| | | 2011 | | | 2010 | |
| | | (In Thousands) | |
| | | | | | | |
| Electric distribution plant | | $ | 845,252 | | | $ | 777,916 | |
| Electric transmission plant | | | 549,995 | | | | 489,223 | |
| Gas distribution plant | | | 1,318,917 | | | | 1,275,133 | |
| Software | | | 139,241 | | | | 129,202 | |
| Land | | | 42,625 | | | | 39,008 | |
| Other plant | | | 236,226 | | | | 233,741 | |
| Total property, plant & equipment | | | 3,132,256 | | | | 2,944,223 | |
| Less accumulated depreciation | | | 929,401 | | | | 859,461 | |
| | | | 2,202,855 | | | | 2,084,762 | |
| Construction work in progress | | | 367,500 | | | | 242,688 | |
| Net property, plant & equipment | | $ | 2,570,355 | | | $ | 2,327,450 | |
Asset Retirement Obligations
The fair value of the liability for an asset retirement obligation (ARO) and/or a conditional ARO is recorded in the period in which it is incurred and the cost is capitalized by increasing the carrying amount of the related long-lived asset. The liability is adjusted to its present value periodically over time, and the capitalized cost is depreciated over the useful
life of the related asset. Upon settlement, the obligation is settled either at its recorded amount or a gain or a loss is incurred. Any timing differences between rate recovery and depreciation expense are deferred as either a regulatory asset or a regulatory liability.
The term conditional ARO refers to an entity's legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. If an entity has sufficient information to reasonably estimate the fair value of the liability for a conditional ARO, it must recognize that liability at the time the liability is incurred.
As of December 31, 2011, UIL Holdings’ ARO, including estimated conditional AROs, was $18.1 million and consisted primarily of obligations related to the removal or retirement of asbestos, polychlorinated biphenyl (PCB)-contaminated equipment, gas pipeline and cast iron gas mains. The long-lived assets associated with the AROs are gas storage property, distribution property and other property. As of December 31, 2010, UIL Holdings’ ARO was $17.8 million.
Allowance for Funds Used During Construction
In accordance with the uniform systems of accounts, the Company capitalizes AFUDC, which represents the approximate cost of debt and equity capital devoted to plant under construction. The portion of the allowance applicable to borrowed funds and the allowance applicable to equity funds are presented as other income in the Consolidated Statement of Income. Although the allowance does not represent current cash income, it has historically been recoverable under the ratemaking process over the service lives of the related properties. Weighted-average AFUDC rates for 2011, 2010 and 2009 were 6.31%, 6.65% and 2.44%, respectively.
Depreciation
Provisions for depreciation on utility plant for book purposes are computed on a straight-line basis, using estimated service lives. For utility plant other than software, service lives are determined by independent engineers and subject to review and approval by PURA and DPU. Software service life is based upon management’s estimate of useful life. The aggregate annual
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
provisions for depreciation for the years 2011, 2010 and 2009 were approximately 3.3%, 3.6%, and 3.7%, respectively, of the original cost of depreciable property
Income Taxes
In accordance with ASC 740 “Income Taxes,” UIL Holdings has provided deferred taxes for all temporary book-tax differences using the liability method. The liability method requires that deferred tax balances be adjusted to reflect enacted future tax rates that are anticipated to be in effect when the temporary differences reverse. In accordance with generally accepted accounting principles for regulated industries, UIL Holdings’ regulated subsidiaries have established a regulatory asset for the net revenue requirements to be recovered from customers for the related future tax expense associated with certain of these temporary differences. For ratemaking purposes, UIL Holdings’ regulated subsidiaries normalize all investment tax credits (ITCs) related to recoverable plant investments.
Under ASC 740, UIL Holdings may recognize the tax benefit of an uncertain tax position only if management believes 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’ policy is to recognize interest accrued and penalties associated with uncertain tax positions as a component of operating expense.
Goodwill
UIL Holdings may be required to recognize an impairment of goodwill in the future due to market conditions or other factors related to its results of operations and performance. Those market events could include a decline in the forecasted results in the company business plan, significant adverse rate case results, changes in capital investment budgets or changes in interest rates that could permanently impair the fair value of a reporting unit. Recognition of impairments of a significant portion of goodwill would negatively affect reported results of operations and total capitalization, the effect of which could be material and could make it more difficult to maintain credit ratings, secure financing on attractive terms, maintain compliance with debt covenants and meet expectations of regulators.
A goodwill impairment test is performed each year and the test will be updated between annual tests if events or circumstances occur that may reduce the fair value of a reporting unit below its carrying value. The annual analysis of the potential impairment of goodwill is a two step process. Step one of the impairment test consists of comparing the fair values of reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, step two must be performed to determine the amount, if any, of the goodwill impairment loss. If the carrying amount is less than fair value, further testing of goodwill impairment is not performed.
Step two of the goodwill impairment test consists of comparing the implied fair value of the reporting unit’s goodwill against the carrying value of the goodwill. Determining the implied fair value of goodwill requires the valuation of a reporting unit’s identifiable tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination on the testing date. The difference between the fair value of the entire reporting unit as determined in step one and the net fair value of all identifiable assets and liabilities represents the implied fair value of goodwill. A goodwill impairment charge, if any, would be the difference between the carrying amount of goodwill and the implied fair value of goodwill upon the completion of step two.
As of October 1, 2011, the fair values of UIL Holdings’ applicable reporting units exceeded their carrying values and therefore no impairment was recognized. No events or circumstances occurred subsequent to October 1, 2011 that would make it more likely than not that the fair value of the reporting units fell below their respective carrying values.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Revenues
Regulated utility revenues are based on authorized rates applied to each customer. These retail rates are approved by regulatory bodies and can be changed only through formal proceedings.
UI utilizes a customer accounting software package integrated with the network meter reading system to estimate unbilled revenue on a customer-by-customer basis, utilizing actual daily meter readings at the end of each month to calculate consumption and pricing for each customer. A significant portion of utility retail kilowatt-hour consumption is read through the network meter reading system. For those customers still requiring manual meter readings, consumption is estimated based upon historical usage and actual pricing for each customer.
For the Gas Companies, unbilled revenues represent estimates of receivables for products and services provided but not yet billed. The estimates are determined based on various assumptions, such as current month energy load requirements, billing rates by customer classification and weather.
Cash and Temporary Cash Investments
UIL Holdings considers all of its highly liquid debt instruments with an original maturity of three months or less at the date of purchase to be cash and temporary cash investments.
Restricted Cash
UIL Holdings’ restricted cash at December 31, 2011 and 2010 totaled $6.5 million and $2.4 million, respectively, which primarily relates to electric distribution and transmission capital projects, which have been withheld by UI and will remain in place until the verification of fulfillment of contractor obligations.
Equity Investments
In February 2008, UI and an NRG affiliate formed GenConn, a 50-50 joint venture, for the purpose of constructing peaking generation plants in Connecticut. UI’s investment in GenConn is being accounted for as an equity investment, the carrying value of which was $131.1 million and $62.8 million as of December 31, 2011 and December 31, 2010, respectively. The loans UI had made for the construction of the GenConn Devon facility of approximately $55.5 million were converted into equity in September 2010. The loans UI made to GenConn for the construction of GenConn Middletown of approximately $63 million were converted into equity in July 2011.
UI’s income from its equity investment in GenConn was $11.3 million, $1.3 million and zero for the years ended December 31, 2011, 2010 and 2009, respectively. In 2011, UI received cash distributions of $8.0 million from GenConn. As of December 31, 2011, the undistributed earnings from UI’s equity investment in GenConn were approximately $4.6 million. In January 2012, UI received cash distributions from GenConn of $3.3 million.
Pension and Other Postretirement Benefits
UIL Holdings accounts for pension plan costs and other postretirement benefits, consisting principally of health and life insurance, in accordance with the provisions of ASC 715 “Compensation - Retirement Benefits.” See – Note (G), Pension and Other Benefits.
Impairment of Long-Lived Assets and Investments
ASC 360 “Property, Plant, and Equipment” requires the recognition of impairment losses on long-lived assets when the book value of an asset exceeds the sum of the expected future undiscounted cash flows that result from the use of the asset and its eventual disposition. If impairment arises, then the amount of any impairment is measured based on discounted cash flows or estimated fair value.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
ASC 360 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 ASC 980 must be assessed on an ongoing basis. As discussed in the description of ASC 980 in this Note (A) under “Regulatory Accounting”, determination that certain regulatory assets no longer qualify for accounting as such could have a material impact on the financial condition of UI, the Gas Companies and UIL Holdings. At December 31, 2011, UI and the Gas Companies, as rate-regulated entities, did not have any assets that were impaired under this standard.
ASC 323 “Investments” requires that a loss in the value of an investment that is other than a temporary decline should be recognized. In accordance with ASC 323, UIL Holdings reviews its investments accounted for by the equity method for impairment by identifying and measuring losses in the value based upon a comparison of fair value to carrying value. At December 31, 2011, UIL Holdings did not have any equity investments that were impaired under this standard.
Earnings per Share
The following table presents a reconciliation of the basic and diluted earnings per share calculations for the years 2011, 2010 and 2009:
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (In Thousands, except per share amounts) | |
| | | | | | | | | | |
| Numerator: | | | | | | | | | |
| Net income attributable to UIL Holdings | | $ | 99,656 | | | $ | 54,854 | | | $ | 54,317 | |
| Less: Net income allocated to unvested units | | | 210 | | | | 149 | | | | 84 | |
| Net income attributable to common shareholders | | $ | 99,446 | | | $ | 54,705 | | | $ | 54,233 | |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Basic average number of shares outstanding | | | 50,609 | | | | 35,722 | | | | 28,027 | |
| Effect of dilutive securities | | | 317 | | | | 361 | | | | 246 | |
| Diluted average number of shares outstanding | | | 50,926 | | | | 36,083 | | | | 28,273 | |
| | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | |
| Basic | | $ | 1.96 | | | $ | 1.53 | | | $ | 1.94 | |
| Diluted | | $ | 1.95 | | | $ | 1.52 | | | $ | 1.93 | |
Options to purchase 89,336, 98,079 and 140,152 shares of common stock were outstanding during 2011, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares during such period.
Stock-Based Compensation
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 over a three-year period. These performance shares were issued under the UIL Holdings 1999 Amended and Restated Stock Plan prior to 2009 and are now issued under the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan). Each award of performance shares vests at the end of a three-year cycle with the actual issuance of UIL Holdings’ common stock in respect of such performance 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 ASC 718 “Compensation-Stock Compensation,” based on the value of the expected payout at the end of each year relative to the
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
performance measures achieved. An additional $0.6 million of compensation expense was recorded in the first quarter of 2011 with respect to retirement-eligible employees based on the application of ASC 718 retirement-eligible provisions.
In 2011, target amounts of performance shares were granted to certain members of management as follows: 111,230 shares in February, 5,314 shares in April and 3,627 shares in May. The averages of the high and low market prices on the February, April and May grant dates were $30.69, $31.76 and $31.85 per share, respectively.
In February 2011, UIL Holdings granted a total of 2,566 shares of restricted stock to its President and Chief Executive Officer under the 2008 Stock Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant was $30.69 per share. Such shares vest in equal annual installments over a five year period.
In April 2011, UIL Holdings granted a total of 9,011 shares of restricted stock to non-employee directors under the 2008 Stock Plan as compensation for service from January 2011 to May 2011; the average of the high and low market price on the date of grant was $30.77 per share. Such shares vested in May 2011.
In May 2011, UIL Holdings granted a total of 23,394 shares of restricted stock to non-employee directors under the 2008 Stock Plan; the average of the high and low market price on the date of grant was $33.51 per share. Such shares vest in May 2012.
Total stock-based compensation expense for the years ended December 31, 2011, 2010 and 2009 was $5.3 million, $4.1 million and $3.6 million, respectively.
Variable Interest Entities
UIL Holdings has identified GenConn as a variable interest entity (VIE), which is accounted for under the equity method. UIL Holdings is not the primary beneficiary of GenConn, as defined in ASC 810 “Consolidation,” because it shares control of all significant activities of GenConn with its joint venturer, NRG. As such, GenConn is not subject to consolidation. GenConn recovers its costs through CfDs, which are cost of service-based and have been approved by PURA. As a result, with the achievement of commercial operation by GenConn Devon and GenConn Middletown, UIL Holdings’ exposure to loss is primarily related to the potential for unrecovered GenConn operating or capital costs in a regulatory proceeding, the effect of which would be reflected in the carrying value of UIL Holdings’ 50% ownership position in GenConn and through “Income from Equity Investments” in UIL Holdings’ Consolidated Financial Statements. Such exposure to loss cannot be determined at this time. For further discussion of GenConn, see “–Equity Investments” as well as Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Equity Investment in Peaking Generation.”
New Accounting Standards
In May 2011, the FASB issued amendments to ASC 820 “Fair Value Measurements and Disclosures.” Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is effective during interim and annual periods beginning after December 15, 2011 and is to be applied on a prospective basis. UIL Holdings expects that the implementation of this guidance will not have a material impact on its consolidated financial statements.
In June 2011, the FASB issued updated guidance to ASC 220 “Comprehensive Income” which allows entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance, which is to be applied retrospectively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. UIL Holdings expects that the implementation of this guidance will not have an impact on its consolidated financial statements.
In September 2011, the FASB issued amendments to ASC 350 “Intangibles-Goodwill and Other” which allow an entity to assess qualitatively whether it is necessary to perform the current two-step goodwill impairment test. Performance of the two-step
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
impairment test is required only if an entity determines it is more-likely-than-not that a reporting unit's fair value is less than its carrying amount. Otherwise, no further testing is required. This guidance is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. UIL Holdings will adopt this guidance in 2012 and expects that the implementation of this guidance will not have a material impact on its consolidated financial statements.
In December 2011, the FASB issued amendments to the disclosure requirements on offsetting in ASC 210 “Balance Sheet” which require an entity to disclose quantitative information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective during interim and annual periods beginning after January 1, 2013 and should be applied retrospectively for all comparative periods presented. UIL Holdings expects that the implementation of this guidance will not have a material impact on its consolidated financial statements.
B) CAPITALIZATION
Common Stock
UIL Holdings had 50,545,487 shares of its common stock, no par value, outstanding as of December 31, 2011 and 50,443,083 shares of its common stock, no par value, outstanding at December 31, 2010. Not included in such shares were 100,003 and 62,368 shares of restricted stock as of December 31, 2011 and 2010, respectively, that are, however, recognized as outstanding for purposes of calculating basic earnings per share due to such shares being the net of the amount of deferred vested restricted stock, less the amount of non-deferred unvested restricted stock.
On September 16, 2010, UIL Holdings priced a public offering of 17,700,000 shares of common stock at $25.75 per share. On September 17, 2010, the underwriters exercised their over-allotment option to purchase an additional 2,655,000 common shares on the same terms. Net proceeds of the offering, including the over-allotment option, were $501.5 million, after expenses and underwriting discounts and were accounted for as an addition to common stock on UIL Holdings’ Consolidated Balance Sheet.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Stock option transactions for 2011, 2010 and 2009 are as follows:
| | | | | | | | | Average | |
| | | Number | | | Option Price | | | Exercise | |
| | | of Options | | | per Share | | | Price | |
| Balance – December 31, 2008 | | | 403,472 | | | $ | 21.68-$34.52 | | | $ | 32.07 | |
| Granted | | | - | | | | N/A | | | | N/A | |
| Forfeited | | | (234,971 | ) | | | N/A | | | | N/A | |
| Exercised | | | - | | | | N/A | | | | N/A | |
| Balance – December 31, 2009 | | | 168,501 | | | $ | 21.68-$34.51 | | | $ | 30.32 | |
| Granted | | | - | | | | N/A | | | | N/A | |
| Forfeited | | | (3,202 | ) | | | N/A | | | | N/A | |
| Exercised | | | (30,305 | ) | | $ | 21.68-$23.64 | | | | N/A | |
| Balance – December 31, 2010 | | | 134,994 | | | $ | 21.68-$34.51 | | | $ | 31.70 | |
| Granted | | | - | | | | N/A | | | | N/A | |
| Forfeited | | | (7,910 | ) | | | N/A | | | | N/A | |
| Exercised | | | (28,864 | ) | | $ | 21.68-$31.25 | | | | N/A | |
| Balance – December 31, 2011 | | | 98,220 | | | $ | 21.68-$33.96 | | | $ | 33.39 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Exercisable at December 31, 2009 | | | 168,501 | | | $ | 21.68-$34.51 | | | $ | 30.32 | |
| Exercisable at December 31, 2010 | | | 134,994 | | | $ | 21.68-$34.51 | | | $ | 31.70 | |
| Exercisable at December 31, 2011 | | | 98,220 | (1) | | $ | 21.68-$33.96 | | | $ | 33.39 | |
| (1) | The intrinsic value of exercisable stock options at December 31, 2011 was $0.2 million. |
As of December 31, 2011, 2010 and 2009, the weighted-average remaining contractual lives for those options outstanding was 0.5 years, 1.3 years, and 2.0 years, respectively.
As of December 31, 2011, total stock option compensation costs were zero, performance share costs were $2.3 million, and restricted stock costs related to non-vested awards not yet recognized were $1.1 million. The weighted-average period over which the stock option compensation costs, performance-share cost, and restricted stock cost will be recognized is zero months, 12 months, and 9 months, respectively.
