UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
T | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
OR
£ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-15052
(Exact name of registrant as specified in its charter)
Connecticut | 06-1541045 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
157 Church Street, New Haven, Connecticut | 06506 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: 203-499-2000
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 October 31, 2007 was 25,160,004.
INDEX
PART I. FINANCIAL INFORMATION
Page Number | ||
Financial Statements. | 3 | |
Consolidated Statement of Income (Loss) for the three and nine months ended September 30, 2007 and 2006. | 3 | |
Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended | ||
September 30, 2007 and 2006. | 3 | |
Consolidated Balance Sheet as of September 30, 2007 and December 31, 2006. | 4 | |
Consolidated Statement of Cash Flows for the nine months ended September 30, 2007 and 2006. | 6 | |
Notes to the Consolidated Financial Statements. | 7 | |
- Statement of Accounting Policies | 7 | |
- Capitalization | 12 | |
- Regulatory Proceedings | 14 | |
- Short-term Credit Arrangements | 17 | |
- Income Taxes | 18 | |
- Supplementary Information | 20 | |
- Pension and Other Benefits | 21 | |
- Related Party Transactions | 23 | |
- Commitments and Contingencies | 23 | |
- Other Commitments and Contingencies | 23 | |
- Connecticut Yankee Atomic Power Company | 23 | |
- Hydro-Quebec | 24 | |
- Environmental Concerns | 24 | |
- Claim of Dominion Energy Marketing, Inc. | 26 | |
- Gross Earnings Tax Assessment | 27 | |
- Property Tax Assessment | 27 | |
- Cross-Sound Cable Company, LLC | 27 | |
- Segment Information | 28 | |
- Discontinued Operations | 31 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 33 |
- Major Influences on Financial Condition | 33 | |
- UIL Holdings Corporation | 33 | |
- The United Illuminating Company | 33 | |
- Xcelecom, Inc. | 38 | |
- Liquidity and Capital Resources | 39 | |
- Critical Accounting Policies | 40 | |
- Off-Balance Sheet Arrangements | 40 | |
- New Accounting Standards | 40 | |
- Results of Operations | 41 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 50 |
Item 4. | Controls and Procedures. | 50 |
PART II. OTHER INFORMATION
Item 1A. | Risk Factors | 51 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 52 |
Item 6. | Exhibits | 52 |
SIGNATURES | 53 |
- 2 -
Item 1. Financial Statement | ||||||||||||||||
UIL HOLDINGS CORPORATION | ||||||||||||||||
CONSOLIDATED STATEMENT OF INCOME (LOSS) | ||||||||||||||||
(In Thousands except per share amounts) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Operating Revenues (Note F) | ||||||||||||||||
Utility | $ | 267,870 | $ | 261,140 | $ | 759,165 | $ | 661,154 | ||||||||
Non-utility businesses | 5 | 4 | 13 | 13 | ||||||||||||
Total Operating Revenues | 267,875 | 261,144 | 759,178 | 661,167 | ||||||||||||
Operating Expenses | ||||||||||||||||
Operation | ||||||||||||||||
Fuel and energy (Note F) | 125,933 | 124,699 | 413,623 | 324,416 | ||||||||||||
Operation and maintenance | 50,811 | 51,754 | 148,231 | 150,819 | ||||||||||||
Transmission wholesale | 11,296 | 11,317 | 23,907 | 23,308 | ||||||||||||
Depreciation and amortization (Note F) | 25,466 | 21,065 | 66,000 | 54,562 | ||||||||||||
Taxes - other than income taxes (Note F) | 12,617 | 12,616 | 34,196 | 33,602 | ||||||||||||
Total Operating Expenses | 226,123 | 221,451 | 685,957 | 586,707 | ||||||||||||
Operating Income | 41,752 | 39,693 | 73,221 | 74,460 | ||||||||||||
Other Income and (Deductions), net (Note F) | 3,727 | 4,816 | 10,560 | 11,008 | ||||||||||||
Interest Charges, net | ||||||||||||||||
Interest on long-term debt | 5,767 | 5,332 | 16,346 | 16,075 | ||||||||||||
Other interest, net (Note F) | 583 | 374 | 1,413 | 1,100 | ||||||||||||
6,350 | 5,706 | 17,759 | 17,175 | |||||||||||||
Amortization of debt expense and redemption premiums | 416 | 393 | 1,229 | 1,163 | ||||||||||||
Total Interest Charges, net | 6,766 | 6,099 | 18,988 | 18,338 | ||||||||||||
Income Before Gain on Sale of Equity Investments, Income | ||||||||||||||||
Taxes, Equity Earnings and Discontinued Operations | 38,713 | 38,410 | 64,793 | 67,130 | ||||||||||||
Gain on Sale of Equity Investments (Note A) | - | - | - | 18,908 | ||||||||||||
Income Before Income Taxes, Equity Earnings and | ||||||||||||||||
Discontinued Operations | 38,713 | 38,410 | 64,793 | 86,038 | ||||||||||||
Income Taxes (Note E) | 15,742 | 9,199 | 26,961 | 29,414 | ||||||||||||
Income Before Equity Earnings and Discontinued Operations | 22,971 | 29,211 | 37,832 | 56,624 | ||||||||||||
Income (Loss) from Equity Investments | 7 | 446 | 55 | 104 | ||||||||||||
Income from Continuing Operations | 22,978 | 29,657 | 37,887 | 56,728 | ||||||||||||
Discontinued Operations, Net of Tax (Note N) | (1,985 | ) | (17,858 | ) | (1,745 | ) | (79,717 | ) | ||||||||
Net Income (Loss) | $ | 20,993 | $ | 11,799 | $ | 36,142 | $ | (22,989 | ) | |||||||
Average Number of Common Shares Outstanding - Basic | 25,012 | 24,455 | 24,973 | 24,382 | ||||||||||||
Average Number of Common Shares Outstanding - Diluted | 25,288 | 24,852 | 25,272 | 24,760 | ||||||||||||
Earnings Per Share of Common Stock - Basic: | ||||||||||||||||
Continuing Operations | $ | 0.92 | $ | 1.21 | $ | 1.52 | $ | 2.33 | ||||||||
Discontinued Operations | (0.08 | ) | (0.73 | ) | (0.07 | ) | (3.27 | ) | ||||||||
Net Earnings (Loss) | $ | 0.84 | $ | 0.48 | $ | 1.45 | $ | (0.94 | ) | |||||||
Earnings Per Share of Common Stock - Diluted: | ||||||||||||||||
Continuing Operations | $ | 0.91 | $ | 1.19 | $ | 1.50 | $ | 2.29 | ||||||||
Discontinued Operations | (0.08 | ) | (0.72 | ) | (0.07 | ) | (3.22 | ) | ||||||||
Net Earnings (Loss) | $ | 0.83 | $ | 0.47 | $ | 1.43 | $ | (0.93 | ) | |||||||
Cash Dividends Declared per share of Common Stock | $ | 0.432 | $ | 0.432 | $ | 1.296 | $ | 1.296 | ||||||||
UIL HOLDINGS CORPORATION | ||||||||||||||||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
(In Thousands) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net Income (Loss) | $ | 20,993 | $ | 11,799 | $ | 36,142 | $ | (22,989 | ) | |||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Interest rate cap mark-to-market | - | (169 | ) | 23 | 69 | |||||||||||
Other Comprehensive Income | - | (169 | ) | 23 | 69 | |||||||||||
Comprehensive Income (Loss) (Note A) | $ | 20,993 | $ | 11,630 | $ | 36,165 | $ | (22,920 | ) | |||||||
The accompanying Notes to the Consolidated Financial | ||||||||||||||||
Statements are an integral part of the financial statements. |
- 3 -
UIL HOLDINGS CORPORATION | ||||||||
CONSOLIDATED BALANCE SHEET | ||||||||
ASSETS | ||||||||
(Thousands of Dollars) | ||||||||
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Current Assets | ||||||||
Unrestricted cash and temporary cash investments | $ | 52,663 | $ | 63,364 | ||||
Restricted cash | 203 | 366 | ||||||
Utility accounts receivable less allowance of $3,300 and $2,600 | 101,612 | 66,511 | ||||||
Other accounts receivable | 15,616 | 33,741 | ||||||
Unbilled revenues | 40,368 | 33,729 | ||||||
Current regulatory assets | 49,574 | 43,755 | ||||||
Materials and supplies, at average cost | 3,573 | 2,204 | ||||||
Deferred income taxes | 9,089 | 9,303 | ||||||
Refundable taxes, net | 14,618 | 29,609 | ||||||
Prepayments | 5,105 | 2,942 | ||||||
Other current assets | 3,158 | 2,655 | ||||||
Current assets of discontinued operations held for sale | 10,543 | 10,406 | ||||||
Total Current Assets | 306,122 | 298,585 | ||||||
Other investments | 13,800 | 9,985 | ||||||
Property, Plant and Equipment at original cost | ||||||||
In service | 884,110 | 838,072 | ||||||
Less, accumulated depreciation | 307,870 | 290,742 | ||||||
576,240 | 547,330 | |||||||
Construction work in progress | 223,630 | 99,684 | ||||||
Net Property, Plant and Equipment | 799,870 | 647,014 | ||||||
Regulatory Assets (future amounts due from customers | ||||||||
through the ratemaking process) | 640,516 | 660,174 | ||||||
Deferred Charges and Other Assets | ||||||||
Unamortized debt issuance expenses | 6,941 | 7,105 | ||||||
Other long-term receivable | 6,918 | 7,313 | ||||||
Contracts for differences | 8,907 | - | ||||||
Other | 885 | 1,142 | ||||||
Total Deferred Charges and Other Assets | 23,651 | 15,560 | ||||||
Long-term assets of discontinued operations held for sale | 411 | 175 | ||||||
Total Assets | $ | 1,784,370 | $ | 1,631,493 | ||||
The accompanying Notes to the Consolidated Financial | ||||||||
Statements are an integral part of the financial statements. |
- 4 -
UIL HOLDINGS CORPORATION | ||||||||
CONSOLIDATED BALANCE SHEET | ||||||||
CAPITALIZATION AND LIABILITIES | ||||||||
(Thousands of Dollars) | ||||||||
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Current Liabilities | ||||||||
Current portion of long-term debt | $ | 78,286 | $ | 78,286 | ||||
Accounts payable | 116,784 | 78,192 | ||||||
Dividends payable | 10,829 | - | ||||||
Accrued liabilities | 23,601 | 28,165 | ||||||
Current regulatory liabilities | 16,374 | 21,877 | ||||||
Interest accrued | 5,101 | 4,047 | ||||||
Current liabilities of discontinued operations held for sale | 9,418 | 19,284 | ||||||
Total Current Liabilities | 260,393 | 229,851 | ||||||
Noncurrent Liabilities | ||||||||
Purchase power contract obligation | 24,814 | 38,836 | ||||||
Pension accrued | 43,824 | 45,961 | ||||||
Connecticut Yankee contract obligation | 26,515 | 28,923 | ||||||
Other post-retirement benefits accrued | 36,324 | 35,002 | ||||||
Contracts for differences | 28,747 | - | ||||||
Other | 6,797 | 3,258 | ||||||
Total Noncurrent Liabilities | 167,021 | 151,980 | ||||||
Deferred Income Taxes (future tax liabilities owed | ||||||||
to taxing authorities) | 326,507 | 326,247 | ||||||
Regulatory Liabilities (future amounts owed to customers | ||||||||
through the ratemaking process) | 61,939 | 54,125 | ||||||
Long-term liabilities of discontinued operations held for sale | 62 | 106 | ||||||
Commitments and Contingencies (Note J) | ||||||||
Capitalization (Note B) | ||||||||
Long-term debt | 504,317 | 408,603 | ||||||
Common Stock Equity | ||||||||
Common stock | 327,280 | 323,383 | ||||||
Paid-in capital | 10,595 | 15,363 | ||||||
Capital stock expense | (2,170 | ) | (2,170 | ) | ||||
Unearned employee stock ownership plan equity | (1,899 | ) | (2,612 | ) | ||||
Accumulated other comprehensive loss | (34 | ) | (57 | ) | ||||
Retained earnings | 130,359 | 126,674 | ||||||
Net Common Stock Equity | 464,131 | 460,581 | ||||||
Total Capitalization | 968,448 | 869,184 | ||||||
Total Liabilities and Capitalization | $ | 1,784,370 | $ | 1,631,493 | ||||
The accompanying Notes to the Consolidated Financial | ||||||||
Statements are an integral part of the financial statements. | ||||||||
- 5 -
UIL HOLDINGS CORPORATION | ||||||||
CONSOLIDATED STATEMENT OF CASH FLOWS | ||||||||
(Thousands of Dollars) | ||||||||
(Unaudited) | ||||||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2007 | 2006 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income (loss) | $ | 36,142 | $ | (22,989 | ) | |||
Adjustments to reconcile net income | ||||||||
to net cash provided by operating activities: | ||||||||
(Gain) on sale of equity investments | - | (18,908 | ) | |||||
Loss on settlements of divested businesses | 1,650 | - | ||||||
(Gain) on sale of assets of discontinued operations held for sale | - | (602 | ) | |||||
Impairment of remaining assets of discontinued operations held for sale | - | 24,829 | ||||||
Goodwill impairment | - | 85,004 | ||||||
Depreciation and amortization | 51,472 | 40,001 | ||||||
Purchase power contract amortization (Note F) | 15,708 | 15,992 | ||||||
Purchase power above market fuel expense credit (Note F) | (15,708 | ) | (15,992 | ) | ||||
Deferred income taxes | (3,301 | ) | (37,613 | ) | ||||
Stock-based compensation expense (Note A) | 2,367 | 4,581 | ||||||
Excess tax benefits from share-based compensation | (293 | ) | (490 | ) | ||||
Pension expense | 9,992 | 12,454 | ||||||
Deferred investment tax credits (net) | (110 | ) | (6,405 | ) | ||||
Allowance for funds used during construction - equity | (1,624 | ) | (1,529 | ) | ||||
Other non-cash items (net) | (2,693 | ) | (6,885 | ) | ||||
Changes in: | ||||||||
Accounts receivable | (25,173 | ) | 1,273 | |||||
Materials and supplies | (1,706 | ) | 1,023 | |||||
Prepayments | (1,093 | ) | (4,081 | ) | ||||
Accounts payable | 8,800 | (11,938 | ) | |||||
Interest accrued | 1,054 | 338 | ||||||
Taxes accrued and refundable | 13,191 | 8,559 | ||||||
Accrued pension expense | (4,329 | ) | (185 | ) | ||||
Accrued liabilities | (8,551 | ) | 5,982 | |||||
Other assets | (5,483 | ) | (4,866 | ) | ||||
Other liabilities | (333 | ) | (12,014 | ) | ||||
Total Adjustments | 33,837 | 78,528 | ||||||
Net Cash provided by Operating Activities | 69,979 | 55,539 | ||||||
Cash Flows from Investing Activities | ||||||||
Non-utility minority interest investments, net | - | (109 | ) | |||||
Proceeds from Cross-Sound Cable Project | - | 23,787 | ||||||
Proceeds from sale of equity investments | - | 100,949 | ||||||
Proceeds from sale of Steel Point | 4,600 | - | ||||||
Proceeds from settlements of divested businesses | 2,500 | - | ||||||
Proceeds from sale of assets of discontinued operations held for sale | - | 9,125 | ||||||
Deferred payments in prior acquisitions | - | (9,382 | ) | |||||
Plant expenditures including AFUDC debt | (160,729 | ) | (46,479 | ) | ||||
Changes in restricted cash | 162 | 210 | ||||||
Net Cash provided by (used in) Investing Activities | (153,467 | ) | 78,101 | |||||
Cash Flows from Financing Activities | ||||||||
Issuances of common stock | 999 | 3,474 | ||||||
Excess tax benefits from share-based compensation | 293 | 490 | ||||||
Issuances of long-term debt | 100,000 | - | ||||||
Payments on long-term debt | (4,286 | ) | (4,286 | ) | ||||
Notes payable - short-term, net | - | (26,279 | ) | |||||
Expenses of issuances | (432 | ) | - | |||||
Payment of common stock dividend | (21,628 | ) | (31,600 | ) | ||||
Other | - | 3,507 | ||||||
Net Cash provided by (used in) Financing Activities | 74,946 | (54,694 | ) | |||||
Cash and Temporary Cash Investments: | ||||||||
Net change for the period | (8,542 | ) | 78,946 | |||||
Balance at beginning of period | 63,364 | 28,860 | ||||||
Balance at end of period | 54,822 | 107,806 | ||||||
Less cash and temporary cash investments of | ||||||||
discontinued operations at end of period | 2,159 | - | ||||||
Continuing operations balance at end of period | $ | 52,663 | $ | 107,806 | ||||
The accompanying Notes to the Consolidated Financial | ||||||||
Statements are an integral part of the financial statements. |
- 6 -
UIL HOLDINGS CORPORATION
(A) STATEMENT OF ACCOUNTING POLICIES
Basis of Presentation
UIL Holdings Corporation (UIL Holdings) primarily operates its regulated utility business. The utility business consists of the electric transmission and distribution operations of The United Illuminating Company (UI). UIL Holdings also has a non-utility business, United Capital Investments, Inc. (UCI), which primarily holds passive minority ownership interests in two investment funds. The non-utility businesses previously included (1) a minority ownership interest in Bridgeport Energy, LLC (BE) held by United Bridgeport Energy, Inc. (UBE) until the completion of the sale of that interest to an affiliate of Duke Energy on March 28, 2006, (2) UCI’s minority ownership interest in Cross-Sound Cable Company, LLC (Cross-Sound) until the completion of the sale of that interest to Babcock & Brown Infrastructure Ltd. on February 27, 2006, and (3) the operations of Xcelecom, Inc. (Xcelecom) until the substantial completion of the sale of that business effective December 31, 2006. The remaining Xcelecom businesses are further described in Note A, “Discontinued Operations / Assets Held for Sale.” UIL Holdings is headquartered in New Haven, Connecticut, where its senior management maintains offices and is responsible for overall planning, operating and financial functions. UIL Holdings’ Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes thereto included in UIL Holdings’ Annual Report on Form 10-K for the year ended December 31, 2006. Such notes are supplemented below.
The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted in accordance with Securities and Exchange Commission rules and regulations. UIL Holdings believes that the disclosures made herein 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 nine months ended September 30, 2007 are not necessarily indicative of the results that will be achieved for the entire fiscal year ending December 31, 2007.
Certain amounts reported in the Consolidated Statement of Income (Loss) and Consolidated Statement of Cash Flows in previous periods have been reclassified to conform to the current presentation, which includes a separate line item for transmission wholesale expenses and additional detail regarding non-cash operating activities.
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 September 30, 2007 and December 31, 2006, totaled $3.4 million and $4.4 million, respectively.
Goodwill and Other Intangible Assets
In January 2002, UIL Holdings adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement modified the accounting and reporting of goodwill and intangible assets. On 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 pretax goodwill impairment charge of $85.0 million was recorded during the first quarter of 2006, based on UIL Holdings’ intent to divest and estimates of fair value as determined by indicative third party bids. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144) the impairment is included in discontinued operations. See below, “Note (A) - Discontinued Operations / Assets Held For Sale.” As of September 30, 2007 and December 31, 2006, UIL Holdings had no remaining goodwill recorded on its Consolidated Balance Sheet.
- 7 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
Impairment of Long-Lived Assets and Investments
SFAS No. 144 also requires that rate-regulated companies recognize an impairment loss when a regulator excludes all or part of a cost from rates, even if the regulator allows the company to earn a return on the remaining costs allowed. Under this standard, the probability of recovery and the recognition of regulatory assets under the criteria of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” must be assessed on an ongoing basis. Determination that certain regulatory assets no longer qualify for accounting as such could have a material impact on the financial condition of both UI and UIL Holdings. As of September 30, 2007 and December 31, 2006, UI, as a rate-regulated entity, did not have any assets that were impaired under this standard.
