XML 44 R24.htm IDEA: XBRL DOCUMENT

STATEMENT OF ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2011

STATEMENT OF ACCOUNTING POLICIES [Abstract]

Basis of Presentation

The Consolidated Financial Statements include the accounts of UIL Holdings and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

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

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

Discontinued Operations

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

Regulatory Accounting

Generally accepted accounting principles for regulated entities in the United States of America allow UIL Holdings' regulated subsidiaries to give accounting recognition to the actions of regulatory authorities in accordance with the provisions of Accounting Standards Codification (ASC) 980 “Regulated Operations.” In accordance with ASC 980, UIL Holdings' regulated utilities have deferred recognition of costs (a regulatory asset) or have recognized obligations (a regulatory liability) if it is probable that such costs will be recovered or obligations relieved in the future through the ratemaking process. UIL Holdings' regulated utilities are allowed to recover all such deferred costs through its regulated rates. See Note (C), “Regulatory Proceedings,” for a discussion of the recovery of certain deferred costs, as well as a discussion of the regulatory decisions that provide for such recovery.

In addition to the Regulatory Assets and Liabilities identified on the Consolidated Balance Sheet and described below, there are other regulatory assets and liabilities such as certain deferred tax liabilities. UI also has obligations under long-term power contracts, the recovery of which is subject to regulation. If UIL Holdings' regulated utilities, or a portion of their assets or operations, were to cease meeting the criteria for application of these accounting rules, accounting standards for businesses in general would become applicable and immediate recognition of any previously deferred costs would be required in the year in which such criteria are no longer met (if such deferred costs are not recoverable in the portion of the business that continues to meet the criteria for application of ASC 980). UIL Holdings expects its regulated utilities to continue to meet the criteria for application of ASC 980 for the foreseeable future. If a change in accounting were to occur, it could have a material adverse effect on the earnings and retained earnings of the applicable regulated utility and UIL Holdings in that year and could also have a material adverse effect on their on going financial condition.

Derivatives

UIL Holdings' regulated subsidiaries are parties to contracts, and involved in transactions, that have been determined to be derivatives and are discussed below.

The fair value of the gross derivative assets and liabilities as of December 31, 2011 and 2010 were as follows:

	December 31, 2011
	(In Thousands)

	Current Assets		Deferred Charges and Other Assets		Current Liabilities			Noncurrent Liabilities

Derivative assets/(liabilities), gross	$	14,189	$	73,264	$	(28,888	)	$	(239,147	)

	December 31, 2010
	(In Thousands)


	Current Assets		Deferred Charges and Other Assets		Current Liabilities			Noncurrent Liabilities

Derivative assets/(liabilities), gross	$	6,057	$	28,131	$	(13,246	)	$	(129,560	)

Contracts for Differences (CfDs)

Pursuant to Connecticut's 2005 Energy Independence Act (EIA), PURA initiated a process to solicit bids to create new or incremental capacity resources in order to reduce federally mandated congestion charges, and selected four new capacity resources. To facilitate the transactions between selected capacity resources and Connecticut electric customers, and provide the commitment necessary for owners of these resources to obtain necessary financing, PURA required that UI and CL&P execute long-term contracts with the selected resources. In August 2007, PURA approved four CfDs, each of which specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price. As directed by PURA, UI executed two of the contracts and CL&P executed the other two contracts. The cost of the contracts will be paid by customers and will be subject to a cost-sharing agreement whereby approximately 20% of the cost is borne by UI customers and approximately 80% by CL&P customers.

PURA has determined that costs associated with these CfDs will be recoverable by UI and CL&P, and in accordance with ASC 980 “Regulated Operations,” UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability). The CfDs are marked-to-market in accordance with ASC 815. For those CfDs signed by CL&P, UI records its approximate 20% portion of CL&P's derivative, pursuant to the cost-sharing agreement noted above. As of December 31, 2011, UI has recorded a gross derivative asset of $83.9 million, a regulatory asset of $184.1 million, and a gross derivative liability of $268.0 million ($163.1 million related to its portion of CL&P's derivative liabilities). See Note (K) “Fair Value of Financial Instruments” for additional CfD information.

