for purposes of disposal of spent fuel
and high-level waste, including greater than class C waste. The trial for the
damage claim ended August 31, 2004. The court heard closing arguments on January24, 2005 and the final post-trial briefs were filed on February 18,2005.
The
amount of the claim for damages incurred through 2010, net of adjustments made
as part of the trial record, is approximately $186 to $198 million, depending
on
the discount rate applied. Inaddition,
incremental continuing damages that will be incurred for periods beyond 2010
are
being sought based on an annual dollar value. The 2003 Estimate discussed above
does not include an allowance for recovery of damages in this matter. The
Department of Justice submitted a motion to the court during the damage trial
which raises the issue of whether Connecticut Yankee’s pre-1983 spent fuel fee
obligation of approximately $155 million should be treated as an offset to
any
payment of damages. The Court’s ruling on that matter is expected to be issued
in the same time frame as its overall ruling in the case.
On
September 9, 2005, the U.S. Court of Appeals for the Federal Circuit issued
its
decision in the Indiana
Michigan vs. United States
spent
fuel litigation case. The opinion affirmed the lower Court’s ruling that Indiana
Michigan is entitled to no damages. Additionally, the Court also held that
Plaintiffs in “partial breach” cases (such as Connecticut Yankee’s case) are not
entitled to future damages, although the actual date or event beyond which
damages are considered “future damages” was not clarified by the Court. This
decision may limit Connecticut Yankee’s recovery of damages in the current case
to those damages which actually occurred through 1998, 2004 or potentially
2006.
The Court’s ruling does not bar Connecticut Yankee from attempting to recover,
at a later date, damages after they have occurred.
The
Judge
in Connecticut Yankee’s case asked for supplemental briefing on the impact of
the Indiana
Michigan
decision. In response to the Judge’s request, Connecticut Yankee argued that the
Court should award Connecticut Yankee damages through 2002 now, and direct
the
parties to promptly pursue additional proceedings in which Connecticut Yankee
may recover its post-2002 damages to the extent already incurred. In its
supplemental brief, Connecticut Yankee claims damages through 2002 of $82.8
million. The government has initially taken the position that Connecticut Yankee
can only recover its damages through the date it filed suit (April 1998). In
other similar cases, however, the government has acknowledged that courts have
flexibility to award damages after the date suit was filed. Connecticut Yankee
expects the issue of the date through which damages may be awarded in the
current proceedings to be decided together with the Court’s overall ruling on
other damage issues. If the DOE litigation is decided in Connecticut Yankee’s
favor, any damages recovered would be used to reduce customer rates, with no
impact to UI’s results of operations.
Connecticut
Yankee believes it is entitled to substantial damages for the failure of the
DOE
to remove the Company’s nuclear waste covered by the 1983 contract, but due to
the novelty and complexity of the issues and the possibility of appeals, cannot
predict the amount of damages it will receive or the timing of the final
determination of such damages.
-
25 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
Bechtel
Litigation
Connecticut
Yankee terminated its decommissioning contract with Bechtel Power Corporation
(Bechtel) in July 2003, due to Bechtel’s history of incomplete and untimely
performance of decommissioning work. In June 2003, Bechtel filed a complaint
against Connecticut Yankee in Connecticut Superior Court, asserting a number
of
claims, including wrongful termination and negligent misrepresentation.
In
August
2003, Connecticut Yankee filed a counterclaim, including counts for breach
of
contract, negligent misrepresentation and breach of duty of good faith and
fair
dealing. Connecticut Yankee has been managing the decommissioning process and
was continuing to prosecute its counterclaims for excess completion costs and
other damages against Bechtel in Connecticut Superior Court until completion
of
the settlement described below.
On
March7, 2006, Connecticut Yankee and Bechtel entered into a binding settlement
agreement regarding this litigation. The agreement includes provisions providing
that (1) all disputes between the parties are fully and finally settled and
the
decommissioning contract is deemed to be terminated by agreement, (2) the
parties shall exchange a mutual general release of all claims, including any
liens, garnishments and attachments, and (3) Bechtel shall pay Connecticut
Yankee $15 million. Connecticut Yankee and Bechtel executed more complete
implementing documentation relating to this settlement on March 17, 2006.
Connecticut Yankee expects to credit net proceeds of the settlement against
decommissioning costs recoverable under the power contracts in a superseding
rate application at FERC.
On
January 27, 2006, the Connecticut Superior Court granted Bechtel a Prejudgment
Remedy that included attachment of Connecticut Yankee’s real property in an
amount not to exceed $7.9 million and garnishment of power purchasers’ payments
in the amount of $41.7 million. These measures were never implemented by
Bechtel. As a result of the settlement with Bechtel on March 7, 2006, the
attachment and garnishment have been released.
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, 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 June 30, 2006, the amount of UI’s guarantee for this debt
totaled approximately $2.8 million.
Environmental
Concerns
In
complying with existing environmental statutes and regulations and further
developments in areas of environmental concern, including legislation and
studies in the fields of water quality, hazardous waste handling and disposal,
toxic substances, 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.
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 the
Memorandum of Understanding (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. A MOU among UI, the City of Bridgeport,
-
26 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
and
the
City’s selected developer for the property was filed with the DPUC. 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.
The
MOU provides for the filing of a stipulated judgment incorporating the MOU’s
terms in the eminent domain proceeding currently pending in the Connecticut
Superior Court, and for title to the property to transfer as part of that
judgment upon the City’s payment of $10.3 million, with the remaining $4.6
million to be paid by June 30, 2007.
UI
may be
required to remove additional soil on the Steel Point property to achieve
environmental compliance prior to the transfer of title to the property. Under
the MOU, the City and developer release UI from any further liability with
respect to the Steel Point property after title transfers, and the City and/or
developer must indemnify UI for environmental matters related to the Steel
Point
property once title transfers to the City. 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 occurring on the site before title transfers
to the City. 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
from the City of Bridgeport. As a result of the approved ratemaking described
above, $8.5 million will be 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.
A
site on
the Mill River in New Haven was conveyed by UI to an unaffiliated entity,
Quinnipiac Energy LLC (QE), reserving to UI permanent easements for the
operation of its transmission facilities on the site. At the time of the sale,
a
fund of approximately $1.9 million, an amount equal to the then-current estimate
for remediation, was placed in escrow for purposes of bringing soil and
groundwater on the site into compliance with applicable environmental
laws.
Approximately $0.5 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 have 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
accrued these estimated expenses during the third quarter of 2002.
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
-
27 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
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 a 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
has begun. Implementation
of the verification work is not expected to have a material impact on the
financial condition of UI.
Claim
of Enron Power Marketing, Inc.
UI
had a
wholesale power agreement and other agreements with Enron Power Marketing,
Inc.
(EPMI) (the “Agreements”). Following EPMI’s bankruptcy filing on
December 2, 2001, UI terminated the Agreements in accordance with their
terms, effective January 1, 2002, in reliance upon provisions of the
Bankruptcy Code that permit termination of such contracts. The Agreements
permitted UI to calculate its gains and losses resulting from the termination,
and globally to net these gains and losses against one another, and against
any
other amounts that UI owed to EPMI under the Agreements, to arrive at a single
sum. On January 31, 2003, EPMI commenced an adversary proceeding against UI
and UIL Holdings in the EPMI bankruptcy. UIL Holdings was sued as the guarantor
of UI’s financial obligations under the Agreements. EPMI contended that UI was
not entitled to offset, against any losses UI suffered from the termination
of
the Agreements, any amounts owing to EPMI for power delivered to UI after the
date EPMI filed for bankruptcy. The amount of the allegedly improper setoff
that
EPMI sought to recover in the adversary proceeding was approximately $8.2
million, plus interest and attorneys’ fees. UI retained a reserve of $8.2
million for this claim.
In
June
2006, UI reached a settlement agreement with EMPI in connection with which
UI
paid $7.9 million to fully settle all outstanding claims. In conjunction with
this settlement, UI entered into a separate agreement with an investment banking
firm to purchase UI’s claim against EPMI for $5.7 million. As a result of the
settlements, the remaining $6.0 million in the reserve will be applied to the
benefit of customers through the CTA.
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
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 responsible for certain “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 and not “Transmission
Congestion Costs,” for which DEMI would be responsible under the terms of the
PSA. DEMI has indicated that it does not intend to terminate the PSA
-
28 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
prior
to
resolution of the dispute, but the parties have not agreed to a dispute
resolution process. On February 14, 2005, DEMI filed a complaint in United
States District Court for the District of Connecticut (USDC-CT) seeking the
court’s interpretation of the PSA and an order to compel UI to pay the claimed
damages. On March 14, 2005, UI filed a complaint with the FERC requesting that
it exercise jurisdiction under Section 206 of the Federal Power Act and order
DEMI to abide by the terms and conditions of the PSA. On May 13, 2005, the
FERC
issued an order granting UI’s request, noting that DEMI is responsible for the
“CT Reliability COS” charges. Subsequently, DEMI filed a notice of voluntary
dismissal of the complaint filed with the USDC-CT, which was granted. DEMI
also
filed a request for rehearing with the FERC, which was granted on September15,2005. On May 26, 2006 an initial decision was issued by the FERC administrative
law judge denying DEMI’s motion to dismiss UI’s claim and granting UI’s request,
again, noting that DEMI is responsible for the “CT Reliability COS” charges.