Discontinued Operations / Assets Held for Sale
SFAS No. 144 also addresses the accounting for, and disclosure of, long-lived assets to be disposed of by sale. Under SFAS No. 144, a long-lived asset or group of assets (disposal group) is classified as discontinued operations when (1) the company commits to a plan to sell the long-lived asset (disposal group) within a 12-month period, (2) there will be no significant continuing involvement following the sale, and (3) certain other criteria set forth in the statement are satisfied. In such a case:
· | The disposal group is 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 disposal group is not depreciated (amortized) while it is classified as held for sale. |
· | The related operations of the disposal group are reported as discontinued operations in the consolidated statement of income (loss), with all comparable periods restated. |
· | The operations and cash flows of the disposal group are eliminated from ongoing operations. |
On April 26, 2006, UIL Holdings announced its intention to divest its wholly-owned subsidiary, Xcelecom. With the announcement, Xcelecom met the criteria set forth in SFAS No. 144 to be classified as held for sale and the operating results and financial position have been included as discontinued operations held for sale in the accompanying Consolidated Balance Sheet and Consolidated Statement of Income (Loss).
Major classes of assets and liabilities of Xcelecom as of September 30, 2007, consisted of current assets of $10.5 million, property, plant and equipment of $0.4 million, current liabilities of $9.4 million and non-current liabilities of $0.1 million.
- 8 -
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 nine months ended September 30, 2007 and September 30, 2006:
Income Applicable to Common Stock | Average Number of Shares Outstanding | Earnings per Share | ||||||||||
(In Thousands, except per share amounts) | ||||||||||||
Nine Months Ended September 30: | ||||||||||||
2007 | ||||||||||||
Basic earnings (loss) from continuing operations | $ | 37,887 | 24,973 | $ | 1.52 | |||||||
Basic earnings (loss) from discontinued operations | (1,745 | ) | 24,973 | (0.07 | ) | |||||||
Basic earnings (loss) | 36,142 | 24,973 | 1.45 | |||||||||
Effect of dilutive stock options (1) | - | 299 | (0.02 | ) | ||||||||
Diluted earnings (loss) | $ | 36,142 | 25,272 | $ | 1.43 | |||||||
2006 | ||||||||||||
Basic earnings (loss) from continuing operations (3) | $ | 56,728 | 24,382 | $ | 2.33 | |||||||
Basic earnings (loss) from discontinued operations | (79,717 | ) | 24,382 | (3.27 | ) | |||||||
Basic earnings (loss) | (22,989 | ) | 24,382 | (0.94 | ) | |||||||
Effect of dilutive stock options (1) | - | 378 | 0.01 | |||||||||
Diluted earnings (loss) | $ | (22,989 | ) | 24,760 | $ | (0.93 | ) | |||||
Three Months Ended September 30: | ||||||||||||
2007 | ||||||||||||
Basic earnings (loss) from continuing operations | $ | 22,978 | 25,012 | $ | 0.92 | |||||||
Basic earnings (loss) from discontinued operations | (1,985 | ) | 25,012 | (0.08 | ) | |||||||
Basic earnings (loss) | 20,993 | 25,012 | 0.84 | |||||||||
Effect of dilutive stock options (1) | - | 276 | (0.01 | ) | ||||||||
Diluted earnings (loss) | $ | 20,993 | 25,288 | $ | 0.83 | |||||||
2006 | ||||||||||||
Basic earnings (loss) from continuing operations (3) | $ | 29,657 | 24,455 | $ | 1.21 | |||||||
Basic earnings (loss) from discontinued operations | (17,858 | ) | 24,455 | (0.73 | ) | |||||||
Basic earnings (loss) | 11,799 | 24,455 | 0.48 | |||||||||
Effect of dilutive stock options (1) | - | 397 | (0.01 | ) | ||||||||
Diluted earnings (loss) | $ | 11,799 | 24,852 | $ | 0.47 |
(1) | Reflecting the effect of dilutive stock options, performance shares and restricted stock. |
(2) | Dilutive securities diluted earnings from continuing operations by $0.01 per share but did not dilute earnings from discontinued operations for the three months ended September 30, 2007. Dilutive securities diluted earnings from continuing operations by $0.02 per share but did not dilute earnings from discontinued operations for the nine months ended September 30, 2007. Dilutive securities diluted earnings from continuing operations by $0.02 per share and diluted the loss from discontinued operations by $0.01 per share for the three months ended September 30, 2006. Dilutive securities diluted earnings from continuing operations by $0.04 per share and diluted the loss from discontinued operations by $0.05 per share for the nine months ended September 30, 2006. |
(3) | The three and nine months ended September 30, 2006 includes non-recurring earnings of $6.5 million, or $0.27 per share, due to reversal of accumulated deferred investment tax credits and excess deferred federal income taxes resulting from a final decision from the DPUC in regards to the Private Letter Ruling (PLR) issued by the Internal Revenue Service (IRS). |
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
All outstanding options to purchases shares of common stock were included in the computation of diluted earnings per share for the three and nine months ended September 30, 2007 and 2006, respectively.
Stock-Based Compensation
On January 1, 2006, UIL Holdings adopted SFAS No. 123 (Revised), “Share-Based Payment” (SFAS No. 123R), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and supersedes Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). Under the modified prospective method of adoption, pursuant to SFAS No. 123R, options granted after December 31, 2005 are expensed based on their fair value at date of grant over the vesting period, following the non-substantive vesting approach.
In 2004, UIL Holdings implemented a performance-based long-term incentive arrangement under the UIL Holdings 1999 Amended and Restated Stock Plan (Plan) pursuant to which certain members of management have the opportunity to earn a pre-determined number of performance shares, the number of which is predicated upon the achievement of various pre-defined performance measures. These performance shares vest at the end of the three-year cycle with the actual issuance of UIL Holdings’ common stock in respect of such shares following the end of each three-year cycle. A new three-year cycle begins in January of each year. UIL Holdings records compensation expense for these performance shares ratably over the three-year period, except in the case of retirement-eligible employees, for whom compensation expense is immediately recognized in accordance with SFAS No. 123R, based on the value of the expected payout at the end of each year relative to the performance measures achieved. An additional $0.5 million of compensation expense was recorded in the first quarter of 2007 in regards to retirement-eligible employees in connection with UIL Holdings’ adoption of SFAS No. 123R retirement-eligible provisions. A target amount of 81,750 performance shares was granted during the first quarter of 2007; the average of the high and low market price on the date of grant was $35.585 per share. In March 2007, 84,957 vested shares were issued to members of management and receipt of 40,883 vested shares was deferred. The number of deferred shares that ultimately will be issued is subject to the employees’ personal income tax elections.
In March 2007, UIL Holdings granted a total of 2,213 shares of restricted stock to its President and Chief Executive Officer, James P. Torgerson, and 4,215 shares of restricted stock to its Senior Vice-President and General Counsel, Linda L. Randell, under the Plan and in accordance with their employment agreements; the average of the high and low market price on the date of those grants was $35.585 per share. Compensation expense for this restricted stock is recorded ratably over the five-year vesting period for such restricted stock. In the first quarter of 2007, 3,849 shares of restricted stock previously granted to Mr. Torgerson vested.
In March 2007, UIL Holdings granted a total of 22,512 shares of restricted stock to non-executive directors under the Plan; the average of the high and low market price on the date of grant was $35.585 per share. Compensation expense for this restricted stock is recorded ratably over the three-year vesting period for such restricted stock, except in the case of retirement-eligible directors, for whom compensation expense is accelerated in accordance with SFAS No. 123R. In March 2007, 33,333 shares of restricted stock previously granted to directors vested, of which 8,000 shares were issued to directors who did not elect to have their vested shares deferred.
Total stock-based compensation expenses were $0.7 million and $2 million, for the three months ended September 30, 2007 and 2006, respectively, and $2.4 million and $4.6 million, for the nine months ended September 30, 2007 and 2006, respectively.
Comprehensive Income
Comprehensive income is equal to net income plus the amount of an interest rate cap mark-to-market adjustment related to $64.5 million principal amount of Pollution Control Revenue Refunding Bonds. For each of the three and nine months ended September 30, 2007, the adjustment to comprehensive income was of an immaterial amount, after-tax. Comprehensive income for the three months ended September 30, 2006 was equal to net income less an interest rate cap mark-to-market adjustment of approximately $0.2 million, after-tax. Comprehensive income for the nine months ended September 30, 2006 was equal to net income plus an interest rate cap mark-to-market adjustment
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
of approximately $0.1 million. For further information regarding this interest rate cap transaction, see “Note (B) – Capitalization – Long-Term Debt.”
Equity Investment Sales
On February 27, 2006, UCI completed the sale of its ownership interest in Cross-Sound. UCI received proceeds of $29.9 million for its $11.4 million investment in Cross-Sound. Excluding transaction costs, UCI recognized a pretax gain on the sale of approximately $18.5 million.
On March 28, 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 pretax gain on the sale of approximately $0.4 million.
These gains on sale of ownership interests are included in gain on sale of equity investments on the UIL Holdings’ Consolidated Statement of Income (Loss) for the nine months ended September 30, 2006.
Income Taxes
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), an interpretation of SFAS No. 109, “Accounting for Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109. The interpretation prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that has a level of uncertainty of being sustained on audit by the taxing authority. Under FIN 48, UIL Holdings may recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authority based upon the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based upon the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
UIL Holdings adopted the provisions of FIN 48 on January 1, 2007 and did not recognize any additional liability for unrecognized tax benefits or accrue any interest or penalties associated with uncertain tax benefits as of January 1, 2007. There have been no changes during the nine months ended September 30, 2007. Prior to the adoption of FIN 48, UIL Holdings recognized interest associated with uncertain tax positions as interest expense and penalties as a component of operation expense and has continued this treatment since the adoption of FIN 48.
UIL Holdings and its subsidiaries are subject to the United States federal income tax statutes administered by the Internal Revenue Service (IRS). UIL Holdings and its subsidiaries are also subject to the income tax statutes of the State of Connecticut and those of other states in which the UIL Holdings’ subsidiaries have operated and transacted business. As of September 30, 2007, the tax years 2004, 2005 and 2006 remain open and subject to audit for both federal income tax and state income tax purposes. Currently, the IRS is conducting an examination of the tax years 2004 and 2005.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
Regulatory Accounting
UIL Holdings’ regulatory assets and liabilities as of September 30, 2007 and December 31, 2006 were comprised of the following:
(In Thousands) | September 30, 2007 | December 31, 2006 | ||||||
Regulatory Assets | ||||||||
Nuclear plant investments – above market | $ | 359,835 | $ | 375,169 | ||||
Income taxes due principally to book-tax differences | 70,228 | 66,458 | ||||||
Long-term purchase power contracts–above market | 24,814 | 38,837 | ||||||
Connecticut Yankee | 26,515 | 28,923 | ||||||
Unamortized redemption costs | 16,315 | 16,917 | ||||||
Stranded cost recovery | 59,285 | 67,324 | ||||||
Pension and other post-retirement benefit plans | 102,272 | 108,248 | ||||||
Contracts for differences | 22,616 | - | ||||||
Other | 8,210 | 2,053 | ||||||
Total regulatory assets | 690,090 | 703,929 | ||||||
Less current portion of regulatory assets | 49,574 | 43,755 | ||||||
Regulatory Assets, Net | $ | 640,516 | $ | 660,174 | ||||
Regulatory Liabilities | ||||||||
Accumulated deferred investment tax credits | $ | 5,381 | $ | 5,490 | ||||
Deferred gain on sale of property | 37,579 | 34,761 | ||||||
Excess generation service charge | 10,632 | 11,021 | ||||||
Asset removal costs | 3,370 | 4,383 | ||||||
Other | 21,351 | 20,347 | ||||||
Total regulatory liabilities | 78,313 | 76,002 | ||||||
Less current portion of regulatory liabilities | 16,374 | 21,877 | ||||||
Regulatory Liabilities, Net | $ | 61,939 | $ | 54,125 |
New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157). This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between market participant assumptions and the reporting entity’s own assumptions. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This statement is not expected to have a material impact on UIL Holdings’ consolidated financial position, results of operations or liquidity.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. This statement is not expected to have a material impact on UIL Holdings’ consolidated financial position, results of operations or liquidity.
(B) CAPITALIZATION
Common Stock
UIL Holdings had 25,160,004 shares of its common stock, no par value, outstanding at September 30, 2007, of which (1) 93,135 shares were unallocated shares held by UI’s 401(k)/Employee Stock Ownership Plan (KSOP), and
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(2) 46,636 shares were restricted stock. The unallocated shares held by the KSOP and shares of restricted stock are not recognized as outstanding for purposes of calculating basic earnings per share.
UI has an arrangement under which it loaned $11.5 million to the KSOP. Prior to the formation of UIL Holdings, the trustee for the KSOP used the funds to purchase 547,167 shares of UI common stock in open market transactions. On July 20, 2000, effective with the formation of a holding company structure, unallocated shares held by the KSOP were converted into shares of UIL Holdings’ common stock. The shares will be allocated to employees’ KSOP accounts, as the loan is repaid, to cover a portion of the required KSOP contributions. Compensation expense is recorded when shares are committed to be allocated based on the fair market value of the stock. The loan will be repaid by the KSOP over a 12-year period ending October 1, 2009, using employer contributions and UIL Holdings’ dividends paid on the unallocated shares of the stock held by the KSOP. Dividends on allocated shares are charged to retained earnings. As of September 30, 2007, 93,135 shares, with a fair market value of $3 million, had been purchased by the KSOP and had not been committed to be released or allocated to KSOP participants.
Long-Term Debt
On June 20, 2007, the Connecticut Department of Public Utility Control (DPUC) approved UI’s financing plan for the period from 2007 through 2009. UI’s financing plan proposes that UI issue not more than $375 million principal amount of debt securities (the Proposed Notes). No further DPUC approvals are required unless there are material modifications of the terms and conditions outlined in the financing plan. The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes: (1) to refinance $225 million principal amount of maturing existing debt; (2) to finance capital expenditures; (3) to repay short-term borrowings incurred to temporarily fund these requirements; (4) to pay issuance costs related to the Proposed Notes; and (5) for general corporate purposes.
On September 5, 2007, UI entered into a Note Purchase Agreement with a group of institutional accredited investors providing for the sale to such investors of senior unsecured notes in the aggregate principal amount of $175 million, in the following series: (1) $40 million, 6.06% Senior Notes, Series A, due September 5, 2017; (2) $30 million 6.06% Senior Notes, Series B, due December 6, 2017; (3) $44 million 6.26% Senior Notes, Series C, due September 5, 2022; (4) $33 million 6.26% Senior Notes, Series D, due December 6, 2022; (5) $16 million 6.51% Senior Notes, Series E, due September 5, 2037; and (6) $12 million 6.51% Senior Notes, Series F, due December 6, 2037. $100 million was funded on September 5, 2007, and $75 million is expected to be funded on December 6, 2007, subject to certain conditions. Under the agreement, UI is subject to certain covenants, including the requirement to maintain a ratio of consolidated indebtedness to consolidated capitalization of not greater than 65%. The Note Purchase Agreement describes typical events of default, including the situation in which UI defaults on indebtedness in the aggregate principal amount of at least $10 million due to (1) a default in payment or payments due on the indebtedness, or (2) default in the performance of or compliance with any term or condition of the indebtedness, which default could result in the requirement that such indebtedness be repaid, or (3) the occurrence of any event or condition which could require the purchase or repayment of the indebtedness prior to maturity.
On March 9, 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 October 15, 2007, the interest rate on the bonds was 3.6%. The rate cap was set at 3.68% and became effective March 30, 2006. The rate cap will terminate on August 5, 2009. The rate cap is tied to the U.S. Dollar – Bond Market Association (USD-BMA) Municipal Swap Index. If the average of the index for the calculation period exceeds the rate cap, UI will be paid an amount based on such difference. For the three and nine months ended September 30, 2007, UI received cash of an immaterial amount related to the average index exceeding the rate cap. At the end of each quarter, the carrying value of the rate caps as reflected on the Consolidated Balance Sheet must be adjusted to reflect current market values. The ineffective portion of the gains or losses from this rate cap adjustment is reported in current earnings, which resulted in a $0.1 million and $0.2 million charge to expense for the three and nine months ended September 30, 2007, respectively, while the effective portion is reported within other comprehensive income. UI paid $0.6 million to enter into the rate cap transaction, which is being amortized
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
over the life of the rate cap based upon quarterly fair market value analysis. As such, the above treatment constitutes hedge accounting in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133).
(C) REGULATORY PROCEEDINGS
Department of Public Utility Control
UI generally has several regulatory proceedings open and pending at the DPUC at any given time. Examples of such proceedings include an annual DPUC review and reconciliation of UI’s Competitive Transition Assessment (CTA) and Systems Benefits Charge (SBC) revenues and expenses, dockets to consider specific restructuring or electricity market issues, consideration of specific rate or customer issues, and review of conservation programs.
2007 Rates
On December 19, 2006, the DPUC issued a decision implementing UI’s 2007 rate increase and established customers’ Generation Services Charge (GSC) for the first six months of 2007 to reflect the cost of wholesale power supply procured by UI to provide standard service and supplier of last resort service. The decision implements a settlement between UI and the Prosecutorial unit of the DPUC staff that, in addition to implementation of new distribution and GSC rates, provides short-term measures to mitigate the impact of these rate increases on residential customers. These measures consist of the acceleration of certain revenue requirement reductions and a temporary reduction in the working capital balance used to manage the monthly dollar amount difference between the GSC retail price charged to customers and monthly prices that UI is required to pay to its wholesale power suppliers. Under the settlement and decision, UI is recovering its power procurement costs and distribution rates in their entirety, along with the costs associated with these mitigation measures, including carrying charges calculated at UI’s pretax weighted cost of capital, and will restore the working capital balance to $9.1 million by the end of 2007. During the first two quarters of 2007, UI implemented the 2007 rate increase in accordance with the terms of the final decision. On July 1, 2007, revised retail rates became effective, reflecting new GSC rates for standard service and supplier of last resort, resulting from UI’s most recent power procurement, as described below. A $2.3 million increase to SBC rates was approved in August 2007 for implementation effective January 1, 2008.
Pension and Postretirement Expenses
In February 2007, the Internal Revenue Service mandated a change in the mortality tables utilized for certain ERISA-related liability calculations, effective January 1, 2007. As a result, UI made a corresponding change to its mortality table assumption used to determine pension and postretirement expense for accounting purposes. This change resulted in an increase to pension and postretirement expenses of approximately $1.8 million annually. In its last rate case, UI requested regulatory asset treatment for the increase in pension and postretirement expenses if, and when, the Internal Revenue Service mandated a change in the mortality tables during the 2006 to 2009 period. On August 1, 2007, in response to a UI request for clarification, the DPUC confirmed that it would be appropriate for UI to set up a regulatory asset for the change in such expenses resulting from the use of the new mortality tables. In the second quarter, UI deferred approximately $0.9 million of pension and postretirement expense and set up a regulatory asset, reflecting the increase in costs from January 1, 2007 through June 30, 2007. During the third quarter, UI deferred approximately $0.5 million of additional pension and postretirement expense. UI will continue to defer the incremental pension and postretirement costs resulting from the change in the mortality tables until its next rate case and believes it is probable that the regulatory asset will be recovered.
Power Supply Arrangements
UI must procure its standard service power pursuant to a procurement plan approved by the DPUC. UI works closely with a third party consultant retained by the DPUC in the procurement process for standard service and supplier of last resort service and in recommending bids to the DPUC.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
UI has now conducted four rounds of solicitation, the most recent in October 2007 for standard service and supplier of last resort service. As a result of these procurements, UI has wholesale power supply agreements in place for the supply of all of UI’s standard service customers for the remainder of 2007 and all of 2008. UI has power supply agreements in place for supplier of last resort service for the remainder of 2007 and the first quarter of 2008. Under Connecticut legislation passed in 2007, supplier of last resort service will be procured on a quarterly basis going forward. These contracts are derivatives under SFAS No. 133 and UI elected the “normal purchase, normal sale” exception under SFAS No. 133.