In February 2010, an explosion occurred at the construction site of a 620-megawatt plant being built by Kleen Energy Systems, LLC (Kleen), one of four capacity resources selected in 2008 by PURA to create new or incremental capacity resources. CL&P executed the CfD with the Kleen project which is subject to the cost-sharing agreement between UI and CL&P. In July 2011, Kleen reported that the rebuilding of its facility was complete and that commercial operation of the facility commenced on July 19, 2011, at which time payments under the CfD began.

The unrealized gains and losses from mark-to-market adjustments to derivatives recorded in regulatory assets or regulatory liabilities for the years ended December 31, 2011 and 2010 were as follows:

	Year Ended
	December 31,
	2011		2010
	(In Thousands)

Regulatory Assets - Derivative assets	$	69,397	$	(23,022	)

Regulatory Liabilities - Derivative liabilities	$	5,736	$	584

Weather Insurance Contracts

On October 20, 2011, SCG and CNG each entered into weather insurance contracts for the winter period of November 1, 2011 through April 30, 2012 in order to provide financial protection from significant weather fluctuations. According to the terms of each contract, if temperatures are warmer than normal at a prescribed level for the contract period, SCG and CNG will each receive a payment, up to the maximum amount allowed under the contracts of $3 million; however, if temperatures are colder than normal at a prescribed level for the contract period, SCG and CNG will each make a payment of up to a maximum of $2 million. The premiums paid are amortized over the terms of the contracts. The fair value of the contracts is carried on the balance sheet as a derivative with changes in value recorded in the income statement as Other Income and (Deductions). The derivative asset related to these contracts totaled $3.5 million at December 31, 2011.

Property, Plant and Equipment

The cost of additions to property, plant and equipment and the cost of renewals and betterments are capitalized. Cost consists of labor, materials, services and certain indirect construction costs, including an allowance for funds used during construction (AFUDC). The costs of current repairs, major maintenance projects and minor replacements are charged to appropriate operating expense accounts as incurred. The original cost of utility property, plant and equipment retired or otherwise disposed of and the cost of removal, less salvage, are charged to the accumulated provision for depreciation.

UI and the Gas Companies accrue for estimated costs of removal for certain of their plant-in-service. Such removal costs are included in the approved rates used to depreciate these assets. At the end of the service life of the applicable assets, the accumulated depreciation in excess of the historical cost of the asset provides for the estimated cost of removal. In accordance with ASC 980 “Regulated Operations,” the accrued costs of removal have been recorded as a regulatory liability. Accrued costs of removal as of December 31, 2011 and 2010 were $224.1 million and $219.1 million, respectively.

Asset Retirement Obligations

The fair value of the liability for an asset retirement obligation (ARO) and/or a conditional ARO is recorded in the period in which it is incurred and the cost is capitalized by increasing the carrying amount of the related long-lived asset. The liability is adjusted to its present value periodically over time, and the capitalized cost is depreciated over the useful

life of the related asset. Upon settlement, the obligation is settled either at its recorded amount or a gain or a loss is incurred. Any timing differences between rate recovery and depreciation expense are deferred as either a regulatory asset or a regulatory liability.

The term conditional ARO refers to an entity's legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. If an entity has sufficient information to reasonably estimate the fair value of the liability for a conditional ARO, it must recognize that liability at the time the liability is incurred.

As of December 31, 2011, UIL Holdings' ARO, including estimated conditional AROs, was $18.1 million and consisted primarily of obligations related to the removal or retirement of asbestos, polychlorinated biphenyl (PCB)-contaminated equipment, gas pipeline and cast iron gas mains. The long-lived assets associated with the AROs are gas storage property, distribution property and other property. As of December 31, 2010, UIL Holdings' ARO was $17.8 million.

