SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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, 2001 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 ------------- ----------- COMMISSION FILE NUMBER 1-15995 UIL HOLDINGS CORPORATION (Exact name of registrant as specified in its charter) CONNECTICUT 06-1541045 (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 --------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON REGISTRANT TITLE OF EACH CLASS WHICH REGISTERED ---------- ------------------- ------------------------- UIL Holdings Corporation Common Stock, no par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ---------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark 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 February 28, 2002 was $781,492,395 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 March 1, 2002. The number of shares outstanding of the registrant's only class of common stock, as of February 28, 2002 was 14,381,531. DOCUMENTS INCORPORATED BY REFERENCE Part of this Form 10-K into Document which document is incorporated -------- ------------------------------ DEFINITIVE PROXY STATEMENT, DATED APRIL 5, 2002, FOR ANNUAL MEETING OF THE SHAREHOLDERS TO BE HELD ON MAY 15, 2002. III UIL HOLDINGS CORPORATION FORM 10-K DECEMBER 31, 2001 TABLE OF CONTENTS PAGE ---- 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 7 - Hydro-Quebec 7 - United Resources, Inc. 7 - Financing 8 - Employees 8 Item 2. Properties. 8 - Capital Expenditure Program 8 - The United Illuminating Company 8 - Transmission and Distribution Plant 8 - Generating Facilities 9 - General Considerations 9 - Nuclear Fuel 9 - Insurance Requirements 10 - Waste Disposal and Decommissioning 10 - Environmental Regulation 10 - United Resources, Inc. 11 Item 3. Legal Proceedings. 11 Item 4. Submission of Matters to a Vote of Security Holders. 11 Executive Officers 12 - 1 - TABLE OF CONTENTS (CONTINUED) PAGE ---- PART II Item 5. Market for UIL Holdings' Common Equity and Related Stockholder Matters. 13 Item 6. Selected Financial Data. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16 - Major Influences on Financial Condition 16 - Liquidity and Capital Resources 18 - New Accounting Standards 19 - Results of Operations 19 - Looking Forward 30 Item 8. Financial Statements and Supplementary Data. 35 - Consolidated Financial Statements 35 - Statement of Income for the Years 2001, 2000 and 1999 35 - Statement of Cash Flows for the Years 2001, 2000 and 1999 36 - Balance Sheet as of December 31, 2001 and 2000 37 - Statement of Changes in Shareholders' Equity for the Years 2001, 2000 and 1999 39 - Notes to Consolidated Financial Statements 40 - Statement of Accounting Policies 40 - Capitalization 47 - Rate-Related Regulatory Proceedings 51 - Restructuring 53 - Short-Term Credit Arrangements 53 - Income Taxes 55 - Supplementary Information 57 - Pension and Other Benefits 59 - Jointly Owned Plant 62 - Unamortized Cancelled Nuclear Project 62 - Lease Obligations 62 - Commitments and Contingencies 64 - Capital Expenditure Program 64 - Nuclear Insurance Contingencies 64 - Other Commitments and Contingencies 65 - 2 - TABLE OF CONTENTS (CONTINUED) PAGE ---- PART II (CONTINUED) - Connecticut Yankee 65 - Hydro-Quebec 65 - Cross Sound Cable Project 65 - Environmental Concerns 66 - Site Decontamination, Demolition and Remediation Costs 66 - Nuclear Fuel Disposal and Nuclear Plant Decommissioning 67 - Fair Value of Financial Instruments 68 - Quarterly Financial Data (Unaudited) 69 - Segment Information 70 Report of Independent Accountants 71 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. 73 PART III Item 10. Directors and Executive Officers 73 Item 11. Executive Compensation. 73 Item 12. Security Ownership of Certain Beneficial Owners and Management. 73 Item 13. Certain Relationships and Related Transactions. 73 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 74 Signatures 80 - 3 - 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). 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 730,000, 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 140,000) 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 2001 retail electric revenues, approximately 42% were derived from residential sales, 41% from commercial sales, 15% 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-Related 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. 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 facilities, wholesale electric service rates and accounting procedures, among other things. See "Arrangements with Other Utilities." - 4 - In connection with ownership and leasehold interests in Seabrook Station, 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 - Generating Facilities." 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 Station. 