SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NUMBER 1-15995
UIL HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-01541045
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
157 CHURCH STREET, NEW HAVEN, CONNECTICUT 06506
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-499-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
REGISTRANT TITLE OF EACH CLASS WHICH REGISTERED
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UIL Holdings Corporation Common Stock, no par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates on January 31, 2001 was $690,426,547 computed on the basis of the
average of the high and low sale prices of said stock reported in the listing of
composite transactions for New York Stock Exchange listed securities, published
in The Wall Street Journal on February 1, 2001.
The number of shares outstanding of the registrant's only class of common stock,
as of January 31, 2001, was 14,321,231.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of this Form 10-K into
-------- which document is incorporated
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DEFINITIVE PROXY STATEMENT,
DATED APRIL 6, 2001, FOR ANNUAL MEETING
OF THE SHAREHOLDERS TO BE HELD ON MAY 16, 2001. III
UIL HOLDINGS CORPORATION
FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business. 4
- General 4
- The United Illuminating Company 4
- Franchises 4
- Regulation 4
- Rates 5
- Power Supply Arrangements 5
- Arrangements with Other Utilities 6
- New England Power Pool 6
- New England Transmission Grid 6
- Hydro-Quebec 6
- Long Island Cable Project 7
- United Resources, Inc. 7
- Financing 8
- Employees 8
Item 2. Properties. 8
- Capital Expenditure Program 8
- The United Illuminating Company 8
- Generating Facilities 8
- Transmission and Distribution Plant 8
- Nuclear Generation 9
- General Considerations 10
- Nuclear Fuel 10
- Insurance Requirements 10
- Waste Disposal and Decommissioning 11
- Environmental Regulation 11
- United Resources, Inc. 13
Item 3. Legal Proceedings. 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
Executive Officers 14
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TABLE OF CONTENTS (CONTINUED)
PAGE
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PART II
Item 5. Market for UIL Holdings' Common Equity and Related
Stockholder Matters. 15
Item 6. Selected Financial Data. 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 18
- Major Influences on Financial Condition 18
- Liquidity and Capital Resources 20
- New Accounting Standards 21
- Results of Operations 21
- Looking Forward 30
Item 8. Financial Statements and Supplementary Data. 34
- Consolidated Financial Statements 34
- Statement of Income for the Years 2000, 1999 and 1998 34
- Statement of Cash Flows for the Years 2000, 1999 and 1998 35
- Balance Sheet as of December 31, 2000 and 1999 36
- Statement of Changes in Shareholders' Equity for the Years
2000, 1999 and 1998 38
- Notes to Consolidated Financial Statements 39
- Statement of Accounting Policies 39
- Capitalization 45
- Rate-Related Regulatory Proceedings 49
- Accounting for Phase-in Plan 51
- Short-Term Credit Arrangements 51
- Income Taxes 53
- Supplementary Information 55
- Pension and Other Benefits 57
- Jointly Owned Plant 60
- Unamortized Cancelled Nuclear Project 60
- Lease Obligations 60
- Commitments and Contingencies 62
- Capital Expenditure Program 62
- Nuclear Insurance Contingencies 62
- Other Commitments and Contingencies 63
- Connecticut Yankee 63
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TABLE OF CONTENTS (CONTINUED)
PAGE
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PART II (CONTINUED)
- Hydro-Quebec 63
- Long Island Cable Project 63
- Environmental Concerns 64
- Site Decontamination, Demolition and Remediation Costs 64
- Nuclear Fuel Disposal and Nuclear Plant Decommissioning 64
- Fair Value of Financial Instruments 66
- Quarterly Financial Data (Unaudited) 67
- Segment Information 67
Report of Independent Accountants 69
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures. 71
PART III
Item 10. Directors and Executive Officers 71
Item 11. Executive Compensation. 71
Item 12. Security Ownership of Certain Beneficial Owners and
Management. 71
Item 13. Certain Relationships and Related Transactions. 71
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. 72
Consent of Independent Accountants 78
Signatures 79
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PART I
Item 1. Business.
GENERAL
UIL Holdings Corporation (UIL Holdings) is the parent holding company for The
United Illuminating Company (UI) and United Resources, Inc (URI) and is not
itself an operating company. This holding company structure became effective on
July 20, 2000 as a result of the corporate restructuring of UI and its direct
and indirect non-regulated subsidiaries. All of UI's interests in all of its
direct and indirect non-regulated subsidiaries have been transferred to UIL
Holdings and, to the extent new businesses are subsequently acquired or
commenced, UIL Holdings expects they will be owned by UIL Holdings. UIL Holdings
is headquartered in New Haven, Connecticut, where its senior management
maintains offices and is responsible for overall planning, operating and
financial functions. UIL Holdings is an exempt public utility holding company
under the provisions of the Public Utility Holding Company Act of 1935.
THE UNITED ILLUMINATING COMPANY
UI is a regulated operating electric public utility established in 1899. It is
engaged principally in the purchase, transmission, distribution and sale of
electricity for residential, commercial and industrial purposes in a service
area of about 335 square miles in the southwestern part of the State of
Connecticut. The population of this area is approximately 704,000, which
represents approximately 21% of the population of the State. The service area,
largely urban and suburban in character, includes the principal cities of
Bridgeport (population approximately 137,000) and New Haven (population
approximately 124,000) and their surrounding areas. Situated in the service area
are retail trade and service centers, as well as large and small industries
producing a wide variety of products, including helicopters and other
transportation equipment, electrical equipment, chemicals and pharmaceuticals.
Of UI's 2000 retail electric revenues, approximately 42% were derived from
residential sales, 40% from commercial sales, 16% from industrial sales and 2%
from other sales.
For a description of the changes in UI's electric public utility business that
have resulted from Connecticut's enactment, in 1998, of Public Act 98-28 (the
Restructuring Act), see PART II, Item 8, "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note (C), Rate-Regulated
Regulatory Proceedings."
FRANCHISES
Subject to the power of alteration, amendment or repeal by the Connecticut
legislature, and subject to certain approvals, permits and consents of public
authorities and others prescribed by statute, UI has valid franchises to engage
in the purchase, transmission, distribution and sale of electricity in the area
served by it, the right to erect and maintain certain facilities on public
highways and grounds, and the power of eminent domain.
REGULATION
UI is subject to regulation by the Connecticut Department of Public Utility
Control (DPUC), which has jurisdiction with respect to, among other things,
retail electric service rates, accounting procedures, certain dispositions of
property and plant, mergers and consolidations, the issuance of securities,
certain standards of service, management efficiency, operation and construction,
and the location and construction of certain electric facilities. The DPUC
consists of five Commissioners, appointed by the Governor of Connecticut with
the advice and consent of both houses of the Connecticut legislature.
The location and construction of certain electric facilities is also subject to
regulation by the Connecticut Siting Council with respect to environmental
compatibility and public need. See "Environmental Regulation."
UI is a "public utility" within the meaning of Part II of the Federal Power Act
and is subject to regulation by the Federal Energy Regulatory Commission, which
has jurisdiction with respect to interconnection and coordination of
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facilities, wholesale electric service rates and accounting procedures, among
other things. See "Arrangements with Other Utilities."
In connection with ownership and leasehold interests in Seabrook Unit 1 and
Millstone Unit 3, UI is a holder of licenses under the Atomic Energy Act of
1954, as amended, and, as such, is subject to the jurisdiction of the United
States Nuclear Regulatory Commission (NRC), which has broad regulatory and
supervisory jurisdiction with respect to the construction and operation of
nuclear reactors, including matters of public health and safety, financial
qualifications, antitrust considerations and environmental impact. Connecticut
Yankee Atomic Power Company (Connecticut Yankee), in which UI has a 9.5% common
stock ownership share, is also subject to this NRC regulatory and supervisory
jurisdiction. See Item 2, "Properties - The United Illuminating Company -
Nuclear Generation."
UI is subject to the jurisdiction of the New Hampshire Public Utilities
Commission for limited purposes in connection with its 17.5% ownership and
leasehold interests in Seabrook Unit 1.
RATES
UI's retail electric service rates are subject to regulation by the DPUC.
UI's present general retail rate structure consists of various rate and service
classifications covering residential, commercial, industrial and street lighting
services.
Utilities are entitled by Connecticut law to charge rates that are sufficient to
allow them an opportunity to cover their reasonable operating and capital costs,
to attract needed capital and maintain their financial integrity, while also
protecting relevant public interests.
See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note (C), Rate-Regulated Regulatory
Proceedings" regarding the five-year incentive rate regulation plan, for the
years 1997 through 2001, that is currently in effect for UI and the standard
offer rates established by the DPUC pursuant to the Restructuring Act.
POWER SUPPLY ARRANGEMENTS
Under the Restructuring Act, all Connecticut electricity customers are able to
choose their power supply providers. Until January 1, 2004, UI is required to
offer full retail service to its customers under a regulated "standard offer"
rate and is also required to be the power supply provider to each customer who
does not choose an alternate power supply provider, even though UI is no longer
in the business of retail power generation. UI is also required under the
Restructuring Act to provide back-up power supply service to customers whose
alternate power supply provider fails to provide power supply services for
reasons other than the customers' failure to pay for such services.
On December 28, 1999, UI entered into a series of agreements with Enron Power
Marketing, Inc. (EPMI), a subsidiary of Enron Corp., Houston, Texas, for the
supply of all of the power needed by UI to meet its standard offer obligations
until the end of the four-year standard offer period and the power needed to
serve UI's special contract customers for the remaining contract terms. The
agreements also provide for the sale to EPMI of UI's entitlements under all of
its wholesale purchased power agreements (PPAs). However, unless or until a PPA
is terminated or formally assigned to EPMI, UI remains legally liable to pay the
applicable power supplier all amounts due under the PPA. The agreements with
EPMI also include a financially settled contract for differences related to
certain call rights of EPMI and put rights of UI with respect to UI's
entitlements in Seabrook Unit 1 and in Millstone Unit 3, and UI's provision to
EPMI of certain ancillary products and services associated with those nuclear
entitlements, which provisions terminate at the earlier of December 31, 2003 or
the date that UI sells its nuclear interests. The agreements do not restrict
UI's right to sell to third parties UI's ownership interests in those nuclear
generation units or the generated energy actually attributable to its ownership
interests.
If the generation resources available to UI's wholesale suppliers become
inadequate to meet its customer service obligations, UI expects to be able to
reduce the load on its system by the implementation of demand-side
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management programs, to acquire other demand-side and supply-side resources,
and/or to purchase capacity from other utilities or from the installed
capability spot market, as necessary. However, because the generation and
transmission systems of the major New England utilities, including UI, are
operated as if they were a single system, the ability of UI to meet its customer
service obligations is and will be dependent on the ability of the region's
generation and transmission systems to meet the region's load.
ARRANGEMENTS WITH OTHER UTILITIES
NEW ENGLAND POWER POOL
UI, in cooperation with other privately and publicly owned New England electric
utilities, established the New England Power Pool (NEPOOL) in 1971. NEPOOL was
formed to assure reliable operation of the bulk power system in the most
economic manner for the region. It has achieved these objectives through central
dispatching of all generation facilities owned by its members and through
coordination of the activities of the members that can have significant
inter-utility impacts. NEPOOL is governed by an agreement (NEPOOL Agreement)
that is filed with the Federal Energy Regulatory Commission (FERC); and its
provisions are subject to continuing FERC jurisdiction.
Because of evolving industry-wide changes, NEPOOL has been restructured. Its
membership has been broadened to cover all entities engaged in the electricity
business in New England, including power marketers and brokers, independent
power producers and load aggregators. An independent entity, ISO New England,
Inc. (ISO-NE), has the responsibility for the operation of the regional bulk
power system, so that the regional bulk power system will continue to be
operated both in accordance with the NEPOOL objectives and free of any adverse
impact on competition in the wholesale power markets, where various energy and
capacity products are traded in open competition among all participants.
Amendments to the NEPOOL Agreement establishing the markets were filed with and
have been approved by the FERC, and the markets became operational on May 1,
1999. There will be further substantial changes to the NEPOOL power markets,
including implementation of a transmission congestion management system (CMS)
and a multi-settlement system (MSS). CMS will help to optimize the use of the
existing transmission system and will help to ensure the efficient siting of new
generation and transmission resources. MSS will significantly reduce incentives
for participants to strategically manipulate purchase and sale bids. CMS is
scheduled to become functional in the spring of 2002. MSS is expected to go into
effect one year later.
On January 16, 2001, the New England transmission owners, including UI, and
ISO-NE, submitted a joint compliance filing with the FERC, pursuant to the
FERC's Order No. 2000, proposing a regional transmission organization for the
New England region. The proposed regional transmission organization would
consist of the not-for-profit independent system operator (ISO-NE) working in
concert with a for-profit independent transmission company, of which UI intends
to be a part. The system operator will be responsible for the real-time
operation of the electric system, short-term reliability, and administrative
functions associated with the electricity markets; the independent transmission
company will be primarily responsible for managing the transmission assets,
including system maintenance, expansion and long-term reliability.
NEW ENGLAND TRANSMISSION GRID
Under other agreements related to UI's participation in the ownership of
Seabrook Unit 1 and Millstone Unit 3, UI contributes to the financial support of
certain 345 kilovolt transmission facilities that are a part of the New England
transmission grid.
HYDRO-QUEBEC
UI is a participant in the Hydro-Quebec transmission intertie facility linking
New England and Quebec, Canada. Phase I of this facility, which became
operational in 1986 and in which UI has a 5.45% participating share, has a 690
megawatt equivalent generation capacity value; and Phase II, in which UI has a
5.45% participating share, increased the equivalent generation capacity value of
the intertie from 690 megawatts to a maximum of 2000
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megawatts in 1991. UI is obligated to furnish a guarantee for its participating
share of the debt financing for the Phase II facility. As of December 31, 2000,
UI's guarantee liability for this debt was approximately $5.6 million.
LONG ISLAND CABLE PROJECT
United Capital Investments (UCI), a wholly-owned subsidiary of United Resources,
Inc., has a 25% interest in a merchant electric transmission line project that
proposes to install, own and operate a 330-megawatt transmission line connecting
Connecticut and Long Island under Long Island Sound. UCI is obligated to furnish
a direct guarantee by means of a letter of credit for its participating share of
the debt financing of the project. Under separate agreement, UIL Holdings is an
indirect guarantor of the obligation of UCI. As of December 31, 2000, UCI's
guarantee liability for this debt was approximately $7.7 million.
UNITED RESOURCES, INC.
URI serves as the parent corporation for several non-regulated businesses, each
of which is incorporated separately to participate in business ventures that
will provide long-term rewards to UIL Holdings' shareowners. URI, which is not
itself an operating company, has four wholly-owned subsidiaries:
AMERICAN PAYMENT SYSTEMS, INC. (APS) is the largest vendor in the nation for
walk-in payment of utility bills. APS manages a national network of agents for
the processing of bill payments made by customers of UI and other companies. It
recruits and manages agents who collect payments for APS clients that include
major utility and telecommunications companies such as Entergy, Southern
California Edison, AT&T, and Ameritech. APS collects and forwards payment and
other information electronically to its clients, and sweeps agent accounts daily
for deposit in the clients' bank accounts. It processes all critical data
in-house in Hamden, Connecticut.
XCELECOM, INC. (Xcelecom, formerly known as Precision Power, Inc.) and its
subsidiaries, provide general and specialty electrical and voice-data-video
design, construction, systems integration and services in regional markets of
the Northeastern United States. The Xcelecom group currently includes Allan
Electric Co., Inc., JBL Electric, Inc. and The Datastore, Incorporated, of New
Jersey, Orlando Diefenderfer Electrical Contractors, Inc., of Pennsylvania, and
Johnson Electric Co., Inc., McPhee Electric Ltd., LLC and McPhee Utility Power
and Signal, Ltd., of Connecticut. Xcelecom also owns and operates heating and
cooling energy centers through its Thermal Energies, Inc. subsidiary, providing
heating and cooling services to two of New Haven, Connecticut's largest office
and government complexes.
UNITED CAPITAL INVESTMENTS, INC. (UCI) and its subsidiaries invest in business
ventures that are expected to earn above-average returns. Its investments
include:
o LONG ISLAND CABLE PROJECT - UCI has a 25% interest in a merchant electric
transmission line project that proposes to install, own and operate a
330-megawatt transmission line connecting Connecticut and Long Island under
Long Island Sound;
o FRESHNEX - UCI owns an 11% interest in an integrated business-to-business
electronic trading system for the food industry that creates a national
wholesale exchange linking supply, ordering, freight logistics and
financial settlement functions into one fulfillment system;
o ZERO STAGE - A regional high technology venture capital fund in which UCI
has invested, both as a financial investment and as a means of promoting
local economic development; and
o GEMINI NETWORKS - A regional wholesale bandwidth provider.
UNITED BRIDGEPORT ENERGY, INC. owns, as a passive investor, 331/3% of a merchant
wholesale electric generating facility co-owned and operated by a unit of Duke
Energy and located in Bridgeport, Connecticut.
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FINANCING
See PART II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources,"
regarding UIL Holdings' capital requirements and resources and its financings
and financial commitments.
EMPLOYEES
As of December 31, 2000, UIL Holdings and its subsidiaries had a total of 2,277
employees, consisting of 829 in UI and 1,448 in URI and its subsidiaries. Of the
829 UI employees, approximately 375 were members of a union and 87% had been
with UI for 10 or more years. Of the 1,448 employees of URI and its
subsidiaries, approximately 165 were employed by APS and 1,280 by Xcelecom.
Item 2. Properties.
CAPITAL EXPENDITURE PROGRAM
UIL Holdings' continuing capital expenditure program for 2001 through 2005 is
presently estimated at $292.7 million, excluding UI's allowance for funds used
during construction. See PART II, Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note (L),
Commitments and Contingencies."
THE UNITED ILLUMINATING COMPANY
GENERATING FACILITIES
The electric generating capability of UI as of December 31, 2000, based on
summer ratings of the generating units, was as follows:
YEAR OF MAX CLAIMED COMPANY
OPERATED BY OTHER UTILITIES: FUEL INSTALLATION CAPABILITY, MW ENTITLEMENT
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% Mw
Millstone Unit 3,
Waterford, Connecticut Nuclear 1986 1145.60 3.685 42.21 (1)
Seabrook Unit 1,
Seabrook, New Hampshire Nuclear 1990 1161.00 17.50 203.18 (2)
(1) Represents UI's 3.685% ownership share of total net capability.
(2) Represents UI's 17.5% ownership and leasehold share of total net
capability. In August 1990, UI sold to and leased back from an owner trust
established for the benefit of an institutional investor a portion of UI's
17.5% ownership interest in this unit. This portion of the unit is subject
to the lien of a first mortgage granted by the owner trustee.
UI is in the process of selling all of its interests in Millstone Unit 3 and
Seabrook Unit 1, in compliance with Connecticut's Restructuring Act. See PART
II, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (C), Rate-Regulated Regulatory Proceedings."
TRANSMISSION AND DISTRIBUTION PLANT
The transmission lines of UI consist of approximately 102 circuit miles of
overhead lines and approximately 17 circuit miles of underground lines, all
operated at 345 KV or 115 KV and located within or immediately adjacent to the
territory served by UI. These transmission lines interconnect electric
generation facilities in Bridgeport and New Haven and are part of the New
England transmission grid through connections with the transmission lines of The
Connecticut Light and Power Company. A major portion of UI's transmission lines
is constructed on railroad
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right-of-way pursuant to two Transmission Line Agreements. One of the Agreements
expired in May 2000 and UI expects to extend this Agreement. The other Agreement
has been extended to May 2040.
UI owns and operates 25 bulk electric supply substations with a capacity of
1,756,300 KVA and 32 distribution substations with a capacity of 154,770 KVA. UI
has 3,170 pole-line miles of overhead distribution lines and 130 conduit-bank
miles of underground distribution lines.
See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note (L), Commitments and Contingencies -
Capital Expenditure Program" concerning the estimated cost of additions to UI's
transmission and distribution facilities.
NUCLEAR GENERATION
Seabrook Unit 1 is a nuclear generating unit located in Seabrook, New Hampshire,
that is jointly owned by UI and ten other New England electric utility entities.
Millstone Unit 3 is a nuclear generating unit located in Waterford, Connecticut,
that is jointly owned by UI and twelve other New England electric utility
entities. UI holds ownership and leasehold interests totalling 17.5% (203.18
megawatts) in Seabrook Unit 1, and a 3.685% (42.21 megawatts) ownership interest
in Millstone Unit 3. UI also owns 9.5% of the common stock of Connecticut
Yankee, and was entitled to an equivalent percentage (53.21 megawatts) of the
generating capability of the Connecticut Yankee Unit prior to its retirement
from commercial operation on December 4, 1996.
Seabrook Unit 1 commenced commercial operation in June of 1990, pursuant to an
operating license issued by the NRC, which will expire in 2026. It is jointly
owned by eleven New England electric utility entities, including UI, and is
operated by a service company subsidiary of Northeast Utilities (NU). Through
December 31, 2000, Seabrook Unit 1 has operated at a lifetime capacity factor of
80.3%.
Millstone Unit 3 commenced commercial operation in April of 1986, pursuant to a
40-year operating license issued by the NRC. It is jointly owned by thirteen New
England electric utility entities, including UI, and is operated by another
service company subsidiary of NU. Through December 31, 2000, Millstone Unit 3
has operated at a lifetime capacity factor of 63.3%.
UI is in the process of selling all of its interests in Millstone Unit 3 and
Seabrook Unit 1, in compliance with Connecticut's Restructuring Act. See PART
II, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (C), Rate-Regulated Regulatory Proceedings."
The Connecticut Yankee Unit commenced commercial operation in January of 1968,
pursuant to a 40-year operating license issued by the NRC. It is owned, through
ownership of Connecticut Yankee's common stock, by ten New England electric
utilities, including UI. In July of 1996, the Connecticut Yankee Unit was taken
out of service following an engineering evaluation, and an economic study by the
owners, comparing the costs of continuing to operate the Connecticut Yankee Unit
over the remaining period of its operating license to the costs of shutting down
the unit permanently and incurring replacement power costs for the same period,
resulted in a decision, in December of 1996, by the Board of Directors of
Connecticut Yankee to retire the Connecticut Yankee Unit from commercial
operation.
The power purchase contract under which UI purchased its 9.5% entitlement to the
Connecticut Yankee Unit's power output permits Connecticut Yankee to recover
9.5% of all of its costs from UI. In December of 1996, Connecticut Yankee filed
decommissioning cost estimates and amendments to the power contracts with its
owners with the Federal Energy Regulatory Commission (FERC). Based on regulatory
precedent, this filing requested confirmation that Connecticut Yankee will
continue to collect from its owners its decommissioning costs, the unrecovered
investment in the Connecticut Yankee Unit and other costs associated with the
permanent shutdown of the Connecticut Yankee Unit. On April 7, 2000, Connecticut
Yankee reached a settlement agreement with the Connecticut Department of Public
Utility Control (DPUC) and the Connecticut Office of Consumer Counsel (two of
the intervenors in the FERC proceeding). This agreement was submitted to the
FERC, which approved it in all respects on July 26, 2000; and it became
effective on August 1, 2000. The agreement allows Connecticut Yankee to earn a
return on equity of 6% and
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stipulates a new decommissioning cost estimate for the Connecticut Yankee Unit
for purposes of FERC-approved decommissioning cost collections by Connecticut
Yankee through the power contracts with the unit's owners.
GENERAL CONSIDERATIONS
Seabrook Unit 1, Millstone Unit 3 and the Connecticut Yankee Unit are each
subject to the licensing requirements and jurisdiction of the Nuclear Regulatory
Commission (NRC) under the Atomic Energy Act of 1954, as amended, and to a
variety of other state and federal requirements.
The NRC regularly conducts generic reviews of numerous technical issues, ranging
from seismic design to education and fitness for duty requirements for licensed
plant operators. The outcome of reviews that are currently pending, and the ways
in which the nuclear generating units in which UI has interests may be affected
by these reviews, cannot be determined; and the cost of complying with any new
requirements that might result from the reviews cannot be estimated. However,
such costs could be substantial.
Additional capital expenditures and increased operating costs for nuclear
generating units may result from modifications of these facilities or their
operating procedures required by the NRC, or from actions taken by other joint
owners or companies having entitlements in the units. Some equipment
modifications have required and may in the future require shutdowns or deratings
of generating units that would not otherwise be necessary and that result in
additional costs. The amounts of additional capital expenditures and increased
costs cannot now be predicted, but they have been and may in the future be
substantial.
NUCLEAR FUEL
Generally, the supply of fuel for nuclear generating units involves the mining
and milling of uranium ore to uranium concentrates, the conversion of uranium
concentrates to uranium hexafluoride, enrichment of that gas and fabrication of
the enriched hexafluoride into usable fuel assemblies.