On December 28, 2001, UI entered into an agreement with Virginia Electric and Power Company, subsequently assigned to its affiliate Dominion Energy Marketing, Inc. (DEMI), for the supply of all of UI’s generation service requirements through 2008 for certain customers who entered into long-term special contracts with UI prior to the enactment of the 1998 restructuring legislation. Through contract expirations or customers choosing an alternate supplier to supply generation service requirements, these requirements expired in August 2007.
Contracts for Differences
Pursuant to Connecticut Public Act 05-01 (the Energy Independence Act or EIA), the DPUC initiated a process to solicit bids to create new or incremental capacity resources in order to reduce federally mandated congestion charges. In August 2007, the DPUC approved four “contracts for differences” under which each contract specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price. As directed by the DPUC, UI executed two of the contracts and The Connecticut Light and Power Company (CL&P) executed the other two contracts. Simultaneously, UI executed a sharing agreement with CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contracts. The DPUC has confirmed that costs associated with these contracts for difference would be recoverable by UI and CL&P, and in accordance with SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” UI has deferred recognition of costs (a regulatory asset) or has recognized obligations (a regulatory liability). An appeal of the DPUC decision approving the contracts for difference was filed by an entity that had submitted a proposal to the DPUC that was not selected, and is presently pending. The above contract is a derivative and is marked-to-market in accordance with SFAS No. 133. As a result, UI recorded a derivative asset of $8.9 million, a regulatory asset of $22.6 million, a derivative liability of $28.7 million and a regulatory liability of $2.8 million in the accompanying Consolidated Balance Sheet.
New Renewable Source Generation
Under Connecticut law, electric distribution companies are required to enter into contracts to purchase the output of new renewable source generation, up to a total of 150 megawatts in the future statewide, at prices and upon terms approved by the DPUC. To date, one contract has been approved by the DPUC. UI is not a party to that contract but, as directed by the DPUC, UI has executed a sharing agreement with CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contract. UI’s costs associated with all such contracts, whether UI is a direct party or pursuant to the sharing agreement, would be recoverable by UI.
Transmission
Return on Equity
On October 31, 2006, the Federal Energy Regulation Commission (FERC) issued an initial order establishing allowable return on equity (ROE) for various types of transmission assets (ROE Order). The ROE Order set a base ROE of 10.20% and approved two ROE adders as follows: (i) a 50 basis point ROE adder for participation in a Regional Transmission Organization; and (ii) a 100 basis point ROE adder for new transmission investment included in the ISO-New England Regional System Plan. In addition, the FERC approved an ROE adjustment reflecting updated U.S. Treasury Bond data, applicable prospectively from the date of the order.
Various state agencies, public officials and electric cooperatives filed requests for rehearing of the FERC ROE Order. They argue that there was no legitimate basis for the FERC to use the yield on U.S. Treasury Bonds to increase the New England Transmission Owners’ (TOs) common base ROE from 10.20% to 10.90%. In addition,
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
they argue that the evidentiary record showed that a 100 basis point ROE adder for new PTF investment would not change the TOs’ behavior and would produce no benefit for customers. The TOs also filed a request for rehearing asserting that there is no record evidence supporting the FERC’s determination of base ROE of 10.20% (instead of 10.50%). On December 29, 2006, the FERC granted rehearing for further consideration, but has not yet issued a substantive order on the rehearing requests.
UI’s overall transmission ROE will be determined by the mix of UI’s transmission rate base between new and existing transmission assets, and whether such assets are PTF (Pool Transmission Facilities) or Non-PTF. UI’s transmission assets are primarily PTF. For 2007, UI is estimating an overall allowed weighted-average ROE for its transmission business of 11.99%.
Middletown to Norwalk Project
On March 23, 2007, UI filed with the FERC to obtain incentive rate treatment for costs associated with the Middletown/Norwalk project. In particular, UI sought approval for (1) the inclusion of 100% of construction work in progress (CWIP) in the transmission rate base, as opposed to the 50% previously approved, and (2) a 50 basis point ROE adder for the project’s use of advanced transmission technologies. A FERC order was issued on May 22, 2007, which accepted UI’s request for the inclusion of 100% of CWIP in rate base and partially accepted a 50 basis point adder for advanced transmission technologies, which will only be applied to certain of the technologies that will be used in the construction of the project. UI estimates that approximately 50% of the project costs represent the advanced transmission technologies with respect to which the 50 basis point adder was approved by the FERC. In June 2007, the DPUC and other intervenors filed requests for rehearing of the FERC order granting UI these incentives. On July 23, 2007, the FERC granted rehearing, but has not yet issued a substantive order on such rehearing requests. On September 25, 2007, UI filed a requested clarification of the tariff with the FERC, reflecting all applicable incentives. The comment period has now passed, with no comment filed.
Other Transmission
On May 31, 2006, Northeast Utilities (NU) filed proposed amendments to its local transmission service tariff at the FERC. The proposed revisions would have the effect of charging UI customers a prorated portion of the construction cost of NU’s Bethel to Norwalk 345-kiloVolt (kV) transmission line that ISO-NE decides should not be included in the New England regional transmission rate (Localized Costs). On June 21, 2006, UI protested NU’s proposed allocation of the Localized Costs to UI customers on the grounds that UI’s customers neither caused nor benefit from these costs. On July 28, 2006, the FERC accepted the NU filing. UI filed a request for rehearing, which was denied by the FERC on December 26, 2006. UI filed a petition for review of the FERC’s order accepting the NU filing and its order denying rehearing with the U.S. Court of Appeals on February 23, 2007. These Localized Costs are included in UI’s local transmission tariff and, therefore, recovered through rates.
Transmission Adjustment Clause
UI makes a semiannual transmission adjustment clause (TAC) 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 from 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 semiannual change of the TAC charge or credit facilitates the timely matching of transmission revenues and transmission revenue requirements.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
Generation
On October 17, 2007, UI entered into a joint development agreement (the Agreement) with NRG Energy, Inc. (NRG), pursuant to which UI and NRG have agreed to work together on an exclusive basis to develop and submit to the DPUC a joint proposal to construct peaking generation in Connecticut. The joint proposal would be submitted in response to the Public Act 07-242, “An Act Concerning Electricity and Energy Efficiency” (2007 Energy Act), which requires UI to submit a proposal to construct peaking generation.
The Agreement provides that UI and NRG will use their reasonable best efforts to submit a joint proposal to the DPUC during January 2008 as required by the 2007 Energy Act and work together in connection with the DPUC approval process following submission of the proposal. The details of the joint proposal are subject to the mutual agreement of UI and NRG. In the event that the DPUC accepts a joint proposal submitted by the parties, the Agreement contemplates that UI and NRG would each hold a 50% ownership interest in the peaking generation facilities, which would be located on sites in Connecticut. The Agreement also provides that certain expenses incurred in connection with the joint proposal will be shared equally by the parties.
(D) SHORT-TERM CREDIT ARRANGEMENTS
UIL Holdings has a money market loan arrangement with JPMorgan Chase Bank. This is an uncommitted short-term borrowing arrangement under which JPMorgan Chase Bank may make loans to UIL Holdings for fixed periods. The periods may be from one day up to six months, depending on UIL Holdings’ credit rating. JPMorgan Securities, Inc. acts as an agent and sells the loans to investors. The fixed interest rates on the loans are determined based on conditions in the financial markets at the time of each loan. As of September 30, 2007, UIL Holdings did not have any short-term borrowings outstanding under this arrangement.
UI and UIL Holdings entered into a revolving credit agreement with a group of banks that extends to December 22, 2011. The borrowing limit under the facility for UI is $175 million, with $50 million of the limit available for UIL Holdings. The facility permits borrowings at fluctuating interest rates determined by reference to Citibank’s New York base rate and the Federal Funds Rate (as defined in the facility), and also permits borrowings for fixed periods of time specified by UI and UIL Holdings at fixed interest rates determined by the Eurodollar interbank market in London (LIBOR). The facility also permits the issuance of letters of credit up to $50 million. As of September 30, 2007, UIL Holdings and UI did not have any borrowings outstanding under the facility. As of September 30, 2007, UI had a standby letter of credit outstanding in the amount of $3 million that expires on December 31, 2007, and UIL Holdings had a standby letter of credit outstanding in the amount of $2.6 million that expires on January 31, 2008, but is automatically extended for one year from the expiration date (or any future expiration date), unless the issuer bank elects not to extend.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(E) INCOME TAXES
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(In Thousands) | ||||||||||||||||
Income tax expense for continuing operations consists of: | ||||||||||||||||
Income tax provisions (benefit): | ||||||||||||||||
Current | ||||||||||||||||
Federal | $ | 16,783 | $ | 14,673 | $ | 27,828 | $ | 35,560 | ||||||||
State | 3,064 | 2,874 | 4,272 | 8,783 | ||||||||||||
Total current | 19,847 | 17,547 | $ | 32,100 | 44,343 | |||||||||||
Deferred | ||||||||||||||||
Federal | (3,012 | ) | (7,685 | ) | (3,296 | ) | (12,278 | ) | ||||||||
State | (1,056 | ) | (626 | ) | (1,733 | ) | (2,541 | ) | ||||||||
Total deferred | (4,068 | ) | (8,311 | ) | (5,029 | ) | (14,819 | ) | ||||||||
Investment tax credits | (37 | ) | (37 | ) | (110 | ) | (110 | ) | ||||||||
Total income tax expense | $ | 15,742 | $ | 9,199 | $ | 26,961 | $ | 29,414 | ||||||||
Income tax components charged as follows: | ||||||||||||||||
Operating tax expense | $ | 15,788 | $ | 14,317 | $ | 27,517 | $ | 26,659 | ||||||||
Nonoperating tax expense (benefit) | (49 | ) | (5,291 | ) | (578 | ) | (5,002 | ) | ||||||||
Equity investments tax (benefit) | 3 | 173 | 22 | 7,757 | ||||||||||||
Total income tax expense | $ | 15,742 | $ | 9,199 | $ | 26,961 | $ | 29,414 | ||||||||
Legislation enacted in Connecticut in 2005 imposed a 20% surcharge on the corporation business tax only for the year 2006. This surcharge effectively increased the statutory rate of Connecticut corporation business tax from 7.5% to 9.0% for the year 2006. Due to the elimination of the surcharge, the combined statutory federal and state income tax rate for UIL Holdings’ Connecticut-based entities decreased from 40.85% for the year 2006 to 39.875% for the year 2007.
Differences in the treatment of certain transactions for book and tax purposes occur which cause the rate of UIL Holdings’ reported income tax expense to differ from the statutory tax rate described above. The effective book income tax rates for the three and nine months ended September 30, 2007 were 40.7% and 41.6%, respectively, as compared to 23.7% and 34.2% for the three and nine months ended September 30, 2006. The increase in the 2007 effective book income tax rates from those for the 2006 periods was due primarily to the absence in 2007 of non-recurring earnings recorded in 2006 associated with the IRS PLR.
The effective book income tax rate for the nine months ended September 30, 2007 is higher than the 2007 effective statutory tax rate due primarily to: (1) non-normalized effect associated with the CTA, and (2) differences in the amount of book depreciation in excess of non-normalized tax depreciation. For the nine months ended September 30, 2007, the effective state book income tax rate was less than the state statutory tax rate of 7.5% as a result of state tax credits recognized during the period.
UIL Holdings was not able to recognize a portion of federal income tax benefits or any state income tax benefits for capital losses associated with the divestiture of Xcelecom and the state income tax benefits associated with operating losses at Allan/Brite-Way Electrical Contractors, Inc. incurred during the year ended December 31, 2006. As a result, UIL Holdings has recorded a valuation allowance of $7.1 million and $12.7 million, respectively, associated with future federal and state income tax benefits from capital losses in connection with which the realization was uncertain as of December 31, 2006. These future federal and state income tax benefits may be recognized over the
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
course of the next five years to the extent that capital gains are realized by UIL Holdings, with respect to federal income tax benefits, and by Xcelecom, with respect to the state income tax benefits. During the first nine months of 2007, UIL Holdings was able to recognize $0.1 million of federal and state income tax benefits as a result of capital gains realized during the nine month period resulting from the settlement reached with the buyer of Terry’s Electric, Inc. See “Note N – Discontinued Operations.” In the third quarter of 2007, UIL Holdings recorded a capital loss associated with the settlement reached with the buyer of JBL Electric, Inc., JE Richards, Inc., and McPhee Electric Ltd., LLC. As a result, UIL Holdings recorded an additional valuation allowance of $0.2 million associated with future federal and state income tax benefits from this capital loss for which the realization was uncertain as of September 30, 2007.
As a result of capital losses incurred during 2006 related to the Xcelecom divestiture, UIL Holdings has filed a refund request with the IRS to carryback a portion of these capital losses to prior years to offset capital gains on which UIL Holdings previously paid federal income taxes. The total amount of the refund request was $26.5 million, of which $6.1 million was received in October 2007. UIL Holdings expects to receive the remaining $20.4 million in the fourth quarter of 2007.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(F) SUPPLEMENTARY INFORMATION | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(In Thousands) | ||||||||||||||||
Operating Revenues | ||||||||||||||||
Utility: | ||||||||||||||||
Retail | $ | 248,940 | $ | 236,427 | $ | 697,975 | $ | 597,957 | ||||||||
Wholesale | 8,805 | 7,469 | 27,000 | 22,266 | ||||||||||||
Other (1) | 10,125 | 17,244 | 34,190 | 40,931 | ||||||||||||
Non-utility business unit revenues: | ||||||||||||||||
Other | 5 | 4 | 13 | 13 | ||||||||||||
Total Operating Revenues | $ | 267,875 | $ | 261,144 | $ | 759,178 | $ | 661,167 | ||||||||
Fuel and Energy | ||||||||||||||||
Fuel and Energy Expense | $ | 131,227 | $ | 130,088 | $ | 429,331 | $ | 340,408 | ||||||||
Purchase Power above market fuel expense credit (2) | (5,294 | ) | (5,389 | ) | (15,708 | ) | (15,992 | ) | ||||||||
Total Fuel and Energy Expense | $ | 125,933 | $ | 124,699 | $ | 413,623 | $ | 324,416 | ||||||||
Depreciation and Amortization | ||||||||||||||||
Utility property, plant, and equipment depreciation | $ | 8,273 | $ | 7,888 | $ | 26,595 | $ | 23,342 | ||||||||
Amortization of nuclear plant regulatory assets | 11,797 | 7,459 | 23,374 | 14,296 | ||||||||||||
Amortization of purchase power contracts (2) | 5,294 | 5,389 | 15,708 | 15,992 | ||||||||||||
Subtotal CTA Amortization | 17,091 | 12,848 | 39,082 | 30,288 | ||||||||||||
Amortization of intangibles | 8 | - | 24 | 4 | ||||||||||||
Amortization of other regulatory assets | 94 | 329 | 299 | 928 | ||||||||||||
Total Amortization | 17,193 | 13,177 | 39,405 | 31,220 | ||||||||||||
Total Depreciation and Amortization | $ | 25,466 | $ | 21,065 | $ | 66,000 | $ | 54,562 | ||||||||
Taxes - Other than Income Taxes | ||||||||||||||||
Connecticut gross earnings | $ | 8,914 | $ | 9,126 | $ | 22,216 | $ | 22,255 | ||||||||
Local real estate, personal property and other | 2,503 | 2,498 | 7,784 | 7,692 | ||||||||||||
Payroll taxes | 1,200 | 992 | 4,196 | 3,655 | ||||||||||||
Total Taxes - Other than Income Taxes | $ | 12,617 | $ | 12,616 | $ | 34,196 | $ | 33,602 | ||||||||
Other Income and (Deductions), net | ||||||||||||||||
Interest income | $ | 712 | $ | 1,395 | $ | 2,881 | $ | 3,157 | ||||||||
Allowance for funds used during construction | 557 | 902 | 2,952 | 2,544 | ||||||||||||
Conservation and Load Management (C&LM) incentives | 270 | 289 | 585 | 596 | ||||||||||||
Emergency generation and load curtailment incentives | 1,459 | - | 1,441 | - | ||||||||||||
GSC procurement fee | - | 943 | - | 2,242 | ||||||||||||
ISO load response, net | 671 | 1,092 | 2,345 | 2,017 | ||||||||||||
Miscellaneous other income and (deductions) - net | 58 | 195 | 356 | 452 | ||||||||||||
Total Other Income and (Deductions), net | $ | 3,727 | $ | 4,816 | $ | 10,560 | $ | 11,008 | ||||||||
Other Interest, net | ||||||||||||||||
Notes Payable | $ | 574 | $ | - | $ | 1,360 | $ | 151 | ||||||||
Other | 9 | 374 | 53 | 949 | ||||||||||||
Total Other Interest, net | $ | 583 | $ | 374 | $ | 1,413 | $ | 1,100 | ||||||||
(1) Includes activity in the GSC "working capital allowance" which can positvely or negatively impact other revenues. | ||||||||||||||||
(2) 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. | ||||||||||||||||
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(G) PENSION AND OTHER BENEFITS
The United Illuminating Company Pension Plan (the Pension Plan) covers the majority of employees of UIL Holdings and UI. UI also has a non-qualified supplemental pension plan for certain employees and a non-qualified retiree-only pension plan for certain early retirement benefits.
Funding policy for the Pension Plan is to make annual contributions that satisfy the minimum funding requirements of ERISA but that do not exceed the maximum deductible limits of the Internal Revenue Code. These amounts are determined each year as a result of an actuarial valuation of the Pension Plan. Based upon preliminary actuarial calculations, UI does not expect to make a contribution to the Pension Plan for 2007. UI did make cash payouts to its retired Chief Executive Officer under the Supplemental Executive Retirement Plan totaling $4.1 million, of which $2.7 million was paid in January 2007 and $1.4 million was paid in April 2007.
In addition to providing pension benefits, UI also provides other post-retirement benefits (OPEB), consisting principally of health care and life insurance benefits, for retired employees and their dependents. For funding purposes, UI has established Voluntary Employees’ Benefit Association Trust (VEBA) accounts for the years 2007 through 2020 to fund OPEB for UI’s non-union employees who retire on or after January 1, 1994. These VEBA accounts were approved by the IRS and UI expects to contribute an amount that is not in excess of $5.0 million (the maximum tax deductible amount under IRS regulations) in the fourth quarter of 2007 to fund OPEB for non-union employees.
Union employees whose sum of age and years of service at the time of retirement is equal to or greater than 85 (or who are 62 with at least 20 years of service) are eligible for benefits partially subsidized by UI. UI does not expect to make a contribution in 2007 to fund OPEB for union employees.
UI adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefits an amendment of FASB No. 87, 88, 106 and 132(R)” (SFAS 158), as of December 31, 2006 on a prospective basis. The Statement requires an employer that sponsors one or more defined benefit pension or other postretirement plans to recognize an asset or liability for the overfunded or underfunded status of the plan. For a pension plan, the asset or liability is the difference between the fair value of the plan’s assets and the projected benefit obligation. For any other postretirement benefit plan, the asset or liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation. UI has reflected all unrecognized prior service costs and credits and unrecognized actuarial gains and losses as regulatory assets rather than in accumulated other comprehensive income, as it is probable that such items are recoverable through the ratemaking process in future periods.