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-Related 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. Through December 31, 2003, UI is required to offer fully bundled retail service to its customers under a regulated "standard offer" rate 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 agreements with Enron Power Marketing, Inc. (EPMI), a subsidiary of Enron Corp. (Enron), Houston, Texas, for the supply of all of the power needed by UI to meet its standard offer obligations at fixed prices until the end of the four-year standard offer period on December 31, 2003. On December 2, 2001, Enron, and many of its subsidiaries, including EPMI, commenced bankruptcy proceedings seeking protection from their creditors while they attempt to reorganize under federal bankruptcy law. This action by EPMI was an event of default under its agreements with UI and effective January 1, 2002, UI terminated all of its agreements with EPMI. On December 28, 2001, UI entered into an agreement with Virginia Electric and Power Company for the supply of all of UI's standard offer generation service needs from January 1, 2002 through December 31, 2003. If the generation resources available to UI's wholesale supplier become inadequate to meet UI's customer service obligations, UI expects to be able to acquire demand-side and supply-side resources, and/or to purchase capacity from other utilities or from the New England spot market, as necessary. However, because the generation and transmission systems in New England are operated by the independent system operator 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. - 5 - ARRANGEMENTS WITH OTHER UTILITIES NEW ENGLAND POWER POOL UI, in cooperation with other privately and publicly owned New England 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 New England region. It achieved these objectives through central dispatching of all of the generation and transmission facilities that are owned by its members and also through coordination of the pool activities that may have significant impacts on the member utilities. 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 the evolving industry-wide changes, NEPOOL has gone through restructuring. Its membership has been broadened to encompass all entities engaged in the electricity business in New England, including power marketers and brokers, independent power producers and load aggregators. Currently there are approximately 210 individual members of NEPOOL. An independent entity, ISO New England Inc. (ISO-NE), has been given the responsibility for the operation of the regional bulk power system, to assure that the bulk power system will continue to be operated in accordance with the NEPOOL objectives and also to assure that the wholesale power markets will be workably competitive and non-discriminatory. Various energy, capacity and ancillary services products are traded in the NEPOOL market in open competition among the participants. Amendments to the NEPOOL Agreement establishing the power markets in New England became effective on May 1, 1999. In the near future, there will be further substantial changes to the NEPOOL power markets. These changes will include the implementation of a transmission congestion management system (CMS) and a multi-settlement system (MSS). CMS will aid in optimizing 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 manipulate purchase and sale bids strategically. CMS and MSS are scheduled to be implemented by June of 2003. The CMS and MSS processes that will be employed in New England, known as the Standard Market Design, are based on the proven systems that are currently operational in the Pennsylvania-New Jersey-Maryland control area. 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 (RTO) for the New England region. The proposed RTO 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 would be responsible for the real-time operation of the electric system, short-term reliability, and administrative functions associated with the electricity markets, while the independent transmission company would be primarily responsible for managing the transmission assets, including system maintenance, expansion, and long-term reliability. In August of 2001, the FERC issued an order directing ISO-NE, the New York Independent System Operator (NYISO), the Pennsylvania-New Jersey-Maryland independent systems operator, and all other interested parties, including the New England transmission owners, to participate in discussions relating to the formation of a single RTO for the entire Northeast region. UI has participated actively in those discussions, and in ongoing efforts of the transmission owners from New England and the other regions to form a for-profit independent transmission company as part of a Northeast RTO. Presently, it is not clear whether, and if so when, there will be a single RTO for the Northeast region or the exact nature of such an organization. As a step toward creating a larger trading region, on January 28, 2002, ISO-NE and NYISO executed an agreement pursuant to which they intend to develop a common electricity marketplace predicated on a common market design consisting of the two adjacent control regions. Additionally, they have agreed to evaluate the possibility of eventually forming an RTO for the New England and New York region. - 6 - NEW ENGLAND TRANSMISSION GRID Under other agreements related to UI's participation in the ownership of Seabrook Station, 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 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, 2001, UI's guarantee liability for this debt was approximately $5.0 million. UNITED RESOURCES, INC. URI serves as the parent corporation for several non-utility businesses, each of which is incorporated separately to participate in business ventures that are intended to provide long-term rewards to UIL Holdings' shareowners. As of December 31, 2001, UIL Holdings has invested approximately $239 million in URI. URI, which is not itself an operating company, has four wholly-owned subsidiaries: AMERICAN PAYMENT SYSTEMS, INC. (APS) provides an electronic bill payment service to companies throughout the United States with which APS has contractual relationships, including major electric utility and telecommunications companies, and for retailers with which APS does not have