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EXHIBIT 99.1

FINANCIAL STATEMENTS

OF

THE UNITED ILLUMINATING COMPANY

AS OF AND JUNE 30, 2015 AND DECEMBER 31, 2014 AND

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(UNAUDITED)

 

TABLE OF CONTENTS

 

THE UNITED ILLUMINATING COMPANY

STATEMENT OF INCOME

(In Thousands)

(Unaudited)

 

The accompanying Notes to Financial

Statements are an integral part of the financial statements.

 

THE UNITED ILLUMINATING COMPANY

BALANCE SHEET

ASSETS

(In Thousands)

(Unaudited)

 

The accompanying Notes to Financial

Statements are an integral part of the financial statements.

 

THE UNITED ILLUMINATING COMPANY

BALANCE SHEET

LIABILITIES AND CAPITALIZATION

(In Thousands)

(Unaudited)

 

The accompanying Notes to Financial

Statements are an integral part of the financial statements.

 

THE UNITED ILLUMINATING COMPANY

STATEMENT OF CASH FLOWS

(Thousands of Dollars)

(Unaudited)

 

The accompanying Notes to Financial

Statements are an integral part of the financial statements.

 

THE UNITED ILLUMINATING COMPANY

STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY

June 30, 2015

(Thousands of Dollars)

(Unaudited)

The accompanying Notes to Financial

Statements are an integral part of the financial statements.

 

 

(A)	BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING

The United Illuminating Company (UI), a wholly owned subsidiary of UIL Holdings Corporation (UIL Holdings), is a regulated operating electric public utility established in 1899. It is engaged principally in the purchase, transmission, distribution and sale of electricity for residential, commercial and industrial purposes.

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).

Accounting Records

The accounting records of UI are maintained in conformity with accounting principles generally accepted in the United States of America (GAAP) and in accordance with the uniform systems of accounts prescribed by the FERC and the PURA.

Basis of Presentation

The preparation of financial statements in conformity with GAAP requires management to use estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (2) the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Certain immaterial amounts that were reported in the Financial Statements in previous periods have been reclassified to conform to the current presentation.

UI has evaluated subsequent events through the date its financial statements were available to be issued, August 21, 2015.

Pursuant to Connecticut’s 2005 Energy Independence Act, 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 between UI and CL&P pursuant to which 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.

PURA has determined that costs associated with these CfDs will be fully recoverable by UI and CL&P through electric rates, 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 June 30, 2015, UI has recorded a gross derivative asset of $32.8 million ($1.5 million of which is related to UI’s portion of the CfD signed by CL&P), a regulatory asset of $75.2 million, a gross derivative liability of $107.2 million ($68.0 million of which is related to UI’s portion of the CfD signed by CL&P) and a regulatory liability of $0.9 million.  See Note (K) “Fair Value of Financial Instruments” for additional CfD information.

 

The gross derivative assets and liabilities as of June 30, 2015 and December 31, 2014 were as follows:

The unrealized gains and losses from fair value adjustments to these derivatives, which are recorded in regulatory assets or regulatory liabilities, for the three- and six-month periods ended June 30, 2015 and 2014 were as follows:

The fluctuations in the balances of the derivatives as well as the related unrealized gains in the three- and six-month periods ended June 30, 2015 compared to the three- and six-month periods ended June 30, 2014 are primarily due to fluctuations in forward prices for capacity and reserves.

Equity Investments

UI is party to a 50-50 joint venture with the 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 $112.9 million and $114.2 million as of June 30, 2015 and December 31, 2014, respectively.  As of June 30, 2015, there was $1.3 million of undistributed earnings from UI’s equity investment in GenConn.

UI’s pre-tax income from its equity investment in GenConn was $3.9 million and $3.5 million for the three-month periods ending June 30, 2015 and 2014, respectively.  UI’s pre-tax income from its equity investment in GenConn for each of the six-month periods ending June 30, 2015 and 2014 was $6.9 million.

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 $2.7 million and $3.4 million in the three-month periods ending June 30, 2015 and 2014, respectively.  UI received cash distributions from GenConn of $8.1 million and $8.8 million in the six-month periods ending June 30, 2015, respectively and 2014.

 

 

Regulatory Accounting

Unless otherwise stated below, all of our regulatory assets earn a return.  Our regulatory assets and liabilities as of June 30, 2015 and December 31, 2014 included the following:

 

 

Variable Interest Entities

We have 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, our 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 our 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.”

