|
|
|
Three Months Ended |
|
|
|
|
March 31, |
|
|
|
|
2005 |
|
2004 |
|
|
|
(In Thousands) |
|
Operating
Revenues |
|
|
|
|
|
|
|
Utility |
|
|
|
|
|
|
|
| Retail |
|
$ |
176,842 |
|
$ |
167,771 |
|
| Wholesale |
|
|
5,449
|
|
|
6,214
|
|
| Other |
|
|
4,625
|
|
|
7,858
|
|
|
Non-utility
businesses |
|
|
|
|
|
|
|
|
Xcelecom |
|
|
91,620
|
|
|
67,548
|
|
|
Other |
|
|
4
|
|
|
36
|
|
|
Total Operating Revenues |
|
$ |
278,540 |
|
$ |
249,427 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Fuel
and Energy |
|
|
|
|
|
|
|
|
Fuel and Energy Expense |
|
$ |
100,530 |
|
$ |
93,631 |
|
|
Purchase Power above market fuel expense credit (1) |
|
|
(5,363 |
) |
|
(5,693 |
) |
|
Total Fuel and Energy Expense |
|
$ |
95,167 |
|
$ |
87,938 |
|
| |
|
|
|
|
|
|
|
|
Depreciation
and Amortization |
|
|
|
|
|
|
|
|
Utility property, plant, and equipment |
|
$ |
7,496 |
|
$ |
7,495 |
|
|
Non-utility business property, plant and equipment |
|
|
871
|
|
|
872
|
|
|
Total Depreciation |
|
|
8,367
|
|
|
8,367
|
|
|
Amortization of nuclear plant regulatory assets |
|
|
4,551
|
|
|
2,647
|
|
|
Amortization of purchase power contracts (1) |
|
|
5,363
|
|
|
5,693
|
|
|
Amortization of other CTA regulatory assets |
|
|
(157 |
) |
|
283
|
|
|
Subtotal CTA Amortization |
|
|
9,757
|
|
|
8,623
|
|
|
Amortization of intangibles |
|
|
274
|
|
|
313
|
|
|
Amortization of other regulatory assets |
|
|
20
|
|
|
187
|
|
|
Total Amortization |
|
|
10,051
|
|
|
9,123
|
|
|
Total Depreciation and Amortization |
|
$ |
18,418 |
|
$ |
17,490 |
|
| |
|
|
|
|
|
|
|
|
Taxes
- Other than Income Taxes |
|
|
|
|
|
|
|
|
Operating: |
|
|
|
|
|
|
|
|
Connecticut gross earnings |
|
$ |
5,891 |
|
$ |
6,026 |
|
|
Local real estate and personal property |
|
|
2,717
|
|
|
2,542
|
|
|
Payroll taxes |
|
|
2,280
|
|
|
2,177
|
|
| Total Taxes
- Other than Income Taxes |
|
$ |
10,888 |
|
$ |
10,745 |
|
| |
|
|
|
|
|
|
|
|
Other
Income (Expense), net |
|
|
|
|
|
|
|
|
Interest Income |
|
$ |
628 |
|
$ |
373 |
|
|
Allowance for funds used during construction |
|
|
688
|
|
|
466
|
|
|
Seabrook reserve reduction |
|
|
-
|
|
|
1,355
|
|
|
C&LM incentive |
|
|
204
|
|
|
746
|
|
|
GSC procurement fees |
|
|
659
|
|
|
779
|
|
|
ISO load response |
|
|
711
|
|
|
-
|
|
|
Miscellaneous other income and (expense) - net |
|
|
(178 |
) |
|
581
|
|
|
Total Other Income (Expense), net |
|
$ |
2,712 |
|
$ |
4,300 |
|
| |
|
|
|
|
|
|
|
|
Other
Interest, net |
|
|
|
|
|
|
|
|
Notes Payable |
|
$ |
89 |
|
$ |
291 |
|
|
Other |
|
|
460
|
|
|
431
|
|
|
Total Other Interest, net |
|
$ |
549 |
|
$ |
722 |
|
| |
|
|
|
|
|
|
|
|
(1)
The amortization of this regulatory asset is a cash neutral item, as there
is an offsetting liability |
|
which is relieved through a credit to fuel and energy expense.
|
|
|
|
|
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(G)
PENSION AND OTHER BENEFITS
UI’s
qualified pension plan covers substantially all of its employees, the employees
of UIL Holdings and certain management employees of Xcelecom. Xcelecom employees
no longer accrue benefits under the plan, but any benefits accrued to them
through December 2003 remain in the plan. UI also has a non-qualified
supplemental pension plan for certain executives and a non-qualified
retiree-only pension plan for certain early retirement benefits.
The
funding policy for the qualified pension plan is to make annual contributions
that satisfy the minimum funding requirements of ERISA but that do not exceed
the maximum deductible limits of the Internal Revenue Code. These amounts are
determined each year as a result of an actuarial valuation of the qualified
pension plan. Based upon preliminary actuarial calculations, the
contribution to the qualified pension plan for 2005 is expected to be $7.9
million.
There is
potential variability to the pension expense calculation depending on changes in
certain assumptions: if there is a 0.25% change in the discount rate used , the
pension expense would increase or decrease inversely by $0.9 million; if there
is a 1% change in the expected return on assets, the pension expense would
increase or decrease inversely by $2.8 million.
In
addition to providing pension benefits, UI also provides other post-retirement
benefits (OPEB), consisting principally of health care and life insurance
benefits, for retired employees and their dependents. Employees who are 55 years
of age and whose sum of age and years of service at time of retirement is equal
to or greater than 65 are eligible for benefits partially subsidized by UI. The
amount of benefits subsidized by UI is determined by age and years of service at
retirement. UI is
expected to contribute approximately $9.6 million in 2005 to fund OPEB.
There is
potential variability in the calculation of OPEB plan expenses depending on
changes in certain assumptions: if there is a 0.25% change in the discount rate
used, the OPEB plan expenses would increase or decrease inversely by $0.2
million; if there is a 1% change in the expected return on Voluntary Employees’
Benefit Association Trust assets, the OPEB plan expenses would increase or
decrease inversely by $0.2 million.
A new
retirement plan is being implemented for new employees. The new plan, which
replaces the existing qualified pension plan and retiree medical plan benefits,
became effective on April 1, 2005 for those hired into the bargaining unit and
May 1, 2005 for all other new employees. It does not affect employees hired
prior to the effective dates noted above. The new retirement plan, which is a
“defined contribution plan”, consists of the current provisions of the KSOP plus
the following benefits:
| · |
An
additional cash contribution of 4.0% of total annual compensation (as
defined in the KSOP Plan) to a separate account in the KSOP of new
hires. |
| · |
An
additional cash contribution of $1,000 per year (pro rata per pay period)
into a separate Retiree Medical Fund within the KSOP account for new
hires. |
| · |
New
employees do not need to contribute to the KSOP to receive these
additional contribution amounts, they only need to enroll in the KSOP
Plan. |
| · |
Both
additional contributions to the KSOP will vest 100% after 5 years of
service. |
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
following table represents the components of net periodic benefit cost for the
pension and OPEB in the 2005 plan projections.
| |
|
For
the Quarter Ended March 31, |
|
| |
|
Pension
Benefits |
|
Other
Postretirement Benefits |
|
| |
|
Q1
2005 |
|
Q1
2004 |
|
Q1
2005 |
|
Q1
2004 |
|
| |
|
(In
Thousands) |
|
Components
of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
1,574 |
|
$ |
1,586 |
|
$ |
245 |
|
$ |
231 |
|
|
Interest
cost |
|
|
4,496 |
|
|
4,508 |
|
|
782 |
|
|
764 |
|
|
Expected
return on plan assets |
|
|
(5,565 |
) |
|
(5,012 |
) |
|
(380 |
) |
|
(327 |
) |
|
Amortization
of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs |
|
|
265 |
|
|
266 |
|
|
(45 |
) |
|
(45 |
) |
|
Transition
obligation (asset) |
|
|
(131 |
) |
|
(264 |
) |
|
265 |
|
|
265 |
|
|
Actuarial
(gain) loss |
|
|
1,579 |
|
|
1,666 |
|
|
415 |
|
|
422 |
|
|
Net
periodic benefit cost |
|
$ |
2,218 |
|
$ |
2,750 |
|
$ |
1,282 |
|
$ |
1,310 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following actuarial weighted average assumptions were used in calculating
net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate |
|
|
5.75 |
% |
|
6.00 |
% |
|
5.75 |
% |
|
6.00 |
% |
|
Average
wage increase |
|
|
4.50 |
% |
|
4.50 |
% |
|
N/A |
|
|
N/A |
|
|
Return
on plan assets |
|
|
8.00 |
% |
|
8.00 |
% |
|
8.00 |
% |
|
8.00 |
% |
|
Pre-65
health care trend rate (current yr.) |
|
|
N/A |
|
|
N/A |
|
|
12.00 |
% |
|
13.00 |
% |
|
Pre-65
health care trend rate (2012+) |
|
|
N/A |
|
|
N/A |
|
|
5.50 |
% |
|
5.50 |
% |
|
Post-65
health care trend rate (current yr.) |
|
|
N/A |
|
|
N/A |
|
|
6.50 |
% |
|
7.00 |
% |
|
Post-65
health care trend rate (2008+) |
|
|
N/A |
|
|
N/A |
|
|
5.00 |
% |
|
5.00 |
% |
(J)
COMMITMENTS AND CONTINGENCIES
Other
Commitments and Contingencies
Connecticut
Yankee Atomic Power Company
UI has a
9.5% stock ownership share in the Connecticut Yankee Atomic Power Company
(Connecticut Yankee), the carrying value of which was $4.2 million as of March
31, 2005. On December 4, 1996, the Board of Directors of Connecticut Yankee
voted unanimously to retire the Connecticut Yankee nuclear plant (the
Connecticut Yankee Unit) from commercial operation. A decision by the FERC that
became effective on August 1, 2000 allows Connecticut Yankee to collect,
through the power contracts with the unit’s owners, the FERC-approved
decommissioning costs, other costs associated with the permanent shutdown of the
Connecticut Yankee Unit, the unrecovered investment in the Connecticut Yankee
Unit, and a return on equity of 6%. Connecticut Yankee may recover 9.5% of these
costs from UI.
Connecticut
Yankee updates its cost to decommission the unit annually, or as needed, and
provides UI with a projected recovery schedule depicting annual costs expected
to be billed to UI, including a return on investment over the term of the
projected recovery period. The present value of these costs is calculated using
UI’s weighted average cost of capital and, after consideration of
recoverability, recorded as a Connecticut Yankee Contract Obligation and a
corresponding regulatory asset. At March 31, 2005, UI has regulatory approval to
recover in future rates $19.4 million of its regulatory asset for Connecticut
Yankee over a term ending in 2007. The remaining portion of the regulatory
asset, as of March 31, 2005, was $26.4 million, which consists of costs subject
to a regulatory review and approval process and reflects the present value of
the revenue requirements to fund the increased costs described in the following
paragraphs.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
regulatory review and approval process may extend the recovery period beyond
2007. Although UI believes full regulatory recovery is probable because these
costs are similar in nature to the costs for which UI already has regulatory
approval to recover in future rates, the actual amounts subject to recovery may
be different.
Current
Cost Estimate
As part
of the Connecticut Yankee April 2000 rate case settlement with the FERC,
remaining decommissioning costs were originally estimated at $436 million. The
original estimate was updated in November 2002 to increase the estimated
decommissioning costs by approximately $130 million. The $130 million increase
stemmed primarily from additional security costs, increased insurance costs and
other factors. In December 2003 the estimate was increased by an additional $265
million, reflecting the fact that Connecticut Yankee is now directly managing
the work necessary to complete decommissioning of the plant following
termination in July 2003 of the contractor that had been managing such work.
Consequently, the total current cost estimate of approximately $831 million
(2003 Estimate) represents an aggregate increase of approximately $395 million
over the April 2000 FERC rate case settlement amount. The above financial
information has been adjusted to 2003 dollars.
UI’s
share of the estimated increased cost of $395 million over the 2000 FERC
settlement is approximately $37.5 million. This increase will not impact current
period earnings, as the amounts will be deferred on UI’s balance sheet pending
resolution of the litigation and regulatory proceedings described herein.
Ultimately, if this issue is resolved favorably, the costs will be recovered in
rates and therefore would not have a financial impact on UI’s results of
operations. If the outcome is not favorable, there could be a material negative
impact to UI’s results of operations.
Bechtel
Litigation
Connecticut
Yankee terminated its decommissioning contract with Bechtel Power Corporation
(Bechtel) in July 2003 due to Bechtel’s history of incomplete and untimely
performance of decommissioning work. In June 2003, Bechtel filed a complaint
against Connecticut Yankee in Connecticut Superior Court, asserting a number of
claims, including wrongful termination. In August 2003, Connecticut Yankee filed
a counterclaim, including counts for breach of contract, negligent
misrepresentation and breach of duty of good faith and fair dealing. Connecticut
Yankee is now managing the decommissioning process and continues to prosecute
its counterclaims for excess completion costs and other damages against Bechtel
in Connecticut Superior Court. Discovery is underway and a trial has been
scheduled for May 2006. The 2003 Estimate does not include any allowance for
cost recovery in this matter.
