---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10‑Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to ______

Commission file number 1‑15052

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:  203‑499-2000

N/A

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒      No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☒      No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

The number of shares outstanding of the issuer’s only class of common stock, as of October 29, 2015 was 56,629,377.

 

---

 

INDEX

PART I.  FINANCIAL INFORMATION

PART II.  OTHER INFORMATION

 

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

UIL HOLDINGS CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(In Thousands except per share amounts)

(Unaudited)

 

---

UIL HOLDINGS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

The accompanying Notes to the Consolidated Financial

Statements are an integral part of the financial statements.

 

UIL HOLDINGS CORPORATION

CONSOLIDATED BALANCE SHEET

ASSETS

(In Thousands)

(Unaudited)

The accompanying Notes to the Consolidated Financial

Statements are an integral part of the financial statements.

 

UIL HOLDINGS CORPORATION

CONSOLIDATED BALANCE SHEET

LIABILITIES AND CAPITALIZATION

(In Thousands)

(Unaudited)

The accompanying Notes to the Consolidated Financial

Statements are an integral part of the financial statements.

 

UIL HOLDINGS CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(In Thousands)

(Unaudited)

The accompanying Notes to the Consolidated Financial

Statements are an integral part of the financial statements.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

The accompanying notes should be read in conjunction with Notes to Consolidated Financial Statements included in UIL Holdings Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  References in this Quarterly Report on Form 10-Q to "UIL Holdings” “we,” “our,” and “us” refer to UIL Holdings Corporation and its consolidated subsidiaries.

(A)  BUSINESS ORGANIZATION AND STATEMENT OF ACCOUNTING POLICIES

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).

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).

Basis of Presentation

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.  Intercompany accounts and transactions have been eliminated in consolidation.  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.  We believe 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 our opinion, 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 three- and nine-month periods ended September 30, 2015 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2015.

Proposed Merger with Iberdrola USA

On February 25, 2015, we announced that UIL Holdings had entered into a definitive merger agreement (the Agreement) with Iberdrola USA and its wholly-owned subsidiary, Green Merger Sub, Inc. (merger sub) under which Iberdrola USA will acquire UIL Holdings through a merger of UIL Holdings with and into merger sub and merger sub being the surviving corporation (the merger).  Merger sub will change its name to UIL Holdings Corporation and remain a direct or indirect wholly-owned subsidiary of Iberdrola USA.  Iberdrola USA will then become a newly listed U.S. publicly-traded company.  In connection with the merger, each issued and outstanding share of the common stock of UIL Holdings will be converted into the right to receive one validly issued share of common stock of the newly listed company plus $10.50 in cash.  Immediately following the consummation of the merger, former holders of UIL Holdings’ common stock will own approximately 18.5% of the newly listed company.  The merger remains subject to certain closing conditions, including the approval of the shareowners of UIL Holdings and regulatory approvals from the Connecticut Public Utilities Regulatory Authority (PURA) and the Massachusetts Department of Public Utilities (DPU).  All other regulatory approvals have been obtained.  Iberdrola USA and UIL Holdings made the required filings at the PURA and the DPU seeking approval of the change in control on March 25, 2015.  On July 7, 2015, in response to the issuance of a draft decision issued by PURA, UIL Holdings and Iberdrola USA filed a letter with PURA withdrawing their pending application and terminating the proceeding.  On July 31, 2015, UIL Holdings and Iberdrola USA (including its related entities) filed a new application with PURA for approval of the change in control.

On September 18, 2015, UIL Holdings, Iberdrola USA (including its related parties) and the Connecticut Office of Consumer Counsel (OCC) filed a settlement agreement with PURA that included various commitments in addition to

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

those included in the July 31, 2015 application.  Hearings have been completed and a draft decision is expected on November 24, 2015 with a final decision currently scheduled for December 9, 2015.

On October 19, 2015, UIL Holdings and Iberdrola USA (including its related parties), the Attorney General of the Commonwealth of Massachusetts and the Massachusetts Department of Energy Resources (DOER) filed a settlement agreement with the DPU that supplements, modifies and supersedes the various commitments included in the March 25, 2015 application and August 6, 2015 updated testimony.  The filing of the settlement agreement requests that the DPU approve the settlement agreement and authorize the merger by December 18, 2015.