DEMI has requested reconsideration of the initial decision by the full
Commission.
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 which 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, Public Act 98-28, which became effective on January 1, 2000. 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 on the basis that it believes its claim to be
meritorious 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 recorded a reserve of $0.7 million
during the third quarter of 2005, representing UI’s total estimated liability
for additional tax and interest covering: (1) the original audit period of
July1, 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
September 30, 2005.
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. The DPUC plans to conduct a hearing to consider the views
of the parties involved in this matter, and issue a response to the DRS petition
in the form of a final decision thereafter.
Based
on
an assessment of the current litigation status of this matter as of June 30,2006, UI believes that the reserve amount established during the third quarter
of 2005 appropriately reflects a potential liability UI may incur with respect
to this issue.
Cross-Sound
Cable Company, LLC
On
February 27, 2006, UIL Holdings and UCI completed the sale of UCI’s 25%
ownership interest in Cross-Sound to Babcock & Brown Infrastructure Ltd. The
gross proceeds were approximately $53.2 million in exchange for UCI’s equity
interest in Cross-Sound and the repayment of a loan made by UIL Holdings to
Cross-Sound.
After
completion of the sale transaction, 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. Babcock
& Brown
will
indemnify Hydro-Quebec from liabilities incurred under the existing guarantees
and post a letter of credit in favor of Hydro-Quebec. Accordingly, in the event
Hydro-Quebec is called on to perform on the guarantees; UIL Holdings expects
that Hydro-Quebec would first seek recovery from Babcock
& Brown before requiring UIL Holdings and
-
29 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
UCI
to
perform under its guarantees.
The
$2.5
million guarantee supports an HQ guarantee to the Long Island Power Authority
(LIPA) to provide for damages in the event of a delay in the date of achieving
commercial operation of the Cross-Sound Cable. There had been a delay in
achieving the originally agreed upon date of commercial operation, primarily
due
to a Connecticut legislative moratorium on installing new gas and utility lines
across Long Island Sound, which precluded the CDEP from considering applications
related to submarine cables under Long Island Sound. UCI believes action or
inaction of governmental, regulatory or judicial bodies qualify as events beyond
its control and performance under the guarantee is not required. Further, on
June 24, 2004, Cross-Sound executed a settlement agreement allowing for
immediate commercial operation of the cable. Although retaining commercial
operating status is contingent upon the satisfaction of certain provisions
of
the settlement agreement, 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 June 30, 2006.
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 (Shellfish Agreement).
The
payments to the fishermen are being made over a 10-year period, and the
obligation under this guarantee reduces proportionately with each payment made.
As of June 30, 2006, the remaining amount of the guarantee was $1.1 million.
UIL
Holdings has completed a probability weighted analysis based on the likelihood
of certain events occurring that would cause UIL Holdings to be required to
perform under this guarantee. This analysis resulted in a liability amount
that
was inconsequential, and, accordingly, UIL Holdings has not recorded a liability
related to this guarantee in its Consolidated Balance Sheet as of June 30,2006.
United
Bridgeport Energy, Inc.
UBE
held
a 33 1/3% ownership interest in Bridgeport Energy LLC (BE), the owner of a
gas-fired 520 MW merchant wholesale electric generating facility located in
Bridgeport, Connecticut. On
March28, 2006, UBE sold that interest to the majority owner in exchange for $71
million and a release of all claims by the parties.
Discontinued
Operations
Xcelecom
has a revolving credit agreement with a bank that extends to the earlier of
June30, 2007 and the date on which UIL Holdings’ divestiture of Xcelecom is
substantially completed. In connection with an amendment of this agreement,
dated as of July 28, 2006, UIL Holdings has guaranteed the obligations under
the
agreement. This agreement provides for a $20 million revolving loan facility
available to meet working capital needs and to support standby letters of credit
issued by Xcelecom in the normal course of its business (such amount to be
reduced as UIL Holdings’ divestiture of Xcelecom is completed), and to meet
capital equipment needs of up to $1 million. Capital equipment loans under
this
facility can be converted to amortizing term loans with a maturity of up to
four
years. This agreement also provides for the payment of interest at a rate,
at
the option of Xcelecom, based on the agent bank’s prime interest rate or LIBOR.
As of June 30, 2006, Xcelecom did not have any borrowings outstanding under
the
revolving working capital balance under this facility. Xcelecom had $0.8 million
of capital equipment funding that had been converted to term notes outstanding
and standby letters of credit of $3.8 million outstanding at June 30, 2006
under
the facility.
(M)
SEGMENT INFORMATION
As
described in “Note (P) - Discontinued Operations,” to the Consolidated Financial
Statements, Xcelecom has been classified as held for sale and its results of
operations have been reported as discontinued operations. Accordingly, UIL
Holdings
has one
segment, UI, its regulated electric utility business engaged in the purchase,
transmission, distribution and sale of electricity. 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.
-
30 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
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, administrative costs, and inter-segment
eliminations.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
(O)
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, where UI leases office
space for its corporate headquarters. UI’s lease payments for this office space
for the six months ended June 30, 2006 and 2005 totaled $4.9 million and $4.6
million, respectively and for the three months ended June 30, 2006 and 2005
totaled $2.6 million and $2.3 million, respectively.
On
March31, 2006, a subsidiary of Xcelecom sold its 52% partnership interest in
Government Center Thermal Energy Partnership for $0.7 million to an entity
with
an indirect affiliation to Arnold L. Chase, a Director of UIL Holdings. The
gain
on the sale is included in Discontinued Operations. The sale was approved at
the
Board of Directors meeting in March 2006 at which time Mr. Chase disclosed
his
interest in the buyer. Mr. Chase stated that he had not participated in
negotiations of the transaction, nor did he participate in the Board of
Directors’ discussion or vote concerning the sale.
(P)
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. In accordance with the requirements of
SFAS
No. 142, this event triggered a review for goodwill impairment based upon a
reduction in the estimated fair value of Xcelecom below its carrying amount.
As
a result, a pretax goodwill impairment charge of $85.0 million was recorded
during the first quarter of 2006 based upon UIL Holdings’ intent to divest,
estimates of fair value as determined by an outside advisory firm and indicative
third party bids.
In
accordance with the provisions of SFAS No. 144, the results of Xcelecom for
the
three and six months ended June 30, 2006 and 2005 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 June 30, 2006 and December 31, 2005.
A
summary
of the discontinued operations of Xcelecom follows (in thousands):
Xcelecom,
through one of its subsidiaries, filed suit in New Jersey Superior Court against
M. J. Paquet (Paquet), a general contractor doing business in the state of
New
Jersey, and Paquet’s surety, United States Fidelity & Guaranty Company.
Paquet was the general contractor on a completed project for the New Jersey
Department of Transportation and one of Xcelecom’s subsidiaries was the
electrical subcontractor on the project. Xcelecom alleged in its suit, among
other causes of action, breach of contract, failure to comply with New Jersey’s
Prompt Pay Act, and breach of trust. Xcelecom sought to recover approximately
$2.4 million in overdue payments, plus
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
damages
for delay and failure by Paquet to comply with New Jersey state law. Paquet
had
asserted numerous defenses to the suit, as well as various counterclaims. In
June 2006, a settlement agreement was reached in which Xcelecom received $2.2
million for release of all claims, resulting in an immaterial impact on net
income.
Xcelecom
is contingently liable to sureties with respect to performance and payment
bonds
issued by sureties, all relating to construction projects entered into in the
normal course of business. These
bonds provide a guarantee to the customer that Xcelecom will perform under
the
terms of a contract and that it will pay subcontractors and vendors. If Xcelecom
fails 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. Xcelecom must reimburse the surety for any expenses or outlays it incurs.
Xcelecom has
maintained a relationship with its primary surety since 1999. To date, Xcelecom
has not had any situation in which any of its sureties has been required to
incur expenses on Xcelecom’s behalf. As of June 30, 2006, sureties had issued
bonds for the account of Xcelecom in the aggregate amount of approximately
$177.8 million. The expected cost to complete projects covered by such surety
bonds was approximately $41.2 million as of June 30, 2006.