After a region (approximately 1/3 to 1/2 of the nuclear fuel assemblies in the
reactor at any time) of spent fuel is removed from a nuclear reactor, it is
placed in temporary storage in a spent fuel pool at the nuclear station for
cooling and ultimately is expected to be transported to a permanent storage
site, which has yet to be determined. See PART II, Item 8, "Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note (M),
Nuclear Fuel Disposal and Nuclear Plant Decommissioning. "
Based on information furnished by the utility responsible for the operation of
the units in which UI is participating, there are outstanding contracts that
cover uranium concentrate purchases for Millstone Unit 3 and Seabrook Unit 1
through 2003. In addition, there are outstanding contracts, to the extent
indicated below, for conversion, enrichment and fabrication services for these
units extending through the following years:
CONVERSION TO
HEXAFLUORIDE ENRICHMENT FABRICATION
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Millstone Unit 3 2003 2002 2008
Seabrook Unit 1 2003 2007 2008
INSURANCE REQUIREMENTS
The Price-Anderson Act, currently extended through August 1, 2002, limits public
liability resulting from a single incident at a nuclear power plant. The first
$200 million of liability coverage is provided by purchasing the maximum amount
of commercially available insurance. Additional liability coverage will be
provided by an assessment of up to $83.9 million per incident, levied on each of
the nuclear units licensed to operate in the United States, subject to a maximum
assessment of $10 million per incident per nuclear unit in any year. In
addition, if the sum of all public liability claims and legal costs resulting
from any nuclear incident exceeds the maximum amount of financial protection,
each reactor operator can be assessed an additional 5% of $83.9 million, or $4.2
million. The maximum assessment is adjusted at least every five years to reflect
the impact of inflation. With respect to each of the two
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operating nuclear generating units in which UI has an interest, UI will be
obligated to pay its ownership and/or leasehold share of any statutory
assessment resulting from a nuclear incident at any nuclear generating unit.
Based on its interests in these nuclear generating units, UI estimates its
maximum liability would be $17.8 million per incident. However, any assessment
would be limited to $2.1 million per incident per year.
The Nuclear Regulatory Commission requires each operating nuclear generating
unit to obtain property insurance coverage in a minimum amount of $1.06 billion
and to establish a system of prioritized use of the insurance proceeds in the
event of a nuclear incident. The system requires that the first $1.06 billion of
insurance proceeds be used to stabilize the nuclear reactor to prevent any
significant risk to public health and safety and then for decontamination and
cleanup operations. Only following completion of these tasks would the balance,
if any, of the segregated insurance proceeds become available to the unit's
owners. For each of the two operating nuclear generating units in which UI has
an interest, UI is required to pay its ownership and/or leasehold share of the
cost of purchasing such insurance. Although each of these units has purchased
$2.75 billion of property insurance coverage, representing the limits of
coverage currently available from conventional nuclear insurance pools, the cost
of a nuclear incident could exceed available insurance proceeds. Under those
circumstances, the nuclear insurance pools that provide this coverage may levy
assessments against the insured owner companies if pool losses exceed the
accumulated funds available to the pool. The maximum potential assessments
against UI with respect to losses occurring during current policy years are
approximately $2.4 million.
WASTE DISPOSAL AND DECOMMISSIONING
See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note (M), Nuclear Fuel Disposal and Nuclear
Plant Decommissioning" regarding the disposal of spent nuclear fuel and
high-level and low-level radioactive wastes in connection with the operation and
decommissioning of Seabrook Unit 1, Millstone Unit 3 and the Connecticut Yankee
Unit.
ENVIRONMENTAL REGULATION
The National Environmental Policy Act requires that detailed statements of the
environmental effect of UI's facilities be prepared in connection with the
issuance of various federal permits and licenses, some of which are described
below. Federal agencies are required by that Act to make an independent
environmental evaluation of the facilities as part of their actions during
proceedings with respect to these permits and licenses.
Under the federal Toxic Substances Control Act (TSCA), the Environmental
Protection Agency (EPA) has issued regulations that control the use and disposal
of polychlorinated biphenyls (PCBs). PCBs had been widely used as insulating
fluids in many electric utility transformers and capacitors manufactured before
TSCA prohibited any further manufacture of such PCB equipment. Fluids with a
concentration of PCBs higher than 500 parts per million and materials (such as
electrical capacitors) that contain such fluids must be disposed of through
burning in high temperature incinerators approved by the EPA. Solid wastes
containing PCBs must be disposed of in either secure chemical waste landfills or
in high-efficiency incinerators. In response to EPA regulations, UI has phased
out the use of certain PCB capacitors and has tested all UI-owned transformers
located inside customer-owned buildings and replaced all transformers found to
have fluids with detectable levels of PCBs (higher than 1 part per million) with
transformers that have no detectable PCBs. Presently, no transformers having
fluids with levels of PCBs higher than 500 parts per million are known by UI to
remain in service in its system, except at one generating station. Compliance
with TSCA regulations has necessitated substantial capital and operational
expenditures by UI, and such expenditures may continue to be required in the
future, although their magnitude cannot now be estimated.
Under the federal Resource Conservation and Recovery Act (RCRA), the generation,
transportation, treatment, storage and disposal of hazardous wastes are subject
to regulations adopted by the EPA. Connecticut has adopted state regulations
that parallel RCRA regulations but are more stringent in some respects. UI has
complied with the notification and application requirements of present
regulations, and the procedures by which UI handles, stores, treats and disposes
of hazardous waste products have been revised, where necessary, to comply with
these regulations.
UI has sold 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
- 11 -
with the marketing of these plants indicated that substantial remediation
expenditures will be required in order to bring the plant sites into compliance
with applicable Connecticut minimum standards following their sale. The
purchaser of the plants undertook liability for payment of any remediation
required with respect to the purchased assets. However, UI will be responsible
for remediation of the portions of the plant sites that it has retained, and no
estimate of the potential costs is available.
UI has estimated that the total cost of decontaminating and demolishing its
Steel Point Station and completing requisite environmental remediation of the
site will be approximately $11.3 million, of which approximately $8.7 million
had been incurred as of December 31, 2000, and that the value of the property
following remediation will not exceed $6.0 million. As a result of a 1992 DPUC
retail rate decision, beginning January 1, 1993, UI has been recovering through
retail rates $1.075 million of the remediation costs per year. The remediation
costs, property value and recovery from customers will be subject to true-up in
UI's next retail rate proceeding based on actual remediation costs and actual
gain on UI's disposition of the property.
UI has begun replacing the bulkhead surrounding a site, bordering the Mill River
in New Haven, that contains transmission facilities and deactivated generation
facilities, at an estimated cost of $13.5 million. Of this amount, $4.2 million
represents the portion of the costs to protect UI's transmission facilities and
will be capitalized as plant in service. The remaining estimated cost of $9.3
million was expensed in 1999. UI has conveyed to an unaffiliated entity,
Quinnipiac Energy LLC (QE), this entire site, reserving to UI permanent
easements for the operation of its transmission facilities on the site. QE will
complete the bulkhead replacement project at UI's expense. UI has also funded
61% (approximately $1.2 million) of the environmental remediation costs that
will be incurred by QE to bring the site into compliance with applicable
Connecticut minimum standards. QE intends to reactivate the generation
facilities on the site as a merchant electric generating plant.
RCRA also regulates underground tanks storing petroleum products or hazardous
substances, and Connecticut has adopted state regulations governing underground
tanks storing petroleum and petroleum products that, in some respects, are more
stringent than the federal requirements. UI currently owns 8 underground storage
tanks, which are used primarily for gasoline and fuel oil, that are subject to
these regulations. A testing program has been installed to detect leakage from
any of these tanks, and substantial costs may be incurred for future actions
taken to prevent tanks from leaking, to remedy any contamination of groundwater,
and to modify, remove and/or replace older tanks in compliance with federal and
state regulations.
The owner of a parcel of property in Derby, Connecticut, has notified UI that
the owner is remediating soil contamination of the property by fuel oil, which
contamination the owner has asserted resulted from activities conducted on the
property when it was owned by UI during the period 1961 to 1976. Based on its
own investigation to date, UI has advised the owner that UI has no
responsibility for the alleged soil contamination. The Connecticut Department of
Environmental Protection is remediating a migration of fuel oil contamination
from a neighboring parcel of property into the adjacent Housatonic River. If UI
or regulatory agencies determine that UI is responsible for the costs of these
remediation activities, UI may experience substantial costs, although no
estimate of potential costs is available.
In the past, UI has disposed of residues from operations at landfills, as most
other industries have done. In recent years it has been determined that such
disposal practices, under certain circumstances, can cause groundwater
contamination. Although UI has no knowledge of the existence of any such
contamination, if UI or regulatory agencies determine that remedial actions must
be taken in relation to past disposal practices, UI may experience substantial
costs.
Connecticut statutes prohibit the commencement of construction or reconstruction
of electric transmission facilities, or modification of such facilities, unless
the Connecticut Siting Council has issued a certificate of environmental
compatibility and public need or a declaratory ruling that no certificate is
required because the facility or modification will not have a substantial
adverse environmental effect.
In complying with existing environmental statutes and regulations and further
developments in these and other areas of environmental concern, including
legislation and studies in the fields of water and air quality, hazardous waste
handling and disposal, toxic substances, and electric and magnetic fields, UI
may incur substantial capital expenditures for
- 12 -
equipment modifications and additions, monitoring equipment and recording
devices, and it may incur additional operating expenses. Litigation expenditures
may also increase as a result of scientific investigations, and speculation and
debate, concerning the possibility of harmful health effects of electric and
magnetic fields. The total amount of these expenditures is not now determinable.
See also "Regulation" and "Rates" and Item 2, "Properties -The United
Illuminating Company - Nuclear Generation."
UNITED RESOURCES, INC.
Each of the URI subsidiaries APS and Xcelecom leases office space in Hamden,
Connecticut, that houses its management and general office personnel. The
several operating subsidiaries of Xcelecom own or lease real property, buildings
and equipment in Connecticut, New Jersey and Pennsylvania necessary for the
management and operation of their electrical and voice-data-video design and
construction businesses.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2000.
- 13 -
EXECUTIVE OFFICERS
The names and ages (as of December 31, 2000) of all executive officers of UIL
Holdings and all such persons chosen to become executive officers, all positions
and offices with UIL Holdings held by each such person, and the period during
which he or she has served as an officer in the office indicated, are as
follows:
NAME AGE POSITION EFFECTIVE DATE
- ---- --- -------- --------------
Nathaniel D. Woodson 59 Chairman of the Board of Directors, March 22, 1999
President and Chief Executive Officer
Robert L. Fiscus 63 Vice Chairman of the Board of Directors March 22, 1999
and Chief Financial Officer
Gregory E. Sages 45 Vice President Finance August 28, 2000
Susan E. Allen 41 Vice President Investor Relations, August 28, 2000
Corporate Secretary and Assistant
James L. Benjamin 59 Treasurer Controller August 28, 2000
Charles J. Pepe 52 Treasurer and Assistant Secretary August 28, 2000
There is no family relationship between any director, executive officer, or
person nominated or chosen to become a director or executive officer of UIL
Holdings. All executive officers of UIL Holdings hold office at the pleasure of
UIL Holdings' Board of Directors. All of the above executive officers have
entered into employment agreements with UIL Holdings. There is no arrangement or
understanding between any executive officer of UIL Holdings and any other person
pursuant to which such officer was selected as an officer.
A brief account of the business experience during the past five years of each
executive officer of UIL Holdings is as follows:
NATHANIEL D. WOODSON. Mr. Woodson served as President and General Manager of the
Energy Systems Business Unit of Westinghouse Electric Corporation during the
period January 1, 1996 to April 30, 1996. He served as President of The United
Illuminating Company during the period February 23, 1998 to May 20, 1998 and
President and Chief Executive Officer during the period May 20, 1998 to December
31, 1998. He has served as Chairman of the Board of Directors, President and
Chief Executive Officer of The United Illuminating Company since December 31,
1998 and of UIL Holdings Corporation since its inception on March 22, 1999.
ROBERT L. FISCUS. Mr. Fiscus served as President and Chief Financial Officer of
The United Illuminating Company during the period January 1, 1996 to February
23, 1998, Vice Chairman of the Board of Directors and Chief Financial Officer
from February 23, 1998 to October 25, 1999, Vice Chairman of the Board of
Directors, Chief Financial Officer, Treasurer and Secretary from October 25,
1999 to August 28, 2000, Vice Chairman of the Board of Directors and Chief
Financial Officer from June 26, 2000 to February 26, 2001 and has served as Vice
Chairman of the Board of Directors since February 26, 2001. He also served as
Vice Chairman of the Board of Directors and Chief Financial Officer of UIL
Holdings Corporation from its inception on March 22, 1999 to October 25, 1999,
Vice Chairman of the Board of Directors, Chief Financial Officer, Treasurer and
Secretary from October 25, 1999 to August 28, 2000 and has served as Vice
Chairman of the Board of Directors and Chief Financial Officer since August 28,
2000.
GREGORY E. SAGES. Mr. Sages served as Executive Director Financial Analysis and
Planning for Tenneco, Inc. from March 16, 1996 to December 31, 1999. He served
as Vice President Finance of The United Illuminating Company from June 12, 2000
to February 26, 2001 and has served as Vice President Finance and Chief
Financial Officer since February 26, 2001. He has also served as Vice President
Finance of UIL Holdings Corporation since August 28, 2000.
SUSAN E. ALLEN. Ms. Allen served as Manager of Financing and Corporate Secretary
Administration of The United Illuminating Company during the period January 1,
1996 to June 30, 1999 and Director Finance and Corporate Secretary
Administration from July 1, 1999 to June 26, 2000. She has served as Vice
President Investor Relations,
- 14 -
Corporate Secretary and Assistant Treasurer of The United Illuminating Company
since June 26, 2000 and of UIL Holdings Corporation since August 28, 2000.
JAMES L. BENJAMIN. Mr. Benjamin has served as Controller of The United
Illuminating Company during the five year period and of UIL Holdings Corporation
since August 28, 2000.
CHARLES J. PEPE. Mr. Pepe served as Assistant Treasurer and Assistant Secretary
of The United Illuminating Company during the period January 1, 1996 to June 26,
2000. He has served as Treasurer and Assistant Secretary of The United
Illuminating Company since June 26, 2000 and of UIL Holdings Corporation since
August 28, 2000.
PART II
Item 5. Market for UIL Holdings' Common Equity and Related Stockholder Matters.
On July 20, 2000, as a result of a corporate restructuring of UI and its direct
and indirect subsidiaries into a holding company system, UI became a
wholly-owned subsidiary of UIL Holdings and each share of UI's issued and
outstanding Common Stock was automatically converted into a share of UIL
Holdings Common Stock. This Common Stock has traded on the New York Stock
Exchange since 1971. The high and low sale prices during 2000 and 1999 were as
follows:
2000 SALE PRICE 1999 SALE PRICE
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter 52 1/8 38 1/8 52 11/16 41 7/8
Second Quarter 47 3/8 39 5/8 44 11/16 39 5/16
Third Quarter 55 1/8 44 3/16 50 11/16 43 1/8
Fourth Quarter 52 3/16 43 3/8 53 3/16 47 15/16
UI and UIL Holdings have paid quarterly dividends on the Common Stock since
1900. The quarterly dividends declared by UI in 1999 and by UI and UIL Holdings
in 2000 were at a rate of 72 cents per share.
As of December 31, 2000, there were 12,592 Common Stock shareowners of record.
- 15 -
ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
=================================================================================================================================
FINANCIAL RESULTS OF OPERATION ($000'S)
Sales of electricity
Utility
Retail
Residential $252,730 $271,605 $262,974 $259,325 $266,068
Commercial 242,075 256,246 254,765 248,490 264,111
Industrial 96,955 100,437 102,201 102,763 109,032
Other 10,587 11,308 11,667 11,755 11,903
------------- ------------- -------------- ------------- ------------
Total Retail 602,347 639,596 631,607 622,333 651,114
Wholesale 67,990 24,334 44,948 82,871 72,844
Other operating revenues 34,354 16,045 9,636 3,825 3,300
Nonregulated businesses 176,164 70,755 61,900 38,040 22,151
------------- ------------- -------------- ------------- ------------
Total operating revenues 880,855 750,730 748,091 747,069 749,409
------------- ------------- -------------- ------------- ------------
Fuel and interchange energy -net
Retail-own load 262,252 134,851 116,769 109,542 95,359
Wholesale 19,901 24,552 34,775 73,124 65,158
Capacity purchased-net 4,682 33,873 34,515 39,976 46,830
Depreciation 33,278 61,040 86,861(1) 77,745(1) 68,211
Amortization of regulatory assets 36,435 36,394 13,758 13,758 13,758
Other operating expenses, excluding
tax expense 331,305 256,285 247,636 236,253 243,454
Gross earnings tax 23,715 24,518 24,039 23,571 26,804
Other non-income taxes 19,341 22,622 40,635(2) 28,922 30,382
------------- ------------- -------------- ------------- ------------
Total operating expenses, excluding
income taxes 730,909 594,135 598,988 602,891 589,956
------------- ------------- -------------- ------------- ------------
AFUDC 2,609 2,235 468 1,575 2,375
Other non-operating income(loss) 730 2,686 1,928 1,898 (4,482)
Interest expense
Long-term debt - net 31,729 35,260 42,836 56,158 65,046
Dividend requirement of mandatorily
redeemable securities 3,529 4,813 4,813 4,813 4,813
Other 9,241 7,319 9,007 6,068 4,721
------------- ------------- -------------- ------------- ------------
Total 44,499 47,392 56,656 67,039 74,580
------------- ------------- -------------- ------------- ------------
Income tax expense
Operating income tax 52,298 65,042 52,862 39,281 49,277
Non-operating income tax (4,269) (3,142) (3,091) (2,126) (5,556)
------------- ------------- -------------- ------------- ------------
Total 48,029 61,900 49,771 37,155 43,721
------------- ------------- -------------- ------------- ------------
Net income 60,757 52,224 45,072 43,457 39,045
Premium (Discount) on preferred
stock redemption - 53 (21) (48) (1,840)
Preferred and preference stock dividends - 66 201 205 330
------------- ------------- -------------- ------------- ------------
Income applicable to common stock $60,757 $52,105 $44,892 $43,300 $40,555
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income $149,946 $156,595 $149,103 $144,178 $159,453
=================================================================================================================================
FINANCIAL CONDITION ($000'S)
Current assets $ 288,306 $ 220,126 $ 305,189 $ 204,474 $ 199,097
Other property and investments (4) 155,526 144,768 49,549 47,706 39,240
Property, Plant and Equipment - net 495,850 482,836(3) 1,181,053 1,232,909 1,268,157
Construction work in progress 30,267 25,708 33,695 25,448 40,998
Deferred charges and regulatory assets 898,605 924,772(3) 371,674 408,993 449,150
------------- ------------- -------------- ------------- ------------
Total Assets $1,868,554 $1,798,210 $1,941,160 $1,919,530 $1,996,642
- ---------------------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt $ - $ 25,000 $ 66,202 $ 100,000 $ 69,900
Other current liabilities 245,821 166,213 172,830 175,340 166,138
Noncurrent liabilities 208,486 247,135 111,848 121,746 140,704
Deferred income tax liabilities and other 302,282 316,205 339,072 349,591 355,326
Long-term debt excluding current portion 522,221 518,228 664,510 644,670 759,680
Notes payable 110,699 17,131 86,892 37,751 10,965
Preferred, preference stock and
company-obligated mandatorily redeemable
securities of subsidiaries holding solely
parent debentures - 50,000 54,299 54,351 54,461
Common stock equity 479,045 458,298 445,507 436,081 439,468
------------- ------------- -------------- ------------- ------------
Total Liabilities and Capitalization $1,868,554 $1,798,210 $1,941,160 $1,919,530 $1,996,642
=================================================================================================================================
(1) Includes the before-tax effect of charges for additional amortization of
conservation & load management costs: $13.1 million in 1998 and $6.6
million in 1997.
(2) Includes the effect of charges of $14.0 million, before-tax, associated
with property tax settlement.
(3) Reflects reclassification of $518.3 million of nuclear assets from plant in
service to regulatory asset.
(4) Includes an investment of $90.3 million and $83.5 million in a generation
facility as of December 31, 2000 and 1999, respectively.
- 16 -
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
2000 1999 1998 1997 1996
====================================================================================================================================
COMMON STOCK DATA
Average number of shares outstanding 14,073,168 14,052,091 14,017,644 13,975,802 14,100,806
Number of shares outstanding at year-end 14,076,697 14,062,502 14,034,562 13,907,824 14,101,291
Earnings per share (average) - basic $4.32 $3.71 $3.20 $3.10 $2.88
Earnings per share (average) - diluted $4.31 $3.71 $3.20 $3.09 $2.87
Book value per share $34.03 $32.59 $31.74 $31.35 $31.16
Average return on equity
Total 13.00% 11.45% 9.44% 10.45% 9.20%
Utility 13.50% 14.00% 11.43% 11.54% 11.51%
Dividends declared per share $2.88 $2.88 $2.88 $2.88 $2.88
Market Price:
High $55.125 $53.188 $53.750 $45.938 $39.750
Low $38.125 $39.313 $42.625 $24.500 $31.375
Year-end $49.750 $51.375 $51.500 $45.938 $31.375
====================================================================================================================================
Net cash provided by operating activities,
less dividends ($000's) $60,801 $57,907 $71,566 $132,189 $120,624
Capital expenditures, excluding AFUDC $56,401 $34,772 $38,040 $33,436 $47,174
====================================================================================================================================
OTHER FINANCIAL AND STATISTICAL DATA
Sales by class (MWh's)
Residential 2,056,366 2,053,927 1,924,724 1,899,284 1,895,804
Commercial 2,403,212 2,388,240 2,324,507 2,248,974 2,263,056
Industrial 1,146,295 1,161,856 1,154,935 1,168,470 1,143,410
Other 47,852 48,027 48,166 48,619 48,388
-------------- ------------- -------------- ------------- ---------------
Total 5,653,725 5,652,050 5,452,332 5,365,347 5,350,658
-------------- ------------- -------------- ------------- ---------------
Number of retail customers by class (average)
Residential 284,955 282,986 281,591 280,283 279,024
Commercial 29,776 29,757 29,468 29,228 28,666
Industrial 1,725 1,746 1,752 1,697 1,652
Other 1,207 1,185 1,172 1,163 1,141
-------------- ------------- -------------- ------------- ---------------
Total 317,663 315,674 313,983 312,371 310,483
-------------- ------------- -------------- ------------- ---------------
Revenue per kilowatt hour by class (cents)
Residential 12.29 13.22 13.66 13.65 14.03
Commercial 10.07 10.73 10.96 11.05 11.67
Industrial 8.46 8.64 8.85 8.79 9.54
Average large industrial customers time
of use rate (cents) 8.06 8.21 8.16 8.12 8.26
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues - retail sales ($000's)
Base $620,486 $655,327 $629,446 $620,636 $643,344
Base rate adjustments (18,139) (15,731) 2,161 1,697 7,770
-------------- ------------- -------------- ------------- ---------------
Total $602,347 $639,596 $631,607 $622,333 $651,114
Revenues - retail sales per kWh (cents)
Base 10.97 11.59 11.54 11.57 12.02
Base rate adjustments (0.32) (0.28) 0.04 0.03 0.15
-------------- ------------- -------------- ------------- ---------------
Total 10.65 11.31 11.58 11.60 12.17
- ------------------------------------------------------------------------------------------------------------------------------------
Number of employees at year-end 2,277 1,239 1,193 1,175 1,287
Total utility employees payroll($000's) $59,276 $66,155 $65,294 $68,640 $69,276
====================================================================================================================================
- 17 -
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
MAJOR INFLUENCES ON FINANCIAL CONDITION
UIL Holdings' financial condition will continue to be dependent on the level of
UI's electric utility retail sales and UI's ability to control expenses, as well
as on the performance of the businesses of UIL Holdings' non-regulated
subsidiaries. The two primary factors that affect electric utility sales volume
are economic conditions and weather. The principal factors affecting the
financial condition of APS and Xcelecom are the pace of technological changes,
competition and risks related to the management of growth, including, in the
case of Xcelecom, acquisition financing and integration.
UIL Holdings' financial status and financing capability will continue to be
sensitive to many other factors, including conditions in the securities markets,
economic conditions, interest rates, the level of income and cash flow of UIL
Holdings' subsidiaries, and legislative and regulatory developments, including
the cost of compliance with increasingly stringent environmental legislation and
regulations.
On December 31, 1996, the Connecticut Department of Public Utility Control
(DPUC) completed a financial and operational review of UI and ordered a
five-year incentive regulation plan for the years 1997 through 2001 (the Rate
Plan). The Rate Plan accelerates the amortization and recovery of unspecified
assets during 1999-2001 if UI's common equity return on regulated utility
investment exceeds 10.5% after recording the amortization. UI's authorized
return on regulated utility common equity during the period is 11.5%. Earnings
above 11.5%, on an annual basis, are utilized one-third for customer price
reductions, one-third to increase amortization of assets, and one-third retained
as earnings.