Allowance for Funds Used During Construction

In accordance with the uniform systems of accounts, the Company capitalizes AFUDC, which represents the approximate cost of debt and equity capital devoted to plant under construction. The portion of the allowance applicable to borrowed funds and the allowance applicable to equity funds are presented as other income in the Consolidated Statement of Income. Although the allowance does not represent current cash income, it has historically been recoverable under the ratemaking process over the service lives of the related properties. Weighted-average AFUDC rates for 2011, 2010 and 2009 were 6.31%, 6.65% and 2.44%, respectively.

Depreciation

Provisions for depreciation on utility plant for book purposes are computed on a straight-line basis, using estimated service lives. For utility plant other than software, service lives are determined by independent engineers and subject to review and approval by PURA and DPU. Software service life is based upon management's estimate of useful life. The aggregate annual provisions for depreciation for the years 2011, 2010 and 2009 were approximately 3.3%, 3.6%, and 3.7%, respectively, of the original cost of depreciable property.

Income Taxes

In accordance with ASC 740 “Income Taxes,” UIL Holdings has provided deferred taxes for all temporary book-tax differences using the liability method. The liability method requires that deferred tax balances be adjusted to reflect enacted future tax rates that are anticipated to be in effect when the temporary differences reverse. In accordance with generally accepted accounting principles for regulated industries, UIL Holdings' regulated subsidiaries have established a regulatory asset for the net revenue requirements to be recovered from customers for the related future tax expense associated with certain of these temporary differences. For ratemaking purposes, UIL Holdings' regulated subsidiaries normalize all investment tax credits (ITCs) related to recoverable plant investments.

Under ASC 740, UIL Holdings may recognize the tax benefit of an uncertain tax position only if management believes it is more likely than not that the tax position will be sustained on examination by the taxing authority based upon the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based upon the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. UIL Holdings' policy is to recognize interest accrued and penalties associated with uncertain tax positions as a component of operating expense.

Goodwill

UIL Holdings may be required to recognize an impairment of goodwill in the future due to market conditions or other factors related to its results of operations and performance. Those market events could include a decline in the forecasted results in the company business plan, significant adverse rate case results, changes in capital investment budgets or changes in interest rates that could permanently impair the fair value of a reporting unit. Recognition of impairments of a significant portion of goodwill would negatively affect reported results of operations and total capitalization, the effect of which could be material and could make it more difficult to maintain credit ratings, secure financing on attractive terms, maintain compliance with debt covenants and meet expectations of regulators.

A goodwill impairment test is performed each year and the test will be updated between annual tests if events or circumstances occur that may reduce the fair value of a reporting unit below its carrying value. The annual analysis of the potential impairment of goodwill is a two step process. Step one of the impairment test consists of comparing the fair values of reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, step two must be performed to determine the amount, if any, of the goodwill impairment loss. If the carrying amount is less than fair value, further testing of goodwill impairment is not performed.

Step two of the goodwill impairment test consists of comparing the implied fair value of the reporting unit's goodwill against the carrying value of the goodwill. Determining the implied fair value of goodwill requires the valuation of a reporting unit's identifiable tangible and intangible assets and liabilities as if the reporting unit had been acquired in a business combination on the testing date. The difference between the fair value of the entire reporting unit as determined in step one and the net fair value of all identifiable assets and liabilities represents the implied fair value of goodwill. A goodwill impairment charge, if any, would be the difference between the carrying amount of goodwill and the implied fair value of goodwill upon the completion of step two.

As of October 1, 2011, the fair values of UIL Holdings' applicable reporting units exceeded their carrying values and therefore no impairment was recognized. No events or circumstances occurred subsequent to October 1, 2011 that would make it more likely than not that the fair value of the reporting units fell below their respective carrying values.

Revenues

Regulated utility revenues are based on authorized rates applied to each customer. These retail rates are approved by regulatory bodies and can be changed only through formal proceedings.