Cash received from options exercised under all share-based payment arrangements for the years ended December 31, 2011, 2010 and 2009, was $0.8 million, $0.7 million, and zero, respectively. The actual tax benefit realized for the tax deductions from the exercises totaled $0.1 million, $0.1 million, and zero, respectively.
The shares issued to non-employee directors are drawn from the Non-Employee Director Common Stock and Deferred Compensation Plan or the 2008 Stock and Incentive Compensation Plan. Employee performance shares and options were drawn from the 1999 Amended and Restated UIL Holdings Corporation Stock Plan until 2009, and are now drawn from the 2008 Stock and Incentive Compensation Plan.
Redeemable Preferred Stock of Subsidiaries, Noncontrolling Interests
The redeemable preferred stock of subsidiaries are noncontrolling interests because they contain a feature that allows the holders to elect a majority of the subsidiary’s board of directors if preferred stock dividends are in default in an amount equivalent to four full quarterly dividends. Such a potential redemption-triggering event is not solely within the control of the subsidiary.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
CNG has two series of cumulative preferred stock authorized, a 6.00% series and an 8.00% series. The par value per share and the redemption price per share for the 6.00% series are $100.00 and $110.00, respectively. There are 4,104 shares issued and outstanding on December 31, 2011. The par value per share for CNG’s 8.00% non-callable preferred stock is $3.125 per share. There were 108,706 shares issued and outstanding as of December 31, 2011.
In 2011, Berkshire redeemed the remaining 776 shares of its one series of outstanding 4.8% cumulative preferred stock at par.
At December 31, 2011, the consolidated redeemable preferred stock, noncontrolling interest was as follows:
| Subsidiary and Series | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| CNG, 6.00% | | $ | 100 | | | $ | 110 | | | | 4,104 | | | $ | 410 | |
| CNG, 8.00% Noncallable | | $ | 3.125 | | | | - | | | | 108,706 | | | | 340 | |
| Total | | | | | | | | | | | 112,810 | | | $ | 750 | |
| | (1) | At December 31, 2011, CNG had 775,609 shares of $3.125 par value preferred stock and 9,994,964 shares of $100 par value preferred stock authorized but unissued. |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| | | December 31, | |
| | | 2011 | | | 2010 | |
| | | (In Thousands) | |
| UIL Holdings | | | | | | |
| 7.23% Senior Notes, Series A, due 2011 | | $ | - | | | $ | 4,286 | |
| 7.38% Senior Notes, Series B, due 2011 | | | - | | | | 45,000 | |
| 4.625% Unsecured Senior Notes, due 2020 | | | 450,000 | | | | 450,000 | |
| | | | | | | | | |
| UI | | | | | | | | |
| Pollution Control Revenue Bonds: | | | | | | | | |
| | | | | | | | | |
| 5.75%, 1996 Series, due 2026 (1) | | | 7,500 | | | | 7,500 | |
| 4.50% 2010 Series, due 2027 | | | 27,500 | | | | 27,500 | |
| 7.13%, 1997 Series, due 2027 (1) | | | 71,000 | | | | 71,000 | |
| 6.88%, 2009 Series, due 2029 (1) | | | 25,000 | | | | 25,000 | |
| Auction Rate, 2003 Series, due 2033 (2) | | | 64,460 | | | | 64,460 | |
| | | | | | | | | |
| Notes: | | | | | | | | |
| | | | | | | | | |
| 6.06% Senior Notes, Series A and B, due 2017 | | | 70,000 | | | | 70,000 | |
| 6.26% Senior Notes, Series C and D, due 2022 | | | 77,000 | | | | 77,000 | |
| 6.51% Senior Notes, Series E and F due 2037 | | | 28,000 | | | | 28,000 | |
| 6.46% Senior Notes , Series A and 6.51%, Senior Notes, Series B, due 2018 | | | 100,000 | | | | 100,000 | |
| 6.61% Senior Notes, Series C, due 2020 | | | 50,000 | | | | 50,000 | |
| 5.61% Senior Notes, due 2025 | | | 50,000 | | | | 50,000 | |
| 6.09% Senior Notes, due 2040 | | | 100,000 | | | | 100,000 | |
| | | | | | | | | |
| Equity Bridge Loan | | | - | | | | 61,783 | |
| | | | | | | | | |
| Gas Companies | | | | | | | | |
| Senior Secured Notes: | | | | | | | | |
| | | | | | | | | |
| 6.59% Senior Secured Medium Term Note II, due 2011 | | | - | | | | 30,000 | |
| 3.88% - 7.50% Senior Secured Medium Term Note IV, due 2018 -2041 | | | 100,000 | | | | 50,000 | |
| 5.772% - 6.38% Senior Secured Medium Term Notes III, due 2025 - 2037 | | | 85,000 | | | | 85,000 | |
| 6.88% - 7.95% Senior Secured Medium Term Notes I, due 2026 - 2028 | | | 29,000 | | | | 29,000 | |
| 10.06% First Mortgage Bond Series P, due 2019 | | | 10,000 | | | | 10,000 | |
| | | | | | | | | |
| Unsecured Notes: | | | | | | | | |
| | | | | | | | | |
| 4.76% - 9.60% Senior Unsecured Notes, due 2011 - 2021 | | | 22,545 | | | | 27,000 | |
| 6.85 - 9.10% Unsecured Medium Term Notes, Series A, due 2012 - 2017 | | | 55,000 | | | | 55,000 | |
| 6.50% Unsecured Medium Term Note, Series D, due 2013 | | | 20,000 | | | | 20,000 | |
| 8.12% - 8.49% Unsecured Medium Term Notes, Series B, due 2014 - 2024 | | | 10,000 | | | | 10,000 | |
| 5.63% - 6.66% Unsecured Medium Term Notes, Series C, due 2035 - 2037 | | | 65,000 | | | | 65,000 | |
| | | | | | | | | |
| Long-Term Debt | | | 1,517,005 | | | | 1,612,529 | |
| Less: Current portion of long-term debt (3) | | | 13,712 | | | | 154,114 | |
| Less: Unamortized discount | | | 3,221 | | | | 3,512 | |
| Plus: Unamortized premium | | | 48,275 | | | | 56,865 | |
| Net Long-Term Debt | | $ | 1,548,347 | | | $ | 1,511,768 | |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| (1) | The interest rates on these bonds were due to be remarketed on February 1, 2012; however such bonds were refinanced in January 2012, as discussed below. |
| (2) | The interest rate on these Bonds is reset through an auction held every 35 days. On February 6, 2012, the interest rate on the Bonds was 0.52%. |
| (3) | Includes the current portion of unamortized premium. |
The weighted-average remaining fixed rate period of outstanding long-term debt obligations of UIL Holdings and its subsidiaries as of December 31, 2011 was 11.3 years, at an average interest rate of 5.9%.
The fair value of UIL Holdings’ long-term debt was $1.7 billion and $1.6 billion as of December 31, 2011 and 2010, respectively, which was estimated by UIL Holdings based on market conditions. The expenses to issue long-term debt are deferred and amortized over the life of the respective debt issue or the fixed interest-rate period in the case of pollution control revenue bonds.
Information regarding maturities and mandatory redemptions/repayments are set forth below:
| | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 & thereafter | |
| | | (In Thousands) | |
| Maturities | | $ | 6,455 | | | $ | 41,455 | | | $ | 6,455 | | | $ | 1,455 | | | $ | 1,461,185 | |
Due to conditions in the municipal bond market, UIL Holdings determined it was economically favorable to refinance multiple series of pollution control revenue bonds in the aggregate principal amount outstanding of $103.5 million with notes issued in the private placement market. On January 30, 2012, UI entered into a Note Purchase Agreement with a group of institutional accredited investors to issue $203.5 million principal amount of senior unsecured notes. On January 30, 2012, $103.5 million of such notes were issued as follows: 3.61%, Series B, due January 31, 2022, in the principal amount outstanding of $51.5 million and 4.89%, Series D, due January 30, 2042, in the principal amount outstanding of $52 million.
In September 2011, SCG repaid, upon maturity, the outstanding balance of its 6.59% senior secured medium term notes totaling $30 million.
On August 29, 2011, SCG entered into a note purchase agreement with a group of institutional accredited investors providing for the sale to such investors of (1) secured 3.88% medium-term notes due September 22, 2021 (constituting a series of first mortgage bonds) in the principal amount of $25 million, and (2) secured 5.39% medium-term notes due September 22, 2041 (constituting a series of first mortgage bonds) in the principal amount of $25 million. SCG received $25 million, upon the issuance of such notes on September 22, 2011.
In July 2011, UI repaid, upon maturity, approximately $63 million of borrowings under its equity bridge loan (EBL) relating to GenConn. The EBL was used by UI to fund its commitments as a 50-50 joint venturer in GenConn.
In May 2011, Berkshire repaid, upon maturity, the outstanding balance of its 4.76% unsecured notes totaling $3.0 million.
In February 2011, UIL Holdings repaid, upon maturity, the outstanding balances of its 7.23% Series A Senior Notes totaling $4.3 million and its 7.38% Series B Senior Notes totaling $45 million.
On October 7, 2010, UIL Holdings issued, through a public offering, senior unsecured 4.625% notes in the principal amount of $450 million, due on October 1, 2020. The notes were issued at a discounted price of 99.204%, resulting in net proceeds of $443.5 million.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
On May 13, 2010, UI entered into a note purchase agreement with a group of institutional accredited investors providing for the sale of senior unsecured 6.09% notes in the principal amount of $100 million, due on July 27, 2040. Such notes were issued on July 27, 2010.
On February 1, 2010, $27.5 million of tax-exempt bonds were refunded with the proceeds from the issuance of $27.5 million of new tax-exempt bonds, at a fixed interest rate of 4.5%, for a period of five years and five months.
(C) REGULATORY PROCEEDINGS
Electric Distribution and Transmission
Tropical Storm Irene, which passed through Connecticut in August 2011, and the autumn nor’easter, which passed through Connecticut in October 2011, (the “Storms”), caused extensive damage to the electric system in UI’s service territory and left approximately 59% and 16%, respectively, of UI’s customers without electricity. PURA has opened an investigation of the service response and communications of UI, among other utilities, following power outages resulting from the Storms. In accordance with PURA regulatory decisions and past storm cost guidance, UI has established a regulatory asset for its storm-related expenses. As of December 31, 2011, UI’s estimate of the cost of repairing the damage resulting from the Storms and restoring service to customers is approximately $25 million, of which approximately $5 million has been capitalized as property plant and equipment and the remainder as a regulatory asset. UI expects to seek recovery of these costs in future rate proceedings.
On January 9, 2012, a panel formed by Connecticut Governor Malloy issued its “Report of the Two Storm Panel” (the Report). The Report considered areas such as (i) utility preparedness, tree trimming and infrastructure hardening, (ii) communications and information sharing, and (iii) municipal matters such as preparedness, road safety and shelter operations. The Report also makes a number of recommendations with respect to emergency preparedness in the State of Connecticut. UI is unable to assess if any of the recommendations related to Connecticut’s utilities will be implemented in the future, but expects any costs associated with any related legislative or regulatory action to be fully recoverable.
Rates
In rulings throughout 2009, PURA issued its final decision regarding UI’s application requesting an increase in distribution rates (the 2009 Decisions), the results of which provided for an allowed distribution return on equity of 8.75%, a decrease from the previously approved 9.75%, and a capital structure of 50% equity and 50% debt, compared to the previously approved 48% equity and 52% debt capital structure. The 2009 Decisions continued the prior earnings sharing mechanism structure, applying to the new 8.75% allowed return, whereby 50% of any earnings over the allowed twelve month level is returned to customers and 50% is retained by UI. Additionally, the 2009 Decisions provided for a two year pilot program for full decoupling of distribution revenues from sales.
On April 1, 2010, UI filed its ratemaking proposal and underlying decoupling analysis for the 2009 rate year ended February 3, 2010. On September 1, 2010, PURA issued its final decision in this matter approving a decoupling charge totaling approximately $1.6 million, which was recovered from ratepayers over a twelve month period commencing in October 2010. In addition to the decoupling charge, PURA also approved a pension and earnings sharing over-recovery credit totaling approximately $3.6 million, which was refunded to ratepayers over the same twelve month period commencing in October 2010.
UI filed its 2010 rate year decoupling results with PURA on April 4, 2011 and on August 31, 2011 PURA issued a final decision approving a decoupling adjustment totaling approximately $1.4 million, to be credited to ratepayers over a twelve month period beginning in October 2011 and extending the decoupling pilot until UI’s next general rate proceeding.
In December 2011, UI received a letter ruling approving rates effective January 1, 2012 incorporating the 2009 distribution rate changes mentioned above along with previously approved changes to the Generation Services Charges (GSC), Non-Bypassable
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Federally Mandated Congestion Charges, transmission and systems benefits charges. Additionally, last resort service GSC rates have been approved for the period through March 31, 2012.
Approval for the Issuance of Debt
UI has PURA approval for the issuance of up to $379 million principal amount of debt securities from 2010 through 2013 (the Proposed Notes). The proceeds from the sales of the Proposed Notes may be used by UI for the following purposes: (1) to finance capital expenditures; (2) to repay the equity bridge loan, the proceeds of which were used to finance UI’s equity contribution in GenConn for the development and construction of GenConn Devon and GenConn Middletown; (3) to fund UI’s pension plan; (4) to partially repay short-term borrowings that are incurred to temporarily fund the preceding needs; (5) to pay for issuance costs related to the Proposed Notes; (6) to repay $103.5 million principal amount outstanding of pollution control revenue bonds, due to be remarketed in the municipal bond market on February 1, 2012, and (7) for general corporate purposes. UI has issued $203.5 million principal amount of senior unsecured notes, $100 million of which were issued on July 27, 2010 and $103.5 million of which were issued on January 30, 2012. UI expects to issue an additional $100 million principal amount of senior unsecured notes in April 2012.
Other Proceedings
UI generally has several regulatory proceedings open and pending at PURA at any given time. Examples of such proceedings include an annual PURA review and reconciliation of UI’s Competitive Transition Assessment (CTA) and Systems Benefits Charges (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.
UI files semi-annual true-ups with PURA regarding Bypassable Federally Mandated Congestion Charges and Non-Bypassable Federally Mandated Congestion Charges. These customer charges relate to “congestion costs” associated with not having adequate transmission infrastructure to move energy from the generating sources to the consumer and costs associated with ensuring adequate capacity on the electric system, such as peaking generation and capacity CfDs with generators. These costs change from time to time and the semi-annual true-ups provide a mechanism for the electric distribution companies to adjust the charges to customers that allow the companies to recover the Federally Mandated Congestion Charges.
UI makes a semi-annual transmission adjustment clause (TAC) filing with PURA 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. PURA holds an administrative proceeding to approve the TAC charge or credit and holds a hearing to determine the accuracy of customer billings under the TAC. The TAC tariff and this semi-annual change of the TAC charge or credit facilitates the timely matching of transmission revenues and transmission revenue requirements.
Pension and Postretirement Expenses
In response to the Internal Revenue Service (IRS) mandated change in mortality tables utilized for certain Employee Retirement Income Security Act of 1974 (ERISA)-related liability calculations, effective January 1, 2007, PURA allowed regulatory treatment for the change in pension and postretirement expenses resulting from the use of the new mortality tables. In the 2009 Decisions, PURA approved the recovery of these expenses over a four-year period beginning in 2009. As of December 31, 2011, the remaining regulatory asset was approximately $1.1 million.
The 2009 Decisions also provide for the establishment of an annual regulatory asset to address a portion of the actual increase in pension and postretirement expense for each of 2009 and 2010. As of December 31, 2009, UI had recorded a regulatory asset of approximately $10.2 million which was fully recovered in 2010. Additionally, $11.4 million was included in rates in 2010 for UI’s estimate of 2010 pension and postretirement expense.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Power Supply Arrangements
UI’s retail electricity customers are able to choose their electricity supplier. Since January 1, 2007, UI has been required to offer standard service to those of its customers who do not choose a retail electric supplier and have a maximum demand of less than 500 kilowatts. In addition, UI is required to offer supplier of last resort service to customers who are not eligible for standard service and who do not choose to purchase electric generation service from a retail electric supplier licensed in Connecticut.
UI must procure its standard service power pursuant to a procurement plan approved by PURA. The procurement plan must provide for a portfolio of service agreements procured in an overlapping pattern over fixed time periods (a laddering approach). In June 2006, PURA approved a procurement plan for UI. As required by Connecticut statute, a third party consultant retained by PURA works closely with UI in the procurement process and to provide a joint recommendation to PURA as to selected bids.
UI has wholesale power supply agreements in place for the supply of all of its standard service customers for all of 2012, and 40% of 2013. Supplier of last resort service is procured on a quarterly basis. UI determined that its contracts for standard service and supplier of last resort service are derivatives under ASC 815 “Derivatives and Hedging” and elected the “normal purchase, normal sale” exception under ASC 815 “Derivatives and Hedging.” As such, UI regularly assesses the accounting treatment for its power supply contracts. These wholesale power supply agreements contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt was to fall below investment grade. In October 2011, Moody’s Investor Services released its updated credit opinion for UI and maintained its Baa2 rating with a stable outlook. In May 2011, Standard & Poors’ Investor Services released its updated credit opinion for UI, maintaining its BBB rating with a stable outlook. If UI’s credit rating were to decline one rating and UI were to be placed on negative credit watch, monthly amounts due and payable to the power suppliers would be accelerated to semi-monthly payments. UI’s credit rating would have to decline two ratings to fall below investment grade at either rating service. If this were to occur, UI would have to deliver collateral security in an amount equal to the receivables due to the sellers for the thirty-day period immediately preceding the default notice. If such a situation had been in effect as of December 31, 2011, UI would have had to post approximately $12.2 million in collateral.