UIL
Holdings indemnifies the respective surety bond companies against any exposure
under the bonds described above. The purpose of UIL Holdings’ indemnity is to
allow Xcelecom to obtain bonding at competitive rates. In the event that
Xcelecom does not fulfill its obligations in relation to its bonded contracts
or
obligations, UIL Holdings may be required to make payments under its
indemnification agreements with Xcelecom’s sureties. The majority of these
contingent commitments will expire within the next 12 months, but UIL Holdings
will continue to enter into surety bond indemnification arrangements for
Xcelecom in the future, as necessary. As noted above, since Xcelecom’s
inception, sureties have never been required to make payments on Xcelecom’s
behalf under the bonds. Accordingly, UIL Holdings concluded that it need not
record a liability in connection with these obligations in its Consolidated
Balance Sheet as of June 30, 2006.
Xcelecom
has a revolving credit agreement with a bank that extends to the earlier of
June30, 2007 and the date on which UIL Holdings’ divestiture of Xcelecom is
substantially completed. This agreement provides for a revolving loan facility
available to meet working capital needs and to support standby letters of credit
issued by Xcelecom in the normal course of its business, and to meet capital
equipment needs. Capital equipment loans under this facility can be converted
to
amortizing term loans with a maturity of up to four years. This agreement also
provides for the payment of interest at a rate, at the option of Xcelecom,
based
on the agent bank’s prime interest rate or LIBOR. On July 28, 2006, the
agreement was amended to reduce the amount of the facility from $30 million
to
$20 million, with subsequent reductions in the amount of the facility taking
effect as UIL Holdings executes on its plans to divest of Xcelecom. The
agreement was further amended to reduce the capital equipment loans from an
amount of up to $5 million to $1 million and, effective June 30, 2006, to
eliminate all financial covenants under the agreement. As of June 30, 2006,
Xcelecom did not have any borrowings outstanding under the revolving working
capital balance under this facility. Xcelecom had $0.8 million of capital
equipment funding that had been converted to term notes outstanding and standby
letters of credit of $3.8 million outstanding at June 30, 2006 under the
facility.
In
connection with certain of the acquisitions of Xcelecom, certain of Xcelecom’s
subsidiaries have entered into related party lease arrangements for facilities
with the former owners of companies acquired (or persons or entities related
thereto), some of whom are current employees of Xcelecom. These lease agreements
are for periods generally ranging from three to five years. Xcelecom’s payments
related to these lease arrangements totaled $0.7 million for each of the six
months ended June 30, 2006 and 2005, respectively, and $0.4 million for each
of
the three months ended June 30, 2006 and 2005, respectively.
Xcelecom
recognizes certain significant claims for recovery of incurred costs when it
is
probable that the claim will result in additional contract revenue, when the
amount of the claim can be reliably estimated and 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 approximately $1 million and $1.2 million are
included in current assets of discontinued operations held for sale as of June30, 2006 and December 31, 2005, respectively.
-
33 -
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(Continued)
On
March31, 2006, a subsidiary of Xcelecom, Thermal Energies, Inc. sold its 52%
partnership interest in Government Center Thermal Energy Partnership for $0.7
million to an entity with an indirect affiliation to Arnold L. Chase, a Director
of UIL Holdings, resulting in an after tax gain on sale of approximately $0.7
million.
On
June,
30 2006, Xcelecom entered into an agreement to sell a substantial portion of
the
assets, including all of the operating assets, of its wholly owned subsidiary,
M.J. Daly & Sons, Incorporated. Xcelecom sold assets with a book value of
$3.8 million for approximately $1.8 million, resulting in an after tax loss
on
sale of approximately $1.2 million.
-
34 -
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, services and prices of
UIL
Holdings’ subsidiaries. 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 subsidiaries, UI and Xcelecom.
These operations depend on the continued efforts of their respective current
and
future executive officers, senior management and management personnel. UIL
Holdings cannot guarantee that any member of management at the corporate or
subsidiary level will continue to serve in any capacity for any particular
period of time. In an effort to enhance UIL Holdings’ ability to attract and
retain qualified personnel, UIL Holdings continually evaluates the overall
compensation packages offered to employees at all levels of the
organization.
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. In accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other
Intangible Assets,” this event triggered a review for goodwill impairment based
upon a reduction in the estimated fair value of Xcelecom below its carrying
amount. As a result, a pretax goodwill impairment charge of $85.0 million was
recorded during the first quarter of 2006 based upon 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,” the impairment is included in
UIL Holdings’ discontinued operations at June 30, 2006. See Notes to Financial
Statements, “Note (A) - Impairment
of Long-Lived Assets and Investments and Discontinued Operations.”
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 Regulatory
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 transmission infrastructure, and has
received siting approval to construct its portion of a major transmission line
in southwest Connecticut.
-
35 -
Legislation
& Regulation
Background
State
legislation has significantly restructured the electric utility industry in
Connecticut. The primary restructuring legislation includes Public Act 98-28
(the “1998 Restructuring Legislation”) and Public Act 03-135, as amended in part
by Public Act 03-221 (collectively, the “2003 Restructuring Legislation”). Since
2000, UI’s retail customers have been able to choose their electricity
suppliers. The 2003 Restructuring Legislation requires that UI offer a
“transitional standard offer” rate during the period January 1, 2004 - December31, 2006 to retail customers who do not choose an alternate electric supplier.
The 2003 Restructuring Legislation provides for UI to recover its costs of
acquiring and providing generation services, and directs the DPUC to establish
each electric distribution company’s transitional standard offer
rates.
The
2003
Restructuring Legislation provides for UI to collect a fee of
$0.0005/kilowatt-hour from transitional standard offer service customers,
beginning January 1, 2004, as compensation for providing transitional standard
offer service. This fee is included in the GSC amounts charged to transitional
standard offer customers, and is excluded by the legislation from determinations
of whether UI’s rates are just and reasonable. For 2005, these fees generated
approximately $2.8 million in revenue. The 2003 Restructuring Legislation also
provides for the DPUC to establish an incentive plan for the procurement of
long-term contracts for transitional standard offer service that compares UI’s
actual average contract price to a regional average price for electricity,
making adjustments as deemed appropriate by the DPUC. If UI’s price is lower
than the average, the legislation provides for the plan to allocate
$0.00025/kilowatt-hour of transitional standard offer service to the
distribution company. The DPUC issued a draft decision on December 8, 2005
approving UI’s proposed methodology for calculating the incentive fee and noting
that UI has earned the incentive fee applicable to the year 2004, which amounted
to approximately $1.4 million. The draft decision did not address the incentive
related to 2005. The final decision is scheduled to be issued in the third
quarter of 2006.
2005
Rate Case
On
January 27, 2006, the DPUC issued a final decision in the 2005 Rate Case
proceeding. The DPUC set UI's distribution rates at levels that will increase
revenues by $14.3 million in 2006. The DPUC set incremental distribution rate
increases for 2007, 2008 and 2009, so that revenues will increase a total of
$35.6 million, or 4.9%, by 2009 compared to 2005 rates.
On
February 10, 2006, UI filed a Petition for Reconsideration with the DPUC
requesting that it reconsider the final decision to correct errors in the
decision with respect to employee compensation and the pension/post-retirement
discount rate. On March 1, 2006, the DPUC granted UI’s Petition to reopen the
proceeding for the limited purpose of reconsidering the record with regards
to
employee compensation and denied UI’s request to reconsider the
pension/post-retirement discount rate. Hearings were held on July 7 and July19,2006. On July 28, 2006, a settlement was reached between UI and the
Prosecutorial unit of the DPUC staff. The settlement agreement allows UI to
recover additional distribution revenue requirements of $1.5 million in 2007,
$1.8 million in 2008 and $2.3 million in 2009. The settlement was filed with
the
DPUC on August 1, 2006 and is subject to approval by the DPUC.
Recent
Legislation
On
July6, 2005, An Act Concerning the Department of Transportation, Public Act No.
05-210 (the “2005 Transportation Act”), became law in Connecticut. Section 28 of
this legislation, effective from enactment, amends § 13a-126 of the Connecticut
statutes to provide that the state shall bear no part of the cost to readjust,
relocate or remove an electric transmission line buried within a public highway
right-of-way where such action is required by a state highway project, but
also
provides that the state shall consider such costs in selecting a final project
design in order to minimize the overall cost incurred by the state and the
electric distribution company. As a result, the electric distribution company’s
costs of readjustment, relocation or removal will be included in tariffs, for
collection from customers.
The
DPUC
has approved a transmission adjustment clause (TAC) for UI, implementing the
provisions of Section 30 of the 2005 Transportation Act, which amended § 16-19b
of the Connecticut statutes to establish a “transmission tracker” mechanism by
which the DPUC adjusts an electric distribution company’s retail transmission
rate
-
36 -
periodically
to “track” and recover the transmission costs, rates, tariffs and charges
approved by the FERC. In accordance with the DPUC’s December 14, 2005 decision
in Docket No. 05-08-03, UI has filed a TAC tariff with the DPUC. UI makes a
semi-annual filing with the DPUC, setting forth its actual transmission
revenues, projected transmission revenue requirement, and the required TAC
charge or credit so that any under- or over-collections of transmission revenues
from prior periods are reconciled along with the expected revenue requirements
for the next six months form filing. The DPUC holds an administrative proceeding
to approve the TAC charge or credit, and holds a hearing to determine the
accuracy of customer billings under the TAC. The TAC tariff and this semi-annual
change of the TAC charge or credit mitigates the lag between changes in UI’s
FERC-approved transmission revenue requirements and its retail transmission
rate, and facilitates the timely matching of transmission revenues and
transmission revenue requirements.