contractual relationships. APS recruits and manages retailers to provide this service to the companies' customers who prefer to pay their bills in person. APS acts as an agent for each contracted client to engage in the collection activity, while the non-contracted bill payment service permits each retailer to offer its customers a wider range of electronic bill payment options. APS is the largest processor of contracted utility customer in-person bill payments in the United States, operating in 45 states. APS's subsidiaries include APS Card Services, Inc. (CSI), which is 100% owned, and CellCards of Illinois, LLC (CCI), which is 51% owned. CCI, in which APS acquired its ownership interest in 2001, sells prepaid long distance telephone service, prepaid telephone calling cards and prepaid wireless telephone service in check-cashing locations nationwide. CSI has been organized by APS to market a prepaid stored value card. XCELECOM, INC. (Xcelecom) and its subsidiaries, provide general and specialty electrical and voice-data-video design, construction, systems integration and related services in regional markets of the Eastern United States. The Xcelecom subsidiaries, all of which have been obtained through acquisitions, include Allan Electric Co., Inc., Brite-Way Electrical Contractors, Inc., JBL Electric, Inc. and The Datastore, Incorporated, all in New Jersey, Orlando Diefenderfer Electrical Contractors, Inc., in Pennsylvania, 4Front Systems, Inc., in North Carolina, J. E. Richards, Inc. and Richards Electric, Inc. in Maryland, and Johnson Electric Co., Inc., M. J. Daly & Sons, Inc., McPhee Electric Ltd., LLC and McPhee Utility Power and Signal, Ltd., all in Connecticut. Brite-Way Electrical Contractors, Inc., an electrical contracting company, M. J. Daly & Sons, Inc., which provides mechanical and fire protection contracting services, and 4Front Systems, Inc., a computer network systems integration company, were acquired by Xcelecom during 2001. Xcelecom also owns and operates two heating and cooling energy centers, through its Thermal Energies, Inc. subsidiary, that provide heating and cooling service to two of New Haven, Connecticut's largest office and government complexes. UNITED CAPITAL INVESTMENTS, INC. (UCI) invests in business ventures that are expected to earn above-average returns. Some of its investments include: o CROSS-SOUND CABLE COMPANY, LLC - UCI has a 25% interest ($0.9 million investment) in a merchant electric transmission line project that proposes to install, own and operate a 330-megawatt high voltage direct current transmission line connecting Connecticut and Long Island under Long Island Sound. UCI is obligated to furnish a direct guarantee for its participating share of the debt financing during construction of this project. Under a separate agreement, UIL Holdings is an indirect guarantor of the obligation of UCI. As of December 31, 2001, - 7 - UCI's guarantee liability for this debt was approximately $7.9 million. This project has been opposed by a number of public officials and private groups who have participated actively in governmental permitting proceedings relative to the project. In December 2001, the Connecticut Department of Environmental Protection (CTDEP) issued a notice of intent to grant a permit for the project. A final decision from the CTDEP is expected in the first quarter of 2002. In January 2002, the Connecticut Siting Council (CSC) approved a permit application for siting the cable; but the Connecticut Attorney General and the City of New Haven have appealed the CSC's decision to the Connecticut Superior Court. UCI management believes that the CSC decision will be upheld on appeal, although there can be no assurance that it will. In addition, a permit application for siting the cable is pending before the United States Army Corps of Engineers. A final decision on this application is also anticipated in the first quarter of 2002. o ZERO STAGE CAPITAL - Regional high technology venture capital funds in which UCI has invested, both as a financial investment and as a means of promoting local economic development. o IRONBRIDGE MEZZANINE FUND - A regional Small Business Investment Company committed to investing a portion of its capital in women and minority owned businesses and businesses located in low and moderate income areas. o GEMINI NETWORKS, INC. - A corporation that proposes to develop, build and operate an open-access, hybrid fiber coaxial communications network serving business and residential customers in the Northeastern United States. See also PART III, Item 13. 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. 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, 2001, UIL Holdings and its subsidiaries had a total of 2,589 employees, consisting of 25 in UIL Holdings, 804 in UI and 1,760 in URI and its subsidiaries. Of the 804 UI employees, 364 were members of a union and 85% had been with UI for 10 or more years. Of the 1,760 employees of URI and its subsidiaries, 198 were employed by APS, 1,559 by Xcelecom and its subsidiaries, and 3 by UCI. Item 2. Properties. CAPITAL EXPENDITURE PROGRAM UIL Holdings' continuing capital expenditure program for 2002 through 2006 is presently estimated at $360.4 million, excluding UI's allowance for funds used during construction (AFUDC). See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note (L), Commitments and Contingencies - Capital Expenditure Program." THE UNITED ILLUMINATING COMPANY 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 - 8 - 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 