UI is permitted to seek long-term contracts for up to 20% of standard service requirements, the goal of which is to obtain long-term energy supply contracts and Connecticut Class I Renewable Energy Certificates for UI’s standard service customers that will result in an economic benefit to ratepayers, both in terms of risk and cost mitigation. UI continues to keep apprised of possible long-term contracts that could benefit customers; however, UI has not executed any long-term contracts.
New Renewable Source Generation
Under Connecticut law, electric distribution companies were required to enter into contracts to purchase the output of new renewable generation totaling at least 150 MW, at prices and upon terms approved by the PURA in accordance with statutory requirements. In 2007, one contract was approved by PURA and executed by CL&P. As directed by PURA, UI executed a sharing agreement with CL&P whereby UI pays approximately 20% of the costs and obtains approximately 20% of the benefits of the contract. This contract will be accounted for on an accrual basis. In January 2008, PURA issued a decision approving seven projects; UI is a party to contracts relating to two of these projects. UI signed a contract to purchase, over a fifteen year time period, 100% of the delivered products generated by the Stamford Hospital Fuel Cell Combined Heat and Power Project which has a 4.8 MW capacity. This contract will be accounted for as an operating lease. UI also signed a contract to purchase, over a fifteen year time period, 84.5% of the delivered products generated by the South Norwalk Bio-Fuel Project which has a 30 MW capacity and which will be accounted for on an accrual basis. In April 2009, PURA approved five additional fuel cell projects to which accrual accounting will be applied and for which contracts were executed by CL&P in July 2009. All of these contracts will be subject to the cost sharing agreement with CL&P. UI’s costs associated with all such contracts are recoverable, whether UI is a direct party or pursuant to the sharing agreement. On September 7, 2011, PURA issued a report to the legislature stating that, of the original 150 MW, only 47 MW have the capability of achieving commercial operation within
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
contractual deadlines. This 47 MW includes the Stamford Hospital contract to which UI is a party, but does not include the South Norwalk project. Contracts are expected to be terminated as the commercial operation deadlines expire.
Under a 2011 Connecticut law (PA 11-80), UI and CL&P are required to enter into long-term contracts to purchase Renewable Energy Credits (RECs) from new facilities installed behind distribution customer meters. Under this program, UI will be required to enter into contracts totaling up to $200 million in commitments over an approximate 21 year period. The obligations will phase in over a six year solicitation period, and are expected to peak at an annual commitment level of about $13.6 million/year after six years. The cost of the contracts is expected to be partially mitigated through the resale of the RECs with any remaining costs expected to be recovered in rates. In December 2011, UI and CL&P submitted a joint petition to PURA outlining a plan to address the new requirements. UI expects PURA to issue its final decision in the first quarter of 2012.
PA 11-80 also allows for the development of 30 MW of grid-connected renewable energy whereby UI & CL&P are each allowed to develop up to 10 MW and the Department of Energy and Environmental Protection (DEEP) solicited 10 MW from the market. On December 23, 2011, DEEP announced that it had selected two 5 MW solar projects in CL&P service territory. UI anticipates that CL&P will execute contracts to purchase energy and associated products from both projects, and that a sharing arrangement will be executed between UI and CL&P. Pursuant to PA 11-80, the costs of payments made to projects are recoverable through a reconciling component of electric rates. On January 18, 2012, UI filed a proposal with PURA outlining a framework for approval of UI’s renewable connections program under which UI would develop up to 10 MW of renewable generation for recovery on a cost of service basis. UI expects PURA to issue a final decision in the second quarter of 2012.
FERC
UI recovers its transmission revenue requirements on a prospective basis, subject to reconciliation with actual revenue requirements. UI is required to file information regarding its approved formula rates on an annual basis with the FERC.
ISO-NE and Regional Transmission Organization (RTO)
ISO-NE, an independent, not-for-profit corporation, is the RTO for New England. ISO-NE is responsible for the reliable operation of the region’s bulk electric power system, which includes UI’s electric system, and administration of the region’s wholesale electricity marketplace. ISO-NE also is responsible for the management of the comprehensive bulk electric power system and wholesale markets’ planning processes that address the region's electricity needs.
The FERC has issued orders establishing allowable ROEs for transmission projects of transmission owners in New England, including UI. The FERC established a base-level ROE of 11.14% as well as a 50 basis point ROE adder on Pool Transmission Facilities (PTF) for participation in the RTO for New England and a 100 basis point ROE incentive for projects included in the ISO-NE Regional System Plan that were completed and on line as of December 31, 2008. For projects placed in service after December 31, 2008, incentives may be requested from the FERC, through a specific showing justifying the incentive, on a project-specific basis.
UI’s overall transmission ROE is determined by the mix of UI’s transmission rate base between new and existing transmission assets, and whether such assets are PTF or non-PTF. UI’s transmission assets are primarily PTF. For 2011, UI’s overall allowed weighted-average ROE for its transmission business was 12.4%.
New England East-West Solution
Pursuant to an agreement with CL&P (the Agreement), UI has the right to invest in, and own transmission assets associated with, the Connecticut portion of CL&P’s New England East West Solution (NEEWS) projects to improve regional energy reliability. NEEWS consists of four inter-related transmission projects being developed by subsidiaries of Northeast Utilities (NU), the parent company of CL&P, in collaboration with National Grid USA. Three of the projects have portions located in Connecticut: (1) the Greater Springfield Reliability Project, (2) the Interstate Reliability Project and (3) the Central
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Connecticut Reliability Project. In December 2011, CL&P submitted an application to the CSC seeking siting approval of the Interstate Reliability Project.
Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific transmission assets as they are placed in service. UI has the right to invest up to the greater of $60 million or an amount equal to 8.4% of CL&P’s costs for the Connecticut portions of the NEEWS projects. Based upon the current projected costs, this amount is approximately $60 million. As assets are placed in service, CL&P will transfer title to certain transmission assets to UI in proportion to its investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating and maintenance agreement with UI. Also, under the terms of the Agreement, there are certain circumstances under which CL&P can terminate the Agreement. Such termination would have no affect on the assets previously transferred to UI.
Through December 31, 2011, UI has made deposits totaling $9.6 million in NEEWS and expects to make the remaining deposits over a period of three to five years, depending on the timing and amount of CL&P’s capital expenditures and the projects’ in service dates. UI earned pre-tax income of approximately $1 million on such deposits in 2011. On February 6, 2012, UI made an additional deposit in NEEWS of $1.3 million.
Equity Investment in Peaking Generation
UI is a 50-50 joint venturer with NRG in GenConn, which was chosen by PURA to build and operate two new peaking generation plants to help address Connecticut’s need for power generation during the heaviest load periods. The two new peaking generation projects, GenConn Devon and GenConn Middletown, are both operating in the ISO-New England markets. PURA has approved revenue requirements for the period from January 1, 2012 through December 31, 2012 of $34 million and $42.3 million for GenConn Devon and GenConn Middletown, respectively.
Gas Distribution
Rates
Utilities are entitled by Connecticut and Massachusetts statute to charge rates that are sufficient to allow them an opportunity to cover their reasonable operating and capital costs, to attract needed capital and to maintain their financial integrity, while also protecting relevant public interests.
SCG and CNG
In July and August 2009, PURA issued final decisions in rate cases for CNG and SCG, respectively. Subsequent to the issuance of these final decisions, both CNG and SCG appealed the PURA orders to the Connecticut superior court. The rates established in the 2009 decisions, and certain other orders, were stayed by stipulation pending the resolution of the appeals. In April 2010, the Connecticut superior court ruled in favor of PURA and dismissed the appeals. CNG and SCG appealed the superior court's dismissal to the Connecticut supreme court. On March 24, 2011, SCG, CNG and the Office of Consumer Counsel filed a motion with PURA to reopen the SCG and CNG rate cases for the purposes of reviewing and approving a settlement agreement. On April 13, 2011, PURA reopened the rate cases and then issued a final decision on August 3, 2011. PURA's final decision approves the settlement agreement, except for minor modifications, including removing the provision that would have combined SCG and CNG for ratemaking purposes without further PURA approval. The final decision resolves all pending issues related to the rate case appeals and terminates the SCG potential overearnings investigation. Among other things, it results in the removal for monitoring purposes of the ten basis point penalty originally imposed at both companies for billing issues which have since been remediated resulting in authorized ROEs of 9.41% and 9.36% for CNG and SCG respectively. Additionally, the companies will be allowed to recover carrying charges on the excess interim rate decrease over-credited to customers during the stay of the rate case decisions while on appeal. Recoverable carrying charges of approximately $2.2 million were recorded in the third quarter of 2011 and are included in “Other Income and (Deductions)” in UIL Holdings’ Consolidated Statement of Income. Monthly recognition of carrying charges will continue until the outstanding surcharge
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
balance, which is being collected during the non-winter months (April – November) through November 2012, is extinguished. The rate case appeals were withdrawn in September 2011 and the stays are no longer in effect.
Berkshire
Berkshire’s rates are established by the DPU. During 2011, Berkshire operated under a 10-year rate plan, approved by the DPU and which expired on January 31, 2012. The ROE approved in Berkshire’s rate plan is 10.5%. Berkshire is currently assessing what action, if any, should be taken.
Purchased Gas Adjustment Clause
The Gas Companies have purchased gas adjustment clauses approved by PURA and DPU which enable them to pass the reasonably incurred cost of gas purchases through to customers. These clauses allow companies to recover changes in the market price of purchased natural gas, substantially eliminating exposure to natural gas price risk.
Approval for the Issuance of Debt
On July 5, 2011, PURA approved SCG’s application requesting approval of the issuance of up to $50 million of secured medium-term notes (MTNs) to be priced at a fixed coupon rate not to exceed 7.0% and with maturities ranging from one to 40 years. The proceeds from the sale of the MTNs may be used by SCG for the following purposes: (1) to refinance $30 million principal amount of maturing existing debt; (2) to finance capital expenditures; (3) for working capital purposes; and (4) for general corporate purposes. In September 2011, SCG issued $50 million of debt in accordance with the terms and conditions approved by PURA. See Note (B) “Capitalization – Long-Term Debt” for further information.
Gas Supply Arrangements
The Gas Companies satisfy their natural gas supply requirements through purchases from various producer/suppliers, withdrawals from natural gas storage capacity contracts and winter peaking supplies and resources. The Gas Companies operate diverse portfolios of gas supply, firm transportation, gas storage and peaking resources. Each Gas Company contracts for such gas resources in its own name for regulatory and other reasons. Actual reasonable gas costs incurred by each of the Gas Companies are passed through to customers through state regulated purchased gas adjustment mechanisms subject to regulatory review.
The Gas Companies purchase the majority of the natural gas supply at market prices under seasonal, monthly or mid-term supply contracts and the remainder is acquired on the spot market. The Gas Companies diversify their sources of supply by amount purchased and location. The Gas Companies primarily acquire gas at various locations in the US Gulf of Mexico region, in the Appalachia region and in Canada.
The Gas Companies acquire firm transportation capacity on interstate pipelines under long-term contracts and utilize that capacity to transport both natural gas supply purchased and natural gas withdrawn from storage to the local distribution system. Collectively, the Gas Companies hold eighty-nine firm transportation contracts on twelve different pipelines. Three of those pipelines, Tennessee Gas Pipeline, Algonquin Gas Transmission and Iroquois Gas Transmission, interconnect with one or more of the Gas Companies’ distribution system and the other pipelines provide indirect services upstream of the city gates. The prices and terms and conditions of the firm transportation capacity long-term contracts are regulated by the FERC. Similar to the treatment of gas costs, the actual reasonable cost of such contracts is passed through to customers through state regulated purchased gas adjustment mechanisms. The future obligations under these contracts as of December 31, 2011 are as follows:
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
| | | (In Thousands) | |
| 2012 | | $ | 116,086 | |
| 2013 | | | 111,169 | |
| 2014 | | | 104,823 | |
| 2015 | | | 84,538 | |
| 2016 | | | 71,639 | |
| 2017-after | | | 136,694 | |
| | | $ | 624,949 | |
In November 2010, the Tennessee Gas Pipeline Company (Tennessee), the company that operates a pipeline on which the Gas Companies hold firm transportation contracts, filed a FERC rate case proposing significant rate increases across their entire system which runs from south Texas through New England. In December 2010, the FERC issued an order setting the Tennessee rate proceeding for hearing and suspended the proposed rate increase until June 1, 2011. On that date the rates were placed into effect by Tennessee subject to refund to final rates determined through the federal regulatory process. These rates were nearly double the pre-existing rates for reserving pipeline capacity with Tennessee, but provided for lower variable costs, resulting in a significant net cost increase. On September 30, 2011, Tennessee made a FERC filing seeking approval of a settlement of the issues in the case reached by the active parties, including FERC staff and the Gas Companies. On December 5, 2011 the FERC approved the settlement which reduced the rate increase effective as of November 1, 2011 and provided for refunds for the period of June 1, 2011 through October 31, 2011. The settlement did not have an impact on earnings as the cost of gas is included in customer rates through a purchased gas adjustment mechanism in place at the Gas Companies.
The Gas Companies acquire firm underground natural gas storage capacity using long-term contracts and fill the storage facilities with gas in the summer for subsequent withdrawal in the winter. Collectively, the Gas Companies hold twenty-four gas storage contracts with six different storage contractors. The storage facilities are located in Pennsylvania, New York, West Virginia and Michigan.
Winter peaking resources are primarily attached to the local distribution systems and are either owned or are contracted for by the Gas Companies, each of which is a Local Distribution Company (LDC). Each LDC owns or has rights to the natural gas stored in each of a Liquefied Natural Gas (LNG) facility directly attached to its distribution system.
(D) SHORT-TERM CREDIT ARRANGEMENTS
UIL Holdings, UI, CNG, SCG, and Berkshire are parties to a revolving credit agreement with a group of banks that will expire on November 30, 2016 (the UIL Holdings Credit Facility). The borrowing limit under the UIL Holdings Credit Facility is $400 million, all of which is available to UIL Holdings, of which $250 million is available to UI, of which $150 million is available to each of CNG and SCG, and $25 million of which is available to Berkshire. The UIL Holdings Credit Facility permits borrowings at fluctuating interest rates and also permits borrowings for fixed periods of time specified by each Borrower at fixed interest rates determined by the Eurodollar interbank market in London (LIBOR). The UIL Holdings Credit Facility also permits the issuance of letters of credit of up to $50 million.
As of December 31, 2011, there was $235 million outstanding under the UIL Holdings Credit Facility. Under the UIL Holdings Credit Facility, UIL Holdings has outstanding standby letters of credit in the aggregate amount of $3.9 million, which expire on January 31, 2013 and June 16, 2012, but can be extended under a provision that automatically extends letters of credit for one year periods from the expiration date (or any future expiration date), unless the issuer bank elects not to extend. In addition, UI has an outstanding standby letter of credit in the amount of $0.4 million, which expires on December 31, 2012. Available credit under the UIL Holdings Credit Facility at December 31, 2011 totaled $160.7 million for UIL Holdings and its subsidiaries in the aggregate. UIL Holdings records borrowings under the UIL Holdings Credit Facility as short-term debt, but the UIL Holdings Credit Facility provides for longer term commitments from banks allowing UIL Holdings to borrow and
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
reborrow funds, at its option, until its expiration on November 17, 2014, thus affording UIL Holdings flexibility in managing its working capital requirements.
As of December 31, 2011, UIL Holdings had no short-term borrowings outstanding under its money market loan arrangement with JPMorgan Chase Bank.
On January 13, 2012, UI entered into a revolving credit agreement with JPMorgan Chase Bank, N.A. that was due to expire on July 13, 2012 (the UI Credit Facility). The borrowing limit under the UI Credit Facility was $105 million. The use of funds under the UI Credit Facility was to provide additional liquidity for UI’s obligation to either remarket or repay and cancel $103.5 million of pollution control revenue bonds, due to be remarketed in the municipal bond market on February 1, 2012. The pollution control revenue bonds were repaid and cancelled with the issuance of senior unsecured notes that UI entered into with a group of institutional accredited investors on January 30, 2012, as discussed above. Subsequently, the UI Credit Facility was terminated.
