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UIL Holdings 10-K 2010 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
OR
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
______________________________________________________
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [X
] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the
Act. Yes [ ] No [X]
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 [X] 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 Regulations S-T (§232.405 of this
chapter) during the preceding 12 months (or for shorter period that the
registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the
Act). Yes [ ] No [X]
The
aggregate market value of the registrant’s voting stock held by non-affiliates
on June 30, 2009 was $659,462,217 computed on the basis of the price at which
the said stock was last sold reported in the listing of composite transactions
for New York Stock Exchange listed securities, published in The Wall Street Journal on
July 1, 2009.
The
number of shares outstanding of the registrant’s only class of common stock, as
of February 12, 2010 was 29,929,591.
DOCUMENTS
INCORPORATED BY REFERENCE
Document Part of this Form 10-K into
which document is incorporated
Definitive
Proxy Statement for Annual Meeting of the Shareowners to be held on May 11,
2010III UIL
HOLDINGS CORPORATION
FORM
10-K
December 31,
2009
- 1 -
TABLE
OF CONTENTS (continued)
- 2 -
GLOSSARY
OF TERMS AND ABBREVIATIONS
AFUDC> (Allowance
for Funds Used During Construction) – The cost of utility equity and debt funds
used to finance construction projects that is capitalized as part of
construction cost.
ASC> (Accounting Standards
Codification) – The single source of authoritative United States generally
accepted accounting principles.
CDEP
– Connecticut Department of Environmental Protection.
CfD – Contract for
Differences
DOE
– United States Department of Energy.
EIA
- Energy Independence Act adopted by the State of Connecticut in
2005.
EPA
– United States Environmental Protection Agency.
EPS
– Earnings Per Share.
ESOP
– Employee Stock Ownership Plan.
- 3 -
ITC
– Investment tax credit.
kV (kilovolt)
– 1,000 volts. A volt is a unit of electromotive force.
kW (kilowatt)
– 1,000 watts.
KSOP
– 401(k)/Employee Stock Ownership Plan.
LIBOR
–London Interbank Offered Rate.
MVA
(megavoltampere) – 1,000 kilovoltamperes.
MW (megawatt)
– 1,000 kilowatts.
O&M (Operation and Maintenance) -
Costs incurred in running daily business activities and maintaining
infrastructure.
PTF
– Pool Transmission Facilities.
RCRA
– The federal Resource Conservation and Recovery Act.
RTO-NE>
(Regional Transmission Organization New England) – Organization jointly proposed
by ISO-NE and the New England transmission owners to strengthen the independent
oversight of the region’s bulk power system and wholesale electricity
marketplace. The RTO commenced operation effective February 1,
2005.
- 4 -
SEC
- United States Securities and Exchange Commission.
Transmission
Division – UI’s
operating division that provides transmission services and manages all related
transmission operations.
Watt>
– A unit of electrical power equal to one joule per second. Part
I
Item
1. Business.
GENERAL
The
primary business of UIL Holdings Corporation (UIL Holdings) is ownership of its
operating regulated utility. The utility business consists of the
electric transmission and distribution operations of The United Illuminating
Company (UI). UI is also a 50-50 joint venturer, together with NRG
Energy, Inc., in GenConn Energy LLC (GenConn), a project selected by the
Connecticut Department of Public Utility Control (“DPUC”) to build new peaking
generation plants to help address the state’s growing need for more power
generation during the heaviest load periods. UIL Holdings also has
non-utility activities which recently included the operations of Xcelecom, Inc.
(Xcelecom) until the substantial completion of the sale of that business
effective December 31, 2006. UIL Holdings is headquartered in New
Haven, Connecticut, where its senior management maintains offices and is
responsible for overall planning, operating and financial
functions.
UIL
Holdings files electronically with the United States Securities and Exchange
Commission (SEC): required reports on Form 8-K, Form 10-Q and Form 10-K;
proxy materials; ownership reports for insiders as required by Section 16 of the
Securities and Exchange Act of 1934; and registration statements on Forms S-3
and S-8, as necessary. The public may read and copy any materials UIL
Holdings has filed with the SEC at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, DC 20549. The public may also obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. Copies of UIL Holdings’ annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to these reports filed with the SEC may be requested, viewed, or downloaded
on-line, free of charge, at (www.uil.com).
UIL
Holdings makes available on its website (www.uil.com) the charters of its Audit Committee,
Corporate Governance and Nominating Committee, Compensation and Executive
Development Committee and Finance Committee, as well as its corporate
governance guidelines, code of business conduct for its employees, code of
ethics for financial officers, and code of business conduct for the Board of
Directors.
Due to
the requirements of Accounting Standards Codification (ASC) 280 “Segment
Reporting”, UIL Holdings has divided its regulated business into distribution
and transmission operating segments for financial reporting
purposes. See Part II, Item 8, “Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note (M),
Segment Information,” of this Form 10-K, which is hereby incorporated by
reference.
UTILITY
BUSINESS
UI 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 in a service
area of about 335 square miles in the southwestern part of the State of
Connecticut. The population of this area is approximately 736,000,
which represents approximately 21% of the population of the
State. The service area, largely urban and suburban, includes the
principal cities of Bridgeport (population approximately 137,000) and New Haven
(population approximately 124,000) and their surrounding
areas. Situated in the service area are retail trade and service
centers, as well as large and small industries producing a wide variety of
products, including helicopters and other transportation equipment, electrical
equipment, chemicals and pharmaceuticals. As of December 31, 2009, UI
had approximately 325,000 customers. Of UI’s 2009 retail electric
revenues, approximately 59.5% were derived from residential sales, 34.3% from
commercial sales, 5.0% from industrial sales and 1.2% from street lighting and
other sales. UI’s retail electric revenues vary by season, with the
highest revenues typically in the third quarter of the year reflecting seasonal
rates, hotter weather and air conditioning use. For additional
information regarding UI’s revenues refer to Part II, Item 6, “Selected
Financial Data,” of this Form 10-K which is hereby incorporated by
reference. Franchises
UI has
valid franchises to engage in the purchase, transmission, distribution and sale
of electricity in its service area, the right to erect and maintain certain
facilities over, on and under public highways and grounds, and the power of
eminent domain. These franchises are subject to alteration, amendment
or revocation by the Connecticut legislature, and revocation by the DPUC under
circumstances specified by statute, and subject to certain approvals, permits
and consents of public authorities and others prescribed by
statute.
Regulation
UI is
subject to regulation by several regulatory bodies, including the
DPUC. The DPUC has jurisdiction with respect to, among other things,
retail electric service rates, accounting procedures, certain dispositions of
property and plant, construction of certain electric facilities, mergers and
consolidations, the issuance of securities, the condition of plant and equipment
and the manner of operation in relation to safety, adequacy and suitability to
provide service to customers, including efficiency.
The
location and construction of certain electric facilities, including electric
transmission lines and bulk substations, are subject to regulation by the
Connecticut Siting Council with respect to environmental compatibility and
public need.
UI is a
“public utility” within the meaning of Part II of the Federal Power Act
(FPA). Under the FPA, the Federal Energy Regulatory Commission (FERC)
governs the rates, terms and conditions of transmission of electric energy in
interstate commerce (including transmission service provided by UI),
interconnection service in interstate commerce (which applies to independent
power generators, for example), and the rates, terms and conditions of wholesale
sales of electric energy in interstate commerce (which includes cost-based rates
and market-based rates and regional capacity and electric energy markets
administered by an independent entity, ISO-New England, Inc.
(ISO-NE). FERC approves UI’s transmission revenue requirements, which
are collected through UI’s retail transmission rates. The FERC also
has authority to ensure the reliability of the high voltage electric
transmission system, monitor and investigate wholesale electric energy markets
and entities that have been authorized to sell wholesale power at market-based
rates, impose civil and criminal penalties for violations of the FPA (including
market manipulation) and require public utilities subject to its jurisdiction to
comply with a variety of accounting, reporting and record-keeping
requirements. See Part I, Item 1, “Business” - “Arrangements with
Other Industry Participants.”
UI is
also required to comply with reliability standards issued by the North American
Electric Reliability Corporation (NERC), a not-for-profit corporation whose
mission is to improve the reliability and security of the bulk power
system. NERC reliability standards may be enforced by NERC, FERC
(which oversees NERC), and by a regional reliability organization as approved by
FERC.
Connecticut
Yankee Atomic Power Company, in which UI has a 9.5% common stock ownership
interest, is subject to the jurisdiction of the United States Nuclear Regulatory
Commission and the FERC. The Connecticut Yankee nuclear unit was
retired in 1996 and has been decommissioned. See Part II, Item 8,
“Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – Note (J), Commitments and Contingencies – Connecticut Yankee Atomic
Power Company,” of this Form 10-K, which is hereby incorporated by
reference.
Rates
UI’s
retail electric service rates are subject to regulation by the
DPUC. UI’s present general retail rate structure consists of various
rate and service classifications covering residential, commercial, industrial
and street lighting services.
Utilities
are entitled by Connecticut law to charge rates that are sufficient to allow
them an opportunity to cover their reasonable operating and capital costs, to
attract needed capital and maintain their financial integrity, while also
protecting relevant public interests. The
revenue components of UI’s retail charges to customers, effective as of January
1, 2010, reflect a total average price of 19.9490¢ per kilowatt-hour
(kWh) and consist of the following:
For
further information refer to Part II, Item 8, “Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note (C),
Regulatory Proceedings,” of this Form 10-K, which information is hereby
incorporated by reference. Power
Supply Arrangements
UI’s
retail electricity customers are able to choose their electricity
supplier. Since January 1, 2007, UI has been required to offer
standard service to those of its customers who do not choose a retail electric
supplier and have a maximum demand of less than 500 kilowatts. In
addition, UI is required to offer supplier of last resort service to customers
who are not eligible for standard service and who do not choose to purchase
electric generation service from a retail electric supplier licensed in
Connecticut.
UI must
procure its standard service power pursuant to a procurement plan approved by
the DPUC. The procurement plan must provide for a portfolio of
service agreements procured in an overlapping pattern over fixed time periods (a
“laddering” approach). In June 2006, the DPUC approved a procurement
plan for UI. As required by Connecticut statute, a third party
consultant retained by the DPUC works closely with UI in the procurement process
and to provide a joint recommendation to the DPUC as to selected
bids.
UI has
wholesale power supply agreements in place for the supply of all of UI’s
standard service customers for all of 2010, 80% for 2011 and 20% for
2012. Supplier of last resort service is procured on a quarterly
basis. UI determined that its contracts for standard service and
supplier of last resort service are derivatives under Accounting Standards
Codification (ASC) 815 “Derivatives and Hedging” and elected the “normal
purchase, normal sale” exception under ASC 815 “Derivatives and
Hedging”. As such, UI regularly assesses the accounting treatment for
its power supply contracts. These wholesale power supply agreements
contain default provisions that include required performance assurance,
including certain collateral obligations, in the event that UI’s credit rating
on senior debt was to fall below investment grade. In October 2009,
Moody’s Investor Services (Moody’s) released its updated credit opinion for UI
and maintained its Baa2 rating with a stable outlook. In
December 2009, Standard & Poors’ Investor Services (S&P) reinitiated
coverage on UI and rated it BBB with a stable outlook. UI’s credit
rating would have to decline two ratings to fall below investment grade at
either rating service. If this were to occur, monthly amounts due and
payable to the power suppliers would be accelerated to semi-monthly payments and
UI would have to deliver collateral security in an amount equal to the
receivables due to the sellers for the thirty day period immediately preceding
the default notice. If such a situation was in effect as of
December 31, 2009, UI would have had to post approximately $26 million
in collateral.