right-of-way pursuant to two Transmission Line Agreements. One of the agreements expired in May 2000. Currently UI is negotiating to extend this agreement. Until negotiations are complete, the terms of the expired agreement remain in effect. The other agreement has been extended to May 2040. UI owns and operates 25 bulk electric supply substations with a capacity of 1,783,700 KVA and 28 distribution substations with a capacity of 136,020 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. GENERATING FACILITIES The electric generating capability of UI's only generating facility, as of December 31, 2001, based on the summer rating of the generating unit, was as follows: YEAR OF MAX CLAIMED UI'S FUEL INSTALLATION CAPABILITY, MW ENTITLEMENT (1) ---- ------------ -------------- ----------- % Mw --- --- Seabrook Unit 1, Seabrook, New Hampshire Nuclear 1990 1161 17.5 203.18 (1) 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. Seabrook Unit 1 is a nuclear generating unit located in Seabrook, New Hampshire, that is jointly owned by UI and ten other New England entities. It commenced commercial operation in June of 1990, pursuant to an operating license issued by the Nuclear Regulatory Commission (NRC), which will expire in 2026. Seabrook Station is operated by a service company subsidiary of Northeast Utilities. Through December 31, 2001, Seabrook Unit 1 has operated at a lifetime capacity factor of 80.8%. UI is in the process of selling its interest in Seabrook Station, 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-Related Regulatory Proceedings." GENERAL CONSIDERATIONS Seabrook Unit 1 is subject to the licensing requirements and jurisdiction of the NRC under the Atomic Energy Act of 1954, as amended, and to a variety of other state and federal requirements. 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 - 9 - 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 entity responsible for the operation of Seabrook Unit 1, there are outstanding contracts that cover 100% of uranium concentrate purchases through 2003. In addition, there are outstanding contracts for conversion to hexafluoride, enrichment and fabrication services extending through 2003, 2007 and 2008, respectively. INSURANCE REQUIREMENTS See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note (L), Commitments and Contingencies - Nuclear Insurance Contingencies" regarding insurance requirements for nuclear generation. 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 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. RCRA also regulates underground tanks storing petroleum products or hazardous substances, and Connecticut has adopted state regulations governing underground tanks storing petroleum and petroleum products that, in some respects, are more stringent than the federal requirements. UI currently owns eight underground storage tanks, 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 - 10 - leaking, to remedy any contamination of groundwater, and to modify, remove and/or replace older tanks in compliance with federal and state regulations. 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. 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 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 PART II, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note (L), Commitments and Contingencies - Site Decontamination, Demolition and Remediation Costs" regarding these issues. UNITED RESOURCES, INC. APS and Xcelecom, lease office space in Hamden, Connecticut, which is the site of their corporate headquarters. It is also the location of the transaction processing center for APS and its subsidiary, CSI. APS's other subsidiary, CCI, leases office space in Chicago, Illinois. Xcelecom's operating subsidiaries own or lease real property, buildings and equipment in Connecticut, Maryland, New Jersey, North Carolina and Pennsylvania necessary for the management and operation of their general and specialty electrical and voice-data-video design, construction, systems integration and related services. 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, 2001. - 11 - EXECUTIVE OFFICERS The names and ages 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 60 Chairman of the Board of Directors, March 22, 1999 President and Chief Executive Officer Robert L. Fiscus 64 Vice Chairman of the Board of March 22, 1999 Directors and Chief Financial Officer Susan E. Allen 42 Vice President Investor Relations, August 28, 2000 Corporate Secretary and Assistant Treasurer Richard J. Nicholas 46 Vice President Corporate January 28, 2002 Development and Administration Gregory E. Sages 46 Vice President Finance August 28, 2000 Charles J. Pepe 53 Treasurer and Assistant Secretary August 28, 2000 - ----------------------- *As of December 31, 2001 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, except Mr. Nicholas, have entered into employment agreements with UI; and Mr. Nicholas has entered into an employment agreement with United Capital Investments, Inc. 