Information with respect to short-term borrowings is set forth below:
| | | 2011 | | | 2010 | | | 2009 | |
| | | ($ In Thousands) | |
| UIL Holdings | | | | | | | | | |
| | | | | | | | | | |
| Maximum aggregate principal amount of short-term borrowing outstanding at any month-end | | $ | 46,000 | | | $ | 5,000 | | | $ | 6,900 | |
| Average aggregate short-term borrowings outstanding during the year* | | $ | 20,310 | | | $ | 1,699 | | | $ | 2,298 | |
| Weighted average interest rate* | | | 2.02 | % | | | 0.65 | % | | | 3.26 | % |
| Principal amounts outstanding at year-end | | $ | 35,000 | | | $ | - | | | $ | - | |
| Annualized interest rate on principal amounts outstanding at year-end | | | 1.59 | % | | | N/A | | | | N/A | |
| Fees* | | $ | 224 | | | $ | 115 | | | $ | 58 | |
| | | | | | | | | | | | | |
| UI | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Maximum aggregate principal amount of short-term borrowing outstanding at any month-end | | $ | 200,000 | | | $ | 25,000 | | | $ | 174,000 | |
| Average aggregate short-term borrowings outstanding during the year* | | $ | 82,690 | | | $ | 10,778 | | | $ | 65,526 | |
| Weighted average interest rate* | | | 1.91 | % | | | 0.67 | % | | | 0.88 | % |
| Principal amounts outstanding at year-end | | $ | 200,000 | | | $ | - | | | $ | - | |
| Annualized interest rate on principal amounts outstanding at year-end | | | 1.39 | % | | | N/A | | | | 0.00 | % |
| Fees* | | $ | 559 | | | $ | 273 | | | $ | 513 | |
| | | | | | | | | | | | | |
Gas Companies ** | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Maximum aggregate principal amount of short-term borrowing outstanding at any month-end | | $ | 10,000 | | | $ | 7,000 | | | | N/A | |
| Average aggregate short-term borrowings outstanding during the year* | | $ | 1,222 | | | $ | 6,067 | | | | N/A | |
| Weighted average interest rate* | | | 1.80 | % | | | 0.26 | % | | | N/A | |
| Principal amounts outstanding at year-end | | $ | - | | | $ | 7,000 | | | | N/A | |
| Annualized interest rate on principal amounts outstanding at year-end | | | N/A | | | | 1.75 | % | | | N/A | |
| Fees* | | $ | 783 | | | $ | 75 | | | | N/A | |
| * | Average short-term borrowings represent the sum of daily borrowings outstanding, weighted for the number of days outstanding and divided by the number of days in the period. The weighted average interest rate is determined by dividing interest expense by the amount of average borrowings. Fees are excluded from the calculation of the weighted average interest rate. |
| ** | Gas Company information for 2010 relates to the 45-day period ending December 31, 2010. |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(E) INCOME TAXES
| | | 2011 | | | 2010 | | | 2009 | |
| | | (In Thousands) | |
| Income tax expense consists of: | | | | | | | | | |
| Income tax provisions: | | | | | | | | | |
| Current | | | | | | | | | |
| Federal | | $ | (16,626 | ) | | $ | (21,059 | ) | | $ | 35,452 | |
| State | | | (3,951 | ) | | | (547 | ) | | | 4,331 | |
| Total current | | | (20,577 | ) | | | (21,606 | ) | | | 39,783 | |
| Deferred | | | | | | | | | | | | |
| Federal | | | 72,840 | | | | 56,484 | | | | (1,835 | ) |
| State | | | 10,433 | | | | 558 | | | | (4,706 | ) |
| Total deferred | | | 83,273 | | | | 57,042 | | | | (6,541 | ) |
| | | | | | | | | | | | | |
| Investment tax credits | | | (195 | ) | | | (152 | ) | | | (146 | ) |
| | | | | | | | | | | | | |
| Total income tax expense | | $ | 62,501 | | | $ | 35,284 | | | $ | 33,096 | |
| | | | | | | | | | | | | |
| The following table details the components of the deferred income tax provision: | | | | | | | | | | | | |
| Property related (accelerated depreciation and other) | | $ | 43,734 | | | $ | 76,168 | | | $ | 10,289 | |
| Investment in GenConn | | | 32,694 | | | | 19,201 | | | | 132 | |
| Pension benefits | | | 11,653 | | | | (11,182 | ) | | | (5,941 | ) |
| Storm costs | | | 8,922 | | | | 2,358 | | | | 184 | |
| Regulatory deferrals | | | 6,570 | | | | (19,213 | ) | | | (5,278 | ) |
| Corporate acquisition costs | | | 6,260 | | | | (9,206 | ) | | | - | |
| Goodwill | | | 4,668 | | | | 588 | | | | - | |
| Conservation adjustment mechanisms-Gas Companies | | | 864 | | | | 418 | | | | - | |
| Bond redemption costs | | | (340 | ) | | | (340 | ) | | | (340 | ) |
| Incentive compensation plans | | | (620 | ) | | | 268 | | | | (634 | ) |
| Deferred gas costs | | | (1,608 | ) | | | 4,216 | | | | - | |
| Post retirement benefits | | | (2,117 | ) | | | (2,271 | ) | | | (2,870 | ) |
| Seabrook lease buyout | | | (2,985 | ) | | | (2,542 | ) | | | (1,367 | ) |
| Net operating loss carryforward | | | (23,300 | ) | | | - | | | | - | |
| Other, net | | | (1,122 | ) | | | (1,421 | ) | | | (716 | ) |
| | | | | | | | | | | | | |
| Deferred income tax provision, net | | $ | 83,273 | | | $ | 57,042 | | | $ | (6,541 | ) |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Total income taxes differ from the amounts computed by applying the federal statutory tax rate to income before taxes. The reasons for the differences are as follows:
Tax rate
| | | 2011 | | | 2010 | | | 2009 | |
| | | (In Thousands) | |
| Computed tax at federal statutory rate | | $ | 56,774 | | | $ | 31,549 | | | $ | 30,595 | |
| Increases (reductions) resulting from: | | | | | | | | | | | | |
| ITC taken into income | | | (195 | ) | | | (152 | ) | | | (146 | ) |
| Allowance for equity funds used during construction | | | (3,689 | ) | | | (2,511 | ) | | | (227 | ) |
| Amortization of nuclear plant regulatory assets | | | 8,885 | | | | 7,661 | | | | 3,696 | |
| Book depreciation more (less) than non-normalized tax depreciation | | | (1,023 | ) | | | (734 | ) | | | 313 | |
| State income taxes, net of federal income tax benefits | | | 4,214 | | | | 7 | | | | (223 | ) |
| ESOP dividend payments | | | (526 | ) | | | (488 | ) | | | (457 | ) |
| Mark-to-market adjustments to non-qualified pension investments | | | 3 | | | | (208 | ) | | | (391 | ) |
| Uncollectible reserve and programs | | | 1,477 | | | | 159 | | | | - | |
| Acquisition and closing related expenses | | | 6 | | | | 967 | | | | - | |
| Other items, net | | | (3,425 | ) | | | (966 | ) | | | (64 | ) |
| | | | | | | | | | | | | |
| Total income tax expense | | $ | 62,501 | | | $ | 35,284 | | | $ | 33,096 | |
| | | | | | | | | | | | | |
| Book income before income taxes | | $ | 162,211 | | | $ | 90,141 | | | $ | 87,413 | |
| | | | | | | | | | | | | |
| Effective income tax rates | | | 38.5 | % | | | 39.1 | % | | | 37.9 | % |
Differences in the treatment of certain transactions for book and tax purposes occur which cause the rate of UIL Holdings’ reported income tax expense to differ from the statutory tax rate described above. The effective book income tax rate for the year ended December 31, 2011 was 38.5%, as compared to 39.1% for the year ended December 31, 2010. The decrease in the 2011 effective book income tax rate was primarily due to the absence of acquisition and closing-related expenses associated with the acquisition of the Gas Companies in 2010.
During 2011, UIL Holdings incurred a net operating loss (NOL) for federal income tax purposes of approximately $100 million. It is currently anticipated that a portion of the NOL will be carried back and utilized to obtain a refund of federal income taxes paid in prior years, with the remainder carried forward and utilized commencing with 2012. The NOL carry forward resulted in a deferred tax asset of approximately $23 million as of December 31, 2011.
Federal income tax legislation enacted during the fourth quarter of 2010 provided for accelerated capital recovery for federal income tax purposes for certain capital additions placed in service during the fourth quarter of 2010 and calendar year 2011. As a result, during the fourth quarter of 2010 and calendar year 2011, UIL Holdings recognized additional tax deductions for capital recovery that resulted in cash benefits that were recognized through lower cash requirements for federal income tax deposits required in the fourth quarter of 2010 and calendar year 2011. The remainder of the cash benefits will be recognized through lower operational financing requirements during 2012.
During 2010, UIL Holdings recognized a significant one-time income tax deduction, which it reflected on its 2009 state and federal income tax returns, related to repair and maintenance costs it had previously capitalized for tax purposes. This one-time income tax deduction resulted in a cash benefit of approximately $40.5 million. As a result of this change in accounting for tax purposes, as of December 31, 2011, UIL Holdings had gross unrecognized tax benefits of approximately $13.7 million, including approximately $0.5 million of interest, of which none would impact the effective tax rate if recognized. In December 2011, the Internal Revenue Service (IRS) issued new regulations with respect to the tax deductibility of previously capitalized repair and maintenance costs, which replaced previous proposed regulations issued by the IRS in March 2008. UIL Holdings is currently reviewing the impact of implementing these new regulations with the filing of its 2011 federal and state income tax
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
returns. This review is expected to be completed during the second quarter of 2012 and is not anticipated to result in a material impact to UIL Holdings’ consolidated financial statements.
The following table sets forth a reconciliation of the changes in the gross income tax reserves for the years ended December 31, 2011 and 2010:
| | | 2011 | | | 2010 | |
| | | (In Thousands) | |
| Balance as of December 31 | | $ | 11,349 | | | $ | - | |
| Increases for tax positions related to prior years | | | - | | | | 8,922 | |
| Increases for tax positions related to current year | | | 2,327 | | | | 2,427 | |
| Balance as of December 31 | | $ | 13,676 | | | $ | 11,349 | |
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, in the case of BER, the income tax statutes of the Commonwealth of Massachusetts. As of December 31, 2011, the tax years 2008, 2009, and 2010 remain open and subject to audit for State of Connecticut income tax purposes. As of December 31, 2011, the tax years 2008, 2009, and 2010 are open and subject to audit for federal income tax purposes. During 2009, the IRS closed examinations of the tax years 2004, 2005, 2006, and 2007. The IRS examination of the tax years 2004, 2005, and 2006 resulted in an immaterial assessment to UIL Holdings. The examination of the tax year 2007 resulted in no additional assessment or refund to UIL Holdings.
At December 31, 2011, UIL Holdings had non-current deferred tax liabilities for taxable temporary differences of $512.7 million and non-current deferred tax assets for deductible temporary differences of $124.1 million, resulting in a net non-current deferred tax liability of $388.6 million. UIL Holdings had current deferred tax assets of $41.6 million at December 31, 2011. UIL Holdings did not have any current deferred tax liabilities at December 31, 2011.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table summarizes UIL Holdings’ deferred tax assets and liabilities as of December 31, 2011 and 2010:
| | | 2011 | | | 2010 | |
| | | (In Thousands) | |
| Deferred income tax assets: | | | | | | |
| Regulatory asset related to pension and other post-retirement benefits | | $ | 83,057 | | | $ | 78,427 | |
| Post-retirement benefits | | | 69,624 | | | | 12,106 | |
| Net operating loss carry forward | | | 23,300 | | | | - | |
| Regulatory deferrals | | | 4,751 | | | | 10,966 | |
| Acquisition and closing related expenses | | | 2,947 | | | | 9,207 | |
| ASC 740 gross-up effect on deferred taxes | | | 3,531 | | | | 6,477 | |
| Deferred gas company costs | | | - | | | | 3,637 | |
| Connecticut Yankee equity investment | | | 3,145 | | | | 3,145 | |
| Long-term incentive plan | | | 4,622 | | | | 3,498 | |
| Vacation accrual | | | 2,927 | | | | 2,728 | |
| Incentive compensation plans | | | 2,895 | | | | 2,275 | |
| Deferred compensation plan | | | 2,708 | | | | 2,171 | |
| Supplemental pensions | | | 2,354 | | | | 2,134 | |
| Stock compensation plans | | | 2,037 | | | | 1,836 | |
| Uncollectibles | | | 1,359 | | | | 1,439 | |
| Post-employment benefits | | | 615 | | | | 700 | |
| Gains on sale of property | | | 662 | | | | 662 | |
| Interest during construction | | | 360 | | | | 442 | |
| Other | | | 11,166 | | | | 12,449 | |
| | | $ | 222,060 | | | $ | 154,299 | |
| | | | | | | | | |
| | | | | | | | | |
| Deferred income tax liabilities: | | | | | | | | |
| Plant basis differences | | $ | 169,890 | | | $ | 182,797 | |
| Accelerated depreciation timing differences | | | 220,030 | | | | 154,067 | |
| Regulatory asset related to pension and other post-retirement benefits | | | 71,325 | | | | 69,358 | |
| Investment in GenConn | | | 52,027 | | | | 19,332 | |
| Seabrook lease buyout | | | 13,656 | | | | 16,641 | |
| Hardship programs | | | 5,037 | | | | 5,889 | |
| Bond redemption costs | | | 5,446 | | | | 5,786 | |
| Other | | | 31,567 | | | | 30,554 | |
| | | $ | 568,978 | | | $ | 484,424 | |
ASC 740 requires that all current deferred tax assets and liabilities within each particular tax jurisdiction be offset and presented as a single amount in the Consolidated Balance Sheet. A similar procedure is followed for all non-current deferred tax assets and liabilities. Amounts in different tax jurisdictions cannot be offset against each other. The amount of deferred income taxes as of December 31, 2011 and 2010 included on the following lines of the Consolidated Balance Sheet is as follows:
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| | | 2011 | | | 2010 | |
| | | (In Thousands) | |
| Assets: | | | | | | |
| Deferred and refundable income taxes | | $ | 41,635 | | | $ | 24,039 | |
| Liabilities: | | | | | | | | |
| Deferred income taxes | | | 388,553 | | | | 354,164 | |
| Deferred income taxes – net | | $ | 346,918 | | | $ | 330,125 | |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(F) SUPPLEMENTARY INFORMATION
| | | 2011 | | | 2010 | | | 2009 | |
| | | (In Thousands) | |
| Operating Revenues | | | | | | | | | |
| Electric Distribution and Transmission: | | | | | | | | | |
| Retail | | $ | 656,533 | | | $ | 736,576 | | | $ | 796,665 | |
| Wholesale | | | 491 | | | | 505 | | | | 235 | |
| Other operating revenue | | | 140,632 | | | | 122,466 | | | | 98,781 | |
| Total Electric Distribution and Transmission Revenue | | | 797,656 | | | | 859,547 | | | | 895,681 | |
| Gas Distribution: | | | | | | | | | | | | |
| Retail | | | 675,122 | | | | 123,846 | | | | N/A | |
| Wholesale | | | 65,943 | | | | 8,765 | | | | N/A | |
| Other operating revenue | | | 31,250 | | | | 5,494 | | | | N/A | |
| Total Gas Distribution Revenue | | | 772,315 | | | | 138,105 | | | | N/A | |
| Non-utility revenues: | | | | | | | | | | | | |
| Other | | | 476 | | | | 14 | | | | 869 | |
| Total Operating Revenues | | $ | 1,570,447 | | | $ | 997,666 | | | $ | 896,550 | |
| | | | | | | | | | | | | |
| Depreciation and Amortization | | | | | | | | | | | | |
| Property, plant, and equipment depreciation | | $ | 98,038 | | | $ | 55,118 | | | $ | 49,588 | |
| Amortization of nuclear plant regulatory assets | | | 44,635 | | | | 45,898 | | | | 46,907 | |
| Amortization of other regulatory assets | | | 24,741 | | | | 12,885 | | | | 1,579 | |
| Other amortization | | | 48 | | | | 45 | | | | 42 | |
| Total Amortization | | | 69,424 | | | | 58,828 | | | | 48,528 | |
| Total Depreciation and Amortization | | $ | 167,462 | | | $ | 113,946 | | | $ | 98,116 | |
| | | | | | | | | | | | | |
| Taxes - Other than Income Taxes | | | | | | | | | | | | |
| Operating: | | | | | | | | | | | | |
| Connecticut gross earnings | | $ | 69,906 | | | $ | 51,708 | | | $ | 38,161 | |
| Local real estate and personal property | | | 34,902 | | | | 21,130 | | | | 16,471 | |
| Payroll taxes | | | 9,373 | | | | 5,659 | | | | 5,430 | |
| Other | | | 30 | | | | 205 | | | | - | |
| Total Taxes - Other than Income Taxes | | $ | 114,211 | | | $ | 78,702 | | | $ | 60,062 | |
| | | | | | | | | | | | | |
| Other Income and (Deductions), net | | | | | | | | | | | | |
| Interest income | | $ | 3,483 | | | $ | 4,163 | | | $ | 3,231 | |
| Allowance for funds used during construction - equity | | | 10,539 | | | | 7,180 | | | | 650 | |
| Allowance for funds used during construction - debt | | | 9,143 | | | | 4,735 | | | | 1,305 | |
| Conservation & Load Management incentive | | | 1,035 | | | | 1,720 | | | | 765 | |
| Energy generation and load curtailment incentives | | | 607 | | | | 928 | | | | 369 | |
| ISO load response, net | | | 404 | | | | 1,153 | | | | 1,913 | |
| Miscellaneous other income and (deductions), net | | | 1,721 | | | | (2,617 | ) | | | (2,647 | ) |
| Total Other Income and (Deductions), net | | $ | 26,932 | | | $ | 17,262 | | | $ | 5,586 | |
| | | | | | | | | | | | | |
| Other Interest, net | | | | | | | | | | | | |
| Notes Payable | | $ | 442 | | | $ | 83 | | | $ | 644 | |
| Other | | | 4,774 | | | | 1,470 | | | | 642 | |
| Total Other Interest, net | | $ | 5,216 | | | $ | 1,553 | | | $ | 1,286 | |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(G) PENSION AND OTHER BENEFITS
Disclosures pertaining to UIL Holdings’ pension and other postretirement benefit plans (the Plans) are in accordance with ASC 715 Compensation-Retirement Benefits. UIL Holdings has an investment policy addressing the oversight and management of pension assets and procedures for monitoring and control. UIL Holdings has engaged State Street Bank as the trustee and investment manager to assist in areas of asset allocation and rebalancing, portfolio strategy implementation, and performance monitoring and evaluation.