On June
18, 2004, Bechtel filed a Pre-Judgment Remedy Application (PJR) requesting a $93
million garnishment of the Decommissioning Trust (Trust), Connecticut Yankee
shareholder payments to the Trust and any proceeds from the fuel disposal
contract litigation pending between Connecticut Yankee and the U. S. Department
of Energy (DOE), as well as attachment of any Connecticut Yankee assets,
including real property located in Haddam Neck, Connecticut. On July 16, 2004,
Connecticut Yankee filed its objection to the PJR, including challenging the
legal availability of the remedies requested by Bechtel. On July 20, 2004, the
Court allowed the DPUC to intervene in the PJR proceeding for the limited
purpose of objecting to Bechtel’s requested garnishment of the Trust and related
payments. On August 26, 2004, the Court held oral arguments on the legal
availability of the remedies requested by Bechtel but has not issued a decision.
On November 1, 2004, the Judge in the PJR proceedings signed a Stipulation
reached between Connecticut Yankee and Bechtel. In the Stipulation, Bechtel
agrees: (a) to waive and relinquish its right to seek prejudgment attachment of
the Trust or any future payments into the Trust, including any proceeds of
Connecticut Yankee’s currently pending litigation with the DOE regarding spent
fuel storage costs; and (b) not to file in any forum any additional or amended
applications for prejudgment remedy or other preliminary relief seeking to
attach or garnish any assets of Connecticut Yankee or of any of its shareholders
or power purchasers. Further, Bechtel amends its Application to provide that it
seeks only: (i) to attach real property owned by Connecticut Yankee in
Connecticut with a value of up to $7.9 million; and (ii) to garnish a portion of
the stream of monthly payments to be made through June 2007 to Connecticut
Yankee under the wholesale power contracts between Connecticut Yankee and its
power purchasers, up to an aggregate amount of $41.7 million.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In the
proposed Stipulation, it is further agreed that any attachment of the real
property authorized by the Court will not prevent Connecticut Yankee from
continuing plant decommissioning, and Connecticut Yankee will be entitled to
continue with all deconstruction, demolition, decontamination, remediation and
related activities. This Stipulation does not constitute an admission of
liability by Connecticut Yankee, nor an acknowledgement of any damage
calculation in any respect, and is not admissible in any subsequent legal or
administrative proceeding not related to enforcement of the application,
including any alternative dispute resolution proceedings. The parties have not
reached agreement as to whether the real property and the purchaser payments
referenced above may be lawfully attached or garnished. Connecticut Yankee and
the DPUC continue to dispute that the assets may be lawfully attached or
garnished and the parties submitted briefs to the Court in November 2004. The
Court has taken no further action.
FERC
Matters
2004
Rate Case Filing
Connecticut
Yankee filed the 2003 Estimate with the FERC as part of a July 1, 2004 rate
application (the Filing) seeking additional funding to complete the
decommissioning project and for storage of spent fuel through 2023. The Filing
was required as part of the terms of Connecticut Yankee’s April 2000 rate case
settlement agreement with the FERC and requests that new rates take effect on
January 1, 2005. The Filing includes proposed increased decommissioning charges,
based on the 2003 Estimate, as well as $4.0 million and $2.4 million of new
charges for pension and post-retirement benefits (other than pensions),
respectively. The proposed $93 million annual decommissioning collection
represents a significant increase in annual charges compared to the existing
FERC-approved decommissioning collection rate of $16.7 million per year that had
been approved as part of the April 2000 rate case settlement. The Filing
proposes extending the collection period for decommissioning from June 30, 2007
to December 31, 2010.
Notices
of intervention or protest were filed in July and August at the FERC by several
utility parties and by non-utility parties including the DPUC, the Office of
Consumer Councel (OCC), the Massachusetts Attorney General, the Massachusetts
Department of Telecommunications and Energy, the Rhode Island Attorney General,
and the Maine Public Advocate. Bechtel Power Corporation also filed a motion to
intervene and protest.
On August
30, 2004, FERC issued an order: (1) accepting for filing Connecticut Yankee’s
proposed new charges for decommissioning, pension expense and post-retirement
benefits (other than pensions) expense; (2) suspending the revised charges for a
period of five months, to February 1, 2005, at which time the proposed rates
went into effect subject to refund; (3) establishing hearing procedures, which
commenced with a pre-hearing conference before an administrative law judge (ALJ)
in September 2004; (4) denying the request of the DPUC and OCC for an
accelerated hearing schedule and for a bond or other security for potential
refunds; (5) denying the declaratory ruling requested by the DPUC and OCC (see
paragraph below), and (6) granting Bechtel’s motion to intervene as well as
allowing the interventions by the other applying parties including UI and the
other Connecticut Yankee power purchasers. The hearing is scheduled to begin on
June 1, 2005. The process of resolving the matters in the Filing is likely to be
contentious and lengthy.
FERC
Order on Request for Declaratory Order
On June
10, 2004, the DPUC and the OCC filed a petition (Petition) with the FERC seeking
a declaratory order that Connecticut Yankee can recover all decommissioning
costs from its wholesale purchasers, but that those purchasers may not recover
in their retail rates any costs that the FERC might determine to have been
imprudently incurred. Connecticut Yankee, as well as its wholesale purchasers,
responded in opposition to the Petition, indicating that the order sought by the
DPUC and OCC would violate the Federal Power Act and decisions of the U.S.
Supreme Court, other federal and state courts, and the FERC. As noted above, the
FERC rejected this petition as part of its initial ruling on Connecticut
Yankee’s rate filing. The DPUC and OCC filed a petition for rehearing on the
matter which is pending before the FERC. Connecticut Yankee filed a motion on
October 14, 2004 requesting permission to respond, as well as a response to the
rehearing petition.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DOE
Litigation
To the
extent that the new estimates described above are related to spent fuel storage,
they could be affected by the outcome of an ongoing dispute between the DOE and
several utilities and states. Under the Nuclear Waste Policy Act of 1982 (the
Act), the DOE is required to design, license, construct and operate a permanent
repository for high-level radioactive waste and spent nuclear fuel. The Act
requires the DOE to provide for the disposal of spent nuclear fuel and
high-level waste from commercial nuclear plants through contracts with the
owners. In return for payment of established disposal fees, the federal
government was required to take title to and dispose of the utilities’
high-level waste and spent nuclear fuel beginning no later than
January 1998. After the DOE announced that its first high-level waste
repository will not be in operation earlier than 2010, several utilities and
states obtained a judicial declaration that the DOE has a statutory
responsibility to take title to and dispose of high-level waste and spent
nuclear fuel beginning in January 1998. Although the federal government now
concedes that its failure to begin disposing of high-level waste and spent
nuclear fuel in January 1998 constituted a breach of contract, it continues to
dispute that the entities with which it had contracts are entitled to
damages.
Connecticut
Yankee, together with two other New England-based owners of shutdown nuclear
generating plants, is seeking recovery of damages stemming from the breach by
the DOE under the 1983 contracts that were mandated by the U.S. Congress under
the High Level Waste Act for purposes of disposal of spent fuel and high-level
waste, including greater than class C waste. The trial for the damage claim,
which had been pending in the Federal Court of Claims since March 1998,
commenced on July 12, 2004 and ended August 31, 2004. The court heard closing
arguments on January 24, 2005 and the final post-trial briefs were filed on
February 18, 2005.
The
amount of the claim for damages incurred through 2010, net of adjustments made
as part of the trial record, is approximately $186-$198 million depending on the
discount rate applied. In addition,
incremental continuing damages that will be incurred for periods beyond 2010 are
being sought based on an annual dollar value. The 2003 Estimate discussed above
does not include an allowance for recovery of damages in this matter. The
Department of Justice submitted a motion to the court during the damage trial
which raises the issue of whether Connecticut Yankee’s pre-1983 spent fuel fee
obligation of approximately $155 million should be treated as an offset to any
payment of damages. The Court’s ruling on that matter is expected to be issued
in the same time frame as its overall ruling in the case, which is expected by
the end of 2005.
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
in aggregate has a maximum 2000 megawatt equivalent generation capacity value.
UI is obligated to furnish a guarantee for its participating share of the debt
financing for one phase of this facility. UI’s original guarantee was entered
into in April 1991 in the amount of $11.7 million. The amount of this guarantee
is reduced monthly, proportionate with principal paid on the underlying debt. As
of March 31, 2005, the amount of UI’s guarantee for this debt totaled
approximately $3.2 million.
Environmental
Concerns
In
complying with existing environmental statutes and regulations and further
developments in areas of environmental concern, including legislation and
studies in the fields of water quality, hazardous waste handling and disposal,
toxic substances, and electric and magnetic fields, UIL Holdings and its
wholly-owned direct and indirect subsidiaries may incur substantial capital
expenditures for equipment modifications and additions, monitoring equipment and
recording devices, and it may incur additional operating expenses. The total
amount of these expenditures is not now determinable. Environmental damage
claims may also arise from the operations of UIL Holdings’ subsidiaries.
Significant environmental issues known to UIL Holdings at this time are
described below.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Site
Decontamination, Demolition and Remediation Costs
As a
result of a 1992 DPUC retail rate decision, since January 1, 1993, UI had
been recovering through retail rates $1.1 million per year of environmental
remediation costs for the demolition and decontamination of its Steel Point
Station property in Bridgeport. As a result of the DPUC’s Rate Case decision
dated September 26, 2002, UI recovered the remaining $3 million of these
costs ratably during the 2002 through 2004 time period. Except for capping
contaminated soils that are legally allowed to remain on site, this amount
reflects the estimated remaining costs to remediate the property. Final costs
will be offset by any sale price realized, and will be subject to regulatory
true-up upon disposition of the property. UI is
also replacing portions of the bulkhead at the Steel Point Station property. The
work is expected to cost approximately $7.4 million and is currently expected to
be completed in 2005. UI is entitled to reimbursement of the bulkhead costs from
the City of Bridgeport pursuant to UI’s contract with the City. The cost
estimates for the remediation and bulkhead are based on the most current
information available. Actual remediation and bulkhead replacement costs may be
higher, or lower, than what is currently estimated.
Subsequent
to the demolition of Steel Point Station, the adjacent East Main Street
Substation was removed at the request of the City of Bridgeport and UI
expanded the Congress Street Substation to replace it. As of March 31, 2005, UI
is entitled to $8.9 million from the City of Bridgeport for such removal and
expansion. An additional $1.4 million of costs related to the Substation are
transmission assets recoverable through regional transmission rates. In the
event that UI is unable to reach a negotiated agreement with the City of
Bridgeport, UI will proceed with previously initiated arbitration proceedings to
collect these funds from the City.
A site on
the Mill River in New Haven was conveyed by UI to an unaffiliated entity,
Quinnipiac Energy LLC (QE), reserving to UI permanent easements for the
operation of its transmission facilities on the site. At the time of the sale, a
fund of approximately $1.9 million, an amount equal to the then-current estimate
for remediation, was placed in escrow for purposes of bringing soil and
groundwater on the site into environmental compliance. Approximately $0.6
million of the escrow fund remains unexpended. QE’s environmental consultant
reports that approximately $2 million of remediation remains to be performed.
The City of New Haven has foreclosed on the property, as QE is not current with
property tax payments and the foreclosure sale is scheduled to occur in May
2005. UI could be required by applicable environmental laws to finish
remediating any subsurface contamination at the site if it is determined that QE
has not completed the appropriate environmental remediation at the site and the
property is sold through a foreclosure sale.
On
April 16, 1999, UI closed on the sale of its Bridgeport Harbor Station and
New Haven Harbor Station generating plants in compliance with Connecticut’s
electric utility industry restructuring legislation. Environmental assessments
performed in connection with the marketing of these plants indicate that
substantial remediation expenditures will be required in order to bring the
plant sites into compliance with applicable minimum Connecticut environmental
standards. The purchaser of the plants agreed to undertake and pay for the
remediation of the purchased properties. With respect to the portion of the New
Haven Harbor Station site that UI retained, UI has performed an additional
environmental analysis, indicating that approximately $3.2 million in
remediation expenses will be incurred. Actual remediation costs may be higher or
lower than what is currently estimated. The required remediation is virtually
all on transmission-related property and UI accrued these estimated expenses
during the third quarter of 2002.
UI sold
property to Bridgeport Energy LLC (BE) on April 16, 1999. In connection with the
sale of the property, UI entered into an environmental indemnity agreement with
BE, in which UBE holds a minority interest, to provide indemnification related
to certain environmental conditions specific to the site where BE’s generation
facilities were constructed. Because of soil management and other environmental
remediation activities that were performed during construction of the generation
facilities, UI does not regard its exposure under the environmental indemnity
agreement as material.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
From 1961
to 1976, UI owned a parcel of property in Derby, Connecticut, on which it
operated an oil-fired electric generating unit. For several years, the
Connecticut Department of Environmental Protection (CDEP) has been monitoring
and remediating a migration of fuel oil contamination from a neighboring parcel
of property into the adjacent Housatonic River. Although, based on its own
investigation to date, UI believes it has no responsibility for this
contamination, if regulatory agencies determine that UI is responsible for the
cost of these remediation activities, UI may experience substantial costs, no
estimate of which is currently available.
Electric
System Work Center
UI’s
January 2004 purchase of its Electric System Work Center property, located in
Shelton, Connecticut, caused a review under the CDEP’s Transfer Act Program.
Under this review, the CDEP had an opportunity to examine the current
environmental conditions at the site and direct remediation, or further
remediation, of any areas of concern. At the conclusion of its review, the CDEP
elected not to oversee any further site investigation or remediation at the site
and directed UI to undertake any necessary evaluation and/or remediation
(verification work) using an independent Licensed Environmental Professional
(LEP). UI has hired a LEP and has submitted a schedule to the CDEP for the
verification work. The
schedule has been approved by the CDEP and implementation of the verification
work has begun. Implementation
of the verification work is not expected to have a material impact on the
financial condition of UI.