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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 nine months ended September 30, 2007 and 2006:
Three Months Ended September 30, | ||||||||||||||||
Pension Benefits | Other Post-retirement Benefits | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(In Thousands) | ||||||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||
Service cost | $ | 1,831 | $ | 1,760 | $ | 325 | $ | 319 | ||||||||
Interest cost | 5,009 | 4,635 | 879 | 864 | ||||||||||||
Expected return on plan assets | (6,506 | ) | (5,966 | ) | (596 | ) | (409 | ) | ||||||||
Amortization of: | ||||||||||||||||
Prior service costs | 221 | 263 | (31 | ) | (32 | ) | ||||||||||
Transition obligation (asset) | - | - | 265 | 265 | ||||||||||||
Actuarial (gain) loss | 1,573 | 1,889 | 410 | 564 | ||||||||||||
Additional amount recognized due to settlement or curtailment | - | - | ||||||||||||||
Net periodic benefit cost (2) | $ | 2,128 | $ | 2,581 | $ | 1,252 | $ | 1,571 | ||||||||
Nine Months Ended September 30, | ||||||||||||||||
Pension Benefits | Other Post-retirement Benefits | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(In Thousands) | ||||||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||
Service cost | $ | 5,493 | $ | 5,282 | $ | 976 | $ | 955 | ||||||||
Interest cost | 15,027 | 13,905 | 2,637 | 2,592 | ||||||||||||
Expected return on plan assets | (19,518 | ) | (17,897 | ) | (1,789 | ) | (1,227 | ) | ||||||||
Amortization of: | ||||||||||||||||
Prior service costs | 663 | 789 | (93 | ) | (96 | ) | ||||||||||
Transition obligation (asset) | - | - | 794 | 794 | ||||||||||||
Actuarial (gain) loss | 4,734 | 5,665 | 1,232 | 1,691 | ||||||||||||
Additional amount recognized due to settlement or curtailment (1) | 1,189 | - | - | - | ||||||||||||
Net periodic benefit cost (2) | $ | 7,588 | $ | 7,744 | $ | 3,757 | $ | 4,709 | ||||||||
The following actuarial weighted average assumptions were used in calculating net periodic benefit cost for the three and nine months ending September 30, 2007, respectively: | ||||||||||||||||
Discount rate | 5.75 | % | 5.50 | % | 5.75 | % | 5.50 | % | ||||||||
Average wage increase | 4.40 | % | 4.40 | % | N/A | N/A | ||||||||||
Return on plan assets | 8.50 | % | 8.25 | % | 8.50 | % | 8.25 | % | ||||||||
Pre-65 health care trend rate (current yr) | N/A | N/A | 10.00 | % | 11.00 | % | ||||||||||
Pre-65 health care trend rate (2012+) | N/A | N/A | 5.50 | % | 5.50 | % | ||||||||||
Post-65 health care trend rate (current yr) | N/A | N/A | 5.50 | % | 6.00 | % | ||||||||||
Post-65 health care trend rate (2008+) | N/A | N/A | 5.00 | % | 5.00 | % |
N/A – not applicable. |
(1) Reflects settlement charges resulting from a distribution to a former employee upon retirement.
(2) For the three and nine months ended September 30, 2007, UI has reclassified $0.5 million and $1.4 million, respectively, of pension and OPEB expense shown above to a
regulatory asset, reflecting additional amounts recoverable in rates due to changes in the mortality tables (see Note C – Regulatory Proceedings).
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(H) RELATED PARTY TRANSACTIONS
Arnold L. Chase, a Director of UIL Holdings since June 28, 1999, holds a beneficial interest in the building located at 157 Church Street, where UI leases office space for its corporate headquarters. UI’s lease payments for this office space for the nine months ended September 30, 2007 and 2006 totaled $8.6 million and $7.4 million, respectively and $2.7 million and $2.5 million for the three months ended September 30, 2007 and 2006, respectively.
(J) COMMITMENTS AND CONTINGENCIES
Other Commitments and Contingencies
Connecticut Yankee Atomic Power Company
UI has a 9.5% stock ownership share in the Connecticut Yankee Atomic Power Company (Connecticut Yankee), the carrying value of which was $1.3 million as of September 30, 2007. On December 4, 1996, the Board of Directors of Connecticut Yankee voted unanimously to retire the Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial operation. A decision by the FERC that became effective on August 1, 2000 allows Connecticut Yankee to collect, through the power contracts with the unit’s owners, the FERC-approved decommissioning costs, other costs associated with the permanent shutdown of the Connecticut Yankee Unit, the unrecovered investment in the Connecticut Yankee Unit, and a return on equity of 6%. Connecticut Yankee may recover 9.5% of these costs from UI. The decommissioning project was substantially completed in the first quarter of 2007. On October 25, 2007, the State of Connecticut’s Department of Environmental Protection (CDEP) approved Connecticut Yankee’s application for a Stewardship Permit which states that all corrective action measures required at the Connecticut Yankee site pursuant to the Connecticut General Statutes and the Regulations of Connecticut State Agencies have been completed subject to post remediation groundwater monitoring. Along with groundwater monitoring Connecticut Yankee will continue to store spent nuclear fuel at the site (see DOE Spent Fuel Litigation 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 September 30, 2007, UI has regulatory approval to recover in future rates (through the CTA) its $26.5 million regulatory asset for Connecticut Yankee over a term ending in 2015.
DOE Spent Fuel Litigation
In the Nuclear Waste Policy Act of 1982, Congress provided for the Department of Energy (DOE) to dispose of spent nuclear fuel and other high-level waste, including greater-than-Class-C waste (GTCC) (hereinafter Nuclear Waste), from nuclear generating plants. In 1983, Connecticut Yankee and the DOE entered into a standard disposal contract mandated by the Act. The contract required the DOE to begin disposing of Connecticut Yankee’s Nuclear Waste by the end of January 1998. The DOE failed to honor these contract obligations.
In 1998, Connecticut Yankee, along with Maine Yankee and Yankee Atomic, two other New England-based owners of shut-down nuclear generating plants, filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 contracts by the DOE. In November of 1998, the Court ruled that the DOE had breached the contracts and was liable for damages, but left the amount of damages to be determined after a trial on the evidence. The ruling was affirmed by the United States Court of Appeals for the Federal Circuit in August of 2000. On October 4, 2006, the Court issued judgment for Connecticut Yankee in the amount of $34.2 million for its spent-fuel-related costs through 2001, ruling in favor of Connecticut Yankee on substantially all of the major issues. Connecticut Yankee had sought $37.7 million in damages for the period covered by the decision. On December 4, 2006, the DOE appealed the decision to the United States Court of Appeals for the Federal Circuit and filed its opening brief on April 6, 2007. On July 10, 2007, Connecticut Yankee filed its response and made a cross appeal.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
As an interim measure until the DOE complies with its contractual obligation to dispose of Connecticut Yankee’s spent fuel, Connecticut Yankee constructed an independent spent-fuel storage installation (ISFSI), utilizing dry-cask storage, on the site of the Connecticut Yankee Unit and completed the transfer of its Nuclear Waste to the ISFSI in 2005.
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. In April 1991, UI furnished a guarantee in the amount of $11.7 million, for its participating share of the debt financing for one phase of this facility. The amount of this guarantee which expires in August 2015, is reduced monthly, proportionate with principal paid on the underlying debt. As of September 30, 2007, the amount of UI’s guarantee for this debt totaled approximately $2.4 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.
Middletown/Norwalk
In April 2007, during construction of the Middletown/Norwalk project (the Project) in Bridgeport, Connecticut, UI encountered soil contaminated with polychlorinated biphenyls (PCBs). UI stopped construction at the location, which was a road not owned by UI, and notified the CDEP. At the CDEP’s request, UI is determining the extent of the contamination on property within the limits of the Project. In the second quarter of 2007, based on preliminary analysis, UI recorded a liability of $1.7 million related to the remediation. UI filed a draft remediation action plan (RAP) with the CDEP and the United States Environmental Protection Agency (USEPA), which was reviewed by the agencies. UI revised the RAP based on the agencies’ comments and filed a revised RAP which is currently under review by the agencies. Upon finalization of the RAP, the estimated liability may be adjusted to reflect the actual work expected to be performed. UI believes that it is not responsible for this contamination, but is unable to state with certainty whether UI will be reimbursed by the property owner, the Connecticut Department of Transportation, for remediation costs. Any costs that are incurred by UI are expected to be recovered through transmission rates and are reflected as such in UI’s Consolidated Statement of Income (Loss).
Branford Landfill
By letter dated June 29, 2007, USEPA sent UI a request for information and documents related to the environmental conditions at, and USEPA’s cleanup of, a portion of the East Main Street Disposal Superfund Site in Branford, Connecticut. That portion of the subject site cleaned up by the USEPA consists of two residential properties. The USEPA requests information related to the period 1967-1986, primarily with respect to UI’s construction and operation of the New Haven Harbor Station generating facility. After a diligent review of its corporate files and interviewing employees with knowledge regarding New Haven Harbor Station, UI completed and filed the information request with USEPA on August 24, 2007. UI cannot presently assess the impact, if any, of this recent USEPA request.
UI also received a letter dated September 7, 2007 (also addressed to Raytheon Corp., successor to the building contractor for the New Haven Harbor Station facility, United Engineers and Constructors) in which the current property owner, Shoreline Trailer Court Mobile Homes, states its intent to file suit against UI and Raytheon under the Comprehensive Environmental Response, Liability, and Compensation Act (CERCLA), 42 U.S.C. Sec. 9601, et seq., for compensation relative to its remediation costs at the subject site. The owner claims to have remediated the
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
site at a cost of approximately $0.8 million and seeks compensation for that amount from UI and Raytheon. UI has responded, asking for the basis of the allegations with regard to UI, including the identification of documents and witnesses. UI cannot presently assess the impact, if any, of this recent claim against UI.
Site Decontamination, Demolition and Remediation Costs
On June 16, 2006, UI executed an agreement with the City of Bridgeport and its Redevelopment Authority (the City) for the transfer of title of UI’s Steel Point property to the City and settlement of all claims against the City with respect to relocation of a substation and repair/replacement of a bulkhead, in exchange for payment to UI of $14.9 million, which represents the commercial value of the property and cost to replace the bulkhead. Pursuant to a Memorandum of Understanding among UI, the City of Bridgeport, and the City’s selected developer for the property (MOU), the City must also provide to UI, within one year and free of charge, a substation site within a reasonable proximity to the Steel Point property. On July 12, 2006, the DPUC approved the proposed transfer of property and all of the terms of the MOU. The DPUC also accepted the proposed ratemaking treatment submitted by UI with respect to the property, the substation, and the bulkhead, which provides for UI to recover costs related to the Steel Point property through the CTA, subject to DPUC approval in the annual CTA/SBC reconciliation filing. Pursuant to the terms of the MOU, title transferred to the City on or about December 13, 2006, upon payment to UI of $10.3 million. The remaining $4.6 million was paid on June 29, 2007.
Under the MOU, the City and developer released UI from any further liability with respect to the Steel Point property after title transferred, and the City and/or developer must now indemnify UI for environmental matters related to the Steel Point property. However, UI may be required to remove additional soil on the Steel Point property to achieve environmental compliance to remedy conditions that were discovered before title transferred. The City and the developer have subsequently claimed that there is additional remediation that may be necessary. UI has investigated the claim and determined that additional remediation does not appear to be warranted, at this time. However, any additional costs are expected to be recovered through the CTA. The sole exception to the indemnity is for personal injury claims brought against UI by UI employees or contractors hired by UI relating to incidents that occurred on the site before title transferred to the City. UI is not aware of any such claims. In addition, the MOU provides that there is no indemnity for liability related to contaminated harbor sediments. UI would seek to recover all uninsured 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.
A site on the Mill River in New Haven was conveyed by UI in 2000 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 $0.3 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 developer (Evergreen Power). UI could be required by applicable environmental laws to finish remediating any subsurface contamination at the site if it is determined that QE and/or Evergreen Power has not completed the appropriate environmental remediation at the site.
On April 16, 1999, UI completed the sale of its Bridgeport Harbor Station and New Haven Harbor Station generating plants in compliance with Connecticut’s electric utility industry restructuring legislation. Environmental assessments performed in connection with the marketing of these plants indicate that substantial remediation expenditures will be required in order to bring the plant sites into compliance with applicable minimum Connecticut environmental standards. The purchaser of the plants agreed to undertake and pay for the remediation of the purchased properties. With respect to the portion of the New Haven Harbor Station site that UI retained, UI has performed an additional environmental analysis, indicating that approximately $3.2 million in remediation expenses will be incurred. Actual remediation costs may be higher or lower than what is currently estimated. The required remediation is virtually all on transmission-related property and UI has accrued these estimated expenses.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
UI sold property to Bridgeport Energy LLC (BE) on April 16, 1999. UIL Holdings, through its subsidiary United Bridgeport Energy, Inc. (UBE), held a minority ownership interest in BE at that time and until the sale of that interest to the majority owner in March 2006. In connection with the sale of the property, UI entered into an environmental indemnity agreement with BE to provide indemnification related to certain environmental conditions specific to the site where BE’s generation facilities were constructed. This environmental indemnification remains in place following the sale of UBE’s interest in BE. Because of soil management and other environmental remediation activities that were performed during construction of the generation facilities, UI does not regard its exposure under the environmental indemnity agreement as material.
From 1961 to 1976, UI owned a parcel of property in Derby, Connecticut, on which it operated an oil-fired electric generating unit. For several years, the Connecticut Department of Environmental Protection (CDEP) has been monitoring and remediating a migration of fuel oil contamination from a neighboring parcel of property into the adjacent Housatonic River. Based on its own investigation to date, UI believes it has no responsibility for this contamination. If regulatory agencies determine that UI is responsible for the cost of these remediation activities, UI may incur substantial costs, no estimate of which is currently available.
Electric System Work Center
UI’s January 2004 purchase of its Electric System Work Center property, located in Shelton, Connecticut, caused a review under the CDEP’s Transfer Act Program. Under this review, the CDEP had an opportunity to examine the current environmental conditions at the site and direct remediation, or further remediation, of any areas of concern. At the conclusion of its review, the CDEP elected not to oversee any further site investigation or remediation at the site and directed UI to undertake any necessary evaluation and/or remediation (verification work) using an independent Licensed Environmental Professional (LEP). UI hired an LEP and submitted a schedule to the CDEP for the verification work. The schedule was approved by the CDEP and implementation of the verification work is on-going. The verification work is not expected to have a material impact on the financial position or results of operations of UI.
Claim of Dominion Energy Marketing, Inc.
On December 28, 2001, UI entered into an agreement with Virginia Electric and Power Company, which was subsequently assigned to its affiliate, Dominion Energy Marketing, Inc. (DEMI), for the supply of all of UI’s standard offer generation service needs from January 1, 2002 through December 31, 2003, and for the supply of all of UI’s generation service requirements for special contract customers through 2008 (Power Supply Agreement or PSA). In December 2004, UI received a letter from DEMI claiming that under the terms of this agreement, DEMI should not have been allocated “CT Reliability COS” charges related to reliability-must-run agreements between ISO-NE and NRG (the owner of power plants located in Connecticut that were formerly owned by Northeast Utilities) in an amount currently estimated at $8.2 million, plus interest. DEMI claims that such charges are fixed operation and maintenance costs, rather than “Transmission Congestion Costs” for which DEMI is responsible under the terms of the PSA. UI filed a complaint with the FERC requesting that it exercise jurisdiction and order DEMI to abide by the terms and conditions of the PSA and on May 13, 2005, the FERC issued an order granting UI’s request, finding that DEMI is responsible for the “CT Reliability COS” charges. DEMI filed a request for rehearing with the FERC, and on May 26, 2006, a FERC administrative law judge (ALJ) issued an initial decision finding DEMI responsible for the “CT Reliability COS” charges. DEMI subsequently took exception to the ALJ’s initial decision and requested that the Commission reconsider the initial decision. The Commission unanimously adopted the ALJ’s initial decision and held that DEMI is responsible for the “CT Reliability COS” charges. On March 22, 2007, DEMI filed a request for rehearing of the Commission’s order. On October 17, 2007, the FERC denied DEMI’s request for rehearing. There is a 60 day period within which DEMI may file an appeal in federal court. If UI is determined to be liable for these amounts to DEMI, UI would seek recovery of these amounts through the regulatory process.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
Gross Earnings Tax Assessment
On September 20, 2005, the Appellate Division of the Connecticut Department of Revenue Services (DRS) ruled against UI’s appeal of a gross earnings tax assessment made by the DRS as the result of an audit examination that covered the period July 1, 1998 through December 31, 2000. The assessment, in the amount of $0.1 million (including interest), is entirely attributable to activity within the year 2000 and arose as a result of changes to the gross earnings tax statutes enacted pursuant to Connecticut’s 1998 electric industry restructuring legislation. UI believes that the DRS has erroneously determined that the gross earnings tax statutes, as amended, apply to the following three specific categories of revenues: (1) late payment fees imposed on customers that do not pay their bills within the time specified in their terms of service; (2) returned check fees imposed on customers whose checks were returned to UI due to insufficient funds; and (3) reconnection fees paid by customers who request to have their premises reconnected to UI’s system.
UI has not paid the assessment and, on October 18, 2005, filed a lawsuit with the Superior Court for the State of Connecticut in order to appeal the DRS’s ruling. Because this issue has not been previously adjudicated, UI has recorded a reserve of $1.4 million, of which $0.2 million was recorded in 2007, representing UI’s total estimated liability for additional tax and interest covering: (1) the original audit period of July 1, 1998 through December 31, 2000; (2) a subsequent audit period of July 1, 2001 through June 30, 2004; and (3) the unaudited period of July 1, 2004 through September 30, 2007.
On April 17, 2006, the DRS filed a petition with the DPUC with respect to this matter, specifically seeking a declaratory ruling from the DPUC as to its position regarding the applicability of the gross earnings tax statutes for periods on and after January 1, 2000 to the three specific categories of revenue in question noted above. On August 30, 2006, the DPUC issued its final decision, which stated that although the applicable tax statute does not fall within the DPUC’s jurisdiction, the DPUC believes those specific categories of revenue should be subject to the gross earnings tax. UI disagrees with this interpretation of the applicable tax statute and, as mentioned above, is contesting the DRS’s ruling in the Superior Court of the State of Connecticut.
Property Tax Assessment
In the first quarter of 2007, UI received notice from the City of Bridgeport (the City) that the personal property tax assessment for October 1, 2006 had been increased from the amount declared by UI of $55.7 million to $69.7 million, based upon the assertion by the City that UI’s property tax declaration was not timely filed. UI mailed the declarations prior to the November 1, 2006 filing deadline, but the assessor asserts that the declarations were received after November 1, 2006 and were thus not timely filed. UI appealed the increased assessment to the Bridgeport Board of Assessment Appeal which denied the appeal. The increase in the personal property tax levied by the City equates to approximately $0.6 million. UI believes that its property tax declaration was filed on a timely basis under Connecticut law and is contesting the increased assessment in the Superior Court of the State of Connecticut. On July 31, 2007, UI paid the first half of its property tax obligations to the City, which included half of the increased assessment, or $0.3 million, in order to avoid any potential interest charges applicable to unpaid property tax assessments. UI has amended its complaint with the Superior Court to seek a refund of this $0.3 million payment. Accordingly, a receivable has been recorded within the Consolidated Balance Sheet.
Cross-Sound Cable Company, LLC
UIL Holdings and UCI continue to provide two guarantees, in original amounts of $2.5 million and $1.3 million, in support of guarantees by Hydro-Quebec (HQ), the former majority owner of Cross-Sound, to third parties in connection with the construction of the project.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
The $2.5 million guarantee supports an HQ guarantee to the Long Island Power Authority to provide for damages in the event of a delay in the date of achieving commercial operation of the Cross-Sound Cable. UIL Holdings expects commercial operating status to be maintained and, accordingly, it has not recorded a liability related to this guarantee in its Consolidated Balance Sheet as of September 30, 2007.
The $1.3 million guarantee supports an agreement under which Cross-Sound is providing compensation to shell fishermen for their losses, including loss of income, incurred as a result of the installation of the cable. The payments to the fishermen are being made over a 10-year period, ending October 2013, and the obligation under this guarantee reduces proportionately with each payment made. As of September 30, 2007, the remaining amount of the guarantee was $1 million. Based upon a management assessment, UIL Holdings has not recorded a liability related to this guarantee in its Consolidated Balance Sheet as of September 30, 2007.
(M) SEGMENT INFORMATION
UIL Holdings has two reporting segments related to UI: distribution of electricity and transmission of electricity. Revenues from inter-segment transactions are not material. All of UIL Holdings’ revenues are derived in the United States. The following measures of segment profit and loss are utilized by management for purposes of making decisions about allocating resources to the segments and assessing performance.
