BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES | 9 Months Ended |
Sep. 30, 2013 |
BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES [Abstract] | ' |
BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES | ' |
(A) | BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES | | | | | | | | | | | | | | | |
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UIL Holdings is headquartered in New Haven, Connecticut, where its senior management maintains offices and is responsible for overall planning, operating and financial functions. The primary business of UIL Holdings is ownership of its operating regulated utility businesses. The utility businesses consist of the electric distribution and transmission operations of The United Illuminating Company (UI) and the natural gas transportation, distribution and sales operations of The Southern Connecticut Gas Company (SCG), Connecticut Natural Gas Corporation (CNG), and The Berkshire Gas Company (Berkshire, and together with SCG and CNG, the Gas Companies). |
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UI is also a party to a joint venture with certain affiliates of NRG Energy, Inc. (NRG affiliates) pursuant to which UI holds 50% of the membership interests in GCE Holding LLC, whose wholly owned subsidiary, GenConn Energy LLC (collectively with GCE Holding LLC, GenConn) operates peaking generation plants in Devon, Connecticut (GenConn Devon) and Middletown, Connecticut (GenConn Middletown). |
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Basis of Presentation |
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The financial statements of UIL Holdings are prepared on a consolidated basis and therefore include the accounts of UIL Holdings’ majority-owned subsidiaries noted above. The year‑end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted in accordance with Securities and Exchange Commission (SEC) rules and regulations. UIL Holdings believes that the disclosures made are adequate to make the information presented not misleading. The information presented in the Consolidated Financial Statements reflects all adjustments which, in the opinion of UIL Holdings, are necessary for a fair statement of the financial position and results of operations for the interim periods described herein. All such adjustments are of a normal and recurring nature. The results for the nine-month period ended September 30, 2013 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2013. |
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The Income from Equity Investments line item on UIL Holdings Consolidated Statement of Income, which was previously presented below the Income Taxes line item, is now being presented above the Income Taxes line item. |
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The Company has revised its previously issued annual financial statements for a correction in the 2012 Consolidated Balance Sheet. The effect of this revision on the balance sheet is a $13.1 million adjustment increasing accounts payable and decreasing accrued liabilities in the Consolidated Balance Sheet as of December 31, 2012. This adjustment is not considered to be material to previously issued financial statements. Additionally, certain immaterial amounts that were reported in the Consolidated Balance Sheet and Consolidated Statement of Income in previous periods have been reclassified to conform to the current presentation. |
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Derivatives |
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UIL Holdings’ regulated subsidiaries are parties to contracts, and involved in transactions, that are derivatives. The fair values of the gross derivative assets and liabilities as of September 30, 2013 and December 31, 2012 were as follows: |
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| | September 30, | | | December 31, | | | | | | | | | |
2013 | 2012 | | | | | | | | |
| | (In Thousands) | | | | | | | | | |
Gross derivative assets: | | | | | | | | | | | | | | |
Current Assets | | $ | 9,063 | | | $ | 12,671 | | | | | | | | | |
Deferred Charges and Other Assets | | $ | 45,759 | | | $ | 67,167 | | | | | | | | | |
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Gross derivative liabilties: | | | | | | | | | | | | | | | | |
Current Liabilities | | $ | 26,915 | | | $ | 30,804 | | | | | | | | | |
Noncurrent Liabilities | | $ | 175,662 | | | $ | 224,639 | | | | | | | | | |
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Contracts for Differences (CfDs) |