The goals of the asset investment strategy are to:
| · | Achieve long-term capital growth while maintaining sufficient liquidity to provide for current benefit payments and UIL Holdings’ pension plan operating expenses. |
| · | Provide a total return that, over the long term, provides sufficient assets to fund UIL Holdings’ pension plan liabilities subject to an appropriate level of risk, contributions and pension expense. |
| · | Optimize the return on assets, over the long term, by investing primarily in a diversified portfolio of equities and additional asset classes with differing rates of return, volatility and correlation. |
| · | Diversify investments within asset classes to maximize preservation of principal and minimize over-exposure to any one investment, thereby minimizing the impact of losses in single investments. |
The Plans seek to maintain compliance with the Employee Retirement Income Security Act of 1974 (ERISA) as amended, and any applicable regulations and laws.
The Retirement Benefits Plans Investment Committee of the Board of Directors oversees the investment of the Plans assets in conjunction with management and has conducted a review of the investment strategies and policies of the Plans. This review included an analysis of the strategic asset allocation, including the relationship of Plan assets to Plan liabilities, and portfolio structure. The 2012 target asset allocations, which may be revised by the Retirement Benefits Plans Investment Committee, are approximately as follows: 50% Equity securities, 40% Debt securities and 10% Other securities, which consist primarily of real assets, hedge funds and high yield securities. In the event that the relationship of Plan assets to Plan liabilities changes, the Retirement Benefits Plans Investment Committee will consider changes to the investment allocations. The other postretirement employee benefit fund assets are invested in a balanced mutual fund and, accordingly, the asset allocation mix of the balanced mutual fund may differ from the target asset allocation mix from time to time.
The funding policy for the Plans 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 Plans. UIL Holdings has a minimum funding requirement for 2012 currently estimated at $40 million. Depending upon final actuarial calculations, the 2012 contribution may ultimately range between $50 million and $60 million.
Following the acquisition of the gas companies, UIL Holdings implemented consistent estimation techniques regarding its actuarial assumptions, where appropriate, across the pension and postretirement plans of its operating subsidiaries. The most significant of such changes was in the estimation technique utilized to develop the discount rate for its pension and postretirement benefit plans. The estimation technique is based upon the settlement of such liabilities as of December 31, 2011 utilizing a hypothetical portfolio of actual, high quality bonds, which would generate cash flows required to settle the liabilities. UIL Holdings believes such a change results in an estimate of the discount rate that more accurately reflects the settlement value for plan obligations than the different yield curve methodologies used in prior years. It results in cash flows which closely match the expected payments to participants.
As a result of the change described above, UIL Holdings is utilizing a discount rate of 5.30% as of December 31, 2011 for all of its qualified pension plans, compared to rates ranging from 5.00% to 5.35% in 2010. The discount rate for non-qualified pension plans as of December 31, 2011 was 5.05% compared to a range of 5.10% to 5.15% in 2010.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The discount rate for UIL Holdings’ postretirement benefits plans reflects the differing plan requirements and expected future cash flows. For the UI postretirement plan, the discount rate at December 31, 2011 and 2010 was 5.30%. For the Gas Company postretirement plans, the December 31, 2011 discount rate was a composite rate of 5.05%, weighted by expected future cash outflows, compared to 5.15% for the previous year.
The December 31, 2011 discount rate was selected based on the yield of a portfolio of high quality corporate bonds that could be purchased as of the measurement date to produce cash flows matching the expected plan disbursements within reasonable tolerances.
The pension and other postretirement benefits plans assumptions may be revised over time as economic and market conditions change. Changes in those assumptions could have a material impact on pension and other postretirement expenses. For example, if there had been a 0.25% change in the discount rate assumed for the pension plans, the 2011 pension expense would have increased or decreased inversely by $2.4 million. If there had been a 1% change in the expected return on assets assumed for the pension plans, the 2011 pension expense would have increased or decreased inversely by $6 million. If there had been a 0.25% change in the discount rate assumed for the other postretirement benefits plans, the 2011 other postretirement benefits plan expenses would have increased or decreased inversely by $0.3 million. If there had been a 1% change in the expected return on assets assumed for the other postretirement benefits plans, the 2011 other postretirement benefits plan expenses would have increased or decreased inversely by $0.4 million.
Pension Plans
The United Illuminating Company Pension Plan (the UI 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.
The Gas Companies have multiple qualified pension plans covering substantially all of their union and management employees. These entities also have non-qualified supplemental pension plans for certain employees. The qualified pension plans (Gas Companies’ Plans) are traditional defined benefit plans or cash balance plans for those hired on or after specified dates. In some cases, neither of these plans is offered to new employees and have been replaced with enhanced 401(k) plans for those hired on or after specified dates.
UI has established a supplemental retirement benefit trust and through this trust purchased life insurance policies on certain officers of UIL Holdings and UI to fund the future liability under the non-qualified supplemental plan. The cash surrender value of these policies is included in “Other investments” on the Consolidated Balance Sheet.
In addition, regarding the non-qualified plans, UIL Holdings has several rabbi trusts which were established to provide a supplemental retirement benefit for certain officers and directors of the Gas Companies.
Other Postretirement Benefits Plans
In addition to providing pension benefits, UI also provides other postretirement benefits, consisting principally of health care and life insurance benefits, for retired employees and their dependents. UI does not provide prescription drug benefits for Medicare-eligible employees in its other postretirement health care plans. Non-union employees who are 55 years of age and whose sum of age and years of service at time of retirement is equal to or greater than 65 are eligible for benefits partially subsidized by UI. The amount of benefits subsidized by UI is determined by age and years of service at retirement. For funding purposes, UI established a 401(h) account in connection with the UI Pension Plan and Serial Voluntary Employee Benefit Association Trust (VEBA) accounts for the years 2007 through 2020 to fund other postretirement benefits for UI’s non-union employees who retire on or after January 1, 1994. These VEBA accounts were approved by the IRS and UI contributed $4.5 million to fund the Serial VEBA accounts in 2007. UI does not expect to make a contribution in 2012 to fund OPEB for non-union employees.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
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. The amount of benefits subsidized by UI is determined by age and years of service at retirement. For funding purposes, UI established a VEBA to fund other postretirement benefits for UI’s union employees. The funding strategy for the VEBA is to select funds that most clearly mirror the pension allocation strategy. Approximately 38% of UI’s employees are represented by Local 470-1, Utility Workers Union of America, AFL-CIO, for collective bargaining purposes. Plan assets for the union VEBA consist primarily of equity and fixed-income securities. UI does not expect to make a contribution in 2012 to fund other postretirement benefits for union employees.
SCG and CNG also have plans providing other postretirement benefits for substantially all of their employees. These benefits consist primarily of health care, prescription drug and life insurance benefits, for retired employees and their dependents. The eligibility for these benefits is determined by the employee’s date of hire, number of years of service, age and whether the employee belongs to a certain group, such as a union.Dependents are also eligible at the employee’s date of retirement provided the retired participant pays the necessary contribution. These plans are contributory with the level of participant’s contributions evaluated annually. Benefits payments under these plans include annual caps for CNG participants hired after 1993 and SCG participants hired after 1996. SCG non-union employees hired after November 1995 are not eligible for these benefits. Union employees hired after April 1, 2010 and December 1, 2009 at SCG and CNG, respectively, are not eligible for these benefits. As such, Gas Company OPEB liabilities are not especially sensitive to increases in the healthcare trend rate. These plans are funded through a combination of 401(h) accounts and Voluntary Employee Benefit Association Trust (VEBA) accounts. UIL Holdings did not make any contributions to these plans in 2011, nor does it currently plan to make a contribution in 2012.
Purchase Accounting and Other Accounting Matters
In accordance with ASC 805, when an entity that sponsors a single-employer defined benefit plan or postretirement plan is purchased, the purchaser must assign part of the purchase price to a liability if the projected benefit obligation exceeds plan assets. The measurement of such liability eliminates any existing unrecognized components which are charged to accumulated other comprehensive income (AOCI). As of December 31, 2010, as a result of the application of purchase accounting to the Gas Companies’ pension and other postretirement benefits plans, UIL Holdings recognized $213.0 million in previously unrecognized losses and prior service costs related to these plans. For regulatory purposes, the amortization of these unrecognized amounts has historically been recovered in rates as a component of pension and postretirement expenses. As such, UIL Holdings has recorded a regulatory asset to reflect future recovery of these costs.
Exclusive of the purchase accounting described above, ASC 715 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. UIL Holdings reflects all unrecognized prior service costs and credits and unrecognized actuarial gains and losses as regulatory assets rather than in accumulated other comprehensive income, as management believes it is probable that such items are recoverable through the ratemaking process in future periods. As of December 31, 2011 and 2010, UIL Holdings has recorded regulatory assets of $146.6 million and $136.2 million, respectively.
In accordance with ASC 715, UIL Holdings utilizes an alternative method to amortize prior service costs and unrecognized gains and losses. UI Holdings amortizes prior service costs for both the pension and other postretirement benefits plans on a straight-line basis over the average remaining service period of participants expected to receive benefits. UIL Holdings utilizes an alternative method to amortize unrecognized actuarial gains and losses related to the pension and other postretirement benefits plans over the lesser of the average remaining service period or 10 years. For ASC 715 purposes, UIL Holdings does not recognize gains or losses until there is a variance in an amount equal to at least 5% of the greater of the projected benefit obligation or the market-related value of assets. There is no such allowance for a variance in capturing the amortization of other postretirement benefits unrecognized gains and losses.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table represents the change in benefit obligation, change in plan assets and the respective funded status of UIL Holdings’ pension and other postretirement plans as of December 31, 2011 and 2010. Plan assets and obligations have been measured as of December 31, 2011 and 2010.
| | | Pension Benefits | | | Other Post-Retirement Benefits | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Change in Benefit Obligation: | | (In Thousands) | |
| Benefit obligation at beginning of year | | $ | 776,131 | | | $ | 371,802 | | | $ | 130,633 | | | $ | 69,415 | |
| Net transfer in due to acquistion of the Gas Companies | | | - | | | | 383,233 | | | | - | | | | 57,180 | |
| Service cost | | | 12,574 | | | | 7,675 | | | | 2,164 | | | | 1,450 | |
| Interest cost | | | 40,484 | | | | 22,702 | | | | 6,634 | | | | 4,285 | |
| Participant contributions | | | - | | | | - | | | | 3,020 | | | | 1,520 | |
| Actuarial (gain) loss | | | 5,492 | | | | 14,336 | | | | (9,072 | ) | | | 1,665 | |
| Benefits paid (including expenses) | | | (42,580 | ) | | | (23,617 | ) | | | (10,997 | ) | | | (4,882 | ) |
| Benefit obligation at end of year | | $ | 792,101 | | | $ | 776,131 | | | $ | 122,382 | | | $ | 130,633 | |
| | | | | | | | | | | | | | | | | |
| Change in Plan Assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 502,327 | | | $ | 231,308 | | | $ | 40,762 | | | $ | 22,194 | |
| Net transfer in due to acquistion of the Gas Companies | | | - | | | | 236,682 | | | | - | | | | 18,422 | |
| Actual return on plan assets | | | 13,848 | | | | 49,937 | | | | 501 | | | | 2,662 | |
| Employer contributions | | | 74,542 | | | | 8,017 | | | | - | | | | 846 | |
| Participant contributions | | | - | | | | - | | | | 3,020 | | | | 1,520 | |
| Benefits paid (including expenses) | | | (42,596 | ) | | | (23,617 | ) | | | (6,711 | ) | | | (4,882 | ) |
| Fair value of plan assets at end of year | | $ | 548,121 | | | $ | 502,327 | | | $ | 37,572 | | | $ | 40,762 | |
| | | | | | | | | | | | | | | | | |
| Funded Status at December 31: | | | | | | | | | | | | | | | | |
| Projected benefits (less than) greater than plan assets | | $ | 243,980 | | | $ | 273,804 | | | $ | 84,810 | | | $ | 89,871 | |
| | | | | | | | | | | | | | | | | |
| Amounts Recognized in the Statement of Financial Position consist of: | | | | | | | | | | | | | |
| Non-current assets | | $ | - | | | $ | 456 | | | $ | - | | | $ | - | |
| Current liabilities | | $ | 914 | | | $ | 917 | | | $ | 194 | | | $ | 216 | |
| Non-current liabilities | | $ | 243,065 | | | $ | 273,343 | | | $ | 84,615 | | | $ | 89,654 | |
| | | | | | | | | | | | | | | | | |
| Amounts Recognized as a Regulatory Asset consist of: | | | | | | | | | | | | | | | | |
| Transition obligation (asset) | | $ | - | | | $ | - | | | $ | 392 | | | $ | 1,411 | |
| Prior service cost | | | 1,506 | | | | 2,132 | | | | (23 | ) | | | (125 | ) |
| Net (gain) loss | | | 134,838 | | | | 114,346 | | | | 9,847 | | | | 18,464 | |
| Total recognized as a regulatory asset | | $ | 136,344 | | | $ | 116,478 | | | $ | 10,216 | | | $ | 19,750 | |
| | | | | | | | | | | | | | | | | |
| Information on Pension Plans with an Accumulated Benefit Obligation in excess of Plan Assets: | | | | | |
| Projected benefit obligation | | $ | 776,133 | | | $ | 760,658 | | | | N/A | | | | N/A | |
| Accumulated benefit obligation | | $ | 709,235 | | | $ | 697,081 | | | | N/A | | | | N/A | |
| Fair value of plan assets | | $ | 532,595 | | | $ | 486,398 | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | |
| The following weighted average actuarial assumptions were used in calculating the benefit obligations at December 31: | |
| Discount rate (Qualified Plans) | | | 5.30 | % | | | 5.00-5.35 | % | | | N/A | | | | N/A | |
| Discount rate (Non-Qualified Plans) | | | 5.05 | % | | | 5.10-5.15 | % | | | N/A | | | | N/A | |
| Discount rate (Other Post-Retirement Benefits) | | | N/A | | | | N/A | | | | 5.05-5.30 | % | | | 5.15-5.30 | % |
| Average wage increase | | | 3.50-3.80 | % | | | 3.80-4.00 | % | | | N/A | | | | N/A | |
| Health care trend rate (current year) | | | N/A | | | | N/A | | | | 8.00 | % | | | 7.80-9.00 | % |
| Health care trend rate (2019-2028 forward) | | | N/A | | | | N/A | | | | 5.00 | % | | | 4.50-5.00 | % |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The components of net periodic benefit cost are:
| | | For the Year Ended December 31, | |
| | | Pension Benefits | | | Other Post-Retirement Benefits | |
| | | 2011 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2009 | |
| | | (In Thousands) | |
| Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 12,574 | | | $ | 7,675 | | | $ | 6,133 | | | $ | 2,164 | | | $ | 1,450 | | | $ | 1,334 | |
| Interest cost | | | 40,484 | | | | 22,702 | | | | 20,928 | | | | 6,634 | | | | 4,285 | | | | 4,138 | |
| Expected return on plan assets | | | (42,588 | ) | | | (20,739 | ) | | | (17,113 | ) | | | (2,965 | ) | | | (1,910 | ) | | | (1,640 | ) |
| Amortization of: | | | | | | | | | | | | | | | - | | | | - | | | | | |
| Prior service costs | | | 643 | | | | 646 | | | | 697 | | | | (101 | ) | | | (103 | ) | | | (101 | ) |
| Transition obligation (asset) | | | - | | | | - | | | | - | | | | 1,020 | | | | 1,058 | | | | 1,058 | |
| Actuarial (gain) loss | | | 14,032 | | | | (23,978 | ) | | | 14,425 | | | | 2,008 | | | | 690 | | | | 2,686 | |
| Net periodic benefit cost (1) | | $ | 25,145 | | | $ | (13,694 | ) | | $ | 25,070 | | | $ | 8,760 | | | $ | 5,470 | | | $ | 7,475 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Changes in Plan Assets and Benefit Obligations Recognized as a Regulatory Asset: | |
| Net (gain) loss | | $ | 34,524 | | | $ | 21,425 | | | $ | (5,590 | ) | | $ | (6,608 | ) | | $ | 2,173 | | | $ | (4,670 | ) |
| Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | | | - | | | | - | | | | (697 | ) | | | (1,020 | ) | | | (1,058 | ) | | | 101 | |
| Transition obligation (asset) | | | (626 | ) | | | (646 | ) | | | | | | | 101 | | | | 103 | | | | (1,058 | ) |
| Actuarial (gain) loss | | | (14,032 | ) | | | 23,978 | | | | (14,425 | ) | | | (2,008 | ) | | | (690 | ) | | | (2,686 | ) |
| Total recognized as regulatory asset | | $ | 19,866 | | | $ | 44,757 | | | $ | (20,712 | ) | | $ | (9,535 | ) | | $ | 528 | | | $ | (8,313 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in net periodic benefit costs and regulatory asset | | $ | 45,011 | | | $ | 31,063 | | | $ | 4,358 | | | $ | (775 | ) | | $ | 5,998 | | | $ | (838 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Estimated Amortizations from Regulatory Assets into Net Periodic Benefit Cost for the period January 1, 2011 - December 31, 2011: | |
| Amortization of transition obligation | | $ | - | | | $ | - | | | $ | - | | | $ | 392 | | | $ | 1,020 | | | $ | 1,059 | |
| Amortization of prior service cost | | | 647 | | | | 643 | | | | 645 | | | | (69 | ) | | | (101 | ) | | | (103 | ) |
| Amortization of net (gain) loss | | | 13,173 | | | | 14,032 | | | | 12,309 | | | | 965 | | | | 2,008 | | | | 1,950 | |
| Total estimated amortizations | | $ | 13,820 | | | $ | 14,675 | | | $ | 12,954 | | | $ | 1,288 | | | $ | 2,927 | | | $ | 2,906 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| The following actuarial weighted average assumptions were used in calculating net periodic benefit cost: | |
| Discount rate | | | 5.10-5.35 | % | | | 5.00-5.35 | % | | | 6.20 | % | | | 5.15-5.30 | % | | | 5.00-5.30 | % | | | 6.10 | % |
| Average wage increase | | | 3.50-3.80 | % | | | 3.80-4.00 | % | | | 3.80 | % | | | N/A | | | | N/A | | | | N/A | |
| Return on plan assets | | | 8.25-8.50 | % | | | 8.25-8.50 | % | | | 8.50 | % | | | 5.86-8.25 | % | | | 5.89-8.25 | % | | | 8.50 | % |
| Health care trend rate (current year) | | | N/A | | | | N/A | | | | N/A | | | | 7.80-8.50 | % | | | 8.10-8.50 | % | | | 10.00 | % |
| Health care trend rate (2019 forward) | | | N/A | | | | N/A | | | | N/A | | | | 4.50-5.00 | % | | | 4.50-5.00 | % | | | 5.00 | % |
| (1) | For the year ended December 31, 2009, UI recorded $8.3 million of pension expense and $1.9 million of OPEBexpense as a regulatory asset. These amounts were approved by PURA to address the actual increase in pension and postretirement expense for 2009 (see Note (C), Regulatory Proceedings). |
A one percentage point change in the assumed health care cost trend rate would have the following effects:
| | | 1% Increase | | | 1% Decrease | |
| | | (In Thousands) | |
| Aggregate service and interest cost components | | $ | 936 | | | $ | (763 | ) |
| Accumulated post-retirement benefit obligation | | $ | 10,777 | | | $ | (8,983 | ) |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| Year | | Pension Benefits | | | Other Postretirement Benefits | |
| | | (In Thousands) | |
| 2012 | | $ | 42,406 | | | $ | 7,616 | |
| 2013 | | $ | 47,270 | | | $ | 7,816 | |
| 2014 | | $ | 44,744 | | | $ | 7,884 | |
| 2015 | | $ | 47,002 | | | $ | 7,984 | |
| 2016 | | $ | 48,409 | | | $ | 8,029 | |
| 2017-2021 | | $ | 262,764 | | | $ | 40,860 | |
Defined Contribution Retirement Plans/401(k)
Since 2005, new UIL Holdings and UI employees do not participate in the UI Pension Plan or receive retiree medical plan benefits. These employees participate in a different retirement plan, which is a “defined contribution plan,” consisting of the current provisions of UI’s 401(k)/Employee Stock Ownership Plan (KSOP) plus the following benefits:
| · | An additional cash contribution of 4.0% of total annual compensation (as defined in the KSOP Plan) to a separate account in the KSOP of new hires. |
| · | An additional cash contribution of $1,000 per year (pro rata per pay period) into a separate Retiree Medical Fund within the KSOP account for new hires. |
| · | New employees do not need to contribute to the KSOP to receive these additional cash contribution amounts; they only need to be enrolled in the KSOP Plan. |
| · | Both additional cash contributions to the KSOP vest 100% after five years of service. |
The KSOP, in which substantially all of UIL Holdings’ and UI’s employees are eligible to participate, enables employees to defer receipt of a portion of their compensation, up to statutory limits, and to invest such funds in a number of investment alternatives. Matching contributions are made to the KSOP, in the form of UIL Holdings’ common stock, based on each employee’s salary deferrals in the KSOP. For union employees, the matching contribution to the KSOP is 100% of the first 3% of employee compensation deferred and 50% of the next 2% deferred. The maximum match is 4% of annual salary. For non-union employees, the matching contribution to the KSOP is 100% of the first 2% of employee compensation deferred. All matching contributions are made in the form of UIL Holdings’ common stock. Matching contributions to the KSOP during 2011, 2010 and 2009 were $2.6 million, $2.4 million and $2.5 million, respectively. UIL Holdings pays dividends on the shares of stock in the KSOP to the participant and UIL Holdings receives a tax deduction for the dividends paid. Effective February 12, 2012, the matching contribution to the KSOP for non-union employees was amended such that 100% of the first 2% of employee compensation deferred and 50% of the next 2% deferred is matched.