On
July22, 2005, An Act Concerning Energy Independence, June Special Session, Public
Act No. 05-1 (the “Energy Independence Act”), became law in Connecticut, the
general intention of which is to reduce congestion costs in the state. The
Energy Independence Act consists of forty sections, all of which became
effective by October 1, 2005. The Energy Independence Act: adds to the items
included in the definition of Federally Mandated Congestion Charges (FMCCs,
formerly known as Federally Mandated Congestion Costs); provides for incentives
to promote the development of projects and resources that are intended to reduce
FMCCs and for the recovery 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. The DPUC has initiated numerous dockets,
both
uncontested and contested, to implement the many provisions of the Energy
Independence Act. Some of these proceedings are currently pending, while others
have been concluded. In general, the DPUC is authorized to identify and
implement measures intended to reduce FMCCs. These potential measures include
“grid-side distributed resources,”“customer-side 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. In addition, the Energy Independence Act 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 Energy Independence Act 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. In order to encourage electric
distribution companies to promote measures to reduce FMCCs, the Energy
Independence Act provides for monetary awards to the electric distribution
companies in whose service areas such measures are located. There is also
provision for the DPUC to determine whether electric distribution companies
should have the opportunity to earn an incentive fee for procuring standard
service and default service for the period 2007 and beyond; the DPUC has
determined in a proceeding that there should be no such opportunity. While
the
ultimate impact of this legislation will be determined through the series of
regulatory proceedings described above, and the implementation of the measures
approved in the proceedings, UI does not expect this legislation to have a
material impact on its results of operations or financial condition, because
the
Energy Independence Act provides that electric distribution companies will
recover their costs and investments resulting from the law through a number
of
mechanisms, including the FMCC charges on customers’ bills.
In
August
2005, President Bush signed the Energy Policy Act of 2005 (Energy Act). The
Energy Act repeals the Public Utility Holding Company Act, which will impact
UIL
Holdings, and includes numerous provisions which may affect UI, some of which
include (1) reducing depreciable lives for newly constructed electric
transmission lines, (2) establishing an electric reliability organization
responsible for reliability standards, subject to FERC jurisdiction, approval
and enforcement, (3) authorizing limited FERC backstop siting authority for
interstate transmission projects in federally-designated transmission corridors,
and (4) requiring the FERC to issue a rule that provides
transmission rate incentives to promote capital investment and provides for
recovery of all prudent costs of complying with mandatory reliability standards
and costs related to transmission infrastructure development. In July 2006,
the
FERC issued a final ruling which provides transmission rate incentives to
promote capital investment and provides for recovery of all prudent costs of
complying with mandatory reliability standards and costs related to transmission
infrastructure development. Among other items, the ruling includes provisions
to
allow an incentive return on equity for new infrastructure and 100% construction
work-in-process expenditures in rate base and accelerated book depreciation.
Utilities must apply for these incentives and the FERC will make its
determinations on a case by case basis. UI anticipates filing an application
in
the near future for appropriate treatment of the Middletown/Norwalk transmission
line.
-
37 -
Other
Regulation
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.
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. Based on current
conditions, CTA revenues are expected to remain relatively constant, with
amortization increasing over time as the earnings trend downward due to the
decreasing CTA rate base. A significant amount of UI’s earnings is generated by
the authorized return on the equity portion of as yet unamortized stranded
costs
in the CTA rate base. UI’s after-tax earnings attributable to CTA for the six
months ended June 30, 2006 and 2005 were $5.8 million and $6.5 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 $12 million and $13 million
for
the six months ended June 30, 2006 and 2005, 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 $413
million at year-end 2000, $373 million at year-end 2001, $303 million at
year-end 2002, $279 million at year-end 2003, $267 million at year-end 2004,
$254 million at year-end 2005, and $240 million as of June 30, 2006. The 2005
result is subject to DPUC review, pursuant to an annual review of UI’s CTA
revenues and expenses, and may be adjusted in accordance with that review.
The
2005 annual CTA/SBC reconciliation was filed with the DPUC in the first quarter
of 2006 and included a request for recovery of amounts related to the
misallocation of gross earnings taxes between distribution and CTA. Customer
bills were not affected by this misallocation. Although UI believes it is
entitled to recovery of such amounts, the amount requested for recovery related
to periods prior to 2005 has not been recognized as a regulatory asset based
on
the estimated likelihood for recovery as of December 31, 2005. Based upon UI’s
filings and the DPUC’s decisions in prior annual CTA reconciliation dockets, UI
does not expect the results of this reconciliation docket to have a material
effect on UI, with the exception of the request for recovery of the gross
earnings tax item, which could have a positive impact. 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 between 2013
and
2015, depending primarily upon the DPUC’s future decisions which could affect
future rates of stranded cost amortization.
Capital
Projects
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-kiloVolt transmission line from Middletown, Connecticut, to Norwalk,
Connecticut, which was jointly proposed by UI and The Connecticut Light and
Power Company (CL&P). Additionally, UI has received CSC approval of its
Singer Substation (and 115-kV Interconnections) and 345-kV underground
transmission line Development and Management (D&M) plans. 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 will each construct, 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. UI’s current estimate for its share of the project cost is
approximately $210 million to $250 million (excluding allowance for funds used
during construction). Based on the current projected schedule of construction,
the project is expected to be completed in 2009. Upon project completion, UI’s
rate base will have increased by approximately $245 million to $275 million,
an
increase of more than 200% relative to UI’s current net transmission assets.
-
38 -
Appeals
to the Connecticut Superior Court have been taken by three groups of entities,
each of whom is contesting the CSC’s decision with respect to the location and
construction of the line in two areas along the project route. These appeals
do
not contest the need for the project and do not seek a stay of the CSC decision.
UI has received unanimous approval for the proposed plan application submitted
to the Reliability Committee of NEPOOL, and received a determination from ISO-NE
that implementation of the project will not have a significant adverse effect
on
the stability, reliability or operating characteristics of the transmission
system, subject to certain conditions. The procurement process for most of
the
major project components is presently under way. This past April, UI executed
a
major turn-key contract with Siemens Power Transmission & Distribution (USA)
for the construction of Singer Substation, which is the largest 345-kV gas
insulated substation (GIS) in North America.
The
FERC
recently approved UI’s request to include 50% of construction work in progress
(CWIP) expenditures in rate base, allowing early recovery on a portion of UI’s
investment. The remaining 50% of CWIP will commence earning when it is added
to
rate base in conjunction with the improvements being placed in service. 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. UI’s costs for the project are
expected to be included in and recovered through transmission rates under FERC
jurisdiction.
Discontinued
Operations
As
a
result of the divestiture of Xcelceom, Inc., there are now two principal risks
affecting the financial condition of Xcelecom: operating risk and disposition
risk. Operating risk relates to the risk factors inherent in Xcelecom’s business
operations, whereas disposition risk relates to the risk factors that could
impact the outcome of the divestiture.
When
UIL
Holdings announced its intention to divest of Xcelecom, its wholly-owned
subsidiary, the event triggered a review for goodwill impairment based upon
a
reduction in the estimated fair value of Xcelecom below its carrying amount.
As
a result, a pretax goodwill impairment charge of $85.0 million was recorded
during the first quarter of 2006 based upon UIL Holdings’ intent to divest,
estimates of fair value as determined by an outside advisory firm and indicative
third party bids.
The
significant disposition risks related to Xcelecom are described in “Part II,
Other Information, Item 1A - Risk Factors,” of this Form 10Q.
The
principal factors affecting the operating results of Xcelecom and its
subsidiaries are (1) construction and technology spending in Xcelecom markets;
(2) competition; (3) fixed-priced contract estimation and bidding; (4)
work-related hazards and insurance; (5) attracting and retaining management
expertise; (6) overall liquidity and ability to obtain surety bonding; and
(7)
risks of attaining required labor productivity levels to meet or exceed contract
estimates. Additional risk factors include general economic conditions, the
pace
of technological changes, recoverability, and collectibility of receivables.
These factors are discussed in further detail in UIL Holdings’ Annual Report on
Form 10-K for the year ended December 31, 2005.
Xcelecom’s
contracts are generally awarded on the basis of competitive bids. The final
terms and prices of those contracts are frequently negotiated with the customer.