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Pursuant to Connecticut’s 2005 Energy Independence Act, the Connecticut Public Utilities Regulatory Authority (PURA) solicited bids to create new or incremental capacity resources in order to reduce federally mandated congestion charges, and selected four new capacity resources. To facilitate the transactions between the selected capacity resources and Connecticut electric customers, and provide the commitment necessary for owners of these resources to obtain necessary financing, PURA required that UI and The Connecticut Light and Power Company (CL&P) execute long-term contracts with the selected resources. In August 2007, PURA approved four CfDs, each of which specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price. UI executed two of the contracts and CL&P executed the other two contracts. The costs or benefits of each contract will be paid by or allocated to customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost or benefit is borne by or allocated to UI customers and approximately 80% is borne by or allocated to CL&P customers. |
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PURA has determined that costs associated with these CfDs will be recoverable by UI and CL&P, and in accordance with ASC 980 “Regulated Operations,” UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability). The CfDs are marked-to-market in accordance with ASC 815 “Derivatives and Hedging.” For those CfDs signed by CL&P, UI records its approximate 20% portion pursuant to the cost-sharing agreement noted above. As of September 30, 2013, UI has recorded a gross derivative asset of $54.8 million, a regulatory asset of $147.8 million, and a gross derivative liability of $202.6 million ($134.0 million of which is related to UI’s portion of CL&P’s derivative liabilities). See Note (K) “Fair Value of Financial Instruments” for additional CfD information. |
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The unrealized gains and losses from fair value adjustments to these derivatives recorded in regulatory assets or regulatory liabilities for the three- and nine-month periods ended September 30, 2013 and 2012 were as follows: |
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| | Three Months Ended | | | Nine Months Ended | |
September 30, | September 30, |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | (In Thousands) | | | (In Thousands) | |
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Regulatory Assets - Derivative liabilities | | $ | (5,585 | ) | | $ | (1,832 | ) | | $ | (28,849 | ) | | $ | (7,613 | ) |
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Regulatory Liabilities - Derivative assets | | $ | - | | | $ | (27 | ) | | $ | - | | | $ | (15 | ) |
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The increased unrealized losses in the three- and nine-month periods ended September 30, 2013 compared to September 30, 2012 is primarily due to increases in forward pricing. |
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Weather Insurance Contracts |
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On an annual basis, the Gas Companies each assess the need for weather insurance contracts for the upcoming heating season in order to provide financial protection from significant weather fluctuations. According to the terms of such contracts, if temperatures are warmer than normal at a prescribed level for the contract period, a payment is received by the gas company; in addition, under certain of the contracts, if temperatures are colder than normal at a prescribed level for the contract period, the gas company is required to make a payment. The premiums paid are amortized over the terms of the contracts. The intrinsic value of the contracts is carried on the balance sheet with changes in value recorded in the income statement as Other Income and (Deductions). |
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In October of 2013, CNG entered into a weather insurance contract for the period of November 1, 2013 through December 31, 2013. If temperatures are warmer than normal, CNG will receive a payment, up to a maximum of $1.5 million; however, if temperatures are colder than normal, CNG will make a payment of up to a maximum of $1 million. As a result of the request in CNG’s current rate proceeding for a decoupling mechanism which is anticipated to go into effect in January 2014, the contract does not extend into the 2014 portion of the heating season. |
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In October 2013, Berkshire entered into a weather insurance contract for the winter period of November 1, 2013 through April 30, 2014. If temperatures are warmer than normal, Berkshire will receive a payment, up to a maximum of $1 million; however, if temperatures are colder than normal, Berkshire will make a payment of up to a maximum of $0.2 million. |
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In September 2013, SCG entered into a weather insurance contract for the winter period of November 1, 2013 through April 30, 2014. If temperatures are warmer than normal, SCG will receive a payment, up to a maximum of $3 million; however, if temperatures are colder than normal, SCG will make a payment of up to a maximum of $2 million. |