The following table reconciles certain segment information with that provided in UIL Holdings’ Consolidated Financial Statements. In the table, “Other” includes the information for the remainder of UIL Holdings’ non-utility businesses, including minority interest investments and administrative costs.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(M) SEGMENT INFORMATION | ||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||
Three Months Ended September 30, 2007 | ||||||||||||||||||||
UI | ||||||||||||||||||||
Distribution | Transmission | Total UI | Other (1) | Total | ||||||||||||||||
Operating Revenues | $ | 242,104 | $ | 25,766 | $ | 267,870 | $ | 5 | $ | 267,875 | ||||||||||
Fuel and Energy | 125,933 | - | 125,933 | - | 125,933 | |||||||||||||||
Operation and maintenance | 45,998 | 4,512 | 50,510 | 301 | 50,811 | |||||||||||||||
Transmission wholesale | - | 11,296 | 11,296 | - | 11,296 | |||||||||||||||
Depreciation and amortization | 24,247 | 1,211 | 25,458 | 8 | 25,466 | |||||||||||||||
Taxes - other than income taxes | 9,907 | 2,710 | 12,617 | - | 12,617 | |||||||||||||||
Operating Income (Loss) | 36,019 | 6,037 | 42,056 | (304 | ) | 41,752 | ||||||||||||||
Other Income and (Deductions), net | 3,382 | (100 | ) | 3,282 | 445 | 3,727 | ||||||||||||||
Interest Charges, net | 4,455 | 1,157 | 5,612 | 1,154 | 6,766 | |||||||||||||||
Income (Loss) From Continuing Operations Before Sale of | ||||||||||||||||||||
Equity Investments, Income Taxes and Equity Earnings | 34,946 | 4,780 | 39,726 | (1,013 | ) | 38,713 | ||||||||||||||
Gain (Losses) on sale of Equity Investments | - | - | - | - | - | |||||||||||||||
Income (Loss) From Continuing Operations Before Income | ||||||||||||||||||||
Taxes and Equity Earnings | 34,946 | 4,780 | 39,726 | (1,013 | ) | 38,713 | ||||||||||||||
Income Taxes (Benefits) | 14,240 | 1,679 | 15,919 | (177 | ) | 15,742 | ||||||||||||||
Income (Loss) From Continuing Operations Before Equity Earnings | 20,706 | 3,101 | 23,807 | (836 | ) | 22,971 | ||||||||||||||
Income (Losses) from Equity Investments | 7 | - | 7 | - | 7 | |||||||||||||||
Income (Loss) From Continuing Operations | 20,713 | 3,101 | 23,814 | (836 | ) | 22,978 | ||||||||||||||
Discontinued Operations, Net of Tax | - | - | - | (1,985 | ) | (1,985 | ) | |||||||||||||
Net Income (Loss) | $ | 20,713 | $ | 3,101 | $ | 23,814 | $ | (2,821 | ) | $ | 20,993 | |||||||||
Three Months Ended September 30, 2006 | ||||||||||||||||||||
UI | ||||||||||||||||||||
Distribution | Transmission | Total UI | Other (1) | Total | ||||||||||||||||
Operating Revenues | $ | 241,480 | $ | 19,660 | $ | 261,140 | $ | 4 | $ | 261,144 | ||||||||||
Fuel and Energy | 124,699 | - | 124,699 | - | 124,699 | |||||||||||||||
Operation and maintenance | 47,144 | 3,498 | 50,642 | 1,112 | 51,754 | |||||||||||||||
Transmission wholesale | - | 11,317 | 11,317 | - | 11,317 | |||||||||||||||
Depreciation and amortization | 19,796 | 1,268 | 21,064 | 1 | 21,065 | |||||||||||||||
Taxes - other than income taxes | 10,253 | 2,349 | 12,602 | 14 | 12,616 | |||||||||||||||
Operating Income (Loss) | 39,588 | 1,228 | 40,816 | (1,123 | ) | 39,693 | ||||||||||||||
Other Income and (Deductions), net | 3,192 | 399 | 3,591 | 1,225 | 4,816 | |||||||||||||||
Interest Charges, net | 4,386 | 640 | 5,026 | 1,073 | 6,099 | |||||||||||||||
Income (Loss) From Continuing Operations Before Sale of | ||||||||||||||||||||
Equity Investments, Income Taxes and Equity Earnings | 38,394 | 987 | 39,381 | (971 | ) | 38,410 | ||||||||||||||
Gain (Losses) on sale of Equity Investments | - | - | - | - | - | |||||||||||||||
Income (Loss) From Continuing Operations Before Income | ||||||||||||||||||||
Taxes and Equity Earnings | 38,394 | 987 | 39,381 | (971 | ) | 38,410 | ||||||||||||||
Income Taxes (Benefits) | 9,504 | 92 | 9,596 | (397 | ) | 9,199 | ||||||||||||||
Income (Loss) From Continuing Operations Before Equity Earnings | 28,890 | 895 | 29,785 | (574 | ) | 29,211 | ||||||||||||||
Income (Losses) from Equity Investments | 446 | - | 446 | - | 446 | |||||||||||||||
Income (Loss) From Continuing Operations | 29,336 | 895 | 30,231 | (574 | ) | 29,657 | ||||||||||||||
Discontinued Operations, Net of Tax | - | - | - | (17,858 | ) | (17,858 | ) | |||||||||||||
Net Income (Loss) | $ | 29,336 | $ | 895 | $ | 30,231 | $ | (18,432 | ) | $ | 11,799 | |||||||||
- 29 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
Nine Months Ended September 30, 2007 | ||||||||||||||||||||
UI | ||||||||||||||||||||
Distribution | Transmission | Total UI | Other (1) | Total | ||||||||||||||||
Operating Revenues | $ | 697,450 | $ | 61,715 | $ | 759,165 | $ | 13 | $ | 759,178 | ||||||||||
Fuel and Energy | 413,623 | - | 413,623 | - | 413,623 | |||||||||||||||
Operation and maintenance | 133,646 | 13,830 | 147,476 | 755 | 148,231 | |||||||||||||||
Transmission wholesale | - | 23,907 | 23,907 | - | 23,907 | |||||||||||||||
Depreciation and amortization | 62,369 | 3,607 | 65,976 | 24 | 66,000 | |||||||||||||||
Taxes - other than income taxes | 27,475 | 6,721 | 34,196 | - | 34,196 | |||||||||||||||
Operating Income (Loss) | 60,337 | 13,650 | 73,987 | (766 | ) | 73,221 | ||||||||||||||
Other Income and (Deductions), net | 7,341 | 1,176 | 8,517 | 2,043 | 10,560 | |||||||||||||||
Interest Charges, net | 12,813 | 2,826 | 15,639 | 3,349 | 18,988 | |||||||||||||||
Income (Loss) From Continuing Operations Before Sale of | ||||||||||||||||||||
Equity Investments, Income Taxes and Equity Earnings | 54,865 | 12,000 | 66,865 | (2,072 | ) | 64,793 | ||||||||||||||
Gain (Losses) on sale of Equity Investments | - | - | - | - | - | |||||||||||||||
Income (Loss) From Continuing Operations Before Income | ||||||||||||||||||||
Taxes and Equity Earnings | 54,865 | 12,000 | 66,865 | (2,072 | ) | 64,793 | ||||||||||||||
Income Taxes (Benefits) | 23,780 | 3,764 | 27,544 | (583 | ) | 26,961 | ||||||||||||||
Income (Loss) From Continuing Operations Before Equity Earnings | 31,085 | 8,236 | 39,321 | (1,489 | ) | 37,832 | ||||||||||||||
Income (Losses) from Equity Investments | 55 | - | 55 | - | 55 | |||||||||||||||
Income (Loss) From Continuing Operations | 31,140 | 8,236 | 39,376 | (1,489 | ) | 37,887 | ||||||||||||||
Discontinued Operations, Net of Tax | - | - | - | (1,745 | ) | (1,745 | ) | |||||||||||||
Net Income (Loss) | $ | 31,140 | $ | 8,236 | $ | 39,376 | $ | (3,234 | ) | $ | 36,142 | |||||||||
Nine Months Ended September 30, 2006 | ||||||||||||||||||||
UI | ||||||||||||||||||||
Distribution | Transmission | Total UI | Other (1) | Total | ||||||||||||||||
Operating Revenues | $ | 605,499 | $ | 55,655 | $ | 661,154 | $ | 13 | $ | 661,167 | ||||||||||
Fuel and Energy | 324,416 | - | 324,416 | - | 324,416 | |||||||||||||||
Operation and maintenance | 134,849 | 11,332 | 146,181 | 4,638 | 150,819 | |||||||||||||||
Transmission wholesale | - | 23,308 | 23,308 | - | 23,308 | |||||||||||||||
Depreciation and amortization | 50,845 | 3,712 | 54,557 | 5 | 54,562 | |||||||||||||||
Taxes - other than income taxes | 27,324 | 6,263 | 33,587 | 15 | 33,602 | |||||||||||||||
Operating Income (Loss) | 68,065 | 11,040 | 79,105 | (4,645 | ) | 74,460 | ||||||||||||||
Other Income and (Deductions), net | 7,225 | 1,073 | 8,298 | 2,710 | 11,008 | |||||||||||||||
Interest Charges, net | 12,698 | 1,806 | 14,504 | 3,834 | 18,338 | |||||||||||||||
Income (Loss) From Continuing Operations Before Sale of | ||||||||||||||||||||
Equity Investments, Income Taxes and Equity Earnings | 62,592 | 10,307 | 72,899 | (5,769 | ) | 67,130 | ||||||||||||||
Gain (Losses) on sale of Equity Investments | - | - | - | 18,908 | 18,908 | |||||||||||||||
Income (Loss) From Continuing Operations Before Income | ||||||||||||||||||||
Taxes and Equity Earnings | 62,592 | 10,307 | 72,899 | 13,139 | 86,038 | |||||||||||||||
Income Taxes (Benefits) | 20,244 | 3,610 | 23,854 | 5,560 | 29,414 | |||||||||||||||
Income (Loss) From Continuing Operations Before Equity Earnings | 42,348 | 6,697 | 49,045 | 7,579 | 56,624 | |||||||||||||||
Income (Losses) from Equity Investments | (369 | ) | - | (369 | ) | 473 | 104 | |||||||||||||
Income (Loss) From Continuing Operations | 41,979 | 6,697 | 48,676 | 8,052 | 56,728 | |||||||||||||||
Discontinued Operations, Net of Tax | - | - | - | (79,717 | ) | (79,717 | ) | |||||||||||||
Net Income (Loss) | $ | 41,979 | $ | 6,697 | $ | 48,676 | $ | (71,665 | ) | $ | (22,989 | ) | ||||||||
UI (2) | ||||||||||||||||||||
Distribution | Transmission | Total UI | Other (1) (3) | Total | ||||||||||||||||
Total Assets as of September 30, 2007 | $ | - | $ | - | $ | 1,692,054 | $ | 92,316 | $ | 1,784,370 | ||||||||||
Total Assets as of December 31, 2006 | $ | - | $ | - | $ | 1,496,948 | $ | 134,545 | $ | 1,631,493 | ||||||||||
(1) Include UIL Holdings Corporate and UIL Holdings' non-utility businesses. | ||||||||||||||||||||
(2) Information for segmenting total assets between Distribution and Transmission is not available. Total UI assets are disclosed in the Total UI column. | ||||||||||||||||||||
Net plant in service is segregated by segment and, as of September 30, 2007, was $525.7 million and $274.1 million for Distribution and Transmission, | ||||||||||||||||||||
respectively. As of December 31, 2006, net plant in service was $491.8 million and $155.1 million for Distribution and Transmission, respectively. | ||||||||||||||||||||
(3) Includes assets of discontinued operations held for sale. |
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
(N) DISCONTINUED OPERATIONS
UIL Holdings substantially completed its sale of the business of its wholly-owned subsidiary, Xcelecom effective December 31, 2006, and in accordance with the provisions of SFAS No. 144, the results of Xcelecom for the three and nine months ended September 30, 2007 and 2006 have been reported as discontinued operations in the accompanying Consolidated Statement of Income (Loss), and as discontinued operations held for sale in the Consolidated Balance Sheet as of September 30, 2007 and December 31, 2006.
A summary of the discontinued operations of Xcelecom follows (in thousands):
Three Months Ended September 30, 2007 | Three Months Ended September 30, 2006 | Nine Months Ended September 30, 2007 | Nine Months Ended September 30, 2006 | |||||||||||||
Net operating revenues | $ | 186 | $ | 88,537 | $ | 737 | $ | 284,105 | ||||||||
Operating income (loss) | $ | (685 | ) | $ | (3,050 | ) | $ | (1,494 | ) | (103,802 | ) | |||||
Income (loss) before income taxes | $ | (3,260 | ) | $ | (26,462 | ) | $ | (2,978 | ) | $ | (127,646 | ) | ||||
Income tax benefit (expense) | 1,275 | 8,031 | 1,233 | 47,865 | ||||||||||||
Income (loss) from discontinued operations, net of tax, excluding gain (loss) on sales | $ | (1,985 | ) | $ | (18,431 | ) | $ | (1,745 | ) | $ | (79,781 | ) | ||||
Gain on sale of Government Center Thermal Energy Partnership, net of tax | - | - | - | 705 | ||||||||||||
Loss on sale of assets of M.J. Daly & Sons, Incorporated, net of tax | - | (174 | ) | - | (1,388 | ) | ||||||||||
Gain on sale of subsidiary, the Systems Integration companies, net of tax | - | 747 | - | 747 | ||||||||||||
Net income (loss) from discontinued operations | $ | (1,985 | ) | $ | (17,858 | ) | $ | (1,745 | ) | $ | (79,717 | ) |
UIL Holdings is contingently liable to sureties on performance and payment bonds issued by those sureties, relating to construction projects entered into by Xcelecom and its subsidiaries in the normal course of business. These bonds provide a guarantee to the customer that Xcelecom or its subsidiaries will perform under the terms of a contract and that it will pay subcontractors and vendors. Surety bonds remain outstanding on certain projects being completed by Xcelecom’s former companies. The majority of these contingent commitments will expire within the next three months. If Xcelecom’s former companies and the buyers of those companies fail to perform under a contract or to pay subcontractors or vendors, the customer may demand that the surety make payments or provide services under the bond. UIL Holdings must reimburse the surety for any expenses or outlays it incurs and seek recoupment of those expenses from the buyers of Xcelecom’s former companies. Sureties have never been required to make payments on Xcelecom’s behalf under the bonds, and UIL Holdings believes that the buyers of Xcelecom’s former companies have every incentive to continue to perform their obligations on the construction projects and have adequate management and other resources to do so. Accordingly, UIL Holdings concluded that it need not record a liability in connection with these obligations in its Consolidated Balance Sheet as of September 30, 2007. As of September 30, 2007, sureties had issued bonds for the account of Xcelecom in the aggregate amount of approximately $188.9 million. The expected remaining costs to complete for the projects covered by such surety bonds was approximately $30.4 million as of September 30, 2007.
Xcelecom recognizes certain significant claims for recovery of incurred costs when (1) it is probable that the claim will result in additional contract revenue, (2) when the amount of the claim can be reasonably estimated, and (3) when it is determined that there is legal basis for the claim. Such amounts are recorded at estimated net realizable value and take into account factors that may affect Xcelecom’s ability to bill unbilled revenues and collect amounts
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)
after billing. Receivables, related to claims, of $1.2 million are included in current assets of discontinued operations held for sale as of September 30, 2007 and December 31, 2006. In addition, UIL Holdings has the right to certain claims related to the sales of the Xcelecom businesses that are not included in the accompanying statement of Consolidated Statement of Income (Loss) as of September 30, 2007.
Financial results going forward could be positively or negatively impacted by the following Xcelecom contractual divestiture issues: (1) the completion of certain outstanding projects for which UIL Holdings retained financial responsibility, (2) the collection of certain accounts receivables and promissory notes related to the sales of certain Xcelecom companies, and (3) resolution of certain transitional financial issues. UIL Holdings also has exposure (a) relating to its indemnification obligations to the buyers of the former Xcelecom companies under the agreements relating to the sales of those companies, and (b) to the sureties that have provided performance bonds to certain former Xcelecom companies related to projects bid or awarded prior to the sales of those companies.
In March 2007, UIL Holdings and Xcelecom entered into a prepayment agreement with the buyer of Terry’s Electric, Inc., (Terry’s) which the buyer purchased from Xcelecom in November 2006. Under the terms of the agreement, UIL Holdings received $2.5 million in settlement of all obligations of the buyer under the agreement pursuant to which Terry’s was sold. This resulted in an after-tax gain of $0.4 million, which is reported as discontinued operations in the accompanying Consolidated Statement of Income (Loss) for the nine months ended September 30, 2007.
On September 28, 2007, UIL Holdings and Xcelecom entered into a settlement agreement and second amendment to the December 29, 2006 Securities Purchase Agreement with SAIDS LLC (SAIDS), the buyer of Xcelecom subsidiary, Allan/Brite-Way Electrical Contractors, Inc. Under the terms of the agreement, UIL Holdings received $0.5 million in settlement of certain obligations of the parties to each other. Collections from certain project claims, accounts receivable and retention balances will be allocated to UIL Holdings. This settlement had no impact on the accompanying Consolidated Statement of Income (Loss) for the nine months ended September 30, 2007.
On October 23, 2007, UIL Holdings and Xcelecom entered into a settlement agreement and first amendment to the December 29, 2006 Securities Purchase Agreement with Phalcon, Ltd, the buyer of Xcelecom subsidiaries, JBL Electric, Inc., JE Richards, Inc. and McPhee Electric Ltd., LLC. Under the terms of the agreement, UIL Holdings received $7.3 million in settlement of outstanding notes receivable, interest receivable and certain obligations of the parties to each other. UIL Holdings will retain 50% of the interest in certain outstanding project claims. This settlement resulted in an after-tax loss of $1.6 million, which is reported as discontinued operations in the accompanying Consolidated Statement of Income (Loss) for the nine months ended September 30, 2007.
The aforementioned settlements significantly reduce the risks faced by UIL Holdings and Xcelecom in regards to among other things, the completion of certain outstanding projects, job cost degradation and collection of accounts receivable. In addition, the settlement accelerated the payment of certain notes receivable which were scheduled to be collected through 2010.
- 32 -
Certain statements contained herein, regarding matters that are not historical facts, are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These include statements regarding management’s intentions, plans, beliefs, expectations or forecasts for the future. Such forward-looking statements are based on UIL Holdings’ expectations and involve risks and uncertainties; consequently, actual results may differ materially from those expressed or implied in the statements. Such risks and uncertainties include, but are not limited to, general economic conditions, legislative and regulatory changes, changes in demand for electricity and other products and services, unanticipated weather conditions, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental, and technological factors affecting the operations, markets, products and services of UIL Holdings’ subsidiary, The United Illuminating Company. The foregoing and other factors are discussed and should be reviewed in UIL Holdings’ most recent Annual Report on Form 10-K and other subsequent periodic filings with the Securities and Exchange Commission. Forward-looking statements included herein speak only as of the date hereof and UIL Holdings undertakes no obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or circumstances.
MAJOR INFLUENCES ON FINANCIAL CONDITION
UIL Holdings Corporation
UIL Holdings’ financial condition and financing capability will be dependent on many factors, including the level of income and cash flow of UIL Holdings’ subsidiaries, conditions in the securities markets, economic conditions, interest rates, legislative and regulatory developments, and its ability to retain key personnel.
The loss of key personnel or the inability to hire and retain qualified employees could have an adverse effect on the business, financial condition and results of operations for UIL Holdings and its operating subsidiary, UI. These operations depend on the continued efforts of UI’s current and future executive officers, senior management and management personnel. UIL Holdings cannot guarantee that any member of management will continue to serve in any capacity for any particular period of time. In an effort to enhance UIL Holdings’ ability to attract and retain qualified personnel, UIL Holdings regularly evaluates the overall compensation packages offered to employees at all levels of the organization.