The Rate Plan included a provision that it could be reopened and modified upon
the enactment of electric utility restructuring legislation in Connecticut. On
October 1, 1999, the DPUC issued a decision establishing UI's standard offer
customer rates, commencing January 1, 2000, at a level 10% below 1996 rates, as
directed by the Restructuring Act described in detail below. These standard
offer customer rates supersede the rates that were included in the Rate Plan.
The decision also reduced the required amount of accelerated amortization in
2000 and 2001. Under this 1999 decision, all other components of the 1996 Rate
Plan are expected to remain in effect through 2001. The Connecticut Office of
Consumer Counsel (OCC), the statutory representative of consumer interests in
public utility matters, appealed the DPUC's standard offer decision to the
Connecticut Superior Court, challenging the DPUC's determination of UI's average
prices in 1996 rates from which a 10% reduction is required by the Restructuring
Act. On February 22, 2001, the Superior Court dismissed the OCC's appeal from
the DPUC's decision; but UI is unable to predict, at this time, whether the OCC
will appeal from the Superior Court's decision to the Connecticut Appellate
Court.
On February 13, 2001, the Connecticut Attorney General and the OCC petitioned
the DPUC to initiate a proceeding and hold a hearing concerning the need to
decrease UI's rates by reason of UI' s having earned a return on regulated
common equity more than 1% above the authorized level of 11.5% for at least six
consecutive months. UI believes that a hearing would confirm that UI has
complied with the DPUC-ordered earnings sharing mechanism in UI's rate plan; and
it will contest vigorously any arguments for a rate decrease.
In April 1998, Connecticut enacted Public Act 98-28 (the Restructuring Act), a
massive and complex statute designed to restructure the State's regulated
electric utility industry. As a result of the Restructuring Act, the business of
generating and selling electricity directly to consumers has been opened to
competition. These business activities are separated from the business of
delivering electricity to consumers, also known as the transmission and
distribution business. The business of delivering electricity remains with the
incumbent franchised utility companies (including UI) which continue to be
regulated by the DPUC as Distribution Companies.
Under the Restructuring Act, all of UI's customers are able to choose their
power supply providers. Until January 1, 2004, UI is required to offer full
"standard offer" electric service, under regulated rates, to all customers who
do not choose alternate power supply providers. The standard offer rates must be
at least 10% below the average prices in
- 18 -
1996. Under current regulatory provisions, UI's financial condition is not
affected materially by whether customers choose alternate suppliers to UI's
standard offer electric service.
On December 28, 1999, UI and Enron Power Marketing, Inc. (EPMI) entered into a
Wholesale Power Supply Agreement, a PPA Entitlements Transfer Agreement and
related agreements documenting a four-year standard offer power supply
arrangement and the assumption of all of UI's long-term purchased power
agreements, effective January 1, 2000. Under these agreements, EPMI supplies the
generation services needed by UI to meet its standard offer obligations for the
four-year standard offer period at a fixed price. The agreements with EPMI also
include a financially settled contract for differences related to certain call
rights of EPMI and put rights of UI with respect to UI's entitlements in
Seabrook Unit 1 and in Millstone Unit 3, and UI's provision to EPMI of certain
ancillary products and services associated with those nuclear entitlements,
which provisions terminate at the earlier of December 31, 2003 or the date that
UI sells its nuclear interests. The agreements do not restrict UI's right to
sell to third parties UI's ownership interests in those nuclear generation units
or the generated energy actually attributable to its ownership interests.
The Restructuring Act requires that UI must attempt to divest its ownership
interests in its nuclear-fueled power plants prior to 2004 in order to recover
any stranded costs associated with its power plants. On October 1, 1998, in its
"unbundling plan" filing with the DPUC under the Restructuring Act, and in other
regulatory dockets, UI stated that it plans to divest its nuclear generation
ownership interests (17.5% of Seabrook Unit 1 in New Hampshire and 3.685% of
Millstone Station Unit 3 in Connecticut) by the end of 2003, in accordance with
the Restructuring Act. On April 19, 2000, the DPUC approved UI's plan for
divesting its ownership interest in Millstone Unit 3 by participating in an
auction process for all three of the generating units at Millstone Station,
which was concluded on August 7, 2000, when Dominion Resources, Inc. agreed to
purchase Millstone Units 1 and 2, and 93.47% of Millstone Unit 3 for $1.298
billion. The purchase price agreed to for UI's ownership interest in Unit 3,
which is subject to adjustments for expenditures and eventualities prior to the
date of closing on the sale, is approximately $31 million, exclusive of nuclear
fuel. UI's share of the proceeds from the sale of the nuclear fuel inventory at
the date of closing on the sale is estimated to be approximately $2.5 million.
The sale is scheduled to be consummated on or about April 1, 2001 or as soon
thereafter as all requisite regulatory approvals are received. On December 15,
2000, UI and The Connecticut Light and Power Company filed with the DPUC for its
approval their plan to divest their respective interests in Seabrook Unit 1 by
an auction process. The DPUC has commenced hearings on this divestiture plan.
- 19 -
LIQUIDITY AND CAPITAL RESOURCES
UIL Holdings' capital requirements are presently projected as follows:
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(millions)
Cash on Hand - Beginning of Year (1) $14.2 $ - $ - $ - $ -
Funds from Operations less Dividends (2) 72.0 79.9 95.8 90.7 95.4
---- ---- ---- ---- ----
Subtotal 86.2 79.9 95.8 90.7 95.4
Less:
Capital Expenditures and other Expenditures (2)
UI 75.6 41.4 31.5 49.5 35.9
URI 18.8 12.9 17.7 10.3 11.9
---- ----- ----- ----- -----
Total Capital Expenditures 94.4 54.3 49.2 59.8 47.8
Plus:
Net Cash from Plant Sales 20.2 143.6 - - -
---- ----- ----- ----- -----
Cash Available to pay Debt Maturities and Redemptions 12.0 169.2 46.6 30.9 47.6
Less:
Maturities and Mandatory Redemptions - 100.0 100.0 - 4.3
Optional Redemptions - 128.2 - - -
----- ----- ----- ----- -----
External Financing Requirements (Surplus) (2) (12.0) 59.0 53.4 (30.9) (43.3)
---- ----- ----- ----- -----
Plus:
Issuance and Sale of Senior Notes 75.0 - - - -
---- ----- ----- ----- -----
Increase (Decrease) in Short-Term Borrowings (87.0) 59.0 53.4 (30.9) (43.3)
---- ----- ----- ----- -----
Short-Term Borrowings - End of Year $23.7 $82.7 $136.1 $105.2 $61.9
==== ==== ===== ===== ====
(1) Excludes $3.3 million Seabrook Unit 1 operating deposit and restricted cash
of American Payment Systems, Inc. of $29.9 million.
(2) Funds from Operations less Dividends, Capital Expenditures and External
Financing Requirements are estimates based on current earnings and cash
flow projections. The estimate of Cash from Plant Sales for 2001 is based
on current projections for the Millstone Unit 3 sale anticipated on or
about April 1, 2001. The estimate for Cash from Plant Sales for 2002 is
based on speculative pricing and other projections for the sale of Seabrook
Unit 1, including a sale date in early 2002. All of these estimates are
subject to change due to future events and conditions that may be
substantially different from those used in developing the projections.
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 a $97.5 million revolving credit agreement
with a group of banks, 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 Item 8, "Notes to Consolidated Financial Statements," Note (E) for a
discussion of UIL Holdings' short-term credit arrangements.
On September 25, 2000, UI redeemed $50 million of 9 5/8% Preferred Capital
Securities, Series A, due 2025, at $25.00 per share, plus accrued dividends to
the redemption date of $0.160417 per share. These securities were
- 20 -
issued in April 1995 by United Capital Funding Partnership L. P., a Delaware
limited partnership that was dissolved following the redemption of the
securities.
On February 15, 2001, UIL Holdings issued and sold $75,000,000 of Senior Notes
to several institutional investors in a private sale. The issue was composed of
two series: 7.23% Senior Notes, Series A, due February 15, 2011, in the
principal amount of $30,000,000, and 7.38% Senior Notes, Series B, due February
15, 2011, in the principal amount of $45,000,000. Under the Senior Notes, Series
A, UIL Holdings is required to prepay the principal amount of $4,285,714 each
February 15th, beginning on February 15, 2005 and ending on February 15, 2010.
Interest due under the Senior Notes is payable semi-annually on February 15th
and August 15th. The net proceeds of the sale were used to repay short-term debt
of UIL Holdings.
At December 31, 2000, UIL Holdings had $47.4 million of cash and temporary cash
investments, a decrease of $20.9 million from the corresponding balance at
December 31, 1999. The components of this decrease, which are detailed in the
Consolidated Statement of Cash Flows, are summarized as follows:
(Millions)
--------
Balance, December 31, 1999 $68.3
----
Net cash provided by operating activities 54.1
Net cash provided by (used in) financing activities:
- Financing activities, excluding dividend payments 17.1
- Dividend payments (40.5)
Investment in debt securities 4.8
Cash invested in plant, including nuclear fuel (56.4)
----
Net Change in Cash (20.9)
----
Balance, December 31, 2000 $47.4
====
NEW ACCOUNTING STANDARDS
See the discussion included in PART II, Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note (A),
Statement of Accounting Policies."
RESULTS OF OPERATIONS
As a result of the formation of UIL Holdings, all subsidiary results are
consolidated. All periods reported herein have been reclassified for
consolidated reporting, with no impact on earnings.
- 21 -
2000 VS. 1999
- -------------
UIL Holdings Corporation Results of Operations: 2000 vs. 1999
- --------------------------------------------------------------
- ------------------------------------ --------------- ---------------- ----------------------------
2000 more (less) than 1999
Year Ended Year Ended ---------------------------
($000 except EPS) Dec. 31, 2000 Dec. 31, 1999 Amount Percent
- ------------------------------------ --------------- ---------------- --------------- ------------
Operating Revenue
United Illuminating $704,691 $679,975 $24,716 4%
United Resources, Inc. $176,431 $71,105 $105,326 148%
Eliminations $(267) $(350) $83 - -
Total Operating Revenue $880,855 $750,730 $130,125 17%
TOTAL EARNINGS FOR COMMON STOCK $60,757 $52,105 $8,652 17%
EARNINGS PER SHARE (BASIC)
United Illuminating $4.25 $3.83 $0.42 11%
United Resources, Inc. $0.01 $(0.16) $0.17 - -
TOTAL EPS FROM OPERATIONS $4.26 $3.67 $0.59 16%
EPS from one-time items $0.06 $0.04 $0.02 - -
Dilution $(0.01) - - $(0.01) - -
TOTAL EPS (DILUTED) $4.31 $3.71 $0.60 16%
- ------------------------------------ --------------- ---------------- --------------- ------------
The one-time items recorded in 2000 were: EPS
- --------------- -------------------------------------------------------- -------
2000 Quarter 3 Proceeds from the Millstone Unit 3 litigation
settlement (pre-sharing) $ 0.64
Sharing on Proceeds from the Millstone Unit 3 settlement (0.43)
-----
Net $ 0.21
- --------------- -------------------------------------------------------- -------
2000 Quarter 2 Impairment loss on property in North Haven $(0.15)
- --------------- -------------------------------------------------------- -------
The one-time item recorded in the third quarter of 2000 as Operating revenues -
Other was a cash receipt, in the amount of $14.9 million before-tax, in
settlement of litigation over costs associated with an extended unplanned
shutdown of the Millstone Unit 3 nuclear generating unit in 1996, 1997 and 1998.
The one-time item recorded in 1999 was: EPS
- ---------------- --------------------------------------------- ----------
1999 Quarter 1 Purchased power expense refund (pre-sharing) $ 0.12
Sharing due to refund (0.08)
-----
Net $ 0.04
- ---------------- --------------------------------------------- ----------
UI Results of Operations: 2000 vs. 1999
- ----------------------------------------
GENERAL IMPACTS OF CONNECTICUT'S RESTRUCTURING ACT ON UI FINANCIAL REPORTS
On April 16, 1999, UI completed the sale of its operating fossil-fueled
generating plants that was required by Connecticut's 1998 electric utility
industry restructuring legislation (Restructuring Act). On October 1, 1999, the
Connecticut Department of Public Utility Control (DPUC) issued its decision
establishing UI's standard offer customer rates, commencing January 1, 2000, at
a level 10% below 1996 rates (about 6% below 1999 rates), as directed by the
Restructuring Act. As a result of these two and other associated events, the
"geography" of UI's costs have changed. This particularly relates to regulated
retail pricing patterns, wholesale revenue and expense, other operating
revenues, retail purchased energy and fossil fuel expenses, operation and
maintenance expense, depreciation and property taxes. For example, increased
purchased energy expenses in 2000 are more than offset by portions of the
decreases in miscellaneous operation and maintenance expense, depreciation and
property taxes due to the sale of generating plants.
- 22 -
- ------------------------------------- --------------- ---------------- -----------------------------
2000 more (less) than 1999
Year Ended Year Ended --------------------------
($000 except EPS) Dec. 31, 2000 Dec. 31, 1999 Amount Percent
- ------------------------------------- --------------- ---------------- --------------- -------------
Total Operating Revenue $704,691 $679,975 $24,716 4%
TOTAL EARNINGS FOR COMMON STOCK $60,575 $54,361 $6,214 11%
EPS FROM OPERATIONS (BASIC)
UI excluding Nuclear Production $3.80 N/A N/A N/A
Nuclear Production (Note A) $0.45 N/A N/A N/A
Total UI EPS from operations $4.25 $3.83 $0.42 11%
GWH SALES (THOUSANDS OF MWH) 5,654 5,652 2 - -%
- ------------------------------------- --------------- ---------------- --------------- -------------
Note (A): Nuclear Production was included in retail operations in 1999.
Overall, retail revenue decreased by $37.2 million in 2000 compared to 1999.
$ millions
- ---------------------------------------------------------------- ---------------
Increase/
Retail Revenues (Decrease)
- ---------------------------------------------------------------- ---------------
Revenue from:
- ---------------------------------------------------------------- ---------------
Estimate of operating Distribution Division component of
"weather corrected" retail sales growth, up 2.1% 4.9
- ---------------------------------------------------------------- ---------------
Estimate of operating Distribution Division component of
weather effect on retail sales (10.4)
- ---------------------------------------------------------------- ---------------
Estimate of operating Distribution Division component of
price reduction (14.5)
- ---------------------------------------------------------------- ---------------
Sharing revenues from operations 4.7
- ---------------------------------------------------------------- ---------------
Other retail price reduction, mix of sales and other (17.6)
- ---------------------------------------------------------------- ---------------
TOTAL RETAIL REVENUE FROM OPERATIONS (32.9)
- ---------------------------------------------------------------- ---------------
Sharing revenues from one-time items (4.3)
- ---------------------------------------------------------------- ---------------
TOTAL RETAIL REVENUE (37.2)
- ---------------------------------------------------------------- ---------------
Wholesale sales margin increased by $48.3 million in 2000 compared to 1999. UI's
operating nuclear assets, Seabrook Unit 1 and Millstone Unit 3, supplied power
solely to the wholesale market in 2000. Wholesale margin from the Nuclear
Division, which was incorporated in retail rates in 1999, was $48.3 million in
2000 and accounted for all of the variance. Overall, the Nuclear Division
contributed earnings of $0.45 per share in 2000. This reflects the wholesale
sales margin, offset in part by additional maintenance costs resulting from a
Seabrook Unit 1 outage extension. The outage extension cost UI about $0.33 per
share in 2000.
Other operating revenues increased by $3.3 million in 2000 compared to 1999.
Other operating revenues include transmission revenues from the New England
Power Pool (NEPOOL), which increased by $4.3 million in 2000 compared to 1999
and were offset by an increase in transmission operation expense. Other revenue
items decreased by $1.0 million.
Retail fuel and energy expense increased by $124.7 million in 2000 compared to
1999. UI's operating fossil-fueled generation units were sold on April 16, 1999,
and UI receives, and will receive through 2003, electricity to satisfy its
standard offer retail customer service requirements through fixed-price
purchased power agreements. These costs are recovered through the Generation
Service Charge (GSC) portion of UI's unbundled retail customer rates.
UI's operating expenses for operation, maintenance and purchased capacity
decreased by $47.2 million in 2000 compared to 1999. The principal components of
these expense changes included:
- 23 -
$millions
- ---------------------------------------------------------- ----------
Increase/
Operating Distribution Division: (Decrease)
- ---------------------------------------------------------- ----------
Site remediation costs (Note A) (9.3)
- ---------------------------------------------------------- ----------
1999 fossil generating unit operation and maintenance (7.5)
- ---------------------------------------------------------- ----------
Pension and employee benefits costs (5.2)
- ---------------------------------------------------------- ----------
NEPOOL transmission expense 3.7
- ---------------------------------------------------------- ----------
Other transmission (1.3)
- ---------------------------------------------------------- ----------
1999 Y2K projects (2.7)
- ---------------------------------------------------------- ----------
Other (5.3)
- ---------------------------------------------------------- ----------
TOTAL OPERATING DISTRIBUTION DIVISION (27.6)
- ---------------------------------------------------------- ----------
NUCLEAR DIVISION (NOTE B) (4.9)
- ---------------------------------------------------------- ----------
Competitive Transition Assessment (CTA)
- ---------------------------------------------------------- ----------
Purchased capacity (Note C) (28.5)
- ---------------------------------------------------------- ----------
Other 0.4
- ---------------------------------------------------------- ----------
TOTAL CTA (28.1)
- ---------------------------------------------------------- ----------
CONSERVATION AND LOAD MANAGEMENT AND RENEWABLE
ENERGY (NOTE D) 13.4
- ---------------------------------------------------------- ----------
TOTAL O&M EXPENSE (47.2)
- ---------------------------------------------------------- ----------
Note (A): These costs were incurred in the fourth quarter of 1999 to repair
a riparian bulkhead in New Haven and for remediation of environmental
conditions at another site.
Note (B): Nuclear Division operation and maintenance expenses are incurred
in the business of producing energy for the wholesale market and are
reflected in the Nuclear Division results. These expenses decreased by $4.9
million in 2000 compared to 1999, due primarily to the absence of 1999
Millstone Unit 3 refueling outage costs and reductions in base expenses at
both Seabrook Unit 1 and Millstone Unit 3 that more than offset the
incremental costs associated with the Seabrook Unit 1 2000 outage.
Note (C): UI's wholesale purchased power agreements were assumed by Enron
Power Marketing, Inc. (EPMI) as part of an agreement for EPMI to supply the
power needed by UI to meet its standard offer retail customer service
obligations until the end of the four-year standard offer period (the end
of 2003) and the power needed to serve UI's special contract retail
customers for the remaining contract terms. UI has created a regulatory
asset and noncurrent liability to reflect this agreement, and the
regulatory asset is being amortized as part of the Competitive Transition
Assessment (CTA). The amortization for 2000 of about $26.8 million is
included in the "Amortization of regulatory assets" line of the income
statement.
Note (D): Conservation and load management and renewable energy costs are
pass-through costs recovered in unbundled retail customer rates.
Other taxes for UI decreased by $4.3 million in 2000 compared to 1999, due in
part to the sale of fossil generating units in April 1999.
Depreciation expense for UI decreased by $28.8 million in 2000 compared to 1999.
About $24.5 million of this decrease was due to the reclassification of
depreciation on nuclear plant stranded assets and other assets from depreciation
expense to amortization of regulatory assets within the Competitive Transition
Assessment (CTA). The remaining $4.3 million decrease was due primarily to the
sale of fossil generating units in 1999.
- 24 -
On December 31, 1996, the DPUC issued an order that implemented a five-year Rate
Plan to reduce UI's regulated retail prices and accelerate the recovery of
certain "regulatory assets." According to the Rate Plan, under which UI is
currently operating, "accelerated" amortization of past regulated utility
investments is scheduled for every year that the Rate Plan is in effect,
contingent upon UI earning a 10.5% return on regulated utility common equity.
Beginning in 2000, these accelerated amortizations are charged to the operating
Distribution Division, although they reduce CTA rate base. Additionally, any
"sharing" amortization required as a result of the Distribution Division
exceeding an 11.5% return on the equity portion of its rate base impacts the
Distribution Division earnings but reduces CTA rate base. UI is allowed to earn
an 11.5% return, no more and no less, on the equity portion of the CTA rate base
that includes all stranded assets. If CTA revenues and various costs included in
the CTA do not produce an 11.5% return, then plant amortizations are either
accelerated or deferred accordingly. A similar mechanism is in place to deal
with Systems Benefits Charges (SBC), but the impact is immaterial. The table
below shows the increases and decreases in 2000 compared to 1999 in major
amortizations of regulatory assets. The amortizations for the operating
Distribution Division impact earnings directly, and the amortizations for the
CTA and SBC impact earnings indirectly through changes to rate base.
$ millions
- --------------------------------------------------- -------------- ------------
Amortization of regulatory assets: As Booked After-tax
- --------------------------------------------------- -------------- ------------
Distribution Division:
- --------------------------------------------------- -------------- ------------
Accelerated amortization (3.1) (4.4)
- --------------------------------------------------- -------------- ------------
"Sharing" from operations (1.7) (2.9)
- --------------------------------------------------- -------------- ------------
"Sharing" from one-time items 2.8 2.4
- --------------------------------------------------- -------------- ------------
Deferred Seabrook Return, completed in 1999 (12.6) (12.6)
- --------------------------------------------------- -------------- ------------
Other 1.3 1.0
- --------------------------------------------------- -------------- ------------
TOTAL DISTRIBUTION DIVISION (13.3) (16.5)
- --------------------------------------------------- -------------- ------------
Amortization in CTA and SBC 13.3 13.4
- --------------------------------------------------- -------------- ------------
TOTAL AMORTIZATION OF REGULATORY ASSETS 0.0 (3.1)
- --------------------------------------------------- -------------- ------------
Interest charges for UI, including the "Dividend requirement of mandatorily
redeemable securities," decreased by $10.1 million in 2000 compared to 1999.
URI Results of Operations: 2000 vs. 1999
- -----------------------------------------
- ----------------------------------------------- --------------- --------------- --------------------------
2000 more (less) than 1999
Year Ended Year Ended --------------------------
($000 except EPS) Dec. 31, 2000 Dec. 31, 1999 Amount Percent
- ----------------------------------------------- --------------- --------------- ---------- --------
Total Operating Revenue $176,431 $71,105 $105,326 148%
TOTAL EARNINGS FOR COMMON STOCK $182 $(2,256) $2,438 - -
EPS FROM OPERATIONS (BASIC AND DILUTED)
Operating Businesses
American Payment Systems, Inc. $0.15 $0.11 $0.04 36%
Xcelecom, Inc. $0.15 $(0.21) $0.36 - -
SUBTOTAL $0.30 $(0.10) $0.40 - -
Passive Investments
United Bridgeport Energy, Inc. $(0.19) $(0.01) $(0.18) - -
United Capital Investments, Inc. $0.11 $(0.03) $0.14 - -
SUBTOTAL $(0.08) $(0.04) $(0.04)
URI Headquarters (Note A) $(0.21) $(0.02) $(0.19)
TOTAL NON-REGULATED EPS FROM OPERATIONS $0.01 $(0.16) $0.17 - -
- ----------------------------------------------- --------------- ---------------- ---------- --------
Note (A): Includes financial leveraging, strategic and administrative costs for
the holding company of the non-regulated business units.
Overall, the consolidated non-regulated businesses operating under the parent,
URI, after corporate parent-allocated interest, earned approximately $0.2
million, or $.01 per share, in 2000, compared to losses of about $2.3 million,
or
- 25 -
$0.16 per share, in 1999. Operation expenses for the URI businesses, including
cost of goods sold, selling and administrative expenses, increased by $94.2
million in 2000 compared to 1999, almost entirely as the result of incorporating
acquired companies. Other taxes for URI increased by $0.7 million, reflecting
the expansion of these businesses. Depreciation and amortization expense for the
URI businesses increased by $1.0 million.
Interest charges for URI increased by a net $6.8 million in 2000, compared to
1999. The results of each of the subsidiaries of URI for 2000, as presented
below, reflect the allocation of debt costs from the parent based on a capital
structure, including an equity component and an interest rate deemed to be
appropriate for that type of business.
URI OPERATING BUSINESSES
AMERICAN PAYMENT SYSTEMS, INC. (APS)
Earnings for APS increased $0.04 per share, or 36%, in 2000 compared to 1999,
due primarily to increased transaction volumes. Also, much of APS's field
equipment was fully depreciated, resulting in depreciation savings.
XCELECOM, INC.
Earnings for Xcelecom, Inc. increased by $0.36 per share in 2000 compared to
1999, due to the acquisitions completed in 2000 and continuing cost control
measures. Operating revenue increased by $103 million to $138 million in 2000.
URI PASSIVE INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC. (UBE)
UBE lost $0.19 per share in 2000, compared to a loss of $0.01 per share in 1999.