As a
result of an April 2008 DPUC decision, UI is permitted to seek long-term
contracts for up to 20% of standard service requirements, the goal of which is
to obtain long-term energy supply contracts and Connecticut Class I Renewable
Energy Certificates for UI’s standard service customers that will result in
economic benefit to ratepayers, both in terms of risk and cost
mitigation. UI is exploring long-term contract
alternatives.
Arrangements
with Other Industry Participants
ISO-NE
and RTO-NE
ISO New
England, Inc. (ISO-NE), an independent, not-for-profit corporation, was approved
by the FERC as the regional transmission organization for New England (RTO-NE)
on February 1, 2005. ISO-NE is responsible for the reliable operation
of the region’s bulk electric power system and fair administration of the
region’s wholesale electricity marketplace. ISO-NE is also
responsible for the management of the comprehensive bulk electric power system
and transmission system planning processes that address the region's long-term
electricity needs.
Transmission
Return on Equity (ROE)
In March
2008, the FERC issued an order on rehearing (Rehearing Order) establishing
allowable ROEs for transmission projects of transmission owners in New England,
including UI. In the Rehearing Order, the FERC established the
base-level ROE of 11.14% beginning in November 2006. The Rehearing
Order also confirmed a 50 basis point ROE adder on Pool Transmission Facilities
(PTF) for participation in the RTO-NE and a 100 basis point ROE incentive for
projects included in the ISO-NE Regional System Plan that were
completed and on line as of December 31, 2008. The Middletown/Norwalk
Transmission Project received this 100 basis point ROE
adder. For projects placed in service after December 31,
2008, incentives may be requested from the FERC, through a specific showing
justifying the incentive, on a project specific basis.
In May
2008, several public entities, including the DPUC, filed a petition with the
United States Court of Appeals for the District of Columbia Circuit (U.S. Court
of Appeals) challenging the Rehearing Order. On January 29, 2010, the
U.S. Court of Appeals issued a decision upholding the FERC order.
UI’s
overall transmission ROE is determined by the mix of UI’s transmission rate base
between new and existing transmission assets, and whether such assets are PTF or
non-PTF. UI’s transmission assets are primarily PTF. For
2009, UI’s overall allowed weighted-average ROE for its transmission business
was 12.52%.
Middletown/Norwalk
Transmission Project
In
December 2008, the 345-kilovolt (kV) transmission line from Middletown,
Connecticut, to Norwalk, Connecticut (the Project) was completed and the
transmission assets were placed in service. As a result, UI’s
transmission rate base increased by approximately $300 million, an increase of
more than 200% relative to UI’s net transmission assets existing prior to the
Project receiving approval from the Connecticut Siting Council
(CSC).
In a May
2007 Order, FERC approved rate incentives for the Project. The
Project was allowed to include Construction Work In Progress (CWIP) expenditures
in rate base. For project costs incurred before August 8, 2005,
the FERC allowed UI to include 50% of CWIP expenditures in rate base, and for
project costs incurred after August 8, 2005, the FERC allowed UI to
include 100% of CWIP expenditures in rate base. The FERC also
accepted a 50 basis point adder which will be applied only to costs associated
with advanced transmission technologies.
Certain
parties requested rehearing of the FERC May 2007 order, but in January 2009, the
FERC denied those requests. Also, in January 2009, the DPUC and
the Attorney General of Connecticut filed a petition with the U.S. Court of
Appeals seeking judicial review of the FERC’s May 2007 and January 2009
orders. UI is unable to predict the outcome of these appeals at this
time.
UI and
CL&P filed a transmission cost allocation application relating to the
Project with ISO-NE in April 2008. ISO-NE will determine which costs
of the Project, if any, will be included in the New England regional
transmission rate. UI will seek to recover any non-pool supported costs of the
Project, or Localized Costs, in transmission revenues from customers throughout
the State of Connecticut.
Hydro-Quebec
UI is a
participant in the Hydro-Quebec transmission tie facility linking New England
and Quebec, Canada. UI has a 5.45% participating share in this
facility, which has a maximum 2,000 megawatt-equivalent generation capacity
value.
Environmental
Regulation
The
National Environmental Policy Act (the Act) requires that detailed statements of
the environmental effect of UI’s facilities be prepared in connection with the
issuance of various federal permits and licenses. Federal agencies
are required by that Act to make an independent environmental evaluation of the
facilities as part of their actions during proceedings with respect to these
permits and licenses. In Connecticut, the Connecticut Siting Council
serves as the designated authority to ensure UI’s facilities are in compliance
with the Act, except as otherwise specified in certain permits, such as those
required by the Army Corps of Engineers.
Under the
federal Toxic Substances Control Act (TSCA), the United States Environmental
Protection Agency (EPA) has issued regulations that control the use and disposal
of Polychlorinated Biphenyls (PCBs). PCBs had been widely used as
insulating fluids in many electric utility transformers and capacitors
manufactured before TSCA prohibited any further manufacture of such PCB
equipment. Fluids with a concentration of PCBs higher than 500 parts
per million and materials (such as electrical capacitors) that contain such
fluids must be disposed of through burning in high temperature incinerators
approved by the EPA. Presently, no equipment having fluids with
levels of PCBs higher than 500 parts per million are known by UI to remain in
service in its system. Under the
federal Resource Conservation and Recovery Act (RCRA), the generation,
transportation, treatment, storage and disposal of hazardous wastes are subject
to regulations adopted by the EPA. Connecticut has adopted state
regulations that parallel RCRA regulations but are more stringent in some
respects. UI has complied with the notification and application
requirements of present regulations, and the procedures by which UI handles,
stores, treats and disposes of hazardous waste products comply with these
regulations.
RCRA also
regulates underground tanks storing petroleum products or hazardous substances,
and Connecticut has adopted state regulations governing underground tanks
storing petroleum and petroleum products that, in some respects, are more
stringent than the federal requirements. UI currently owns eight
underground storage tanks, used primarily for gasoline and fuel oil, which are
subject to these regulations. A testing program has been implemented
to detect leakage from any of these tanks, and substantial costs may be incurred
for future actions taken to prevent tanks from leaking, to remedy any
contamination of groundwater, and to modify, remove and/or replace older tanks
in compliance with federal and state regulations.
In
accordance with applicable regulations, UI has disposed of residues from
operations at landfills. In recent years it has been determined that
such disposal practices, under certain circumstances, can cause groundwater
contamination. Although UI has no current knowledge of the existence
of any such contamination, UI or regulatory agencies may determine that remedial
actions must be taken in relation to past disposal practices.
In
complying with existing environmental statutes and regulations and further
developments in these and other areas of environmental concern, including
legislation and studies in the fields of water and air quality, hazardous waste
handling and disposal, toxic substances, electric and magnetic fields, and
global climate change, UI may incur substantial capital expenditures for
equipment modifications and additions, monitoring equipment and recording
devices, and it may incur additional operating expenses. Litigation
expenditures may also increase as a result of ongoing scientific investigations,
speculation and debate concerning the possibility of harmful health effects of
electric and magnetic fields. The total amount of these expenditures
is not now determinable.
If any of
the aforementioned events occurs, UI may experience substantial costs prior to
seeking regulatory recovery. Additional discussion regarding
environmental issues may be found in Part II, Item 8 of this Form 10-K under the
caption, “Financial Statements and Supplementary Data” – Notes to Consolidated
Financial Statements – Note (J), Commitments and Contingencies – Environmental
Concerns,” which information is hereby incorporated by reference.
NON-UTILITY
ACTIVITIES
UIL
Holdings’ non-utility activities primarily consist of United Capital
Investments, Inc. (UCI) which holds a passive, minority equity position in The
Ironwood Mezzanine Fund, an investment fund. Ironwood is a regional
Small Business Investment Company (SBIC) fund committed to investing a portion
of its capital in women-owned and minority-owned businesses and businesses
located in low and moderate income areas. The carrying value of UCI’s
investment in The Ironwood Mezzanine Fund as of December 31, 2009 was $0.8
million. UCI also
has a lease agreement that conveys the right to a third party to a specific area
located in New Haven, Connecticut. UCI’s investment represents the
net present value of future cash flows related to a portion of the
area. In 1999, UCI paid $1.5 million for the net future lease
payments and is amortizing the amount over the life of the
lease. UCI’s investment in the lease at December 31, 2009 was $1.2
million.
FINANCING
Information
regarding UIL Holdings’ capital requirements and resources and its financings
and financial commitments may be found in Part II, Item 7 of this Form 10-K
under the caption, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Liquidity and Capital Resources,” which information
is hereby incorporated by reference. EMPLOYEES
As of
December 31, 2009, UIL Holdings and its subsidiaries had a total of 1,066
employees, of which 480 were members of Local 470-1, Utility Workers Union of
America, AFL-CIO. UI and Union Local 470-1 are parties to a six-year
collective bargaining agreement which expires on May 15, 2011.
Item
1A. Risk Factors.
The
financial condition and results of operations of UIL Holdings are subject to
various risks, uncertainties and other factors, some of which are described
below. Additional risks, uncertainties and other factors not
presently known or currently deemed not to be material may also affect UIL
Holdings’ financial condition and results of operations.
Legislation
and regulation can significantly affect UI’s structure, operations and financial
results.
UI is an
electric transmission and distribution utility whose structure and operations
are significantly affected by legislation and regulation. UI’s rates
and authorized returns on equity are regulated by the FERC and the
DPUC. Legislation and regulatory decisions implementing legislation
establish a framework for UI’s operations. Such legislation and
regulatory decisions may result in the establishment of revenue requirements
that are insufficient for UI to maintain customer services at current levels
while still earning its allowed return. Legislation and regulatory
decisions could negatively impact UI’s ability to reach earnings targets and to
access debt and equity financing at reasonable cost. For a further
discussion of legislative and regulatory actions, refer to Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Major Influences on Financial Condition – The United Illuminating
Company – Legislation & Regulation,” of this Form 10-K.
UIL
Holdings’ ability to maintain future cash dividends at the level currently paid
to shareowners is dependent upon the ability of its subsidiaries, primarily UI,
to pay dividends to UIL.
UIL
Holdings is dependent on dividends from its subsidiaries and from external
financings to provide the cash in excess of the amount currently on hand that is
necessary for debt service, to pay administrative costs, and to pay common stock
dividends to UIL Holdings’ shareholders. As UIL Holdings’ sources of
cash are limited to dividends from its subsidiaries and external borrowings, the
ability to maintain future cash dividends at the level currently paid to
shareowners will be primarily dependent upon sustained earnings from current
operations of UI.