Utility
Operations
With
respect to UI’s general operations, UI received a Notice of Violation (NOV) from
the CDEP, dated September 22, 2004. This NOV alleged that UI was not in
compliance with inspection, recordkeeping and labeling requirements under
certain state and federal waste and used oil regulations. UI has corrected the
deficiencies identified in the NOV and the NOV is now “closed” with no penalties
assessed.
Claim
of Enron Power Marketing, Inc.
UI had a
wholesale power agreement and other agreements with Enron Power Marketing, Inc.
(EPMI) (the Agreements). Following EPMI’s bankruptcy filing on December 2,
2001, UI terminated the Agreements in accordance with their terms, effective
January 1, 2002, in reliance upon provisions of the Bankruptcy Code that
permit termination of such contracts. The Agreements permitted UI to calculate
its gains and losses resulting from the termination, and globally to net these
gains and losses against one another, and against any other amounts that UI owed
to EPMI under the Agreements, to arrive at a single sum. EPMI, however,
commenced on January 31, 2003 an adversary proceeding against UI and UIL
Holdings in the EPMI bankruptcy. UIL Holdings was sued as the guarantor of UI’s
financial obligations under the Agreements. EPMI contends that UI was not
entitled to offset, against any losses UI suffered from the termination of the
Agreements, any amounts owing to EPMI for power delivered to UI after the date
EPMI filed for bankruptcy. The amount of the allegedly improper setoff that EPMI
seeks to recover in the adversary proceeding is approximately $8.2 million, plus
interest and attorneys’ fees. The bankruptcy court has referred this and other
similar cases to mediation and stayed the cases while mediation is conducted.
During mediation sessions, EPMI indicated it has theories for increasing the
amount of its claims against UI. In the event that UI is determined to owe EPMI
a portion or all of the amount claimed, UI will seek appropriate treatment of
such amount through the regulatory process.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Claim
of Dominion Energy Marketing, Inc.
On
December 28, 2001, UI
entered into an agreement with Virginia Electric and Power Company, which was
subsequently assigned to its affiliate Dominion Energy Marketing, Inc. (DEMI),
for the supply of all of UI’s standard offer generation service needs from
January 1, 2002 through December 31, 2003, and for the supply of all
of UI’s generation service requirements for special contract customers through
2008 (Power Supply Agreement or PSA). In December 2004, UI received a letter
from DEMI claiming that under the terms of this agreement, DEMI should not have
been responsible for a currently estimated amount of $8.2 million, plus
interest, of certain “CT Reliability COS” charges related to Reliability Must
Run agreements between ISO-NE and NRG (the owner of power plants located in
Connecticut that were formerly owned by Northeast Utilities). DEMI claims that
such charges are fixed operation and maintenance costs and not “Transmission
Congestion Costs,” for which DEMI would be responsible under the terms of the
PSA. DEMI has indicated that it does not intend to terminate the PSA prior to
resolution of the dispute, but the parties have not agreed to a dispute
resolution process. On February 14, 2005, DEMI filed a complaint in Connecticut
District Court that seeks the court’s interpretation of the PSA and an order
compelling UI to pay the claimed damages. UI does not believe that the court has
jurisdiction, as the dispute pertains to a contract that was approved by, and
falls under jurisdiction of, the FERC. Consequently, on March 14, 2005, UI filed
a complaint with the FERC requesting that it exercise jurisdiction under Section
206 of the Federal Power Act and order DEMI to abide by the terms and conditions
of the PSA. Further, on May 2, 2005, UI filed a motion to dismiss the DEMI
complaint with the Connecticut District Court. UI believes its interpretation of
the PSA is correct. If UI is unable to recover these amounts from DEMI, UI would
seek recovery of these amounts through the regulatory process.
Independent
System Operator - New England
On April
16, 2004, UI announced its participation in the ISO-NE program to secure
emergency energy resources in Southwestern Connecticut. Under a four-year
contract, UI has committed to a load reduction of 30 megawatts when requested by
ISO-NE. UI has partnered with several large customers who have agreed to reduce
their electricity demand when the region’s electric grid is stressed. The
agreement was approved by the FERC in May 2004. As part of the agreement, UI
provided a performance guarantee for the commitment of $0.7 million in the form
of a letter of credit in the event UI was unable to reduce demand when requested
by ISO-NE. Through the end of October 2004, UI was not required to perform under
the $0.7 million letter of credit. In October 2004, the letter of credit was
reduced to $0.4 million, representing UI’s remaining performance guarantee under
the agreement, and the term was extended until October 31, 2005. No liability
has been recorded in the UIL Holdings’ consolidated balance sheet as of March
31, 2005 for the guarantee provided under this letter of credit. The probability
that the letter of credit would be utilized is very low due to the fact that the
customers that UI has partnered with for this program are among UI’s largest,
thus reducing the likelihood of nonperformance in terms of both the requested
kWh reductions and the ability to pay any financial penalties. Furthermore, if
the letter of credit were to be utilized to cover nonperformance of UI’s
customers, the amount paid by UI would be recovered directly from the customers
who did not perform by deducting the amount from the funds that would be
remitted to such customers for their performance in this program.
Cross-Sound
Cable Company, LLC
UCI’s 25%
share of the actual project cost for the Cross-Sound cable was $34.3 million as
of March 31, 2005. UCI has provided an equity infusion of $10 million to
Cross-Sound and UIL Holdings loaned $25.1 million, including capitalized
interest, to Cross-Sound. In addition, UIL Holdings and UCI have provided two
guarantees, in the amounts of $2.5 million and $1.3 million, in support of
Hydro-Quebec’s (HQ) guarantees to third parties in connection with the
construction of the project.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The $2.5
million guarantee is in support of an HQ guarantee to the Long Island Power
Authority (LIPA) to provide for damages in the event of a delay in the date of
achieving commercial operation. There had
been a delay in achieving the originally agreed upon date of commercial
operation, primarily due to a Connecticut legislative moratorium on installing
new gas and utility lines across Long Island Sound, which precluded the CDEP
from considering applications related to submarine cables under Long Island
Sound. UCI believes action or inaction of governmental, regulatory or judicial
bodies qualify as events beyond the party’s control and performance under the
guarantee is not required. Further on June 24, 2004, Cross-Sound executed a
settlement agreement allowing for immediate commercial operation of the cable as
discussed below. Although retaining commercial operating status is contingent
upon the satisfaction of certain provisions of the settlement agreement, no
liability has been recorded related to this guarantee as UIL Holdings expects
all provisions to be satisfied in accordance with the
agreement.
The $1.3
million guarantee is in support of an agreement under which Cross-Sound is
providing compensation to shell fishermen for all losses, including loss of
income, as a result of the installation of the cable (Shellfish Agreement). The
payments to the fishermen are being made over a 10-year period, and the
obligation under this guarantee reduces proportionately with each payment made.
As of March 31, 2005, the remaining amount of the guarantee was $1.2 million.
UIL Holdings has completed a probability weighted analysis based on the
likelihood of certain events occurring that would cause UIL Holdings to be
required to perform under this guarantee. This analysis resulted in a liability
amount that was inconsequential, and as such, no liability has been recorded in
UIL Holdings’ Consolidated Balance Sheet as of March 31, 2005.
In the
event that Cross-Sound is unable to meet any obligations that are supported by
the previously mentioned guarantees, UCI expects that such obligations would be
funded by capital contributions from the owners, who are affiliates of the
guarantors, in amounts in proportion to their respective ownership shares of
Cross-Sound. As such, UCI does not expect to be required to perform under the
guarantee.
On June
24, 2004, Cross-Sound reached a settlement agreement with various regulatory
authorities and other parties with an interest in the cable that allowed for
immediate commercial operation of the cable. Following
execution of the settlement agreement, the existing contract between Cross-Sound
and the Long Island Power Authority for the entire capacity of the transmission
line has been amended to increase the overall term of the agreement from 20
years to 28 years by means of adding an initial three-year period at the current
reduced rates, and an additional five years to the end of the contract term, at
full rates. This amendment was formally approved by the New York State
Comptroller in the first quarter of 2005.
Although
the settlement agreement allows for commercial operation of the cable, such
status is contingent upon the satisfaction of certain provisions set forth in
the agreement. In particular, Cross-Sound was required to bring the cable into
compliance with permit conditions as directed by the CDEP. This remediation was
completed in January 2005 and consisted primarily of achieving the originally
required burial depth in those areas deemed as “soft spots,” meaning the
obstructions which originally prevented achievement of such depth were able to
be removed without the use of techniques such as blasting. The cost of this
remediation amounted to $4 million. Additionally, the settlement agreement calls
for the parties to fund a collective amount of $6 million to a research and
restoration fund for the Long Island Sound all of which was funded.
With
completion of all provisions of the settlement agreement for which Cross-Sound
is responsible, the loan from UIL Holdings may be refinanced with external
project financing. UCI will be responsible for 25% of any additional costs of
project completion.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Xcelecom,
Inc.
Xcelecom,
through one of its subsidiaries, has filed suit in New Jersey Superior Court
against M. J. Paquet (Paquet), a general contractor doing business in the state
of New Jersey, and Paquet’s surety, United States Fidelity & Guaranty
Company. Paquet is the general contractor on a project with the New Jersey
Department of Transportation and one of Xcelecom’s subsidiaries is the
electrical subcontractor on the project. The project is substantially complete.
Xcelecom alleges in its suit, among other causes of action, breach of contract,
failure to comply with New Jersey’s Prompt Pay Act, and breach of trust.
Xcelecom seeks to recover approximately $2.4 million in overdue payments, plus
damages for delay and failure by Paquet to comply with New Jersey state law.
Paquet has asserted numerous defenses to the suit, as well as various
counterclaims. Pleadings are closed and discovery is in process. Xcelecom
intends to vigorously pursue its suit against Paquet and its surety, and to
defend against Paquet’s counterclaims. Xcelecom does not believe there is a
likelihood of an adverse outcome as a result of Paquet’s counterclaims, and as
such, no amount has been accrued for this matter in UIL Holdings’ Consolidated
Financial Statements. There has been no reserve established against the
receivable of approximately $2 million, as Xcelecom expects to collect the
entire amount due on this contract, either directly from Paquet, or through the
payment and performance bonds of Paquet’s surety.
(M)
SEGMENT INFORMATION
As
described in Note (O), “Discontinued Operations,” to the Consolidated Financial
Statements, the sale of APS was completed in June 2004 and its results of
operations are reported as discontinued operations. Accordingly, UIL
Holdings now has
two segments, UI, its regulated electric utility business engaged in the
purchase, transmission, distribution and sale of electricity, and Xcelecom, its
non-utility, indirect, wholly-owned subsidiary, which provides specialized
contracting services in the electrical, mechanical, communications and data
network infrastructure industries. Revenues from inter-segment transactions are
not material. All of UIL Holdings’ revenues are derived in the United States.
The
following table reconciles certain segment information with that provided in UIL
Holdings’ Consolidated Financial Statements. In the table, “Other” includes the
information for the remainder of UIL Holdings’ non-utility businesses, including
minority interest investments, administrative costs, and inter-segment
eliminations.
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(M)
SEGMENT INFORMATION |
|
|
|
|
|
|
|
|
|
(in
Thousands) |
|
|
|
|
|
|
|
|
|
| |
|
For
the quarter ended March 31, 2005 |
|
| |
|
|
|
|
|
Eliminations |
|
|
|
|
|
|
UI |
|
Xcelecom |
|
And
Other |
|
Total |
|
Operating
Revenues |
|
$ |
186,916 |
|
$ |
91,620 |
|
$ |
4 |
|
$ |
278,540 |
|
Fuel
and Energy |
|
|
95,167
|
|
|
-
|
|
|
-
|
|
|
95,167
|
|
Operation
and maintenance |
|
|
46,971
|
|
|
90,980
|
|
|
1,513
|
|
|
139,464
|
|
Depreciation
and amortization |
|
|
17,273
|
|
|
1,123
|
|
|
22
|
|
|
18,418
|
|
|
Taxes
- other than income taxes |
|
|
10,147
|
|
|
738
|
|
|
3
|
|
|
10,888
|
|
|
Operating
Income From Continuing Operations |
|
|
17,358
|
|
|
(1,221 |
) |
|
(1,534 |
) |
|
14,603
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Deductions), net |
|
|
2,102
|
|
|
268
|
|
|
342
|
|
|
2,712
|
|
|
Interest
Expense, net |
|
|
4,261
|
|
|
240
|
|
|
1,512
|
|
|
6,013
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
From Continuing Operations Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Equity Earnings |
|
|
15,199
|
|
|
(1,193 |
) |
|
(2,704 |
) |
|
11,302
|
|
|
Income
taxes |
|
|
7,419
|
|
|
(489 |
) |
|
(2,588 |
) |
|
4,342
|
|
Income
From Continuing Operations Before Equity Earnings |
|
|
7,780
|
|
|
(704 |
) |
|
(116 |
) |
|
6,960
|
|
|
Income
(Losses) from Equity Investments |
|
|
55
|
|
|
-
|
|
|
(3,787 |
) |
|
(3,732 |
) |
Income
From Continuing Operations |
|
|
7,835
|
|
|
(704 |
) |
|
(3,903 |
) |
|
3,228
|
|
|
Discontinued
Operations, Net of Tax |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Net
Income |
|
$ |
7,835 |
|
$ |
(704 |
) |
$ |
(3,903 |
) |
$ |
3,228 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
quarter ended March 31, 2004 |
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
|
|
|
|
|
UI |
|
|
Xcelecom |
|
|
And
Other |
|
|
Total |
|
Operating
Revenues |
|
$ |
181,843 |
|
$ |
67,548 |
|
$ |
36 |
|
$ |
249,427 |
|
Fuel
and Energy |
|
|
87,938
|
|
|
-
|
|
|
-
|
|
|
87,938
|
|
Operation
and maintenance |
|
|
48,441
|
|
|
66,910
|
|
|
1,377
|
|
|
116,728
|
|
Depreciation
and amortization |
|
|
16,304
|
|
|
1,186
|
|
|
-
|
|
|
17,490
|
|
|
Taxes
- other than income taxes |
|
|
10,005
|
|
|
726
|
|
|
14
|
|
|
10,745
|
|
|
Operating
Income From Continuing Operations |
|
|
19,155
|
|
|
(1,274 |
) |
|
(1,355 |
) |
|
16,526
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Deductions), net |
|
|
3,609
|
|
|
365
|
|
|
326
|
|
|
4,300
|
|
|
Interest
Expense, net |
|
|
4,390
|
|
|
119
|
|
|
1,659
|
|
|
6,168
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
From Continuing Operations Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Equity Earnings |
|
|
18,374
|
|
|
(1,028 |
) |
|
(2,688 |
) |
|
14,658
|
|
|
Income
taxes |
|
|
8,826
|
|
|
(447 |
) |
|
(2,313 |
) |
|
6,066
|
|
Income
From Continuing Operations Before Equity Earnings |
|
|
9,548
|
|
|
(581 |
) |
|
(375 |
) |
|
8,592
|
|
|
Income
(Losses) from Equity Investments |
|
|
66
|
|
|
-
|
|
|
(2,966 |
) |
|
(2,900 |
) |
Income
From Continuing Operations |
|
|
9,614
|
|
|
(581 |
) |
|
(3,341 |
) |
|
5,692
|
|
|
Discontinued
Operations, Net of Tax |
|
|
-
|
|
|
-
|
|
|
1,443
|
|
|
1,443
|
|
|
Net
Income |
|
$ |
9,614 |
|
$ |
(581 |
) |
$ |
(1,898 |
) |
$ |
7,135 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations |
|
|
|
|
|
|
|
UI |
|
|
Xcelecom |
|
|
And
Other |
|
|
Total |
|
|
Total
Assets at March 31, 2005 |
|
$ |
1,461,433 |
|
$ |
195,948 |
|
$ |
113,094 |
|
$ |
1,770,475 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets at December 31, 2004 |
|
$ |
1,475,782 |
|
$ |
197,234 |
|
$ |
114,592 |
|
$ |
1,787,608 |
|
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(N)
GOODWILL AND OTHER INTANGIBLE ASSETS
As of
March 31, 2005 and December 31, 2004, UIL Holdings maintains $71.4 million
and $70.5 million, respectively, of goodwill related to Xcelecom that is no
longer being amortized, and $4.7 million and $3.7 million, at March 31, 2005 and
December 31, 2004, respectively, of identifiable intangible assets that
continue to be amortized.