The United Illuminating Company
UI is an electric transmission and distribution utility whose structure and operations are significantly affected by legislation and regulation. UI’s rates and authorized return on equity are regulated by the Federal Energy Regulation Commission (FERC) and the Connecticut Department of Public Utility Control (DPUC). Legislation and regulatory decisions implementing legislation establish a framework for UI’s operations. Other factors affecting UI’s financial results are operational matters such as sales volume and ability to control expenses, major weather disturbances, and capital expenditures. UI expects significant growth in its capital investment in its distribution and transmission infrastructure. UI is constructing its portion of a major transmission line in southwest Connecticut and is also constructing a substation in Trumbull, Connecticut.
Legislation & Regulation
Background
State legislation has significantly restructured the electric utility industry in Connecticut, commencing with Public Act 98-28, continuing with Public Act 03-135, as amended in part by Public Act 03-221, Public Act 05-1 (June Special Session), and most recently with Public Act 07-242 (collectively, the Restructuring Legislation). Since 2000, UI’s retail customers have been able to choose their electricity suppliers. On and after January 1, 2007, UI is required to provide standard service to customers who do not purchase power from an alternate retail electric supplier and who do not have demand meters or whose maximum demand is less than 500 kilowatts, and supplier of last resort service to customers who are not eligible for standard service and who do not choose an alternate electric supplier. UI has procured power to serve its standard service requirements for all of 2007, and a portion of its standard service requirements for 2008. UI has procured supplier of last resort service for all of 2007. The
- 33 -
procurement of these services was undertaken in accordance with statutory and DPUC requirements. The Restructuring Legislation provides for UI to recover its costs of acquiring and providing generation services to customers who do not choose an alternate electric supplier. Electric suppliers must meet renewable portfolio standards.
Connecticut Public Act 05-01 (the Energy Independence Act or EIA) became law in July 2005. The EIA adds to the items included in the definition of Federally Mandated Congestion Charges (FMCCs); provides for incentives to promote the development of projects and resources that are intended to reduce FMCCs; provides for the recovery by UI of the costs of such incentives through the FMCC rate component on retail customers’ bills; makes certain changes to the prior electric restructuring legislation in the state; and makes other changes to the statutes administered by the DPUC. In general, the DPUC is authorized by the EIA to identify and implement measures intended to reduce FMCCs, both in the near- and long-term. These measures can include incentives for the development of distributed resources, new generation and contracts for capacity rights from generation, and conservation and energy efficiency measures to be entered into by electric distribution companies such as UI after a request for proposal process administered by the DPUC. The EIA establishes Class III renewable energy resources and related portfolio standards for generation services, in addition to the existing Class I and Class II renewable energy resources and portfolio standards. The EIA provides for the waiving of electric back-up rates and gas delivery charges for qualifying customer-side distributed resources, with recovery of electric distribution company costs through the FMCC rate component of bills.
Pursuant to the EIA, the DPUC initiated a process to solicit bids to create new or incremental capacity resources in order to reduce federally mandated congestion charges. In August 2007, the DPUC approved four contracts for differences under which each contract specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price. As directed by the DPUC, UI executed two of the contracts and The Connecticut Light and Power Company (CL&P) executed the other two contracts. Simultaneously, UI executed a sharing agreement with CL&P whereby UI pays 20% of the costs and obtains 20% of the benefits of the contracts. The DPUC has confirmed that costs associated with these contracts for difference would be recoverable by UI and CL&P. An appeal of the DPUC decision approving the contracts for difference was filed by an entity that had submitted a proposal to the DPUC that was not selected, and is presently pending.
Connecticut Public Act 07-242, “An Act Concerning Electricity and Energy Efficiency” (2007 Energy Act), consisting of more than 100 sections, became law in June 2007. The 2007 Energy Act, among other things, provides for the state’s two electric distribution companies to submit a comprehensive resource procurement plan to the DPUC by January 2008, to file plans in January 2008 to build peaking generation on a regulated cost of service basis for consideration by the DPUC, to purchase existing generation assets with DPUC approval, to submit competitive proposals to build generation, and to be the builder of generation on a last resort basis on a regulated cost of service basis if other means of meeting the state’s resource needs are not acceptable to the DPUC. The reasonable costs of preparing the resource plan and of regulated generation plans are recoverable by the electric distribution companies. The 2007 Energy Act also provides for the DPUC to order decoupling of an electric distribution company’s revenues from the company’s sales, through rate design changes or a sales adjustment clause or both, at the time of the company’s next rate proceeding, and to consider in that rate case determination whether any adjustment in the company’s authorized return on equity should be made as a result of the decoupling. A decoupling order should reduce or eliminate adverse impacts on electric distribution companies of reduced sales revenues resulting from implementing the energy efficiency and conservation programs promoted by the 2007 Energy Act and prior years’ legislation. The 2007 Energy Act establishes and expands programs promoting distributed generation, renewable source generation, energy efficiency programs and fuel cells, and provides generally for an electric distribution company’s recovery of its reasonable costs incurred in connection with such programs. In addition, the 2007 Energy Act establishes “Energy Improvement Districts,” which can be utilized by municipalities to plan, finance and support the development of distributed resources to serve customers within the municipality’s Energy Improvement District. The DPUC has established regulatory dockets to implement the 2007 Energy Act. UI cannot at this time estimate the impact of the 2007 Energy Act. UI is participating in the DPUC’s implementation proceedings.
Pursuant to the 2007 Energy Act, the DPUC approved a plan to offer a conservation incentive program (Summer Savers Program) to all of UI’s customers. Customers can earn a credit of 10%, 15% or 20% off the generation portion of their electric bill for the months of July through September 2007 if they reduce their electric consumption, weather adjusted, during those months as compared to the same period of 2006. UI estimates that the customer credits, which will be applied to customers’ bills during the November billing period, total $4.5 million.
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Accordingly, a payable has been recorded on the Consolidated Balance Sheet. The credits are recoverable through Systems Benefits Charge (SBC) rates, therefore, there is no impact on net income.
2007 Rates
On December 19, 2006, the DPUC issued a decision implementing UI’s 2007 rate increase and established customers’ Generation Services Charge (GSC) for the first six months of 2007 to reflect the cost of wholesale power supply procured by UI to provide standard service and supplier of last resort service. The decision implements a settlement between UI and the Prosecutorial unit of the DPUC staff that, in addition to implementation of new distribution and GSC rates, provides short-term measures to mitigate the impact of these rate increases on residential
customers. Under the settlement and decision, UI is recovering its power procurement costs and distribution rates in their entirety, along with the costs associated with these mitigation measures. During the first two quarters of 2007, UI implemented the 2007 rate increase in accordance with the terms of the final decision. On July 1, 2007, revised retail rates became effective, reflecting new GSC rates for standard service and supplier of last resort, resulting from UI’s most recent power procurement, as described below. A $2.3 million increase to SBC rates was approved in August 2007 for implementation effective January 1, 2008.
Pension and Postretirement Expenses
In February 2007, the Internal Revenue Service mandated a change in the mortality tables utilized for certain ERISA-related liability calculations, effective January 1, 2007. As a result, UI made a corresponding change to its mortality table assumption used to determine pension and postretirement expense for accounting purposes. This change resulted in an increase to pension and postretirement expenses of approximately $1.8 million annually. In its last rate case, UI requested regulatory asset treatment for the increase in pension and postretirement expenses if, and when, the Internal Revenue Service mandated a change in the mortality tables during the 2006 to 2009 period. On August 1, 2007, in response to a UI request for clarification, the DPUC confirmed that it would be appropriate for UI to set up a regulatory asset for the change in such expenses resulting from the use of the new mortality tables. In the second quarter, UI deferred approximately $0.9 million of pension and postretirement expense and set up a regulatory asset, reflecting the increase in costs from January 1, 2007 through June 30, 2007. During the third quarter, UI deferred approximately $0.5 million of additional pension and postretirement expense. UI will continue to defer the incremental pension and postretirement costs resulting from the change in the mortality tables until its next rate case and believes it is probable that the regulatory asset will be recovered.
Other Regulation
UI filed a revised local network service transmission tariff which was approved by the FERC in the fourth quarter of 2005. The revised transmission tariff will allow UI to recover its transmission revenue requirements on a prospective basis, subject to reconciliation with actual revenue requirements. The revised tariff will reduce the lag between the time transmission-related costs are incurred and the period in which rates are effective. In addition, UI received approval to include in the transmission rate base 50% of new construction work in progress related to new transmission facilities, which include the project to construct a 345-kV transmission line from Middletown, Connecticut, to Norwalk, Connecticut, and which will improve cash flow during design and construction of that transmission facility.
On March 23, 2007, UI filed with the FERC to obtain incentive rate treatment for costs associated with the Middletown/Norwalk project. In particular, UI sought approval for (1) the inclusion of 100% of construction work in progress (CWIP) in the transmission rate base, as opposed to the 50% previously approved, and (2) a 50 basis point ROE adder for the project’s use of advanced transmission technologies. A FERC order was issued on May 22, 2007, which accepted UI’s request for the inclusion of 100% of CWIP in rate base and partially accepted a 50 basis point adder for advanced transmission technologies, which will only be applied to certain of the technologies that will be used in the construction of the project. UI estimates that approximately 50% of the project costs represent the advanced transmission technologies with respect to which the 50 basis point adder was approved by the FERC. In June 2007, the DPUC and other interveners filed requests for rehearing of the FERC order granting UI these incentives. On July 23, 2007, the FERC granted rehearing, but has not yet issued a substantive order. On September 25, 2007, UI filed a requested clarification of the tariff with the FERC, reflecting all applicable incentives. The comment period has now passed, with no comment filed.
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On August 29, 2007, the DPUC issued its final decision on UI’s 2006 Competitive Transition Assessment (CTA)/SBC Reconciliation filing. In the decision, the DPUC approved UI’s 2006 reconciliation filing and a $2.3 million rate increase to recover incurred uncollectibles expenses associated with hardship customers within SBC. In addition, the decision discontinued revenue transfers between CTA and SBC effective January 1, 2007. Prior to January 1, 2007, any difference in SBC revenues and expenses were funded through a revenue transfer from the CTA. Subsequent to January 1, 2007, differences in SBC revenues and expenses will be deferred for true-up in the next annual CTA/SBC Reconciliation filing. This change did not have an impact on the Consolidated Statement of Income (Loss) for the nine months ended September 30, 2007.
Generation
On October 17, 2007, UI entered into a joint development agreement (the Agreement) with NRG Energy, Inc. (NRG), pursuant to which UI and NRG have agreed to work together on an exclusive basis to develop and submit to the DPUC a joint proposal to construct peaking generation in Connecticut. The joint proposal would be submitted in response to the 2007 Energy Act, which requires UI to submit a proposal to construct peaking generation.
The Agreement provides that UI and NRG will use their reasonable best efforts to submit a joint proposal to the DPUC during January 2008 as required by the 2007 Energy Act and work together in connection with the DPUC approval process following submission of the proposal. The details of the joint proposal are subject to the mutual agreement of UI and NRG. In the event that the DPUC accepts a joint proposal submitted by the parties, the Agreement contemplates that UI and NRG would each hold a 50% ownership interest in the peaking generation facilities, which would be located on sites in Connecticut. The Agreement also provides that certain expenses incurred in connection with the joint proposal will be shared equally by the parties.
Operations
In January 2004, upon implementing the Restructuring Legislation, UI established a Distribution Division and other “unbundled” components for accounting purposes, to reflect the various unbundled components on customer bills. Initially, the Distribution Division included both transmission and distribution. For regulatory and accounting purposes, UI has now separated transmission and distribution into separate divisions. Changes to income and expense items related to distribution have a direct impact on net income and earnings per share.
Changes to items in “other unbundled utility components” do not have an impact on net income and earnings per share. The other unbundled components are Transmission (TRAN), the CTA, the SBC, the GSC, the Conservation and Load Management (C&LM) charge, and the Renewable Energy Investment (REI) charge. TRAN earns an allowed return on the equity portion of its rate base. UI is estimating an overall allowed weighted-average return on equity of 11.99% for the year ended December 31, 2007. The CTA earns a 9.75% return on the equity portion of its rate base. The return is achieved either by accruing additional amortization expenses, or by deferring such expenses, as required to achieve the authorized return. Amortization expenses in the CTA component impact earnings indirectly as a result of changes to the CTA rate base. The SBC, GSC, the C&LM charge and the REI charge are essentially pass-through components (revenues are matched to recover costs).
In 2003, legislation provided for UI to collect a fee of $0.0005/kilowatt-hour from transitional standard offer service customers, beginning January 1, 2004, and continuing through December 31, 2006, as compensation for providing transitional standard offer service. This fee was 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 2006, these fees generated approximately $2.8 million in revenue. The legislation also provided 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 was lower than the average, the legislation provided 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 had earned the incentive fee applicable to the year 2004, which amounted to approximately $1.4 million and was recognized in income in 2005. The draft decision did not address the incentive related to 2005. The hearing was subsequently reopened to consider objections raised by the Office of Consumer Counsel. The DPUC engaged a consultant who has issued a report indicating that UI is not entitled to the incentive. UI intends to contest
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the consultant’s methodology and conclusion. A hearing date has been set for early December 2007, with a final decision in February 2008. UI has not recognized the 2005 and 2006 incentive in income.
Power Supply Arrangements
UI must procure its standard service power pursuant to a procurement plan approved by the DPUC. UI works closely with a third party consultant retained by the DPUC in the procurement process for standard service and supplier of last resort service and in recommending bids to the DPUC.
UI has now conducted four rounds of solicitation, the most recent in October 2007 for standard service and supplier of last resort service. As a result of these procurements, UI has wholesale power supply agreements in place for the supply of all of UI’s standard service customers for the remainder of 2007 and all of 2008. UI has power supply agreements in place for supplier of last resort service for the remainder of 2007 and the first quarter of 2008. Under Connecticut legislation passed in 2007, supplier of last resort service will be procured on a quarterly basis going forward.
On December 28, 2001, UI entered into an agreement with Virginia Electric and Power Company, subsequently assigned to its affiliate Dominion Energy Marketing, Inc. (DEMI), for the supply of all of UI’s generation service requirements through 2008 for certain customers who entered into long-term special contracts with UI prior to the enactment of the 1998 restructuring legislation. Through contract expirations or customers choosing an alternate supplier to supply generation service requirements, these requirements expired in August 2007.
Competitive Transition Assessment
UI’s CTA collection recovers costs that have been reasonably incurred, or will be incurred, to meet its public service obligations and that will likely not otherwise be recoverable in a competitive market. These “stranded costs” include above-market long-term purchased power contract obligations, regulatory asset recovery and above-market investments in power plants. A significant amount of UI’s earnings is generated by the authorized return on the equity portion of unamortized stranded costs in the CTA rate base. UI’s after-tax earnings attributable to CTA for the nine months ended September 30, 2007 and 2006 were $8 million and $8.6 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 $25.4 million and $20.6 million for the nine months ended September 30, 2007 and 2006, respectively. The CTA rate base has declined from year to year for a number of reasons, including: amortization of stranded costs, the sale of UI’s nuclear units, and adjustments made through the annual DPUC review process. The original rate base component of stranded costs, as of January 1, 2000, was $433 million. It has since declined to $216 million at September 30, 2007. In the future, UI’s CTA earnings will decrease while, based on UI’s current projections, cash flow will remain fairly constant after the expiration of the Bridgeport RESCO generating facility contract on December 31, 2008, until stranded costs are fully amortized by 2015. The date by which stranded costs are fully amortized depends primarily upon the DPUC’s future decisions which could affect future rates of stranded cost amortization.
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 (kV) transmission line from Middletown, Connecticut, to Norwalk, Connecticut, which was jointly proposed by UI and The Connecticut Light and Power Company (CL&P). This project is expected to improve the reliability of the transmission system in southwest Connecticut.
UI will construct, own, and operate transmission and substation facilities comprising approximately 20% of the total project cost. UI’s current estimate for its share of the project cost is approximately $255 million to $285 million (excluding allowance for funds used during construction). Based on the current projected schedule of construction, the project is expected to be complete in 2009. Upon project completion, UI’s transmission rate base will have increased by approximately $260 million to $290 million, an increase of more than 200% relative to UI’s net
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transmission assets existing prior to the project receiving CSC approval. For project costs incurred prior to August 8, 2005, the FERC approved UI’s request to include 50% of those construction work in progress (CWIP) expenditures in the rate base, allowing a return to be earned on that portion of UI’s investment before the project is completed. UI will commence earning a return on the remaining 50% of the project costs incurred prior to that date when those costs are added to the rate base in conjunction with the investment being placed in service. For project costs incurred after August 8, 2005, the FERC approved UI’s request to include 100% of those CWIP expenditures in rate base, effective as of May 23, 2007. UI’s costs for the project are expected to be included in and recovered through transmission revenues requirements, which are under FERC jurisdiction.
Procurement of most of the major project components has been completed and all significant project approvals have been received. Construction of the 345-kV transmission line and associated facilities is nearly 50% completed. The Project team is preparing its transmission cost allocation application for submittal to ISO-NE by the end of 2007.
Appeals to the Connecticut Superior Court were taken by three groups of entities, each of whom contested the CSC’s decision with respect to the location and construction of the line in two areas along the project route but did not contest the need for the project and did not seek a stay of the CSC decision. Two of these appeals have been resolved and withdrawn and a settlement agreement has been executed with the third group of entities. Two more recent appeals, which were filed by property owners along one portion of the line, were dismissed by the Superior Court. One of the appellants has appealed that dismissal. Several property owners have initiated lawsuits against CL&P and UI with respect to CL&P’s construction of its portion of the project. The lawsuits are unrelated to UI’s portion of the project.
Xcelecom, Inc.
With the substantial completion of the divestiture of Xcelecom, UIL Holdings is no longer subject to the same level of operating risk factors that affected the financial results of Xcelecom in prior reporting periods. Financial results could be positively or negatively impacted by the following Xcelecom contractual divestiture issues: (1) the completion of certain outstanding projects for which UIL Holdings retained financial responsibility, (2) the collection of certain accounts receivables and promissory notes related to the sales of certain Xcelecom companies, and (3) resolution of certain transitional financial issues. UIL Holdings also has exposure relating to (a) its indemnification obligations to the buyers of the former Xcelecom companies under the agreements relating to the sales of those companies, and (b) the sureties that have provided performance bonds to certain former Xcelecom companies related to projects bid or awarded prior to the sales of those companies.
As a result of capital losses incurred during 2006 related to the Xcelecom divestiture, UIL Holdings has filed a refund request with the IRS to carryback a portion of these capital losses to prior years to offset capital gains on which UIL Holdings previously paid federal income taxes. The total amount of the refund request was $26.5 million, of which $6.1 million was received in October 2007. UIL Holdings expects to receive the remaining $20.4 million in the fourth quarter of 2007.
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LIQUIDITY AND CAPITAL RESOURCES
UIL Holdings generates its capital resources primarily through operations. At September 30, 2007, UIL Holdings had $52.7 million of unrestricted cash and temporary cash investments. This represents a decrease of $10.7 million from the corresponding balance at December 31, 2006. The components of this decrease, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows:
(In Millions) | ||||
Balance, December 31, 2006 | $ | 63.4 | ||
Net cash provide by operating activities | 70.0 | |||
Net cash provided by (used in) investing activities: | ||||
Restricted cash | 0.1 | |||
Proceeds from sale of Steel Point | 4.6 | |||
Proceeds from Terry’s Electric, Inc. settlement | 2.5 | |||
Cash invested in plant - net of AFUDC debt | (160.7 | ) | ||
(153.5 | ) | |||
Net cash provided by (used in) financing activities: | ||||
Financing activities, excluding dividend payments | 96.6 | |||
Dividend payments | (21.6 | ) | ||
75.0 | ||||
Net change in cash | (8.5 | ) | ||
Balance, September 30, 2007 | $ | 54.9 | ||
Less cash and temporary cash investments of discontinued operations at end of period | 2.2 | |||
Continuing operations balance, September 30, 2007 | $ | 52.7 |
The unrestricted cash position of UIL Holdings decreased by $10.7 million from December 31, 2006 to September 30, 2007, as cash used in investing activities consisted primarily of capital expenditures of $160.7 million. Cash provided by financing activities during the first nine months included $100 million from long-term debt, partially offset by the quarterly dividend payments on UIL Holdings common stock totaling $21.6 million and a $4.3 million principal payment on UIL Holdings’ long-term debt.