Although contract terms vary considerably, most are made on either a fixed
price
or unit price basis in which Xcelecom agrees to do the work for a fixed amount
for the entire project (fixed price) or for units of work performed (unit
price), although services are sometimes performed on a cost-plus or time and
materials basis. Xcelecom’s most significant cost drivers are the cost of labor,
including employee benefits, the cost of products and materials, and the cost
of
casualty insurance. These costs may vary from the costs originally estimated.
Variations from estimated contract costs along with other risks inherent in
performing fixed price and unit price contracts may result in actual revenue
and
gross profits for a project differing from those originally estimated and could
result in losses on projects. Depending on the size of a particular project,
variations from estimated project costs could have a significant impact on
operating results for any fiscal quarter or year.
During
2006, Xcelecom recognized approximately $11.8 million in after-tax project
losses (excluding charges related to the goodwill impairment,) from cost
overruns incurred on several large projects at Allan/Briteway Electrical
Contractors, Inc. (Allan/Briteway), a New Jersey based subsidiary of Xcelecom.
In addition, the current state tax benefit that would result from these project
losses at Allan/Briteway cannot be recognized in the financial
-
39 -
statements
as UIL Holdings has concluded that these state tax benefits, along with
previously-recorded state net operating losses, will not likely be realized
through the generation of future taxable income at Allan/Briteway. Contracts
in
their early stages changed project managers resulting in new estimates based
on
new experience, which made up the majority of the project losses. The projects
in their final completion stages that resulted in losses were from commodity
price changes and better estimates from recent project experience due to higher
complexity of work and some required rework. Management has taken actions to
improve the operational issues at Allan/Briteway including (1) establishing
project budgets in sufficient detail to track work categories by task, system
or
phase, (2) incorporating a turn-over of the awarded job estimate to the project
manager with the appropriate detail, scope and schedule in order to manage
the
project, and (3) ensuring adequate levels of management staffing and oversight.
As a result of UIL’s announcement to divest of Xcelecom, the task of monitoring
staffing and management levels will continue to be a challenge. The project
losses may be partially offset by pending change orders and claims, for which
all costs have been recognized, but which have not been included in projected
earnings. There is no assurance that these claims will be
recovered.
As
discussed previously in the Notes to the financial statements, on April 26,2006, 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. A pretax goodwill impairment charge of
$85.0
million was recorded during the first quarter of 2006 based upon 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, the
impairment is included in discontinued operations. See Notes to Financial
Statements, “Note (A) - Impairment
of Long-Lived Assets and Investments and Discontinued Operations.”
Cost
Drivers
As
a
service business, Xcelecom’s cost structure is highly variable. Primary costs
include labor, materials and insurance. Approximately 53% of costs are derived
from labor and related expenses. For the six months ended June 30, 2006 and
2005, labor-related expenses totaled $96.8 million and $95.2 million,
respectively.
Approximately
27.8% of Xcelecom’s costs incurred are for materials installed on projects and
equipment and other products sold to customers. This component of the expense
structure is variable based on the demand for services. Costs are generally
incurred for materials once work begins on a project or a customer order is
received. Materials are ordered when needed, shipped directly to the jobsite
or
customer facility, and installed within 30 days. Materials consist of
commodity-based items such as conduit, pipe, data cabling, wire and fuses as
well as specialty items such as fixtures, switchgear, switches and routers,
servers and control panels. For the six months ended June 30, 2006 and 2005,
material and equipment expenses totaled $83.1 million and $70.3 million,
respectively.
United
Capital Investments, Inc.
UCI
had a
25% interest in Cross-Sound Cable Company, LLC (Cross-Sound), which owns and
operates a 330-megawatt transmission line (cable) connecting Connecticut and
Long Island under the Long Island Sound. On February 27, 2006, UCI, together
with the majority owner Hydro-Quebec (HQ), sold Cross-Sound to Babcock &
Brown Infrastructure Ltd. (Babcock & Brown). UCI and UIL Holdings received
proceeds of $53.2 million in exchange for UCI’s equity interest in Cross-Sound
and the repayment of loan made by UIL Holdings to Cross-Sound. After transaction
costs and taxes, UCI and UIL Holdings recognized a gain of approximately $10.6
million and net proceeds of approximately $46 million.
UIL
Holdings and UCI continue to provide two guarantees, in original amounts of
$2.5
million and $1.3 million, in support of HQ guarantees to third parties in
connection with the construction of the project. Babcock
& Brown
will
indemnify Hydro-Quebec from liabilities incurred under the existing guarantees
and post a letter of credit in favor of Hydro-Quebec. Accordingly, in the event
Hydro-Quebec was called on to perform on the guarantees, UIL Holdings expects
that Hydro-Quebec would first seek recovery from Babcock
& Brown before requiring UIL Holdings and UCI to perform under its
guarantees.
The
$2.5
million guarantee supports an HQ guarantee to the Long Island Power Authority
(LIPA) to provide for damages in the event of a delay in the date of achieving
commercial operation of the cross sound cable. There had been a delay in
achieving the originally agreed upon date of commercial operation, primarily
due
to a Connecticut legislative moratorium on installing new gas and utility lines
across Long Island Sound, which precluded the CDEP
-
40 -
from
considering applications related to submarine cables under Long Island Sound.
UCI believes action or inaction of governmental, regulatory or judicial bodies
qualify as events beyond its control and performance under the guarantee is
not
required. Further, on June 24, 2004, Cross-Sound executed a settlement agreement
allowing for immediate commercial operation of the cable. Although retaining
commercial operating status is contingent upon the satisfaction of certain
provisions of the settlement agreement, 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
June30, 2006.
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 (Shellfish Agreement).
The
payments to the fishermen are being made over a 10-year period, and the
obligation under this guarantee reduces proportionately with each payment made.
As of June 30, 2006, the remaining amount of the guarantee was $1.1 million.
UIL
Holdings has completed a probability weighted analysis based on the likelihood
of certain events occurring that would cause UIL Holdings to be required to
perform under this guarantee.
This
analysis resulted in a liability amount that was inconsequential, and,
accordingly, UIL Holdings has not recorded a liability related to this guarantee
in its Consolidated Balance Sheet as of June 30, 2006.
UCI
also
has passive, minority equity positions in two investment funds. UCI viewed
these
investments as an opportunity to earn reasonable returns and promote local
economic development. In 2006, UCI funded $0.2 million of its remaining
$0.3 million commitment to the Ironwood Mezzanine Fund.
United
Bridgeport Energy, Inc.
UBE
held
a 33 1/3% ownership interest in Bridgeport Energy LLC (BE), the owner of a
gas-fired 520 MW merchant wholesale electric generating facility located in
Bridgeport, Connecticut. On
March28, 2006, UBE sold its interest to the majority owner for $71 million and a
release of all claims, and recognized
a gain of approximately $0.2 million after-tax.
-
41 -
LIQUIDITY
AND CAPITAL RESOURCES
UIL
Holdings generates its capital resources primarily through operations. At
June 30, 2006, UIL Holdings had $101.7 million of unrestricted cash and
temporary cash investments. This represents an increase of $72.8 million from
the corresponding balance at December 31, 2005. The components of this
increase, which are detailed in the Consolidated Statement of Cash Flows, are
summarized as follows:
The
unrestricted cash position of UIL Holdings increased by $72.8 million from
December 31, 2005 to June 30, 2006, as cash provided by investment activities
from proceeds from the sale of minority ownership interests in Cross-Sound
and
BE as well as the repayment of the UIL Holdings loan to Cross-Sound supplemented
cash provided by operations which was partly driven by strong accounts
receivable collections at both UI and Xcelecom. Cash used in financing
activities during the first six months included the quarterly dividend payments
on UIL Holdings common stock totaling $21.0 million, a $4.3 million principal
payment on UIL Holdings’ long-term debt and repayment of UIL short term debt
totaling $20 million. Cash used in investing activities during the first six
months of 2006 includes capital expenditures of $26.2 million, mainly by UI.
UIL
Holdings also accesses capital through both long-term and short-term financing
arrangements. Total long-term debt outstanding as of June 30, 2006 was $486.9
million, as compared to $491.2 million at year-end December 31, 2005.
UIL
Holdings and Xcelecom also have short-term credit facilities totaling $100
million and $30 million, respectively (reduced from $30 million to $20 million
on July 28, 2006). See Notes to Financial Statements, “Note (P) --
Discontinued Operations.” The following table presents a
summary
of the amounts available under these credit facilities as of June 30,2006:
UIL
Holdings
Xcelecom
(In
Millions)
Credit
lines available
$
100
$
30
Less:
Credit line advances outstanding
-
-
Less:
Credit facility supporting standby letters of credit
-
4
Less:
Credit facility supporting capital equipment funding
-
1
Available
Credit
$
100
$
25
-
42 -
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, 2005 for a discussion of UIL Holdings’
financing arrangements.