The increased loss was due to a combination of factors that had adverse impacts
on the Bridgeport Energy generating plant: third quarter mild weather that
depressed energy sales prices; high gas prices that further reduced margins;
mechanical difficulties in the early part of the year that caused an extended
shutdown; and a one-time third quarter termination cost of a contractual
liability that is expected to benefit UBE's earnings in subsequent years. Fourth
quarter 2000 results reflect the recovery of $1.6 million of Installed Capacity
(ICAP) revenues, contributing $0.07 per share, based on a power purchaser's
agreement to pay in accordance with its power contract terms as a result of a
Federal Energy Regulatory Commission (FERC) ruling affirming the value of the
ICAP market in New England. However, these ICAP revenues are the subject of an
appeal to the FERC by other entities; and the FERC has temporarily stayed its
order pending a hearing. See the "Looking Forward" section for more information
on the ICAP proceeding and on plans to reduce the risk of the UBE investment.
UNITED CAPITAL INVESTMENTS, INC. (UCI)
UCI earned $0.11 per share in 2000, compared to a $0.03 per share loss in 1999,
due to gains on its passive investments.
URI HEADQUARTERS
URI, the holding company for all non-regulated businesses, lost $0.21 per share
in 2000 compared to a loss of $0.02 per share in 1999. The results of each of
the subsidiaries of URI, as presented above, reflect interest expense on
allocated debt from URI, based on a capital structure, including an equity
component, and an interest rate deemed to be appropriate for that type of
business. Some financial leveraging, and strategic and administrative costs for
the subsidiaries of URI, are retained by the parent URI.
- 26 -
1999 VS. 1998
- -------------
UIL Holdings Corporation Results of Operations: 1999 vs. 1998
- -------------------------------------------------------------
- ---------------------------------- --------------- ---------------- -----------------------------
1999 more (less) than 1998
Year Ended Year Ended --------------------------
($000 except EPS) Dec. 31, 1999 Dec. 31, 1998 Amount Percent
- ---------------------------------- --------------- ---------------- --------------- -------------
Operating Revenue
United Illuminating $679,975 $686,191 $(6,216) (0.9)%
United Resources, Inc. $71,105 $61,861 $9,244 15%
Eliminations $(350) $39 $(389) - -
Total Operating Revenue $750,730 $748,091 $2,639 0.4%
TOTAL EARNINGS FOR COMMON STOCK $52,105 $44,892 $7,213 16%
EARNINGS PER SHARE (BASIC)
United Illuminating $3.83 $3.49 $0.34 10%
United Resources, Inc. $(0.16) $(0.08) $(0.08) - -
TOTAL EPS FROM OPERATIONS $3.67 $3.41 $0.26 8%
EPS from one-time items $0.04 $(0.21) $0.25 - -
Dilution - - - - - - - -
TOTAL EPS (DILUTED) $3.71 $3.20 $0.51 16%
- ---------------------------------- --------------- ---------------- --------------- -------------
The one-time item recorded in 1999 was: EPS
- --------------- --------------------------------------------- --------------
1999 Quarter 1 Purchased power expense refund (pre-sharing) $0.12
Sharing due to refund (0.08)
-----
Net $0.04
- --------------- --------------------------------------------- --------------
The one-time items recorded in 1998 were: EPS
- --------------- ----------------------------------------------------------- --------------
1998 Quarter 4 Property tax settlement with the City of New Haven, CT $(0.59)
Reversal of "sharing" related to property tax settlement 0.29
----
Net $(0.30)
- --------------- ----------------------------------------------------------- --------------
1998 Quarter 3 Refund of prior period transmission charges, with interest $0.14
"Sharing" due to transmission refund (0.05)
----
Net $0.09
- --------------- ----------------------------------------------------------- --------------
UI Results of Operations: 1999 vs. 1998
- ---------------------------------------
- --------------------------------- --------------- ---------------- -----------------------------
1999 more (less) than 1998
Year Ended Year Ended --------------------------
($000 except EPS) Dec. 31, 1999 Dec. 31, 1998 Amount Percent
- --------------------------------- --------------- ---------------- --------------- -------------
Total Operating Revenue $679,975 $686,191 $(6,216) (0.9)%
TOTAL EARNINGS FOR COMMON STOCK $54,361 $45,993 $8,368 18%
EPS FROM OPERATIONS (BASIC) $3.83 $3.49 $0.34 10%
GWH SALES (THOUSANDS OF MWH) 5,652 5,452 200 3.7%
- --------------------------------- --------------- ---------------- --------------- -------------
- 27 -
Overall, retail revenue increased by $8.0 million in 1999 compared to 1998.
$ millions
- ---------------------------------------------------------- ------------- ----------- ----------
From From
Retail Sales Margin Operations One-time Total
- ---------------------------------------------------------- ------------- ----------- ----------
Revenue from:
- ---------------------------------------------------------- ------------- ----------- ----------
Sharing: for 1999 $(14.4) $(3.9) $(18.3)
- ---------------------------------------------------------- ------------- ----------- ----------
Estimate of "real" retail sales growth, up 3.2% 20.2 0 20.2
- ---------------------------------------------------------- ------------- ----------- ----------
Estimate of weather effect on retail sales, up 1.1% 7.1 0 7.1
- ---------------------------------------------------------- ------------- ----------- ----------
Sales decrease from Yale University cogeneration, (0.6)% (3.6) 0 (3.6)
- ---------------------------------------------------------- ------------- ----------- ----------
Price mix of sales and other 2.6 0 2.6
- ---------------------------------------------------------- ------------- ----------- ----------
TOTAL RETAIL REVENUE $11.9 $(3.9) $8.0
- ---------------------------------------------------------- ------------- ----------- ----------
REVENUE BASED TAXES $(0.6) $0.1 $(0.5)
- ---------------------------------------------------------- ------------- ----------- ----------
Fuel and energy, margin effect:
- ---------------------------------------------------------- ------------- ----------- ----------
Sales increase $(4.7) $0 $(4.7)
- ---------------------------------------------------------- ------------- ----------- ----------
Nuclear fuel prices and outage replacement power costs (0.5) 0 (0.5)
- ---------------------------------------------------------- ------------- ----------- ----------
Purchased energy prices (15.5) 0 (15.5)
- ---------------------------------------------------------- ------------- ----------- ----------
TOTAL RETAIL FUEL AND ENERGY $(20.7) $0 $(20.7)
- ---------------------------------------------------------- ------------- ----------- ----------
TOTAL RETAIL SALES MARGIN $(9.4) $(3.8) $(13.2)
- ---------------------------------------------------------- ------------- ----------- ----------
Net wholesale margin (wholesale revenue less wholesale expense) decreased by
$10.4 million in 1999 compared to 1998, due to lower wholesale sales. Other
operating revenues, which include NEPOOL related transmission revenues,
increased by $6.4 million. NEPOOL transmission revenues are recoveries, for the
most part, of NEPOOL transmission expense and reflect new accounting
requirements implemented by the Federal Energy Regulatory Commission.
Operating expenses for operations, maintenance and purchased capacity charges
decreased by $5.7 million in 1999 compared to 1998. The principal components of
these expense changes include:
$millions
- ------------------------------------------------------------------ ----------
Capacity expense:
- ------------------------------------------------------------------ ----------
Connecticut Yankee (2.4)
- ------------------------------------------------------------------ ----------
Cogeneration and other purchases (see Note A) 1.8
- ------------------------------------------------------------------ ----------
TOTAL CAPACITY EXPENSE (0.6)
- ------------------------------------------------------------------ ----------
Other O&M expense:
- ------------------------------------------------------------------ ----------
Seabrook Unit 1 (refueling outage costs and accruals) 4.1
- ------------------------------------------------------------------ ----------
Millstone Unit 3 (refueling outage costs and accruals) 1.1
- ------------------------------------------------------------------ ----------
Other expenses at nuclear units (0.8)
- ------------------------------------------------------------------ ----------
Fossil generation unit operating and maintenance costs (23.1)
- ------------------------------------------------------------------ ----------
NEPOOL transmission expense 3.4
- ------------------------------------------------------------------ ----------
Site remediation costs (see Note B) 7.8
- ------------------------------------------------------------------ ----------
Other miscellaneous, including impact of generation asset sale 2.4
- ------------------------------------------------------------------ ----------
TOTAL O&M EXPENSE (5.1)
- ------------------------------------------------------------------ ----------
Note (A): A cogeneration facility was out of service for about a month in
the first quarter of 1998 but has operated normally in 1999.
Note (B): These costs were incurred to repair a riparian bulkhead in New
Haven and for remediation of environmental conditions at another site. No
further material expenses are currently anticipated for remediation of
these sites.
Depreciation expense decreased by $12.4 million in 1999 compared to 1998, due
primarily to the generation asset sale.
- 28 -
On December 31, 1996, the Connecticut Department of Public Utility Control
issued an order that implemented a five-year Rate Plan to reduce UI's retail
prices and accelerate the recovery of certain "regulatory assets." According to
the Rate Plan, under which UI is currently operating, "accelerated" amortization
of past utility investments is scheduled for every year that the Rate Plan is in
effect, contingent upon UI earning a 10.5% return on utility common stock
equity. All of the scheduled accelerated amortization for 1998, amounting to
$13.1 million before-tax ($8.5 million after-tax), was recorded against earnings
from operations in 1998. UI recorded all of the scheduled accelerated
amortization for 1999 by amortizing regulatory income tax assets, totaling $12.1
million after-tax ($20 million pre-tax equivalent).
UI can also incur additional accelerated amortization expense as a result of the
"sharing" mechanism in the Rate Plan, if UI achieves a return on utility common
stock equity above 11.5%, which UI did achieve during the third quarter of 1999.
One-time items recorded against the return on utility common stock equity,
before UI achieves the 11.5%, are recorded with an appropriate "sharing" effect
if UI projects, at that time, that there will be total "sharing" for the year
adequate to cover the "sharing" for the one-time item. Such "sharing"
amortization was recorded in the first quarter of 1999, in the amount of $1.0
million before-tax ($0.6 million after-tax), as a result of the one-time gain
recorded in that quarter. "Sharing" amortization from operations of $10.0
million after-tax ($16.7 million before-tax) was recorded in 1999. "Sharing"
amortizations recorded and imputed in the first nine months of 1998 were: $0.5
million before-tax ($0.3 million after-tax) as a result of a one-time item, and
$2.1 million before-tax ($1.2 million after-tax) from operations. "Sharing"
amortization recorded against earnings from operations in the fourth quarter of
1998 was imputed to be $0.6 million before-tax ($0.3 million after-tax). All of
those 1998 "sharing" amortizations were reversed in the fourth quarter of 1998
as a result of the impact of a one-time charge recorded in that quarter.
Interest charges continued on a downward trend, decreasing by $12.8 million for
the regulated business in 1999 compared to 1998, partly offset by an increase of
$3.5 million in interest charges for non-regulated subsidiaries. Most of the
reduction in utility interest charges occurred after the generation asset sale,
which was completed on April 16, 1999. On that date, UI used proceeds received
from the sale of plant to pay off $205 million of debt.
URI Results of Operations: 1999 vs. 1998
- ----------------------------------------
- ------------------------------------------------ --------------- ---------------- ---------------
1999
more (less)
Year Ended Year Ended than 1998
($000 except EPS) Dec. 31, 1999 Dec. 31, 1998 Amount
- ------------------------------------------------ --------------- ---------------- ---------------
Total Operating Revenue $71,105 $61,861 $9,244
TOTAL EARNINGS FOR COMMON STOCK $(2,256) $(1,101) $(1,155)
EPS FROM OPERATIONS (BASIC AND DILUTED)
Operating Businesses
American Payment Systems, Inc. $0.11 $0.07 $0.04
Xcelecom, Inc. $(0.21) $(0.10) $(0.11)
SUBTOTAL $(0.10) $(0.03) $(0.07)
Passive Investments
United Bridgeport Energy, Inc. $(0.01) N/A $(0.01)
United Capital Investments, Inc. $(0.03) $(0.05) $0.02
SUBTOTAL $(0.04) $(0.05) $0.01
URI Headquarters (Note A) $(0.02) N/A $(0.02)
TOTAL NON-REGULATED EPS FROM OPERATIONS $(0.16) $(0.08) $(0.08)
- ------------------------------------------------ --------------- ---------------- ---------------
Note (A): Includes financial leveraging, strategic and administrative costs for
the holding company of the non-regulated business units.
Overall, non-regulated businesses, after parent-allocated interest but before
income taxes, lost approximately $3.8 million in 1999 compared to losses of
about $1.8 million in 1998. American Payment Systems, Inc. (APS) earned
approximately $2.6 million (before-tax) in 1999, reflecting an increase of $1.0
million over 1998. Xcelecom, Inc.
- 29 -
lost approximately $5.1 million (before-tax) in 1999, compared to a loss of
approximately $2.4 million in 1998, reflecting increased infrastructure costs
and lower than anticipated contract margins.
On May 11, 1999, United Bridgeport Energy, Inc. (UBE), increased its 4% passive
investment in Bridgeport Energy LLC (BE) to 33 1/3%. The second phase of BE's
merchant wholesale electric generating project went into commercial operation in
July 1999, adding 180 megawatts of generation capacity for a total of 520
megawatts. UBE lost approximately $0.1 million (before-tax) in 1999, as a result
of the second quarter shutdown of the first phase generator to allow for
construction of the second phase, and additional unscheduled outages and higher
gas prices in the fourth quarter of 1999. Other non-regulated subsidiary
operations lost approximately $1.2 million in 1999, compared to a similar loss
in 1998.
- ------------------------------------------------------------------ ---------- -----------
12 mos.
ended 12 mos.
Summary of Non-regulated Business Unit Pre-tax Income: $millions Dec. 99 99 vs. 98
- ------------------------------------------------------------------ ---------- -----------
American Payment Systems, Inc. 2.6 1.0
- ------------------------------------------------------------------ ---------- -----------
Precision Power, Inc. (5.1) (2.7)
- ------------------------------------------------------------------ ---------- -----------
United Bridgeport Energy, Inc. (0.1) (0.1)
- ------------------------------------------------------------------ ---------- -----------
United Resources, Inc. Capital Projects (1.2) -
- ------------------------------------------------------------------ ---------- -----------
TOTAL NON-REGULATED BUSINESSES (3.8) (1.8)
- ------------------------------------------------------------------ ---------- -----------
LOOKING FORWARD
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). SUCH FORWARD-LOOKING STATEMENTS INCLUDE RISKS
AND UNCERTAINTIES; CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED THEREBY, DUE TO IMPORTANT FACTORS INCLUDING, BUT NOT
LIMITED TO, GENERAL ECONOMIC CONDITIONS, LEGISLATIVE AND REGULATORY CHANGES,
DEMAND FOR ELECTRICITY AND OTHER PRODUCTS AND SERVICES, CHANGES IN ACCOUNTING
PRINCIPLES, POLICIES OR GUIDELINES, AND OTHER ECONOMIC, COMPETITIVE,
GOVERNMENTAL, AND TECHNOLOGICAL FACTORS AFFECTING THE OPERATIONS, MARKETS,
PRODUCTS, SERVICES AND PRICES OF THE SUBSIDIARIES. 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.
A LOOK AT 2001
- --------------
UIL Holdings expects that its 2001 earnings will be $4.40-$4.50 per share. This
range reflects compound annual growth of about 11% from earnings from operations
of $2.93 per share in 1997. The primary reasons for the projected increase in
the earnings are: management's commitment to reducing costs while sales increase
at its regulated electric utility subsidiary, and its confidence in the ability
of its non-regulated subsidiary businesses to execute the strategic growth plans
of the various businesses. Further details are explained below.
The United Illuminating Company (UI)
- -----------------------------------
Five-year Rate Plan
On December 31, 1996, the Connecticut Department of Public Utility Control
(DPUC) issued an order (the Order) that implemented a five-year regulatory
framework (Rate Plan) to reduce UI's regulated retail prices and accelerate the
recovery of certain "regulatory assets," beginning with deferred conservation
costs. UI has operated under the terms of this Order since January 1, 1997. The
Order's schedule of price reductions and accelerated amortizations was based on
a DPUC pro-forma financial analysis that anticipated UI would be able to
implement such changes and earn an allowed annual return on common equity
invested in regulated utility assets of 11.5% over the period 1997 through 2001.
The Order established a set formula to share any regulated utility income that
would produce a return above the 11.5% level: one-third to be applied to
customer price reductions, one-third to be applied to
- 30 -
additional amortization of regulatory assets, and one-third to be retained by
shareowners (see "Sharing Implementation" below). Regulated utility income for
this purpose is inclusive of earnings from operations and one-time items.
Sharing Implementation
"Sharing" in 2001 will result only if UI's regulated operating Distribution
Division exceeds its allowed return of 11.5% on its portion of regulated utility
common equity. Earnings subject to sharing does not include the Competitive
Transition Assessment (CTA) and other unbundled utility components. UI is
allowed to earn an 11.5% return, no more and no less, on the equity portion of
the CTA rate base that includes all stranded assets. The CTA return, therefore,
is not subject to "sharing." Distribution Division earnings will not likely
exceed the sharing level before the third quarter of 2001. Assuming the sharing
level of earnings is exceeded in the third quarter of 2001, then earnings in the
third quarter that exceed that level and all positive regulated Distribution
Division earnings recorded in the fourth quarter of 2001 will be subject to
"sharing."
The framework of the current Rate Plan, including the "sharing" mechanism, is
expected to continue at least through 2001. Regulatory decisions during 1999 did
not alter UI's allowed return of 11.5% on regulated utility equity, and did not
impinge on UI's ability to achieve that return.
UI EARNINGS ESTIMATES FOR 2001
If UI were to earn 11.5% on regulated utility equity, excluding the Nuclear
Division, that level of earnings would generate $3.25-$3.35 per share for UIL
Holdings.
UI is allowed to earn an 11.5% return on the equity portions of CTA and the SBC
rate base (the latter is minimal), no more and no less. For the most part, the
regulatory assets that are being recovered through the CTA are being amortized
on a straight-line basis. If CTA revenues and expenses produce a return more or
less than the allowed return, then deferred accounting or accelerated
amortization is used to "true-up" to the allowed return. This true-up adjusts
for sales volume fluctuations as well as pricing factors. A similar adjustment,
on a much less significant scale, applies to the SBC component.
The generation service, conservation and renewables charges are pass-through
charges, based on rates that were set for the standard offer period through
2003. In the case of generation service, UI has contracted with Enron Power
Marketing, Inc., a subsidiary of Enron Corp., for all of UI's retail customer
standard offer service requirements, through 2003, on a fixed-price basis. This
agreement protects UIL Holdings' shareowners and UI's retail customers from the
type of market and pricing volatility that is being experienced in California,
regardless of demand and volume requirements. The only retail electricity sales
volume fluctuations that impact UI's net income are those that apply to the
operating Distribution Division component of rates. Thus, a 1% sales volume
increase will produce additional sales margin of about $2.4 million in 2001. The
Distribution Division was impacted negatively in 2000 by a 0.9% sales decrease,
due to mild summer weather.
A mandated increase in Distribution Division accelerated amortization expense,
the absence of a significant one-time gain that occurred in 2000, and other 2001
cost increases relative to 2000 would, absent management action, likely prevent
Distribution Division earnings from exceeding the 11.5% allowed return level in
2001. However, UI has a major process reengineering effort underway, and expects
that effort to produce enough savings in 2001 for it to retain as much as an
additional $0.05 per share after sharing.
The Nuclear Division contributed $0.45 per share to UIL Holdings' results for
2000. The scheduled four-week refueling outage for the Seabrook nuclear
generating unit that began on October 21, 2000 was extended, adding six weeks of
unscheduled outage in 2000 and an additional four and one-half weeks in 2001.
The total negative impact of the refueling outage and the six-week outage
extension on the 2000 earnings contribution of the Nuclear Division to UIL
Holdings was approximately $0.33 per share. The remaining four and one-half
weeks of outage in 2001 should have an impact on 2001 earnings similar to the
impact the regularly scheduled 2000 four-week outage had on 2000 earnings.
Assuming Seabrook operates normally for the remainder of 2001, the contribution
to earnings in
- 31 -
2001 of the Seabrook unit should be about the same as the 2000 earnings. It is
possible for earnings to improve slightly from that level if the unit operates
at near full capacity as it did in 2000 before the refueling outage began.
UIL Holdings currently expects to complete the sale of its Millstone Unit 3
nuclear generating unit entitlement on or about April 1, 2001. The impact of the
sale and a refueling outage scheduled for the first quarter on the earnings of
the Nuclear Division in the first quarter of 2001 is expected to be negligible.
That unit's impact on 2000 earnings for the Nuclear Division was also
immaterial. An estimated impact of the Millstone sale on the CTA is incorporated
in UI's earnings projections for 2001.
Overall, UI, including the Nuclear Division, is expected to contribute
$3.75-$3.85 to UIL Holdings' earnings per share in 2001.
URI EARNINGS ESTIMATES
UIL Holdings' non-regulated businesses, under the parent URI, are expected to
earn $0.60-$0.70 per share in 2001.
APS is expected to contribute only about $0.00-$0.05 per share to UIL Holdings
in 2001, although its base business is expected to contribute about 15% more
than the $0.15 per share earned in 2000. The expected reduction in earnings from
the base business reflects anticipated strategic expenses designed to produce
future earnings enhancements in the non-contracted payment segment of its
business. Management's experience with Xcelecom indicates that incurring
short-term strategic expenses to build an appropriate management team and
processes that are necessary to grow through acquisitions and product and
service enhancements will increase shareowner value in the longer term.
Management believes that experience will be equally applicable to APS.
Earnings for Xcelecom increased from a loss of $0.21 per share in 1999 to
positive earnings of $0.15 per share in 2000. The acquisitions completed in 2000
and continuing cost control measures are the reasons for the increase. This
strategy is expected to produce further earnings increases in 2001, based on a
full year's impact of the 2000 acquisitions, and earnings could further improve
through additional acquisitions in 2001. Based on past performance and the
assumed accomplishment of a portion of its 2001 acquisition plan, Xcelecom is
expected to contribute $0.55-$0.60 per share in 2001.
Earnings from URI's passive investments offset by headquarters' costs are
expected to contribute $0.00-$0.05 per share in 2001. These investments include
United Bridgeport Energy, Inc. (UBE), which is expected to contribute about
$0.20 per share in 2001. UBE's expected contribution assumes the favorable
outcome of an important pending matter that management is confident will come
about, although there can be no assurance that it will occur. The assumption is
the anticipated recording of UBE's portion of ICAP revenues in 2001, producing
about $0.25 per share for UBE. The Federal Energy Regulatory Commission (FERC),
in a ruling in 2000, affirmed the value of the ICAP market in New England,
thereby validating a pre-existing contract of Bridgeport Energy for ICAP
revenues. However, the FERC ICAP order is the subject of appeal to the FERC by
some other entities, and, as a result, the FERC has temporarily stayed its order
pending a hearing. DETM may be able to book some ICAP revenues, in spite of the
stay, if, as anticipated, the customer continues to pay for its contracted ICAP.
As stated previously, as a result of management's continued confidence in the
potential of the non-regulated businesses, UIL Holdings is evaluating further
investments in this area. Near-term losses could be incurred due to these new
growth initiatives, if the potential for future earnings is deemed to warrant
such losses.
Quarterly Earnings Pattern for 2001
- -----------------------------------
The 2001 quarterly earnings pattern for UI is expected to be different than the
2000 pattern. Nuclear Division outages in the first quarter of 2001 will reduce
earnings compared to the first quarter of 2000. Higher mandated amortization
expense for the Distribution Division will be spread evenly throughout the year,
which will further reduce earnings relative to 2000 in the first two quarters of
2001. Since UI is not projecting any significant "sharing" in 2001 at this time,
the third and fourth quarters of 2001 should show an improvement compared to the
corresponding quarters in 2000. UIL Holdings makes every effort to incorporate
such impacts, including the sharing impact, in its earnings estimates as each
quarter is reported.
- 32 -
Actual 2001 results may vary depending on changes due to weather, economic
conditions, sales mix (the usage pattern of the Distribution Division's retail
customers), the ability to control expenses, and other unanticipated events.
These factors can change from quarter to quarter.
UIL Holdings' current overall estimate of earnings per share from operations for
2001 is $4.40-$4.50 and the estimates of quarterly results are as follows:
Earnings per share from operations:
Estimated Actual
Quarter 2001 Range* 2000
------- ----------- ----
1 $0.65 - $0.70 $1.20
2 $1.00 - $1.05 1.41
3 $1.65 - $1.70 1.19
4 $1.05 - $1.10 0.46
-----
$4.26
*Quarterly range estimates are not additive, that is, adding the low range
numbers produces a result that is lower than UIL Holdings' low estimate for the
year, and adding the high range numbers produces a result that is higher than
UIL Holdings' high estimate for the year. The sums of the low and high range
values should not be construed to represent any estimate other than UIL
Holdings' annual estimate of $4.40-$4.50 per share. The quarterly range
estimates do not add to the total UIL Holdings' range for the year because
impacts in one quarter can affect the results of other quarters through the
sharing mechanism and through timing of activities.