Volatility
in the capital markets could negatively impact UIL Holdings’ ability to access
capital in the debt and equity markets, thus impacting its ability to meet its
financing requirements and fund its capital program.
All of
UIL Holdings’ and UI’s financing and capital requirements that exceed available
cash will be provided by external financing. Although there is no
commitment to provide such financing from any source of funds, other than the
short-term credit facilities currently available to UI and UIL Holdings, future
external financing needs are expected to be satisfied by the issuance of
additional short-term and long-term debt and equity securities. The
continued availability of these methods of financing will be dependent on many
factors, including conditions in the securities and credit markets and economic
conditions generally, as well as the debt ratings, current debt levels and
future income and cash flow of UIL Holdings and UI. See Part II, Item
8, “Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements – Note (B), Capitalization and Note (D), Short Term Credit
Arrangements” of this Form 10-K for a discussion of UIL Holdings’ financing
arrangements.
Increases
in interest rates could have an adverse impact on the financial condition and
results of operations of UIL Holdings and UI.
Credit
market trends impact the cost of UIL Holdings’ and UI’s
borrowings. Increases in interest rates could result in increased
cost of capital in the refinancing of fixed rate debt at maturity and in the
remarketing of multi-annual tax-exempt bonds. As a result of the
remarketing of tax exempt bonds in February 2009, described in Part II, Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-K,
interest rates are higher than the interest rates on the bonds prior to the
remarketing. In addition, UIL Holdings and UI have short-term
revolving credit agreements that permit borrowings at fluctuating interest rates
determined by reference to Citibank’s New York base rate and the
Federal Funds Rate (as defined in the agreements), and also permit borrowings
for fixed periods up to six months as specified by UIL Holdings and UI at fixed
interest rates (London Interbank Offered Rate or LIBOR) determined by the
Eurodollar Interbank Market in London. Changes in LIBOR
or the prime or Federal Funds lending markets will have an impact on interest
expense. For further discussion of UIL Holdings’ cost of capital and
interest rate risk, see Part II, Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Liquidity and Capital
Resources,” and Item 7A, “Quantitative and Qualitative Disclosures About
Market Risk,” of this Form 10-K. For further discussion of
UI and UIL Holdings’ revolving credit facilities, see Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources,” and Part II, Item 8, “Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements –
Note (D) Short-Term Credit Arrangements.”
UIL
Holdings and its subsidiaries may incur substantial capital expenditures and
operating expenses in complying with environmental regulations, which could have
an adverse impact on the results of operations and financial condition of UIL
Holdings.
In
complying with existing environmental statutes and regulations and further
developments in areas of environmental concern, UIL Holdings and its
subsidiaries may incur substantial capital expenditures for equipment
modifications and additions, monitoring equipment and recording devices, and it
may incur additional operating expenses. Environmental damage claims
may also arise from the operations of UIL Holdings’ subsidiaries. For
further discussion of significant environmental issues known to UIL Holdings at
this time, see Part II, Item 8, “Financial Statements and Supplementary Data –
Notes to Consolidated Financial Statements – Note (J), Commitments and
Contingencies – Environmental Concerns,” of this Form 10-K.
In
addition, governmental policy makers, industry representatives and scientists
continue to discuss global climate change and potential legislation to reduce
greenhouse gases. Due to the high level of uncertainty regarding the
character and timing of any legislation or regulations that may be adopted,
management is unable to evaluate the potential economic impact of any such
measures at this time. Additional regulation in this area could
result in UI and GenConn incurring additional capital spending and higher
operating expenses.
The
recent economic downturn has reduced and could further reduce the demand for
electricity and impair the financial soundness of customers, which could
adversely affect our results of operation. The economic downturn
could also impair the financial soundness of UI’s vendors and service
providers.
The
slowing of the Connecticut and national economies has reduced, and could in the
future further reduce, the demand for electricity. In Connecticut,
the economic slow-down has included a sustained decline in the housing market
and rising unemployment. Although it remains below the national
average unemployment rate of 10.0%, Connecticut’s seasonally-adjusted
unemployment rate had risen to 8.9% in December
2009. Furthermore, as a result of the continued economic downturn
affecting the economies of the state of Connecticut, the United States and other
parts of the world, UI’s vendors and service providers could experience serious
cash flow problems. As a result UI’s vendors and service providers
may be unable to perform under existing contracts or may significantly increase
their prices or reduce their output or performance on future
contracts.
The
loss of key personnel or the inability to hire and retain qualified employees
could have an adverse effect on the operations of UI.
A
significant portion of UI’s workforce, including many workers with specialized
skills maintaining and servicing the electrical infrastructure, may retire over
the next five years. The inability to replace these employees could
negatively impact UI’s ability to maintain system reliability at its current
levels. For further discussion refer to Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Major Influences on Financial Condition,” of this Form
10-K.
The
inability of management to maintain good relations and effectively negotiate
future collective bargaining agreements with the bargaining unit could have a
material adverse impact on UI’s financial condition and results of
operations. Significant
portions of the workforce at UI are covered by collective bargaining agreements
that expire in May 2011. The inability of management to maintain good relations
and effectively negotiate future collective bargaining agreements with the
bargaining unit could have a material adverse impact on UI’s financial condition
and results of operations, as a result of increased expenses related to wages
and benefits, poor working performance or organized work stoppages.
The
inability of GenConn to complete its two peaking generation projects, the
inability to meet the contractual commercial operation dates, and the potential
for unrecovered costs could adversely impact UIL Holdings’ financial condition
and results of operations.
Borrowings
by UI under an equity bridge loan (EBL) will be lent to GenConn and be converted
into an equity investment upon the attainment of commercial operation by GenConn
for its two peaking generation facilities. The inability of GenConn
to complete construction of and attain commercial operation for its two peaking
generation facilities, or a significant delay in obtaining commercial operation
by the contractual dates, or the inability to recover the related operating
costs after commercial operation has been obtained, could adversely impact UIL
Holdings’ financial condition and results of operations.
Grid
disturbances, disruption in our networks, severe weather, security cyber
attacks, or acts of war or terrorism could negatively impact UIL Holdings’
operating systems.
A
disruption or black-out caused by an event that impacts the regional grid or
UI’s local system, such as, but not limited to a severe storm, transmission
facility outage, security breach, cyber attack, or terrorist action, could
negatively impact the operation and sustainability of our
systems. Any such disruption or attack could result in a significant
decrease in revenues and significant additional costs to repair assets, which
could have a material adverse impact on our financial
condition
and results of operations. Severe weather, such as ice and snow
storms, hurricanes and other natural disasters, may cause outages and
substantial property damage which may require us to incur additional costs that
are generally not insured.
UIL
Holdings may be required to make payments under its indemnification agreements
with the buyers of former Xcelecom companies, which could adversely impact UIL
Holdings’ financial condition and results of operations.
UIL
Holdings is obligated to indemnify the buyers of Xcelecom’s former companies for
breaches of representations, warranties and covenants made in the transaction
documents with those buyers, and for certain actions by, and obligations of, the
companies. A requirement that UIL Holdings pay an indemnity claim
could negatively impact UIL Holdings’ cash flow.
Item
1B. Unresolved Staff Comments.
None
Item
2. Properties.
Transmission
and Distribution Plant
The
transmission lines of UI consist of approximately 101 circuit miles of overhead
lines and approximately 28 circuit miles of underground lines, all operated at
345-kV or 115-kV and located within or immediately adjacent to the territory
served by UI. These transmission lines are part of the New England
transmission grid. A major portion of UI’s transmission lines is
constructed on railroad rights-of-way pursuant to two Transmission Line
Agreements. One of the agreements expires in May 2030 and will be
automatically extended for up to two successive renewal periods of 15 years
each, unless UI provides timely written notice of its election to reject the
automatic extension. The other agreement will expire in May
2040.
UI owns
and operates 26 bulk electric supply substations with a capacity of 1,827
megavoltampere (MVA), and 21 distribution substations with a capacity of 107
MVA. UI has 3,166 pole-line miles of overhead distribution lines and
132 conduit-bank distribution miles. See Part
II, Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources,” of this Form 10-K
concerning the estimated cost of additions to UI’s transmission and distribution
facilities, which information is hereby incorporated by reference.
Administrative
and Service Facilities
The
corporate headquarters of both UIL Holdings and UI are located in New Haven,
Connecticut. Additionally, UI occupies several facilities within its
service territory for administrative and operational purposes.
Item
3. Legal Proceedings.
The
general contractor and two subcontractors responsible for civil construction
work in connection with the installation of UI’s portion of the
Middletown/Norwalk Transmission Project’s underground electric cable system have
filed a lawsuit seeking payment for change order requests for approximately
$34.5 million plus interest and costs. UI has evaluated the change
order requests and lawsuits and, in doing so, has retained the services of an
independent third party to review the requests and supporting
information. UI intends to defend the litigation
vigorously. To the extent that any of the change order requests are
valid, UI would seek recovery through its transmission revenue
requirement.
Item
4. Submission of Matters to a Vote of Security Holders.
There
were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2009.
EXECUTIVE
OFFICERS
The names
and ages of all executive officers of UIL Holdings, including
certain officers of its subsidiary UI, and the period during which he or
she has held the corporate office indicated, are as follows:
*Age as
of December 31, 2009
(1) Messrs.
Vallillo, Reed, Prete and Marone hold corporate offices of UI but have also been
designated as executive officers of UIL Holdings by the board of directors of
UIL Holdings in light of the policy-making role each fulfills for UIL
Holdings.
(2) As
previously disclosed in UIL Holdings’ filing on Form 8-K dated January 10, 2006,
James P. Torgerson was appointed President of UIL Holdings, effective January
23, 2006. As previously disclosed in UIL Holdings’ filing on Form 8-K
dated July 3, 2006, Mr. Torgerson was appointed Chief Executive Officer of UIL
Holdings, effective July 1, 2006.
(3) As
previously disclosed in UIL Holdings’ filing on Form 8-K dated March 5, 2007,
Linda L. Randell was appointed Senior Vice President and General Counsel of UIL
Holdings commencing March 26, 2007. As previously disclosed in UIL
Holdings’ filing on Form 8-K dated July 24, 2007, Ms. Randell was appointed
Corporate Secretary, effective July 23, 2007.
(4)
Richard J. Reed was appointed Vice President – Electric System of UI on
January 1, 2001. Mr. Reed’s job title was changed to Vice
President – Engineering and Project Excellence of UI, effective January 1,
2010.
(5)
Anthony Marone III was appointed Vice President – Client Services of UI on
October 1, 2007. Mr. Marone’s job title was changed to Vice President
– Client & External Relations of UI effective July 1, 2009. There is
no family relationship between any director, executive officer, or person
nominated or chosen to become a director or executive officer of UIL
Holdings. All of the above executive officers and persons chosen to
become executive officers have entered into employment
agreements. There is no arrangement or understanding between any
executive officer of UIL Holdings and any other person pursuant to which such
officer was selected as an officer.