We have identified the selected capacity resources with which UI has CfDs as VIEs and have 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, we have 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; however any such losses are fully recoverable through electric rates.  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.

We have 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, we have 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.”

New Accounting Pronouncements

In July 2015, the FASB issued Accounting Standards Update (ASU) 2015-11, “Inventory – Simplifying the Measurement of Inventory” which requires inventory that is measured using first-in, first-out or average cost methods to be measured using the lower of cost and net realizable value.  ASU 2015-11 is effective for interim and annual reporting periods beginning after December 15, 2016 and is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.  This is not expected to be material to UI’s financial statements.

In July 2015, the FASB voted to defer by one year the effective date of ASU 2014-09 which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.  A final Accounting Standards Update will be issued that reflects the revised effective date.  We are currently evaluating the effect that adopting this new accounting guidance will have on our financial statements.

In April 2015, the FASB issued Accounting Standards Update (ASU) 2015-03, “Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015 and is to be applied retrospectively.  The effect that adopting this new accounting guidance will have on our financial statements will be reductions in both Deferred Charges and Other Assets and Long-term debt on the balance sheet.  This effect is not expected to be material to UI’s financial statements.

(B)	CAPITALIZATION

Common Stock

UI had 100 shares of common stock; no par value, outstanding as of June 30, 2015 and December 31, 2014.

 

Long-term Debt

On June 29, 2015 (the “execution date”), UI entered into a Note Purchase Agreement with a group of institutional accredited investors providing for the sale to such investors of UI’s 4.61% Senior Notes, Series G, due June 29, 2045, in the principal amount of $50 million which was issued on the execution date.  UI used the net proceeds from this long-term debt issuance to re-pay $27.5 million of pollution control refunding revenue bonds which were subject to mandatory purchase on July 1, 2015 and plans on using the remaining funds for general corporate purposes or other purposes described in its application to PURA for approval of the issuance of debt and as approved by PURA.

(C)	REGULATORY PROCEEDINGS

Rates

Utilities are entitled by Connecticut statutes 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.

UI’s allowed distribution return on equity established by PURA is 9.15%.  UI is required to return to customers 50% of any distribution earnings over the allowed ROE in a calendar year by means of an earnings sharing mechanism.

Power Supply Arrangements

UI has wholesale power supply agreements in place for its entire standard service load for all of 2015 and for 50% of its standard service load for the first half of 2016.  Supplier of last resort service is procured on a quarterly basis, however, from time to time there are no bidders in the procurement process for supplier of last resort service and in such cases UI manages the load directly.  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.”  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 were to fall below investment grade.  If UI’s credit rating were to decline one rating at Standard & Poor’s or two ratings at Moody’s 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 at Standard & Poor’s and three ratings at Moody’s to fall below investment grade.  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 an event had occurred as of June 30, 2015, UI would have had to post an aggregate of approximately $10.9 million in collateral.  UI would have been and remains able to provide that collateral.

New Renewable Source Generation

Pursuant to Connecticut law (PA 13-303), on September 19, 2013, at the direction of the Connecticut Department of Energy and Environmental Protection, (DEEP), UI entered into two contracts for energy and/or RECs from Class I renewable resources, totaling approximately 3.5% of UI’s distribution load, which were subsequently approved by PURA.  Costs of each of these agreements will be fully recoverable through electric rates.  On December 18, 2013, Allco Finance Limited, an unsuccessful bidder for such contracts, filed a complaint against DEEP in the United States District Court in Connecticut alleging that DEEP’s direction to UI and CL&P to enter into the contracts violated the Supremacy Clause of the U.S. Constitution and the Federal Power Act by setting wholesale electricity rates.  This complaint was dismissed in December 2014.  On January 2, 2015 Allco filed an appeal with the United States Court of Appeals for the Second Circuit.

 

Transmission

PURA decisions do not affect the revenue requirements determination for UI’s transmission business, including the applicable return on equity (ROE), which is within the jurisdiction of the FERC.  For 2015, UI is estimating an overall allowed weighted-average ROE for its transmission business in the range of 11.3% to 11.4%.  This includes the impact of the FERC orders issued in 2014 and 2015, and excludes any impacts of the reserve adjustment, both of which are discussed below.