- 33 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
---- ---- ----
OPERATING REVENUES (NOTE G)
Utility $ 704,691 $ 679,975 $ 686,191
Non-regulated businesses 176,164 70,755 61,900
------------ ------------- ------------
Total Operating Revenues 880,855 750,730 748,091
------------ ------------- ------------
OPERATING EXPENSES
Operation
Fuel and energy 282,153 159,403 151,544
Capacity purchased 4,682 33,873 34,515
Other operation and maintenance 305,316 241,236 237,235
Non-regulated - selling, general and administrative 25,989 15,049 10,401
Depreciation and Amortization (Note G) 69,713 97,434 100,619
Taxes - other than income taxes (Note G) 43,056 47,140 64,674
------------ ------------- ------------
Total 730,909 594,135 598,988
------------ ------------- ------------
OPERATING INCOME 149,946 156,595 149,103
------------ ------------- ------------
OTHER INCOME AND (DEDUCTIONS) (NOTE G) 3,339 4,921 2,396
------------ ------------- ------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 153,285 161,516 151,499
------------ ------------- ------------
INTEREST CHARGES
Interest on long-term debt 38,199 42,104 50,129
Interest on Seabrook obligation bonds owned by UI (6,470) (6,844) (7,293)
Dividend requirement of mandatorily redeemable securities 3,529 4,813 4,813
Other interest (Note G) 5,253 4,927 6,496
------------ ------------- ------------
40,511 45,000 54,145
Amortization of debt expense and redemption premiums 3,988 2,392 2,511
------------ ------------- ------------
Net Interest Charges 44,499 47,392 56,656
------------ ------------- ------------
INCOME BEFORE INCOME TAXES 108,786 114,124 94,843
------------ ------------- ------------
INCOME TAXES (NOTE F) 48,029 61,900 49,771
------------ ------------- ------------
NET INCOME 60,757 52,224 45,072
Premium (Discount) on preferred stock redemptions - 53 (21)
Dividends on preferred stock - 66 201
------------ ------------- ------------
INCOME APPLICABLE TO COMMON STOCK $60,757 $52,105 $44,892
============ ============= ============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,073 14,052 14,018
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,098 14,055 14,023
EARNINGS PER SHARE OF COMMON STOCK - BASIC $4.32 $3.71 $3.20
EARNINGS PER SHARE OF COMMON STOCK - DILUTED $4.31 $3.71 $3.20
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $2.88 $2.88 $2.88
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 34 -
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(THOUSANDS OF DOLLARS)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $60,757 $52,224 $45,072
----------- ------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 66,068 83,374 88,099
Deferred income taxes 10,435 17,451 3,074
Deferred income taxes-generation asset sale - (70,222) -
Deferred investment tax credits - net (735) (467) (762)
Amortization of nuclear fuel 6,521 8,425 6,892
Allowance for funds used during construction (2,609) (2,235) (468)
CTA and SBC expense deferral (23,098) - -
Amortization of deferred return - 12,586 12,586
Changes in:
Accounts receivable - net (49,693) 8,749 (14,889)
Fuel, materials and supplies (457) (1,202) (14,466)
Prepayments 181 4,368 (4,027)
Accounts payable 34,143 2,025 (9,782)
Interest accrued 95 (1,770) (63)
Taxes accrued 1,275 (6,446) 4,849
Other assets and liabilities (1,565) (8,387) (4,062)
----------- ------------ -----------
Total Adjustments 40,561 46,249 66,981
----------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 101,318 98,473 112,053
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of:
Common stock 517 1,157 4,923
Long-term debt - 25,000 199,636
Notes payable 93,568 (69,761) 49,141
Securities redeemed and retired:
Preferred stock - (4,299) (52)
Company-obligated mandatorily redeemable securities of
subsidiary holding solely parent debentures (50,000) - -
Long-term debt (26,609) (218,008) (222,348)
(Premium) discount on preferred stock redemptions - (53) 21
Expenses of issuances - (550) (1,600)
Lease obligations (376) (348) (339)
Dividends
Preferred stock - (116) (202)
Common stock (40,517) (40,450) (40,285)
----------- ------------ -----------
NET CASH USED IN FINANCING ACTIVITIES (23,417) (307,428) (11,105)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash acquired (49,371) - -
Investment in non-regulated businesses - (88,489) -
Net cash received from sale of generation assets - 270,590 -
Plant expenditures, including nuclear fuel (54,191) (34,772) (38,040)
Investment in debt securities 4,778 5,447 8,528
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (98,784) 152,776 (29,512)
----------- ------------ -----------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD (20,883) (56,179) 71,436
BALANCE AT BEGINNING OF PERIOD 68,322 124,501 53,065
----------- ------------ -----------
BALANCE AT END OF PERIOD 47,439 68,322 124,501
LESS: RESTRICTED CASH 33,202 29,223 26,812
----------- ------------ -----------
BALANCE: UNRESTRICTED CASH AND TEMPORARY
CASH INVESTMENTS $14,237 $39,099 $97,689
=========== ============ ===========
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $35,252 $40,020 $51,481
=========== ============ ===========
Income taxes $36,900 $121,450 $42,450
=========== ============ ===========
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 35 -
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 2000 and 1999
ASSETS
(Thousands of Dollars)
2000 1999
---- ----
Current Assets
Unrestricted cash and temporary cash investments $ 14,237 $ 39,099
Restricted cash 33,202 29,223
Accounts receivable, less allowance for doubtful
accounts of $2,569 and $2,308 190,159 109,669
Unbilled revenues 36,694 29,787
Materials and supplies, at average cost 10,938 9,259
Prepayments 2,875 3,056
Other 201 33
-------------- --------------
Total 288,306 220,126
-------------- --------------
Other Property and Investments
Investment in United Bridgeport Energy facility 90,284 83,494
Nuclear decommissioning trust fund assets 32,844 28,255
Other 7,862 11,918
-------------- --------------
130,990 123,667
-------------- --------------
Property, Plant and Equipment at original cost
In service 962,485 1,031,601
Less, accumulated provision for depreciation 466,635 548,765
-------------- --------------
495,850 482,836
Construction work in progress 30,267 25,708
Nuclear fuel 24,536 21,101
-------------- --------------
Net Property, Plant and Equipment 550,653 529,645
-------------- --------------
Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Nuclear plant investments-above market 497,829 518,268
Income taxes due principally to book-tax differences 123,043 166,965
Long-term purchase power contracts-above market 128,328 144,406
Connecticut Yankee 24,272 37,013
Unamortized redemption costs 22,293 22,314
Other 44,628 21,019
-------------- --------------
Total 840,393 909,985
-------------- --------------
Deferred Charges
Goodwill 51,508 4,827
Unamortized debt issuance expenses 5,477 8,688
Other 1,227 1,272
-------------- --------------
Total 58,212 14,787
-------------- --------------
Total Assets $1,868,554 $1,798,210
============== ==============
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 36 -
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000 AND 1999
LIABILITIES AND CAPITALIZATION
(Thousands of Dollars)
2000 1999
---- ----
Current Liabilities
Notes payable $ 110,699 $ 17,131
Current portion of long-term debt - 25,000
Accounts payable 149,146 105,289
Dividends payable 10,135 10,125
Taxes accrued 3,845 2,570
Interest accrued 8,528 8,433
Obligations under capital leases 405 375
Other accrued liabilities 73,762 39,421
----------- ------------
Total 356,520 208,344
----------- ------------
Noncurrent Liabilities
Purchase power contract obligation 128,328 144,406
Nuclear decommissioning obligation 32,844 28,255
Connecticut Yankee contract obligation 17,157 27,056
Pensions accrued 1,705 19,026
Obligations under capital leases 15,725 16,131
Other 12,727 12,261
----------- ------------
Total 208,486 247,135
----------- ------------
Deferred Income Taxes (FUTURE TAX LIABILITIES OWED
TO TAXING AUTHORITIES) 252,809 264,223
Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Accumulated deferred investment tax credits 14,422 15,157
Deferred gains on sale of property 15,978 15,901
Customer refund 17,976 18,381
Other 1,097 2,543
----------- ------------
Total Liabilities 49,473 51,982
----------- ------------
Capitalization (Note B)
Long-term debt
Long-term debt 604,856 605,641
Investment in Seabrook obligation bonds (82,635) (87,413)
----------- ------------
Net long-term debt 522,221 518,228
----------- ------------
Company-obligated mandatorily redeemable securities of
subsidiary holding solely parent company debentures - 50,000
----------- ------------
Common stock equity
Common stock (no par value, 14,076,697 and 14,062,502 291,342 292,006
shares outstanding in 2000 and 1999)
Paid-in capital 2,483 2,253
Capital stock expense (2,170) (2,170)
Unearned employee stock ownership plan equity (8,310) (9,261)
Retained earnings 195,700 175,470
----------- ------------
479,045 458,298
Total Capitalization 1,001,266 1,026,526
----------- ------------
Commitments and Contingencies (Note L) - -
----------- ------------
Total Liabilities and Capitalization $1,868,554 $1,798,210
=========== ============
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 37 -
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
DECEMBER 31, 2000, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
CAPITAL UNEARNED
COMMON STOCK PREFERRED STOCK PAID-IN STOCK ESOP RETAINED
SHARES(A) AMOUNT SHARES(B) AMOUNT CAPITAL EXPENSE EQUITY EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1997 13,907,824 $288,730 43,509 $4,351 $1,349 ($2,182) ($11,160) $159,344 $440,432
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 1998 45,072 45,072
Cash dividends on common stock
- $2.88 per share (40,389) (40,389)
Cash dividends on preferred stock (201) (201)
Issuance of 98,798 shares common stock
- no par value 98,798 3,276 459 3,735
Allocation of benefits - ESOP 27,940 238 950 1,188
Repurchase and cancellation of
preferred stock (524) (52) (52)
Discount on preferred stock repurchase 21 21
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1998 14,034,562 292,006 42,985 4,299 2,046 (2,182) (10,210) 163,847 449,806
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 1999 52,224 52,224
Cash dividends on common stock
- $2.88 per share (40,470) (40,470)
Cash dividends on preferred stock (66) (66)
Allocation of benefits - ESOP 27,940 207 949 1,156
Repurchase and cancellation of
preferred stock (42,985) (4,299) 12 (12) (4,299)
Premium on preferred stock repurchase (53) (53)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1999 14,062,502 292,006 0 0 2,253 (2,170) (9,261) 175,470 458,298
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 2000 60,757 60,757
Cash dividends on common stock
- $2.88 per share (40,527) (40,527)
Issuance of 4,670 shares common stock
- no par value 4,616 163 32 195
Retirement of 18,361 shares common stock
- no par value (18,361) (827) (827)
Allocation of benefits - ESOP 27,940 198 951 - 1,149
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2000 14,076,697 $291,342 0 $0 $2,483 ($2,170) ($8,310) $195,700 $479,045
- ------------------------------------------------------------------------------------------------------------------------------------
(a) There were 30,000,000 shares authorized in 2000, 1999 and 1998
(b) There were 5,000,000 shares authorized in 2000 and 1,119,612 shares
authorized in 1999 and 1998
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 38 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UIL Holdings Corporation (UIL Holdings) is the parent holding company for The
United Illuminating Company (UI) and United Resources, Inc (URI) and is not
itself an operating company. This holding company structure became effective on
July 20, 2000 as a result of the corporate restructuring of UI and its direct
and indirect non-regulated subsidiaries. All of UI's interests in all of its
direct and indirect non-regulated subsidiaries have been transferred to UIL
Holdings and, to the extent new businesses are subsequently acquired or
commenced, UIL Holdings expects they will be financed and owned by UIL Holdings.
UIL Holdings is an exempt public utility holding company under the provisions of
the Public Utility Holding Company Act of 1935.
UI is a regulated operating electric public utility established in 1899. It is
engaged principally in the purchase, transmission, distribution and sale of
electricity for residential, commercial and industrial purposes in a service
area of about 335 square miles in the southwestern part of the State of
Connecticut. The population of this area is approximately 704,000, which
represents approximately 21% of the population of the State. The service area,
largely urban and suburban in character, includes the principal cities of
Bridgeport (population approximately 137,000) and New Haven (population
approximately 124,000) and their surrounding areas. Situated in the service area
are retail trade and service centers, as well as large and small industries
producing a wide variety of products, including helicopters and other
transportation equipment, electrical equipment, chemicals and pharmaceuticals.
Of UI's 2000 retail electric revenues, approximately 42% were derived from
residential sales, 40% from commercial sales, 16% from industrial sales and 2%
from other sales.
URI serves as the parent company for UIL Holdings' four non-regulated
businesses, each of which is wholly owned. American Payment Systems, Inc. (APS)
manages a national network of agents for the processing of bill payments made by
customers of UI and other companies. APS is one of the largest vendors in the
nation for walk-in payment of utility bills and already services approximately
25% of the market. Xcelecom, Inc. (formerly known as Precision Power, Inc.) and
its subsidiaries provide specialty electrical and voice-data-video integrated
solutions in regional markets of the Northeastern United States. A third
subsidiary, United Capital Investments, Inc., and its subsidiaries invest in
business ventures that are expected to earn above-average returns. URI's fourth
subsidiary, United Bridgeport Energy, Inc., owns, as a passive investor, 331/3 %
of a merchant wholesale electric generating facility that is co-owned and
operated by a unit of Duke Energy and is located in Bridgeport, Connecticut.
The consolidated financial statements of UIL Holdings and its wholly-owned
direct subsidiaries, UI and URI, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). UIL Holdings'
Consolidated Financial Statements include the accounts of UIL Holdings and its
wholly-owned subsidiaries, UI and URI. UIL Holdings' prior period consolidated
financial statements have been prepared from UI's prior period consolidated
financial statements, except that amounts have been reclassified to reflect UIL
Holdings' structure.
(A) STATEMENT OF ACCOUNTING POLICIES
ACCOUNTING RECORDS
The accounting records for UI are maintained in accordance with the uniform
systems of accounts prescribed by the Federal Energy Regulatory Commission
(FERC) and the Connecticut Department of Public Utility Control (DPUC).
The accounting records of UIL Holdings' non-regulated subsidiaries are
maintained in conformity with generally accepted accounting principles.
- 39 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRESENTATION
The consolidated financial statements include the accounts of UIL Holdings and
its wholly-owned subsidiaries, UI and URI. Intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to use
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain amounts previously reported have been reclassified to conform with
current year presentation.
REGULATORY ACCOUNTING
Generally accepted accounting principles for regulated entities in the United
States of America allow UI to give accounting recognition to the actions of
regulatory authorities in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." In accordance with SFAS No. 71, UI has deferred
recognition of costs (a regulatory asset) or has recognized obligations (a
regulatory liability) if it is probable that such costs will be recovered or
obligations relieved in the future through the ratemaking process. In addition
to the Regulatory Assets and Liabilities separately identified on the
Consolidated Balance Sheet, there are other regulatory assets and liabilities
such as conservation and load management costs and certain deferred tax
liabilities. UI also has obligations under long-term power contracts, the
recovery of which is subject to regulation. If UI, or a portion of its assets or
operations, were to cease meeting the criteria for application of these
accounting rules, accounting standards for businesses in general would become
applicable and immediate recognition of any previously deferred costs, or a
portion of deferred costs, would be required in the year in which the 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 SFAS No. 71.
The Restructuring Act enacted in Connecticut in 1998 provides for UI to recover
previously deferred costs through ongoing assessments to be included in future
regulated service rates. See Note (C), "Rate-Related Regulatory Proceedings" for
a discussion of the nature, amount and timing of recovery of UI's stranded costs
associated with the generation portion of its assets and operations, as well as
a discussion of the regulatory decisions that provide for such recovery. Based
on these regulatory decisions, the sale of UI's fossil-generation assets and the
planned divestiture of its nuclear generation ownership interests by the end of
2003, on December 31, 1999 UI discontinued applying SFAS No. 71 to the
generation portion of its assets and operations. However, based on the recovery
mechanism that allows recovery of all of its stranded costs through its standard
offer rates, UI was not required to take any write-offs in connection with this
event. UI expects to continue to meet the criteria for application of SFAS No.
71 for the remaining portion of its assets and operations for the foreseeable
future. If a change in accounting were to occur to the non-generation portion of
UI's operations, it could have a material adverse effect on UI's earnings and
retained earnings in that year and could have a material adverse effect on UI's
ongoing financial condition as well.
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) in the case of utility plant. The cost of current
repairs and minor replacements is charged to appropriate operating expense
accounts. The original cost of property, plant and equipment retired or
otherwise disposed of and the cost of removal, less salvage, are charged to the
accumulated provision for depreciation.
- 40 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UIL Holdings' property, plant and equipment as of December 31, 2000 and 1999 was
comprised as follows:
2000 1999
---- ----
(000's)
Utility:
Nuclear production $269,750 $271,012
Transmission 152,218 148,419
Distribution 430,620 415,892
General 44,246 46,578
Future use plant 642 30,167
Other 28,499 94,997
-------------- ---------------
Subtotal 925,975 1,007,065
Non-regulated business units 36,510 24,536
-------------- ---------------
$962,485 $1,031,601
============== ===============
See Note (C), "Rate-related Regulatory Proceedings" for a discussion of the sale
by UI of its two operating fossil-fueled generating stations and the regulatory
decisions allowing for recovery of stranded costs, including the above-market
investment in nuclear generating units.
DEPRECIATION
Provisions for depreciation on utility plant for book purposes are computed on a
straight-line basis, using estimated service lives determined by independent
engineers. One-half year's depreciation is taken in the year of addition and
disposition of utility plant, except in the case of major operating units on
which depreciation commences in the month they are placed in service and ceases
in the month they are removed from service. The aggregate annual provisions for
depreciation for the years 2000, 1999 and 1998 were approximately 3.05%, 3.29%
and 3.45%, respectively, of the original cost of depreciable property.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for 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, UI has 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, UI normalizes all investment tax credits (ITC) related
to recoverable plant investments except for the ITC related to Seabrook Unit 1,
which was taken into income in accordance with provisions of a 1990 DPUC retail
rate decision.
REVENUES
Regulated utility revenues for UI are based on authorized rates applied to each
customer's use of electricity. These rates are approved by the DPUC and can be
changed only through formal proceedings. At the end of each accounting period,
the estimated amount of revenues (less related expenses and applicable taxes)
for services rendered but not billed is accrued.
- 41 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues from construction contracts entered into by Xcelecom, Inc., a
wholly-owned subsidiary of URI, are recognized on a percentage-of-completion
method. Under this method, revenue is recognized based on the percentage of
costs incurred and accrued to date to the estimated total cost to complete these
contracts.
CASH AND TEMPORARY CASH INVESTMENTS
For cash flow purposes, UIL Holdings considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash and temporary cash investments.
UI is required to maintain an operating deposit with the project disbursing
agent related to its 17.5% ownership interest in Seabrook Unit 1. This operating
deposit, which is the equivalent to one and one half months of the funding
requirement for operating expenses, is restricted for use and amounted to $3.3
million and $2.3 million at December 31, 2000 and 1999, respectively.
URI's wholly-owned subsidiary, American Payment Systems, Inc., maintains
separate bank accounts for holding cash received from clients' customers before
the amounts are transferred to clients. The amount of this restricted cash at
December 31, 2000 and 1999 was $29.9 million and $26.9 million, respectively.
INVESTMENTS
UI's investment in the Connecticut Yankee Atomic Power Company, a nuclear
generating company in which UI has a 9.50% stock interest, is accounted for on
an equity basis. This investment amounted to $7.1 million and $10.0 million at
December 31, 2000 and 1999, respectively, and is included on the Consolidated
Balance Sheet as a regulatory asset. See Note (L), "Commitments and
Contingencies - Other Commitments and Contingencies - Connecticut Yankee."
GOODWILL
Goodwill represents the excess of the aggregate of purchase price paid in the
acquisition of businesses accounted for as purchases over the estimated fair
market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 15 or 20 years.
UIL Holdings periodically evaluates the recoverability of intangibles resulting
from business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions. If an impairment evaluation is required, the estimated future
undiscounted cash flows associated with the asset will be compared to the
asset's carrying amount to determine if such an impairment exists.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including environmental studies, are charged to
expense as incurred.
PENSION AND OTHER POSTEMPLOYMENT BENEFITS
UIL Holdings accounts for normal pension plan costs in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 87,
"Employers' Accounting for Pensions."
UIL Holdings accounts for other postemployment benefits, consisting principally
of health and life insurance, under the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires,
among other things, that the liability for such benefits be accrued over the
employment period that
- 42 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
encompasses eligibility to receive such benefits. The annual incremental cost of
this accrual has been allowed in retail rates in accordance with a 1992 rate
decision of the DPUC.
URANIUM ENRICHMENT OBLIGATION
Under the Energy Policy Act of 1992 (Energy Act), UI will be assessed for its
proportionate share of the costs of the decontamination and decommissioning of
uranium enrichment facilities operated by the Department of Energy. The Energy
Act imposes an overall cap of $2.25 billion on the obligation assessed to the
nuclear utility industry and limits the annual assessment to $150 million each
year over a 15-year period. UI has recovered these assessments in rates as a
component of fuel expense. Accordingly, UIL Holdings has recognized the
unrecovered costs as a regulatory asset on its Consolidated Balance Sheet. At
December 31, 2000, UI's remaining share of the obligation, based on its
ownership and leasehold interests in Seabrook Unit 1 and Millstone Unit 3, was
approximately $1.0 million.
NUCLEAR DECOMMISSIONING TRUSTS
External trust funds are maintained to fund the estimated future decommissioning
costs of the nuclear generating units in which UI has an ownership interest.
These costs are accrued as a charge to depreciation expense over the estimated
service lives of the units and are recovered in rates on a current basis. UI
paid $4.0 million, $4.0 million and $2.6 million during 2000, 1999 and 1998 into
the decommissioning trust funds for Seabrook Unit 1 and Millstone Unit 3. At
December 31, 2000, UI's shares of the trust fund balances, which included
accumulated earnings on the funds, were $24.2 million and $8.6 million for
Seabrook Unit 1 and Millstone Unit 3, respectively. These fund balances are
included in "Other Property and Investments" and the accrued decommissioning
obligation is included in "Noncurrent Liabilities" on the Consolidated Balance
Sheet.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" 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. This standard 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 allowable costs. Under this standard, the
probability of recovery and the recognition of regulatory assets under the
criteria of SFAS No. 71 must be assessed on an ongoing basis. At December 31,
2000 and 1999, UI did not have any assets that are impaired under this standard.
- 43 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and denominators
of the basic and diluted earnings per share calculations for the years 2000,
1999 and 1998:
INCOME APPLICABLE TO AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
----------- ------------- ---------
(000's, except per share amounts)
2000
Basic earnings per share $60,757 14,073 $4.32
Effect of dilutive stock options - 25 (.01)
-------------------------------------------------------------
Diluted earnings per share $60,757 14,098 $4.31
=============================================================
1999
Basic earnings per share $52,105 14,052 $3.71
Effect of dilutive stock options - 3 (.00)
-------------------------------------------------------------
Diluted earnings per share $52,105 14,055 $3.71
=============================================================
1998
Basic earnings per share $44,892 14,018 $3.20
Effect of dilutive stock options - 5 (.00)
-------------------------------------------------------------
Diluted earnings per share $44,892 14,023 $3.20
=============================================================
STOCK-BASED COMPENSATION
UIL Holdings accounts for employee stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans, such as stock
purchase plans, stock options, restricted stock, and stock appreciation rights.
The statement defines the methods of determining the fair value of stock-based
compensation and requires the recognition of compensation expense for book
purposes. However, the statement allows entities to continue to measure
compensation expense in accordance with the prior authoritative literature, APB
No. 25, "Accounting for Stock Issued to Employees," but requires that pro forma
net income and earnings per share be disclosed for each year for which an income
statement is presented as if SFAS No. 123 had been applied. The accounting
requirements of this statement are effective for transactions entered into after
1995. However, pro forma disclosures must include the effects of all awards
granted after January 1, 1995.
COMPREHENSIVE INCOME
Comprehensive income for the years ended December 31, 2000, 1999 and 1998 was
equal to net income as reported.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, which will
become effective for UIL Holdings in the first quarter of 2001, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires entities to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
- 44 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
instruments at fair value. The accounting for the changes in the fair value of a
derivative (gains and losses) would depend on the intended use and designation
of the derivative. UI has a contract with a power marketer that includes a
financially settled contract for differences related to certain call rights of
the power marketer and put rights of UI with respect to UI's entitlements in
Seabrook Unit 1 and Millstone Unit 3. This contract will terminate at the
earlier of December 31, 2003 or the date that UI sells its interest in these
units. Application of the new accounting standard will require the recognition
of UI's future obligation for financial settlements under this contract. As of
December 31, 2000, UI's estimated future obligation for financial settlements
under this contract is approximately $18 million. This future obligation has
been estimated using assumptions regarding the future market price for power,
the operations of the units, and the projected future sale dates for UI's
interest in these units. If actual market prices, the operations of the units,
and the actual dates of sale differ significantly from these assumptions, the
actual amount paid for financial settlement of this contract will vary
significantly from this estimate. However, since the costs of this contract are
considered in the annual reconciliation of the Competitive Transition
Assessment, there is currently no income statement effect. The adoption of this
accounting statement will not have any impact on UIL Holdings' results of
operations and is not expected to have a material impact on UIL Holdings'
financial condition.