The Gas Companies have several 401(k) plans in which substantially all of its employees are eligible to participate. Employees may defer a portion of the compensation and invest in various investment alternatives. Matching contributions are made in the form of cash and are dependent on the specific provisions of each of the plans. The matching expense related to the Gas Companies for UIL Holdings for 2011 was $2.0 million and was immaterial for the post-acquisition period in 2010.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(H) RELATED PARTY TRANSACTIONS
UI is a 50-50 joint venturer with NRG in GenConn, which was chosen by PURA to build and operate new peaking generation plants to help address Connecticut’s need for power generation during the heaviest load periods. GenConn executed a promissory note (the Loan) with UI under which UI could advance up to an aggregate principal amount of $48.5 million to fund GenConn’s construction and other cash needs until permanent financing was arranged. In connection with the EBL obtained by UI and the project financing obtained by GenConn on April 27, 2009, all outstanding balances on the Loan were replaced by a new promissory note, the balance of which was converted to an equity investment in July 2011. See Note (B) “Capitalization – Long-Term Debt” for further discussion regarding the EBL. Additionally, $1.2 million, $3.3 million and $2.0 million of interest income related to the promissory note are included in “Other Income and (Deductions), net” in the accompanying Consolidated Statements of Income, for the years ended December 31, 2011, 2010 and 2009, respectively, which is offset by the interest expense incurred by UI under the EBL.
A Director of UIL Holdings holds a beneficial interest in the building located at 157 Church Street, New Haven, Connecticut, where UIL Holdings leases office space. UIL Holdings’ lease payments for this office space for the years ended December 31, 2011, 2010 and 2009 totaled $11.4 million, $10.8 million and $11.0 million, respectively.
(I) LEASE OBLIGATIONS
UIL Holdings and its wholly-owned direct and indirect subsidiaries have lease arrangements for data processing equipment, office equipment, office space and land.
Operating leases, which are charged to operating expense, consist principally of leases of office space and facilities, land, railroad rights of way and a wide variety of equipment. The future minimum lease payments under these operating leases are estimated to be as follows:
| | | (In Thousands) | |
| 2012 | | $ | 10,576 | (1) |
| 2013 | | | 2,592 | |
| 2014 | | | 1,819 | |
| 2015 | | | 1,726 | |
| 2016 | | | 1,904 | |
| 2017-after | | | 38,459 | |
| | | $ | 57,076 | |
(1) Lease for office space in the building located at 157 Church Street, New Haven, Connecticut expires in June 2012. In February 2012, such lease was amended, for considerably less space, and extended for various terms not to exceed ten years with certain options to extend thereafter.
Rental payments charged to operating expenses in 2011, 2010 and 2009 were as follows:
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (In Thousands) | |
| | | | | | | | | | |
| Rental payments | | $ | 18,655 | | | $ | 13,997 | | | $ | 13,588 | |
| Less: Sublease rental payments received | | | 1,148 | | | | 1,120 | | | | 1,125 | |
| Rental payments charged to operating expenses | | $ | 17,507 | | | $ | 12,877 | | | $ | 12,463 | |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(J) 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 $0.2 million as of December 31, 2011. In 1996, the Board of Directors of Connecticut Yankee voted unanimously to retire the Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial operation. Connecticut Yankee updates the cost of its remaining decommissioning activity, which consists primarily of ground water monitoring and nuclear fuel storage, at least annually, 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 December 31, 2011, UI has regulatory approval to recover in future rates (through the CTA) its $14.2 million regulatory asset for Connecticut Yankee over a term ending in 2015.
DOE Spent Fuel Litigation
In the Nuclear Waste Policy Act of 1982 (the Act), Congress provided for the United States Department of Energy (DOE) to dispose of spent nuclear fuel and other high-level waste (Nuclear Waste) from nuclear generating plants. In 1983, Connecticut Yankee and the DOE entered into a standard disposal contract mandated by the Act which required the DOE to begin disposing of Connecticut Yankee’s Nuclear Waste by the end of January 1998.
In 1998, Connecticut Yankee filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 contracts by the DOE. In September 2010, the Court issued its decision and awarded Connecticut Yankee damages of $39.7 million for its spent fuel-related costs through 2001. On November 8, 2010, the DOE appealed the decision to the United States Court of Appeals for the Federal Circuit and on November 19, 2010 Connecticut Yankee filed a notice of cross-appeal. UI’s 9.5% ownership share would result in a receipt of approximately $3.8 million which, if awarded, would be refunded to customers.
In December 2007, Connecticut Yankee filed a second set of complaints against the DOE seeking unspecified damages incurred since January 1, 2002 for the DOE’s failure to remove Connecticut Yankee’s spent fuel. In July 2009, Connecticut Yankee provided the DOE with a second set of damage claims totaling approximately $135 million for damages incurred from January 1, 2002 through December 31, 2008. UI’s 9.5% ownership share would result in a receipt of approximately $12.8 million which, if awarded, would be refunded to customers. 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.
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, climate change and electric and magnetic fields, UIL Holdings and its wholly-owned direct and indirect subsidiaries may incur substantial capital expenditures for equipment modifications and additions, monitoring equipment and recording devices, and it may incur additional operating expenses. The total amount of these expenditures is not now determinable. Environmental damage claims may also arise from the operations of UIL Holdings’ subsidiaries. Significant environmental issues known to UIL Holdings at this time are described below.
Site Decontamination, Demolition and Remediation Costs
In June 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. Pursuant to a Memorandum of Understanding (MOU) among
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
UI, the City, and the City’s selected developer for the property, the City and the developer released UI from any further liability with respect to the Steel Point property after title transferred, and the City and/or the developer has indemnified UI for environmental matters related to the Steel Point property. The Steel Point property includes the land up to the bulkhead. The MOU provides that there is no indemnity for liability related to contaminated harbor sediments, and UI is not aware of any such claims. UI would seek to recover any 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 PURA’s July 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. As of December 31, 2011, approximately $0.1 million of the escrow fund remains. QE has since sold the property to Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat). UI is unaware of what agreement was reached between QE and Evergreen Power and Asnat regarding future environmental liability or what remediation activity remains to be undertaken at the site. In July 2008, Evergreen Power and Asnat submitted a claim to UI seeking compensation for environmental remediation on the property, including the existing building which remains on the site. On January 5, 2012, Evergreen Power and Asnat filed a lawsuit in the federal district court in Connecticut against UI seeking, among other things, (i) an order directing UI to reimburse the plaintiffs for costs they have incurred and will incur for the testing, investigating, and remediating of hazardous substances at the property and (ii) an order directing UI to investigate and remediate the property. UI’s knowledge of the current conditions at the site is insufficient to make a reasonable update of the original $1.9 million remediation estimate. UIL Holdings cannot presently assess the potential financial impact, if any, of the suit, and thus has not recorded a liability related to it.
In April 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. 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, which were recovered in transmission rates.
From 1961 to 1976, UI owned a parcel of property in Derby, CT, on which it operated an oil-fired electric generating unit. For several years, DEEP 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.
The Gas Companies own or have previously owned property where Manufactured Gas Plants (MGPs) historically operated. MGP operations have led to contamination of soil and groundwater with petroleum hydrocarbons, benzene and metals, among other things, at these properties, the regulation and cleanup of which is regulated by the federal Resource Conservation and Recovery Act as well as other federal and state statutes and regulations. Each of the Gas Companies has or had an ownership interest in one of such properties contaminated as a result of MGP-related activities. Under the existing regulations, the cleanup of such sites requires state and at times, federal, regulators’ involvement and approval before cleanup can commence. In certain cases, such contamination has been evaluated, characterized and remediated. In other cases, the sites have been evaluated and characterized, but not yet remediated. Finally, at some of these sites, the scope of the contamination has not yet been fully characterized; no liability was recorded in respect of these sites as of December 31, 2011. In the past, the Gas Companies have received approval for the recovery of MGP-related remediation expenses from customers through rates and they will seek recovery in rates for ongoing MGP-related remediation expenses for all of their MGP sites.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
SCG owns property on Pine Street in Bridgeport, CT, the site of one of its former operations centers and a former MGP operation. SCG may be subject to remediation expenses for part of the site, the amount of which cannot be estimated at this time. Future remediation costs, for which SCG will seek recovery in rates, are expected to be in the range of $2 to $3 million. As of December 31, 2011, UIL Holdings has recorded a liability of $2 million for this site.
SCG owns property on Housatonic Avenue in Bridgeport, CT, a former MGP site. Costs associated with the remediation of the site could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates. UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability. As such, as of December 31, 2011, no liability related to this claim has been recorded.
SCG owns property located on Chapel Street in New Haven, CT, the site of one of its former operations centers and a former MGP site. SCG may be subject to remediation expenses for part of the site, the amount of which cannot be estimated at this time. Costs associated with the remediation of the site could be significant and will be subject to a review by PURA as to whether these costs are recoverable in rates. UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability. As such, as of December 31, 2011, no liability related to this claim has been recorded.
A property located on Columbus Boulevard in Hartford, CT is the former Operations Center and Corporate Headquarters of CNG. The property is also a former MGP site. Costs associated with the remediation of the site could be significant, but cannot be estimated at this time, and will be subject to a review by PURA as to whether these costs are recoverable in rates. UIL Holdings cannot presently estimate the costs of remediation or the likelihood of recoverability. As such, as of December 31, 2011, no liability related to this claim has been recorded.
A site on Mill Street in Greenfield, MA is currently owned by Berkshire and is used as a regional operations center. This site is on the Massachusetts Department of Environmental Protection (MDEP) list of confirmed disposal sites and investigation and remediation of contamination resulting from disposal of byproducts and wastes generated by the historic coal and water gas manufacturing operations is ongoing. Extensive soil, and coal tar product non-aqueous phase liquid (NAPL) recovery and remediation work on the land side of the property has been completed, and sediments containing NAPL have been removed from the adjoining Green River. Further evaluation of the NAPL distribution in the river sediments and in the subsurface in stream banks on an adjacent property are ongoing and will involve additional remediation activities. Future expenses potentially in excess of $5.0 million are anticipated. Even after completion of the additional remedial activities there will be ongoing monitoring and reporting to the MDEP that will continue on the site for the foreseeable future. UIL Holdings has accrued $5.0 million for such expenses as of December 31, 2011.
Berkshire formerly owned a site on East Street (the East Street Site) in Pittsfield, MA that was used for gas manufacturing operations. The East Street Site is part of a larger site known as the GE–Pittsfield/Housatonic River Site. The East Street Site is listed on the MDEP list of confirmed disposal sites. Berkshire sold the East Street Site to the General Electric Company (GE) in the 1970s and was named a potentially responsible party by the EPA in 1990. GE filed suit against Berkshire in 2000 seeking reimbursement of and contribution toward costs incurred by GE in responding to releases of hazardous substances by a predecessor in interest to Berkshire at the East Street Site. Berkshire was found liable to GE under the Comprehensive Environmental Response, Compensation and Liability Act and the Massachusetts Oil and Hazardous Materials Release Prevention and Response Act for costs that GE has and will incur in response to historic releases by a predecessor in interest to Berkshire. In December 2002, Berkshire reached a settlement with GE (the Settlement Agreement) which provides, among other things, a framework for Berkshire and GE to allocate various monitoring and remediation costs at the East Street Site. GE previously made several requests for contribution under the terms of the Settlement Agreement. In September 2011, GE sent Berkshire a letter demanding approximately $1.1 million which GE believes represents Berkshire’s share of response costs incurred by GE at the East Street Site from January 1, 2006 through December 31, 2010. The parties are continuing their discussions regarding GE’s claim. Berkshire expects that it and GE will continue to operate under the terms of the Settlement Agreement in
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
connection with the East Street Site. As of December 31, 2011, UIL Holdings has accrued approximately $2.7 million for these and future costs incurred by GE in responding to releases of hazardous substances by Berkshire at the East Street Site.
To date, Berkshire has received approval from the DPU for recovery of its environmental expenses in its customer rates. While management cannot predict the exact costs of the ongoing and future remediation and monitoring expenses, the company will seek regulatory rate recovery of these expenses.
Middletown/Norwalk Transmission Project
The general contractor and two subcontractors responsible for civil construction work in connection with the installation of UI’s portion of the Middletown/Norwalk Transmission Project’s underground electric cable system filed lawsuits in the Connecticut state court on September 22, 2009, March 23, 2009 and January 25, 2010, respectively. The claims, as revised by the general contractor in October 2011, sought payment for change order requests of approximately $33.3 million, a 10% general contractor mark-up on any approved subcontractor change order claims (approximately $2.3 million), interest, costs, and attorneys' fees.
In December 2011, UI settled claims brought by the two subcontractors and their respective lawsuits were dismissed with prejudice. The claim by the general contractor was not settled and remains pending. UI is vigorously defending the litigation. Based on the settlement of the claims of the two subcontractors, UI estimates that the claims of the general contractor have been reduced to approximately $8.4 million, together with interest, costs, and attorneys’ fees. UI also is pursuing an indemnification claim against the general contractor.