We currently expect that the merger will close promptly after satisfaction or waiver of all closing conditions, including receipt of shareowner approval and all regulatory approvals, and not later than December 31, 2015.  There are no assurances that the merger will be consummated on the currently expected timetable or at all.  Unless stated otherwise, all forward-looking information contained in this report does not take into account or give any effect to the impact of the proposed merger.

 

For the three and nine months ended September 30, 2015, UIL Holdings incurred pre-tax merger-related expenses of approximately $0.6 million and $7.4 million, respectively, which represented legal, investment banking, and other merger-related costs.

Further information concerning the proposed merger is included Note (C) “Regulatory Proceedings” and  in a proxy statement/prospectus contained in a registration statement on Form S-4, as amended, filed by Iberdrola USA with the SEC on July 17, 2015 in connection with the proposed merger.

Philadelphia Gas Works

 

In March 2014, UIL Holdings entered into an Asset Purchase Agreement (the Asset Purchase Agreement) with the City of Philadelphia pursuant to which UIL Holdings, through a wholly-owned subsidiary, was to acquire the operating assets and assume certain liabilities of Philadelphia Gas Works.  The proposed acquisition was subject to the satisfaction or waiver of certain customary and other closing conditions for transactions of this type, including approval from the Philadelphia City Council.  In light of the City Council’s October 2014 announcement to not endorse the proposed acquisition, we exercised our contractual right to terminate the Asset Purchase Agreement in December 2014.

For the three and nine month periods ended September 30, 2014, UIL Holdings incurred pre-tax acquisition-related expenses of approximately $1.4 million and $21.3 million, respectively, $0.6 million and $6.1 million, respectively, of which represented legal, investment banking, and due diligence costs that are included in operating expenses and $0.8 million and $15.2 million, respectively, of which is a fee associated with a Bridge Term Loan Agreement that is included in other income and (deductions) in the Consolidated Statement of Income.

 

Derivatives

 

UIL Holdings’ regulated subsidiaries are parties to contracts, and involved in transactions, that are derivatives.

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.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

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 September 30, 2015, UI has recorded a gross derivative asset of $31.5 million ($1.3 million of which is related to UI’s portion of the CfD signed by CL&P), a regulatory asset of $72.0 million, a gross derivative liability of $102.9 million ($65.1 million of which is related to UI’s portion of the CfD signed by CL&P) and a regulatory liability of $0.6 million. See Note (K) “Fair Value of Financial Instruments” for additional CfD information.

The gross derivative assets and liabilities as of September 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 nine-month periods ended September 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 nine-month periods ended September 30, 2015 compared to the three- and nine-month periods ended September 30, 2014 are primarily due to fluctuations in forward prices for capacity and reserves.

On an annual basis, SCG and Berkshire 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.  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).  As a result of PURA’s approval of a decoupling mechanism for CNG which went into effect in January 2014, CNG does not enter into weather insurance contracts.

In September 2015, SCG and Berkshire entered into weather insurance contracts for the winter period of November 1, 2015 through April 30, 2016.  If temperatures are warmer than normal, SCG and Berkshire will receive payments up to a maximum of $3 million and $1 million, respectively.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

Earnings per Share

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, 2015 and 2014:

(1)	Includes unvested restricted stock and performance shares.

 

Equity and Other 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 $110.3 million and $114.2 million as of September 30, 2015 and December 31, 2014, respectively.  As of September 30, 2015, there was $0.1 million of undistributed earnings from UI’s equity investment in GenConn.

UI’s pre-tax income from its equity investment in GenConn was $3.4 million and $3.5 million for the three-month periods ending September 30, 2015 and 2014, respectively.  UI’s pre-tax income from its equity investment in GenConn for each of the nine-month periods ending September 30, 2015 and 2014 was $10.3 million and $10.4 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 $6.0 million and $5.5 million in the three-month periods ending September 30, 2015 and 2014, respectively.  UI received cash distributions from GenConn of $14.1 million and $14.3 million in the nine-month periods ending September 30, 2015, respectively and 2014.