A summary
of the change in UIL Holdings’ goodwill from December 31, 2004 to March 31,
2005 is as follows:
|
(Thousands
of Dollars) |
|
|
Total |
|
|
|
|
|
|
|
Balance,
January 1, 2005 |
|
$ |
70,496 |
|
|
Goodwill
acquired during the quarter ended March 31, 2005 |
|
|
871 |
|
|
Balance,
March 31, 2005 |
|
$ |
71,367 |
|
There
were no impairments to the goodwill balances recognized during the quarters
ended March 31, 2005 and 2004.
As of
March 31, 2005 and December 31, 2004, UIL Holdings’ intangible assets
and related accumulated amortization consisted of the following:
|
|
|
As
of March 31, 2005 |
|
|
(Thousands
of Dollars) |
|
Gross |
|
Accumulated
Amortization |
|
Net
Balance |
|
|
Intangible
assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements |
|
$ |
4,405 |
|
$ |
3,685 |
|
$ |
720 |
|
|
Backlog |
|
|
256 |
|
|
256 |
|
|
- |
|
|
Total |
|
$ |
4,661 |
|
$ |
3,941 |
|
$ |
720 |
|
|
|
|
As
of December 31, 2004 |
|
|
(Thousands
of Dollars) |
|
Gross |
|
Accumulated
Amortization |
|
Net
Balance |
|
|
Intangible
assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements |
|
$ |
3,455 |
|
$ |
3,442 |
|
$ |
13 |
|
|
Backlog |
|
|
256 |
|
|
256 |
|
|
- |
|
|
Total |
|
$ |
3,711 |
|
$ |
3,698 |
|
$ |
13 |
|
The
intangible asset balance is included in “Other Deferred Charges” on the
Consolidated Balance Sheet.
UIL
Holdings recorded amortization expense related to these intangible assets of
$0.3 million for both the three months ended March 31, 2005 and 2004,
respectively. Assuming there are no acquisitions or dispositions that occur in
the future, the remaining intangible assets will be fully amortized in 2006. The
estimated annual amortization expense is shown in the table below.
|
2005 |
2006 |
2007 |
2008 |
2009 |
|
(In
Thousands) |
|
$719 |
$1 |
- |
- |
- |
UIL
HOLDINGS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(O)
DISCONTINUED OPERATIONS
On June
22, 2004, UIL Holdings completed the sale of APS to CheckFree Corporation
(CheckFree), a leading
provider of financial electronic commerce services and products, pursuant to the
purchase agreement entered into between the parties on December 16, 2003.
Accordingly, the results of APS for the three months ended March 31, 2004 have
been reported as discontinued operations in the accompanying Consolidated
Statements of Income and Consolidated Statements of Cash Flows.
A summary
of the discontinued operations of APS for the period ended March 31, 2004
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Net
operating revenues |
|
$ |
21,191 |
|
|
Operating
income |
|
$ |
2,106 |
|
Income
before income taxes |
|
$ |
2,260 |
|
|
Income
tax expense |
|
|
(817) |
|
|
Net
income from discontinued operations |
|
$ |
1,443 |
|
In the
first quarter of 2005, CheckFree elected to treat its purchase of APS as an
asset purchase for tax purposes rather than as a stock purchase. Any adjustment
resulting from this tax election will be reflected when UIL Holdings files its
2004 income tax returns.
(P)
RELATED PARTY TRANSACTIONS
Arnold L.
Chase, a Director of UIL Holdings since June 28, 1999, holds a beneficial
interest in the building located at 157 Church Street, New Haven, Connecticut,
where UI leases office space for its corporate headquarters. UI’s lease payments
for this office space for the three months ended March 31, 2005 and 2004 totaled
$2.3 million and $2.2 million, respectively.
Cross-Sound,
in which UCI holds a 25% minority interest investment, leases a parcel of land
from UI. Cross-Sound’s lease payments to UI for this parcel amount to $0.1
million on an annual basis.
In
connection with certain of the acquisitions of Xcelecom, certain of Xcelecom’s
subsidiaries have entered into related party lease arrangements for facilities
with the former owners of companies acquired (or persons or entities related
thereto), some of whom are current employees of Xcelecom. These lease agreements
are for periods generally ranging from three to five years. Xcelecom’s payments
related to these lease arrangements totaled $0.4 million for each of the three
months ended March 31, 2005 and 2004, respectively.
Item 2. 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, 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, services and prices of UIL
Holdings’ subsidiaries. The foregoing and other factors are discussed and should
be reviewed in the UIL Holdings’ most recent 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.
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 its operating subsidiaries, UI and Xcelecom.
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 all levels of employees.
In the
fourth quarter of 2004, UIL Holdings’ Board of Directors approved a plan to
reorganize UIL Holdings’ Finance organization to reduce costs, improve process
flow and better support its core utility operations. Following the sale of APS
in June 2004, the strategic core of UIL Holdings has returned to its utility
operations, along with the non-utility operations of Xcelecom. As a result, the
accounting, treasury and corporate planning functions of UI and the holding
company have been combined in an effort to gain operating efficiencies. In
connection with this reorganization, UIL Holdings recorded employee termination
costs in the fourth quarter of 2004 amounting to $2 million, which equated
to approximately $0.08 per share, after-tax. These accrued restructuring costs
are expected to be settled later in 2005. On an annualized basis, this
reorganization is expected to yield consolidated after-tax cost savings of
approximately $0.04 per share, although the impact to 2005 will be somewhat
lower due to the timing of employee departures.
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 Connecticut Department of Public Utility Control
(DPUC). Legislation and regulatory decisions implementing legislation establish
a framework for UI’s operations. Primary factors affecting UI’s financial
results, in addition to legislation and regulation, are operational matters such
as sales volume, major weather disturbances, ability to control expenses, and
capital expenditures. UI expects significant growth in its capital investment in
transmission, and has received siting approval to construct its portion of a
major transmission line in southwest Connecticut.
Legislation
& Regulation
Since
1998, State legislation has significantly restructured the electric utility
industry in Connecticut. The primary restructuring legislation includes Public
Act 98-28 (the 1998 Restructuring Legislation) and Public Act 03-135, as amended
in part by Public Act 03-221 (collectively, the 2003 Restructuring Legislation).
The DPUC has initiated proceedings, some of which have been completed and others
of which are ongoing, to implement provisions of the 2003 Restructuring
Legislation.
On June
23, 2004, the DPUC approved UI’s request to amend its Purchased Power Adjustment
Clause rate component to allow UI to apply the clause to special contract
customers. The DPUC also approved a Purchased Power Adjustment rate of $0.000264
per kWh to be applied against special contract load to reflect the increased
cost to serve these customers. This decision will allow UI to recover changes in
the cost to procure energy as it relates to special contract customers through
the generation service charge (GSC). The decision does not explicitly order the
accounting for the increased costs of $0.8 million related to UI’s special
contract customers for the period from January 1, 2004 through June 22, 2004
(the day before the effective date of the final decision). The actual costs for
that period to procure power for UI’s special contracts are included in the
revised annual competitive transition assessment (CTA)/systems benefits charge
(SBC) Reconciliation filing for 2004 which was filed with the DPUC in April
2005. The 1998 Restructuring Legislation and the 2003 Restructuring Legislation
provide that the distribution company is entitled to recover its full cost of
procuring power for customers who do not choose an alternate supplier.
On
December 22, 2004, the DPUC issued a final decision increasing the
non-bypassable Federally Mandated Congestion Costs (NBFMCC) charge UI is
authorized to collect from customers. The NBFMCC charge relates to “congestion
costs” associated with not having adequate transmission infrastructure to move
energy from the generating sources to the consumer. Because the purpose of the
NBFMCC charge is for the electric distribution company to recover its actual
NBFMCC costs on a pass-through basis, the DPUC decision provided for a true-up
of NBFMCC costs and revenues on a semi-annual basis and an adjustment of the
associated amounts deferred for future recovery. The charge originally
established for 2004 was based upon estimates that were made in 2003, and
reflected estimated NBFMCC lower than were actually incurred. The decision
increased the NBFMCC charge from $0.001652 per kWh to $0.012099 per kWh,
effective January 1, 2005. This increase will enable UI to recover both the
forecasted ongoing NBFMCC costs and the $14.4 million deficit that resulted from
the charge originally established being below the incurred costs. In February
2005, the DPUC initiated a semi-annual reconciliation relating to Federally
Mandated Congestion Costs and GSC. Based upon the results of the previous
semi-annual reconciliation, UI did not make a filing for another rate
adjustment. However, the DPUC has included UI in the docket. Hearings were held
on April 25, 2005 and a final decision is scheduled for June 2005.
UI
expects to file a revised transmission tariff with the FERC in the second
quarter of 2005. UI will seek to recover its transmission revenue requirements
on a prospective basis, subject to reconciliation with actual revenue
requirements. Under UI’s current transmission tariff, the annual period during
which wholesale transmission rates are effective begins after the annual period
used to calculate the required transmission rates. The proposed changes to the
tariff are expected to reduce the lag between the time transmission-related
costs are incurred and the period in which rates are effective.
Operations
In
implementing the 1998 Restructuring Legislation, UI established a Distribution
Division and other “unbundled” components for accounting purposes, to reflect
other unbundled components on customer bills. Initially, the Distribution
Division included both transmission and distribution. UI has now separated
transmission and distribution into separate divisions for accounting purposes.
Changes to income and expense items related to transmission and distribution
have an immediate net income and earnings per share impact, while changes to
items in “other unbundled utility components” do not. The other components are
the CTA, the SBC, the GSC, the conservation and load management (C&LM)
charge, and renewable energy investment (REI) charge. In accordance with the
September 26, 2002 Rate Case decision, the CTA and SBC both earn a 10.45% return
on the equity portion of their respective rate bases. Those returns were
achieved either by accruing additional amortization expenses, or by deferring
such expenses, as required to achieve the authorized return. Amortization
expenses in the CTA and SBC components impact earnings indirectly through
changes to rate base. The 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, and a small management fee earned in the
C&LM component, expenses are either accrued or deferred or revenues are
transferred such that there is no net income associated with these three
unbundled components.
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. Subject to future
regulatory changes to the CTA rate, significant load growth, or to the level of
amortization, CTA revenues are expected to remain relatively constant, with
amortization increasing over time as the earnings trend downward due to the
decreasing CTA rate base. A significant amount of UI’s earnings is generated by
the authorized return on the equity portion of as yet unamortized stranded costs
in the CTA rate base. UI’s earnings per share attributable to CTA for the three
months ended March 31, 2005 and 2004 were $0.23 and $0.24, 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. Cash flow from
operations related to CTA amounted to $7 million for each of the three months
ended March 31, 2005 and 2004, respectively. The CTA rate base has declined from
year to year for a number of reasons, including: amortization of stranded costs,
the sale of the 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 $413 million at
year-end 2000, $373 million at year-end 2001, $303 million at year-end 2002,
$279 million at year-end 2003, $267 million at year-end 2004 and $264 million as
of March 31, 2005. The 2004 result is subject to DPUC review, pursuant to an
annual review of UI’s CTA revenues and expenses, and may be adjusted in
accordance with that review. 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 between 2013 and 2015, depending primarily upon the
DPUC’s future decisions which could affect future rates of stranded cost
amortization.