UI utilizes a customer accounting software package integrated with the network meter reading system to estimate unbilled revenue on a customer-by-customer basis, utilizing actual daily meter readings at the end of each month to calculate consumption and pricing for each customer. A significant portion of utility retail kilowatt-hour consumption is read through the network meter reading system. For those customers still requiring manual meter readings, consumption is estimated based upon historical usage and actual pricing for each customer.

For the Gas Companies, unbilled revenues represent estimates of receivables for products and services provided but not yet billed. The estimates are determined based on various assumptions, such as current month energy load requirements, billing rates by customer classification and weather.

Cash and Temporary Cash Investments

UIL Holdings considers all of its highly liquid debt instruments with an original maturity of three months or less at the date of purchase to be cash and temporary cash investments.

Restricted Cash

UIL Holdings' restricted cash at December 31, 2011 and 2010 totaled $6.5 million and $2.4 million, respectively, which primarily relates to electric distribution and transmission capital projects, which have been withheld by UI and will remain in place until the verification of fulfillment of contractor obligations.

Equity Investments

In February 2008, UI and an NRG affiliate formed GenConn, a 50-50 joint venture, for the purpose of constructing peaking generation plants in Connecticut. UI's investment in GenConn is being accounted for as an equity investment, the carrying value of which was $131.1 million and $62.8 million as of December 31, 2011 and December 31, 2010, respectively. The loans UI had made for the construction of the GenConn Devon facility of approximately $55.5 million were converted into equity in September 2010. The loans UI made to GenConn for the construction of GenConn Middletown of approximately $63 million were converted into equity in July 2011.

UI's income from its equity investment in GenConn was $11.3 million, $1.3 million and zero for the years ended December 31, 2011, 2010 and 2009, respectively. In 2011, UI received cash distributions of $8.0 million from GenConn. As of December 31, 2011, the undistributed earnings from UI's equity investment in GenConn were approximately $4.6 million. In January 2012, UI received cash distributions from GenConn of $3.3 million.

Pension and Other Postretirement Benefits

UIL Holdings accounts for pension plan costs and other postretirement benefits, consisting principally of health and life insurance, in accordance with the provisions of ASC 715 “Compensation - Retirement Benefits.” See – Note (G), Pension and Other Benefits.

Impairment of Long-Lived Assets and Investments

ASC 360 “Property, Plant, and Equipment” requires the recognition of impairment losses on long-lived assets when the book value of an asset exceeds the sum of the expected future undiscounted cash flows that result from the use of the asset and its eventual disposition. If impairment arises, then the amount of any impairment is measured based on discounted cash flows or estimated fair value.

ASC 360 also requires that rate-regulated companies recognize an impairment loss when a regulator excludes all or part of a cost from rates, even if the regulator allows the company to earn a return on the remaining costs allowed. Under this standard, the probability of recovery and the recognition of regulatory assets under the criteria of ASC 980 must be assessed on an ongoing basis. As discussed in the description of ASC 980 in this Note (A) under “Regulatory Accounting”, determination that certain regulatory assets no longer qualify for accounting as such could have a material impact on the financial condition of UI, the Gas Companies and UIL Holdings. At December 31, 2011, UI and the Gas Companies, as rate-regulated entities, did not have any assets that were impaired under this standard.

ASC 323 “Investments” requires that a loss in the value of an investment that is other than a temporary decline should be recognized. In accordance with ASC 323, UIL Holdings reviews its investments accounted for by the equity method for impairment by identifying and measuring losses in the value based upon a comparison of fair value to carrying value. At December 31, 2011, UIL Holdings did not have any equity investments that were impaired under this standard.