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In October 2012, SCG and CNG each entered into weather insurance contracts for the winter period of November 1, 2012 through April 30, 2013. If temperatures were warmer than normal, SCG and CNG each would have received a payment, up to a maximum of $3 million; however, if temperatures were colder than normal, SCG and CNG each would have made a payment of up to a maximum of $2 million. Upon the expiration of their respective contracts, SCG and CNG neither received nor made a payment since the variation from normal weather during the contract period did not reach the prescribed level stated in the contracts. |
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In November 2011, Berkshire entered into a weather insurance contract for calendar year 2012 in order to provide financial protection from significant weather fluctuations. According to the terms of the contract, because temperatures were warmer than normal for the contract period, Berkshire received a payment of $1 million on January 8, 2013. The premiums paid were amortized over the term of the contract. The intrinsic value of the contract is carried on the balance sheet, which totaled $1 million at December 31, 2012, with changes in value recorded in the income statement as Other Income and (Deductions). |
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Earnings per Share |
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The following table presents a reconciliation of the basic and diluted earnings per share calculations for the three- and nine‑month periods ended September 30, 2013 and 2012: |
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| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | (In Thousands, except per share amounts) | |
Numerator: | | | | | | | | | | | | |
Net income | | $ | 5,144 | | | $ | 15,749 | | | $ | 74,859 | | | $ | 74,798 | |
Less: Net income allocated to unvested units | | | 5 | | | | 23 | | | | 83 | | | | 126 | |
Net income attributable to common shareholders | | $ | 5,139 | | | $ | 15,726 | | | $ | 74,776 | | | $ | 74,672 | |
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Denominator: | | | | | | | | | | | | | | | | |
Basic average number of shares outstanding | | | 50,989 | | | | 50,799 | | | | 50,956 | | | | 50,760 | |
Effect of dilutive securities | | | 242 | | | | 233 | | | | 281 | | | | 244 | |
Diluted average number of shares outstanding | | | 51,231 | | | | 51,032 | | | | 51,237 | | | | 51,004 | |
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Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.1 | | | $ | 0.31 | | | $ | 1.47 | | | $ | 1.47 | |
Diluted | | $ | 0.1 | | | $ | 0.31 | | | $ | 1.46 | | | $ | 1.46 | |
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All outstanding options to purchase shares of common stock during the nine-month periods ending September 30, 2013 and 2012 and the three-month period ending September 30, 2012 were included in the computation of diluted earnings per share because the options’ exercise prices were lower than the average market price of UIL Holdings’ common shares during such period. There were no outstanding options to purchase shares of common stock during the three-month period ending September 30, 2013. |
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Equity Investments |
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UI is party to a 50-50 joint venture with NRG affiliates in GenConn, which operates two peaking generation plants in Connecticut. UI’s investment in GenConn is being accounted for as an equity investment, the carrying value of which was $126.6 million and $124.8 million as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, there were approximately $4.0 million of undistributed earnings from UI’s equity investment in GenConn. |
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UI’s pre-tax income from its equity investment in GenConn was $11.6 million and $11.8 million for the nine-month periods ended September 30, 2013 and 2012, respectively. The decline in 2013 earnings compared to 2012 is primarily due to the absence in the first quarter 2013 of non-recurring adjustments recorded in the first quarter of 2012 largely relating to 2011. UI’s pre-tax income from its equity investment in GenConn was $3.9 million and $3.4 million for the three‑month periods ended September 30, 2013 and 2012, respectively. |
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Cash distributions from GenConn are reflected as either distributions of earnings or as returns of capital in the operating and investing sections of the Consolidated Statement of Cash Flows, respectively. UI received cash distributions from GenConn of $9.8 million and $17.6 million during the nine-month periods ended September 30, 2013 and 2012, respectively. Due to timing, UI did not receive any cash distributions from GenConn during the three‑month period ended September 30, 2013 but received distributions of $8.2 million in October of 2013. UI received cash distributions from GenConn of $4.7 million during the three-month period ended September 30, 2012. |
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Regulatory Accounting |