The
primary Distribution Division operational factors affecting UI’s financial
results are sales volume, ability to control expenses and capital expenditures.
Retail electric sales volume can be significantly affected by economic
conditions and weather. The level of economic growth can be reflected in many
ways: job growth or workforce reductions, plant relocations into or out of UI
territory, and facilities expansions or contractions, 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 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 internally, through the
recovery of depreciation and from amortization of stranded costs, and the
remainder must be financed externally. For more information, see “Liquidity and
Capital Resources” included later in this item of this Form 10-Q.
In April
2005, the Connecticut Siting Council (CSC) approved a project to construct a
345-kiloVolt transmission line from Middletown, Connecticut, to Norwalk,
Connecticut, which was jointly proposed by UI and The Connecticut Light and
Power Company (CL&P). This project is expected to improve the reliability of
the transmission system in southwest Connecticut. The two companies are working
together for certain permitting, and will each construct, own and operate its
respective portion of the transmission line and related facilities. UI will
construct, own, and operate transmission and substation facilities comprising
approximately 20% of the total project. UI’s current estimate for its share of
the project cost is approximately $180 million to $215 million (excluding
allowance for funds used during construction). Based on the current projected
schedule of construction, the project is expected to be completed in 2009. Upon
project completion, UI’s rate base will increase by approximately $220 million
to $260 million, at which time UI would begin to earn a return on, and commence
recovery of, its investment. Other governmental permitting, together with
approvals from ISO-New England (ISO-NE), will be required for the project. The
total project cost and timing of completion could change depending on other
permit requirements. UI’s costs for the project are expected to be included in
and recovered through transmission rates under FERC jurisdiction.
UI is
dependent on the knowledge, training and abilities of its workforce. Retaining
key employees and maintaining the ability to attract new employees are important
to both UI’s operational and financial performance. A significant portion of
UI’s workforce, including many workers with specialized skills maintaining and
servicing the electrical infrastructure, will be eligible to retire over the
next five years. Such highly skilled individuals cannot be quickly replaced due
to the technically complex work they perform and the time it takes to hire and
train replacements.
The
inability to retain or replace these employees could have an adverse effect on
UI’s financial condition and results of operations. In recognition of this
situation, UI has several recruiting and training initiatives underway to
mitigate the expected future attrition and maintain the skill sets required to
service customers. In April 2005, UI and its unionized employees entered into a
six-year agreement which expires on May 15, 2011. Approximately 45% of UI’s
workforce is covered by this agreement. See Part II, Item 5 “Other Information”
of this Form 10-Q for further information.
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 up to the deductible amounts are accrued
based upon our 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, subject to deductibles as well. As with other
companies, UI has seen significant increases in its workers’ compensation
premiums in the past several years.
Xcelecom,
Inc.
The
principal factors affecting the financial results of Xcelecom and its
subsidiaries are (1) construction and technology spending; (2) competition; (3)
fixed-priced contract estimation and bidding; (4) work-related hazards and
insurance; (5) attracting and retaining management expertise; (6) overall
liquidity and ability to obtain surety bonding, and (7) risks of attaining
required labor productivity levels to meet or exceed contract estimates.
Additional risk factors include general economic conditions, the pace of
technological changes, recoverability and potential for impairment of goodwill,
and collectibility of receivables.
More than
half of Xcelecom’s business involves the installation of electrical, mechanical
and integrated network information systems in newly constructed and renovated
buildings and plants. Downturns in levels of construction starts and business
spending can have a material adverse effect on Xcelecom’s business, financial
condition and results of operations. In addition, Xcelecom’s business is subject
to seasonal variations in operations and demand that affect the construction
business, particularly in new construction. Quarterly results may also be
affected by regional economic conditions. Accordingly, Xcelecom’s performance in
any particular quarter may not be indicative of the results that can be expected
for any other quarter or for the entire year. The
competitive bidding process for new business contracts normally intensifies
during economic downturns, leading to lower profit margins and an increased
potential for project cost overruns or losses.
Xcelecom’s
contracts are generally awarded on the basis of competitive bids. The final
terms and prices of those contracts are frequently negotiated with the customer.
Although contract terms vary considerably, most are made on either a fixed price
or unit price basis in which Xcelecom agrees to do the work for a fixed amount
for the entire project (fixed price) or for units of work performed (unit
price), although services are sometimes performed on a cost-plus or time and
materials basis. Xcelecom’s most significant cost drivers are the cost of labor,
including employee benefits, the cost of products and materials, and the cost of
casualty insurance. These costs may vary from the costs originally estimated.
Variations from estimated contract costs along with other risks inherent in
performing fixed price and unit price contracts may result in actual revenue and
gross profits for a project differing
from
those originally estimated and could result in losses on projects. Depending on
the size of a particular project, variations from estimated project costs could
have a significant impact on operating results for any fiscal quarter or year.
Hazards
related to Xcelecom's industry include, but are not limited to, electrocutions,
fires, mechanical failures, and transportation accidents. These hazards can
cause personal injury and loss of life, severe damage to or destruction of
property and equipment, and may result in suspension of operations. Xcelecom's
third-party insurance is subject to large deductibles for which reserves are
established. Xcelecom believes its insurance and provisions for self-insurance
of deductibles are adequate to cover reasonably foreseeable losses and
liabilities. Losses impacting self-insurance provisions or exceeding insurance
limits could impact Xcelecom's operating results. One of
Xcelecom’s subsidiaries has been affected by the 2004 hurricanes in Florida and
expects recovery from insurance policies for physical premises damage and is
pursuing claims for business interruption. Settlement of these claims is
expected by the second quarter of 2005.
Billings
under fixed price contracts are generally based upon achieving certain
benchmarks and will only be accepted by the customer once those benchmarks have
been met. An allowance for doubtful accounts is maintained for collection issues
related to accounts receivable. Inherent in the assessment of the allowance for
doubtful accounts are certain judgments and estimates including, among others,
customers' access to capital, customers' willingness to pay, general economic
conditions and the ongoing relationships with customers.
Surety
market conditions are currently difficult as a result of significant losses
incurred by many sureties in recent periods, both in the construction industry
as well as in certain large corporate bankruptcies. As a result, less bonding
capacity is available in the market and terms have become more restrictive.
Further, under standard terms in the surety market, sureties issue bonds on a
project by project basis, and can decline to issue bonds at any time.
Historically, approximately one third of Xcelecom’s construction-related
business has required bonds. While Xcelecom has enjoyed a longstanding
relationship with its surety, current market conditions, as well as changes in
the surety’s assessment of Xcelecom’s operating and financial risk, could cause
the surety to decline to issue bonds for future projects. If that were to occur,
Xcelecom could do more business that does not require bonds, post other forms of
collateral for project performance such as letters of credit or cash, and seek
bonding capacity from other sureties. There can be no assurance that such
alternatives could be easily achieved. Accordingly, if Xcelecom were to
experience an interruption in the availability of bonding capacity, its
operating results could be adversely impacted.
Xcelecom’s
profitability is primarily driven by labor costs. The ability to perform
contracts at acceptable margins depends on the ability to deliver substantial
labor productivity. There can be no assurance that productivity will continue at
acceptable levels for a particular period of time. Any loss of productivity
could adversely affect the margins on existing contracts or the ability to
obtain new contracts.
Historically,
a significant amount of Xcelecom's growth has come through acquisitions. From
July of 1999 to Xcelecom's last significant acquisition in April of 2002,
Xcelecom made 12 acquisitions. Xcelecom currently does not intend to grow
materially through acquisitions in the foreseeable future; however, it will
continually evaluate acquisition prospects to complement and expand its existing
business platforms. The timing, size or success of any acquisition effort and
the associated potential capital commitments cannot be predicted. Each
acquisition involves a number of risks. These risks include the diversion of
management's attention from existing businesses to integrating the operations
and personnel of the acquired business; possible adverse effects on operating
results during the integration process; and possible inability to achieve the
intended objectives of the combination. If future
acquisitions do not perform as expected, Xcelecom may be required to write-off
some or all of the value of any goodwill and intangible assets associated with
the acquisitions. Financial results may also be impacted by the degree of
integration of acquisitions, including the ability to achieve synergies over the
network of subsidiaries. Xcelecom's revenue growth over the past several years
has been generated principally through acquisitions. In December 2004, Xcelecom
acquired Datanet Services, Inc. (DSI) in North Carolina. This relatively small
acquisition complements Xcelecom’s existing operations in North Carolina and
provides the opportunity to expand both service offerings and the geographical
area served. The acquisition of DSI is expected to add approximately $22 million
in revenues in 2005.
The loss
of key personnel or the inability to hire and retain qualified employees could
have an adverse effect on Xcelecom’s business, financial condition and results
of operations. Xcelecom’s operations depend on the continued efforts of current
and future executive officers, senior management and management personnel at the
companies Xcelecom has acquired. Xcelecom has taken certain steps to mitigate
the risk of loss of key personnel of acquired companies, including the use of
earn-out payments, promissory notes, and covenant not to compete agreements.
There is no guarantee that any member of management of Xcelecom or any of its
subsidiaries will continue in their capacity for any particular period of time.
The
computer technology industry in general has continued to see an improving
business environment in the United States. Xcelecom sales in its computer
network systems integration line of business can be dependent on demand for
specific technology categories offered through particular vendor partners, and
any change in demand for, or supply of, such technology or change in
relationships with such partners could have a material adverse effect on
Xcelecom’s sales if it fails to react in a timely manner to such changes or
manage such relationships. One crucial measure of performance, gross profit as a
percentage of net sales, can fluctuate due to numerous factors, including
changes in prices from suppliers, reductions in the amount of supplier
reimbursements that are made available, changes in customer mix, the relative
mix of products sold during the period, general competitive conditions, the
availability of opportunistic purchases and opportunities to increase market
share. In addition, expense levels, including the costs and salaries incurred in
connection with the hiring of sales and technical services personnel, are based,
in part, on anticipated sales. Therefore, Xcelecom may not be able to reduce
spending in a timely manner to compensate for any unexpected sales or margin
shortfalls.
As a
result of the factors mentioned above, comparisons of Xcelecom’s quarterly
financial results should not be relied upon as an indication of future
performance.
Cost
Drivers
As a
service business, Xcelecom’s cost structure is highly variable. Primary costs
include labor, materials and insurance. Approximately 48.9% of costs are derived
from labor and related expenses. For the three months ended March 31, 2005
and 2004, labor-related expenses totaled $45.4 million and $35.7 million,
respectively.
Approximately
41.9% of Xcelecom’s costs incurred are for materials installed on projects and
equipment and other products sold to customers. This component of the expense
structure is variable based on the demand for services. Costs are generally
incurred for materials once work begins on a project or a customer order is
received. Materials are ordered when needed, shipped directly to the jobsite or
customer facility, and installed within 30 days. Materials consist of
commodity-based items such as conduit, pipe, data cabling, wire and fuses as
well as specialty items such as fixtures, switchgear, switches and routers,
servers and control panels. For the three months ended March 31, 2005 and 2004,
material and equipment expenses totaled $33.2 million and $22.3 million,
respectively.
Regulations
Xcelecom’s
operations are subject to various federal, state and local laws and regulations,
including:
-
licensing requirements applicable to electricians, steamfitters and plumbers;
-
building, mechanical and electrical codes;
-
regulations relating to consumer protection, including those governing
residential service agreements; and
-
regulations relating to worker safety and protection of the environment.
Xcelecom
believes it has all licenses required to conduct operations and is in
substantial compliance with applicable regulatory requirements. Failure to
comply with applicable regulations could result in substantial fines or
revocation of operating licenses or an inability to perform government work.
Many state and local regulations governing electricians, steamfitters and
plumbers require permits and licenses to be held by individuals. In some cases,
a required permit or license held by a single individual may be sufficient to
authorize specified activities for all employees who work in the state or county
that issued the permit or license. It is Xcelecom’s policy to ensure that, where
possible, any permits or licenses that may be material to its operations in a
particular geographic area are held by multiple Xcelecom employees within that
area.
Risk
Management and Insurance
The
primary risks in Xcelecom’s operations include health, bodily injury, property
damage, and injured workers compensation. Xcelecom is insured for workers
compensation, automobile liability, general liability and employee-related
health care claims, subject to large deductibles. A general liability program
provides coverage for bodily injury and property damage neither expected nor
intended. Losses up to the deductible amounts are accrued based upon our
estimates of the liability for claims incurred and an estimate of claims
incurred but not reported. The accruals are derived from actuarial studies,
known facts, historical trends and industry averages. Xcelecom believes such
accruals to be adequate. However, insurance liabilities are difficult to assess
and estimate due to unknown factors, including the severity of an injury, the
determination of liability in proportion to other parties, the number of claims
incurred but not reported and the effectiveness of Xcelecom’s safety programs.
Therefore, if actual experience differs from the assumptions used in the
actuarial valuation, adjustments to the reserve may be required and would be
recorded in the period that the experience becomes known.
United
Capital Investments, Inc.
UCI has a
25% interest in Cross-Sound Cable Company, LLC (Cross-Sound), which owns and
operates a 330-megawatt transmission line (cable) connecting Connecticut and
Long Island under the Long Island Sound.