Earnings per share

Earnings per Share

The following table presents a reconciliation of the basic and diluted earnings per share calculations for the years 2011, 2010 and 2009:

	Year Ended December 31,
	2011		2010		2009
	(In Thousands, except per share amounts)

Numerator:
Net income attributable to UIL Holdings	$	99,656	$	54,854	$	54,317
Less: Net income allocated to unvested units		210		149		84
Net income attributable to common shareholders	$	99,446	$	54,705	$	54,233

Denominator:
Basic average number of shares outstanding		50,609		35,722		28,027
Effect of dilutive securities		317		361		246
Diluted average number of shares outstanding		50,926		36,083		28,273

Earnings per share:
Basic	$	1.96	$	1.53	$	1.94
Diluted	$	1.95	$	1.52	$	1.93

Options to purchase 89,336, 98,079 and 140,152 shares of common stock were outstanding during 2011, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during such period.

Stock-Based Compensation

Certain members of management have the opportunity to earn a pre-determined number of performance shares, the number of which is predicated upon the achievement of various pre-defined performance measures over a three-year period. These performance shares were issued under the UIL Holdings 1999 Amended and Restated Stock Plan prior to 2009 and are now issued under the UIL Holdings 2008 Stock and Incentive Compensation Plan (2008 Stock Plan). Each award of performance shares vests at the end of a three-year cycle with the actual issuance of UIL Holdings' common stock in respect of such performance shares following the end of each three-year cycle. A new three-year cycle begins in January of each year.

UIL Holdings records compensation expense for these performance shares ratably over the three-year period, except in the case of retirement-eligible employees, for whom compensation expense is immediately recognized in accordance with ASC 718 “Compensation-Stock Compensation,” based on the value of the expected payout at the end of each year relative to the performance measures achieved. An additional $0.6 million of compensation expense was recorded in the first quarter of 2011 with respect to retirement-eligible employees based on the application of ASC 718 retirement-eligible provisions.

In 2011, target amounts of performance shares were granted to certain members of management as follows: 111,230 shares in February, 5,314 shares in April and 3,627 shares in May. The averages of the high and low market prices on the February, April and May grant dates were $30.69, $31.76 and $31.85 per share, respectively.

In February 2011, UIL Holdings granted a total of 2,566 shares of restricted stock to its President and Chief Executive Officer under the 2008 Stock Plan and in accordance with his employment agreement; the average of the high and low market price on the date of grant was $30.69 per share. Such shares vest in equal annual installments over a five year period.

In April 2011, UIL Holdings granted a total of 9,011 shares of restricted stock to non-employee directors under the 2008 Stock Plan as compensation for service from January 2011 to May 2011; the average of the high and low market price on the date of grant was $30.77 per share. Such shares vested in May 2011.

In May 2011, UIL Holdings granted a total of 23,394 shares of restricted stock to non-employee directors under the 2008 Stock Plan; the average of the high and low market price on the date of grant was $33.51 per share. Such shares vest in May 2012.

Total stock-based compensation expense for the years ended December 31, 2011, 2010 and 2009 was $5.3 million, $4.1 million and $3.6 million, respectively.

Variable Interest Entities

UIL Holdings has identified GenConn as a variable interest entity (VIE), which is accounted for under the equity method. UIL Holdings is not the primary beneficiary of GenConn, as defined in ASC 810 “Consolidation,” because it shares control of all significant activities of GenConn with its joint venturer, NRG. As such, GenConn is not subject to consolidation. GenConn recovers its costs through CfDs, which are cost of service-based and have been approved by PURA. As a result, with the achievement of commercial operation by GenConn Devon and GenConn Middletown, UIL Holdings' exposure to loss is primarily related to the potential for unrecovered GenConn operating or capital costs in a regulatory proceeding, the effect of which would be reflected in the carrying value of UIL Holdings' 50% ownership position in GenConn and through “Income from Equity Investments” in UIL Holdings' Consolidated Financial Statements. Such exposure to loss cannot be determined at this time. For further discussion of GenConn, see “–Equity Investments” as well as Note (C) “Regulatory Proceedings – Electric Distribution and Transmission – Equity Investment in Peaking Generation.”