Beginning in 2011, several New England governmental entities, including PURA, the Connecticut Attorney General and the Connecticut Office of Consumer Council (OCC), jointly filed three separate complaints with the FERC against ISO-NE and several New England transmission owners, including UI.  In the first complaint, filed in September 2011, the complainants claimed that the then current approved base ROE of 11.14% used in calculating formula rates for transmission service under the ISO-NE Open Access Transmission Tariff by the New England transmission owners was not just and reasonable and sought a reduction of the base ROE and a refund to customers for a refund period of October 1, 2011 through December 31, 2012.  In 2012 and 2014, respectively, the complainants filed claims with the FERC similarly challenging the base ROE and seeking refunds for the 15-month periods beginning December 27, 2012 and July 31, 2014, respectively.  The complainants in the third complaint also asked for a determination that the top of the zone of reasonableness caps the ROE for each individual project.  The FERC issued an order consolidating the second and third complaints and establishing hearing procedures.  The New England transmission owners petitioned FERC for a rehearing, which was denied in May 2015.  Hearings were held in June 2015 on the second and third complaints before a FERC Administrative Law Judge, relating to the refund periods and going forward.  On July 29, 2015, post-hearing briefs were filed by parties. An initial decision by the Administrative Law Judge is expected by December 31, 2015.  On July 13, 2015, the New England transmission owners filed a petition for review of FERC’s orders establishing hearing and consolidation procedures for the second and third complaints with the U.S. Court of Appeals.

In 2014, the FERC determined that the base ROE should be set at 10.57% for the first complaint refund period and that a utility's total or maximum ROE should not exceed 11.74%.  The FERC ordered the New England transmission owners to provide refunds to customers for the first complaint refund period and set the new base ROE of 10.57% prospectively from October 16, 2014.

On March 3, 2015, the FERC issued an Order on Rehearing in the first complaint (the March Order) denying all rehearing requests from the complainants and the New England transmission owners.  On April 30, 2015, the New England transmission owners filed a petition for review of the FERC’s decisions on the first complaint with the U.S. Court of Appeals for the D.C. Circuit.  On May 1, 2015, two additional petitions for review of those FERC decisions were also filed at the D.C. Circuit by the complainants and by several customers.  The appeals of the FERC’s decisions on the first complaint have been consolidated and are currently pending before the D.C. Circuit.  UI recorded additional pre-tax reserves of $3.2 million in the first six months of 2015 relating to the third complaint and the March Order.  As of June 30, 2015, net pre-tax reserves relating to refunds and potential refunds to customers under all three claims were approximately $7 million and cumulative pre-tax reserves were approximately $11.4 million, of which $4.4 million has already been refunded to customers.

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 (doing business as Eversource Energy), 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 (GSRP), which was fully energized in November 2013, (2) the Interstate Reliability Project (IRP), which is expected to be placed in service in the fourth quarter 2015 and (3) the Central Connecticut Reliability Project, which was reassessed as part of the Greater Hartford Central Connecticut Study (GHCC). As CL&P places assets in service, it will transfer title to certain NEEWS transmission assets to UI in proportion to UI’s investments, but CL&P will continue to maintain these portions of the transmission system pursuant to an operating

 

and maintenance agreement with UI.  Any termination of the Agreement pursuant to its terms would have no effect on the assets previously transferred to UI.

Under the terms of the Agreement, UI has the option to make quarterly deposits to CL&P in exchange for ownership of specific NEEWS 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 originally proposed Connecticut portions of the NEEWS projects.  Based upon the current projected costs, UI’s investment rights in GSRP and IRP is approximately $45 million.  In February 2015, ISO-NE issued its final GHCC transmission solutions report and, in March 2015, approved the proposed plan applications.  UI and Eversource continue to evaluate the approved projects to determine the impact on UI’s aggregate investment in NEEWS.

Deposits associated with NEEWS are recorded as assets at the time the deposit is made and they are reported in the ‘Other’ line item within the Deferred Charges and Other Assets section of the consolidated balance sheet.   When title to the assets is transferred to UI, the amount of the corresponding deposit is reclassified from other assets to plant-in-service on the balance sheet and shown as a non-cash investing activity in the consolidated statement of cash flows.

As of June 30, 2015, UI had made aggregate deposits of $45 million under the Agreement since its inception, with assets associated with the GSRP valued at approximately $24.6 million and assets associated with the IRP valued at approximately $20 million having been transferred to UI.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $0.5 million and $0.4 million in the three‑month periods ended June 30, 2015 and 2014, respectively.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $1.1 million and $0.7 million in the six‑month periods ended June 30, 2015 and 2014, respectively.