In June
2004, Cross-Sound achieved commercial operation of the cable by means of a
settlement agreement that was executed by Cross-Sound, the Connecticut
Department of Environmental Protection (CDEP), the DPUC, Long Island Power
Authority, Long Island Lighting Company d/b/a LIPA (LILCO/LIPA), and Northeast
Utilities Service Company, as agent for The Connecticut Light and Power Company
(CL&P). Continuation of commercial operation is contingent upon the
satisfaction of certain conditions in the settlement agreement which include:
(1) Cross-Sound coming into compliance with permit conditions as directed by the
CDEP; (2) LILCO/LIPA and CL&P reaching an agreement by October 1, 2004 for
the replacement of an existing transmission line (the “1385 line” which is
otherwise unrelated to the Cross-Sound cable) and implementing such replacement
on a schedule approved by the CDEP; and (3) Cross-Sound, CL&P and LILCO/LIPA
committing a collective amount of $6 million, of which Cross-Sound’s commitment
is $2 million, to a research and restoration fund for the Long Island Sound to
be administered jointly by the States of New York and Connecticut.
Cross-Sound
has satisfied the provisions of the settlement agreement for which it is
responsible. Specifically, the remediation work required in the federal
navigation channel in New Haven Harbor to bring the Cross-Sound cable into
compliance with the permit conditions set forth by the CDEP was completed in
January 2005. The remediation required consisted of achieving the originally
required burial depth in those areas deemed as “soft spots,” meaning the
obstructions which originally prevented achievement of such depth could
generally be removed without the use of destructive techniques such as blasting.
The cost of this remediation amounted to $4 million. The Cross-Sound cable was
brought off-line for approximately 12 hours each day during the remediation
activities. The permit conditions did not require the original burial depth to
be achieved in the area where rock ledge obstruction prevented meeting the
original burial depth until such time that the United States Army Corp of
Engineers is authorized to deepen the federal navigation channel in the New
Haven Harbor. During the third quarter of 2004, CL&P and LILCO/LIPA reached
the necessary agreements, as required by the settlement agreement, for the
replacement of the existing 1385 line. Such agreements included a schedule for
implementation, which has been approved by the CDEP. Implementation of this
replacement plan, which is not within Cross-Sound’s control, is now the final
step to satisfy the provisions of the settlement agreement. In late September
2004, Cross-Sound funded its $2 million commitment to the research and
restoration fund for the Long Island Sound, as required by the settlement
agreement. CL&P and LILCO/LIPA have also funded their commitments of $2
million each.
UCI’s 25%
share of the actual project cost for the Cross-Sound cable was $34.3 million as
of March 31, 2005. UCI has provided an equity contribution of $10 million to
Cross-Sound and UIL Holdings loaned $25.1 million, including capitalized
interest, to Cross-Sound. With the completion of all provisions of the
settlement agreement for which Cross-Sound is responsible, the loan from UIL
Holdings may be refinanced with external project financing. In addition, two
guarantees have been provided by UIL Holdings and UCI totaling $3.8 million, in
support of Hydro-Quebec’s guarantees to third parties in connection with the
construction of the project (see “Notes to Consolidated Financial Statements -
Note (J), Commitments and Contingencies - Cross-Sound Cable Company, LLC,” for
further discussion of these guarantees). UCI will be responsible for 25% of any
additional capital needs of the project.
Following
execution of the settlement agreement, the existing contract Cross-Sound has
with the Long Island Power Authority for the entire capacity of the transmission
line has been amended to increase the overall term of the agreement from 20
years to 28 years by means of adding an initial three-year period at the current
reduced rates, and an additional five years to the end of the contract term, at
full rates. This amendment was formally approved by the New York State
Comptroller in the first quarter of 2005.
UCI also
has passive, minority equity positions in several venture funds. UCI viewed
these investments as an opportunity to earn reasonable returns and promote local
economic development. In March 2005, UCI funded $0.2 million to the
Ironwood Mezzanine Fund (formerly the Ironbridge Mezzanine Fund). There has been
no material change since December 31, 2004 in the carrying value of UCI’s
investments in venture funds.
United
Bridgeport Energy, Inc.
UBE holds
a 33 1/3% ownership interest in Bridgeport Energy LLC (BE), the owner of a
gas-fired 520 MW merchant wholesale electric generating facility located in
Bridgeport, Connecticut. The principal factors which affect the financial
condition of UBE are natural gas prices, Connecticut energy prices, maintenance
costs and installed capability (ICAP) revenues. As UBE holds a minority interest
in BE, there are additional risk factors associated with the activities of the
majority owner, an affiliate of Duke Energy. The majority owner of BE is an
affiliate of Duke Energy. Another affiliate of Duke Energy owns a 60% interest
in Duke Energy Trading and Marketing (DETM), which is a joint venture with Exxon
Mobil Corporation. BE has an agreement through August 2018 with DETM that gives
DETM the right to deliver natural gas to the facility and market all the
electricity generated by the facility. DETM reimburses BE under a formula based
on the difference between gas costs and electric prices.
The
majority owner of BE has filed with the FERC an application for “Reliability
Must Run” (RMR) status, which, if approved, could significantly increase BE’s
revenues in 2005. UBE agrees with the majority owner that RMR would be
beneficial to BE, but objected to the application because certain aspects of
proposed related transactions between the majority owner and its affiliates,
including DETM, are not in the best interests of BE. Therefore, in the first
quarter of 2005, UBE notified the majority owner that it will pursue its
contractual rights to sell its 33 1/3% interest to the majority owner at fair
market value. The majority owner has responded to UBE’s notice, asserting that
the contractual preconditions for such a sale have not been met. UBE and the
majority owner have commenced a dispute resolution process to resolve this
disagreement over the sale rights, and hearings before an arbitrator commenced
on April 29, 2005. The arbitrator is expected to issue a decision within 30 days
after conclusion of the hearing. On April 20, 2005, the FERC responded to the
RMR application by issuing a deficiency letter in which it requested an
effective date for the RMR proposal and asked whether, under BE’s governance
procedures, BE has been authorized to proceed with the application. The deadline
for responding to the deficiency letter is May 20, 2005.
Although
routine maintenance is performed on the plant on a regular basis, in March 2005
the plant was brought offline for the first phase of a major scheduled overhaul
which was completed on April 2, 2005. The second phase is expected to be
completed in the fall of 2005. As a result of the outage, BE will require
additional capital from its owners to cover 2005 costs associated with this
overhaul. UBE provided a capital contribution of $2 million in February
2005. Based on current projections, UBE’s additional capital requirement is
expected to be approximately $2 million. UBE and the majority owner plan to fund
the additional capital requirements either through further capital contributions
or through a secured loan to the plant on market terms.
The ICAP
market is designed to offer an incentive to maintain availability of adequate
generating capacity. BE receives ICAP revenues from energy marketers based on
the plant’s installed capacity. The plant began initial operation with a
multi-year contract for ICAP. Since the contract ended in 2002, BE has only been
able to sell its ICAP in the forward month market at a much lower price,
reducing ICAP revenues by approximately 75% to 85%. The FERC has directed ISO-NE
to develop a Locational ICAP Market, with the intent to provide higher capacity
payments to generators within designated congestion areas. The FERC has delayed
the decision on Locational ICAP until June 2005 to allow more time to study the
issue, with any decision expected to become effective in January 2006. The full
impact of Locational ICAP is not known at this time.
Results
at UBE continue to be hampered by high natural gas prices that drive down both
margins and sales volumes at BE, as well as the absence of a viable capacity
market to provide incentive for generating plants to remain available. Although
natural gas prices have remained at elevated levels in recent years, DOE Annual
Energy Outlook projections show improving conditions in the future. In addition,
RMR status and Locational ICAP are expected to provide compensation to the plant
for its availability. Based on these projections, no conditions were noted to
give rise to an impairment with respect to the current $74.4 million carrying
value of UBE’s investment in BE. UBE will continue to monitor its investment in
BE for recoverability, as changes in the projections considered could have a
negative impact on the carrying value of the investment in the
future.
As the
majority owner of BE, Duke Energy’s affiliate is responsible for the daily
operations and administration of the plant, including all accounting and
financial reporting functions of BE. As a minority interest owner, UBE relies on
the financial reports provided by BE to record its appropriate share of income
or losses of BE. During 2004, results at BE were negatively impacted by a number
of accounting adjustments related to prior years. The completion of the annual
independent audit of BE’s 2003 and 2004 financial statements is still pending,
and there could be additional adjustments as a result of the audit. UBE
conducted an audit of BE during 2004 and is discussing its findings with the
majority owner and DETM. Resolution of these issues is expected in 2005 and
could potentially have a favorable impact on the results of operations of UBE
and may reduce the amount of capital required from UBE in 2005.
LIQUIDITY
AND CAPITAL RESOURCES
UIL
Holdings generates its capital resources primarily through operations. At
March 31, 2005, UIL Holdings had $26.5 million of unrestricted cash and
temporary cash investments. This represents a decrease of $13.7 million from the
corresponding balance at December 31, 2004. The components of this
decrease, which are detailed in the Consolidated Statement of Cash Flows, are
summarized as follows:
|
|
(In
Millions) |
|
|
|
|
|
|
|
Balance,
December 31, 2004 |
|
$ |
40.2 |
|
|
|
|
|
|
|
|
Net
cash provided by operating activities of continuing
operations |
|
|
4.0 |
|
|
|
|
|
|
|
|
Net
cash (used in) investing activities of continuing
operations: |
|
|
|
|
|
- Non-utility
minority interest investments |
|
|
(2.2) |
|
|
- Cash
invested in plant |
|
|
(9.1) |
|
|
- Deferred
payments in prior acquisitions |
|
|
(1.8) |
|
|
- Loan
to Cross-Sound Cable Project |
|
|
(0.3) |
|
|
|
|
|
(13.4) |
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities of continuing
operations: |
|
|
|
|
|
- Financing
activities, excluding dividend payments |
|
|
6.1 |
|
|
- Dividend
payments |
|
|
(10.4) |
|
|
|
|
|
(4.3) |
|
|
|
|
|
|
|
|
Net
Change in Cash |
|
|
(13.7) |
|
|
|
|
|
|
|
|
Balance,
March 31, 2005 |
|
$ |
26.5 |
|
The
unrestricted cash position of UIL Holdings decreased by $13.7 million from
December 31, 2004 to March 31, 2005, as cash provided by operations and net
proceeds from short-term borrowings was supplemented by existing cash on hand to
cover a variety of investing and financing activities. Cash used in investing
activities during the first quarter of 2005 consisted primarily of capital
expenditures of $9.1 million, mainly by UI. In addition, a $2 million
contribution was made to BE, which represented UBE’s share of additional capital
required by the plant to cover costs associated with an outage related to the
first phase of a scheduled major overhaul. First quarter 2005 investing
activities also included $1.8 million of deferred non-compete and earn-out
provision payments related to prior Xcelecom acquisitions. Financing activities
during the first quarter of 2005 included the quarterly dividend
payment
on UIL Holdings common stock totaling $10.4 million and a $4.3 million principal
payment on UIL Holdings’ long-term debt.
The
following table presents a summary
of the amounts available under these credit facilities as of March 31,
2005:
| |
|
UIL
Holdings |
|
Xcelecom |
|
| |
|
(in
millions) |
|
| |
|
|
|
|
|
|
|
|
Credit
lines available |
|
$ |
100 |
|
$ |
30 |
|
|
Less:
Credit line advances outstanding |
|
|
16 |
|
|
3 |
|
|
Less:
Credit facility supporting standby letters of credit |
|
|
- |
|
|
6 |
|
|
Less:
Credit facility supporting capital equipment funding |
|
|
- |
|
|
1 |
|
|
Available
Credit |
|
$ |
84 |
|
$ |
20 |
|
All
capital requirements that exceed available cash will have to 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 discussed
above, future external financing needs are expected to be satisfied by the
issuance of additional short-term and long-term debt. The continued availability
of these methods of financing will be dependent on many factors, including
conditions in the securities markets, economic conditions, and future income and
cash flow. See Part I,
Item 1,
“Financial Statements - Notes to Consolidated Financial Statements -
Note (B), Capitalization and Note (D), Short-Term Credit Arrangements”
of this Form 10-Q and UIL Holdings’ Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 for a discussion of UIL Holdings’ financing
arrangements.
There
have been no material changes in UIL Holdings’ 2005 capital resource projections
from those reported in UIL Holdings’ Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.
Contractual
and Contingent Obligations
At
March 31, 2005 there was no material change in contractual and contingent
obligations of UIL Holdings and its subsidiaries from those reported in UIL
Holdings’ Annual Report on Form 10-K for the fiscal year ended December 31,
2004.
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. UIL Holdings
believes that 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. The accounting policies and related
risks described in UIL Holdings’ Annual Report on Form 10-K for the fiscal year
ended December 31, 2004 are those that depend most heavily on these
judgments and estimates. At March 31, 2005, there have been no material
changes to any of the Critical Accounting Policies described
therein.
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 March 31, 2005, UIL
Holdings had certain guarantee contracts outstanding for which no liability has
been recorded in the Consolidated Financial Statements (see Part
I, Item 1, “Financial Statements - Notes
to
Consolidated Financial Statements - Note (J), Commitments and Contingencies,” of
this Form 10-Q 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 Quarterly Report on Form 10-Q, 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 I, Item 1,
“Financial Statements - Notes to Consolidated Financial Statements - Note (A),
Statement of Accounting Policies - New Accounting Standards,” for further
discussion regarding new accounting standards.
RESULTS
OF OPERATIONS
First
Quarter 2005 vs. First Quarter 2004
UIL
Holdings Corporation Results of Operations: First Quarter 2005 vs. First Quarter
2004
UIL
Holdings’ earnings from continuing operations for the first quarter of 2005
decreased by $2.5 million, or $0.18 per share, compared to the first quarter of
2004. Net income from discontinued operations decreased by $1.4 million, or
$0.10 per share, in the first quarter of 2005 from the first quarter 2004. Total
earnings for the first quarter of 2005, including discontinued operations,
decreased by $3.9 million, or $0.28 per share, from the same period of
2004.