A brief
account of the business experience during the past five years of each executive
officer of UIL Holdings is as follows:
Anthony Marone
III. >Mr. Marone served as Senior Director – Client Services of
UI from January 2003 to February 2005. Mr. Marone served as Associate
Vice President – Client Services of UI from February 2005 to October
2007. Mr. Marone served as Vice President – Client Services of UI
from October 2007 to July 2009. Mr. Marone’s job title was changed to
Vice President – Client and External Relations of UI on July 1,
2009. Mr. Marone is also the President of GenConn Energy LLC
(GenConn), a 50-50 joint venture of UI and NRG. See Part II, Item 8,
“Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – Note (H), Related Party Transactions,” of this Form 10-K, which is
hereby incorporated by reference.
Part
II
Item
5. Market for UIL Holdings’ Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
UIL
Holdings’ common stock is traded on the New York Stock Exchange, where the high
and low closing sale prices during 2009 and 2008 were as follows:
Quarterly
dividends on the common stock have been paid since 1900. The
quarterly cash dividends declared in 2009 and 2008 were at a rate of $0.432 per
share.
UIL
Holdings expects to continue its policy of paying regular cash dividends,
although there is no assurance as to the amount of future dividends which
depends on future earnings, capital requirements, and financial
condition.
Further
information regarding payment of dividends is provided in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources,” of this Form 10-K.
As of
December 31, 2009, there were 7,899 common stock shareowners of
record.
The line
graph appearing below compares the yearly change in UIL Holdings’ cumulative
total shareowner return on its common stock with the cumulative total return on
the S&P Composite-500 Stock Index, the S&P Public Utility Index and the
S&P Electric Power Companies Index for the period of five fiscal years
commencing 2005 and ending 2009.
UIL
Holdings repurchased 20,316 shares of common stock in open market transactions
to satisfy matching contributions for participants’ contributions into UIL
Holdings 401(k) in the form of UIL Holdings stock as follows:
*
All shares were purchased in open market transactions. The effects of
these transactions did not change the number of outstanding shares of UIL
Holdings’ common stock.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Certain
statements contained herein, regarding matters that are not historical facts,
are forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These include statements regarding management’s
intentions, plans, beliefs, expectations or forecasts for the
future. Such forward-looking statements are based on UIL Holdings’
expectations and involve risks and uncertainties; consequently, actual results
may differ materially from those expressed or implied in the
statements. Such risks and uncertainties include, but are not limited
to, general economic conditions, conditions in the debt and equity markets,
legislative and regulatory changes, changes in demand for electricity and other
products and services, unanticipated weather conditions, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental, and technological factors affecting the operations, markets,
products and services of UIL Holdings’ subsidiaries. The foregoing
and other factors are discussed and should be reviewed in this Annual Report on
Form 10-K and other subsequent periodic filings with the Securities and Exchange
Commission. Forward-looking statements included herein speak only as
of the date hereof and UIL Holdings undertakes no obligation to revise or update
such statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events or circumstances.
OVERVIEW
AND STRATEGY
The
primary business of UIL Holdings Corporation (UIL Holdings) is ownership of its
operating regulated utility. The utility business consists of the
electric transmission and distribution operations of The United Illuminating
Company (UI). UI is also a 50-50 joint venturer, together with NRG
Energy, Inc. (NRG), in GenConn Energy LLC (GenConn), a project selected to build
new peaking generation plants chosen by the Connecticut Department of Public
Utility Control (“DPUC”) to help address the state’s growing need for more power
generation during the heaviest load periods. UIL Holdings also has
non-utility activities which recently included the operations of Xcelecom, Inc.
(Xcelecom) until the substantial completion of the sale of that business
effective December 31, 2006. UIL Holdings is headquartered in New
Haven, Connecticut, where its senior management maintains offices and is
responsible for overall planning, operating and financial
functions.
UIL
Holdings’ current overall corporate strategy is to create shareowner value by
investing in the utility business to grow earnings and cash flow in the
following major areas of business focus:
The
United Illuminating Company
UI, the
utility operating unit of UIL Holdings, is an electric transmission and
distribution utility, the primary objective of which is to provide high-quality
customer service, including the safe, reliable, cost-effective delivery of
electricity to its customers in the 17 municipalities in Southwest Connecticut
in which it operates. To provide reliable service, UI will prudently
invest in, and maintain, its transmission and distribution
infrastructure. The transmission business explores future
transmission opportunities, pursues FERC incentives, acts to influence the ISO
planning process as appropriate, and develops additional transmission
infrastructure projects. As part of this effort, UI and The
Connecticut Light and Power Company (CL&P) (which provides electric
transmission and distribution service in other Connecticut municipalities)
worked together and, in December 2008, completed a major transmission upgrade,
the Middletown/Norwalk Project, in southwest Connecticut. UI has
Connecticut Siting Council (CSC) approval for complete replacement and
construction of the Grand Avenue switching station in New Haven,
Connecticut. GenConn, a 50-50 joint-venture of UI and
NRG is currently constructing two peaking generation projects
approved by the DPUC to help address Connecticut’s growing need for more power
generation during the heaviest load
periods. GenConn’s Devon
plant is scheduled to be in commercial operation by June 2010, and its
Middletown plant is scheduled to be in commercial operation by
June 2011. See “Major Influences on Financial Condition – The
United Illuminating Company – Generation” for further discussion.
UI plans
to manage operating and maintenance costs to have a reasonable opportunity to
achieve its authorized return on equity, while producing earnings and cash flow,
consistent with maintaining reliable service to customers. Earnings
from UI’s Competitive Transition Assessment (CTA) component are expected to
decline over time due to the planned amortization of, and resulting reduction
in, UI’s stranded cost rate base. The decline in CTA revenues is
expected to be offset by higher transmission revenues, resulting from planned
transmission infrastructure investments, investments in the distribution rate
base, and the completion of the GenConn peaking generation
facilities.
United
Capital Investments, Inc.
UCI is a
limited partner in an investment fund, The Ironwood Mezzanine Fund, with equity
participation of approximately 4% and recently held a passive, minority position
in Zero Stage Capital which was a venture capital fund that invested in emerging
growth companies. The Ironwood Mezzanine Fund is a Small Business
Investment Company that focuses on mezzanine financing and invests a portion of
its capital in women-owned and minority-owned small businesses and businesses
located in low and moderate income areas. As a mezzanine fund, it
provides growth and acquisition capital to privately held businesses committed
to sustainable long-term growth. UCI received a final distribution
for Zero Stage Capital during 2008. UCI also has a lease agreement
that conveys the right to a third party to a specific area located in New Haven,
Connecticut. The net carrying value of UCI’s investments as of
December 31, 2009, was $2.0 million.
MAJOR
INFLUENCES ON FINANCIAL CONDITION
UIL
Holdings Corporation
UIL
Holdings’ financial condition and financing capability will be dependent on many
factors, including the level of income and cash flow of UIL Holdings’
subsidiaries, conditions in the securities markets, economic conditions,
interest rates, legislative and regulatory developments, and its ability to
retain key personnel.
The loss
of key personnel or the inability to hire and retain qualified employees could
have an adverse effect on the business, financial condition and results of
operations for UIL Holdings and The United Illuminating Company
(UI). These operations depend on the continued efforts of their
respective current and future executive officers, senior management and
management personnel. UIL Holdings cannot guarantee that any member
of management at the corporate or subsidiary level will continue to serve in any
capacity for any particular period of time. In an effort to enhance
UIL Holdings’ ability to attract and retain qualified personnel, UIL Holdings
continually evaluates the overall compensation packages offered to employees at
all levels of the organization.
The
United Illuminating Company
UI is an
electric transmission and distribution utility whose structure and operations
are significantly affected by legislation and regulation. UI’s rates
and authorized return on equity are regulated by the Federal Energy Regulation
Commission (FERC) and the DPUC. Legislation and regulatory decisions
implementing legislation establish a framework for UI’s
operations. Other factors affecting UI’s financial results are
operational matters, such as the ability to manage expenses, uncollectibles and
capital expenditures, in addition to sales volume and major weather
disturbances. Sales volume is not expected to have an impact on
distribution earnings during the two-year decoupling pilot established in the
2008 Rate Case final decision. The extent to which sales volume will
have an impact on UI’s financial results beyond such period will depend upon the
nature and extent of decoupling implemented by the DPUC. UI expects to continue
to make capital investments in its distribution and transmission
infrastructure.
Generation
GenConn
is a 50-50 joint venture of UI and NRG. In 2008, the DPUC selected
two projects proposed by GenConn to help address Connecticut’s growing need for
more power generation during the heaviest load periods. Two
peaking generation projects, each with a nominal capacity of 200 megawatts (MW),
are being constructed at NRG’s existing Connecticut plant locations in Devon and
Middletown. GenConn’s Devon plant is scheduled to be in commercial
operation by June 2010, and its Middletown plant is scheduled to be in
commercial operation by June 2011. GenConn recovers its costs
under a contract for differences (CfD) agreement which is cost of service
based. GenConn has signed CfDs for both projects with
CL&P. The cost of the contracts will be paid by customers and
will be subject to a cost-sharing agreement whereby approximately 20% of the
cost is borne by UI customers and approximately 80% by CL&P
customers.
Given the
anticipated commercial operation date for the Devon plant of June 2010, GenConn
filed its required rate case request with the DPUC in December 2009 seeking
approval of 2010 revenue requirements.
As a
result of changed market conditions and updated cost information, GenConn
project costs have increased over the proposal it had originally submitted to
the DPUC. The increase was driven primarily by increased financing
costs and the cost to build interconnection facilities at the Middletown
site. The DPUC has ruled that prudently incurred financing costs,
interconnection costs and taxes will be recoverable and, therefore, GenConn
expects to recover such costs. The CfDs will provide for a true-up of
revenue from the ISO New England (ISO-NE) markets in which GenConn participates
to DPUC approved revenue requirements.
Contracts for
Differences
In
accordance with FASB ASC 820 “Fair Value Measurements and Disclosures” (ASC
820), UIL Holdings applies fair value measurements to certain assets and
liabilities, a portion of which fall into Level 3 of the fair value hierarchy
defined by ASC 820 as pricing inputs that include significant inputs that are
generally less observable from objective sources. As of December 31,
2009, the assets and liabilities, other than pension and other post-retirement
assets, that are accounted for at fair value on a recurring basis as Level 3
instruments are contracts for differences, which represent 78.4% of the total
amount of assets, and 100% of the total amount of liabilities accounted for at
fair value on a recurring basis. The determination of fair value of
the contracts for differences is based on a probability-based expected cash flow
analysis that is discounted at risk-free interest rates and an adjustment for
non-performance risk using credit default swap rates. Certain
management assumptions were made in this valuation process, including
development of pricing that extended over the term of the
contracts. In addition, UIL performs an assessment of risks related
to obtaining regulatory, legal and siting approvals, as well as obtaining
financing resources and ultimately attaining commercial
operation. The DPUC has determined that costs associated with
these contracts for differences are fully recoverable. As a result,
there is no impact on UIL Holdings’ net income as any unrealized gains/(losses)
resulting from quarterly mark-to-market adjustments are offset by the
establishment of regulatory assets/(liabilities) that have been recognized for
the purpose of such recovery.