Other Proceedings

On November 12, 2014, PURA issued a decision in a docket addressing UI’s semi-annual Generation Services Charge (GSC), bypassable federally mandated congestion charge and the non-bypassable federally mandated congestion charge (NBFMCC) reconciliations.  PURA’s decision allowed for recovery of $7.7 million of the $11.3 million request included in UI’s filing for the reconciliation of certain revenues and expenses relating to the period from 2004 through 2013.  This resulted in UI recording a pre-tax write-off of approximately $3.8 million during the fourth quarter of 2014, which amount included the disallowed portion of UI’s request as well as additional 2014 carrying charges.

Also on November 12, 2014, PURA issued a final decision in UI’s final Competitive Transition Assessment (CTA) reconciliation proceeding which extinguished all remaining CTA balances.  In addition, the final decision allowed for the application of an approximate $8.2 million remaining CTA regulatory liability, as well as an approximate $12.0 million regulatory liability related to the Connecticut Yankee Atomic Power Company litigation against the U.S. Department of Energy (DOE), against UI’s storm regulatory asset balance.  The final decision required that remaining regulatory liability balance be applied to the GSC “working capital allowance” and be returned to customers through the NBFMCC.

Because the two decisions noted above, among other things, fail to apply rate making principles on a consistent basis, UI filed appeals with the State of Connecticut Superior Court in December 2014 for both the GSC/NBFMCC and the CTA final decisions.  On February 3, 2015, PURA filed a motion to dismiss UI’s appeal of the CTA final decision.  On June 17, 2015, the Superior Court denied PURA’s motion to dismiss the CTA appeal.

(D)	SHORT‑TERM CREDIT ARRANGEMENTS

As of June 30, 2015, UI did not have any borrowings outstanding under the revolving credit agreement, which will expire on November 30, 2016, entered into by and among UIL Holdings and its regulated subsidiaries including UI (the Credit Facility).  Available credit under the Credit Facility at June 30, 2015 totaled $250 million for UI.  UI records borrowings under the Credit Facility as short‑term debt, but the Credit Facility provides for longer term

 

commitments from banks allowing UI to borrow and reborrow funds, at its option, until its expiration, thus affording UI flexibility in managing its working capital requirements.

(E)	INCOME TAXES

The significant portion of UI’s income tax expense, including deferred taxes, is recovered through its utility rates.  UI’s annual income tax expense and associated effective tax rate is impacted by differences in the treatment of certain transactions for book and tax purposes and by differences between the timing of deferred tax temporary difference activity and deferred tax recovery.  In accordance with ASC 740, UI uses an estimated annual effective tax rate approach to calculate interim period income tax expense for ordinary income.  UI also records separate income tax effects for significant unusual or infrequent items.  The annualized effective income tax rates for the three-month periods ended June 30, 2015 and 2014 were 31.6% and 30.8%, respectively.  The annualized effective income tax rates for the six-month periods ended June 30, 2015 and 2014 were 31.0% and 30.8%, respectively.  Income tax expense for the six months of 2015 decreased $1.3 million from the six months of 2014 due primarily lower pre-tax book income.

(G)	PENSION AND OTHER BENEFITS

During the six months ended June 30, 2015, UI made pension contributions of $4.6 million.  Additional contributions during the remainder of 2015 are expected to be $2.3 million.

The following table represents the components of net periodic benefit cost for pension and other postretirement benefits (OPEB) as well as the actuarial weighted-average assumptions used in calculating net periodic benefit cost for the three- and six-month periods ended June 30, 2015 and 2014:

 

N/A – not applicable

(H)	RELATED PARTY TRANSACTIONS

UI received cash distributions from GenConn of $2.7 million and $3.4 million in the three-month periods ending June 30, 2015 and 2014, respectively.  UI received cash distributions from GenConn of $8.1 million and $8.8 million in the six-month periods ending June 30, 2015 and 2014, respectively.

Inter-company Transactions

UI receives various administrative and management services from and enters into certain inter-company transactions with UIL Holdings and its subsidiaries. Costs of the services that are allocated amongst UI and other of UIL Holdings’ regulated subsidiaries are settled periodically by way of inter-company billings and wire transfers.  As of June 30, 2015 and December 31, 2014, the Balance Sheet reflects inter-company receivables of $3.6 million and $3.3 million, respectively, and inter-company payables of $10.7 million and $15.4 million, respectively.

Dividends/Capital Contributions

If necessary, UI pays dividends via wire transfers to UIL Holdings on a quarterly basis in order to maintain its capitalization structure as allowed per PURA.  For the six months ended June 30, 2015 and 2014, UI accrued and paid dividends to UIL Holdings of $35.7 million and $38.2 million, respectively.