The
decrease in earnings from continuing operations was mainly due to the absence of
2004 non-recurring gains at UI related to a change in accounting estimate
adjustment to unbilled revenues, a DPUC decision allowing partial recovery of
increased pension and post-retirement benefit expense, and the impact of final
decisions by the DPUC regarding the disposition of proceeds from UI’s investment
in nuclear generating facilities. In addition, first quarter 2005 results at UBE
were impacted by a scheduled maintenance-related plant outage.
The table
below represents a comparison of UIL Holdings’ Net Income and Earnings per Share
(EPS) for the first quarter of 2005 and the first quarter of 2004.
| |
Quarter
Ended
March
31, 2005 |
Quarter
Ended
March
31, 2004 |
2005
more (less) than 2004 |
|
Amount |
Percent |
|
Net
Income (In Millions except Percents and Per Share
Amounts) |
|
|
|
|
|
UI |
$7.8 |
$9.6 |
$(1.8) |
(19)% |
|
Non-Utility |
(4.6) |
(3.9) |
(0.7) |
(18)% |
|
Total Net Income from
Continuing Operations |
$3.2 |
$5.7 |
(2.5) |
(44)% |
|
Discontinued
Operations |
- |
1.4 |
(1.4) |
(100)% |
|
Total
Net Income |
$3.2 |
$7.1 |
(3.9) |
(55)% |
| |
|
|
|
|
|
EPS
|
|
|
|
|
|
UI |
$0.54 |
$0.67 |
(0.13) |
(19)% |
|
Non-Utility |
(0.32) |
(0.27) |
(0.05) |
(19)% |
|
Total
EPS from Continuing Operations
- Basic |
$0.22 |
$0.40 |
(0.18) |
(45)% |
|
Discontinued
Operations |
- |
0.10 |
(0.10) |
(100)% |
|
Total
EPS - Basic |
$0.22 |
$0.50 |
$(0.28) |
(56)% |
|
Total
EPS - Diluted (Note A) |
$0.22 |
$0.49 |
$(0.27) |
(55)% |
| |
|
|
|
|
Note A:
Reflecting
the effect of dilutive stock options, performance shares and restricted stock.
Dilutive
securities did not dilute earnings from continuing operations for the three
months ended March 31, 2005. Dilutive securities diluted the earnings from
continuing operations by $0.01 per share for the three months ended March 31,
2004, but did not dilute the earnings from discontinued operations for the same
period of 2004.
The
following table presents a line-by-line breakdown of revenue and expenses from
UIL Holdings’ Consolidated Statement of Income by subsidiary, including
comparisons between the first quarter of 2005 and the first quarter of 2004.
Significant variances are explained in the discussion and analysis of individual
subsidiary results that follow.
| |
|
Quarter
Ended |
|
Quarter
Ended |
|
2005
more (less) |
|
(In
Millions) |
|
Mar.
31, 2005 |
|
Mar.
31, 2004 |
|
than
2004 |
|
Operating
Revenues |
|
|
|
|
|
|
|
|
|
|
|
UI
from operations |
|
$ |
186.9 |
|
$ |
181.8 |
|
$ |
5.1 |
|
|
Xcelecom |
|
|
91.6 |
|
|
67.6 |
|
|
24.0 |
|
|
Total
Operating Revenues |
|
$ |
278.5 |
|
$ |
249.4 |
|
$ |
29.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Fuel
and energy expenses - UI |
|
$ |
95.2 |
|
$ |
87.9 |
|
$ |
7.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance expenses |
|
|
|
|
|
|
|
|
|
|
|
UI
|
|
$ |
47.0 |
|
$ |
48.4 |
|
$ |
(1.4 |
) |
|
Xcelecom |
|
|
91.0 |
|
|
66.9 |
|
|
24.1 |
|
|
Minority
Interest Investment & Other (1) |
|
|
1.5 |
|
|
1.4 |
|
|
0.1 |
|
|
Total
operation and maintenance expenses |
|
$ |
139.5 |
|
$ |
116.7 |
|
$ |
22.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expenses |
|
|
|
|
|
|
|
|
|
|
|
UI
|
|
$ |
7.5 |
|
$ |
7.5 |
|
$ |
- |
|
|
Xcelecom |
|
|
0.9 |
|
|
0.9 |
|
|
- |
|
|
Subtotal
depreciation |
|
|
8.4 |
|
|
8.4 |
|
|
- |
|
|
Amortization
of regulatory assets (UI) |
|
|
9.8 |
|
|
8.8 |
|
|
1.0 |
|
|
Amortization
Xcelecom |
|
|
0.2 |
|
|
0.3 |
|
|
(0.1 |
) |
|
Total
depreciation and amortization expenses |
|
$ |
18.4 |
|
$ |
17.5 |
|
$ |
0.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Taxes
- other than income taxes |
|
|
|
|
|
|
|
|
|
|
|
UI
- State gross earnings tax |
|
$ |
5.9 |
|
$ |
6.0 |
|
$ |
(0.1 |
) |
|
UI
- other |
|
|
4.3 |
|
|
4.0 |
|
|
0.3 |
|
|
Xcelecom |
|
|
0.7 |
|
|
0.7 |
|
|
- |
|
|
Total
taxes - other than income taxes |
|
$ |
10.9 |
|
$ |
10.7 |
|
$ |
0.2 |
|
| |
|
Quarter
Ended |
|
Quarter
Ended |
|
2005
more (less) |
|
(In
Millions) |
|
Mar.
31, 2005 |
|
Mar.
31, 2004 |
|
than
2004 |
|
Other
Income (Deductions) |
|
|
|
|
|
|
|
|
UI |
|
$ |
2.1 |
|
$ |
3.6 |
|
$ |
(1.5 |
) |
|
Xcelecom |
|
|
0.3 |
|
|
0.3 |
|
|
- |
|
|
Minority
Interest Investment & Other (1) |
|
|
0.3 |
|
|
0.4 |
|
|
(0.1 |
) |
|
Total
Other Income (Deductions) |
|
$ |
2.7 |
|
$ |
4.3 |
|
$ |
(1.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
Charges |
|
|
|
|
|
|
|
|
|
|
|
UI
|
|
$ |
3.9 |
|
$ |
4.1 |
|
$ |
(0.2 |
) |
|
UI
- Amortization: debt expense, redemption premiums |
|
|
0.3 |
|
|
0.3 |
|
|
- |
|
|
Xcelecom |
|
|
0.3 |
|
|
0.1 |
|
|
0.2 |
|
|
Minority
Interest Investment & Other (1) |
|
|
1.5 |
|
|
1.7 |
|
|
(0.2 |
) |
|
Total
Interest Charges |
|
$ |
6.0 |
|
$ |
6.2 |
|
$ |
(0.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes |
|
|
|
|
|
|
|
|
|
|
|
UI |
|
$ |
7.4 |
|
$ |
8.9 |
|
$ |
(1.5 |
) |
|
Xcelecom |
|
|
(0.5 |
) |
|
(0.4 |
) |
|
(0.1 |
) |
|
Minority
Interest Investment & Other (1) |
|
|
(2.6 |
) |
|
(2.4 |
) |
|
(0.2 |
) |
|
Total
Income Taxes |
|
$ |
4.3 |
|
$ |
6.1 |
|
$ |
(1.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Income
(Losses) from Equity Investment |
|
|
|
|
|
|
|
|
|
|
|
UI |
|
$ |
0.1 |
|
$ |
0.1 |
|
$ |
- |
|
|
Minority
Interest Investment (2) |
|
|
(3.8 |
) |
|
(3.0 |
) |
|
(0.8 |
) |
|
Total
Income (Losses) from Equity Investment |
|
$ |
(3.7 |
) |
$ |
(2.9 |
) |
$ |
(0.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
|
|
|
|
|
|
|
|
|
|
UI |
|
$ |
7.8 |
|
$ |
9.6 |
|
$ |
(1.8 |
) |
|
Xcelecom |
|
|
(0.7 |
) |
|
(0.6 |
) |
|
(0.1 |
) |
|
Minority
Interest Investment & Other (1) (2) |
|
|
(3.9 |
) |
|
(3.3 |
) |
|
(0.6 |
) |
|
Subtotal
Net Income from Continuing Operations |
|
|
3.2 |
|
|
5.7 |
|
|
(2.5 |
) |
|
Discontinued
Operations |
|
|
- |
|
|
1.4 |
|
|
(1.4 |
) |
|
Total
Net Income |
|
$ |
3.2 |
|
$ |
7.1 |
|
$ |
(3.9 |
) |
| (1) |
The
category "Minority Interest Investment and Other" includes amounts
recognized at the non-utility businesses in relation to their minority
interest investments, as well as unallocated holding company
costs. |
| (2) |
Includes
income (losses) recognized at the non-utility businesses in relation to
their minority interest investments. |
The
United Illuminating Company Results of Operations: First Quarter of
2005
vs. First Quarter of 2004
| |
Quarter
Ended
March
31, 2005 |
Quarter
Ended
March
31, 2004 |
2005
more (less) than 2004 |
|
Amount |
Percent |
|
EPS
from operations |
|
|
|
|
|
Total
UI - basic |
$0.54 |
$0.67 |
$(0.13) |
(19)% |
|
Total
UI - diluted (Note A) |
$0.54 |
$0.67 |
$(0.13) |
(19)% |
|
Retail
Sales* |
1,474 |
1,523 |
(49) |
(3)% |
|
Unbilled
Adjustment* (Note B) |
- |
(46) |
46 |
3% |
|
Leap
Year Adjustment* (Note C) |
- |
(16) |
16 |
1% |
|
Weather
Impact* (Note D) |
(3) |
(18) |
15 |
1% |
|
Retail
Sales - Normalized* |
1,471 |
1,443 |
28 |
2% |
*
Millions of kilowatt-hours
Note A:
Reflecting
the effect of dilutive stock options, performance shares and restricted stock.
Note
B: 46
million kilowatt-hour non-recurring adjustment associated with a change in
accounting estimate to unbilled
revenue recognized in the first quarter of 2004.
Percentage
change reflects impact to total retail sales.
Note
C: 16
million kilowatt-hour adjustment to reflect the impact of leap year in
2004. Percentage change reflects
impact to
total retail sales.
Note
D: Percentage
change reflects impact to total retail sales.
UI’s net
income was $7.8 million, or $0.54 per share, in the first quarter of 2005,
compared to $9.6 million, or $0.67 per share, in the first quarter of 2004. The
decrease from the first quarter of 2004 was mainly attributable to the absence
of $0.13 per share of non-recurring gains associated with a change in accounting
estimate adjustment to unbilled revenues ($0.07 per share), a DPUC decision
allowing partial recovery of increased pension and post-retirement benefits
expenses for a portion of 2004 ($0.03 per share), and the impact of final
decisions by the DPUC regarding the disposition of proceeds from UI’s investment
in nuclear generating facilities ($0.03 per share).
Overall,
UI’s revenue increased by $5.1 million, from $181.8 million in the first quarter
of 2004 to $186.9 million in the first quarter of 2005. Retail revenue increased
$9.1 million due mainly to the impact of an average 7.9% price increase
effective January 1, 2005 resulting from various DPUC decisions (see “Major
Influences - The United Illuminating Company - Legislation & Regulation,”
for further discussion). The price increase allowed UI to collect certain
Federally Mandated Congestion Cost charges from customers to offset higher costs
of procuring energy (see fuel and energy expense discussion below). The effect
of the price increase was partially offset by an overall decrease in
kilowatt-hour volume. Of the 49 million kilowatt-hour decrease in volume in the
quarter, compared to the first quarter of 2004, approximately 3%, or 46 million
kilowatt-hours, of this decrease was attributable to a non-recurring adjustment
associated with a change in accounting estimate to unbilled revenue. Milder
weather in the first quarter of 2005, as compared to the first quarter of 2004,
reduced kilowatt-hour volume by 1%. Wholesale revenue decreased by $0.8 million,
as compared to the first quarter of 2004, due to lower volume. Other revenue
decreased $3.2 million primarily due to the reclassification from retail to
other revenue representing net activity increasing the GSC “working capital
allowance,” established in a DPUC decision, for the quarter.
Retail
fuel and energy expense increased by $7.3 million, from $87.9 million in the
first quarter of 2004, to $95.2 million in the first quarter of 2005. The
increase was primarily due to increased costs of transitional standard offer
service supply as well as UI’s portion of costs related to RMR agreements
between ISO-NE and NRG. UI receives electricity to satisfy its transitional
standard offer retail customer service requirements through a fixed-price
purchased power agreement. These costs are recovered through the GSC portion of
UI’s unbundled retail customer rates. UI’s wholesale energy expense in the first
quarter of 2005 decreased by $1.6 million compared to the same period of 2004,
mainly due to lower volume as a result of a scheduled and unscheduled outage in
2005.
UI’s
operation and maintenance (O&M) expenses decreased by $1.4 million, from
$48.4 million in the first quarter of 2004 to $47 million in the first quarter
of 2005. The decrease was attributable to a variety of factors including
decreases in bad debt expenses and C&LM program costs partially offset by
increases in decommissioning expenses. Changes to the C&LM program costs and
decommissioning expenses do not impact net income, as they are offset by
revenues and amortization expense, respectively.
Amortization
of regulatory assets increased by $1 million, from $8.8 million in the first
quarter of 2004 to $9.8 million in the first quarter of 2005. The primary reason
for the increase was due to CTA amortization. UI accrues or defers additional
amortization to achieve the authorized return on equity of 10.45% on unamortized
CTA rate base.