On
February 7, 2010, an explosion occurred at the construction site of the nearly
completed 620-megawatt plant being built by Kleen Energy Systems, LLC (“Kleen”),
one of the four capacity resources selected by the DPUC to create new or
incremental capacity resources as noted above. As noted above,
CL&P has executed CfDs with two of the selected projects, including the
Kleen project. The CfD with Kleen is subject to the sharing agreement
between UI and CL&P whereby UI pays 20% of the costs and obtains 20% of the
benefits of the contract. The extent of damage and any resulting
delay in the attainment of commercial operation is not now determinable,
therefore, UI cannot presently assess the potential financial
impact. Based on information known to date, it appears to be
reasonably likely that there will be a delay in Kleen's attainment of commercial
operation, which could have a material impact in 2010 on the fair value of the
related regulatory asset and derivative liability that existed on the
Consolidated Balance Sheet as of December 31, 2009 which was based on a
probability-based expected cash flow analysis that was discounted at the
December 31, 2009 risk-free interest rate, and an adjustment for non-performance
risk using credit default swap rates. This event will not have an
impact on UIL Holdings’ Consolidated Statement of Income.
Legislation
& Regulation
Background
From time
to time, state legislation impacts the operation of the electric utility
industry in Connecticut. The electric industry in Connecticut was
significantly restructured commencing in 1998. Legislation enacted
since then (as described below) continues to address various energy
issues. There was no significant legislation passed in 2008 or 2009
concerning the utility industry. Electric
Restructuring As a result of Public Act 98-28, Public Act
03-135, as amended in part by Public Act 03-221, Public Act 05-1 (June Special
Session), and Public Act 07-242 (collectively, the Restructuring
Legislation), UI’s distribution and transmission rates are “unbundled” on
customers’ bills, which also include separate charges for the Competitive
Transition Assessment (CTA), Generation Services Charge (GSC), a combined public
benefits charge that includes the
C&LM charge, Renewable Energy Investment (REI) charge, and Systems Benefits
Charge (SBC), and Federally Mandated Congestion Charges (FMCCs), each as defined
in the Restructuring Legislation.
Transitional Standard Offer
Incentive The 2003 legislation provided for the DPUC to
establish an incentive plan for the procurement of long-term contracts for
transitional standard offer service that compares UI’s actual average contract
price to a regional average price for electricity, making adjustments as deemed
appropriate by the DPUC. If UI’s price was lower than the average,
the legislation provided for the plan to allocate $0.00025/kilowatt-hour of
transitional standard offer service to the distribution company. The
DPUC issued a final decision in January 2009 that found UI was not eligible for
a procurement incentive for 2004. UI appealed the DPUC’s final
decision to the state superior court. By decision filed February 5,
2010, the superior court determined that the DPUC did not apply the proper
standard in determining whether UI qualified for the incentive and that the DPUC
made other errors, and remanded the case to the DPUC for further proceeding in
accordance with the court's decision.
Energy Independence
Act In July 2005, the Energy Independence Act (EIA) became law
in Connecticut. The EIA in large part provides for incentives to
promote the development of projects and resources that are intended to reduce
FMCCs, and provides that electric distribution companies will recover their
costs and investments resulting from the law through a number of mechanisms,
including the FMCC on customers’ bills.
2007 Energy
Act In July 2007, the 2007 Energy Act became law in
Connecticut. The 2007 Energy Act contains numerous provisions
primarily regarding the electric industry. The 2007 Energy Act
resulted in the DPUC’s selection of certain peaking generation projects
(including GenConn’s proposal to build capacity at NRG’s existing plants in
Middletown and Devon). Pursuant to the 2007 Energy Act, UI continues
to work with CL&P and the Connecticut Energy Advisory Board (CEAB) in the
development of an energy assessment and resource plan that is submitted by the
CEAB to the DPUC.
2005 Transportation
Act In July 2005, the 2005 Transportation Act, became law in
Connecticut. Section 28 of this legislation, provides that the state
shall bear no part of the cost to readjust, relocate or remove an electric
transmission line buried within a public highway right-of-way where such action
is required by a state highway project, but also provides that the state shall
consider such costs in selecting a final project design in order to minimize the
overall cost incurred by the state and the electric distribution
company. As a result, the electric distribution company’s costs of
readjustment, relocation or removal will be included in tariffs, for collection
from customers.
Transmission Adjustment
Clause The DPUC has approved a transmission adjustment clause
(TAC) for UI, implementing the provisions of Section 30 of the 2005
Transportation Act, to establish a “transmission tracker” mechanism by which the
DPUC adjusts an electric distribution company’s retail transmission rate
periodically to “track” and recover the transmission costs, rates, tariffs and
charges approved by the FERC. UI makes a semi-annual filing with the
DPUC, setting forth its actual transmission revenues, projected transmission
revenue requirement, and the required TAC charge or credit so that any under- or
over-collections of transmission revenues from prior periods are reconciled
along with the expected revenue requirements for the next six months from
filing. The DPUC holds an administrative proceeding to approve the
TAC charge or credit and holds a hearing to determine the accuracy of customer
billings under the TAC. The TAC tariff and this semi-annual change of
the TAC charge or credit mitigates the lag between changes in UI’s FERC-approved
transmission revenue requirements and its retail transmission rate and
facilitates the timely matching of transmission revenues and transmission
revenue requirements.
Energy Policy
Act In August 2005, the Energy Policy Act of 2005 (Energy
Policy Act) became federal law. Title XII of the Energy Policy Act
included provisions that impact UIL Holdings, such as the repeal of the Public
Utility Holding Company Act (PUHCA) of 1935 and the enactment of PUHCA 2005, and
numerous provisions that may affect UI, some of which include (1) reducing
depreciable lives for newly constructed electric transmission lines, (2)
establishing an electric reliability organization responsible for reliability
standards, subject to FERC jurisdiction, approval and enforcement, (3)
authorizing limited FERC backstop siting authority for interstate transmission
projects in federally designated
transmission corridors, (4) requiring the FERC to issue a rule that provides
transmission rate incentives to promote capital investment and provides for
recovery of all prudent costs of complying with mandatory reliability standards
and costs related to transmission infrastructure development, (5) prohibiting
energy market manipulation and vesting the FERC with enhanced authority to
impose penalties for violations of the FPA, and (6) revising the regulation of
Cogeneration and Qualifying Facilities under the Public Utility Regulatory
Policies Act of 1978 (PURPA).
Rates
In
rulings throughout 2009, the DPUC issued its final decision regarding UI’s
application requesting an increase in distribution rates (the “2009 Decisions”),
the results of which included a $6.8 million increase in revenue requirements
for 2009, compared to 2008. Because a larger, previously approved
increase in revenue requirements for 2009 had gone into effect
January 1, 2009, UI returned approximately $0.97 million to ratepayers
through a one-time adjustment in April 2009.
The 2009
Decisions provided for an allowed distribution return on equity of 8.75%, a
decrease from the previously approved 9.75%, and a capital structure of 50%
equity and 50% debt, compared to the previously approved 48% equity and 52%
debt. The 2009 Decisions continued the prior earnings sharing
mechanism structure, applying to the new 8.75% allowed return, whereby 50% of
any earnings over the allowed twelve month level is returned to customers and
50% is retained by UI. Given the effective date of the 2009
Decisions, UI’s weighted average allowed distribution return on equity for 2009
was 8.84%. Additionally, the 2009 Decisions provided for full revenue
decoupling of distribution revenues from sales, recovery of updated pension and
postretirement expense for 2010, a partial reconciliation for the cost of debt
and an additional increase in distribution revenue requirements of $19.4 million
for 2010.
The 2009
Decisions also provided for the establishment of a regulatory asset to address
the portion of the actual increase in pension and postretirement expense for
2009 and 2010 that was not included in rates. For 2009, a $10.2
million regulatory asset was approved and established, for which full recovery
in 2010 rates was subsequently approved by the DPUC; accordingly, it will be
removed from rates effective February 4, 2011. The DPUC
also approved the 2010 cash recovery of $11.4 million for estimated 2010 pension
and postretirement expense not previously included in rates.
In
December 2009, UI received a letter ruling approving rates effective January 1,
2010 incorporating the above mentioned distribution rate changes along with
previously approved changes to the GSC, Non-Bypassable Federally Mandated
Congestion Charges (NBFMCC), transmission and system benefits charge resulting
in no change in the total rate for a residential Rate R customer with standard
service generation. Additionally, last resort service GSC rates for
the January 1, 2010 through March 31, 2010 time period were
approved.
Transmission Return on
Equity
DPUC
decisions do not affect the revenue requirements determination for transmission,
including the applicable return on equity, which are within the jurisdiction of
the FERC. For 2009, UI’s overall allowed weighted-average ROE for its
transmission business was 12.52%. See Part II, Item 8, “Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements –
Note (C), Regulatory Proceedings – Regional Transmission Organization for New
England,” of this Form 10-K for further information.
Other
Regulation
UI
generally has several regulatory proceedings open and pending at the DPUC at any
given time. Examples of such proceedings include an annual DPUC
review and reconciliation of UI’s CTA and SBC revenues and expenses, dockets to
consider specific restructuring or electricity market issues, consideration of
specific rate or customer issues, and review of conservation
programs.
UI files
semi-annual true-ups with the DPUC regarding Bypassable Federally Mandated
Congestion Charges (BFMCC) and NBFMCC. These customer charges relate
to “congestion costs” associated with not having adequate transmission
infrastructure to move energy from the generating sources to the consumer and
costs associated with maintaining the reliability of electric
service. These costs change from time to time and the semi-annual
true-ups provide a mechanism for the electric distribution companies to adjust
the charges to customers accordingly. During
2007, UI submitted a filing to the FERC requesting inclusion of 100% of
Construction Work in Progress (CWIP) in transmission rate base and a 50 basis
point ROE adder for use of advanced transmission technologies in the
Middletown/Norwalk transmission project. In May 2007, the FERC ruled
that for project costs incurred after August 8, 2005, UI could include
100% of CWIP expenditures in rate base. Certain parties requested
rehearing of the FERC’s May 2007 order, but in January 2009, the FERC denied
those requests. Also in January 2009 the DPUC and the Attorney
General of Connecticut filed a petition with the United States Court of Appeals
for the District of Columbia Circuit seeking judicial review of the FERC’s
May 2007 and January 2009 orders. The Company is unable to
predict the outcome of these appeals at this time.
In its
January 2009 decision, the DPUC determined that UI did not earn the Transitional
Standard Offer (TSO) procurement incentive for 2004 of approximately $0.8
million, after tax. The determination was a result of a change in the
DPUC’s methodology from its initial determination in 2005 that UI had earned the
incentive. The DPUC issued a final decision in January 2009 that found UI was
not eligible for a procurement incentive for 2004. UI appealed the
DPUC’s final decision to the state superior court. By decision filed
February 5, 2010, the superior court determined that the DPUC did not apply the
proper standard in determining whether UI qualified for the incentive and that
the DPUC made other errors, and remanded the case to the DPUC for further
proceeding in accordance with the court's decision.