UI expects to recover amounts paid to resolve the change order requests through its transmission revenue requirements.
GenConn
On July 28, 2011, GenConn Devon and the former general contractor responsible for the construction of the GenConn Devon facility executed and delivered a settlement agreement with respect to change order requests and delay and impact claims and pursuant to which GenConn Devon paid a settlement amount of $10.5 million upon satisfaction of certain conditions performed by the former general contractor. In April 2011, the parties settled a claim by the general contractor for work at the GenConn Middletown facility and executed and delivered a settlement agreement pursuant to which GenConn Middletown paid a settlement amount of $3.0 million. GenConn will seek and expects to recover the associated costs through its annual regulatory proceeding. To the extent that there is any financial impact on GenConn, the effect on UIL Holdings’ Consolidated Financial Statements will be reflected in the carrying value of UIL Holdings’ 50% ownership position in GenConn and through “Income from Equity Investments” in the Consolidated Statement of Income.
Purchase and Sale Agreement
As part of its plan to consolidate operations and office personnel, on July 7, 2011, UI entered into a Purchase and Sale Agreement for the sale of the Electric System Work Center (ESWC) located at 801 Bridgeport Avenue in Shelton, CT for approximately $10.2 million. UI acquired the ESWC for approximately $16 million and expects to recover any loss resulting from the sale of the property through the regulatory process. The transaction, which has been approved by PURA, is expected to close by the first quarter of 2014 after the completion of due diligence, zoning approval, and site plan approval periods, as defined in the Purchase and Sale Agreement.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(K) FAIR VALUE MEASUREMENTS
UIL Holdings utilizes an income approach valuation technique to value the majority of its assets and liabilities measured and reported at fair value. As required by ASC 820, financial assets and liabilities are classified in their entirety, based on the lowest level of input that is significant to the fair value measurement. UIL Holdings’ assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following tables set forth UIL Holdings’ financial assets and liabilities, other than pension benefits and OPEB, which were accounted for at fair value on a recurring basis as of December 31, 2011 and December 31, 2010.
| | | Fair Value Measurements Using | |
| | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| December 31, 2011 | | (In Thousands) | |
| Assets: | | | | | | | | | | | | |
| Derivative assets | | $ | - | | | $ | - | | | $ | 87,454 | | | $ | 87,454 | |
| Noncurrent investments available for sale | | | 9,152 | | | | - | | | | - | | | | 9,152 | |
| Deferred Compensation Plan | | | 3,739 | | | | - | | | | - | | | | 3,739 | |
| Supplemental retirement benefit trust life insurance policies (Note G) | | | - | | | | 5,655 | | | | - | | | | 5,655 | |
| | | $ | 12,891 | | | $ | 5,655 | | | $ | 87,454 | | | $ | 106,000 | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Derivative liabilities | | $ | - | | | $ | - | | | $ | 268,035 | | | $ | 268,035 | |
| | | | | | | | | | | | | | | | | |
| Net fair value assets/(liabilities), December 31, 2011 | | $ | 12,891 | | | $ | 5,655 | | | $ | (180,581 | ) | | $ | (162,035 | ) |
| | | Fair Value Measurements Using | |
| | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| December 31, 2010 | | (In Thousands) | |
| Assets: | | | | | | | | | | | | |
| Derivative assets | | $ | - | | | $ | - | | | $ | 34,188 | | | $ | 34,188 | |
| Noncurrent investments available for sale | | | 9,774 | | | | - | | | | - | | | | 9,774 | |
| Deferred Compensation Plan | | | 3,725 | | | | - | | | | - | | | | 3,725 | |
| Supplemental retirement benefit trust life insurance policies (Note G) | | | - | | | | 5,665 | | | | - | | | | 5,665 | |
| | | $ | 13,499 | | | $ | 5,665 | | | $ | 34,188 | | | $ | 53,352 | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Derivative liabilities | | $ | - | | | $ | - | | | $ | 142,806 | | | $ | 142,806 | |
| | | | | | | | | | | | | | | | | |
| Net fair value assets/(liabilities), December 31, 2010 | | $ | 13,499 | | | $ | 5,665 | | | $ | (108,618 | ) | | $ | (89,454 | ) |
The determination of fair value of the derivative assets and liabilities, which primarily consist of contracts for differences, was based on a probability-based expected cash flow analysis that was discounted at the December 31, 2011 or December 31, 2010 risk-free interest rates, as applicable, and an adjustment for non-performance risk using credit default swap rates. Certain management assumptions were required, including development of pricing that extended over the term of the contracts. In addition, UIL performed an assessment of risks related to obtaining regulatory, legal and siting approvals, as well as obtaining financing resources and ultimately attaining commercial operation. PURA has determined that changes in fair value associated with the contracts for differences are fully recoverable. As a result, such changes have no impact on UIL Holdings’ net income.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The fair value of the noncurrent investments available for sale is determined using quoted market prices in active markets for identical assets. The investments primarily consist of money market funds.
Under the UIL Deferred Compensation Plan (DCP), directors, named executive officers and certain other executives may elect to defer certain elements of compensation. Participants in the DCP are permitted to direct investments of their elective deferral accounts into “deemed” investments consisting of mutual funds and UIL Holdings common stock equivalents. These investments, which are actively traded in sufficient frequency and volume to provide pricing information on an ongoing basis, are marked-to-market in accordance with ASC 815 based upon such pricing information.
The following tables set forth a reconciliation of changes in the fair value of the assets and liabilities above that are classified as Level 3 in the fair value hierarchy for the twelve month periods ended December 31, 2011 and 2010.
| | | Year Ended | |
| | | December 31, 2011 | |
| | | (In Thousands) | |
| | | | |
| Net derivative assets/(liabilities), December 31, 2010 | | $ | (108,618 | ) |
| Unrealized gains and (losses), net | | | | |
| Included in earnings | | | 3,090 | |
| Included in other comprehensive income | | | 64 | |
| Included in regulatory assets/(liabilities) | | | (75,117 | ) |
| Net derivative assets/(liabilities), December 31, 2011 | | $ | (180,581 | ) |
| | | | | |
| | | | | |
| Change in unrealized gains (losses), net relating to net derivative assets/(liabilities), still held as of December 31, 2011 | | $ | (71,963 | ) |
| | | Year Ended | |
| | | December 31, 2010 | |
| | | (In Thousands) | |
| | | | |
| Net derivative assets/(liabilities), December 31, 2009 | | $ | (131,399 | ) |
| Acquired derivatives, November 17, 2010 | | | 412 | |
| Unrealized gains and (losses), net | | | | |
| Included in earnings | | | (100 | ) |
| Included in other comprehensive income | | | 46 | |
| Included in regulatory assets/(liabilities) | | | 22,423 | |
| Net derivative assets/(liabilities), December 31, 2010 | | $ | (108,618 | ) |
| | | | | |
| | | | | |
| Change in unrealized gains (losses), net relating to net derivative assets/(liabilities), still held as of December 31, 2010 | | $ | 22,368 | |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table sets forth a reconciliation of changes in the net regulatory asset/(liability) balances that were established to recover any unrealized gains/(losses) associated with the contracts for differences for the years ended December 31, 2011 and 2010. The amounts offset the net contract for differences liabilities included in the derivative liabilities detailed above.
| | | Year Ended | |
| | | December 31, 2011 | |
| | | (In Thousands) | |
| | | | |
| Net regulatory assets/(liabilities), December 31, 2010 | | $ | 108,976 | |
| Unrealized (gains) and losses, net | | | 75,117 | |
| Net regulatory assets/(liabilities), December 31, 2011 | | $ | 184,093 | |
The following tables set forth the fair values of UIL Holdings’ pension and OPEB assets that were accounted for at fair value on a recurring basis as of December 31, 2011 and 2010.
| | | Year Ended | |
| | | December 31, 2010 | |
| | | (In Thousands) | |
| | | | |
| Net regulatory assets/(liabilities), December 31, 2009 | | $ | 131,399 | |
| Unrealized (gains) and losses, net | | | (22,423 | ) |
| Net regulatory assets/(liabilities), December 31, 2010 | | $ | 108,976 | |
| | | Fair Value Measurements Using | |
| | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| December 31, 2011 | | (In Thousands) | |
| | | | | | | | | | | | | |
| Pension assets | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 27,204 | | | $ | - | | | $ | - | | | $ | 27,204 | |
| Mutual funds | | | - | | | | 520,917 | | | | - | | | | 520,917 | |
| Hedge fund | | | - | | | | - | | | | - | | | | - | |
| | | | 27,204 | | | | 520,917 | | | | - | | | | 548,121 | |
| OPEB assets | | | | | | | | | | | | | | | | |
| Mutual funds | | | 37,572 | | | | - | | | | - | | | | 37,572 | |
| | | | 37,572 | | | | - | | | | - | | | | 37,572 | |
| | | | | | | | | | | | | | | | | |
| Fair value of plan assets, December 31, 2011 | | $ | 64,776 | | | $ | 520,917 | | | $ | - | | | $ | 585,693 | |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| | | Fair Value Measurements Using | |
| | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| December 31, 2010 | | (In Thousands) | |
| | | | | | | | | | | | | |
| Pension assets | | | | | | | | | | | | |
| Mutual funds | | $ | 257,238 | | | $ | 244,699 | | | $ | - | | | $ | 501,937 | |
| Hedge fund | | | - | | | | - | | | | 390 | | | | 390 | |
| | | | 257,238 | | | | 244,699 | | | | 390 | | | | 502,327 | |
| OPEB assets | | | | | | | | | | | | | | | | |
| Mutual funds | | | 40,762 | | | | - | | | | - | | | | 40,762 | |
| | | | 40,762 | | | | - | | | | - | | | | 40,762 | |
| | | | | | | | | | | | | | | | | |
| Fair value of plan assets, December 31, 2010 | | $ | 298,000 | | | $ | 244,699 | | | $ | 390 | | | $ | 543,089 | |
The determination of fair value of the Level 1 and Level 2 pension and OPEB assets was based on quoted prices, as of December 31, 2011 and 2010, in the active markets for the various funds within which the assets are held. The determination of fair value of the Level 3 pension assets was based on the Net Asset Value (NAV) provided by the managers of the underlying fund investments. The NAV provided by the managers typically reflect the fair value of each underlying fund investment, including unrealized gains and losses. Changes in the fair value of pension benefits and OPEB are accounted for in accordance with ASC 715 Compensation – Retirement Benefits as discussed in Note (G) “Pension and Other Benefits”.
The following tables set forth a reconciliation of changes in the fair value of the assets above that are classified as Level 3 in the fair value hierarchy for the twelve month periods ended December 31, 2011 and 2010.
| | | Year Ended | |
| | | December 31, 2011 | |
| | | (In Thousands) | |
| Pension assets-Level 3, December 31, 2010 | | $ | 390 | |
| Unrealized gains and (losses), net | | | 2,889 | |
| Realized gains and (losses), net | | | (2,895 | ) |
| Purchases | | | - | |
| Settlements | | | (384 | ) |
| Pension assets-Level 3, December 31, 2011 | | $ | - | |
| | | | | |
| | | | | |
| Change in unrealized gains (losses), net relating to pension assets still held as of December 31, 2011 | | $ | 2,889 | |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
| | | Year Ended | |
| | | December 31, 2010 | |
| | | (In Thousands) | |
| | | | |
| Pension assets-Level 3, December 31, 2009 | | $ | 3,476 | |
| Unrealized gains and (losses), net | | | (919 | ) |
| Realized gains and (losses), net | | | (835 | ) |
| Sales | | | (1,332 | ) |
| Pension assets-Level 3, December 31, 2010 | | $ | 390 | |
| | | | | |
| | | | | |
| Change in unrealized gains (losses), net relating to pension assets still held as of December 31, 2010 | | $ | (919 | ) |
(L) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2011 and 2010 are set forth below:
| | | 1st | | | 2nd | | | 3rd | | | 4th | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| (In Thousands, Except Per Share Amounts) | | | | | | | | | | | | |
| 2011 | | | | | | | | | | | | |
| Operating Revenues | | $ | 561,053 | | | $ | 314,049 | | | $ | 321,427 | | | $ | 373,918 | |
| Operating Income | | $ | 99,815 | | | $ | 40,224 | | | $ | 34,253 | | | $ | 45,090 | |
| Net Income attributable to UIL Holdings | | $ | 52,044 | | | $ | 14,156 | | | $ | 12,180 | | | $ | 21,276 | |
| | | | | | | | | | | | | | | | | |
| Earnings Per Share of Common Stock – Basic: (2) | | $ | 1.03 | | | $ | 0.28 | | | $ | 0.24 | | | $ | 0.42 | |
| | | | | | | | | | | | | | | | | |
| Earnings Per Share of Common Stock – Diluted: (3) | | $ | 1.02 | | | $ | 0.28 | | | $ | 0.24 | | | $ | 0.42 | |
| | | | | | | | | | | | | | | | | |
| 2010 | | | | | | | | | | | | | | | | |
| Operating Revenues | | $ | 220,280 | | | $ | 207,116 | | | $ | 236,277 | | | $ | 333,993 | |
| Operating Income | | $ | 32,880 | | | $ | 25,513 | | | $ | 34,763 | | | $ | 32,143 | |
| Net Income attributable to UIL Holdings (1) | | $ | 15,915 | | | $ | 11,489 | | | $ | 16,976 | | | $ | 10,474 | |
| | | | | | | | | | | | | | | | | |
| Earnings Per Share of Common Stock – Basic: (2) | | $ | 0.53 | | | $ | 0.38 | | | $ | 0.52 | | | $ | 0.21 | |
| | | | | | | | | | | | | | | | | |
| Earnings Per Share of Common Stock – Diluted: (3) | | $ | 0.53 | | | $ | 0.38 | | | $ | 0.52 | | | $ | 0.20 | |
| (1) | Includes acquisition-related costs in the 2nd, 3rd and 4th quarters of 2010 |
| (2) | Based on weighted average number of shares outstanding each quarter. |
| (3) | ased on weighted average number of shares outstanding each quarter. Reflecting the effect of dilutive stock options,performance shares and restricted stock. |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(M) SEGMENT INFORMATION
UIL Holdings has three reporting segments: Electric Distribution, Electric Transmission and Gas Distribution. 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 to make 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, distribution includes all electric utility revenue and expenses except for transmission, which is provided in a separate column. “Other” includes the information for the remainder of UIL Holdings’ non-utility activities and unallocated corporate costs, including minority interest investments and administrative costs.