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 of The United Illuminating Company during the period February 23, 1998 to May 20, 1998; President and Chief Executive Officer during the period May 20, 1998 to December 31, 1998; and Chairman of the Board of Directors, President and Chief Executive Officer of The United Illuminating Company during the period December 31, 1998 to February 1, 2001. He has served as Chairman of the Board of Directors and Chief Executive Officer of The United Illuminating Company since February 1, 2001 and Chairman of the Board of Directors, President and Chief Executive Officer 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, 1997 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 June 26, 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. SUSAN E. ALLEN. Ms. Allen served as Manager of Financing and Corporate Secretary Administration of The United Illuminating Company during the period January 1, 1997 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, - 12 - Corporate Secretary and Assistant Treasurer of The United Illuminating Company since June 26, 2000 and of UIL Holdings Corporation since August 28, 2000. RICHARD J. NICHOLAS. Mr. Nicholas served as Assistant Vice President Regulatory Affairs and Public Policy for Southern New England Telecommunications Corporation during the period January 1, 1997 to February 2000. He served as Vice President and Chief Operating Officer of United Capital Investments, Inc. during the period May 1, 2001 to January 28, 2002. He has served as Vice President Corporate Development and Administration of UIL Holdings Corporation and as Presidentof United Capital Investments, Inc. and of United Bridgeport Energy, Inc. since January 28, 2002. GREGORY E. SAGES. Mr. Sages served as Executive Director Financial Analysis and Planning for Tenneco, Inc. during the period January 1, 1997 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. CHARLES J. PEPE. Mr. Pepe served as Assistant Treasurer and Assistant Secretary of The United Illuminating Company during the period January 1, 1997 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. The Common Stock of UI and UIL Holdings has traded on the New York Stock Exchange since 1971. The high and low closing prices during 2001 and 2000 were as follows: 2001 SALE PRICE 2000 SALE PRICE --------------- --------------- HIGH LOW HIGH LOW ---- --- ---- --- First Quarter $51.23 $44.25 $52.13 $38.13 Second Quarter 50.29 45.65 47.38 39.63 Third Quarter 49.47 45.70 55.13 44.19 Fourth Quarter 52.42 47.27 52.19 43.38 UI and UIL Holdings have paid quarterly dividends on the Common Stock since 1900. The quarterly dividends declared by UI and UIL Holdings in 2000 and by UIL Holdings in 2001 were at a rate of 72 cents per share. As of December 31, 2001, there were 11,912 Common Stock shareowners of record. - 13 - ITEM 6. SELECTED FINANCIAL DATA 2001 2000 1999 1998 1997 ============================================================================================================================== FINANCIAL RESULTS OF OPERATION ($000'S) Sales of electricity Utility Retail Residential $ 266,585 $ 252,730 $ 271,605 $ 262,974 $ 259,325 Commercial 254,842 242,075 256,246 254,765 248,490 Industrial 95,250 96,955 100,437 102,201 102,763 Other 10,501 10,587 11,308 11,667 11,755 ------------- ------------- ------------- ------------- ------------- Total Retail 627,178 602,347 639,596 631,607 622,333 Wholesale 61,570 67,990 24,334 44,948 82,871 Other operating revenues 26,070 34,354 16,045 9,636 3,825 Non-utility businesses 371,028 176,164 70,755 61,900 38,040 ------------- ------------- ------------- ------------- ------------- Total operating revenues 1,085,846 880,855 750,730 748,091 747,069 ------------- ------------- ------------- ------------- ------------- Fuel and interchange energy -net Retail -own load 252,576 262,252 134,851 116,769 109,542 Wholesale 19,331 19,901 24,552 34,775 73,124 Capacity purchased-net 3,296 4,682 33,873 34,515 39,976 Other operating expenses, excluding tax expense 524,661 331,305 256,285 247,636 236,253 Depreciation 32,811 31,839 61,040 86,861(1) 77,745 Amortization 63,317 37,874 36,394 13,758 13,758 Gross earnings tax 26,661 23,715 24,518 24,039 23,571 Other non-income taxes 18,488 19,341 22,622 40,635(2) 28,922 ------------- ------------- ------------- ------------- ------------- Total operating expenses, excluding income taxes 941,141 730,909 594,135 598,988 602,891 ------------- ------------- ------------- ------------- ------------- Operating income 144,705 149,946 156,595 149,103 144,178 ------------- ------------- ------------- ------------- ------------- Other Income, net AFUDC 1,913 2,609 2,235 468 1,575 Other non-operating income 4,475 730 2,686 1,928 1,898 ------------- ------------- ------------- ------------- ------------- Total 6,388 3,339 4,921 2,396 3,473 ------------- ------------- ------------- ------------- ------------- Interest Charges, net Long-term debt - net 36,529 31,729 35,260 42,836 56,158 Dividend requirement of mandatorily redeemable securities - 3,529 4,813 4,813 4,813 Other 7,010 9,241 7,319 9,007 6,068 ------------- ------------- ------------- ------------- ------------- Total 43,539 44,499 47,392 56,656 67,039 ------------- ------------- ------------- ------------- ------------- Income tax expense Operating income tax 52,368 52,298 65,042 52,862 39,281 Non-operating income tax (4,177) (4,269) (3,142) (3,091) (2,126) ------------- ------------- ------------- ------------- ------------- Total 48,191 48,029 61,900 49,771 37,155 ------------- ------------- ------------- ------------- ------------- Net income 59,363 60,757 52,224 45,072 43,457 Premium (Discount) on preferred stock redemption - - 53 (21) (48) Preferred and preference stock dividends - - 66 201 205 ------------- ------------- ------------- ------------- ------------- Income applicable to common stock $ 59,363 $ 60,757 $ 52,105 $ 44,892 $ 43,300 ============================================================================================================================== FINANCIAL CONDITION ($000'S) Current assets $ 351,967 $ 288,306 $ 220,126 $ 305,189 $ 204,474 Other