Operations
In
implementing the Restructuring Legislation, UI established a Distribution
Division and other “unbundled” components for accounting purposes, to reflect
the various unbundled components on customer bills. Initially, the
Distribution Division included both transmission and
distribution. For regulatory and accounting purposes, UI has now
separated transmission and distribution into separate
divisions. Changes to income and expense items related to
transmission and distribution have a direct impact on net income and earnings
per share, while changes to items in “other unbundled utility components” do not
have such an impact. The other components are the CTA, the SBC, the
GSC, the C&LM charge, and REI charge. The CTA earns an authorized
8.75% return on the equity portion of rate base. Returns are achieved
either by accruing additional amortization expenses, or by deferring such
expenses, as required to achieve the authorized return. Amortization
expense within CTA impacts earnings indirectly through changes to the rate
base. The SBC, GSC, C&LM and REI are essentially pass-through
components (revenues are matched to recover costs). Except for the
procurement fee in the GSC previously discussed in the “Legislative &
Regulation – Background” section and the incentives earned with GSC and C&LM
as well as any SBC carrying charges applied to deferred charges as discussed in
the “Rates” section, expenses are either accrued or deferred such that there is
no net income associated with these four unbundled components.
The
primary operational factors affecting UI’s financial results are the ability to
control expenses and capital expenditures. Retail electric sales
volume can be significantly affected by economic conditions, customer
conservation efforts, and weather. Sales volume is not expected to
have an impact on distribution earnings during the two-year decoupling pilot
established in the 2008 Rate Case final decision. The extent to which
sales volume will have an impact on UI’s financial results beyond such period
will depend upon the nature and extent of decoupling implemented by the
DPUC. The level of economic growth can be impacted by job growth or
workforce reductions, plant relocations into or out of UI service territory, and
expansions or contractions of facilities within UI’s service territory, all of
which can affect demand for electricity. The weather can also have an
impact on expenses, dependent on the level of work required as a result of
storms or other extreme conditions. UI’s major expense components are
(1) purchased power, (2) amortization of stranded costs, (3) wages and benefits,
(4) depreciation, and (5) regional network service (RNS) transmission
costs.
In 2008,
UI completed the purchase of a parcel of land that is centrally located within
its service territory. This land, on 34 acres in the Town of Orange,
adjacent to I-95, will serve as the home of UI’s consolidated operations
center. In close proximity to this property, UI entered into a
long-term lease of a parcel of land that will serve as the future home of the
Company’s corporate offices. The two parcels will help UI to realize
its plan to consolidate operations and office personnel in close proximity to
each other. UI expects the result to be increased operational
efficiencies and improved customer service. Power Supply
Arrangements
UI’s
retail electricity customers are able to choose their electricity
supplier. Since January 1, 2007, UI has been required to offer
standard service to those of its customers who do not choose a retail electric
supplier and have a maximum demand of less than 500 kilowatts. In
addition, UI is required to offer supplier of last resort service to customers
who are not eligible for standard service and who do not choose to purchase
electric generation service from a retail electric supplier licensed in
Connecticut.
UI must
procure its standard service power pursuant to a procurement plan approved by
the DPUC. The procurement plan must provide for a portfolio of
service agreements procured in an overlapping pattern over fixed time periods (a
“laddering” approach). In June 2006, the DPUC approved a procurement
plan for UI. As required by Connecticut statute, a third party
consultant retained by the DPUC works closely with UI in the procurement process
and to provide a joint recommendation to the DPUC as to selected
bids.
UI has
wholesale power supply agreements in place for the supply of all of UI’s
standard service customers for all of 2010, 80% for 2011 and 20% for
2012. Supplier of last resort service is procured on a quarterly
basis. UI determined that its contracts for standard service and
supplier of last resort service are derivatives under Accounting Standards
Codification (ASC) 815 “Derivatives and Hedging” and elected the “normal
purchase, normal sale” exception under ASC 815 “Derivatives and
Hedging”. As such, UI regularly assesses the accounting treatment for
its power supply contracts. These wholesale power supply agreements
contain default provisions that include required performance assurance,
including certain collateral obligations, in the event that UI’s credit rating
on senior debt was to fall below investment grade. In October 2009,
Moody’s Investor Services (Moody’s) released its updated credit opinion for UI
and maintained its Baa2 rating with a stable outlook. In
December 2009, Standard & Poors’ Investor Services (S&P) reinitiated
coverage on UI and rated it BBB with a stable outlook. UI’s credit
rating would have to decline two ratings to fall below investment grade at
either rating service. If this were to occur, monthly amounts due and
payable to the power suppliers would be accelerated to semi-monthly payments and
UI would have to deliver collateral security in an amount equal to the
receivables due to the sellers for the thirty day period immediately preceding
the default notice. If such a situation was in effect as of
December 31, 2009, UI would have had to post approximately $26 million
in collateral.
As a
result of an April 2008 DPUC decision, UI is permitted to seek long-term
contracts for up to 20% of standard service requirements, the goal of which is
to obtain long-term energy supply contracts and Connecticut Class I Renewable
Energy Certificates for UI’s standard service customers that will result in
economic benefit to ratepayers, both in terms of risk and cost
mitigation. UI is exploring long-term contract
alternatives.
Competitive Transition
Assessment
UI’s CTA
collection recovers costs that have been reasonably incurred, or will be
incurred, to meet its public service obligations and that will likely not
otherwise be recoverable in a competitive market. These “stranded
costs” include above-market long-term purchased power contract obligations,
regulatory asset recovery and above-market investments in power
plants. A significant amount of UI’s earnings is generated by the
authorized return on the equity portion of unamortized stranded costs in the CTA
rate base. UI’s after-tax earnings attributable to CTA for the years
ended December 31, 2009, 2008 and 2007 were $7.1 million, $9.1 million and $10.5
million, respectively. A significant portion of UI’s cash flow from operations
is also generated from those earnings and from the recovery of the CTA rate base
and other stranded costs. Cash flow from operations related to CTA
amounted to $40 million, $38 million and $35 million for the years ended
December 31, 2009, 2008 and 2007, respectively. The CTA rate base has
declined from year to year for a number of reasons,
including: amortization of stranded costs, the sale of UI’s nuclear
units, and adjustments made through the annual DPUC review
process. The original rate base component of stranded costs, as of
January 1, 2000, was $433 million. It has since declined to
$145.2 million at year-end 2009. In the future, UI’s CTA earnings
will decrease while, based on UI’s current projections, cash flow will remain
fairly constant until stranded costs are fully amortized. Total CTA
cost recovery is currently projected to be completed in 2015, with stranded cost
amortizations expected to end in 2013. The date by which stranded
costs are fully amortized depends primarily upon the DPUC’s future decisions,
which could affect future rates of stranded cost amortization. Capital
Projects
In order
to maintain and improve its electricity delivery system and to provide quality
customer service, UI is required to spend a significant amount each year on
capital projects in the Distribution and Transmission Divisions. A
large portion of the funds required for capital projects is provided by
operating activities, and the remainder must be financed
externally.
In
December 2008, the 345-kilovolt (kV) transmission line from Middletown,
Connecticut, to Norwalk, Connecticut (the Project) was completed and the
transmission assets were placed in service. As a result, UI’s
transmission rate base increased by approximately $300 million, an increase of
more than 200% relative to UI’s net transmission assets existing prior to the
Project receiving approval from the Connecticut Siting Council
(CSC).
In a May
2007 Order, the FERC approved rate incentives for the Project. The
Project was allowed to include Construction Work In Progress (CWIP) expenditures
in rate base. For project costs incurred before August 8, 2005,
the FERC allowed UI to include 50% of CWIP expenditures in rate base, and for
project costs incurred after August 8, 2005, the FERC allowed UI to
include 100% of CWIP expenditures in rate base. The FERC also
accepted a 50 basis point adder which will be applied only to costs associated
with advanced transmission technologies.
Certain
parties requested rehearing of the FERC May 2007 order, but in January 2009, the
FERC denied those requests. Also, in January 2009, the DPUC and
the Attorney General of Connecticut filed a petition with the U.S. Court of
Appeals seeking judicial review of the FERC’s May 2007 and January 2009
orders. UI is unable to predict the outcome of these appeals at this
time.
UI and
CL&P filed a transmission cost allocation application relating to the
Project with ISO-NE in April 2008. ISO-NE will determine which costs
of the Project, if any, will be included in the New England regional
transmission rate. UI will seek to recover any non-pool supported costs of the
Project, or Localized Costs, in transmission revenues from customers throughout
the State of Connecticut.
Regional
Transmission Organization for New England
Transmission
Return on Equity (ROE)
In March
2008, the FERC issued an order on rehearing (Rehearing Order) establishing
allowable ROEs for transmission projects of transmission owners in New England,
including UI. In the Rehearing Order, the FERC established the
base-level ROE of 11.14% beginning in November 2006. The Rehearing
Order also confirmed a 50 basis point ROE adder on Pool Transmission Facilities
(PTF) for participation in the RTO-NE and a 100 basis point ROE incentive for
projects included in the ISO-NE Regional System Plan that were
completed and on line as of December 31, 2008. The Middletown/Norwalk
Transmission Project received this 100 basis point ROE
adder. For projects placed in service after December 31,
2008, incentives may be requested from the FERC, through a specific showing
justifying the incentive, on a project specific basis.
In May
2008, several public entities, including the DPUC, filed a petition with the
United States Court of Appeals for the District of Columbia Circuit (U.S. Court
of Appeals) challenging the Rehearing Order. On January 29, 2010, the
U.S. Court of Appeals issued a decision upholding the FERC order.
UI’s
overall transmission ROE is determined by the mix of UI’s transmission rate base
between new and existing transmission assets, and whether such assets are PTF or
non-PTF. UI’s transmission assets are primarily PTF. For
2009, UI overall allowed weighted-average ROE for its transmission business was
12.52%.
Risk Management and
Insurance
UI’s
primary risk management and insurance exposures include bodily injury, property
damage, fiduciary responsibility, and injured workers’
compensation. UI is insured for general liability, automobile
liability, property loss, fiduciary liability and workers’ compensation
liability. UI’s general liability and automobile liability programs
provide insurance coverage for third party liability claims for bodily injury
(including “pain and suffering”) and property damage, subject to a
deductible. Losses are accrued based upon UI’s estimates of the
liability for claims incurred and an estimate of claims incurred but not
reported. UI reviews the general liability reserves quarterly to
ensure the adequacy of those reserves. The reserve is based on
historical claims, business events, industry averages and actuarial
studies. Insurance liabilities are difficult to assess and estimate
due to unknown factors such as claims incurred but not reported and awards
greater than expected; therefore, reserve adjustments may become necessary as
cases unfold. UI insures its property subject to deductibles
depending on the type of property. UI’s fiduciary liability program
and workers’ compensation program provide insurance coverage, also subject to
deductibles.
Xcelecom,
Inc.