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Unless otherwise stated below, all of UIL Holdings’ regulatory assets earn a return. UIL Holdings’ regulatory assets and liabilities as of September 30, 2013 and December 31, 2012 included the following: |
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Remaining Period | | September 30, | | | December 31, | | | | | | | | |
2013 | 2012 | | | | | | | |
| | | (In Thousands) | | | | | | | | |
Regulatory Assets: | | | | | | | | | | | | | | |
Nuclear plant investments – above market | (a) | | $ | 238,868 | | | $ | 252,498 | | | | | | | | |
Connecticut Yankee | Not applicable | | | - | | | | 11,129 | | | | | | | | |
Unamortized redemption costs | 8 to 20 years | | | 11,502 | | | | 12,103 | | | | | | | | |
Pension and other post-retirement benefit plans | (b) | | | 444,038 | | | | 458,019 | | | | | | | | |
Environmental remediation costs | 4 to 5 years | | | 16,754 | | | | 14,772 | | | | | | | | |
Hardship programs | (c) | | | 23,833 | | | | 29,852 | | | | | | | | |
Debt premium | 1 to 24 years | | | 35,671 | | | | 41,016 | | | | | | | | |
Deferred purchased gas | (d) | | | - | | | | 12,444 | | | | | | | | |
Unfunded future income taxes | (e) | | | 27,201 | | | | 17,319 | | | | | | | | |
Contracts for differences | (f) | | | 147,726 | | | | 176,597 | | | | | | | | |
Excess generation service charge | (g) | | | 8,228 | | | | 8,864 | | | | | | | | |
Deferred transmission income/expense | (h) | | | 10,744 | | | | 21,379 | | | | | | | | |
Storm costs | (i) | | | 15,797 | | | | 52,009 | | | | | | | | |
Other | (j) | | | 27,825 | | | | 27,449 | | | | | | | | |
Total regulatory assets | | | | 1,008,187 | | | | 1,135,450 | | | | | | | | |
Less current portion of regulatory assets | | | | 98,323 | | | | 120,935 | | | | | | | | |
Regulatory Assets, Net | | | $ | 909,864 | | | $ | 1,014,515 | | | | | | | | |
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Regulatory Liabilities: | | | | | | | | | | | | | | | | |
Accumulated deferred investment tax credits | 30 years | | $ | 4,502 | | | $ | 4,612 | | | | | | | | |
Income taxes due principally to book-tax differences | (j) | | | 57,828 | | | | 41,928 | | | | | | | | |
Deferred gain on sale of property | (a) | | | 37,933 | | | | 37,933 | | | | | | | | |
Middletown/Norwalk local transmission network service collections | 36 years | | | 21,545 | | | | 21,975 | | | | | | | | |
Pension and other post-retirement benefit plans | 1 to 7 years | | | 11,985 | | | | 15,016 | | | | | | | | |
Deferred income taxes | (e) | | | 44,522 | | | | 41,816 | | | | | | | | |
Asset retirement obligation | (k) | | | 4,254 | | | | 4,995 | | | | | | | | |
Deferred purchased gas | (d) | | | 11,893 | | | | - | | | | | | | | |
Low income programs | (l) | | | 23,509 | | | | 17,651 | | | | | | | | |
Asset removal costs | (j) | | | 254,131 | | | | 243,854 | | | | | | | | |
Other | (j) | | | 22,203 | | | | 36,660 | | | | | | | | |
Total regulatory liabilities | | | | 494,305 | | | | 466,440 | | | | | | | | |
Less current portion of regulatory liabilities | | | | 7,135 | | | | 21,284 | | | | | | | | |
Regulatory Liabilities, Net | | | $ | 487,170 | | | $ | 445,156 | | | | | | | | |
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(a) Asset/Liability relates to the Competitive Transition Assessment (CTA). Total CTA costs recovery and stranded cost amortization were substantially completed in the third quarter of 2013. The remaining balances are fully offset by amounts primarily included in income taxes, due principally to book-tax differences. As a result of the outcome of UI’s 2013 distribution rate request, PURA approved UI’s proposed rate treatment to leave CTA rates unchanged until January 1, 2014 at which point the charge will end and the remaining balances will be extinguished. |
(b) Asset life is dependent upon timing of final pension plan distribution; balance, which is fully offset by a corresponding liability, is recalculated each year in accordance with ASC 715 "Compensation-Retirement Benefits." See Note (G) “Pension and Other Benefits” for additional information. |
(c) Hardship customer accounts deferred for future recovery to the extent they exceed the amount in rates. |
(d) Deferred purchase gas costs balances at the end of the rate year are normally recorded/returned in the next year. |
(e) The balance will be extinguished when the asset, which is fully offset by a corresponding liability, or liability has been realized or settled, respectively. |
(f) Asset life is equal to delivery term of related contracts (which vary from approximately 7 - 14 years); balance fluctuates based upon quarterly market analysis performed on the related derivatives (Note K); amount, which does not earn a return, is fully offset by corresponding derivative asset/liability. See “-Contracts for Differences” discussion above for additional information. |
(g) Working capital allowance for generation service charge; this amount fluctuates based upon cash inflows and outflows in a given period. |