On July 24, 2015, UIL Holdings announced its participation in Tennessee Gas Pipeline Company LLC’s (TGP) proposed Northeast Energy Direct project (NED pipeline) through an acquisition of a 2.5% equity interest in Northeast Expansion LLC.  Northeast Expansion LLC is a joint venture between an affiliate of Kinder Morgan, Inc., (Kinder Morgan) and Liberty Utilities (Pipeline & Transmission) Corp, which will construct and own the NED pipeline, a new, “market path”  natural gas pipeline segment of approximately 188 miles from Wright, New York, to Dracut, Massachusetts.  This 2.5% equity interest, which totaled approximately $1.6 million as of September 30, 2015, commits UIL Holdings to an initial capital investment opportunity that is expected to total up to approximately $80 million, depending on the final pipeline configuration and design capacity.  Pursuant to an option agreement with Kinder Morgan, UIL Holdings also has the option to acquire up to an additional 12.5% of equity interests in Northeast Expansion LLC under certain limited circumstances, including if certain additional firm transportation agreements for service on the NED pipeline are entered into or if TGP does not sell additional volume on the NED pipeline.   Any

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

increase in equity ownership would increase UIL Holdings’ investment commitment proportionately.  In addition, as a condition to making this investment, UIL Holdings entered into a 20-year Precedent Agreement with TGP for pipeline capacity of 70,000 Dekatherms/day on the NED pipeline, which capacity commitment, under the terms of the Precedent Agreement, would be reduced in the event that TGP enters into additional precedent agreements with third parties for capacity on the NED pipeline.

Regulatory Accounting

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

(a)	Life is dependent upon timing of final pension plan distribution; balance, which is fully offset by a corresponding asset/liability, is recalculated each year in accordance with ASC 715 "Compensation-Retirement Benefits." See Note (G) “Pension and Other Benefits” for additional information.

(b)	Hardship customer accounts deferred for future recovery to the extent they exceed the amount in rates.

(c)	Amortization period and/or balance vary depending on the nature and/or remaining life of the underlying assets/liabilities.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

 

(d)	The balance will be extinguished when the asset, which is fully offset by a corresponding liability, or liability has been realized or settled, respectively.

(e)

Asset life is equal to delivery term of related contracts (which vary from approximately 5 - 12 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.

(f)	Regulatory asset or liability which defers transmission income or expense and fluctuates based upon actual revenues and revenue requirements.

(g)	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 certain amounts that are not currently earning a return; September 30, 2015 liability amount includes decoupling of $18.9 million.

(h)	Regulatory asset or liability which defers generation-related and nonbypassable federally mandated congestion costs or revenues for future recovery from or return to customers.  Amount fluctuates based upon timing differences between revenues collected from rates and actual costs incurred.

(i)	The liability will be extinguished simultaneous with the retirement of the assets and settlement of the corresponding asset retirement obligation.

(j)	Various hardship and payment plan programs approved for recovery.

(k)	Deferred purchased gas costs balances at the end of the rate year are normally recorded/returned in the next year.

 

Stock-Based Compensation

Pursuant to the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan), 94,410 restricted stock units were granted to certain members of management in March 2015; the average of the high and low market prices on the grant date, which approximate fair value, was $49.72 per share.

Also in March 2015, we granted a total of 1,584 shares of restricted stock to our 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 $49.72 per share.  Such shares vest in equal annual installments over a five-year period.

In May 2015, UIL Holdings granted a total of 18,801 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 $48.37 per share.  Such shares vest in May 2016.

Total stock-based compensation expense for the three-month periods ended September 30, 2015 and 2014 was $0.7 million and an immaterial amount, respectively.  Total stock-based compensation expense for the nine-month periods ended September 30, 2015 and 2014 $6.1 million and $3.4 million, respectively.