(B) CAPITALIZATION
COMMON STOCK
UIL Holdings had 14,321,177 shares of its common stock, no par value,
outstanding at December 31, 2000 and 14,334,922 shares of its common stock, no
par value, outstanding at December 31, 1999, of which 244,480 shares and 272,420
shares were unallocated shares held by UI's 401(k)/Employee Stock Ownership Plan
(KSOP) and not recognized as outstanding for accounting purposes as of December
31, 2000 and 1999, respectively.
UI has entered into an arrangement under which it loaned $11.5 million to the
KSOP. The trustee for the KSOP used the funds to purchase shares of UI common
stock in open market transactions. On July 20, 2000, effective with the
formation of the holding company structure, unallocated shares held by the KSOP
were converted into shares of UIL Holdings' common stock. The shares will be
allocated to employees' KSOP accounts, as the loan is repaid, to cover a portion
of the required KSOP contributions. The loan will be repaid by the KSOP over a
twelve-year period, using employer contributions and UIL Holdings' dividends
paid on the unallocated shares of the stock held by the KSOP. As of December 31,
2000, 244,480 shares, with a fair market value of $12.2 million, had been
purchased by the KSOP and had not been committed to be released or allocated to
KSOP participants.
In 1990, UI's Board of Directors and the shareowners approved a stock option
plan for officers and key employees of UI. Effective with the formation of the
holding company structure on July 20, 2000, all outstanding options were
converted into options to purchase an equivalent number of shares of UIL
Holdings' common stock. Options to purchase 3,500 shares of stock at an exercise
price of $30 per share, 7,800 shares of stock at an exercise price of $39.5625
per share, and 5,000 shares of stock at an exercise price of $42.375 per share
have been granted and remained outstanding at December 31, 2000. None of these
options were exercised during 2000.
On March 22, 1999, UI's Board of Directors approved a stock option plan for
directors, officers and key employees of UI. The plan provides for the awarding
of options to purchase up to 650,000 shares of UI's common stock over periods of
from one to ten years following the dates when the options are granted. The
exercise price of each option cannot be less than the market value of the stock
on the date of the grant. On June 28, 1999, UI's shareowners approved the plan.
Effective with the formation of the holding company structure on July 20, 2000,
all outstanding options were converted into options to purchase an equivalent
number of shares of UIL Holdings' common stock. Options to purchase 6,300 shares
of stock at an exercise price of $43.50 per share, 121,925 shares of stock at an
exercise price of $43.21875 per share, 183,800 shares of stock at an exercise
price of $39.40625 per share, 2,170 shares of stock at an exercise price of
$53.1250, 382 shares of stock at an exercise price of $52.6875, 1,000 shares of
stock at an
- 45 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
exercise price of $50.3125, 407 shares of stock at an exercise price of $53.0625
and 446 shares at an exercise price of $48.40625 have been granted and remained
outstanding at December 31, 2000. Options to purchase 9,075 shares of stock at
an exercise price of $43.21875 were exercised during the twelve months ended
December 31, 2000.
Stock option transactions for 2000, 1999 and 1998 are as follows:
2000 1999 1998
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Balance - Beginning of Year 16,300 $38.37 16,300 $38.37 115,098 $33.90
Granted 334,605 $41.15 - - - -
Forfeited (9,100) $40.59 - - - -
Exercised (9,075) $43.22 - - (98,798) $33.16
------------ ------------ -------------
Balance - End of Year 332,730 $41.00 16,300 $38.37 16,300 $38.37
============ ============ =============
Exercisable at End of Year 58,730 $41.58 16,300 $38.37 16,300 $38.37
============ ============ =============
If compensation expense had been recorded for the stock option plan based on the
fair value method as opposed to the intrinsic value method applied by UIL
Holdings, net income and earnings per share for 2000 would have been as follows:
2000
----
Net income
As reported $60,757
Pro forma $60,490
Earnings per share-Basic
As reported $4.32
Pro forma $4.30
Earnings per share-Diluted
As reported $4.31
Pro forma $4.29
The fair value of stock options granted has been estimated on the date of grant
using the Black-Scholes option-pricing model using the following assumptions:
2000
----
Risk-free interest rate 5.08%
Expected volatility 16.51%
Expected lives 9.09 years
Expected dividend yield 6.13%
The weighted average fair value of options granted during 2000 was $3.16. As of
December 31, 2000, the weighted average remaining contractual life for those
options outstanding is 8.4 years.
- 46 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On February 23, 1998, UI's Board of Directors granted 80,000 "phantom" stock
options to Nathaniel D. Woodson upon his appointment as President of UI.
Effective with the formation of the holding company structure on July 20, 2000,
all outstanding phantom stock options were converted to UIL Holdings' phantom
stock options. On each of the first five anniversaries of the grant date, 16,000
phantom stock options become exercisable and can be exercised at any time within
Mr. Woodson's period of employment with UI by means of UI paying him the
difference between the prevailing market price for each share of UIL Holdings'
common stock and the phantom stock option price of $45.16 per share. At ten
years after the grant date any unexercised phantom stock options will expire. At
December 31, 2000, 32,000 phantom stock options were exercisable. During 2000,
$282,000 was recognized as expense with regard to these phantom stock options.
RETAINED EARNINGS RESTRICTION
The indenture under which UI has issued $200 million principal amount of Notes
places limitations on UI relative to the payment of cash dividends on its common
stock, which is wholly-owned by UIL Holdings, and the purchase or redemption of
said common stock. Retained earnings in the amount of $117.9 million were free
from such limitations at December 31, 2000.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY HOLDING SOLELY
PARENT DEBENTURES
On September 25, 2000, UI redeemed $50 million of 9 5/8% Preferred Capital
Securities, Series A, due 2025, at $25.00 per share, plus accrued dividends to
the redemption date of $0.160417 per share. These securities were issued in
April 1995 by United Capital Funding Partnership L. P., a Delaware limited
partnership (United Capital).
United Capital was a special purpose limited partnership in which UI owned all
of the general partner interests. Its only asset was $50 million of 9 5/8%
Junior Subordinated Deferrable Interest Debentures, Series A, due April 30,
2025, issued by UI in 1995, which were repaid by UI in conjunction with United
Capital's redemption of its 9 5/8% Preferred Capital Securities, Series A, due
2025. United Capital was dissolved following its redemption of these securities.
- 47 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-TERM DEBT
DECEMBER 31,
2000 1999
---- ----
(000's)
Other Long-Term Debt
Pollution Control Revenue Bonds:
4.35%, 1996 Series, due June 26, 2026 (1) $ 7,500 $ 7,500
8%, 1989 Series A, due December 1, 2014 - 25,000
5 7/8%, 1993 Series, due October 1, 2033 64,460 64,460
Pollution Control Refunding Revenue Bonds:
4.35%, 1997 Series, due July 30, 2027 (2) 27,500 27,500
4.55%, 1997 Series, due July 30, 2027 (1) 71,000 71,000
5.40%, 1999 Series, due December 1, 2029 (3) 25,000 25,000
Notes:
6.25%, 1998 Series I, due December 15, 2002 100,000 100,000
6.00%, 1998 Series J, due December 15, 2003 100,000 100,000
Obligation under the Seabrook Unit 1
sale/leaseback agreement 209,565 210,424
------- -------
605,025 630,884
Unamortized debt discount less premium (169) (243)
------- -------
604,856 630,641
Less:
Current portion included in Current Liabilities - 25,000
Investment-Seabrook Lease Obligation Bonds 82,635 87,413
------- -------
Total Long-Term Debt $522,221 $518,228
======= =======
(1) The interest rate for these Bonds was fixed on February 1, 1999 for the
five-year period ending January 31, 2004. Prior to February 1, 1999, the
interest rate was variable.
(2) The interest rate for these Bonds was fixed on February 1, 1999 for the
three-year period ending January 31, 2002. Prior to February 1, 1999, the
interest rate was variable.
(3) The interest rate for these Bonds was fixed on December 16, 1999 for the
three-year period ending December 1, 2002.
On February 15, 2001, UIL Holdings issued and sold $75,000,000 of Senior Notes
to several institutional investors in a private sale. The issue was composed of
two series: 7.23% Senior Notes, Series A, due February 15, 2011, in the
principal amount of $30,000,000, and 7.38% Senior Notes, Series B, due February
15, 2011, in the principal amount of $45,000,000. Under the Senior Notes, Series
A, UIL Holdings is required to prepay the principal amount of $4,285,714 each
February 15th, beginning on February 15, 2005 and ending on February 15, 2010.
Interest due under the Senior Notes is payable semi-annually on February 15th
and August 15th. The net proceeds of the sale were used to repay short-term debt
of UIL Holdings.
The expenses to issue long-term debt are deferred and amortized over the life of
the respective debt issue.
- 48 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Maturities and mandatory redemptions/repayments are set forth below:
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(000's)
Maturities $ - $100,000 $100,000 $ - $4,286
(C) RATE-RELATED REGULATORY PROCEEDINGS
On December 31, 1996, the Connecticut Department of Public Utility Control
(DPUC) completed a financial and operational review of UI and ordered a
five-year incentive regulation plan for the years 1997 through 2001 (the Rate
Plan). The Rate Plan accelerates the amortization and recovery of unspecified
assets during 1999-2001 if UI's common equity return on regulated utility
investment exceeds 10.5% after recording the amortization. UI's authorized
return on regulated utility common equity during the period is 11.5%. Earnings
above 11.5%, on an annual basis, are utilized one-third for customer price
reductions, one-third to increase amortization of assets, and one-third retained
as earnings.
The Rate Plan included a provision that it could be reopened and modified upon
the enactment of electric utility restructuring legislation in Connecticut. On
October 1, 1999, the DPUC issued a decision establishing UI's standard offer
customer rates, commencing January 1, 2000, at a level 10% below 1996 rates, as
directed by the Restructuring Act described in detail below. These standard
offer customer rates supersede the rates that were included in the Rate Plan.
The decision also reduced the required amount of accelerated amortization in
2000 and 2001. Under this 1999 decision, all other components of the 1996 Rate
Plan are expected to remain in effect through 2001. The Connecticut Office of
Consumer Counsel (OCC), the statutory representative of consumer interests in
public utility matters, appealed the DPUC's standard offer decision to the
Connecticut Superior Court, challenging the DPUC's determination of UI's average
prices in 1996 rates from which a 10% reduction is required by the Restructuring
Act. On February 22, 2001, the Superior Court dismissed the OCC's appeal from
the DPUC's decision; but UI is unable to predict, at this time, whether the OCC
will appeal from the Superior Court's decision to the Connecticut Appellate
Court.
On February 13, 2001, the Connecticut Attorney General and the OCC petitioned
the DPUC to initiate a proceeding and hold a hearing concerning the need to
decrease UI's rates by reason of UI' s having earned a return on regulated
common equity more than 1% above the authorized level of 11.5% for at least six
consecutive months. UI believes that a hearing would confirm that UI has
complied with the DPUC-ordered earnings sharing mechanism in UI's rate plan; and
it will contest vigorously any arguments for a rate decrease.
In April 1998, Connecticut enacted Public Act 98-28 (the Restructuring Act), a
massive and complex statute designed to restructure the State's regulated
electric utility industry. As a result of the Restructuring Act, the business of
generating and selling electricity directly to consumers has been opened to
competition. These business activities are separated from the business of
delivering electricity to consumers, also known as the transmission and
distribution business. The business of delivering electricity remains with the
incumbent franchised utility companies (including UI) which continue to be
regulated by the DPUC as Distribution Companies. Since mid-1999, Distribution
Companies have been required to separate on consumers' bills the electricity
generation services component from the charge for delivering the electricity and
all other charges.
A major component of the Restructuring Act is the collection, by Distribution
Companies, of a "competitive transition assessment," a "systems benefits
charge," an "energy conservation and load management program charge" and a
"renewable energy investment charge." The competitive transition assessment
represents costs that have been reasonably incurred by, or will be incurred by,
Distribution Companies to meet their public service obligations as electric
companies, and that will likely not otherwise be recoverable in a competitive
generation and supply market.
- 49 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
These costs include above-market long-term purchased power contract obligations,
regulatory asset recovery and above-market investments in power plants
(so-called stranded costs). The systems benefits charge represents public policy
costs, such as generation decommissioning and displaced worker protection costs.
Beginning in 2000, a Distribution Company has been required to collect the
competitive transition assessment, the systems benefits charge, the energy
conservation and load management program charge and the renewable energy
investment charge from all Distribution Company customers.
Under the Restructuring Act, all of UI's customers are able to choose their
power supply providers. Until January 1, 2004, UI is required to offer full
"standard offer" electric service, under regulated rates, to all customers who
do not choose alternate power supply providers. The standard offer rates must be
at least 10% below the average prices in 1996. The standard offer rates must
include the price of generation, transmission and distribution services, the
competitive transition assessment, the systems benefits charge and the
conservation and renewable energy charges. Under current regulatory provisions,
UI's financial condition is not affected materially by whether customers choose
alternate suppliers to UI's standard offer electric service.
On December 28, 1999, UI and Enron Power Marketing, Inc. (EPMI) entered into a
Wholesale Power Supply Agreement, a PPA Entitlements Transfer Agreement and
related agreements documenting a four-year standard offer power supply
arrangement and the assumption of all of UI's long-term purchased power
agreements, effective January 1, 2000. Under these agreements, EPMI supplies the
generation services needed by UI to meet its standard offer obligations for the
four-year standard offer period at a fixed price. The agreements with EPMI also
include a financially settled contract for differences related to certain call
rights of EPMI and put rights of UI with respect to UI's entitlements in
Seabrook Unit 1 and in Millstone Unit 3, and UI's provision to EPMI of certain
ancillary products and services associated with those nuclear entitlements,
which provisions terminate at the earlier of December 31, 2003 or the date that
UI sells its nuclear interests. The agreements do not restrict UI's right to
sell to third parties UI's ownership interests in those nuclear generation units
or the generated energy actually attributable to its ownership interests.
The Restructuring Act requires that, in order for a Distribution Company to
recover any stranded costs associated with its power plants, its fossil-fueled
plants must be sold prior to 2000, with any net excess proceeds used to mitigate
its recoverable stranded costs, and UI must attempt to divest its ownership
interests in its nuclear-fueled power plants prior to 2004.
On April 16, 1999, UI sold both of its operating fossil-fueled generating
stations, Bridgeport Harbor Station and New Haven Harbor Station, to Wisvest
Corporation, a non-utility subsidiary of Wisconsin Energy Corporation based in
Milwaukee, Wisconsin. UI realized a book gain from the sale proceeds net of
taxes and plant investment. However, this gain was offset by a writedown of
other above-market generation costs, such as regulated plant costs and
tax-related regulatory assets or other costs related to the restructuring
transition, such that there was no net income effect of the sale. Net cash
proceeds from the sale were approximately $165 million.
On August 17, 2000, UI sold English Station (a deactivated non-nuclear
generating station, bordering the Mill River in New Haven) to Quinnipiac Energy
LLC (QE), a privately-owned independent power producer. QE intends to reactivate
the generating units at the station. Under the terms of the transaction, UI has
retained a permanent right of occupancy on and over the station property for
UI's existing New Haven harbor transmission line towers and cables. QE will
complete the bulkhead replacement project that UI has commenced to preserve and
protect the station property; and QE will assume responsibility for any and all
environmental liability associated with UI's prior ownership and operation of
the station. UI has agreed to pay for the cost of completing the bulkhead
replacement project and has funded 61% (approximately $1.2 million) of the
environmental remediation costs that will be incurred by QE under Connecticut's
Transfer Act as a result of QE's acquisition of the station. UI has also paid QE
$4.25 million for QE's assumption of the remaining Transfer Act remediation
costs and any and all environmental liability associated with UI's prior
ownership and operation of the station.
- 50 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On October 1, 1998, in its "unbundling plan" filing with the DPUC under the
Restructuring Act, and in other regulatory dockets, UI stated that it plans to
divest its nuclear generation ownership and leasehold interests (17.5% of
Seabrook Unit 1 in New Hampshire and 3.685% of Millstone Station Unit 3 in
Connecticut) by the end of 2003, in accordance with the Restructuring Act. On
April 19, 2000, the DPUC approved UI's plan for divesting its ownership interest
in Millstone Unit 3 by participating in an auction process for all three of the
generating units at Millstone Station, which was concluded on August 7, 2000,
when Dominion Resources, Inc. agreed to purchase Millstone Units 1 and 2, and
93.47% of Millstone Unit 3 for $1.298 billion. The purchase price agreed to for
UI's ownership interest in Unit 3, which is subject to adjustments for
expenditures and eventualities prior to the date of closing on the sale, is
approximately $31 million, exclusive of nuclear fuel. UI's share of the proceeds
from the sale of the nuclear fuel inventory at the date of closing on the sale
is estimated to be approximately $2.5 million. The sale is scheduled to be
consummated on or about April 1, 2001 or as soon thereafter as all requisite
regulatory approvals are received. On December 15, 2000, UI and The Connecticut
Light and Power Company filed with the DPUC for its approval their plan to
divest their respective interests in Seabrook Unit 1 by an auction process. The
DPUC has commenced hearings on this divestiture plan.
The 1999 DPUC decision establishing UI's standard offer rates authorized UI to
recover $801 million of stranded costs through its rate structure.
Based on the decisions in the regulatory proceedings described above, the sale
of UI's fossil-generation assets and the planned divestiture of its nuclear
generation ownership interests by the end of 2003, UI ceased applying SFAS No.
71 to the generation portion of its assets and operations as of December 31,
1999. Based on the favorable DPUC decisions that allow full recovery, through
UI's rates, of all historically incurred stranded costs, UI did not record any
write-offs in connection with this event.
(D) ACCOUNTING FOR PHASE-IN PLAN
UI phased into rate base its allowable investment in Seabrook Unit 1, amounting
to $640 million, during the period January 1, 1990 to January 1, 1994. In
conjunction with this phase-in plan, UI was allowed to record a deferred return
on the portion of allowable investment excluded from rate base during the
phase-in period. UI amortized the net-of-tax accumulated deferred return of
$62.9 million over the five-year period that ended on December 31, 1999.
(E) SHORT-TERM CREDIT ARRANGEMENTS
On June 26, 2000, UI entered into a Money Market Loan arrangement with Chase
Manhattan Bank. On September 29, 2000, this arrangement was transferred to UIL
Holdings. This is an uncommitted short-term borrowing arrangement under which
Chase Manhattan Bank may make loans to UIL Holdings for fixed maturities from
one day up to six months. Chase Securities, Inc. acts as an agent and sells the
loans to investors. The fixed interest rates on the loans are determined based
on conditions in the financial markets at the time of each loan. As of December
31, 2000, UIL Holdings had loans totaling $59 million outstanding under this
arrangement.
UI's $60 million revolving credit agreement with a group of banks was terminated
on August 3, 2000. UI had no short-term borrowings outstanding under this
facility at that time.
UIL Holdings has a revolving credit agreement with the same group of banks,
which extends to August 2, 2001. The borrowing limit of this facility is $97.5
million. The facility permits UIL Holdings to borrow funds at a fluctuating
interest rate determined by the prime lending market in New York, and also
permits UIL Holdings to borrow money for fixed periods of time specified by UIL
Holdings at fixed interest rates determined by the Eurodollar interbank market
in London. If a material adverse change in the business, operations, affairs,
assets or condition, financial or otherwise, or
- 51 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
prospects of UIL Holdings and its subsidiaries, on a consolidated basis, should
occur, the banks may decline to lend additional money to UIL Holdings under this
revolving credit agreement, although borrowings outstanding at the time of such
an occurrence would not then become due and payable. As of December 31, 2000,
UIL Holdings had $50 million in short-term borrowings outstanding under this
facility.
The revolving credit agreement described above requires that UIL Holdings (i)
maintain a ratio of consolidated debt to consolidated capital, as of the last
day of each March, June, September and December, of not greater than 0.65 to
1.00; and (ii) shall not cause to exist debt of UIL Holdings (excluding debt of
its subsidiaries) to exceed $175 million in the aggregate principal amount
outstanding at any time. As of December 31, 2000, UIL Holdings' consolidated
debt to consolidated capital ratio was 0.58 and its aggregate principal debt
outstanding (excluding debt of its subsidiaries) was $173.7 million (including
intercompany loans to UIL Holdings).
Information with respect to short-term borrowings under the UIL Holdings' Money
Market Loan arrangement and revolving credit agreement and the UI revolving
credit agreement is as follows:
2000 1999 1998
---- ---- ----
(000's)
Maximum aggregate principal amount of
short-term borrowings outstanding at
any month-end $114,000 $80,000 $130,000
Average aggregate short-term borrowings
outstanding during the year* $42,511 $45,300 $115,753
Weighted average interest rate* 7.2% 5.5% 6.1%
Principal amounts outstanding at year-end $109,000 $17,000 $80,000
Annualized interest rate on principal amounts
outstanding at year-end 7.6% 7.0% 5.7%
*Average short-term borrowings represent the sum of daily borrowings
outstanding, weighted for the number of days outstanding and divided by the
number of days in the period. The weighted average interest rate is determined
by dividing interest expense by the amount of average borrowings. Fees of
approximately $386,000, $291,000 and $381,000 paid during 2000, 1999 and 1998,
respectively, are excluded from the calculation of the weighted average interest
rate.
- 52 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(F) INCOME TAXES
2000 1999 1998
---- ---- ----
(In thousands)
Income tax expense consists of:
Income tax provisions:
Current
Federal $31,650 $91,247 $36,774
State 6,679 23,891 10,685
------------- ------------ ------------
Total current 38,329 115,138 47,459
------------- ------------ ------------
Deferred
Federal 9,152 (39,767) 2,964
State 1,283 (13,004) 110
------------- ------------ ------------
Total deferred 10,435 (52,771) 3,074
------------- ------------ ------------
Investment tax credits (735) (467) (762)
------------- ------------ ------------
Total income tax expense $48,029 $61,900 $49,771
============= ============ ============
Income tax components charged as follows:
Operating tax expense $52,298 $65,042 $52,862
Nonoperating tax expense (4,269) (3,142) (3,091)
------------- ------------ ------------
Total income tax expense $48,029 $61,900 $49,771
============= ============ ============
The following table details the components
of the deferred income taxes:
Gain on sale of utility property $ - $ (70,573) $ (697)
Seabrook sale/leaseback transaction (2,599) (69) 304
Pension benefits 6,878 4,192 3,463
Accelerated depreciation (3,006) 4,996 5,449
Tax depreciation on unrecoverable
plant investment 235 5,902 6,291
Unit overhaul and replacement power costs 326 1,523 (1,157)
Conservation and load management (107) (2,181) (8,026)
Displaced worker protection costs (909) 2,329 -
Bond redemption costs (585) (1,014) (1,039)
Cancelled nuclear project (467) (467) (467)
Restructuring costs 1,132 490 -
Regulatory deferrals 9,210 - -
Other - net 327 2,101 (1,047)
------------- ------------ ------------
Deferred income taxes - net $10,435 ($52,771) $3,074
============= ============ ============
- 53 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total income taxes differ from the amounts computed by applying the federal
statutory tax rate to income before taxes. The reasons for the differences are
as follows:
2000 1999 1998
---- ---- ----
PRE-TAX TAX PRE-TAX TAX PRE-TAX TAX
------- ------- ------- ------- ------- -------
(000's) (000's) (000's)
Computed tax at federal statutory rate $38,075 $39,943 $33,195
Increases (reductions) resulting from:
Deferred return-Seabrook Unit 1 - - 12,586 4,405 12,586 4,405
ITC taken into income (735) (735) (468) (468) (762) (762)
Allowance for equity funds used during
construction (1,149) (402) (575) (201) (13) (5)
Fossil plant decommissioning reserve (13) (4) (262) (92) (723) (253)
Amortization of regulatory asset 41,236 14,433 22,635 7,922 - -
Book depreciation in excess of
non-normalized tax depreciation (10,185) (3,565) 16,155 5,654 22,789 7,976
State income taxes, net of federal
income tax benefits 7,962 5,176 10,887 7,076 10,795 7,017
Other items - net (14,140) (4,949) (6,683) (2,339) (5,149) (1,802)
------- ------- -------
Total income tax expense $48,029 $61,900 $49,771
======= ======= =======
Book income before income taxes $108,786 $114,124 $94,843
======== ======== =======
Effective income tax rates 44.1% 54.2% 52.5%
===== ===== =====
At December 31, 2000, UIL Holdings had deferred tax liabilities for taxable
temporary differences of $339 million and deferred tax assets for deductible
temporary differences of $86 million, resulting in a net deferred tax liability
of $253 million. Significant components of deferred tax liabilities and assets
were as follows: tax liabilities on book/tax plant basis differences and on the
cumulative amount of income taxes on temporary differences previously flowed
through to ratepayers, $194 million; tax liabilities on normalization of
book/tax depreciation timing differences, $122 million and tax assets on the
disallowance of plant costs, $35 million.