Financial
Covenants
UIL
Holdings and its subsidiaries 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 and UIL Holdings and its subsidiaries
were
in compliance at June 30, 2006. UIL Holdings amended its Note Purchase Agreement
and Revolving Credit Agreement, in each case, effective March 30, 2006, to
define consolidated net income without regard to any reduction in net income
resulting from any impairment of goodwill in connection with a decision by
UIL
Holdings to divest of Xcelecom or its subsidiaries.
Xcelecom
has a revolving credit agreement with a bank that extends to the earlier of
June30, 2007 and the date on which UIL Holdings’ divestiture of Xcelecom is
substantially completed. In connection with an amendment of this agreement,
dated as of July 28, 2006, UIL Holdings has guaranteed the obligations under
the
agreement. This agreement provides for a $20 million revolving loan facility
available to meet working capital needs and to support standby letters of credit
issued by Xcelecom in the normal course of its business (such amount to be
reduced as UIL Holdings’ divestiture of Xcelecom is completed), and to meet
capital equipment needs of up to $1 million. Capital equipment loans under
this
facility can be converted to amortizing term loans with a maturity of up to
four
years. This agreement also provides for the payment of interest at a rate,
at
the option of Xcelecom, based on the agent bank’s prime interest rate or LIBOR.
Effective June 30, 2006, all financial covenants were eliminated in connection
with the amendment of the agreement. As of June 30, 2006, Xcelecom did not
have
any borrowings outstanding under the revolving working capital balance under
this facility. Xcelecom had $0.8 million of capital equipment funding that
had
been converted to term notes outstanding and standby letters of credit of $3.8
million outstanding at June 30, 2006 under the facility.
2006
Capital Resource Projections
There
have been no material changes in UIL Holdings’ 2006 capital resource projections
from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal
year ended December 31, 2005. UIL holdings will re-evaluate those
projections as it proceeds with the divestiture of Xcelecom, the results of
which may have a material impact on such projections.
Contractual
and Contingent Obligations
At
June30, 2006, there was no material change in contractual and contingent obligations
of UIL Holdings and its subsidiaries from those reported in UIL Holdings’ Annual
Report on Form 10-K for the fiscal year ended December 31,2005.
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, 2005 are those that depend most heavily on these
judgments and estimates. At June 30, 2006, there have been no material
-
43 -
changes
to any of the Critical Accounting Policies described therein, except for the
adoption of SFAS No. 123R. See “Note (A) - Stock Based
Compensation.”
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 June 30, 2006, 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, 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), adopted January 1, 2006, is a new accounting standard
that is 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 - Stock Based Compensation,” for further
discussion regarding this adoption.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes”.
This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in accordance with SFAS No. 109.
The provisions of this interpretation are effective for UIL Holdings as of
January 1, 2007 and the adoption of this interpretation is not expected to
have
a material impact on UIL Holdings’ financial position, results of operations or
liquidity. See “Note (A) - New Accounting Standards.”
RESULTS
OF OPERATIONS
Use
of Non-GAAP Measures
Within
the “Results of Operations” section of this Form 10-Q, tabular presentations
showing a comparison of UIL Holdings’ net income and earnings per share (EPS)
for the three and six months ended June 30, 2006 and 2005 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 for each of UIL Holdings’ lines of
business, calculated by dividing the income from 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 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
-
44 -
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.
All
EPS
amounts and references to common stock share numbers reflect the previously
announced 5 for 3 common stock split, which occurred on July 3, 2006 for
shareowners of record as of June 6, 2006.
Second
Quarter 2006 vs. Second Quarter 2005
UIL
Holdings Corporation Results of Operations: Second Quarter 2006 vs. Second
Quarter 2005
UIL
Holdings’ earnings from continuing operations increased by $3.7 million, or
$0.15 per share. Net income from discontinued operations decreased by $4.1
million, or $0.17 per share. Total earnings, including discontinued operations,
decreased by $0.4 million, or $0.02 per share.
The
increase in earnings from continuing operations was mainly due to the improved
results from UI as well as the absence of losses incurred in the second quarter
of 2005 at UBE (due to the sale of Bridgeport Energy, LLC, (BE) in the first
quarter of 2006).
Net
Income (In Millions except Percents and Per Share
Amounts)
UI
$
10.9
$
9.1
$
1.8
20
%
Non-Utility
(0.6
)
(2.5
)
1.9
(76
)%
Total
Net Income from Continuing
Operations
$
10.3
$
6.6
$
3.7
56
%
Discontinued
Operations
(7.3
)
(3.2
)
(4.1
)
128
%
Total
Net Income
$
3.0
$
3.4
$
(0.4
)
(12
)%
EPS
UI
$
0.45
$
0.37
$
0.08
22
%
Non-Utility
(0.03
)
(0.10
)
0.07
(70
)%
Total
EPS from Continuing
Operations
- Basic
$
0.42
$
0.27
$
0.15
56
%
Discontinued
Operations
(0.30
)
(0.13
)
(0.17
)
131
%
Total
EPS - Basic
$
0.12
$
0.14
$
(0.02
)
(14
)%
Total
EPS - Diluted (Note A)
$
0.12
$
0.14
$
(0.02
)
(14
)%
Note
A: Reflecting
the effect of dilutive stock options, performance shares and restricted stock.
Dilutive
securities did not dilute earnings from continuing operations or discontinued
operations for the three months ended June 30, 2006 or 2005, respectively.
-
45 -
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 second quarter of 2006 and the second quarter of 2005.
Significant variances are explained in the discussion and analysis of individual
subsidiary results that follow.
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.
-
47 -
The
United Illuminating Company Results of Operations: Second Quarter of
2006
vs. Second Quarter of 2005
Reflecting
the effect of dilutive stock options, performance shares and restricted
stock. Dilutive
securities did not dilute earnings from for the three months ended
June30, 2006 or 2005, respectively.
Note
B: Percentage
change reflects impact to total retail sales.
UI’s
net
income was $10.9 million, or $0.45 per share, in the second quarter of 2006,
compared to $9.1 million, or $0.37 per share, in the second quarter of 2005.
The
increase in earnings was primarily due to higher retail rates partially offset
by increased outside services, stock based compensation and pension
expense.
Overall,
UI’s revenue increased by $13.8 million, from $185.9 million in the second
quarter of 2005 to $199.7 million in the second quarter of 2006. Retail revenue
increased $4.7 million due mainly to increases in customer prices and volume
primarily due to the positive impact of the weather. The price increase allowed
UI to collect certain FMCC charges from customers to offset higher costs of
procuring energy (see fuel and energy expense discussion below). Wholesale
revenue decreased by $0.4 million as compared to second quarter 2005, primarily
due to lower wholesale market price. “Other” revenues increased $9.5 million as
compared to second quarter 2005, largely due to the net activity of the GSC
“working capital allowance,” which increased 2006 “other” revenues by $1.9
million for the second quarter, as compared to a decrease in “other” revenues of
$5.5 million in the second quarter 2005.
Fuel
and
energy expense increased by $2.7 million from $93.9 million in the second
quarter of 2005 to $96.6 million in the second quarter of 2006. Retail fuel
expense in the second quarter of 2006 increased by $2.5 million compared to
the
second quarter of 2005, primarily due to UI’s portion of costs related to
reliability must run agreements between ISO-NE and generators as well as
increased costs of transitional standard offer service supply. UI receives
electricity to satisfy its transitional standard offer retail customer service
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 second quarter of 2006 increased by
$0.2 million compared to the second quarter of 2005, primarily due to increased
volume from the Bridgeport RESCO generating plant.
UI’s
operation and maintenance expenses increased by $5.5 million, from $48.1 million
in the second quarter of 2005 to $53.6 million in the second quarter of 2006.
The increase was primarily attributable to (1) increases in outside services
mainly due to higher consulting fees, mainly due to upgrades to the customer
billing system, (2) increases in stock based compensation largely due to
expenses related to retirement eligible employees, (3) increases in pension
expense, (4) higher transmission expense mainly due to increased tariffs, and
(5) increases in overhead line maintenance.
UI’s
amortization of regulatory assets increased by $1.5 million, from $7.8 million
in the second quarter of 2005 to $9.3 million in the second quarter of 2006.
The
increase was mainly due to CTA amortization. UI accrues or defers additional
amortization to achieve the authorized return on equity of 9.75% on unamortized
CTA rate base. The increase was partially offset by the absence of amortization
related to regulatory assets no longer required under the 2005 Rate
Case.
-
48 -
Non-Utility
Results of Operations: Second Quarter 2006 vs. Second Quarter
2005
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 from continuing operations or
discontinued operations for the three months ended June 30, 2006
or 2005.