UIL
Holdings’ exposure regarding Xcelecom is now primarily related to the collection
of promissory note, notes from, and the indemnification obligations to, the
buyers of the former Xcelecom companies.
LIQUIDITY
AND CAPITAL RESOURCES
UIL
Holdings generates its capital resources primarily through
operations. At December 31, 2009, UIL Holdings had $15.3 million
of unrestricted cash and temporary cash investments. This represents
an increase of $7.5 million from the corresponding balance at December 31,
2008. The components of this increase, which are detailed in the
Consolidated Statement of Cash Flows, are summarized as follows:
(1)
As of December 31, 2009, UIL Holdings had $3.7 million in restricted cash which
primarily relates to certain retention amounts concerning the Middletown/Norwalk
Transmission Project which have been withheld by UI and will remain in place
until the verification of fulfillment of contractor obligations.
The
unrestricted cash position of UIL Holdings increased by $7.5 million from
December 31, 2008 to December 31, 2009, as cash provided by operating
and financing activities exceeded cash used in investing
activities. Cash used in investing activities during 2009 consisted
primarily of capital expenditures of $123.6 million for distribution and
transmission infrastructure as well as an additional $72.2 million in funds
loaned to GenConn. Cash provided by financing activities during 2009
included $92.2 million from issuances of common stock and $127.5 million from
net issuances of long-term debt, partially offset by net payments on short-term
notes payable of $148.0 million and the quarterly dividend payments on UIL
Holdings’ common stock totaling $47.7 million. UIL
Holdings accesses capital through both long-term and short-term financing
arrangements. Total current and long-term debt outstanding as of
December 31, 2009 was $731.8 million, as compared to $604.3 million at year-end
December 31, 2008. In December 2009, UI issued $50 million
of debt to repay maturing debt.
UIL
Holdings and UI have a revolving credit agreement with a group of banks that
extends to December 22, 2011. The borrowing limit under the
facility for UI is $175 million, with $50 million of the limit available for UIL
Holdings. The facility permits borrowings at fluctuating interest
rates determined by reference to Citibank’s New York base rate and the Federal
Funds Rate (as defined in the facility), and also permits borrowings for fixed
periods up to six months as specified by UI and UIL Holdings at fixed interest
rates (London Interbank Offered Rate or LIBOR determined by the Eurodollar
Interbank Market in London. The facility also permits the issuance of
letters of credit up to $50 million. As of December 31, 2009, UI had
no outstanding borrowings under the facility and UIL Holdings had a standby
letter of credit outstanding in the amount of $1 million. The
UIL Holdings standby letter of credit reduces the amount of credit available for
UI. Available credit, under this facility, at December 31, 2009
for UI was $174 million, of which $49 million is available for UIL
Holdings.
In
November 2008, UI entered into a revolving credit agreement with Union Bank,
N.A., formerly Union Bank of California, N.A., with a borrowing limit of $25
million. UI terminated that credit agreement on April 27,
2009.
During
late 2008, conditions in the capital markets resulted in reductions in asset
values of funded pension and postretirement plans. In particular, the
projected benefit obligation for the qualified pension plan now exceeds the fair
market value of the plan assets by $140 million. Although asset
values recovered somewhat in 2009, these reductions, if not offset by additional
gains in future years, will result in higher pension and postretirement expenses
in future years along with additional cash contributions. Asset
values as of December 31, 2009 and December 31, 2008 were approximately $231.3
million and $211.7 million, respectively. While there was no minimum
required pension contribution for the 2009 plan year, UI expects to make a
contribution of approximately $9 million in 2010, subject to current proposals
that are pending before the United States Congress.
All
capital requirements that exceed available cash will be funded through external
financings. Although there is no commitment to provide such financing
from any source of funds, other than the short-term credit facility discussed
above, future external financing needs are expected to be satisfied by the
issuance of additional short-term and long-term debt and equity. In
addition to debt financing, in May 2009, UIL Holdings accessed the external
equity markets to raise capital. A public offering of 4,600,000
shares of common stock at $21.00 per share resulted in net proceeds of $91.4
million, after expenses and underwriting discounts. The continued
availability of these methods of financing will be dependent on many factors,
including conditions in the securities markets, economic conditions, and UIL
Holdings’ future income and cash flow. See Part II, Item 8,
“Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements – Note (B), Capitalization and Note (D), Short-Term Credit
Arrangements” of this Form 10-K for a discussion of UIL Holdings’ financing
arrangements.
GenConn
has approval from the DPUC to build 200 MW of nominal capacity at NRG’s existing
plant in Devon, CT (the “Devon Project”) and 200 MW of nominal capacity at NRG’s
existing plant in Middletown, CT (the “Middletown Project”). GenConn
expects to finance 50% of its capital requirements with the proceeds of the
Project Financing it obtained on April 27, 2009. UI and NRG will each
make an equity investment in GenConn on a 50%/50% basis to meet the remaining
50% of GenConn’s capital requirements. Such equity investments are
expected to occur within the first six months of 2010 in the amount of
approximately $53 million for the Devon Project and within the first six months
of 2011 in the amount of approximately $60 million for the Middletown
Project. UI expects to use the proceeds of the EBL it obtained on
April 27, 2009 for its portion of those requirements and to replace the EBL with
cash on hand and with funds raised in the capital markets. See
Part II, Item 8, “Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements – Note (B), Capitalization” of this
Form 10-K for further discussion of the EBL.
UI’s
wholesale power supply agreements contain default provisions that include
required performance assurance, including certain collateral obligations in the
event that UI’s credit rating on senior debt was to fall below investment
grade. In October 2009, Moody’s released its updated credit opinion
for UI and maintained its Baa2 rating with a stable outlook. In
December 2009, S&P reinitiated coverage on UI and rated it BBB with a stable
outlook. UI’s credit rating would have to decline two ratings to fall
below investment grade at either rating service. If this were to
occur, monthly amounts
due and payable to the power suppliers would be accelerated to semi-monthly
payments and UI would have to deliver collateral security in an amount equal to
the receivables due to the sellers for the thirty day period immediately
preceding the default notice. If such a situation was in effect as of
December 31, 2009, UI would have had to post approximately $26 million
in collateral.
Financial
Covenants
UIL
Holdings and UI are required to comply with certain covenants in connection with
their respective loan agreements. The covenants are normal and
customary in bank and loan agreements. The summary below describes
only the financial covenants in the agreements.
Long-Term
Debt
UIL
Holdings
Under the
Note Purchase Agreement in connection with the (1) 7.23% Senior Notes, Series A,
due February 15, 2011, in the original principal amount of $30 million, and
(2) 7.38% Senior Notes, Series B, due February 15, 2011, in the principal
amount of $45 million, issued by UIL Holdings, UIL Holdings is required to (i)
maintain a ratio of consolidated debt to consolidated capital of not greater
than 65% (debt ratio); (ii) maintain a ratio of consolidated earnings available
for interest charges to consolidated interest charges for any period of four
consecutive fiscal quarters of at least 2.00 to 1.00 (interest coverage ratio);
and (iii) maintain consolidated net worth of at least $345 million plus 25% of
consolidated net income on a cumulative basis for each fiscal quarter after
December 31, 2000 for which consolidated net income is positive. As
of December 31, 2009, UIL Holdings’ debt ratio was 56%; its interest
coverage ratio was 3.16 to 1.00; and it had consolidated net worth that exceeded
the amount required by the covenant by $111.9 million. The Note
Purchase Agreement describes typical events of default, including the situation
in which UIL Holdings, UI, or the direct parent of the non-utility subsidiaries
defaults on indebtedness in the aggregate principal amount of at least $10
million due to (i) a default in payment or payments due on the indebtedness, or
(ii) default in the performance of or compliance with any term or condition of
the indebtedness, which could result in the requirement that such indebtedness
be repaid, or (iii) the occurrence of any event or condition that could require
the purchase or repayment of the indebtedness prior to maturity.
There are
no repayment triggers based on changes in UIL Holdings’ Issuer Rating, assigned
by Moody’s, or corporate credit rating, assigned by S&P, in connection with
the agreement described above.
UI
Under (1)
the Note Purchase Agreement in connection with the (a) 6.06% Senior Notes,
Series A, due September 5, 2017, in the principal amount of $40 million,
(b) 6.06% Senior Notes, Series B, due December 6, 2017, in the principal
amount of $30 million, (c) 6.26% Senior Notes, Series C, due September 5,
2022, in the principal amount of $44 million, (d) 6.26% Senior Notes, Series D,
due December 6, 2022, in the principal amount of $33 million, (e) 6.51%
Senior Notes, Series E, due September 5, 2037, in the principal amount of
$16 million, and (f) 6.51% Senior Notes, Series F, due December 6, 2037, in the
principal amount of $12 million, (2) the Note Purchase Agreement in connection
with the (a) 6.46% Senior Notes, Series A, due November 3, 2018, in the
principal amount of $50 million, (b) 6.51% Senior Notes, Series B, due
December 1, 2018, in the principal amount of $50 million, and (c) 6.61%
Senior Notes, Series C, due December 1, 2020, in the principal amount of $50
million, (3) the Note Purchase Agreement in connection with the 5.61% Senior
Notes, due March 10, 2025, in the principal amount of $50 million, and (4) the
Equity Bridge Loan, UI is required to maintain a ratio of consolidated debt to
consolidated capital of not greater than 65% (debt ratio). As of
December 31, 2009, UI’s debt ratio was 53%. The Note Purchase
Agreements and the Equity Bridge Loan describe typical events of default,
including the situation in which UI defaults on indebtedness in the aggregate
principal amount of at least $10 million due to (i) a default in payment or
payments due on the indebtedness, or (ii) default in the performance of or
compliance with any term or condition of the indebtedness, which could result in
the requirement that such indebtedness be repaid, or (iii) the occurrence of any
event or condition that could require the purchase or repayment of the
indebtedness prior to maturity.
There are
no dividend restrictions or repayment triggers based on changes in UI’s Issuer
Rating, assigned by Moody’s, or corporate credit rating, assigned by S&P, in
connection with the above agreements. Short-term
Debt
UIL
Holdings / UI
UIL
Holdings and UI are parties to a revolving credit agreement with a group of
banks that extends to December 22, 2011 (the “Credit Agreement”). The
borrowing limit under the Credit Agreement for UI is $175 million with $50
million of the limit available for UIL Holdings. Under the Credit
Agreement, UIL Holdings and UI are each required to maintain a ratio of
consolidated debt to consolidated capital of not greater than 65% (debt
ratio). As of December 31, 2009, UIL Holdings’ debt ratio was
56% and UI’s debt ratio was 53%.
The
Credit Agreement describes typical events of default, including the situation in
which UIL Holdings or UI fails to pay when due any interest or principal due on
indebtedness in the principal amount of at least $10 million or any interest or
premium thereon in the aggregate amount of at least $10 million; or any other
default or other event shall occur related to such indebtedness if the effect of
such default or event is to accelerate, or to permit the acceleration of, the
maturity of such indebtedness, or any such indebtedness shall be declared due
and payable, or required to be prepaid, prior to the stated
maturity. Notwithstanding anything to the contrary in the foregoing,
a default by UIL Holdings generally does not create a cross-default in respect
of outstanding indebtedness of UI (except in the case of a default arising from
a Change of Control of UIL Holdings, as defined in the Credit
Agreement).