UIL Holdings also accesses capital through both long-term and short-term financing arrangements. Total current and long-term debt outstanding as of September 30, 2007 was $582.6 million, as compared to $486.9 million as of December 31, 2006. UI entered into a Note Purchase Agreement in the principal amount of $175 million, of which $100 million was funded on September 30, 2007 and $75 million is expected to be funded on December 6, 2007, subject to certain conditions. UI and UIL Holdings also have a short-term credit facility under which UI and UIL Holdings have aggregate borrowing capacity totaling $175 million, with $50 million of the limit available for UIL Holdings. Pursuant to the agreement, UI will not be liable for any borrowings incurred by UIL Holdings. UI had a standby letter of credit outstanding in the amount of $3 million as of September 30, 2007. UIL Holdings had a standby letter of credit outstanding in the amount of $2.6 million as of September 30, 2007. This standby letter of credit also reduces the amount of credit available for UI under the credit facility. Available credit for UI at September 30, 2007 was $169 million, of which $47 million of that amount is available for UIL Holdings.
All capital requirements that exceed available cash will have to be provided by external financing. Although there is no commitment to provide such financing from any source of funds, other than the short-term credit facilities and Note Purchase Agreement discussed above, future external financing needs are expected to be satisfied by the issuance of additional short-term and long-term debt. The continued availability of these methods of financing will be dependent on many factors, including conditions in the securities markets, economic conditions, and future income and cash flow. See Part I, Item 1, “Financial Statements - Notes to Consolidated Financial Statements – Note (B), Capitalization and Note (D), Short-Term Credit Arrangements” of this Form 10-Q and UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2006, for a discussion of UIL Holdings’ financing arrangements.
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Financial Covenants
UIL Holdings and its operating subsidiary, UI, are required to comply with certain covenants in connection with their respective loan agreements. The covenants are normal and customary in bank and loan agreements.
2007 Capital Resource Program
There have been no material changes in UIL Holdings’ 2007 capital resource projections from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Contractual and Contingent Obligations
There have been no material changes in UIL Holdings’ 2007 contractual and contingent obligations from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
CRITICAL ACCOUNTING POLICIES
UIL Holdings’ Consolidated Financial Statements are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. UIL Holdings believes that investors need to be aware of these policies and how they impact UIL Holdings’ financial reporting to gain a more complete understanding of UIL Holdings’ Consolidated Financial Statements as a whole, as well as management’s related discussion and analysis presented herein. While UIL Holdings believes that these accounting policies are grounded on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in UIL Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31, 2006 are those that depend most heavily on these judgments and estimates. At September 30, 2007, there have been no material changes to any of the Critical Accounting Policies described therein, except for the adoption of FIN 48. See Part I, Item 1, “Financial Statements – Notes to Consolidated Financial Statements – Note (A), Statement of Accounting Policies – Income Taxes.”
OFF-BALANCE SHEET ARRANGEMENTS
UIL Holdings and its subsidiaries occasionally enter into guarantee contracts in the ordinary course of business. At the time a guarantee is provided, an analysis is performed to assess the expected financial impact, if any, based on the likelihood of certain events occurring that would require UIL Holdings to perform under such guarantee. Subsequent analysis is performed on a periodic basis to assess the impact of any changes in events or circumstances. If such an analysis results in an amount that is inconsequential, no liability is recorded on the balance sheet related to the guarantee. As of September 30, 2007, UIL Holdings had certain guarantee contracts outstanding for which no liability has been recorded in the Consolidated Financial Statements. See Part I, Item 1, “Financial Statements – Notes to Consolidated Financial Statements – Note (J), Commitments and Contingencies,” of this Form 10-Q for further discussion of such guarantees.
NEW ACCOUNTING STANDARDS
UIL Holdings reviews new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have. As of the filing of this Quarterly Report on Form 10-Q, there were no new accounting standards issued that were projected to have a material impact on UIL Holdings’ Consolidated Balance Sheet, Consolidated Statement of Income (Loss) or liquidity. Refer to Part I, Item 1, “Financial Statements – Notes to Consolidated Financial Statements – Note (A), Statement of Accounting Policies – New Accounting Standards,” for further discussion regarding new accounting standards.
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RESULTS OF OPERATIONS
Use of Non-GAAP Measures
Within the “Results of Operations” section of this Quarterly Report on Form 10-Q, tabular presentations showing a comparison of UIL Holdings’ net income and earnings per share (EPS) for the three and nine months ended September 30, 2007 and 2006 are provided. The amounts presented show the earnings per share from continuing operations for each of UIL Holdings’ lines of business, calculated by dividing the income from continuing operations of each line of business by the average number of shares of UIL Holdings common stock outstanding for the periods presented. The earnings per share tables presented in “The United Illuminating Company Results of Operations” and “Non-Utility Results of Operations” for all periods presented are calculated on the same basis and reconcile to the amounts presented in the table under the heading “UIL Holdings Corporation Results of Operations.” UIL Holdings believes this information is useful in understanding the fluctuations in earnings per share between the current and prior year periods. The total earnings per share from continuing operations and discontinued operations in the table presented under the heading “UIL Holdings Corporation Results of Operations” are presented on a GAAP basis.
In discussing the results of operations, UIL Holdings also believes that a breakdown, presented on a per share basis, of how particular significant items contributed to the change in income from continuing operations by line of business (Item Variance EPS Presentation) is useful in understanding the overall change in the consolidated results of operations for UIL Holdings from one reporting period to another. UIL Holdings presents such per share amounts by taking the dollar amount of the applicable change for the revenue or expense item, booked in accordance with GAAP, and applying UIL Holdings’ combined effective statutory federal and state tax rate. See Item 1, “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note (E), Income Taxes” of this Form 10-Q for details of UIL Holdings’ combined effective statutory tax rate to obtain the after-tax impact of the item. The after-tax amount is then divided by the average number of shares of UIL Holdings’ common stock outstanding for the period presented. Any amounts provided as Item Variance EPS Presentation are provided for informational purposes only and are not intended to be used to calculate “Pro-Forma” amounts.
Third Quarter 2007 vs. Third Quarter 2006
UIL Holdings Corporation Results of Operations: Third Quarter 2007 vs. Third Quarter 2006
UIL Holdings’ earnings from continuing operations were $22.9 million, or $0.92 per share, for the third quarter of 2007, a decrease of $6.7 million, or $0.29 per share, compared to the third quarter of 2006. The decrease in earnings was primarily due to the absence in 2007 of non-recurring earnings recorded in 2006 of $6.5 million, or $0.27 per share, due to reversal of accumulated deferred investment tax credits and excess deferred federal income taxes resulting from a final decision from the DPUC in regards to the Private Letter Ruling (PLR) issued by the Internal Revenue Service (IRS). Loss from discontinued operations was $2.0 million, or $0.08 per share, for the third quarter of 2007, an improvement of $15.8 million or $0.65 per share, compared to the third quarter of 2006. Total earnings, including discontinued operations, were $20.9 million, or $0.84 per share, for the third quarter of 2007, an increase of $9.1 million, or $0.36 per share, compared to the third quarter of 2006.
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The table below represents a comparison of UIL Holdings’ Net Income (Loss) and Earnings per Share (EPS) for the third quarter of 2007 and the third quarter of 2006.
2007 more (less) than 2006 | |||||||||||||||
Quarter Ended September 30, 2007 | Quarter Ended September 30, 2006 | Amount | Percent | ||||||||||||
(In Millions except Percents and Per Share Amounts) | |||||||||||||||
Net Income (Loss) | |||||||||||||||
UI | $ | 23.7 | $ | 30.1 | $ | (6.4 | ) | (21 | )% | ||||||
Non-Utility | (0.8 | ) | (0.5 | ) | (0.3 | ) | (60 | )% | |||||||
Total Net Income from Continuing Operations | $ | 22.9 | $ | 29.6 | $ | (6.7 | ) | (23 | )% | ||||||
Discontinued Operations | (2.0 | ) | (17.8 | ) | 15.8 | 88 | % | ||||||||
Total Net Income (Loss) | $ | 20.9 | $ | 11.8 | $ | 9.1 | 77 | % | |||||||
EPS | |||||||||||||||
UI | $ | 0.95 | $ | 1.23 | $ | (0.28 | ) | (23 | )% | ||||||
Non-Utility | (0.03 | ) | (0.02 | ) | (0.01 | ) | (50 | )% | |||||||
Total EPS from Continuing Operations - Basic | 0.92 | $ | 1.21 | $ | (0.29 | ) | (24 | )% | |||||||
Discontinued Operations | (0.08 | ) | (0.73 | ) | 0.65 | 89 | % | ||||||||
Total EPS – Basic | $ | 0.84 | $ | 0.48 | $ | 0.36 | 75 | % | |||||||
Total EPS - Diluted (Note A) | $ | 0.83 | $ | 0.47 | $ | 0.36 | 77 | % | |||||||
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, but did not dilute the loss from discontinued operations for the three months ended September 30, 2007. Dilutive securities diluted earnings from continuing operations by $0.02 per share and diluted the loss from discontinued operations by $0.01 per share for the three months ended September 30, 2006.
The following table presents a line-by-line breakdown of revenue and expenses from UIL Holdings' Consolidated Statement of Income (Loss) by subsidiary, including | ||||||||||||
comparisons between the third quarter of 2007 and the third quarter of 2006. Significant variances are explained in the discussion and analysis of individual subsidiary results that follow. | ||||||||||||
Quarter Ended | Quarter Ended | 2007 more (less) | ||||||||||
(In Millions) | September 30, 2007 | September 30, 2006 | than 2006 | |||||||||
Operating Revenue | $ | 267.9 | $ | 261.1 | $ | 6.8 | ||||||
Fuel and energy expense - UI | $ | 125.9 | $ | 124.7 | $ | 1.2 | ||||||
Operation and maintenance expense | ||||||||||||
UI | $ | 61.8 | $ | 62.0 | $ | (0.2 | ) | |||||
Minority Interest Investment and Other | 0.4 | 1.1 | (0.7 | ) | ||||||||
Total | $ | 62.2 | $ | 63.1 | $ | (0.9 | ) | |||||
Depreciation and amortization | ||||||||||||
UI | $ | 8.3 | $ | 7.9 | $ | 0.4 | ||||||
Amortization of regulatory assets (UI) | 17.2 | 13.2 | 4.0 | |||||||||
Total depreciation and amortization | $ | 25.5 | $ | 21.1 | $ | 4.4 | ||||||
Taxes - other than income taxes | ||||||||||||
UI - State gross earnings tax | $ | 8.9 | $ | 9.2 | $ | (0.3 | ) | |||||
UI - other | 3.7 | 3.4 | 0.3 | |||||||||
Total | $ | 12.6 | $ | 12.6 | $ | (0.0 | ) | |||||
Other Income (Deductions) | ||||||||||||
UI - other | $ | 3.2 | $ | 3.6 | $ | (0.4 | ) | |||||
Minority Interest Investment and Other | 0.6 | 1.2 | (0.6 | ) | ||||||||
Total | $ | 3.8 | $ | 4.8 | $ | (1.0 | ) | |||||
Interest Charges | ||||||||||||
UI | $ | 5.2 | $ | 4.7 | $ | 0.5 | ||||||
UI - Amortization: debt expense, redemption premiums | 0.4 | 0.4 | 0.0 | |||||||||
Minority Interest Investment and Other | 1.2 | 1.0 | 0.2 | |||||||||
Total | $ | 6.8 | $ | 6.1 | $ | 0.7 | ||||||
Gain on Sale of Equity Investments - UIL & Other | $ | 0.0 | $ | 0.0 | $ | 0.0 | ||||||
Income Taxes | ||||||||||||
UI | $ | 16.0 | $ | 9.5 | $ | 6.5 | ||||||
Minority Interest Investment and Other | (0.2 | ) | (0.4 | ) | 0.2 | |||||||
Total | $ | 15.8 | $ | 9.1 | $ | 6.7 | ||||||
Income (Losses) from Equity Investments | ||||||||||||
UI | $ | 0.0 | $ | 0.4 | $ | (0.4 | ) | |||||
Minority Interest Investment and Other | 0.0 | 0.0 | 0.0 | |||||||||
Total | $ | 0.0 | $ | 0.4 | $ | (0.4 | ) | |||||
Net Income | ||||||||||||
UI | $ | 23.7 | $ | 30.1 | $ | (6.4 | ) | |||||
Minority Interest Investment and Other | (0.8 | ) | (0.5 | ) | (0.3 | ) | ||||||
Subtotal Net Income from Continuing Operations | 22.9 | 29.6 | (6.7 | ) | ||||||||
Discontinued Operations | (2.0 | (17.8 | ) | 15.8 | ||||||||
Total Net Income | $ | 20.9 | $ | 11.8 | $ | 9.1 | ||||||
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The United Illuminating Company (UI) Results of Operations: Third Quarter of 2007 vs. Third Quarter of 2006
2007 more (less) than 2006 | |||||||||||||||
Quarter Ended September 30, 2007 | Quarter Ended September 30, 2006 | Amount | Percent | ||||||||||||
EPS | |||||||||||||||
Total UI - basic | $ | 0.95 | $ | 1.23 | $ | (0.28 | ) | (23 | )% | ||||||
Total UI – diluted (Note A) | $ | 0.94 | $ | 1.21 | $ | (0.27 | ) | (22 | )% | ||||||
Retail Sales* | 1,619 | 1,691 | (72 | ) | (4 | )% | |||||||||
Weather Impact* (Note B) | 30 | (2 | ) | 32 | 2 | % | |||||||||
Retail Sales – Normalized* | 1,649 | 1,689 | (40 | ) | (2 | )% |
* Millions of kilowatt-hours
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
three months ended September 30, 2007 and diluted earnings from operations by $0.02 per share for the three months ended 2006.
Note B: Percentage change reflects impact to total retail sales.
UI’s net income was $23.7 million, or $0.95 per share, in the third quarter of 2007, compared to $30.1 million, or $1.23 per share, in the third quarter of 2006. The decrease in earnings was primarily due to the absence in 2007 of non-recurring earnings recorded in 2006 of $6.5 million, or $0.27 per share, associated with the IRS PLR.
Overall, UI’s operating revenue increased by $6.8 million, from $261.1 million in the third quarter of 2006 to $267.9 million in the third quarter of 2007. Retail revenue increased $12.5 million due mainly to increases in customer rates. The rate increase allowed UI to collect from customers amounts to recover higher energy costs (see fuel and energy expense discussion below). Wholesale revenue increased by $1.3 million primarily due to higher wholesale market prices. Other revenues decreased $7.0 million, largely due to (1) the net activity of the GSC “working capital allowance” which decreased “other” revenues by $7.2 million for the third quarter of 2007, as compared to an increase in “other” revenues of $3.9 million for the third quarter of 2006 and (2) the third quarter of 2006 includes $4.8 million of “other” revenues resulting from the DPUC approval of UI’s request to recover amounts related to gross earnings tax in the 2005 SBC/CTA reconciliation filing; these were partially offset by $5.9 million of SBC “other” revenues to recover costs associated with the 2007 Summer Savers Program and a short-fall in expense recovery due to the elimination of the revenue transfer from CTA to SBC as directed by the 2006 SBC/CTA reconciliation decision.
Fuel and energy expense increased by $1.2 million, from $124.7 million in the third quarter of 2006 to $125.9 million in the third quarter of 2007. Retail fuel expense increased by $0.9 million in the third quarter of 2007, primarily due to higher energy costs, partially offset by lower volume. UI receives electricity to satisfy its standard service and supplier of last resort requirements through DPUC-approved purchased power agreements. These costs are recovered through the GSC and Bypassable Federally Mandated Congestion Costs (BFMCC) portion of UI’s unbundled retail customer rates. UI’s wholesale energy expense in the third quarter of 2007 increased by $0.3 million primarily due to higher pricing for generation and increased volume at the Bridgeport RESCO generating plant.
UI’s operation and maintenance (O&M) expenses decreased by $0.2 million, from $62.0 million in the third quarter of 2006 to $61.8 million in the third quarter of 2007. The decrease was primarily attributable to a reduction in payroll and incentive compensation related to the former CEO, partially offset by higher maintenance and metering related expenses.
UI’s depreciation and amortization increased by $4.4 million, from $21.1 million in the third quarter of 2006 to $25.5 million in the third quarter of 2007. The increase was primarily attributable to higher CTA amortization. UI accrues or defers additional amortization to achieve the authorized return on equity of 9.75% on unamortized CTA rate base.
UI’s interest expense increased by $0.5 million, from $5.1 million in the third quarter of 2006 to $5.6 million in the third quarter of 2007. The increase was primarily attributable to interest charges associated with increased long-term and short-term borrowings.
UI’s income taxes increased by $6.5 million, from $9.5 million in the third quarter of 2006 to $16.0 million in the third quarter of 2007. The increase was primarily due to the absence in 2007 of non-recurring earnings recorded in 2006 of $6.5 million associated with the IRS PLR.
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Non-Utility Results of Operations: Third Quarter 2007 vs. Third Quarter 2006
2007 more (less) than 2006 | |||||||||||||||
Quarter Ended September 30, 2007 | Quarter Ended September 30, 2006 | Amount | Percent | ||||||||||||
EPS | |||||||||||||||
Minority Interest Investments | |||||||||||||||
UBE | $ | - | $ | - | $ | - | - | ||||||||
UCI | - | - | - | - | |||||||||||
Subtotal Minority Interest Investments | - | - | - | - | |||||||||||
UIL Corporate (Note A) | (0.03 | ) | (0.02 | ) | (0.01 | ) | 50 | % | |||||||
Total Non-Utility EPS from Continuing Operations | (0.03 | ) | (0.02 | ) | (0.01 | ) | 50 | % | |||||||
Discontinued Operations | (0.08 | ) | (0.73 | ) | 0.65 | 89 | % | ||||||||
Total Non-Utility EPS – Basic | $ | (0.11 | ) | $ | (0.75 | ) | $ | 0.64 | 85 | % | |||||
Total Non-Utility EPS – Diluted (Note B) | $ | (0.11 | ) | $ | (0.74 | ) | $ | 0.63 | 85 | % | |||||
Note A: | 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 September 30, 2007. Dilutive securities did not dilute earnings from continuing operations but diluted the loss from discontinued operations by $0.01 per share for the three months ended September 30, 2006. |
The consolidated non-utility businesses reported a net loss of $0.8 million, or $0.03 per share from continuing operations in the third quarter of 2007, compared to net loss of $0.5 million, or $0.02 per share, in the third quarter of 2006.
The following is a detailed explanation of the quarterly variances for each of UIL Holdings’ non-utility businesses.
Non-Utility Businesses
Minority Interest Investments
United Bridgeport Energy, Inc. (UBE)
With the completion of the sale of UBE’s 33 1/3% interest in Bridgeport Energy, LLC in March 2006, no results were reported in the third quarter of 2007 or 2006.
United Capital Investments, Inc. (UCI)
UCI lost $0.2 million in the third quarter of 2007 and earned a minimal amount in the third quarter of 2006. In the third quarter of 2007, UCI recorded an impairment charge of $0.4 million to reduce the carrying value of its investment in Zero Stage Capital to fair market value as the carrying value of the investment was greater than the estimated fair market value and the impairment was determined to be other than temporary.
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 net after-tax costs of $0.6 million in the third quarter of 2007, compared to net after-tax costs of $0.5 million in the third quarter 2006. The increase in loss was primarily due to lower interest income on short-term investments.
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Discontinued Operations
Xcelecom, Inc. (Xcelecom)
Xcelecom lost $2 million, or $0.08 per share, in the third quarter of 2007, compared to a loss of $17.8 million, or $0.73 per share, in the third quarter of 2006. The decrease in loss was largely due to the absence of an after-tax impairment charge incurred in 2006 to bring the carrying value of the remaining Xcelecom businesses in line with their estimated fair value, partially offset by an after-tax loss of $1.6 million recorded in the third quarter of 2007 on the settlement of outstanding notes receivable, interest receivable and other obligations with Phalcon, Ltd., the buyer of Xcelecom subsidiaries, JBL Electric, Inc., JE Richards, Inc. and McPhee Electric Ltd., LLC.