property and investments 149,830(4) 155,526(4) 144,768(4) 49,549 47,706 Property, Plant and Equipment - net 493,342 495,850 482,836(3) 1,181,053 1,232,909 Construction work in progress 32,103 30,267 25,708 33,695 25,448 Deferred charges and regulatory assets 836,689 898,605 924,772(3) 371,674 408,993 ------------- ------------- ------------- ------------- ------------- Total Assets $ 1,863,931 $ 1,868,554 $ 1,798,210 $ 1,941,160 $ 1,919,530 ============================================================================================================================== Current portion of long-term debt $ 100,000 $ - $ 25,000 $ 66,202 $ 100,000 Other current liabilities 264,531 236,047 166,213 172,830 175,340 Noncurrent liabilities 195,253 218,260 247,135 111,848 121,746 Deferred income tax liabilities and other 272,380 302,282 316,205 339,072 349,591 Net long-term debt excluding current portion 498,557 522,221 518,228 664,510 644,670 Notes payable 33,215 110,699 17,131 86,892 37,751 Preferred stock & company-obligated mandatorily redeemable securities of subsidiaries holding solely parent debentures - - 50,000 54,299 54,351 Net common stock equity 499,995 479,045 458,298 445,507 436,081 ------------- ------------- ------------- ------------- ------------- Total Liabilities and Capitalization $ 1,863,931 $ 1,868,554 $ 1,798,210 $ 1,941,160 $ 1,919,530 ============================================================================================================================== (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 $92.0 million, $90.3 million and $83.5 million in a generation facility as of December 31, 2001, 2000 and 1999, respectively. - 14 - ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) 2001 2000 1999 1998 1997 ========================================================================================================================== COMMON STOCK DATA Average number of shares outstanding (000's) 14,097 14,073 14,052 14,018 13,976 Number of shares outstanding at year-end (000's) 14,116 14,077 14,063 14,035 13,908 Earnings per share (average) - basic $ 4.21 $ 4.32 $ 3.71 $ 3.20 $ 3.10 Earnings per share (average) - diluted $ 4.19 $ 4.31 $ 3.71 $ 3.20 $ 3.09 Book value per share $ 35.42 $ 34.03 $ 32.59 $ 31.74 $ 31.35 Average return on equity Total 12.13% 13.00% 11.45% 9.44% 10.45% Utility 11.98% 13.50% 14.00% 11.43% 11.54% Dividends declared per share $ 2.88 $ 2.88 $ 2.88 $ 2.88 $ 2.88 Market Price: High $ 52.42 $ 55.13 $ 53.19 $ 53.75 $ 45.94 Low $ 44.25 $ 38.13 $ 39.31 $ 42.63 $ 24.50 Year-end $ 51.30 $ 49.75 $ 51.38 $ 51.50 $ 45.94 ========================================================================================================================== CASH FLOW INFORMATION Net cash provided by operating activities, less dividends ($000's) $116,372 $ 60,801 $ 57,907 $ 71,566 $132,189 Capital expenditures, excluding AFUDC $ 47,370 $ 54,191 $ 34,772 $ 38,040 $ 33,436 ========================================================================================================================== OTHER FINANCIAL AND STATISTICAL DATA Sales by class (millions of kWh's) Residential 2,120 2,057 2,054 1,925 1,899 Commercial 2,476 2,403 2,388 2,324 2,249 Industrial 1,082 1,146 1,162 1,155 1,168 Other 46 48 48 48 49 ----------- ----------- ------------ ------------ ------------- Total 5,724 5,654 5,652 5,452 5,365 ----------- ----------- ------------ ------------ ------------- Number of retail customers by class (average) Residential 286,331 284,955 282,986 281,591 280,283 Commercial 29,889 29,776 29,757 29,468 29,228 Industrial 1,707 1,725 1,746 1,752 1,697 Other 1,250 1,207 1,185 1,172 1,163 ----------- ----------- ------------ ------------ ------------- Total 319,177 317,663 315,674 313,983 312,371 ----------- ----------- ------------ ------------ ------------- Average price per kilowatt hour by class (cents) Residential 12.57 12.29 13.22 13.66 13.66 Commercial 10.29 10.07 10.73 10.96 11.05 Industrial 8.80 8.46 8.64 8.85 8.80 Average large industrial customers time of use rate 8.13 8.06 8.21 8.16 8.12 Revenues - retail sales per kWh 10.96 10.65 11.31 11.58 11.60 Number of employees at year-end 2,589 2,277 1,239 1,193 1,175 ========================================================================================================================== - 15 - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. MAJOR INFLUENCES ON FINANCIAL CONDITION The financial condition of UIL Holdings Corporation (UIL Holdings) will continue to be dependent on the level of the electric utility retail sales of its direct subsidiary, The United Illuminating Company (UI), and on UI's ability to control expenses, as well as on the performance of the businesses of UIL Holdings' non-utility subsidiaries. The two primary factors that affect electric utility sales volume are economic conditions and weather. The principal factors affecting the financial condition of UIL Holdings' operating non-utility subsidiaries, American Payment Systems, Inc. and Xcelecom, Inc., are the pace of technological changes, competition, risks related to management of internal growth, acquisition financing and integration, exposure to downturns in the economy, risks associated with contracts, recoverability and possible impairment of goodwill, and collectibility of receivables. 