| (In Thousands) | | | | | | | | | | | | | | | | | | |
| | | December 31, 2011 | |
| | | Electric Distribution and Transmission | | | | | | | | | | |
| | | Distribution | | | Transmission | | | Total UI | | | Gas Distribution | | | Other | | | Total | |
| Operating Revenues | | $ | 599,153 | | | $ | 198,503 | | | $ | 797,656 | | | $ | 772,315 | | | $ | 476 | | | $ | 1,570,447 | |
| Purchased power and gas | | | 180,149 | | | | - | | | | 180,149 | | | | 429,079 | | | | - | | | | 609,228 | |
| Operation and maintenance | | | 216,361 | | | | 32,027 | | | | 248,388 | | | | 133,126 | | | | 653 | | | | 382,167 | |
| Transmission wholesale | | | - | | | | 77,997 | | | | 77,997 | | | | - | | | | - | | | | 77,997 | |
| Depreciation and amortization | | | 83,725 | | | | 12,690 | | | | 96,415 | | | | 70,694 | | | | 353 | | | | 167,462 | |
| Taxes - other than income taxes | | | 45,967 | | | | 24,736 | | | | 70,703 | | | | 43,494 | | | | 14 | | | | 114,211 | |
| Acquisition-related costs | | | - | | | | - | | | | - | | | | - | | | | | | | | - | |
| Operating Income (Loss) | | | 72,951 | | | | 51,053 | | | | 124,004 | | | | 95,922 | | | | (544 | ) | | | 219,382 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Income and (Deductions), net | | | 14,697 | | | | 6,651 | | | | 21,348 | | | | 6,571 | | | | (987 | ) | | | 26,932 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Charges, net | | | 30,489 | | | | 13,235 | | | | 43,724 | | | | 28,939 | | | | 22,722 | | | | 95,385 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income Before Income Taxes and Equity Earnings | | | 57,159 | | | | 44,469 | | | | 101,628 | | | | 73,554 | | | | (24,253 | ) | | | 150,929 | |
| Income Taxes | | | 30,865 | | | | 13,186 | | | | 44,051 | | | | 29,721 | | | | (11,271 | ) | | | 62,501 | |
| Income Before Equity Earnings | | | 26,294 | | | | 31,283 | | | | 57,577 | | | | 43,833 | | | | (12,982 | ) | | | 88,428 | |
| Income (Losses) from Equity Investments | | | 11,282 | | | | - | | | | 11,282 | | | | - | | | | - | | | | 11,282 | |
| Net Income | | | 37,576 | | | | 31,283 | | | | 68,859 | | | | 43,833 | | | | (12,982 | ) | | | 99,710 | |
| Less: | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock Dividends of | | | | | | | | | | | | | | | | | | | | | | | | |
| Subsidiary, Noncontrolling Interests | | | - | | | | - | | | | - | | | | 54 | | | | - | | | | 54 | |
| Net Income attributable to UIL Holdings | | $ | 37,576 | | | $ | 31,283 | | | $ | 68,859 | | | $ | 43,779 | | | $ | (12,982 | ) | | $ | 99,656 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Electric Distribution and Transmission (1) | | | | | | | | | | | | | |
| | | Distribution | | | Transmission | | | Total UI | | | Gas Distribution | | | Other | | | Total (2) | |
| Total Assets at December 31, 2011 | | $ | - | | | $ | - | | | $ | 2,716,460 | | | $ | 1,953,079 | | | $ | 75,070 | | | $ | 4,744,609 | |
| (1) | Information for segmenting total assets between Distribution and Transmission is not available. Total UI assets are disclosedin the Total UI column. Net plant in service is segregated by segment and, as of December 31, 2011, was $1,029.8 million and $495.8 million for Distribution and Transmission, respectively. |
| (2) | Includes $266.8 million of goodwill in the Gas Distribution segment as of December 31, 2011. |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(M) SEGMENT INFORMATION (Continued)
| (In Thousands) | | | | | | | | | | | | | | | | | | |
| | | December 31, 2010 | |
| | | Electric Distribution and Transmission | | | | | | | | | | |
| | | Distribution | | | Transmission | | | Total UI | | | Gas Distribution | | | Other | | | Total | |
| Operating Revenues | | $ | 667,737 | | | $ | 191,810 | | | $ | 859,547 | | | $ | 138,105 | | | $ | 14 | | | $ | 997,666 | |
| Purchased power and gas | | | 242,268 | | | | - | | | | 242,268 | | | | 81,428 | | | | - | | | | 323,696 | |
| Operation and maintenance | | | 210,646 | | | | 27,699 | | | | 238,345 | | | | 19,297 | | | | 640 | | | | 258,282 | |
| Transmission wholesale | | | - | | | | 72,169 | | | | 72,169 | | | | - | | | | - | | | | 72,169 | |
| Depreciation and amortization | | | 96,007 | | | | 12,402 | | | | 108,409 | | | | 5,492 | | | | 45 | | | | 113,946 | |
| Taxes - other than income taxes | | | 44,206 | | | | 27,435 | | | | 71,641 | | | | 7,054 | | | | 7 | | | | 78,702 | |
| Acquisition-related costs | | | - | | | | - | | | | - | | | | - | | | | 25,572 | | | | 25,572 | |
| Operating Income (Loss) | | | 74,610 | | | | 52,105 | | | | 126,715 | | | | 24,834 | | | | (26,250 | ) | | | 125,299 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Income and (Deductions), net | | | 13,101 | | | | 2,939 | | | | 16,040 | | | | 107 | | | | 1,115 | | | | 17,262 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Charges, net | | | 28,539 | | | | 12,034 | | | | 40,573 | | | | 4,014 | | | | 9,111 | | | | 53,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income Before Income Taxes and Equity Earnings | | | 59,172 | | | | 43,010 | | | | 102,182 | | | | 20,927 | | | | (34,246 | ) | | | 88,863 | |
| Income Taxes | | | 25,026 | | | | 14,682 | | | | 39,708 | | | | 8,026 | | | | (12,450 | ) | | | 35,284 | |
| Income Before Equity Earnings | | | 34,146 | | | | 28,328 | | | | 62,474 | | | | 12,901 | | | | (21,796 | ) | | | 53,579 | |
| Income (Losses) from Equity Investments | | | 1,278 | | | | - | | | | 1,278 | | | | - | | | | - | | | | 1,278 | |
| Net Income | | | 35,424 | | | | 28,328 | | | | 63,752 | | | | 12,901 | | | | (21,796 | ) | | | 54,857 | |
| Less: | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred Stock Dividends of Subsidiary, Noncontrolling Interests | | | - | | | | - | | | | - | | | | 3 | | | | - | | | | 3 | |
| Net Income attributable to UIL Holdings | | $ | 35,424 | | | $ | 28,328 | | | $ | 63,752 | | | $ | 12,898 | | | $ | (21,796 | ) | | $ | 54,854 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Electric Distribution and Transmission (1) | | | | | | | | | | | | | |
| | | Distribution | | | Transmission | | | Total UI | | | Gas Distribution | | | Other | | | Total (2) | |
| Total Assets at December 31, 2010 | | $ | - | | | $ | - | | | $ | 2,383,057 | | | $ | 2,050,332 | | | $ | 48,449 | | | $ | 4,481,838 | |
| | | December 31, 2009 | |
| | | Electric Distribution and Transmission | | | | | | | | | |
| | | Distribution | | | Transmission | | | Total UI | | | Other | | | Total | |
| Operating Revenues | | $ | 726,562 | | | $ | 169,119 | | | $ | 895,681 | | | $ | 869 | | | | 896,550 | |
| Purchased power | | | 333,339 | | | | - | | | | 333,339 | | | | - | | | | 333,339 | |
| Operation and maintenance | | | 195,894 | | | | 29,027 | | | | 224,921 | | | | 932 | | | | 225,853 | |
| Transmission wholesale | | | - | | | | 57,012 | | | | 57,012 | | | | - | | | | 57,012 | |
| Depreciation and amortization | | | 85,617 | | | | 12,349 | | | | 97,966 | | | | 150 | | | | 98,116 | |
| Taxes - other than income taxes | | | 40,978 | | | | 19,080 | | | | 60,058 | | | | 4 | | | | 60,062 | |
| Operating Income (Loss) | | | 70,734 | | | | 51,651 | | | | 122,385 | | | | (217 | ) | | | 122,168 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other Income and (Deductions), net | | | 5,586 | | | | (33 | ) | | | 5,553 | | | | 33 | | | | 5,586 | |
| | | | | | | | | | | | | | | | | | | | | |
| Interest Charges, net | | | 24,592 | | | | 11,699 | | | | 36,291 | | | | 4,109 | | | | 40,400 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income Before Income Taxes and Equity Earnings | | | 51,728 | | | | 39,919 | | | | 91,647 | | | | (4,293 | ) | | | 87,354 | |
| Income Taxes | | | 20,106 | | | | 14,627 | | | | 34,733 | | | | (1,637 | ) | | | 33,096 | |
| Income Before Equity Earnings | | | 31,622 | | | | 25,292 | | | | 56,914 | | | | (2,656 | ) | | | 54,258 | |
| Income (Losses) from Equity Investments | | | 59 | | | | - | | | | 59 | | | | - | | | | 59 | |
| Net Income | | $ | 31,681 | | | $ | 25,292 | | | $ | 56,973 | | | $ | (2,656 | ) | | $ | 54,317 | |
| | | UI (1) | | | | | | | | | |
| | | Distribution | | | Transmission | | | Total UI | | | Other | | | Total | |
| Total Assets | | $ | - | | | $ | - | | | $ | 2,203,062 | | | $ | 18,698 | | | $ | 2,221,760 | |
| (1) | 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 December 31, 2010, was $820.9 million and $512.2 million for Distribution and Transmission, respectively. As of December 31, 2009, net plant in service was $691.1 million and $461.8 million for Distribution and Transmission, respectively. |
| (2) | Includes $298.9 million of goodwill in the Gas Distribution segment as of December 31, 2010. |
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(N) ACQUISITION
On November 16, 2010, UIL Holdings completed its acquisition (the Acquisition) of the Gas Companies from Iberdrola USA, Inc. The Gas Companies contributed $772.3 million in operating revenues and $43.8 million in net income to UIL Holdings’ results of operations for the year ended December 31, 2011. The Gas Companies contributed $138.1 million in operating revenues and $12.9 million in net income to UIL Holdings’ 2010 results of operations for the post-acquisition period of 45 days from November 17, 2010 to December 31, 2010.
Taking into account the final indebtedness and working capital adjustment of $11.2 million in May 2011, the net purchase price amounted to $906.7 million. UIL Holdings accounted for the Acquisition in accordance with ASC 805 “Business Combinations,” whereby the purchase price paid was allocated to tangible assets acquired and liabilities assumed as well as goodwill based upon their fair values as of the closing date of the Acquisition. UIL Holdings determined that the historical book value of the assets and liabilities of the Gas Companies approximates their fair value given the regulation under which they operate in the states of Connecticut and Massachusetts. The following table summarizes the allocation of the purchase price:
| | | Amount | |
| | | (In Millions) | |
| | | | |
| Current assets | | $ | 310.8 | |
| Noncurrent assets | | | 1,418.9 | |
| Current liabilities | | | (167.9 | ) |
| Long-term debt | | | (397.4 | ) |
| Other noncurrent liabilities | | | (523.7 | ) |
| Preferred stock | | | (0.8 | ) |
| Total identifiable net assets | | | 639.9 | |
| Goodwill | | | 266.8 | |
| Total Purchase Price, Net | | $ | 906.7 | |
Goodwill is calculated as the excess of the purchase price over the value of the net assets acquired and the contributing factors to the amount recorded included expected future cash flows, potential operational synergies, the utilization of technology, and cost savings opportunities in the delivery of certain shared administrative and other services. As of December 31, 2011, goodwill is $266.8 million, a decrease of $32.1 million compared to the December 31, 2010 balance. The decrease was primarily attributable to $33.7 million of adjustments to the values of the assets and liabilities recognized in the Acquisition as a result of the finalization of the allocation of the consideration transferred, which UIL Holdings had up to one year from the date of the Acquisition to finalize under business combination accounting guidance. Such adjustments were primarily related to changes in deferred income tax balances which resulted from the finalization of certain income tax filings required to be included with UIL Holdings’ 2010 federal income tax return as a result of the Acquisition. The decrease was partially offset by a $1.6 million adjustment due to the working capital adjustment noted above.
Supplemental Pro Forma Data (unaudited)
The supplemental pro forma data below has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or the future consolidated results of operations of the combined company.
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
| | | Year Ended | |
| | | December 31, 2010 | |
| | | (Thousands, except per share amounts) | |
| | | | |
| Pro forma operating revenues | | $ | 1,605,904 | |
| Pro forma operating expenses | | | | |
| Pro forma goodwill impairment charge | | | 271,175 | |
| Pro forma other | | | 1,385,634 | |
| Pro forma total operating expenses | | | 1,656,809 | |
| Pro forma net income (loss) | | $ | (181,746 | ) |
| Pro forma earnings per share of common stock - basic | | $ | (3.60 | ) |
Excluding the goodwill impairment changes, pro forma net income and earnings per share would have been $89.4 million and $1.77, respectively.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of UIL Holdings Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1) present fairly, in all material respects, the financial position of UIL Holdings and its subsidiaries (the Company) at December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
February 22, 2012
PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110
T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
UIL Holdings maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to UIL Holdings’ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Management designed its disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.
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 December 31, 2011. As of December 31, 2011, UIL Holdings’ Chief Executive Officer and its Chief Financial Officer concluded that its disclosure controls and procedures were effective and provided reasonable assurance that the disclosure controls and procedures accomplished their objectives.
Changes in Internal Control Over Financial Reporting
There have been no changes in UIL Holdings’ internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, UIL Holdings’ internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
Management of UIL Holdings is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. UIL Holdings’ internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of UIL Holdings; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America; (3) provide reasonable assurance that receipts and expenditures of UIL Holdings are being made only in accordance with authorization of management and directors of UIL Holdings; and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices) and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, one cannot assume that existing internal control over financial reporting will be effective in future periods due to changes in conditions, or deterioration in the degree of compliance with existing policies or procedures.
Management assessed the effectiveness of UIL Holdings’ internal control over financial reporting as of December 31, 2011. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as of December 31, 2011, UIL Holdings maintained effective internal control over financial reporting.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2011, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8, “Financial Statements and Supplementary Data – Report of Independent Registered Public Accounting Firm,” of this Form 10-K.
Item 9B. Other Information.
None.
Part III
The information appearing under the captions “ELECTION OF DIRECTORS” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in UIL Holdings Corporation’s (UIL Holdings’) definitive Proxy Statement for the Annual Meeting of the Shareowners scheduled to be held on May 15, 2012, which Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about April 5, 2011, is incorporated by reference in partial answer to this item. See also “EXECUTIVE OFFICERS,” following Part I, Item 4 of this Form 10-K. The UIL Holdings Code of Ethics for the Chief Executive Officer, Presidents, and Senior Financial Officers is available on UIL Holdings’ website (www.uil.com), and is included as Exhibit 14 to this filing on Form 10-K.
Item 11. Executive Compensation.
The information appearing under the captions “COMPENSATION DISCUSSION AND ANALYSIS,” “SUMMARY COMPENSATION TABLE,” “GRANTS OF PLAN-BASED AWARDS,” “OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END,” “OPTIONS EXERCISES AND STOCK VESTED,” “QUALIFIED AND SUPPLEMENTAL EXECUTIVE DEFINED BENEFIT RETIREMENT PLANS,” “NONQUALIFIED DEFERRED COMPENSATION,” “POSTRETIREMENT PAYMENTS AND BENEFITS UPON TERMINATION OR CHANGE IN CONTROLS,” “DIRECTORS’ COMPENSATION,” “COMPENSATION AND EXECUTIVE DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE COMPENSATION,” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION,” in UIL Holdings’ definitive Proxy Statement for the Annual Meeting of the Shareowners scheduled to be held on May 15, 2012, which Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about April 5, 2012, is incorporated by reference in answer to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information appearing under the captions “PRINCIPAL SHAREOWNERS” and “STOCK OWNERSHIP OF DIRECTORS AND OFFICERS” in UIL Holdings’ definitive Proxy Statement for the Annual Meeting of the Shareowners scheduled to be held on May 15, 2012, which Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about April 5, 2012, is incorporated by reference in partial answer to this item. The information appearing in Item 5, “Market for UIL Holdings’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Equity Compensation Plan Information,” of this Form 10-K is incorporated by reference in partial answer to this item.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information appearing under the captions “TRANSACTIONS WITH RELATED PERSONS,” and “ELECTION OF DIRECTORS – DIRECTORS’ INDEPENDENCE” in UIL Holdings’ definitive Proxy Statement for the Annual Meeting of the Shareowners scheduled to be held on May 15, 2012, which Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about April 5, 2012, is incorporated by reference in answer to this item.
Item 14. Principal Accounting Fees and Services.
The information appearing under the caption “BOARD OF DIRECTORS REPORT OF THE AUDIT COMMITTEE” in UIL Holdings’ definitive Proxy Statement for the Annual Meeting of the Shareowners scheduled to be held on May 15, 2012, which Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about April 5, 2012, is incorporated by reference in answer to this item.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as a part of this report:
Financial Statements (see Item 8):
Consolidated Statement of Income for the years ended December 31, 2011, 2010 and 2009
Consolidated Statement of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009
Consolidated Statement of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Consolidated Balance Sheet, December 31, 2011 and 2010
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Report of independent registered public accounting firm
Financial Statement Schedule (see S-1)
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2011, 2010 and 2009
(b) Exhibits:
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, certain of the following listed exhibits, which are annexed as exhibits to previous statements and reports filed by UIL Holdings Corporation (Commission File Number 1-15052) and/or The United Illuminating Company (Commission File Number 1-6788), are hereby incorporated by reference as exhibits to this report.
(a) Exhibits:
Exhibit No. | | Description | |
| 2.1 | | Purchase Agreement, dated as of May 25, 2010 by and between Iberdrola USA, Inc. and UIL Holdings Corporation (pursuant to Item 601(b)(2) of Regulation S-K, schedules to the Purchase Agreement have been omitted; schedules will be provided supplemental to the SEC upon request), (incorporated herein by reference to Form 8-K filed with the Securities and Exchange Commission on May 25, 2010). | |
| | | | |
| 2.2 | | Agreement, dated as of July 14, 2010 by and between The United Illuminating Company and The Connecticut Light & Power Company (incorporated herein by reference to Form 8-K filed with the Securities and Exchange Commission on July 15, 2010). | |
| | | | |
| 3.1 | | Certificate of Incorporation of UIL Holdings Corporation, as amended through May 10, 2011 (incorporated herein by reference to Form 10-Q filed with the Securities and Exchange Commission for the fiscal quarter ended June 30, 2011). | |
| | | | |
| 3.2 | | Bylaws of UIL Holdings Corporation as amended through April 27, 2009 (incorporated herein by reference to Form 10-Q filed with the Securities and Exchange Commission for the fiscal quarter ended June 30, 2009). | |
| | | | |
| 4.1 | | Indenture, dated as of August 1, 1991, from The United Illuminating Company to The Bank of New York, Trustee (incorporated herein by reference to UI Registration Statement No. 33-40169 effective August 12, 1991). | |
| | | | |
| 4.2 | | Note Purchase Agreement, dated July 29, 2008, for 6.46% Series A Senior Notes, 6.51% Series B Senior Notes, and 6.61% Series C Senior Notes (incorporated herein by reference to Form 8-K filed with the Securities and Exchange Commission on August 1, 2008). | |
| | | | |
| 4.3 | | Note Purchase Agreement, dated December 10, 2009, for 5.61% Senior Notes (incorporated herein by reference to Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2009). | |
| | | | |
| 4.4 | | Note Purchase Agreement, dated May 13, 2010, for 6.09% Senior Notes (incorporated herein by reference to Form 8-K filed with the Securities and Exchange Commission on May 14, 2010). | |
| | | | |
| 4.5 | | Senior Indenture, dated as of October 7, 2010, between UIL Holdings Corporation and The Bank of New York Mellon, as trustee (incorporated herein by reference to Form 8-K filed with the Securities and Exchange Commission on October 7, 2010). | |