UIL Holdings Corporation Results of Operations: First Nine Months 2007 vs. First Nine Months 2006
UIL Holdings’ earnings from continuing operations were $37.8 million, or $1.52 per share, for the first nine months of 2007, a decrease of $18.9 million, or $0.81 per share, compared to the first nine months of 2006. The decrease in earnings was primarily due to the absence in 2007 of non-recurring earnings recorded in 2006 of $6.5 million, or $0.27 per share, associated with the IRS PLR. Loss from discontinued operations was $1.7 million, or $0.07 per share, for the first nine months of 2007, an improvement of $78.0 million, or $3.20 per share, compared to the first nine months of 2006. Total earnings, including discontinued operations, were $36.1 million, or $1.45 per share, for the first nine months of 2007, an increase of $59.1 million, or $2.39 per share, compared to the first nine months of 2006.
The table below represents a comparison of UIL Holdings’ Net Income (Loss) and Earnings per Share (EPS) for the first nine months of 2007 and the first nine months of 2006.
2007 more (less) than 2006 | ||||||||||||||||
Nine Months Ended September 30, 2007 | Nine Months Ended September 30, 2006 | Amount | Percent | |||||||||||||
(In Millions except Percents and Per Share Amounts) | ||||||||||||||||
Net Income (Loss) | ||||||||||||||||
UI | $ | 39.3 | $ | 48.6 | $ | (9.3 | ) | (19 | )% | |||||||
Non-Utility | (1.5 | ) | 8.1 | (9.6 | ) | N/A | ||||||||||
Total Net Income from Continuing Operations | $ | 37.8 | $ | 56.7 | $ | (18.9 | ) | (33 | )% | |||||||
Discontinued Operations | (1.7 | ) | (79.7 | ) | 78.0 | 98 | % | |||||||||
Total Net Income (Loss) | $ | 36.1 | $ | (23.0 | ) | $ | 59.1 | N/A | ||||||||
EPS | ||||||||||||||||
UI | $ | 1.58 | $ | 2.00 | $ | (0.42 | ) | (21 | )% | |||||||
Non-Utility | (0.06 | ) | 0.33 | (0.39 | ) | N/A | ||||||||||
Total EPS from Continuing Operations - Basic | $ | 1.52 | $ | 2.33 | $ | (0.81 | ) | (35 | )% | |||||||
Discontinued Operations | (0.07 | ) | (3.27 | ) | 3.20 | 98 | % | |||||||||
Total EPS – Basic | $ | 1.45 | $ | (0.94 | ) | $ | 2.39 | N/A | ||||||||
Total EPS – Diluted (Note A) | $ | 1.43 | $ | (0.93 | ) | $ | 2.36 | N/A | ||||||||
Note A: Reflecting the effect of dilutive stock options, performance shares and restricted stock. Dilutive securities diluted earnings from continuing operations by $0.02 per share, but did not dilute earnings from discontinued operations for the nine months ended September 30, 2007. Dilutive securities diluted earnings from continuing operations by $0.04 per share and the loss from discontinued operations by $0.05 per share for the nine months ended September 30, 2006.
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comparisons between the first nine months of 2007 and the first nine months of 2006. Significant variances are explained in the discussion and analysis of individual subsidiary results that follow. | ||||||||||||
Nine Months Ended | Nine Months Ended | 2007 more (less) | ||||||||||
(In Millions) | September 30, 2007 | September 30, 2006 | than 2006 | |||||||||
Operating Revenue | $ | 759.2 | $ | 661.1 | $ | 98.1 | ||||||
Fuel and energy expense - UI | $ | 413.6 | $ | 324.4 | $ | 89.2 | ||||||
Operation and maintenance expense | ||||||||||||
UI | $ | 171.4 | $ | 169.5 | $ | 1.9 | ||||||
Minority Interest Investment and Other | 0.8 | 4.6 | (3.8 | ) | ||||||||
Total | $ | 172.2 | $ | 174.1 | $ | (1.9 | ) | |||||
Depreciation and amortization | ||||||||||||
UI | $ | 26.6 | $ | 23.4 | $ | 3.2 | ||||||
Amortization of regulatory assets (UI) | 39.4 | 31.2 | 8.2 | |||||||||
Total depreciation and amortization | $ | 66.0 | $ | 54.6 | $ | 11.4 | ||||||
Taxes - other than income taxes | ||||||||||||
UI - State gross earnings tax | $ | 22.2 | $ | 22.3 | $ | (0.1 | ) | |||||
UI - other | 12.0 | 11.3 | 0.7 | |||||||||
Total | $ | 34.2 | $ | 33.6 | $ | 0.6 | ||||||
Other Income (Deductions) | ||||||||||||
UI - other | $ | 8.5 | $ | 8.3 | $ | 0.2 | ||||||
Minority Interest Investment and Other | 2.1 | 2.7 | (0.6 | ) | ||||||||
Total | $ | 10.6 | $ | 11.0 | $ | (0.4 | ) | |||||
Interest Charges | ||||||||||||
UI | $ | 14.5 | $ | 13.4 | $ | 1.1 | ||||||
UI - Amortization: debt expense, redemption premiums | 1.2 | 1.1 | 0.1 | |||||||||
Minority Interest Investment and Other | 3.4 | 3.8 | (0.4 | ) | ||||||||
Total | $ | 19.1 | $ | 18.3 | $ | 0.8 | ||||||
Gain on Sale of Equity Investments - UIL & Other | $ | 0.0 | $ | 18.9 | $ | (18.9 | ) | |||||
Income Taxes | ||||||||||||
UI | $ | 27.6 | $ | 23.8 | $ | 3.8 | ||||||
Minority Interest Investment and Other | (0.6 | ) | 5.6 | (6.2 | ) | |||||||
Total | $ | 27.0 | $ | 29.4 | $ | (2.4 | ) | |||||
Income (Losses) from Equity Investments | ||||||||||||
UI | $ | 0.1 | $ | (0.4 | ) | $ | 0.5 | |||||
Minority Interest Investment and Other | 0.0 | 0.5 | (0.5 | ) | ||||||||
Total | $ | 0.1 | $ | 0.1 | $ | 0.0 | ||||||
Net Income | ||||||||||||
UI | $ | 39.3 | $ | 48.6 | $ | (9.3 | ) | |||||
Minority Interest Investment and Other | (1.5 | ) | 8.1 | (9.6 | ) | |||||||
Subtotal Net Income from Continuing Operations | �� | 37.8 | 56.7 | (18.9 | ) | |||||||
Discontinued Operations | (1.7 | ) | (79.7 | ) | 78.0 | |||||||
Total Net Income (Loss) | $ | 36.1 | $ | (23.0 | ) | $ | 59.1 | |||||
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The United Illuminating Company Results of Operations: First Nine Months of 2007 vs. First Nine Months of 2006
2007 more (less) than 2006 | ||||||||||||||||
Nine Months Ended September 30, 2007 | Nine Months Ended September 30, 2006 | Amount | Percent | |||||||||||||
EPS | ||||||||||||||||
Total UI – basic | $ | 1.58 | $ | 2.00 | $ | (0.42 | ) | (21 | )% | |||||||
Total UI – diluted (Note A) | $ | 1.56 | $ | 1.96 | $ | (0.40 | ) | (20 | )% | |||||||
Retail Sales* | 4,486 | 4,529 | (43 | ) | (1 | )% | ||||||||||
Weather Impact* (Note B) | 31 | 24 | 7 | - | % | |||||||||||
Retail Sales – Normalized* | 4,517 | 4,553 | (36 | ) | (1 | )% |
* Millions of kilowatt-hours
Note A: Reflecting the effect of dilutive stock options, performance shares and restricted stock. Dilutive securities diluted earnings from operations by $0.02 per share for the
nine months ended September 30, 2007 and diluted earnings from operations by $0.04 for the and nine months ended September 30, 2006.
Note B: Percentage change reflects impact to total retail sales.
UI’s net income was $39.3 million, or $1.58 per share, in the first nine months of 2007, compared to $48.6 million, or $2.00 per share, in the first nine months of 2006. The decrease in earnings was primarily due to the absence in 2007 of non-recurring earnings recorded during 2006 of (1) $6.5 million, or $0.27 per share, associated with the IRS PLR and (2) $1.3 million of compensation for procuring transitional standard offer power.
Overall, UI’s revenue increased by $98.1 million, from $661.1 million in the first nine months of 2006 to $757.9 million in the first nine months of 2007. Retail revenue increased $100.0 million due mainly to increases in customer rates. The rate increase allowed UI to collect from customers amounts to recover higher energy costs (see fuel and energy expense discussion below). Wholesale revenue increased $4.7 million primarily due to higher wholesale market prices. Other revenues decreased $6.6 million, largely due (1) the net activity of the GSC “working capital allowance” which increased “other” revenues by $0.4 million and $9.0 million for the first nine months of 2007 and 2006, respectively and (2) the third quarter of 2006 includes $4.8 million of “other” revenues resulting from the DPUC approval of UI’s request to recover amounts related to gross earnings tax in the 2005 SBC/CTA reconciliation filing; partially offset by $5.9 million of SBC “other” revenues recorded during the first nine months of 2007 to recover costs associated with the 2007 Summer Savers Program and a short-fall in expense recovery due to the elimination of the revenue transfer from CTA to SBC as directed by the 2006 SBC/CTA reconciliation filing.
Fuel and energy expense increased by $89.2 million from $324.4 million in the first nine months of 2006 to $413.6 million in the first nine months of 2007. Retail fuel expense in the first nine months of 2007 increased by $89.5 million compared to the first nine months of 2006, primarily due to higher energy costs. UI receives electricity to satisfy its standard service and supplier of last resort requirements through DPUC-approved purchased power agreements. 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 nine months of 2007 decreased by $0.3 million primarily due to lower pricing for generation at the Bridgeport RESCO generating plant.
UI’s O&M expenses increased by $1.9 million, from $169.5 million in the first nine months of 2006 to $171.4 million in the first nine months of 2007. The increase was primarily attributable to (1) higher uncollectible accounts, mainly due to increases in customer rates, (2) transmission expenses, partly due to an accrual for potential environmental remediation incurred during construction of the Middletown/Norwalk project which are expected to be fully recovered in transmission revenue above, and (3) insurance expenses; partially offset by reductions in payroll and incentive compensation costs.
UI’s depreciation and amortization increased by $11.4 million, from $54.6 million in the first nine months of 2006 to $66.0 million in the first nine months of 2007. The increase was primarily attributable to higher depreciation related to distribution and software assets and increased CTA amortization. UI accrues or defers additional amortization to achieve the authorized return on equity of 9.75% on unamortized CTA rate base.
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UI’s interest expense increased by $1.2 million, from $14.5 million in the first nine months of 2006 to $15.7 million in the first nine months of 2007. The increase was primarily attributable to interest charges associated with increased long-term and short-term borrowings.
UI’s income taxes increased by $3.8 million, from $23.8 million in the first nine months of 2006 to $27.6 million in the first nine months of 2007. The increase was primarily due to the absence in 2007of non-recurring earnings recorded in 2006 of $6.5 million, or $0.27 per share, associated with the IRS PLR, partially offset by the tax effects associated with lower taxable income in the first nine months of 2007.
Non-Utility Results of Operations: First Nine Months 2007 vs. First Nine Months 2006
2007 more (less) than 2006 | |||||||||||||||
Nine Months Ended September 30, 2007 | Nine Months Ended September 30, 2006 | Amount | Percent | ||||||||||||
EPS | |||||||||||||||
Minority Interest Investments | |||||||||||||||
UBE | $ | - | (0.01 | ) | $ | 0.01 | 100 | % | |||||||
UCI | - | 0.44 | (0.44 | ) | (100 | )% | |||||||||
Subtotal Minority Interest Investments | - | 0.43 | (0.43 | ) | (100 | )% | |||||||||
UIL Corporate (Note A) | (0.06 | ) | (0.10 | ) | 0.04 | 40 | % | ||||||||
Total Non-Utility EPS from Continuing Operations | (0.06 | ) | 0.33 | (0.39 | ) | N/A | % | ||||||||
Discontinued Operations | (0.07 | ) | (3.27 | ) | 3.20 | 98 | % | ||||||||
Total Non-Utility EPS – Basic | $ | (0.13 | ) | $ | (2.94 | ) | $ | 2.81 | 100 | % | |||||
Total Non-Utility EPS – Diluted (Note B) | $ | (0.13 | ) | $ | (2.89 | ) | $ | 2.76 | 100 | % | |||||
Note A: | 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 nine months ended September 30, 2007. Dilutive securities did not dilute earnings from continuing operations and diluted the loss from discontinued operations by $0.05 per share for the nine months ended September 30, 2006. |
The consolidated non-utility businesses reported a loss from continuing operations, including unallocated holding company costs, of $1.5 million, or $0.06 per share, in the first nine months of 2007, compared to income of $8.1 million, or $0.33 per share, in the first nine months of 2006. The decrease in earnings was mainly due to the absence of the gain on sale of Cross-Sound Cable recorded in 2006.
The following is a detailed explanation of the year-to-date variances for each of UIL Holdings’ non-utility businesses.
Non-Utility Business
Minority Interest Investments
United Bridgeport Energy, Inc.
With the completion of the sale of UBE’s 33 1/3% interest in Bridgeport Energy, LLC in March 2006, no results were reported in the first nine months of 2007. UBE lost $0.2 million, or $0.01 per share, in the first nine months of 2006.
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United Capital Investments, Inc. (UCI)
UCI lost $0.1 million in the first nine months of 2007 compared to income of $10.8 million, or $0.44 per share, in the first nine months of 2006. The decrease in earnings was mainly due to the absence of the gain on sale of Cross-Sound Cable recorded in 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 net after-tax costs of $1.4 million, or $0.06 per share, in the first nine months of 2007, compared to net after-tax costs of $2.5 million, or $0.10 per share, in the first nine months of 2006. The improvement was largely due to lower general and administrative expenses.
Discontinued Operations
Xcelecom, Inc.
Xcelecom loss $1.7 million, or $0.07 per share, in the first nine months of 2007, compared to a loss of $79.7 million, or $3.27 per share in the first nine months of 2006. The increase in earnings was primarily due to the absence of an after-tax goodwill impairment charge of $50.5 million recorded during the first quarter of 2006 as well as the absence of an after-tax impairment charge of $16.8 million incurred in the third quarter of 2006 to bring the carrying value of the remaining Xcelecom businesses in line with their estimated fair value.
UIL Holdings’ and UI’s primary market risk is the interest rate risk associated with the need to refinance fixed rate debt at maturity, the remarketing of multi-annual tax-exempt bonds, and the need to sell additional debt securities in connection with its DPUC-approved financing plan. The weighted-average remaining fixed rate period of outstanding long-term debt obligations of UIL Holdings and UI is 4.13 years, at an average interest rate of 4.83%.
On June 20, 2007, the DPUC approved UI’s financing plan for the period from 2007 through 2009. UI’s financing plan proposes that UI issue not more than $375 million principal amount of debt securities (the Proposed Notes). The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes: (1) to refinance $225 million principal amount of maturing existing debt; (2) to finance capital expenditures; (3) to repay short-term borrowings incurred to temporarily fund these requirements; (4) to pay issuance costs related to the Proposed Notes and (5) for general corporate purposes.
On September 5, 2007, UI entered into a Note Purchase Agreement with a group of institutional accredited investors providing for the sale to such investors of senior unsecured notes in the aggregate principal amount of $175 million, in the following series: (1) $40 million 6.06% Senior Notes, Series A, due September 5, 2017; (2) $30 million 6.06% Senior Notes, Series B, due December 6, 2017; (3) $44 million 6.26% Senior Notes, Series C, due September 5, 2022; (4) $33 million 6.26% Senior Notes, Series D, due December 6, 2022; (5) $16 million 6.51% Senior Notes, Series E, due September 5, 2037; and (6) $12 million 6.51% Senior Notes, Series F, due December 6, 2037. $100 million was funded on September 5, 2007, and $75 million is expected to be funded on December 6, 2007, subject to certain conditions. Under the agreement, UI is subject to certain covenants, including the requirement to maintain a ratio of consolidated indebtedness to consolidated capitalization of not greater than 65%. The Note Purchase Agreement describes typical events of default, including the situation in which UI defaults on indebtedness in the aggregate principal amount of at least $10 million due to (1) a default in payment or payments due on the indebtedness, or (2) default in the performance of or compliance with any term or condition of the indebtedness, which could result in the requirement that such indebtedness be repaid, or (3) the occurrence of any event or condition, which could require the purchase or repayment of the indebtedness prior to maturity.
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
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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 September 30, 2007. Based on the foregoing, UIL Holdings’ Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective as of September 30, 2007.
There have been no changes in UIL Holdings’ internal control over financial reporting during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect UIL Holdings’ internal control over financial reporting.
Item 1A. – Risk Factors.
The financial condition and results of operations of UIL Holdings are subject to various risks, uncertainties and other factors, as described in UIL Holdings’ Annual Report on Form 10K for the year ended December 31, 2006. The following risk factors included in that report have been updated to reflect activity as of September 30, 2007:
The inability to collect certain accounts receivable of the divested Xcelecom companies and amounts due under promissory notes from the buyers of those companies could adversely impact UIL Holdings’ financial condition.
The buyers of the former Xcelecom companies are responsible for the collection of certain outstanding accounts receivable on behalf of UIL Holdings, which total $2.2 million as of September 30, 2007. If those accounts receivable are not collected, UIL Holdings will recognize additional losses (to the extent existing reserves related to those accounts are insufficient) and weaker than expected cash flows.
The buyers of certain former Xcelecom companies have signed promissory notes payable to Xcelecom or UIL Holdings, the outstanding principal amount of which total $3.0 million as of September 30, 2007. If those notes payable are not collected, UIL Holdings could recognize additional losses and weaker than expected cash flows.
UIL Holdings could suffer additional losses from the completion of certain outstanding projects by Xcelecom’s former operating companies.
UIL Holdings has financial responsibility for outstanding projects being completed by certain of Xcelecom’s former operating companies, the costs to complete of which total approximately $0.7 million as of September 30, 2007. The buyers of those companies are responsible for the management and completion of outstanding projects and are operating based on estimates of the cost to complete those projects. Variations from the estimated contract costs, along with other risks inherent in performing fixed price and unit price contracts, may result in actual costs and billings differing from those estimated and could result in additional losses and negatively impact UIL Holdings’ cash flow.
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(a) | From time to time UIL Holdings issues unregistered shares pursuant to its Non-Employee Director Common Stock and Deferred Compensation Plan. On July 26, 2007 and August 2, 2007, UIL Holdings issued 620 and 333 unregistered shares of UIL Holdings’ common stock, respectively, which qualified as exempt private placement transactions pursuant to Section 4 (2) of the Securities Act of 1933. These unregistered shares were issued to a former director of UIL Holdings and UI to satisfy the provisions of deferred compensation arrangements. |
(c) | UIL Holdings repurchased 953 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 | |||||
July | 620 | $ | 29.91 | None | None | ||||
August | 333 | $ | 30.82 | None | None | ||||
September | - | - | None | None | |||||
Total | 953 | $ | 30.23 | None | None |
*All shares were purchased in open market transactions. As noted above in paragraph (a), these shares were issued to a former director of UIL Holdings. The effects of these transactions did not change the number of outstanding shares of UIL Holdings common stock.
(a) Exhibits.
Exhibit Table Item Number | Exhibit Number | Description |
(31) | 31.1 | Certification of Periodic Financial Report. |
(31) | 31.2 | Certification of Periodic Financial Report. |
(32) | 32 | Certification of Periodic Financial Report. |
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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 11/01/2007 | �� /s/ Richard J. Nicholas |
Richard J. Nicholas | |
Executive Vice President | |
and Chief Financial Officer |
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