(J)	COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, we are involved in various proceedings, including legal, tax, regulatory and environmental matters, which require management’s assessment to determine the probability of whether a loss will occur and, if probable, an estimate of probable loss.  When assessments indicate that it is probable that a liability has been incurred and an amount can be reasonably estimated, we accrue a reserve and disclose the reserve and related matter.  We disclose material matters when losses are probable but for which an estimate cannot be reasonably estimated or when losses are not probable but are reasonably possible.  Subsequent analysis is performed on a periodic basis to assess the impact of any changes in events or circumstances and any resulting need to adjust existing reserves or record additional reserves.  However, given the inherent unpredictability of these legal and regulatory proceedings, we cannot assure you that our assessment of such proceedings will reflect the ultimate outcome, and an adverse outcome in certain matters could have a material adverse effect on our results of operations or cash flows.

Connecticut Yankee Atomic Power Company

UI has a 9.5% stock ownership share in the Connecticut Yankee Atomic Power Company, an inactive nuclear generating company (Connecticut Yankee), the carrying value of which was $0.2 million as of June 30, 2015.  Connecticut Yankee has completed the physical decommissioning of its generation facilities and is now engaged primarily in the long-term storage of its spent nuclear fuel. Connecticut Yankee collects its costs through wholesale FERC-approved rates from UI and several other New England utilities.  UI recovers these costs from its customers through electric rates.

 

DOE Spent Fuel Litigation

In 1998, Connecticut Yankee filed claims in the United States Court of Federal Claims seeking damages resulting from the breach of the 1983 spent fuel and high level waste disposal contract between Connecticut Yankee and 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, which was affirmed in May 2012.  Connecticut Yankee received payment of the damage award and, in light of its ownership share, in July 2013 UI received approximately $3.8 million of such award which was credited back to customers through the CTA.

In December 2007, Connecticut Yankee filed a second set of complaints with the United States Court of Federal Claims against the DOE seeking damages incurred since January 1, 2002 for the DOE’s failure to remove Connecticut Yankee’s spent fuel.  In November 2013, the court issued a final judgment, which was not appealed, awarding Connecticut Yankee damages of $126.3 million.  In light of its ownership share, in June 2014, UI received approximately $12.0 million of such award which was applied, in part, against the remaining storm regulatory asset balance.  The remaining regulatory liability balance was applied to the GSC “working capital allowance” and will be returned to customers through the nonbypassable federally mandated congestion charge.  See Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Other Proceedings” for additional information.

In August 2013, Connecticut Yankee filed a third set of complaints with the United States Court of Federal Claims against the DOE seeking an unspecified amount of damages incurred since January 1, 2009 for the DOE’s failure to remove Connecticut Yankee’s spent fuel.  In April 2015, Connecticut Yankee provided the DOE with a third set of damage claims totaling approximately $32.9 million for damages incurred from January 1, 2009 through December 31, 2012.  UI’s 9.5% ownership share would result in a receipt of approximately $3.1 million which, if awarded, would be refunded to customers.

Environmental Matters

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, we may incur substantial capital expenditures for equipment modifications and additions, monitoring equipment and recording devices, as well as additional operating expenses.  The total amount of these expenditures is not now determinable.  Environmental damage claims may also arise from the operations of our subsidiaries.  Significant environmental issues known to us at this time are described below.

Site Decontamination, Demolition and Remediation Costs

In January 2012, Evergreen Power, LLC (Evergreen Power) and Asnat Realty LLC (Asnat), then and current owners of a former generation site on the Mill River in New Haven (the “English Station site”) that UI sold to Quinnipiac Energy in 2000, filed a lawsuit in 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, investigation and remediation of hazardous substances at the English Station site and (ii) an order directing UI to investigate and remediate the site.  In December 2013, Evergreen and Asnat filed a subsequent lawsuit in Connecticut state court seeking among other things: (i) remediation of the property; (ii) reimbursement of remediation costs; (iii) termination of UI’s easement rights; (iv) reimbursement for costs associated with securing the property; and (v) punitive damages.  UI believes the claims are without merit.  Management cannot presently assess the potential financial impact, if any, of the pending lawsuits.  UI has not recorded a liability related to it.