- 54 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(G) SUPPLEMENTARY INFORMATION
2000 1999 1998
---- ---- ----
(000's)
OPERATING REVENUES
- ------------------
Utility
Retail $602,347 $639,596 $631,607
Wholesale 67,990 24,334 44,948
Proceeds from Millstone Unit 3 settlement 14,960 - -
Other 19,394 16,045 9,636
Non-regulated business unit revenues
American Payment Systems 37,940 35,595 33,746
Xcelecom 138,267 35,423 28,115
Other/Eliminations (43) (263) 39
--------------- --------------- --------------
Total Operating Revenues $880,855 $750,730 $748,091
=============== =============== ==============
SALES BY CLASS(MEGAWATT-HOURS) - UNAUDITED
- ------------------------------------------
Retail
Residential 2,056,366 2,053,927 1,924,724
Commercial 2,403,212 2,388,240 2,324,507
Industrial 1,146,295 1,161,856 1,154,935
Other 47,852 48,027 48,166
--------------- --------------- --------------
5,653,725 5,652,050 5,452,332
Wholesale 2,237,805 1,009,866 1,551,109
--------------- --------------- --------------
Total Sales by Class 7,891,530 6,661,916 7,003,441
=============== =============== ==============
DEPRECIATION AND AMORTIZATION
- -----------------------------
Utility property, plant, and equipment $24,575 $53,347 $67,143
Nonutility property-unregulated 4,717 3,689 4,052
Accelerated Conservation and
Load Management Costs - - 13,086
Amortization of nuclear plant regulatory assets 2,851 22,636 -
Amortization of purchase power contracts 26,744 - -
Amortization of other regulatory assets 5,668 - -
Amortization of cancelled plant 1,172 1,172 1,172
Amortization of deferred return - 12,586 12,586
Nuclear Decommissioning 3,986 4,004 2,580
--------------- --------------- --------------
Total Depreciation and Amortization $69,713 $97,434 $100,619
=============== =============== ==============
- 55 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(G) SUPPLEMENTARY INFORMATION - CONTINUED
2000 1999 1998
---- ---- ----
(000's)
TAXES - OTHER THAN INCOME TAXES
- -------------------------------
Charged to:
Operating:
State gross earnings $23,715 $24,518 $24,039
Local real estate and personal property (1) 13,939 17,745 35,088
Payroll taxes 5,402 4,877 5,547
--------------- --------------- --------------
43,056 47,140 64,674
Nonoperating and other accounts 654 598 510
--------------- --------------- --------------
Total Taxes - other than income taxes $43,710 $47,738 $65,184
=============== =============== ==============
OTHER INCOME AND (DEDUCTIONS) - NET
- -----------------------------------
Interest income $1,723 $1,801 $3,181
Allowance for funds used during construction 2,609 2,235 468
Equity earnings from Connecticut Yankee 1,913 36 854
Miscellaneous other income and (deductions) - net (2,906) 849 (2,107)
--------------- --------------- --------------
Total Other Income and (Deductions) - net $3,339 $4,921 $2,396
=============== =============== ==============
OTHER INTEREST CHARGES
- ----------------------
Notes Payable $3,078 $2,662 $5,050
Other 2,175 2,265 1,446
--------------- --------------- --------------
Total Other Interest Charges $5,253 $4,927 $6,496
=============== =============== ==============
(1) 1998 includes $14,025 charge for property tax settlement
- 56 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(H) PENSION AND OTHER BENEFITS
UI's qualified pension plan, which is based on the highest three years of pay,
covers substantially all of its employees, the employees of APS, and certain
management employees of URI and Xcelecom. UI also has a non-qualified
supplemental plan for certain executives and a non-qualified retiree only plan
for certain early retirement benefits. The net pension credit to income for
these plans for 2000, 1999 and 1998 was $14.7 million, $8.0 million, and $5.1
million, respectively.
Funding policy for the qualified 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 plan. In 1998,
$2.6 million was contributed for 1998 funding requirements. No contributions
were made in 1999. In 2000, $2.5 million was contributed for 1999 funding
requirements. UI has established a supplemental retirement benefit trust and
through this trust purchased life insurance policies on the officers of UI to
fund the future liability under the supplemental plan. The cash surrender value
of these policies is shown as an investment on the Consolidated Balance Sheet.
In addition to providing pension benefits, UI also provides other postretirement
benefits (OPEB), consisting principally of health care and life insurance
benefits, for retired employees and their dependents. Employees whose sum of age
and years of service at time of retirement is equal to or greater than 85 (or
who are 62 with at least 20 years of service) 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.
For funding purposes, UI established a Voluntary Employees' Benefit Association
Trust (VEBA) to fund OPEB for UI's union employees. Approximately 45% of UI's
employees are represented by Local 470-1, Utility Workers Union of America,
AFL-CIO, for collective bargaining purposes. UI established a 401(h) account in
connection with the qualified pension plan to fund OPEB for UI's non-union
employees who retire on or after January 1, 1994. The funding policy assumes
contributions to these trust funds to be the total OPEB expense calculated under
SFAS No. 106, adjusted to reflect a share of amounts expensed as a result of
voluntary early retirement programs minus pay-as-you-go benefit payments for
pre-January 1, 1994 non-union retirees, allocated in a manner that minimizes
current income tax liability, without exceeding maximum tax deductible limits.
In accordance with this policy, UI did not make contributions to the union VEBA
in 2000, 1999 and 1998. UI contributed $0.2 million to the 401(h) account in
2000. UI did not make a contribution to the 401(h) account in 1999 and
contributed $0.9 million to the 401(h) account in 1998. Plan assets for both the
union VEBA and 401(h) account consist primarily of equity and fixed-income
securities.
The following table represents the plans' beginning benefit obligation balance
reconciled to the ending benefit obligation balance, beginning fair value of
plan assets balance reconciled to the ending fair value of plan assets balance
and the respective funded status reconciled to the Consolidated Balance Sheet.
- 57 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AT DECEMBER 31,
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
2000 1999 2000 1999
---- ---- ---- ----
(000's)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $232,392 $280,746 $31,591 $40,229
Service Cost 4,052 5,334 442 549
Interest cost 16,669 17,470 2,336 2,276
Amendments 8,698 994 - 1,364
Actuarial (gain) loss (6,476) (34,672) 910 (9,322)
Benefits paid (including expenses) (21,495) (18,979) (2,569) (1,935)
Acquisition/(Divestiture) - (18,500) - (1,570)
------- ------- ------ ------
Benefit obligation at end of year $233,840 $232,393 $32,710 $31,591
======= ======= ====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year $277,987 $268,684 $20,681 $23,203
Actual return on plan assets (12,109) 39,757 1,615 555
Employer contributions 2,657 2,525 807 208
Benefits paid (including expenses) (21,495) (18,979) (2,569) (1,935)
Acquisition/(Divestiture) - (14,000) - (1,350)
------- ------- ------ ------
Fair value of plan assets at end of year $247,040 $277,987 $20,534 $20,681
======= ======= ====== ======
Funded Status at December 31:
Projected benefits (less than) greater
than plan assets $(13,200) $(45,594) $12,176 $10,910
Unrecognized prior service cost (11,553) (3,731) (280) (291)
Unrecognized transition asset 4,741 5,552 (12,345) (13,435)
Unrecognized net gain (loss) from
past experience 21,717 62,799 5,464 7,674
------- ------- ------ ------
Accrued benefit obligation $ 1,705 $ 19,026 $ 5,015 $ 4,858
====== ======= ====== ======
AT DECEMBER 31,
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
2000 1999 2000 1999
---- ---- ---- ----
The following actuarial assumptions were
used in calculating the benefit
obligations at December 31:
Discount rate 7.50% 7.50% 7.50% 7.50%
Average wage increase 4.50% 4.50% 4.50% 4.50%
Health care cost trend rate N/A N/A 5.50% 5.50%
- 58 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of net periodic benefit cost are:
FOR THE YEAR ENDED DECEMBER 31,
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
2000 1999 2000 1999
---- ---- ---- ----
(000's)
Components of net periodic benefit cost:
Service cost $ 4,052 $ 5,334 $ 442 $ 549
Interest cost 16,669 17,470 2,336 2,276
Expected return on plan assets (29,735) (28,677) (2,227) (2,463)
Amortization of:
Prior service costs 876 537 11 11
Transition obligation (asset) (1,054) (1,097) 1,089 1,169
Actuarial (gain) loss (5,471) (1,527) (687) (801)
Settlements (curtailments) - - - -
------ ------ ----- -----
Net periodic benefit cost $(14,663) $(7,960) $ 964 $ 741
======= ====== ===== =====
FOR THE YEAR ENDED DECEMBER 31,
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
2000 1999 2000 1999
---- ---- ---- ----
The following actuarial assumptions were
used in calculating net periodic benefit cost:
Discount rate 7.50% 6.75% 7.50% 6.75%
Average wage increase 4.50% 4.50% 4.50% 4.50%
Return on plan assets 11.00% 11.00% 11.00% 11.00%
Health care cost trend rate N/A N/A 5.50% 5.50%
A one percentage point change in the assumed health care cost trend rate would
have the following effects:
1% INCREASE 1% DECREASE
----------- -----------
(000's)
Aggregate service and interest cost components $354 $(290)
Accumulated postretirement benefit obligation $3,412 $(2,858)
UI has a 401(k)/Employee Stock Ownership Plan (KSOP) in which substantially all
of its employees, the employees of APS, and certain management employees of URI
and Xcelecom are eligible to participate. The KSOP enables employees to defer
receipt of up to 15% of their compensation and to invest such funds in a number
of investment alternatives. Matching contributions are made to the KSOP, in the
form of UIL Holdings' common stock, based on each employee's salary deferrals in
the KSOP. The matching contribution currently equals fifty cents for each dollar
of the employee's compensation deferred, but is not more than 3 3/8% of the
employee's annual salary. Matching contributions to the KSOP during 2000, 1999
and 1998 were $1.8 million, $1.5 million and $1.7 million, respectively.
UIL Holdings pays dividends on the shares of stock in the KSOP to the
participant and UIL Holdings receives a tax deduction for the dividends paid.
Contributions are made to the KSOP equal to 25% of the dividends paid to each
participant. Annual contributions during 2000, 1999 and 1998 were $293,000,
$319,000 and $270,000, respectively.
- 59 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(I) JOINTLY OWNED PLANT
At December 31, 2000, UI had the following interests in jointly owned plants:
OWNERSHIP/
LEASEHOLD PLANT ACCUMULATED
SHARE INVESTMENT (1) DEPRECIATION
----------- ---------- ------------
(Millions)
Seabrook Unit 1 17.5 % $654 $179
Millstone Unit 3 3.685 136 69
(1) Of the plant investment amounts, $456 million for Seabrook Unit 1 and $62
million for Millstone Unit 3 are reflected on the consolidated balance
sheet as regulatory assets.
UI's share of the operating costs of jointly owned plants is included in the
appropriate expense captions in the Consolidated Statement of Income.
(J) UNAMORTIZED CANCELLED NUCLEAR PROJECT
From December 1984 through December 1992, UI had been recovering its investment
in Seabrook Unit 2, a partially constructed nuclear generating unit that was
cancelled in 1984, over a regulatory approved ten-year period without a return
on its unamortized investment. In the 1992 rate decision, the DPUC adopted a
proposal by UI to write off its remaining investment in Seabrook Unit 2,
beginning January 1, 1993, over a 24-year period, corresponding with the
flowback of certain Connecticut Corporation Business Tax (CCBT) credits. Such
decision will allow UI to retain the Seabrook Unit 2/CCBT amounts for ratemaking
purposes, with the accumulated CCBT credits not deducted from rate base during
the 24-year period of amortization in recognition of a longer period of time for
amortization of the Seabrook Unit 2 balance. As a result of reducing its
remaining unamortized investment in Seabrook Unit 2 with proceeds from the sale
of certain Seabrook Unit 2 equipment, UI expects to completely amortize its
unamortized investment in the year 2007.
(K) LEASE OBLIGATIONS
UIL Holdings has lease arrangements for data processing equipment, office
equipment, vehicles and office space, including the lease of a distribution
service facility, which is recognized as a capital lease. The gross amount of
assets recorded under capital leases and the related obligations of those leases
as of December 31, 2000 are recorded on the Consolidated Balance Sheet.
Future minimum lease payments under capital leases, excluding the Seabrook
sale/leaseback transaction, which is being treated as a long-term financing, are
estimated to be as follows:
- 60 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(000's)
2001 $ 1,696
2002 1,696
2003 1,696
2004 16,000
2005 -
After 2005 -
----------
Total minimum capital lease payments 21,088
Less: Amount representing interest 4,958
----------
Present value of minimum capital lease payments $16,130
==========
Capitalization of leases on UI's books has no impact on income, since the sum of
the amortization of a leased asset and the interest on the lease obligation
equals the rental expense allowed for ratemaking purposes.
Operating leases, which are charged to operating expense, consist principally of
lease of office space and facilities and a wide variety of equipment. The most
significant operating lease is that of UI's corporate headquarters. The future
minimum lease payments under these operating leases is estimated to be as
follows:
(000's)
2001 $ 8,550
2002 9,781
2003 10,504
2004 10,655
2005 11,443
2006 - after 71,965
-----------
Total $122,898
===========
Rental payments charged to operating expenses in 2000, 1999 and 1998, including
rental payments for its corporate headquarters, were $11.3 million, $11.0
million and $11.7 million, respectively.
- 61 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(L) COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURE PROGRAM (UNAUDITED)
UIL Holdings' 2001-2005 estimated capital expenditure program, excluding UI's
allowance for funds used during construction, is presently budgeted as follows:
2001 2002 2003 2004 2005 TOTAL
---- ---- ---- ---- ---- -----
(000's)
UI
Distribution and Transmission $67,167 $41,427 $31,455 $49,457 $35,903 $225,409
Nuclear Generation (1) 2,829 - - - - 2,829
Nuclear Fuel (1) 5,569 - - - - 5,569
------ ------ ------ ------ ------ -------
Total UI $75,565 $41,427 $31,455 $49,457 $35,903 $233,807
------ ------ ------ ------ ------ -------
URI
Xcelecom $ 5,333 $ 7,337 $12,906 $ 6,677 $ 8,130 $ 40,383
American Payment Systems 3,364 5,063 4,800 3,627 3,719 20,573
United Capital Investments 10,155 516 - - - 10,671
------ ------ ------ ------ ------ -------
Total URI $18,852 $12,916 $17,706 $10,304 $11,849 $ 71,627
------ ------ ------ ------ ------ ------
Total UIL Holdings $94,417 $54,343 $49,161 $59,761 $47,752 $305,434
====== ====== ====== ====== ====== =======
(1) Assumes that the sale of UI's interest in Millstone Unit 3 and Seabrook
Unit 1 will be completed by April 1, 2001 and December 31, 2001,
respectively.
NUCLEAR INSURANCE CONTINGENCIES
The Price-Anderson Act, currently extended through August 1, 2002, limits public
liability resulting from a single incident at a nuclear power plant. The first
$200 million of liability coverage is provided by purchasing the maximum amount
of commercially available insurance. Additional liability coverage will be
provided by an assessment of up to $83.9 million per incident, levied on each of
the nuclear units licensed to operate in the United States, subject to a maximum
assessment of $10 million per incident per nuclear unit in any year. In
addition, if the sum of all public liability claims and legal costs resulting
from any nuclear incident exceeds the maximum amount of financial protection,
each reactor operator can be assessed an additional 5% of $83.9 million, or $4.2
million. The maximum assessment is adjusted at least every five years to reflect
the impact of inflation. With respect to each of the two operating nuclear
generating units in which UI has an interest, UI will be obligated to pay its
ownership and/or leasehold share of any statutory assessment resulting from a
nuclear incident at any nuclear generating unit. Based on its interests in these
nuclear generating units, UI estimates its maximum liability would be $17.8
million per incident. However, any assessment would be limited to $2.1 million
per incident per year.
The Nuclear Regulatory Commission requires each operating nuclear generating
unit to obtain property insurance coverage in a minimum amount of $1.06 billion
and to establish a system of prioritized use of the insurance proceeds in the
event of a nuclear incident. The system requires that the first $1.06 billion of
insurance proceeds be used to stabilize the nuclear reactor to prevent any
significant risk to public health and safety and then for decontamination and
cleanup operations. Only following completion of these tasks would the balance,
if any, of the segregated insurance proceeds become available to the unit's
owners. For each of the two operating nuclear generating units in which UI has
an interest, UI is required to pay its ownership and/or leasehold share of the
cost of purchasing such insurance. Although each of these units has purchased
$2.75 billion of property insurance coverage, representing the limits of
- 62 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
coverage currently available from conventional nuclear insurance pools, the cost
of a nuclear incident could exceed available insurance proceeds. Under those
circumstances, the nuclear insurance pools that provide this coverage may levy
assessments against the insured owner companies if pool losses exceed the
accumulated funds available to the pool. The maximum potential assessments
against UI with respect to losses occurring during current policy years are
approximately $2.4 million.
OTHER COMMITMENTS AND CONTINGENCIES
CONNECTICUT YANKEE
On December 4, 1996, the Board of Directors of the Connecticut Yankee Atomic
Power Company (Connecticut Yankee) voted unanimously to retire the Connecticut
Yankee nuclear plant (the Connecticut Yankee Unit) from commercial operation. UI
has a 9.5% stock ownership share in Connecticut Yankee. The power purchase
contract under which UI had purchased its 9.5% entitlement to the Connecticut
Yankee Unit's power output permits Connecticut Yankee to recover 9.5% of all of
its costs from UI. In December of 1996, Connecticut Yankee filed decommissioning
cost estimates and amendments to the power contracts with its owners with the
Federal Energy Regulatory Commission (FERC). Based on regulatory precedent, this
filing requested confirmation that Connecticut Yankee will continue to collect
from its owners its decommissioning costs, the unrecovered investment in the
Connecticut Yankee Unit and other costs associated with the permanent shutdown
of the Connecticut Yankee Unit. On April 7, 2000, Connecticut Yankee reached a
settlement agreement with the DPUC and the Connecticut Office of Consumer
Counsel (two of the intervenors in the FERC proceeding). This agreement was
submitted to the FERC, which approved it in all respects on July 26, 2000; and
it became effective on August 1, 2000. The agreement allows Connecticut Yankee
to earn a return on equity of 6% and stipulates a new decommissioning cost
estimate for the Connecticut Yankee Unit for purposes of FERC-approved
decommissioning cost collections by Connecticut Yankee through the power
contracts with the unit's owners.
UI's estimate of its remaining share of Connecticut Yankee costs, including
decommissioning, less return of investment (approximately $7.1 million) and
return on investment (approximately $1.6 million) at December 31, 2000, is
approximately $17.2 million. This estimate, which is subject to ongoing review
and revision, has been recorded as an obligation and a regulatory asset on the
Consolidated Balance Sheet.
HYDRO-QUEBEC
UI is a participant in the Hydro-Quebec transmission intertie facility linking
New England and Quebec, Canada. Phase I of this facility, which became
operational in 1986 and in which UI has a 5.45% participating share, has a 690
megawatt equivalent generation capacity value; and Phase II, in which UI has a
5.45% participating share, increased the equivalent generation capacity value of
the intertie from 690 megawatts to a maximum of 2000 megawatts in 1991. UI is
obligated to furnish a guarantee for its participating share of the debt
financing for the Phase II facility. As of December 31, 2000, UI's guarantee
liability for this debt was approximately $5.6 million.
LONG ISLAND CABLE PROJECT
United Capital Investments (UCI), an indirect wholly-owned subsidiary of UIL
Holdings, has a 25% interest in a merchant electric transmission line project
that proposes to install, own and operate a 330-megawatt transmission line
connecting Connecticut and Long Island under Long Island Sound. UCI is obligated
to furnish a direct guarantee by means of a letter of credit for its
participating share of the debt financing of the project. Under separate
agreement, UIL Holdings is an indirect guarantor of the obligation of UCI. As of
December 31, 2000, UCI's guarantee liability for this debt was approximately
$7.7 million.
- 63 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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.
SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS
UI has estimated that the total cost of decontaminating and demolishing its
Steel Point Station and completing requisite environmental remediation of the
site will be approximately $11.3 million, of which approximately $8.7 million
had been incurred as of December 31, 2000, and that the value of the property
following remediation will not exceed $6.0 million. As a result of a 1992 DPUC
retail rate decision, beginning January 1, 1993, UI has been recovering through
retail rates $1.075 million of the remediation costs per year. The remediation
costs, property value and recovery from customers will be subject to true-up in
UI's next retail rate proceeding based on actual remediation costs and actual
gain on UI's disposition of the property.
UI has begun replacing the bulkhead surrounding a site, bordering the Mill River
in New Haven, that contains transmission facilities and deactivated generation
facilities, at an estimated cost of $13.5 million. Of this amount, $4.2 million
represents the portion of the costs to protect UI's transmission facilities and
will be capitalized as plant in service. The remaining estimated cost of $9.3
million was expensed in 1999. UI has conveyed to an unaffiliated entity,
Quinnipiac Energy LLC (QE), this entire site, reserving to UI permanent
easements for the operation of its transmission facilities on the site. QE will
complete the bulkhead replacement project at UI's expense. UI has also funded
61% (approximately $1.2 million) of the environmental remediation costs that
will be incurred by QE to bring the site into compliance with applicable
Connecticut minimum standards. QE intends to reactivate the generation
facilities on the site as a merchant electric generating plant.
As described at Note (C), "Rate-Related Regulatory Proceedings," 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 on April 16, 1999. 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 Connecticut minimum standards. The purchaser of the
plants has agreed to undertake and pay for the major portion of this
remediation. However, UI will be responsible for remediation of the portions of
the plant sites that have been retained by it.
(M) NUCLEAR FUEL DISPOSAL AND NUCLEAR PLANT DECOMMISSIONING
Costs associated with nuclear plant operations include amounts for disposal of
nuclear wastes, including spent fuel, and for the ultimate decommissioning of
the plants. Under the Nuclear Waste Policy Act of 1982, the federal Department
of Energy (DOE) is required to design, license, construct and operate a
permanent repository for high level radioactive wastes and spent nuclear fuel.
The Act requires the DOE to provide for the disposal of spent nuclear fuel and
high level radioactive waste from commercial nuclear plants through contracts
with the owners and generators of such waste; and the DOE has established
disposal fees that are being paid to the federal government by electric
utilities owning or operating nuclear generating units. In return for payment of
the prescribed fees, the federal government was required to take title to and
dispose of the utilities' high level wastes and spent nuclear fuel beginning no
later than January 1998. However, the DOE has announced that its first high
level waste repository will not be in operation earlier than 2010, and possibly
not earlier than 2013, and that, absent a repository, the DOE has no statutory
obligation to begin taking high level wastes and spent nuclear fuel for disposal
by January 1998. However, numerous utilities and states have
- 64 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
obtained a judicial declaration that the DOE has a statutory responsibility to
take title to and dispose of high level wastes and spent nuclear fuel beginning
in January 1998, and that the contracts between the DOE and the plant owners and
generators of such waste will provide a potentially adequate remedy to owners
and generators in monetary damages for breach of the contracts. The DOE is
contesting these judicial declarations; and it is unclear at this time whether
the United States Congress will enact legislation to address spent fuel/high
level waste disposal issues.
Until the federal government begins receiving such materials, nuclear generating
units will need to retain high level wastes and spent nuclear fuel on-site or
make other provisions for their storage. Storage facilities for the Connecticut
Yankee Unit are deemed adequate, and storage facilities for Millstone Unit 3 are
expected to be adequate for the projected life of the unit. Storage facilities
for Seabrook Unit 1 are expected to be adequate until at least 2010. Fuel
consolidation and compaction technologies are being considered for Seabrook Unit
1 and may provide adequate storage capability for the projected life of the
unit. In addition, other licensed technologies, such as dry storage casks, may
satisfy spent nuclear fuel storage requirements.
Disposal costs for low-level radioactive wastes (LLW) that result from operation
or decommissioning of nuclear generating units decreased in 1999, as a result of
negotiations between the generators of such wastes and the owners of licensed
disposal facilities. Currently, the Chem Nuclear LLW facility at Barnwell, South
Carolina, is open to the Connecticut Yankee Unit, Millstone Unit 3, and Seabrook
Unit 1 for disposal of LLW. The Envirocare LLW facility at Clive, Utah, is also
open to these generating units for portions of their LLW. All three units have
contracts in place for LLW disposal at these disposal facilities.
Because access to a LLW disposal facility may be interrupted at any time,
Seabrook Unit 1 and Millstone Unit 3 have storage plans that will allow on-site
retention of LLW for at least five years in the event that disposal is
interrupted. The Connecticut Yankee Unit, which has been retired from commercial
operation, has a similar storage program, although disposal of its LLW is taking
place in connection with its decommissioning.