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 retail rates regulation plan for the years 1997 through 2001 (the Rate Plan). The Rate Plan accelerated the amortization and recovery of regulatory assets if UI's common stock equity return on regulated utility investment exceeded 10.5% after recording the amortization. UI's authorized return on regulated utility common stock equity during the period was 11.5%. Earnings above 11.5%, on an annual basis, were utilized one-third for customer bill reductions, one-third to accelerate amortization of regulatory 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 superseded the rates that were included in the Rate Plan. The decision also reduced the required amount of accelerated amortization of assets in 2000 and 2001. Under this 1999 decision, all other components of the 1996 Rate Plan remained in effect through 2001. On February 13, 2001, the Connecticut Attorney General and the Office of Consumer Counsel petitioned the DPUC to initiate a proceeding and hold a hearing concerning the need to decrease UI's rates by reason of UI having earned a return on regulated common equity more than 1% above the authorized level of 11.5% for at least six consecutive months. The DPUC docketed such a proceeding and, by a letter dated July 3, 2001, stated its intention to combine a full review of UI's retail rates (a Rate Case) in the same docket as the overearnings proceeding. Following hearings on August 8, 2001 and August 27, 2001, the DPUC issued a final decision on October 31, 2001 holding that as a result of the earnings sharing mechanism embedded in UI's Rate Plan, UI's customers have directly benefited when UI has earned over its 11.5% authorized return on regulated common equity during the Rate Plan period. Because the earnings sharing mechanism was scheduled to end, with the Rate Plan, on December 31, 2001, the DPUC ordered that the earnings sharing mechanism be extended effective January 1, 2002 until the conclusion of the Rate Case proceeding. The DPUC's decision also found that UI's earnings are not expected to exceed 11.5% in 2002, but that just and reasonable rates for UI at this point in time can only be determined in the full Rate Case proceeding. UI filed Rate Case schedules in November 2001, together with supporting pre-filed sworn written testimony. DPUC hearings have been scheduled for March and April 2002. UI anticipates a final decision in the Rate Case proceeding by mid-2002. 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 - 16 - 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 Connecticut electricity customers are able to choose their power supply providers. Through December 31, 2003, UI is required to offer fully bundled retail service to its customers under a regulated "standard offer" rate 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 agreements with Enron Power Marketing, Inc. (EPMI), a subsidiary of Enron Corp. (Enron), Houston, Texas, for the supply of all of the power needed by UI to meet its standard offer obligations at fixed prices until the end of the four-year standard offer period on December 31, 2003. On December 2, 2001, Enron, and many of its subsidiaries, including EPMI, commenced bankruptcy proceedings seeking protection from their creditors while they attempt to reorganize under federal bankruptcy law. This action by EPMI was an event of default under its agreements with UI and effective January 1, 2002, UI terminated all of its agreements with EPMI. On December 28, 2001, UI entered into an agreement with Virginia Electric and Power Company for the supply of all of UI's standard offer generation service needs from January 1, 2002 through December 31, 2003. The Restructuring Act requires that, in order for UI to recover any stranded costs, it must attempt to divest its ownership interests in its nuclear-fueled power plants prior to 2004. 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 planned to divest its nuclear generation ownership and leasehold interests (17.5% of Seabrook Station in New Hampshire and 3.685% of Millstone Unit 3 in Connecticut) by the end of 2003, in accordance with the Restructuring Act. The sale of UI's ownership in Millstone Unit 3 was consummated on March 31, 2001. UI's share of the proceeds from the sale, including nuclear fuel, was $34.4 million. There was no direct impact on UI's financial results, and net-of-tax proceeds from the sale that were in excess of the market value of the plant, as set by the DPUC, were credited to reduce stranded cost rate base. That amount is approximately $15.3 million and is subject to true-up by the DPUC. On December 15, 2000, UI and The Connecticut Light and Power Company filed with the DPUC for approval of their plan to divest their respective interests in Seabrook Station by an auction process. On October 10, 2001, the DPUC issued its final decision approving the plan with certain modifications. The New Hampshire Public Utilities Commission, in coordination with the DPUC, has retained an investment banking firm as the exclusive financial advisor to conduct the auction of Seabrook Station, which is expected to be completed around the end of 2002. - 17 - LIQUIDITY AND CAPITAL RESOURCES UIL Holdings' capital requirements are presently projected as follows: 2002 2003 2004 2005 2006 ---- ---- ---- ---- ---- (In Millions) Unrestricted Cash on Hand - Beginning of Year (1) $29.5 $ - $ - $ - $ - Funds from Operations less Dividends (2) 76.4 71.6 83.6 93.0 93.3 ----------- ---------- ----------- ----------- ----------- Subtotal 105.9 71.6 83.6 93.0 93.3 Less: Capital Expenditures (2) UI 68.3 54.1 35.8 26.4 22.4 URI 73.0 16.6 21.6 23.2 19.0 ----------- ---------- ----------- ----------- ----------- Total Capital Expenditures 141.3 70.7 57.4 49.6 41.4 Plus: Net Cash from Plant Sales (3) 127.0 - - - - ----------- ---------- ----------- ----------- ----------- Cash