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 future 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

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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 August 2015, the FASB issued Accounting Standards Update (ASU) 2015-13, “Derivatives and Hedging” which specifies that the use of locational marginal pricing by an independent system operator does not constitute net settlement of a forward contract for the purchase or sale of electricity and does not cause that contract to fail to meet the physical delivery criterion of the normal purchases and normal sales scope exception.  This guidance was effective upon issuance and does have an impact on UIL Holdings’ consolidated financial statements.

In August 2015, the FASB issued Accounting Standards Update (ASU) 2015-14, “Revenue from Contracts with Customers” which defers the effective date of ASU 2014-09 by one year.  ASU 2014-09 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.  We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.

Also in August 2015, the FASB issued Accounting Standards Update (ASU) 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” which incorporates SEC guidance into ASC 835 “Interest” that allows an entity to defer and present debt issuance costs related to line of credit arrangements as an asset and subsequently amortize such costs ratably over the term of the arrangement regardless of whether there are any outstanding borrowings on the line of credit.  This guidance is not expected to be material to UIL Holdings’ consolidated financial statements.

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 UIL Holdings’ consolidated 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.  Adopting this new accounting guidance will reduce both Deferred Charges and Other Assets and Long-term debt on the consolidated balance sheet.  This effect is not expected to be material to UIL Holdings’ consolidated financial statements.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

(B)  CAPITALIZATION

Common Stock

UIL Holdings had 56,629,377 shares of its common stock, no par value, outstanding at September 30, 2015.

Long-term Debt

On June 29, 2015, UI issued $50 million of its 4.61% Senior Notes, Series G, due June 29, 2045.  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

Proposed Merger with Iberdrola USA

 

As discussed in Note A “Organization and Statement of Accounting Policies”, on February 25, 2015 we announced that UIL Holdings had entered into a the Agreement with Iberdrola USA and merger sub under which Iberdrola USA will acquire UIL Holdings through a merger of UIL Holdings with and into merger sub and merger sub being the surviving corporation.  The merger remains subject to certain closing conditions, including the approval of the shareowners of UIL Holdings and regulatory approval from PURA and the DPU.  Iberdrola USA and UIL Holdings made the required filings at the PURA and the DPU seeking approval of the change in control on March 25, 2015.  On July 7, 2015, in response to the issuance of a draft decision issued by PURA, UIL Holdings and Iberdrola USA filed a letter with PURA withdrawing their pending application and terminating the proceeding.  On July 31, 2015, Iberdrola USA (and its related entities) and UIL Holdings filed a new application with PURA for approval of the change in control.

The new application includes commitments and identifies public interest benefits to meet the statutory requirements in Connecticut for approval of a change in control.  The commitments include rate credits to customers (approximately $20 million), a distribution rate freeze to 2018 for SCG and CNG, and to 2017 for UI, commitments to contribute to a clean energy fund and disaster relief (together, approximately $7 million), accelerated capital investment in electric distribution system resiliency and gas distribution system replacement of cast iron and bare steel (delayed recovery in rates resulting in nearly $7 million).  In addition, in the new application the companies commit to no change in the day-to-day management and operation of UIL Holdings’ three Connecticut utilities, to hiring 150 employees or contractors within the State of Connecticut over the next three years, to maintain UI’s high service reliability and CNG and SCG’s high levels of gas leak response, and to improve certain customer service metrics over the next three years.

The new application also proposes comprehensive “ring fencing” provisions to protect the Connecticut utilities from involuntary bankruptcy associated with potential future adverse changes in financial circumstances of Iberdrola affiliates.  These provisions include the creation of a special purpose entity with at least one independent director, dividend limitations on the Connecticut utilities where the investment grade credit rating is in jeopardy or if a minimum common equity ratio is not maintained, commitments to maintain separate books and records and a prohibition on commingling of funds.