The
consolidated non-utility businesses reported a loss from continuing operations,
including unallocated holding company costs, of $0.6 million, or $0.03 per
share, in the second quarter of 2006, compared to a loss of $2.5 million,
or $0.10 per share, in the same period of 2005. The increase in earnings was
mainly due to the absence of losses incurred in the second quarter of 2005
at
UBE (due to the sale of Bridgeport Energy, LLC, (BE) in the first quarter of
2006) and lower losses at UIL Corporate due to increased interest income earned
on short term investments.
The
following is a detailed explanation of the quarterly variances for each of
UIL
Holdings’ non-utility businesses.
Non-Utility
Business
Minority
InterestInvestments
United
Bridgeport Energy, Inc.
UBE
owned
a 33 1/3% interest in Bridgeport Energy, LLC (BE) until the completion of
its sale to an affiliate of Duke Energy on March 28, 2006. With the sale of
its
interest in BE, no operations were reported at UBE for the second quarter of
2006. UBE lost $1.2 million, or $0.05 per share, in the second quarter of 2005.
United
Capital Investments, Inc.
UCI
earned $0.1 million, with no impact on earnings per share, in the second quarter
of 2006, compared to a loss of $0.1 million, with no impact on earnings per
share in the second quarter of 2005. The
improvement from the prior year was primarily due to positive results from
its
passive investments.
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 unallocated after-tax costs of $0.7 million, or $0.03 per share in
the
second quarter of 2006, compared to a loss of $1.2 million, or $0.05 per share
in the second quarter of 2005. The improvement was largely due to increased
interest income on short term investments.
-
49 -
Discontinued
Operations
Xcelecom,
Inc.
Xcelecom
lost $7.3 million, or $0.30 per share, in the second quarter of 2006, compared
to a loss of $3.2 million, or $0.13 per share in the second quarter of
2005. The decline in earnings from prior year was largely due to (1) increases
in project losses incurred in the second quarter of 2006, partially due to
increases in commodity prices and from refinements to previous job costs and
project loss estimates as work in progress continues toward completion, (2)
a
recognized loss on the partial asset sale of Xcelecom subsidiary, M.J. Daly
& Sons, Incorporated, and (3) severance and other divestiture-related costs
incurred due to the divestiture announcement. In accordance with SFAS No. 144,
depreciation of assets classified as “held for sale” was ceased in April 2006.
As such, 2006 depreciation and amortization expense was $0.6 million, after
tax,
lower than it would have been if the assets of Xcelecom had been depreciated
through June 30, 2006.
UIL
Holdings Corporation Results of Operations: First Six Months 2006 vs. First
Six
Months 2005
UIL
Holdings’ earnings from continuing operations increased by $16.6 million, or
$0.68 per share. Net income from discontinued operations decreased by $58
million, or $2.38 per share. Total earnings, including discontinued operations,
decreased by $41.4 million, or $1.70 per share.
The
increase in earnings from continuing operations was mainly due to the sale
of
UIL Holdings’ ownership interest in Cross-Sound, absence of costs related to a
scheduled outage in 2005 at Bridgeport Energy, and improved results from
UI.
The
table
below represents a comparison of UIL Holdings’ Net Income and Earnings per Share
(EPS) for the first six months of 2006 and the first six months of
2005.
Net
Income (In Millions except Percents and Per Share
Amounts)
UI
$
18.5
$
16.9
$
1.6
9
%
Non-Utility
8.6
(6.4
)
15.0
(234
)%
Total
Net Income from Continuing
Operations
$
27.1
$
10.5
$
16.6
158
%
Discontinued
Operations
(61.9
)
(3.9
)
(58.0
)
1,487
%
Total
Net Income (Loss)
$
(34.8
)
$
6.6
$
(41.4
)
(627
)%
EPS
UI
$
0.76
$
0.69
$
0.07
10
%
Non-Utility
0.35
(0.26
)
0.61
(235
)%
Total
EPS from Continuing
Operations
- Basic
$
1.11
$
0.43
$
0.68
158
%
Discontinued
Operations
(2.54
)
(0.16
)
(2.38
)
1,488
%
Total
EPS - Basic
$
(1.43
)
$
0.27
$
(1.70
)
(630
)%
Total
EPS - Diluted (Note A)
$
(1.41
)
$
0.27
$
(1.70
)
(630
)%
Note
A: Reflecting
the effect of dilutive stock options, performance shares and restricted stock.
Dilutive
securities diluted earnings from continuing operations by $0.01 per share
and
diluted the loss from discontinued operations by $0.03 per share for the
six
months ended June 30, 2006. Dilutive securities did not dilute earnings from
continuing operations or discontinued operations for the six months ended
June30, 2005.
-
50 -
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 six months of 2006 and the first six months of
2005. Significant variances are explained in the discussion and analysis of
individual subsidiary results that follow.
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.
-
52 -
The
United Illuminating Company Results of Operations: First Six Months of
2006
vs. First Six Months of 2005
Note
A: Reflecting
the effect of dilutive stock options, performance shares and restricted stock.
Dilutive
securities diluted earnings from operations by $0.01 per share for the six
months ended June 30, 2006 and did not dilute earnings from operations for
the
six months ended June 30, 2005.
Note
B: Percentage
change reflects impact to total retail sales.
UI’s
net
income was $18.5 million, or $0.76 per share, in the first six months of 2006,
compared to $16.9 million, or $0.69 per share, in the first six months of 2005.
The increase in earnings was primarily due to higher retail rates partially
offset by increased outside services, stock based compensation, uncollectible
expenses and pension expense.
Overall,
UI’s revenue increased by $27.2 million, from $372.8 million in the first six
months of 2005 to $400 million in the first six months of 2006. Retail revenue
increased $8.3 million due mainly to increases in customer prices, partially
offset by lower customer volume largely arising from weather conditions. The
price increase allowed UI to collect certain FMCC charges from customers to
offset higher costs of procuring energy (see fuel and energy expense discussion
below). Wholesale revenue increased by $2.1 million as compared to the first
six
months of 2005, primarily due to generation at the Bridgeport RESCO generating
plant. “Other” revenues increased $16.8 million as compared to the first six
months of 2005, largely due to the net activity of the GSC “working capital
allowance,” which increased 2006 “other” revenues by $5.1 million for the first
six months, as compared to a decrease in “other” revenues of $9.2 million in the
first six months of 2005.
Fuel
and
energy expense increased by $10.6 million from $189.1 million in the first
six
months of 2005 to $199.7 million in the first six months of 2006. Retail fuel
expense in the first six months of 2006 increased by $5.7 million compared
to
the first six months of 2005, primarily due to UI’s portion of costs related to
reliability must run agreements between ISO-NE and generators as well as
increased costs of transitional standard offer service supply, partially offset
by lower volume. UI receives electricity to satisfy its transitional standard
offer retail customer service 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 six
months of 2006 increased by $4.9 million compared to the first six months of
2005, primarily due to increased volume from the Bridgeport RESCO generating
plant.
UI’s
operation and maintenance expenses increased by $12.4 million, from $95.1
million in the first six months of 2005 to $107.5 million in the first six
months of 2006. The increase was primarily attributable to (1) increases in
outside services mainly due to higher consulting fees, mainly due to upgrades
to
the customer billing system, (2) increases in stock based compensation largely
due to expenses related to retirement eligible employees, (3) increases in
pension expense, (4) higher transmission expense mainly due to increased
tariffs, and (5) increases in uncollectible expenses, partly due to the impact
of customers dealing with higher bills.
-
53 -
Non-Utility
Results of Operations: First Six Months 2006 vs. First Six Months
2005
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 from continuing operations and
diluted
the loss from discontinued operations by $0.03 per share for the
six
months ended June 30, 2006. Dilutive securities did not dilute earnings
from continuing operations or discontinued operations for the six
months
ended June 30, 2005.
The
consolidated non-utility businesses reported income from continuing operations,
including unallocated holding company costs, of 8.6 million, or $0.35 per share,
in the first six months of 2006, compared to a loss of $6.4 million, or
$0.26 per share, in the first six months of 2005. The increase in earnings
was
mainly due the sale of UIL Holdings’ ownership interest in Cross-Sound in the
first quarter of 2006, and the absence of costs related to a scheduled outage
in
2005 at Bridgeport Energy.
The
following is a detailed explanation of the year-to-date variances for each
of
UIL Holdings’ non-utility businesses.
Non-Utility
Business
Minority
InterestInvestments
United
Bridgeport Energy, Inc.
UBE
owned
a 33 1/3% interest in Bridgeport Energy, LLC (BE) until the completion of
its sale to an affiliate of Duke Energy on March 28, 2006. UBE lost $0.2
million, or $0.01 per share, in the first six months of 2006, compared to a
loss
of $3.9 million, or $0.16 per share in the first six months of 2005.
The
improvement from the prior year was mainly due to the absence of
costs
related to a scheduled outage in 2005.
United
Capital Investments, Inc.
UCI
earned $10.8 million, or $0.44 per share, in the first six months of 2006,
compared to breakeven for the first six months of 2005. The
improvement from the prior year was mainly due to the sale of Cross-Sound which
occurred on February 27, 2006.