Other
income decreased by $1.5 million in the first quarter of 2005, compared to the
first quarter of 2004, mainly due to the absence of a reduction of reserves
associated with UI’s investment in Seabrook Station resulting from a March 2004
DPUC decision.
Non-Utility
Results of Operations: First Quarter 2005 vs. First Quarter
2004
| |
Quarter
Ended
March
31, 2005 |
Quarter
Ended
March
31, 2004 |
2005
more (less) than 2004 |
|
Amount |
Percent |
|
EPS
|
|
|
|
|
|
Operating
Business |
|
|
|
|
|
Xcelecom |
$(0.05) |
$(0.04) |
$(0.01) |
(25)% |
| |
|
|
|
|
|
Minority
Interest Investments |
|
|
|
|
|
UBE |
(0.19) |
(0.11) |
(0.08) |
(73)% |
|
UCI |
0.01 |
(0.01) |
0.02 |
200% |
|
Subtotal
Minority Interest
Investments |
(0.18) |
(0.12) |
(0.06) |
(50)% |
| |
|
|
|
|
|
UIL
Corporate (Note A) |
(0.09) |
(0.11) |
0.02 |
18% |
| |
|
|
|
|
|
Total
Non-Utility EPS from Continuing Operations |
(0.32) |
(0.27) |
(0.05) |
(19)% |
|
Discontinued
Operations |
- |
0.10 |
(0.10) |
(100)% |
|
Total
Non-Utility EPS - Basic |
$(0.32) |
$(0.17) |
$(0.15) |
(88)% |
|
Total
Non-Utility EPS - Diluted (Note B) |
$(0.32) |
$(0.18) |
$(0.14) |
(78)% |
|
Note
A: |
Includes
interest charges and strategic and administrative costs of the non-utility
holding company. |
|
Note
B: |
Reflecting
the effect of dilutive stock options, performance shares and restricted
stock. Dilutive
securities did not dilute earnings from continuing operations for the
three months ended March 31, 2005. Dilutive securities diluted the
earnings from continuing operations by $0.01 per share for the three
months ended March 31, 2004, but did not dilute the earnings from
discontinued operations for the same period of
2004. |
The
consolidated non-utility businesses reported a loss from continuing operations,
including unallocated holding company costs, of $4.6 million, or $0.32 per
share, in the first quarter of 2005, an increased loss of $0.7 million, or $0.05
per share, compared to the same period of 2004. The increased loss was mainly
attributed to results at UBE which were impacted by a scheduled
maintenance-related plant outage. Net income from discontinued operations for
the first quarter of 2004 amounted to $1.4 million, or $0.10 per
share.
Operating
revenue for the non-utility businesses increased by $24 million, or 35% compared
to the first quarter of 2004. The entire increase in revenues came from
Xcelecom. First quarter 2005 operating expenses for the non-utility businesses
increased $24.2 million, mainly from higher expenses at Xcelecom due to the
increase in business. Losses from Equity investments increased by $0.8 million
compared to the first quarter 2004 mainly due to the costs of a planned outage
at UBE’s investment that occurred in March and continued into April
2005.
The
following is a detailed explanation of the quarterly variances for each of UIL
Holdings’ non-utility businesses.
Non-Utility
Businesses
Xcelecom,
Inc.
Xcelecom
lost $0.7 million, or $0.05 per share, in the first quarter of 2005, compared to
a loss of $0.6 million, or $0.04 per share in the first quarter of 2004.
Although overall revenues at Xcelecom increased by approximately $24 million as
compared to the first quarter of 2004, the profitability realized on 2005
revenues was lower due to customer and project mix, and a lower proportion of
service and smaller project revenues. Increases in selling and administrative
costs in the first quarter of 2005 were primarily driven by the impacts of an
acquisition made in 2004, along with hiring of additional personnel in the
systems integration businesses to meet the needs of certain large projects.
These overhead cost increases fully offset the positive impact of higher sales
volume in the quarter.
Xcelecom’s
backlog of work to be completed as of March 31, 2005 amounted to $186 million,
an increase of $15 million, or 9%, from the same period of 2004. The overall
expected profitability related to the March 31, 2005 backlog is slightly higher,
in percentage terms, than the expected profitability percentage carried in the
March 31, 2004 backlog balance. There has been a shift in the composition of
backlog from time to time, based on market demand and economic trends in
Xcelecom’s geographic markets. At March 31, 2005, the backlog of work was
predominantly for education and commercial projects. On a project size basis,
19% of the backlog is attributable to projects with values of $0.5 million or
less, 78% is attributable to projects with values between $0.5 million and
$5 million, and 3% is attributable to projects with values in excess of $5
million. On a regional basis, 72% of this backlog is attributable to the
Northeast, with the remaining 28% attributable to the mid-Atlantic and Southeast
regions.
Minority
Interest Investments
United
Bridgeport Energy, Inc.
UBE owns
a 33 1/3% interest in Bridgeport Energy, LLC (BE). UBE lost $2.7 million,
or $0.19 per share, in the first quarter of 2005, compared to a loss of $1.6
million, or $0.11 per share in the first quarter of 2004. First quarter 2005
results were approximately $0.12 per share lower than the same period of 2004
due to the costs of a planned outage that occurred in March and continued into
April 2005. Excluding the impact of the outage, first quarter 2005 results were
$0.04 per share better than the first quarter of 2004 due to higher revenues at
the plant. In general, lower energy prices, high natural gas prices and the
absence of a viable capacity market to provide incentive for generating plants
to remain available, continue to negatively impact results. BE’s
first quarter 2005 results were also impacted by legal fees associated with
resolving a dispute between UBE and the majority owner of BE regarding UBE’s
contractual rights to sell its 33 1/3% interest in BE to the majority owner at
fair market value, which reduced earnings by approximately $0.02 per
share.
United
Capital Investments, Inc.
UCI
earned $0.1 million, or $0.01 per share, in the first quarter of 2005, compared
to a loss of $0.1 million, or $0.01 per share in the first quarter of 2004.
The
improvement from the prior year was due to increased income from Cross-Sound of
$0.01 per share and better performance from UCI’s passive
investments.
UIL
Corporate
UIL
Holdings retains certain costs at the holding company, or “corporate” level
which are not allocated to the various non-utility subsidiaries. UIL Corporate
incurred unallocated after-tax costs of $1.3 million, or $0.09 per share in the
first quarter of 2005, compared to unallocated after-tax costs of $1.6 million,
or $0.11 per share in the same quarter of 2004. The improvement from the first
quarter of 2004 was mainly due to lower interest and administrative costs.
Unallocated costs at UIL Corporate were partially offset by after-tax interest
income earned on the loan to Cross-Sound totaling $0.2 million, or $0.01 per
share, and $0.1 million, or $0.01 per share, for the first quarter of 2005 and
2004, respectively.
Discontinued
Operations
On June
22, 2004, UIL completed the sale of APS to CheckFree, a leading
provider of financial electronic commerce services and products, pursuant to the
purchase agreement entered into between the parties on December 16, 2003. APS,
and its 51% ownership interest in CellCards of Illinois, LLC (CCI) were
classified as discontinued operations in the fourth quarter of 2003. On February
13, 2004, CCI was sold to an independent third party for book value, excluding
transaction costs.
Net
income from discontinued operations amounted to $1.4 million, or $0.10 per
share, in the first quarter of 2004. No operations were classified as
discontinued during the first quarter of 2005.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
UIL
Holdings’ and UI’s primary market risk is the interest rate risk associated with
the need to refinance fixed rate debt at maturity and the remarketing of
multi-annual tax-exempt bonds. The weighted average remaining fixed rate period
of outstanding long-term debt obligations of UIL Holdings and UI is 3.4 years at
an average interest rate of 4.3%. Given the term of the fixed rate debt, UIL
Holdings believes that it has no material quantitative or qualitative exposure
to market risk in the near term. In addition, historically, UI has been able to
include its interest costs in revenue requirements for recovery through rates.
UIL
Holdings and Xcelecom have short-term revolving credit agreements that permit
borrowings for fixed periods of time at fixed interest rates determined by the
London Interbank Offered Rate (LIBOR), and also borrowings at fluctuating
interest rates determined by the prime lending market. Changes in LIBOR or the
prime lending market will have an impact on interest expense, but due to the
relatively low level of short-term borrowings under these credit facilities, the
impact of changes in short-term interest rates is not expected to be material.
UIL
Holdings does not have any derivative instruments or any material investments in
financial instruments at this time.
UIL
Holdings maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its periodic reports to the
Securities and Exchange Commission (SEC) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to UIL Holdings’
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure based on
the definition of “disclosure controls and procedures” in Rule 13a-15(e) and
Rule 15d-15(e) under the Securities Exchange Act of 1934. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Also, through
United Capital Investments, Inc. and United Bridgeport Energy, Inc., UIL
Holdings has minority investments in certain other entities. As UIL Holdings
does not control or manage these entities, its disclosure controls and
procedures with respect to such entities are necessarily substantially more
limited than those it maintains with respect to its subsidiaries.
UIL
Holdings carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and its
Chief Financial Officer, of the effectiveness of the design and operation of UIL
Holdings’ disclosure controls and procedures as of March 31, 2005. Based on the
foregoing, UIL Holdings’ Chief Executive Officer and Chief Financial Officer
concluded that its disclosure controls and procedures were
effective.
There
have been no changes in UIL Holdings’ internal control over financial reporting
during the quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect UIL Holdings’ internal control over
financial reporting. In connections with the previously announced restructuring
of UIL Holdings’ Finance organization, effective March 1, 2005, Richard J.
Nicholas assumed the role of Executive Vice President and Chief Financial
Officer (CFO) of UIL Holdings, in addition to his current role of Vice President
Finance and
CFO of
UI, UIL Holdings utility subsidiary. UIL Holdings’ internal control over
financial reporting has not changed as a result of this personnel change, but
key personnel, such as the CFO, are an integral part of the internal control
environment.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
From time
to time, UIL Holdings issues unregistered shares pursuant to its Non-Employee
Director Common Stock and Deferred Compensation Plan. On March
17, 2005, UIL Holdings issued 376 unregistered shares of UIL Holdings’ common
stock, which qualified as an exempt private placement transaction pursuant to
Section 4 (2) of the Securities Act of 1933, to a director of UIL Holdings to
satisfy the
provisions of a deferred compensation arrangement. The shares issued were
obtained by UIL Holdings through open market transactions, as noted in the table
below.
|
Period |
Total
Number of Shares Purchased* |
Average
Price Paid Per Share |
Total
Number of Shares Purchased as Part of Publicly Announced
Plans |
Maximum
Number of Shares that May Yet Be Purchased Under the
Plans |
|
January |
- |
- |
None |
None |
|
February |
- |
- |
None |
None |
|
March |
376 |
$50.89 |
None |
None |
|
Total |
376 |
$50.89 |
None |
None |
*All
shares were purchased in open market transactions by UIL Holdings’ to satisfy
the provisions of a deferred compensation arrangement with a director of UIL
Holdings. The effects of this transaction did not change the number of
outstanding shares of UIL Holdings common stock.
Item
5. Other Information
On May 3,
2005, The United Illuminating Company (UI) and Local 470-1, Utility Workers
Union of America, AFL-CIO executed a six-year agreement effective April 1, 2005,
which expires on May 15, 2011. The material terms of the agreement provide for
general annual wage increases for all members of the bargaining unit as follows:
a 3.50% general increase effective April 1, 2005, a 3.75% general increase
effective each April 1 of 2006 through 2008, and a 3.50% general increase
effective each April 1 of 2009 and 2010. The agreement also provides a no-layoff
guarantee (1) for all current employees who are members of the bargaining unit
through May 15, 2006, (2) effective May 15, 2006 through the remaining term of
the agreement for all employees who are members of the bargaining unit hired
prior to May 15, 2003, and (3) effective May 15, 2010 through the remaining term
of the contract for all employees who are members of the bargaining unit hired
prior to May 15, 2004. The agreement also calls for continuation of the current
core health insurance plan through December 31, 2005, with a switch to a new
core plan effective January 1, 2006. Cost-sharing related to health insurance
premiums for members of the bargaining unit will remain at 13% through December
31, 2007 and then increase to 13.5% for 2008, 15% for 2009, 15.75% for 2010 and
16.5% for 2011. In addition, the agreement provides for changes to the
retirement and post-retirement medical benefits that will be offered to members
hired into the bargaining unit on or after April 1, 2005 (see Part I, Item
1, “Financial Statements - Notes to Consolidated Financial Statements - Note
(G), Pension and Other Benefits” of this Form 10-Q for further discussion of the
new retirement plan). The information provided herein under Item 5. “Other
Information” is being provided in lieu of a current filing on Form 8-K. A copy
of the agreement is attached to this filing on Form 10-Q as exhibit
10.29.
(a) Exhibits.
|
Exhibit
Table
Item
Number |
Exhibit
Number |
Description |
|
|
|
|
|
(10) |
10.29 |
Copy
of Agreement, dated May 3, 2005, between The United Illuminating Company
and Local 470-1, Utility Workers Union of America,
AFL-CIO. |
|
(31) |
31.1 |
Certification
of Periodic Financial Report. |
|
(31) |
31.2 |
Certification
of Periodic Financial Report. |
|
(32) |
32 |
Certification
of Periodic Financial Report. |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
UIL
HOLDINGS CORPORATION |
| |
|
| |
|
| |
|
| |
|
|
Date 05/05/2005 |
/s/ Richard J.
Nicholas |
| |
Richard
J. Nicholas |
| |
Executive Vice
President |
| |
and
Chief Financial Officer |