The new application also included an agreement to negotiate a consent order with DEEP to remediate the English Station site in New Haven, Connecticut, formerly owned by UI.  On September 16, 2015, UI signed a Proposed Partial Consent Order that, when issued by the Commissioner of DEEP, and subject to the closing of the merger and other terms and conditions in the Proposed Partial Consent Order, would require UI to investigate and remediate certain environmental conditions within the perimeter of the English Station site.  Under the Proposed Partial Consent Order, to the extent that the cost of this investigation and remediation of the English Station site is less than $30 million, UI will remit to the State of Connecticut the difference between such cost and $30 million to be used for a public purpose as determined in the discretion of the Governor of the State of Connecticut, the Attorney General of the State of Connecticut, and the Commissioner of DEEP.  Pursuant to the Proposed Partial Consent Order, upon its issuance and subject to its terms and conditions, UI is obligated to comply with the Proposed Partial Consent Order, even if the cost

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

of such compliance exceeds $30 million.  The State will discuss options with UI on recovering or funding any cost above $30 million such as through public funding or recovery from third parties, however it is not bound to agree to or support any means of recovery or funding.

On September 18, 2015, UIL Holdings, Iberdrola USA (including its related parties) and the OCC filed a settlement agreement with PURA that included various commitments in addition to those included in the July 31, 2015 application.  The settlement agreement includes $12.5 million in additional rate credits for CNG’s customers and $7.5 million in additional rate credits for SCG’s customers, both of which would be allocated over the ten-year period of 2018 – 2027.  As part of the settlement, both OCC and UI will also withdraw their respective appeals of certain PURA decisions that are currently pending.  Hearings have been completed and a draft decision is expected on November 24, 2015 with a final decision is currently scheduled for December 9, 2015.

On October 19, 2015, UIL Holdings and Iberdrola USA (including its related parties), the Attorney General of the Commonwealth of Massachusetts and the Massachusetts Department of Energy Resources (DOER) filed a settlement agreement with the DPU that supplements, modifies and supersedes the various commitments included in the March 25, 2015 application and August 6, 2015 updated testimony.  The settlement agreement includes $4 million in rate credits for Berkshire customers and $1 million for jobs, economic development, or alternative heating programs for municipal owned buildings, low-income and moderate income residential consumers, or residences or businesses in Berkshire’s service territory, as determined by DOER.  The settlement agreement also includes a distribution rate freeze for Berkshire, such that current distribution rates for Berkshire remain in effect, with no new distribution base rates in effect prior to June 1, 2018.  The settlement agreement includes similar local management, ring-fencing and economic commitments to those that were offered in the settlement agreement filed with PURA in Connecticut. The filing of the settlement agreement requests that the DPU approve the settlement agreement and authorize the merger by December 18, 2015.

Electric Distribution and Transmission

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 2015, 80% of its standard service load for the first half of 2016 and 30% of the standard serve load for the second 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 September 30, 2015, UI would have had to post an aggregate of approximately $10.0 million in collateral.  UI would have been and remains able to provide that collateral.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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 state attorneys general, state regulatory commissions, consumer advocates, consumer groups, municipal parties and other parties 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 and on August 26, 2015 reply 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 $3.4 million in the first nine months of 2015 relating to the third complaint and the March Order.  As of September 30, 2015, net pre-tax reserves relating to refunds and potential refunds to customers under all three claims were approximately $5.1 million and cumulative pre-tax reserves were approximately $11.5 million, of which $6.4 million has already been refunded to customers.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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 December 2015 and (3) the Central Connecticut Reliability Project (CCRP), 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.  Based on the ISO-NE reassessment of CCRP and the currently planned generation in Connecticut, UI does not anticipate making any investments in GHCC or further 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 September 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 an immaterial amount and $0.5 million in the three‑month periods ended September 30, 2015 and 2014, respectively.  UI earned pre-tax income on deposits, net of transferred assets, of approximately $1.2 million in each of the nine‑month periods ended September 30, 2015 and 2014.

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

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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.

UI filed a motion to stay the appeals in the two proceedings discussed above in connection with the settlement agreement filed with PURA in the change in control proceeding.  On October 12, 2015, the motions to stay were granted.  Upon PURA’s acceptance of the settlement agreement, such proceedings would be terminated.

Gas Distribution

Rates

Utilities are entitled by Connecticut and Massachusetts 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.