The State of New Hampshire has not met deadlines for compliance with the
Low-Level Radioactive Waste Policy Act and has stated that the state is
unsuitable for a LLW disposal facility. New Hampshire is pursuing other options
for out-of-state disposal of LLW. Connecticut, New Jersey and South Carolina
have formed the Atlantic Compact, which should ensure that the Connecticut
Yankee Unit and Millstone Unit 3 will have access to the Chem Nuclear LLW
facility at Barnwell, South Carolina, through the end of their decommissioning.
NRC licensing requirements and restrictions are also applicable to the
decommissioning of nuclear generating units at the end of their service lives,
and the NRC has adopted comprehensive regulations concerning decommissioning
planning, timing, funding and environmental reviews. UI and the other owners of
the nuclear generating units in which UI has interests estimate decommissioning
costs for the units and attempt to recover sufficient amounts through their
allowed electric rates, together with earnings on the investment of funds so
recovered, to cover expected decommissioning costs. Changes in NRC requirements
or technology, as well as inflation, can increase estimated decommissioning
costs.
New Hampshire has enacted a law requiring the creation of a government-managed
fund to finance the decommissioning of nuclear generating units in that state.
The New Hampshire Nuclear Decommissioning Financing Committee (NDFC) has
established $609.3 million (in 2001 dollars) as the decommissioning cost
estimate for Seabrook Unit 1, of which UI's share would be approximately $107
million. This estimate assumes the prompt removal and dismantling of the unit at
the end of its estimated 36-year energy producing life. Monthly decommissioning
payments are being made to the state-managed decommissioning trust fund. UI's
share of the decommissioning payments made during 2000 was $3.4 million. UI's
share of the fund at December 31, 2000 was approximately $24.2 million.
- 65 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Connecticut has enacted a law requiring the operators of nuclear generating
units to file periodically with the DPUC their plans for financing the
decommissioning of the units in that state. The current decommissioning cost
estimate for Millstone Unit 3 is $648 million (in 2001 dollars), of which UI's
share would be approximately $24 million. This estimate assumes the prompt
removal and dismantling of the unit at the end of its estimated 40-year energy
producing life. Monthly decommissioning payments, based on these cost estimates,
are being made to a decommissioning trust fund managed by Northeast Utilities
(NU). UI's share of the Millstone Unit 3 decommissioning payments made during
2000 was $0.6 million. UI's share of the fund at December 31, 2000 was
approximately $8.6 million. The current decommissioning cost estimate for the
Connecticut Yankee Unit, assuming the prompt removal and dismantling of the
unit, is $393 million, of which UI's share would be $37 million. Through
December 31, 2000, $244 million has been expended for decommissioning. The
projected remaining decommissioning cost is $149 million, of which UI's share
would be $14 million. The decommissioning trust fund for the Connecticut Yankee
Unit is also managed by NU. For UI's 9.5% equity ownership in Connecticut
Yankee, decommissioning costs of $2.4 million were funded by UI during 2000, and
UI's share of the fund at December 31, 2000 was $16 million.
The Financial Accounting Standards Board (FASB) expects to issue a revised
exposure draft related to the accounting for the closure and removal costs of
long-lived assets, including nuclear plant decommissioning. If the proposed
accounting standard were adopted, it may result in higher annual provisions for
decommissioning to be recognized earlier in the operating life of nuclear units
and an accelerated recognition of the decommissioning obligation. The FASB will
be deliberating this issue, and the resulting final pronouncement is not
expected to be effective prior to 2002.
(N) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of UIL Holdings' financial instruments are as follows:
2000 1999
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(000's) (000's)
Unrestricted cash and
temporary cash investments $14,237 $14,237 $39,099 $39,099
Long-term debt (1)(2)(3) $395,460 $384,838 $420,217 $399,767
(1) Excludes the obligation under the Seabrook Unit 1 sale/leaseback agreement.
(2) The fair market value of UIL Holdings' long-term debt is estimated by
brokers based on market conditions at December 31, 2000 and 1999,
respectively.
(3) See Note (B), "Capitalization - Long-Term Debt."
- 66 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(O) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2000 and 1999 are set forth below:
OPERATING OPERATING NET EARNINGS PER SHARE OF
QUARTER REVENUES(1) INCOME(1) INCOME COMMON STOCK(2)
- ------- ----------- --------- ------ ---------------
(000's) (000's) (000's) Basic Diluted
----- -------
2000
First Quarter $204,240 $38,099 $16,865 $1.20 $1.20
Second Quarter 194,804 43,389 17,796 1.26 1.26
Third Quarter 247,054 49,961 19,707 1.40 1.40
Fourth Quarter 234,757 18,497 6,389 .46 .46
1999
First Quarter $181,184 $38,012 $ 9,901 $ .70 $ .70
Second Quarter 175,897 39,054 13,986 .99 .99
Third Quarter 220,527 59,358 24,997 1.78 1.78
Fourth Quarter 173,122 20,171 3,340 .24 .24
--------------------
(1) Operating revenues and operating income for the 1999 quarterly periods have
been restated to reflect the presentation on the Consolidated Statement of
Income.
(2) Based on weighted average number of shares outstanding each quarter.
(P) SEGMENT INFORMATION
UIL Holdings has two reportable operating segments, UI, its regulated electric
utility business engaged in the transmission, distribution and sale of
electricity, and Xcelecom, Inc., its non-regulated, wholly-owned subsidiary,
which provides specialized contracting services in the electrical,
communications and data network infrastructure industries. Revenues from
inter-segment transactions are not material, and 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' unregulated businesses and
inter-segment eliminations.
2000 1999 1998
---- ---- ----
Revenues from External Customers
- --------------------------------
Regulated Utility $704,691 $679,975 $686,191
Xcelecom - Unregulated business 138,267 35,423 28,115
Other 37,897 35,332 33,785
------------- ------------- ---------------
Total UIL Holdings $880,855 $750,730 $748,091
============= ============= ===============
- 67 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2000 1999 1998
---- ---- ----
Income (Loss) before Income Taxes
- ---------------------------------
Regulated Utility $108,039 $117,902 $96,710
Xcelecom - Unregulated business 3,944 (4,805) (2,366)
Other (3,197) 1,027 499
------------- ------------- ---------------
Total UIL Holdings $108,786 $114,124 $94,843
============= ============= ===============
2000 1999
---- ----
Total Assets
- ------------
Regulated Utility $1,602,327 $1,809,451
Xcelecom - Unregulated business 136,951 24,215
Other 129,276 (35,456)
------------- -------------
Total UIL Holdings $1,868,554 $1,798,210
============= =============
- 68 -
PRICEWATERHOUSE COOPERS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York NY 10019-6013
Telephone (212) 596 8000
Facsimile (212) 259 5324
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Shareholders
of UIL Holdings Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
UIL Holdings Corporation and its subsidiaries (the "Company") at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 22, 2001
New York, NY
- 69 -
PRICEWATERHOUSE COOPERS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York NY 10019-6013
Telephone (212) 596 8000
Facsimile (212) 259 5324
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and the Shareholders
of UIL Holdings Corporation:
Our audits of the consolidated financial statements referred to in our report
dated January 22, 2001 appearing in the 2000 Annual Report on Form 10-K also
included an audit of the financial statement schedule on page S-1 of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
January 22, 2001
New York, NY
- 70 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Not Applicable
PART III
Item 10. Directors and Executive Officers.
The information appearing under the captions "NOMINEES FOR ELECTION AS
DIRECTORS" AND "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in UIL
Holdings' definitive Proxy Statement, dated April 6, 2001 for the Annual Meeting
of the Shareowners to be held on May 16, 2001, which Proxy Statement will be
filed with the Securities and Exchange Commission on or about April 6, 2001, is
incorporated by reference in partial answer to this item. See also "EXECUTIVE
OFFICERS", following Part I, Item 4 herein.
Item 11. Executive Compensation.
The information appearing under the captions "EXECUTIVE COMPENSATION,"
"OPTIONS/SAR GRANTS IN LAST FISCAL YEAR," "STOCK OPTION EXERCISES IN 2000 AND
YEAR-END OPTION VALUES," "RETIREMENT PLANS," "BOARD OF DIRECTORS COMPENSATION
AND EXECUTIVE DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE COMPENSATION,"
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," "DIRECTOR
COMPENSATION" and "SHAREOWNER RETURN PRESENTATION" in UIL Holdings' definitive
Proxy Statement, dated April 6, 2001, for the Annual Meeting of the Shareowners
to be held on May 16, 2001, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about April 6, 2001, is incorporated by
reference in answer to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information appearing under the captions "PRINCIPAL SHAREOWNERS" and "STOCK
OWNERSHIP OF DIRECTORS AND OFFICERS" in UIL Holdings' definitive Proxy
Statement, dated April 6, 2001 for the Annual Meeting of the Shareowners to be
held on May 16, 2001, which Proxy Statement will be filed with the Securities
and Exchange Commission on or about April 6, 2001, is incorporated by reference
in answer to this item.
Item 13. Certain Relationships and Related Transactions.
Under a lease agreement dated May 7, 1991, UI leased its corporate headquarters
offices in New Haven from Connecticut Financial Center Associates Limited
Partnership (CFCALP). CFCALP is a limited partnership controlled by the David T.
Chase family, including Arnold L. Chase, a Director of UIL Holdings since June
28, 1999, and members of his immediate family. During 2000, UI's lease payments
to CFCALP totaled $6,300,000.
A subsidiary of United Resources, Inc., United Capital Investments, Inc. (UCI),
has invested $1,500,000 (with another $2,250,000 committed) to purchase a
minority ownership interest in a newly-formed corporation, Gemini-United, Inc.
(GUI), that proposes to develop, build and operate an open-access, hybrid fiber
coaxial communications network serving business and residential customers
located in UI's franchised service area. UCI also intends to provide marketing,
management of system customer base, and network deployment and maintenance
consulting services to GUI, for an annual fee of $70,000, for a period of five
years, subject to early termination in certain limited circumstances. The
majority owner of GUI is Gemini Networks, Inc., a corporation controlled by the
David T. Chase family; and Arnold L. Chase is the Chairman of the Board of
Directors of GUI and the President and a Director of Gemini Networks, Inc.
Since January 1, 2000, there has been no other transaction, relationship or
indebtedness of the kinds described in Item 404 of Regulation S-K.
- 71 -
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
Financial Statements (see Item 8):
Consolidated statement of income for the years ended December 31, 2000,
1999 and 1998
Consolidated statement of cash flows for the years ended December 31,
2000, 1999 and 1998
Consolidated balance sheet, December 31, 2000 and 1999
Consolidated statement of changes in shareholders' equity for the years
ended December 31, 2000, 1999 and 1998
Notes to consolidated financial statements
Report of independent accountants
Financial Statement Schedule (see S-1)
Schedule II - Valuation and qualifying accounts for the years ended
December 31, 2000, 1999 and 1998.
- 72 -
Exhibits:
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, certain of
the following listed exhibits, which are annexed as exhibits to previous
statements and reports filed by UIL Holdings Corporation (Commission File Number
1-5995) (UIL) and/or The United Illuminating Company (Commission File Number
1-6788) (UI), are hereby incorporated by reference as exhibits to this report.
Such statements and reports are identified by reference numbers as follows:
(1) Filed with UI and UIL Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 2000.
(2) Filed with UI Registration Statement No. 33-40169, effective August 12,
1991.
(3) Filed with UI Registration Statement No. 33-35465, effective August 1,
1990.
(4) Filed with UI Registration Statement No. 2-57275, effective October 19,
1976.
(5) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1995.
(6) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1996.
(7) Filed with UI Registration Statement No. 2-60849, effective July 24, 1978.
(8) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1991.
(9) Filed with UI Registration Statement No. 2-54876, effective November 19,
1975.
(10) Filed with UI Registration Statement No. 2-66518, effective February 25,
1980.
(11) Filed with UI Registration Statement No. 2-52657, effective February 6,
1975.
(12) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June
30, 1997.
(13) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1997.
(14) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1998.
(15) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1999.
(16) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 1997.
(17) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended March
31, 1998.
(18) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June
30, 1999.
(19) Filed March 29, 1996, with proxy material for the Annual Meeting of the
Shareowners of UI.
- 73 -
The exhibit number in the statement or report referenced is set forth in the
parenthesis following the description of the exhibit. Those of the following
exhibits not so identified are filed herewith.
Exhibit
Table Exhibit Reference
Item No. No. No. Description
- ------- ------- --------- -----------
(3) 3.1 (1) Copy of Certificate of Incorporation of UIL Holdings Corporation, as amended through July 20,
2000. (Exhibit 3.3)
(3) 3.2 (1) Copy of Bylaws of UIL Holdings Corporation, as amended through July 20, 2000. (Exhibit 3.4)
(4) 4.1 (2) Copy of Indenture, dated as of August 1, 1991, from The United Illuminating Company to The
Bank of New York, Trustee. (Exhibit 4)
(4),(10) 4.2 (3) Copy of Participation Agreement, dated as of August 1, 1990, among Financial Leasing
Corporation, Meridian Trust Company, The Bank of New York and The United Illuminating
Company. (Exhibits 4(a) through 4(h), inclusive, Amendment Nos. 1 and 2).
(10) 10.1 (4) Copy of Stockholder Agreement, dated as of July 1, 1964, among the various stockholders of
Connecticut Yankee Atomic Power Company, including The United Illuminating Company. (Exhibit
5.1-1)
(10) 10.2a (4) Copy of Power Contract, dated as of July 1, 1964, between Connecticut Yankee Atomic Power
Company and The United Illuminating Company. (Exhibit 5.1-2)
(10) 10.2b (5) Copy of Additional Power Contract, dated as of April 30, 1984, between Connecticut Yankee
Atomic Power Company and The United Illuminating Company.
(10) 10.2c (6) Copy of 1987 Supplementary Power Contract, dated as of April 1, 1987, supplementing Exhibits
10.2a and 10.2b. (Exhibit 10.2c)
(10) 10.2d (6) Copy of 1996 Amendatory Agreement, dated as of December 4, 1996, amending Exhibits 10.2b and
10.2c. (Exhibit 10.2d)
(10) 10.2e (6) Copy of First Supplement to 1996 Amendatory Agreement, dated as of February 10, 1997,
supplementing Exhibit 10.2d. (Exhibit 10.2e)
(10) 10.3 (4) Copy of Capital Funds Agreement, dated as of September 1, 1964, between Connecticut Yankee
Atomic Power Company and The United Illuminating Company. (Exhibit 5.1-3)
(10) 10.4 (7) Copy of Capital Contributions Agreement, dated October 16, 1967, between The United
Illuminating Company and Connecticut Yankee Atomic Power Company. (Exhibit 5.1-5)
(10) 10.5a (8) Copy of Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear
Units, dated May 1, 1973, as amended to February 1, 1990. (Exhibit 10.7a)
(10) 10.5b (9) Copy of Transmission Support Agreement, dated as of May 1, 1973, among the Seabrook Companies.
(Exhibit 5.9-2)
(10) 10.5c (6) Copy of Twenty-third Amendment to Agreement for Joint Ownership, Construction and Operation of
New Hampshire Nuclear Units, dated as of November 1, 1990, amending Exhibit 10.5a. (Exhibit
10.7c)
- 74 -
Exhibit
Table Exhibit Reference
Item No. No. No. Description
- ------- ------- --------- -----------
(10) 10.6a (10) Copy of Sharing Agreement - 1979 Connecticut Nuclear Unit, dated as of September 1, 1973,
among The Connecticut Light and Power Company, The Hartford Electric Light Company, Western
Massachusetts Electric Company, New England Power Company, The United Illuminating Company,
Public Service Company of New Hampshire, Central Vermont Public Service Company, Montaup
Electric Company and Fitchburg Gas and Electric Light Company, relating to a nuclear fueled
generating unit in Connecticut. (Exhibit 5.8-1)
(10) 10.6b (11) Copy of Amendment to Sharing Agreement - 1979 Connecticut Nuclear Unit, dated as of August 1,
1974, amending Exhibit 10.6a. (Exhibit 5.9-2)
(10) 10.6c (4) Copy of Amendment to Sharing Agreement - 1979 Connecticut Nuclear Unit, dated as of
December 15, 1975, amending Exhibit 10.6a. (Exhibit 5.8-4, Post-effective Amendment No. 2)
(10) 10.7a (7) Copy of Transmission Line Agreement, dated January 13, 1966, between the Trustees of the
Property of The New York, New Haven and Hartford Railroad Company and The United Illuminating
Company. (Exhibit 5.4)
(10) 10.7b (8) Notice, dated April 24, 1978, of The United Illuminating Company's intention to extend term of
Transmission Line Agreement dated January 13, 1966, Exhibit 10.7a. (Exhibit 10.9b)
(10) 10.7c (8) Copy of Letter Agreement, dated March 28, 1985, between The United Illuminating Company and
National Railroad Passenger Corporation, supplementing and modifying Exhibit 10.7a. (Exhibit
10.9c)
(10) 10.7d (12) Copy of Notice, dated April 22, 1997, of The United Illuminating Company's intention to extend
term of Transmission Line Agreement, Exhibit 10.9a, as supplemented and modified by Exhibit
10.7c. (Exhibit 10.9d)
(10) 10.8a (13) Copy of Agreement, effective May 16, 1997, between The United Illuminating Company and Local
470-1, Utility Workers Union of America, AFL-CIO. (Exhibit 10.10)
(10) 10.8b (14) Copy of Memorandum of Agreement, dated January 27, 1999, between The United Illuminating
Company and Local 470-1, Utility Workers Union of America, AFL-CIO. (Exhibit 10.9b)
(10) 10.8c (15) Copy of Memorandum of Agreement, dated March 5, 1999, between The United Illuminating Company
and Local 470-1, Utility Workers Union of America, AFL-CIO. (Exhibit 10.9c)
(10) 10.9a* (16) Copy of Amended and Restated Employment Agreement, effective as of March 1, 1997, between The
United Illuminating Company and Robert L. Fiscus. (Exhibit 10.23)
(10) 10.9b* (17) Copy of First Amendment to Amended and Restated Employment Agreement between The United
Illuminating Company and Robert L. Fiscus, dated as of February 1, 1998, amending Exhibit
10.9a. (Exhibit 10.14a)
(10) 10.10* (16) Copy of Employment Agreement, dated as of March 1, 1997, between The United Illuminating
Company and James L. Benjamin. (Exhibit 10.29)
(10) 10.11a* (16) Copy of Employment Agreement, dated as of March 1, 1997, between The United Illuminating
Company and Charles J. Pepe. (Exhibit 10.31)
(10) 10.11b* (15) Copy of First Amendment to Employment Agreement between The United Illuminating Company and
Charles J. Pepe, dated as of December 13, 1999. (Exhibit 10.19b*)
(10) 10.12a* (17) Copy of Employment Agreement, dated as of February 23, 1998, between The United Illuminating
Company and Nathaniel D. Woodson. (Exhibit 10.28)
- 75 -
Exhibit
Table Exhibit Reference
Item No. No. No. Description
- ------- ------- --------- -----------
(10) 10.12b* (15) Copy of First Amendment to Employment Agreement between The United Illuminating Company and
Nathaniel D. Woodson, dated as of December 13, 1999. (Exhibit 10.20b*)
(10) 10.13a* (17) Copy of The United Illuminating Company Phantom Stock Option Agreement, dated as of
February 23, 1998, between The United Illuminating Company and Nathaniel D. Woodson.
(Exhibit 10.29)
(10) 10.13b* (1) Copy of First Amendment, made as of the close of business on July 20, 2000, to The United
Illuminating Company Phantom Stock Option Agreement, dated as of February 28, 1998, between
The United Illuminating Company and Nathaniel D. Woodson, amending Exhibit 10.13a*. (Exhibit
10.21b+)
(10) 10.14* (1) Copy of Employment Agreement, made as of June 12, 2000, between The United Illuminating
Company and Gregory E. Sages. (Exhibit 10.28+)
(10) 10.15* (1) Copy of Employment Agreement, made as of June 26, 2000, between The United Illuminating
Company and Susan E. Allen. (Exhibit 10.29+)
(10) 10.16* (1) Copy of Resolution adopted by the Board of Directors of The United Illuminating Company on
June 26, 2000, and effective at the close of business on July 20, 2000, amending Section 7 of
each of the Employment Exhibits 10.9a*, 10.10*, 10.11a*, 10.12a*, 10.14* and 10.15*. (Exhibit
10.30+)
(10) 10.17a* (6) Copy of The United Illuminating Company 1990 Stock Option Plan, as amended on December 20,
1993, January 24, 1994 and August 22, 1994. (Exhibit 10.18*)
(10) 10.17b* (1) Copy of First Amendment to The United Illuminating Company 1990 Stock Option Plan, as
previously amended through August 22, 1994, effective immediately prior to the close of
business on July 20, 2000, amending Exhibit 10.17a*. (Exhibit 10.23b+)
(10) 10. 18a* (18) Copy of The United Illuminating Company 1999 Stock Option Plan. (Exhibit 10.29)
(10) 10.17c*, 10.18b* (1) Copy of Instrument of Assumption of Stock Option Plans, made as of July 21, 2000, between UIL
Holdings Corporation and The United Illuminating Company, with respect to Exhibits 10.17a*,
10.17b*, and 10.18a*. (Exhibit 10.23c+ and 10.24a+)
(10) 10.19* Copy of Non-Employee Directors' Common Stock and Deferred Compensation Plan of UIL Holdings
Corporation, as amended through December 31, 2000.
(10) 10.20* (1) Copy of UIL Holdings Corporation Non-Employee Directors Change in Control Severance Plan.
(Exhibit 10.32+)
(21) 21 List of subsidiaries of UIL Holdings Corporation.
- -------------------------------
*Management contract or compensatory plan or arrangement.
- 76 -
The foregoing list of exhibits does not include instruments defining the rights
of the holders of certain long-term debt of UIL Holdings Corporation and its
subsidiaries where the total amount of securities authorized to be issued under
the instrument does not exceed ten (10%) of the total assets of UIL Holdings
Corporation and its subsidiaries on a consolidated basis; and UIL Holdings
Corporation hereby agrees to furnish a copy of each such instrument to the
Securities and Exchange Commission on request.
(b) Reports on Form 8-K.
None
- 77 -
PRICEWATERHOUSE COOPERS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York NY 10019-6013
Telephone (212) 596 8000
Facsimile (212) 259 5324
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 33-50221 and
No. 33-64003) of our report dated January 22, 2001 relating to the financial
statements and financial statement schedule appearing in UIL Holdings
Corporation's Annual Report on Form 10-K for the year ended December 31, 2000.
/s/ PricewaterhouseCoopers LLP
January 22, 2001
New York, NY
- 78 -
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, UIL Holdings has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UIL HOLDINGS CORPORATION
By /s/ Nathaniel D. Woodson
-------------------------------------------
Nathaniel D. Woodson
Chairman of the Board of Directors,
President and Chief Executive Officer
DATE: MARCH 10, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Director, Chairman of the
Board of Directors and
/s/ Nathaniel D. Woodson Chief Executive Officer March 10, 2001
- ------------------------------
(Nathaniel D. Woodson)
(Principal Executive Officer)
Director, Vice Chairman
of the Board of Directors
/s/ Robert L. Fiscus and Chief Financial Officer March 10, 2001
- ------------------------------
(Robert L. Fiscus)
(Principal Financial and
Accounting Officer)
/s/ John F. Croweak Director March 10, 2001
- ------------------------------
(John F. Croweak)
/s/ F. Patrick McFadden, Jr. Director March 10, 2001
- ------------------------------
(F. Patrick McFadden, Jr.)
/s/ Betsy Henley-Cohn Director March 10, 2001
- ------------------------------
(Betsy Henley-Cohn)
/s/ James A. Thomas Director March 10, 2001
- ------------------------------
(James A. Thomas)
/s/ David E.A. Carson Director March 10, 2001
- ------------------------------
(David E.A. Carson)
/s/ John L. Lahey Director March 10, 2001
- ------------------------------
(John L. Lahey)
- 79 -
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Marc C. Breslawsky Director March 10, 2001
- ------------------------------
(Marc C. Breslawsky)
/s/ Thelma R. Albright Director March 10, 2001
- ------------------------------
(Thelma R. Albright)
/s/ Arnold L. Chase Director March 10, 2001
- ------------------------------
(Arnold L. Chase)
/s/ Daniel J. Miglio Director March 10, 2001
- ------------------------------
(Daniel J. Miglio)
- 80 -
SCHEDULE II
VALUATION AND
QUALIFYING ACCOUNTS
UIL HOLDINGS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
(Thousands of Dollars)
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-------------- --------- ---------- -------- ---------- ------
RESERVE DEDUCTION FROM
ASSET TO WHICH IT APPLIES:
Reserve for uncollectible
accounts (consolidated):
2000 $2,308 $5,790 - $5,529 (A) $2,569
1999 $2,431 $4,772 - $4,895 (A) $2,308
Reserve for uncollectible
accounts (American
Payment Systems,
agent collections (B))
2000 $170 $408 - $372 (A) $206
1999 $545 ($498) - ($123)(A) $170
- ------------------------------------
NOTE:
(A) Accounts written off, less recoveries.
(B) Included in consolidated amounts above.
S-1