(h) Regulatory asset or liability which defers transmission income or expense and fluctuates based upon actual revenues and revenue requirements. |
(i) Storm costs include accumulated costs for major storms occurring from January 2009 forward. See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Rates” for a discussion of the recovery of these costs. |
(j) Amortization period and/or balance vary depending on the nature, cost of removal and/or remaining life of the underlying assets/liabilities; asset amount includes decoupling ($12.4 million) and certain other amounts that are not currently earning a return. See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Rates” for a discussion of the decoupling recovery period. |
(k) The liability will be extinguished simultaneous with the retirement of the assets and settlement of the corresponding asset retirement obligation. |
(l) Various hardship and payment plan programs approved for recovery. |
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Stock-Based Compensation |
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Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), target amounts of 101,150 and 5,860 performance shares were granted to certain members of management in March and May of 2013, respectively; the averages of the high and low market prices on the grant dates, which approximates fair value, were $38.73 and $41.34 per share, respectively. |
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Also in March 2013, UIL Holdings granted a total of 2,033 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, which approximates fair value, was $38.73 per share. Such shares vest in equal annual installments over a five-year period. |
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In May 2013, UIL Holdings granted a total of 21,558 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, which approximates fair value, was $40.69 per share. Such shares vest in May 2014. |
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Also in May 2013, UIL Holdings granted a total of 2,177 shares of restricted stock to its Vice President – Information Technology and Chief Information Officer under the Amended and Restated UIL Holdings 2008 Stock and Incentive Compensation Plan; the average of the high and low market price on the date of grant, which approximates fair value, was $41.34 per share. Such shares vest in May 2016. |
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Total stock-based compensation expense for the nine-month periods ended September 30, 2013 and 2012 was $4.1 million and $3.9 million, respectively. Total stock-based compensation expense for the three-month periods ended September 30, 2013 and 2012 was $1.1 million and $0.2 million, respectively. |
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Variable Interest Entities |
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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 affiliates. 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.” |
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UIL Holdings has identified the selected capacity resources with which UI has CfDs as VIEs and has concluded that UI is not the primary beneficiary as UI does not have the power to direct any of the significant activities of these capacity resources. As such, UIL Holdings has not consolidated the selected capacity resources. UI’s maximum exposure to loss through these agreements is limited to the settlement amount under the CfDs as described in “–Derivatives – Contracts for Differences (CfDs)” above. UI has no requirement to absorb additional losses nor has UI provided any financial or other support during the periods presented that were not previously contractually required. |
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UIL Holdings has identified the entities for which UI is required to enter into long-term contracts to purchase Renewable Energy Credits (RECs) as VIEs. In assessing these contracts for VIE identification and reporting purposes, UIL Holdings has aggregated the contracts based on similar risk characteristics and significance to UI. UI is not the primary beneficiary as UI does not have the power to direct any of the significant activities of these entities. UI’s exposure to loss is primarily related to the purchase and resale of the RECs, but, any losses incurred are recoverable through electric rates. For further discussion of RECs, see Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – New Renewable Source Generation.” |
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New Accounting Pronouncements |
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In July 2013, the FASB issued updated guidance to ASC 740 “Income Taxes” which prescribes the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective during interim and annual periods beginning after December 15, 2013 and is to be applied on a prospective basis. The implementation of this guidance is not expected to have a material impact on UIL Holdings’ consolidated financial statements. |