The allowed returns on equity established by PURA are 9.18% and 9.36% for CNG and SCG, respectively.  Berkshire’s rates are established by the DPU.  Berkshire’s 10-year rate plan, which was approved by the DPU and included an approved ROE of 10.5%, expired on January 31, 2012.

Berkshire continues to charge the rates that were in effect at the end of the rate plan.  Based on existing tracking mechanisms in place for gas and other costs, discussions with the DPU, and precedence set by other utility companies, Berkshire believes that regulatory assets are recoverable and regulatory liabilities are fairly stated.

SCG and CNG each have purchased gas adjustment clauses and Berkshire has a cost of gas adjustment clause, approved by PURA and DPU, respectively, which enable them to pass their reasonably incurred cost of gas purchases through to customers.  These clauses allow utilities to recover costs associated with changes in the market price of purchased natural gas, substantially eliminating exposure to natural gas price risk.  Additionally, Berkshire’s mechanism allows for the recovery of the gas-cost portion of bad debt.

On January 22, 2014, PURA approved new base delivery rates for CNG, with an effective date of January 10, 2014, which, among other things, approved an allowed ROE of 9.18%, a decoupling mechanism, and two separate ratemaking mechanisms that reconcile actual revenue requirements related to CNG’s cast iron and bare steel replacement program and system expansion.  Additionally, the final decision requires the establishment of an earnings sharing mechanism by which CNG and customers share on a 50/50 basis all earnings above the allowed ROE in a calendar year.  The decision also allows CNG, on a provisional basis, to reflect the increased rate base resulting from the accumulated deferred income tax (ADIT) impacts of the election of Section 338(h)(10) of the Internal Revenue Code upon its acquisition by UIL Holdings.   The decision requires CNG to seek a private letter ruling from the Internal Revenue Service with regard to the specific question of whether, after extinguishment of an ADIT balance, a directive by a public utility commission to institute a ratemaking mechanism to reflect a credit to ratepayers of ADIT benefits lost through a Section 338(h)(10) election would result in a normalization violation.  The decision states that in the event of a ruling from the Internal Revenue Service stating that imposing such a ratemaking mechanism would not create a normalization violation, PURA would adjust rates to offset the ratemaking impacts of the 338(h)(10) election on rate base.  We estimate the impact to be an approximate $2.5 to $3.5 million decrease in annual revenue requirements.  In March 2014, CNG filed a draft of its private letter ruling request with PURA for approval upon which PURA subsequently issued comments.  During the first quarter of 2014, the OCC appealed PURA’s decision to the Connecticut Superior Court with regard to the establishment of an adjustment mechanism for incremental cast iron and bare steel replacement as well as PURA’s directive to seek a private letter ruling with respect to the extinguishment of ADITs rather than ordering a rate credit to hold customers harmless from the ratemaking effect of extinguishing the ADITs.  At the request of PURA, the OCC and CNG engaged in settlement discussions regarding the appeal.  Settlement discussions have now terminated.  In connection with the settlement agreement filed with PURA in our change in control proceeding, CNG filed a motion with PURA to extend the due date for CNG’s response to PURA’s comments on the private letter ruling to November 24, 2015.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

The OCC filed a motion to stay the appeal discussed above in connection with the settlement agreement filed with PURA in our change in control proceeding.  On August 31, 2015, the motion to stay was granted.  Upon PURA’s acceptance of the settlement agreement, the proceeding would be terminated.

Other Proceedings

As discussed above, CNG’s 2013 rate proceeding provides for a decoupling mechanism as well as a rate making mechanism related to its cast iron and bare steel replacement program.  Additionally, a comprehensive joint 10-year natural gas expansion plan (“Expansion Plan”) filed jointly by CNG, SCG and Yankee Gas Services Company in response to the gas expansion goals proposed in the Connecticut Governor’s Comprehensive Energy Strategy and Public Act 13-298 and approved by PURA includes a new business reconciliation mechanism that reconciles the actual new business revenue requirements each year with the revenues received from the new business customers.  The initial filings for these mechanisms are discussed below.

On March 2, 2015, CNG filed its initial decoupling adjustment which includes a $10.8 million credit to customers, which will be credited on customers’ bills during the period of April 1, 2015 through March 31, 2016.