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 unallocated after-tax costs of $2 million, or $0.08 per share in the
first six months of 2006, compared to a loss of $2.5 million, or $0.10 per
share
in the first six months of 2005. The improvement was largely due to increased
interest income on short term investments.
-
54 -
Discontinued
Operations
Xcelecom,
Inc.
Xcelecom
lost $61.9 million, or $2.54 per share, in the first six months of 2006,
compared to a loss of $3.9 million, or $0.16 per share in the first six
months of 2005. The decrease in earnings was largely due to the announcement
of
UIL Holdings’ intention to divest its wholly-owned subsidiary, Xcelecom,
completing its corporate strategic realignment to focus on its regulated
electric utility, UI. An after-tax goodwill impairment charge of $50.5 million
was recorded during the first quarter of 2006 based upon UIL Holdings’ intent to
divest, estimates of fair value as determined by an outside advisory firm and
indicative third party bids. Additionally, the decline in earnings from prior
year was partially due to (1) increases in project losses incurred in the first
six months of 2006 partially due to increases in commodity prices and from
refinements to previous job costs and project loss estimates as work in progress
continues toward completion, (2) a recognized loss on the partial asset sale
of
Xcelecom subsidiary, M.J. Daly & Sons, Incorporated, and (3) severance and
other divestiture-related costs incurred due to the divestiture announcement.
In
accordance with SFAS No. 144, depreciation of assets classified as “held for
sale” was ceased in April 2006. As such, 2006 depreciation and amortization
expense was $0.6 million, after tax, lower than it would have been if the assets
of Xcelecom had been depreciated through June 30, 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 2.7 years
at
an average interest rate of 4.5%. Given the term of the fixed rate debt, UIL
Holdings believes that it has no material quantitative or qualitative exposure
to market risk in the near term. In addition, historically, UI has been able
to
include its interest costs in revenue requirements for recovery through rates.
UIL
Holdings and Xcelecom have short-term revolving credit agreements that permit
borrowings for fixed periods of time at fixed interest rates determined by
the
London Interbank Offered Rate (LIBOR), and also borrowings at fluctuating
interest rates determined by the prime lending market. Changes in LIBOR or
the
prime lending market will have an impact on interest expense, but due to the
relatively low level of short-term borrowings under these credit facilities,
the
impact of changes in short-term interest rates is not expected to be material.
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 July 17,2006, the interest rate on the bonds was 3.60%. The rate cap was set at 3.68%
and became effective March 30, 2006. The rate cap will terminate on August5,2009. The rate cap is tied to the US Dollar - Bond Market Association (USD-BMA)
Municipal Swap Index.
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 June 30, 2006. Based on the
foregoing, UIL Holdings’
-
55 -
Chief
Executive Officer and Chief Financial Officer concluded that its disclosure
controls and procedures were effective as of June 30, 2006.
There
have been no changes in UIL Holdings’ internal control over financial reporting
during the quarter ended June 30, 2006 that have materially affected, or are
reasonably likely to materially affect UIL Holdings’ internal control over
financial reporting. In connection with the previously announced pending
retirement of Nathanial D. Woodson, effective July 1, 2006, James P. Torgerson
assumed the role of Chief Executive Officer (CEO) of UIL Holdings, in addition
to his current role as President of UIL Holdings. UIL Holdings’ internal control
over financial reporting has not changed as a result of this personnel change,
but key personnel, such as the CEO, are an integral part of the internal control
environment.
-
56 -
PART
II. OTHER INFORMATION
Item
1A - Risk Factors
UIL
Holdings may be unable to complete its divestiture of Xcelecom on reasonable
terms.
As
previously described in UIL Holdings’ Annual Report on Form 10K for the year
ended December 31, 2005, there are numerous risks inherent in Xcelecom’s
businesses. With the announcement by UIL Holdings of its decision to divest
of
Xcelecom, certain operating risks related to Xcelecom may be magnified including
the following: maintaining key customer contracts, attracting new business
and
hiring and retaining employees may become more difficult and costly during
the
period through divestiture.
There
is
also considerable risk related to the divestiture itself. There is no assurance
that Xcelecom will be sold at the current book value and, given the potential
operating risks noted above, additional reductions in the carrying value of
Xcelecom may become necessary. If UIL Holdings cannot sell Xcelecom on
reasonable terms, the subsidiary would return to a hold and operate status.
All
of the above divestiture related risks could have a negative effect on UIL
Holdings’ financial position and results of operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
(a)
UIL
Holdings issued 11,540 shares of common stock on April 26, 2006 to
satisfy
a contractual earn-out obligation arising from the acquisition of
4Front
Systems, Inc. (4Front) by UIL Holdings’ indirect subsidiary Xcelecom. The
shares were issued in reliance on an exemption from the registration
requirements of the Securities Act of 1933 pursuant to Section 3(a)(10)
in
connection with which the State of North Carolina approved the issuance
of
shares under the acquisition agreement between Xcelecom and
4Front.
(c)
UIL
Holdings repurchased 11,540 shares of common stock in open market
transactions as follows:
Period
Total
Number of Shares Purchased*
Average
Price Paid Per Share
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
Maximum
Number of Shares that May Yet Be Purchased Under the
Plans
March
-
-
None
None
April
11,540
$
31.97
None
None
May
-
-
None
None
Total
11,540
$
31.97
None
None
*
All
shares were purchased in open market transactions. As noted above in paragraph
(a), an equal number of shares were issued to former stockholders of 4Front
to
whom a contractual earn-out payment was due. The effects of this transaction
did
not change the number of outstanding shares of UIL Holdings common
stock.
Total
number of shares purchased and average price paid per share amounts reflect
the
previously announced 5 for 3 common stock split, which occurred on July 3,2006
for shareowners of record as of June 6, 2006.
Item
4. Submission of Matters to Vote of Security Holders.
The
Annual Meeting of the Shareowners of UIL Holdings was held on May 10, 2006,
for the purpose of electing a Board of Directors for the ensuing year and
ratifying the selection of PricewaterhouseCoopers LLP as the firm of independent
public accountants to audit the books and affairs of UIL Holdings for the fiscal
year 2006.
-
57 -
All
of
the nominees for election as Directors listed in UIL Holdings' proxy statement
for the meeting were elected by the following votes:
Number
of Shares
Voted
Not
Nominee
"For"
Voted
Thelma
R. Albright
20,866,722
384,135
Marc
C. Breslawsky
20,628,420
622,437
Arnold
L. Chase
20,680,135
570,722
John
F. Croweak
20,597,480
653,377
Betsy
Henley-Cohn
20,871,128
379,728
John
L. Lahey
20,813,712
437,143
F.
Patrick McFadden, Jr.
20,720,340
530,515
Daniel
J. Miglio
20,817,795
433,060
William
F. Murdy
20,714,288
536,568
James
A. Thomas
20,634,072
616,785
Nathaniel
D. Woodson
20,867,553
383,295
The
selection of PricewaterhouseCoopers LLP as the firm of independent registered
public accounting firm to audit the books and affairs of UIL Holdings for the
fiscal year 2006 was ratified by the following vote:
Number
of Shares
Voted
Voted
Not
Voted/
"For"
"Against"
Abstain
20,713,547
466,202
71,108
Item
5. Other Information
Xcelecom
has a revolving credit agreement with a bank that extends to the earlier of
June30, 2007 and the date on which UIL Holdings’ divestiture of Xcelecom is
substantially completed. In connection with an amendment of this agreement,
dated as of July 28, 2006, UIL Holdings has guaranteed the obligations under
the
agreement. This agreement provides for a $20 million revolving loan facility
available to meet working capital needs and to support standby letters of credit
issued by Xcelecom in the normal course of its business (such amount to be
reduced as UIL Holdings’ divestiture of Xcelecom is completed), and to meet
capital equipment needs of up to $1 million. Capital equipment loans under
this
facility can be converted to amortizing term loans with a maturity of up to
four
years. This agreement also provides for the payment of interest at a rate,
at
the option of Xcelecom, based on the agent bank’s prime interest rate or LIBOR.
Item
6. Exhibits
(a) Exhibits.
Exhibit
Table
Item
Number
Exhibit
Number
Description
(10)
10.35
Copy
of Severance and Release Agreement, dated April 10, 2006, among UIL
Holdings Corporation and Louis J. Paglia.
(31)
31.1
Certification
of Periodic Financial Report.
(31)
31.2
Certification
of Periodic Financial Report.
(32)
32
Certification
of Periodic Financial Report.
-
58 -
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
UIL
HOLDINGS CORPORATION
Date 08/02/2006
/s/
Richard J.
Nicholas
Richard
J. Nicholas
Executive
Vice
President
and
Chief Financial Officer
-
59
-
Dates Referenced Herein and Documents Incorporated by Reference