There are
no dividend restrictions or repayment triggers based on changes in UIL Holdings’
Issuer Rating or UI’s Issuer Rating or Senior Unsecured debt rating, assigned by
Moody’s, in connection with the Credit Agreement.
2010
Capital Resource Projections
For
financial planning purposes, the amount of UIL Holdings’ quarterly per share
cash dividend in 2010 is currently projected to be equal to the cash dividend of
$0.432 per share paid in each quarter of 2009. UIL Holdings will
continue to be dependent on dividends from its subsidiaries and from external
borrowings to provide the cash in excess of the amount currently on hand that is
necessary for debt service, to pay administrative costs, and to pay common stock
dividends to UIL Holdings’ shareowners. As UIL Holdings’ sources of
cash are limited to cash on hand, dividends from its subsidiaries and external
capital raising activities, the ability to maintain future cash dividends at the
level currently paid to shareowners will be dependent primarily upon sustained
earnings from current operations of UI.
In order
to achieve long-term growth in earnings, UI will need to increase its rate base
through distribution and transmission reliability and capacity enhancement
capital investments program. UI’s earnings will gradually decline
over time, if additions to the rate base and returns on equity investments are
lower than the annual amount of depreciation and amortization. See
the “Major Influences on Financial Condition” section of this Item 7. for more
information.
The
following table represents UIL Holdings’ projected sources and uses of capital
for 2010:
Any
additional cash requirements are expected to be funded by short-term
debt. UI
UI is
expected to continue to generate strong cash flow from operating activities in
2010, currently projected to be approximately $163 million. UI is
expected to provide dividends to UIL Holdings in 2010. To maintain
its capital structure at the allowed level of equity of 50%, such dividends are
currently projected to be approximately $52 million. Funds from
operations, equity infusions from UIL Holdings and short-term and long-term
borrowings will be used to finance capital expenditures and other investing
activities.
UI's
projected capital expenditures for 2010 are $242 million as shown
below:
Contractual
and Contingent Obligations
CRITICAL
ACCOUNTING POLICIES
UIL
Holdings’ Consolidated Financial Statements are prepared based on certain
critical accounting policies that require management to make judgments and
estimates that are subject to varying degrees of
uncertainty. Investors need to be aware of these policies and how
they impact UIL Holdings’ financial reporting to gain a more complete
understanding of UIL Holdings’ Consolidated Financial Statements as a whole, as
well as management’s related discussion and analysis presented
herein. While UIL Holdings believes that these accounting policies
are grounded on sound measurement criteria, actual future events can and often
do result in outcomes that can be materially different from these estimates or
forecasts.
Accounting
for Regulated Public Utilities
Generally
accepted accounting principles in the United States of America (GAAP) for
regulated entities allow UI to give accounting recognition to the actions of
regulatory authorities in accordance with the provisions of the Accounting
Standards Codification (ASC) 980 “Regulated Operations”. In
accordance with ASC 980, UI has deferred recognition of costs (a regulatory
asset) or has recognized obligations (a regulatory liability) if it is probable
that such costs will be recovered or obligations relieved in the future through
the ratemaking process. In addition to the Regulatory Assets and
Liabilities identified on the Consolidated Balance Sheet, and in Part II, Item
8, “Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements - Note (A) - Regulatory Accounting,” there are other
regulatory assets and liabilities included in the Consolidated Balance Sheet
such as certain deferred tax assets and liabilities. UI also has
obligations under power contracts, the recovery of which is subject to
regulation. If UI, or a portion of its assets or operations, were to
cease meeting the criteria for application of these accounting rules, accounting
standards for businesses in general would become applicable and immediate
recognition of any previously deferred costs would be required in the year in
which such criteria are no longer met (if such deferred costs are not
recoverable in the portion of the business that continues to meet the criteria
for application of ASC 980).
Accounting
for Pensions and Other Postretirement Benefits
UIL
Holdings accounts for its pension and postretirement benefit plans in accordance
with ASC 715 “Compensation - Retirement Benefits”. In applying these
accounting practices, assumptions are made regarding the valuation of benefit
obligations and the performance of plan assets. Delayed recognition
of differences between actual results and those assumed allows for a smoother
recognition of changes in benefit obligations and plan performance over the
working lives of the employees who benefit under the plans. The
primary assumptions are as follows:
These
assumptions are the responsibility of management, in consultation with its
outside actuarial and investment advisors. A variance in the discount
rate, expected return on assets or average wage increase could have a
significant impact on pension costs, assets and obligations recorded under ASC
715. In addition to a change in the discount rate and the expected
return on assets, a variance in the health care cost trend assumption could have
a significant impact on postretirement medical expense recorded under ASC
715.
As of
December 31, 2009, UIL Holdings changed its discount rate assumption that
was used to calculate the 2009 liability as follows: qualified
pension from 6.2% to 5.85%, the non-qualified pension from 6.10% to 5.65%, and
other postretirement benefit from 6.10% to 5.80%, to reflect the decrease in
interest rates for a portfolio of long-term
fixed-income
securities, which approximate the required payment of estimated liabilities for
each plan. UIL Holdings’ expected return on plan assets was 8.50%,
based on projections of future expected performance developed in conjunction
with UIL Holdings’ actuaries and investment advisors.
The
assumptions listed above will be revised over time as economic and market
conditions change. Changes in those assumptions could have a material
impact on qualified pension and postretirement expenses. For example,
if there had been a 0.25% change in the discount rate assumed at 6.2%, for the
qualified pension plan and non-qualified plan, respectively, the 2009 pension
expense would have increased or decreased inversely by $1.2 million for the
qualified plan and an immaterial amount for the non-qualified
plan. If there had been a 1% change in the expected return on assets,
the 2009 pension expense would have increased or decreased inversely by $2.3
million for both the qualified pension plan and non-qualified
plan. If there had been a 0.25% change in the discount rate
assumed, the 2009 OPEB plan expenses would have increased or decreased inversely
by $0.2 million; if there had been a 1% change in the expected return on assets,
the 2009 OPEB plan expenses would have increased or decreased inversely by $0.2
million.
The
projected, long-term average wage increases were 3.8% in 2009. The
health care cost trend rate assumption for all retirees was set at 10.0% in
2009, with such rate decreasing by 0.5% per year to 5.0% in 2019.
UIL
Holdings’ 2009 pension and postretirement benefits expenses were $16.7 million
and $5.6 million, respectively, net of amounts deferred as a regulatory
asset.
The
assumptions are used to predict the net periodic expense on a forward-looking
basis. To the extent actual investment earnings, actual wage
increases and other items differ from the assumptions, a gain or loss is
created, and subsequently amortized into expense.
UI will
reflect all unrecognized prior service costs and credits and unrecognized
actuarial gains and losses as regulatory assets as it is probable that such
items are recoverable through the ratemaking process in future
periods.
Unbilled
Revenue
UI
utilizes a customer accounting software package integrated with the network
meter reading system to estimate unbilled revenue (installation
method). The installation method allows for the calculation of
unbilled revenue on a customer-by-customer basis, utilizing actual daily meter
readings at the end of each month to calculate consumption and pricing for each
customer. A significant portion of utility retail kilowatt-hour
consumption is read through the network meter reading system. For
those customers still requiring manual meter readings, consumption is estimated
based upon historical usage and actual pricing for each customer.
Accounting
for Contingencies
ASC 450
“Contingencies” applies to an existing condition, situation or set of
circumstances involving uncertainty as to possible loss that will ultimately be
resolved when one or more future events occur or fail to occur. In
accordance with ASC 450, UIL Holdings accrues estimated losses related to each
contingency as to which a loss is probable and can be reasonably estimated and
no liability is accrued for any contingency as to which a loss is not probable
or cannot be reasonably estimated. With respect to amounts accrued
for contingencies related to UI, if it is probable that such estimated costs
would be recovered through the ratemaking process, recognition of such costs is
deferred in accordance with the provisions of ASC 980 (see “Accounting for
Regulated Public Entities – ASC 980” of this item). Refer to
Part II, Item 8, “Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – Note (J), Commitments and Contingencies” of
this Form 10-K for a detailed discussion of UIL Holdings’ current known material
contingencies. OFF-BALANCE
SHEET ARRANGEMENTS
UIL
Holdings and its subsidiaries occasionally enter into guarantee contracts in the
ordinary course of business. At the time a guarantee is provided, an
analysis is performed to assess the expected financial impact, if any, based on
the likelihood of certain events occurring that would require UIL Holdings to
perform under such guarantee. Subsequent analysis is performed on a
periodic basis to assess the impact of any changes in events or
circumstances. If such an analysis results in an amount that is
inconsequential, no liability is recorded on the balance sheet related to the
guarantee.
As of
December 31, 2009, UIL Holdings had certain guarantee contracts outstanding for
which no liability has been recorded in the Consolidated Financial
Statements. Refer to Part II, Item 8, “Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note (J),
Commitments and Contingencies,” of this Form 10-K for further discussion of such
guarantees.
NEW
ACCOUNTING STANDARDS
UIL
Holdings reviews new accounting standards to determine the expected financial
impact, if any, that the adoption of each such standard will have. As
of the filing of this Annual Report on Form 10-K, there were no new accounting
standards issued that were projected to have a material impact on UIL Holdings’
consolidated financial position, results of operations or
liquidity. Refer to Part II, Item 8, “Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note (A),
Statement of Accounting Policies – New Accounting Standards,” for further
discussion regarding new accounting standards.
RESULTS
OF OPERATIONS
Use
of Non-GAAP Measures
Within
the “Results of Operations” section of this Form 10-K, tabular presentations
showing a comparison of UIL Holdings’ net income and earnings per share (EPS)
for 2009 and 2008, as well as 2008 and 2007, are provided. UIL
Holdings believes this information is useful in understanding the fluctuations
in earnings per share between the current and prior year periods. The
amounts presented show the earnings per share from continuing operations for
each of UIL Holdings’ lines of business, calculated by dividing the income from
continuing operations of each line of business by the average number of shares
of UIL Holdings’ common stock outstanding for the periods
presented. The earnings per share tables presented in “The United
Illuminating Company Results of Operations” for all periods presented are
calculated on the same basis and reconcile to the amounts presented in the table
under the heading “UIL Holdings Corporation Results of
Operations.” The total earnings per share from continuing operations
and discontinued operations in the table presented under the heading “UIL
Holdings Corporation Results of Operations” are presented on a GAAP
basis.
Results
of Operations: 2009 vs. 2008
UIL Holdings
Corporation
UIL
Holdings’ total earnings were $54.3 million, or $1.94 per share, an increase of
$6.2 million, or $0.02 per share, compared to 2008. These
results include immaterial losses from discontinued operations in both
years. The dilutive effect of the May 2009 issuance of an additional
4,600,000 shares of common stock in 2009 was $0.21 per share. The table
below presents a comparison of UIL Holdings’ net income and EPS for 2009 and
2008.
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