On March 20, 2015, SCG and CNG filed their initial System Expansion (SE) Rate reconciliation for 2014. The proposed SE rate was approved by PURA for implementation as of April 1, 2015, pending final PURA approval following a contested hearing.

On April 1, 2015, CNG filed its initial Distribution Integrity Management Program (DIMP) reconciliation filing, which reconciles actual revenue requirements related to CNG’s cast iron and bare steel replacement program.  The proposed DIMP rate was approved by PURA for implementation as of May 1, 2015.

(D)  SHORT‑TERM CREDIT ARRANGEMENTS

As of September 30, 2015, there was $85 million in borrowings outstanding under the existing revolving credit agreement among UIL Holdings, certain of its subsidiaries and a group of banks that expires on November 30, 2016 (the UIL Holdings Credit Facility).  Under the UIL Holdings Credit Facility, UIL Holdings has outstanding standby letters of credit in the aggregate amount of $4.4 million, which expire on January 31, 2016 and June 16, 2016.  Available credit under the UIL Holdings Credit Facility at September 30, 2015 totaled $310.6 million for UIL Holdings and its subsidiaries in the aggregate.  We record 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 us to borrow and reborrow funds, at our option, until the facility’s expiration, thus affording us flexibility in managing our working capital requirements.

(E) INCOME TAXES

The significant portion of UIL Holdings’ income tax expense, including deferred taxes, is recovered through its regulated subsidiaries’ utility rates.  UIL Holdings’ 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, we use an estimated annual effective tax rate approach to calculate interim period income tax expense for ordinary income.  We also record separate income tax effects for significant unusual or infrequent items.  UIL Holdings’ income tax expense increased by $1.8 million, from $5.0 million in the third quarter of 2014 to $6.8 million in the third quarter of 2015.  The increase was primarily attributable to higher pre-tax earnings.  UIL Holdings’ income tax expense increased $8.3 million, from $35.3 million in the first nine months of 2014 to $43.6 million in the first nine months of 2015.  The increase was primarily attributable to higher pre-tax earnings due mainly to the absence in 2015 of acquisition bridge facility fees.

The annualized effective income tax rate for both nine-month periods ended September 30, 2015 and 2014 was 32.9%.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

The Internal Revenue Service completed its examination of UIL Holdings’ income tax years 2009 through 2012, resulting in the effective settlement of these tax years and the recording of an additional $1.1 million in tax expense during the second quarter of 2015.

(F)  SUPPLEMENTARY INFORMATION

(G)  PENSION AND OTHER BENEFITS

During the nine months ended September 30, 2015, we made pension contributions of $15 million.  No further contributions are expected during the remainder of 2015.

The following tables represent the components of net periodic benefit cost for pension and other postretirement benefits as well as the actuarial weighted-average assumptions used in calculating net periodic benefit cost for the three-and nine‑month periods ended September 30, 2015 and 2014:

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

N/A – not applicable

(H)  RELATED PARTY TRANSACTIONS

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 each of the three‑month periods ended September 30, 2015 and 2014 totaled $0.4 million. UIL Holdings’ lease payments for this office space for the nine‑month periods ended September 30, 2015 and 2014 totaled $1.1 million and $1.4 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 September 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.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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 September 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.  These lawsuits were stayed pending the disposition of mediation efforts involving the parties and certain claims relating to the English Station site.  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.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

On September 16, 2015, UI signed a Proposed Partial Consent Order that, when issued by the Commissioner of DEEP, and subject to the closing of the merger of UIL Holdings with Iberdrola USA and other terms and conditions in the Proposed Partial Consent Order, would require UI to investigate and remediate certain environmental conditions within the perimeter of the English Station site.  Under the Proposed Partial Consent Order, to the extent that the cost of this investigation and remediation is less than $30 million, UI will remit to the State of Connecticut the difference between such cost and $30 million to be used for a public purpose as determined in the discretion of the Governor of the State of Connecticut, the Attorney General of the State of Connecticut, and the Commissioner of DEEP.  Pursuant to the Proposed Partial Consent Order, upon its issuance and subject to its terms and conditions, UI would be obligated to comply with the Proposed Partial Consent Order, even if the cost of such compliance exceeds $30 million.  The State will discuss options with UI on recovering or funding any cost above $30 million such as through public funding or recovery from third parties, however it is not bound to agree to or support any means of recovery or funding.  On September 30, 2015, the Hearing Officer in DEEP’s administrative proceeding approved a Motion for Stay of further proceedings filed by DEEP, staying all proceedings on the administrative order for 120 days.  A status conference is scheduled for January 28, 2016.