On April 8, 2013, DEEP issued an administrative order addressed to UI, Evergreen Power, Asnat and others, ordering the parties to take certain actions related to investigating and remediating the English Station site.  Mediation of the matter began in the fourth quarter of 2013 and concluded unsuccessfully in April of 2015.  Hearings on the administrative order are expected to take place in late February and early March 2016.  UI has

 

requested access to the English Station site from Evergreen Power and Asnat, the current property owners, for purposes of performing additional investigation; this access has not yet been granted.

As discussed in its’ joint application with PURA for approval of a change in control of UIL Holdings to Iberdrola USA, UIL Holdings is negotiating a consent order with DEEP that would, upon closing of the merger, provide for UI to begin to investigate and remediate the English Station site.  DEEP has informed UIL Holdings that it has estimated the approximate cost of the remediation of the English Station site to be $30 million.  Management has not assessed the accuracy of or any support for this DEEP estimate.  Until UIL Holdings has successfully negotiated and agreed to a consent order and have sufficient access to the English Station site to permit the undertaking of a reliable investigation, the expected cost of the remediation or the extent of any potential liability will not be known.

UI’s knowledge of the current conditions at the English Station site is insufficient for it to make a reliable investigation and remediation estimate at this time.  Therefore, management cannot predict the financial impact on UI of DEEP’s administrative order, the agreements regarding the consent order or other matters relating to the English Station site, and no range of loss can be reasonably estimated at this time.  UI has not recorded a liability related to it.

With respect to transmission-related property adjacent to the New Haven Harbor Generating Station, UI performed an environmental analysis that indicated remediation expenses would be approximately $3.2 million.  UI has accrued these estimated expenses, which were recovered in transmission rates.

Middletown/Norwalk Transmission Project

The general contractor 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 a lawsuit in Connecticut state court on September 22, 2009.  On September 3, 2013, the court found for UI on all claims but one related to certain change orders, and ordered UI to pay the general contractor approximately $1.3 million, which has since been paid.  On October 22, 2013, the general contractor filed an appeal of the trial court’s decision and on June 23, 2015, the appellate court affirmed the trial court’s judgment.  The period to file a petition for review by the Connecticut Supreme Court has passed and the case is now concluded.

 

In April 2013, an affiliate of the general contractor for the Middletown/Norwalk Transmission Project, purporting to act as a shareholder on behalf of UIL Holdings, filed a complaint against the UIL Holdings Board of Directors alleging that the directors breached a fiduciary duty by failing to undertake an independent investigation in response to a letter from the affiliate asking for an investigation regarding alleged improper practices by UI in connection with the Middletown/Norwalk Transmission Project.  In October 2013, the court granted the defendants’ motion to dismiss the complaint, which dismissal was affirmed by the Connecticut Appellate Court in March 2015.  The period to file a petition for review by the Connecticut Supreme Court has passed and the case is now concluded.

 

 

(K)	FAIR VALUE MEASUREMENTS

As required by ASC 820 “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety, based on the lowest level of input that is significant to the fair value measurement.  Our 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 the fair value of our financial assets and liabilities, other than pension benefits and other postretirement benefits, as of June 30, 2015 and December 31, 2014.

Fair value measurements categorized in Level 3 of the fair value hierarchy are prepared by individuals with expertise in valuation techniques, pricing of energy and energy-related products, and accounting requirements.  The derivative assets consist primarily of CfDs.  The determination of fair value of the CfDs was based on a probability-based expected cash flow analysis that was discounted at the June 30, 2015 or December 31, 2014 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.  We believe this methodology provides the most reasonable estimates of the amount of future discounted cash flows associated with the CfDs.  Additionally, on a quarterly basis, we perform analytics to ensure that the fair value of the derivatives is consistent with changes, if any, in the various fair value model inputs.  Additional quantitative information about Level 3 fair value measurements is as follows:

 

Significant singular changes in the risk of non-performance, the discount rate or the contract term pricing would result in an inverse change in the fair value of the CfDs.

The fair value of the noncurrent investments is determined using quoted market prices in active markets for identical assets.  The investments primarily consist of money market funds.

The determination of the fair value of the supplemental retirement benefit trust life insurance policies was based on quoted prices as of June 30, 2015 and December 31, 2014 in the active markets for the various funds within which the assets are held.

Long-term debt is carried at cost on the consolidated balance sheet.  The fair value of long-term debt as displayed in the table above is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit 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 six-month period ended June 30, 2015.

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 CfDs for the six-month period ended June 30, 2015.  The amounts offset the net CfDs liabilities included in the derivative liabilities detailed above.

 

 

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