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.

The Gas Companies own or have previously owned properties where Manufactured Gas Plants (MGPs) had historically operated and are contaminated as a result of MGP-related activities.  Under existing regulations, the cleanup of such sites requires state and at times, federal, regulators’ involvement and approval in advance of commencement of any required cleanup.  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 September 30, 2015 and no amount of loss, if any, can be reasonably estimated at this time.  In the past, the Gas Companies have received approval for the recovery of MGP-related remediation expenses from customers through rates and will seek recovery in rates for ongoing MGP-related remediation expenses for all of their MGP sites.

SCG owns properties on Housatonic Avenue in Bridgeport, Connecticut and on Chapel Street in New Haven, Connecticut, and CNG owns a property located on Columbus Boulevard in Hartford, Connecticut, all of which are former MGP sites.  Costs associated with the remediation of the sites, which will likely be subject to regulators’ approval, could be significant and these costs will be subject to a review by PURA as to whether these costs are recoverable in rates.  Regarding the Chapel Street property, on October 7, 2015, SCG received a Proposed Consent Order from DEEP.  SCG is presently reviewing this draft consent order, which, if issued by DEEP, would require the completion of investigation and then the development and implementation of a remedial action plan for the Chapel Street property.  We cannot presently reasonably estimate the costs or range of costs of remediation or the likelihood of recoverability for these former MGP sites, including the Chapel Street property.  As a result, as of September 30, 2015, we have not recorded any liabilities related to these properties.

Berkshire owns property on Mill Street in Greenfield, Massachusetts, a former MGP site.  We estimate that expenses associated with the remaining remedial activities, as well as the required ongoing monitoring and reporting to the Massachusetts Department of Environmental Protection will likely amount to approximately $0.9 million and have recorded a liability and offsetting regulatory asset for such expenses as of September 30, 2015.  Historically, Berkshire has received approval from the DPU for recovery of environmental expenses in its customer rates.

Berkshire formerly owned a site on East Street (the East Street Site) in Pittsfield, Massachusetts, a former MGP site which was sold to the General Electric Company (GE) in the 1970s.  We reached a settlement with GE which provides, among other things, a framework for Berkshire and GE to allocate various monitoring and remediation costs at the East Street Site.  As of September 30, 2015, we had accrued approximately $3.2 million and established a regulatory asset for these and future costs incurred by GE in responding to releases of hazardous substances at the East Street Site.  Historically, Berkshire has received approval from the DPU for recovery of remediation expenses in its customer rates.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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.  UI expects to recover any amounts paid to resolve the contractor and subcontractor claims through UI’s transmission revenue requirements.

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 September 30, 2015 and December 31, 2014.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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 September 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 isolated 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.

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, with the exception of long-term incentive plan deferrals which are required to be invested in 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 based upon such pricing information.

The determination of the fair value of the supplemental retirement benefit trust life insurance policies was based on quoted prices as of September 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.

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

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

 

UIL HOLDINGS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED) (Continued)

(M)  SEGMENT INFORMATION

UIL Holdings is organized into Electric Distribution, Electric Transmission and Gas Distribution reporting segments based on several factors including, but not limited to, the nature of each segment’s products and services, the sources of operating revenues and expenses and the regulatory environment in which each segment operates.  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 our 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 our non‑utility activities and unallocated corporate costs, including minority interest investments and administrative costs.  Revenues from inter‑segment transactions are not material.  All of our revenues are derived in the United States.

(In Thousands)