Available to pay Debt Maturities and Redemptions 91.6 0.9 26.2 43.4 51.9 Less: Maturities and Mandatory Redemptions 100.0 100.0 - 104.3 104.3 Optional Redemptions 128.2 - - - - ----------- ---------- ----------- ----------- ----------- External Financing Requirements (Surplus) (2) 136.6 99.1 (26.2) 60.9 52.4 ----------- ---------- ----------- ----------- ----------- Plus: Issuance and Sale of Long-term Debt 100.0 100.0 - 50.0 50.0 ----------- ---------- ----------- ----------- ----------- Increase (Decrease) in Short-Term Borrowings 36.6 (0.9) (26.2) 10.9 2.4 ----------- ---------- ----------- ----------- ----------- Short-Term Borrowings/(Temporary Cash Investments) - End of Year $68.2 $67.3 $41.1 $52.0 $54.4 =========== ========== =========== =========== =========== (1) Excludes restricted cash in American Payment Systems, Inc. of $53.0 million, UI of $3.2 million and Xcelecom of $0.4 million. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note (A), Statement of Accounting Policies - Restricted Cash." (2) "Funds from Operations less Dividends", "Capital Expenditures" and "External Financing Requirements (Surplus)" are estimates based on current earnings and cash flow projections. 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. 2002 capital expenditures for URI include estimates for acquisitions and investments similar to those previously completed. There is no guarantee that such acquisitions or investments will take place, and none are forecast beyond 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. (3) The estimate for "Net Cash from Plant Sales" for 2002 is based on speculative pricing and other projections for the sale of Seabrook Unit 1, expected to be completed around the end of 2002. 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 $70 million revolving credit agreement that UIL Holdings has with a group of banks, a $25 million revolving credit agreement that Xcelecom has with a bank, and a $10 million revolving credit agreement that APS has with a bank, future external financing needs are expected to be satisfied by the issuance of additional short-term and long-term debt. The continued availability - 18 - 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, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note (B), Capitalization and Note (E), Short-Term Credit Arrangements" for a discussion of UIL Holdings' credit arrangements. At December 31, 2001, UIL Holdings had $86.1 million of cash and temporary cash investments, of which $56.6 million is restricted cash. This represents an increase of $38.7 million from the corresponding balance at December 31, 2000. The components of this increase, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows: (In Millions) ----------- Balance, December 31, 2000 $47.4 ---- Net cash provided by operating activities 157.0 Net cash provided by (used in) financing activities: - Financing activities, excluding dividend payments (2.4) - Dividend payments (40.6) Retirement of debt securities (1.1) Cash invested in plant, including nuclear fuel (47.4) Acquisition of businesses, net of cash acquired (23.0) Non-utility passive investments (3.8) ---- Net Change in Cash 38.7 ---- Balance, December 31, 2001 $86.1 ===== NEW ACCOUNTING STANDARDS See the discussion included in Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note (A), Statement of Accounting Policies." RESULTS OF OPERATIONS UIL Holdings Corporation Results of Operations: 2001 Actual Earnings vs. - ------------------------------------------------------------------------- Previous Estimate - ----------------- Net Income for UIL Holdings Corporation (UIL Holdings) was $59.4 million in 2001, or $4.21 per share. This was above the top of the estimated 2001 range of $4.05 - $4.15 reported in UIL Holdings' earnings release dated July 23, 2001 and reaffirmed in its earnings release dated October 22, 2001. UIL Holdings' utility subsidiary, United Illuminating (UI), hit the top of its range and UIL Holdings' non-utility subsidiary, United Resources (URI), exceeded its top range despite the poorer than expected performance of passive investments reflecting poor financial market conditions. URI's Xcelecom, Inc. (Xcelecom) subsidiary experienced significant earnings growth in 2001, offsetting the losses in some of URI's passive investments. 2001 VS. 2000 - ------------- UIL Holdings Corporation Results of Operations: 2001 vs. 2000 - -------------------------------------------------------------- Compared to 2000 net income of $60.8 million, or $4.32 per share, UIL Holdings' 2001 earnings decreased by $1.4 million, or $0.11 per share. The reduction was due primarily to the absence of net one-time gains of $0.9 million, or $0.06 per share, recorded in 2000, to higher amortization of regulatory assets as mandated for 2001 in UI's retail electric Rate Plan, and to lower investment returns on UI's pension plan assets resulting from poor financial market - 19 - conditions. These reductions were offset, in large part, by improved Nuclear Division performance due to shorter outages in 2001 compared to 2000, and by an improvement at the non-utility businesses to more than twelve times the income earned in 2000. The non-utility business improvement was driven by Xcelecom's acquisition strategy, which was partially offset by losses in some of URI's passive investments. The total impact of poor financial market performance on UIL Holdings' 2001 earnings was about $0.50 per share. Absent this factor, UIL Holdings would have earned about $4.71 per share in 2001, or a 9% increase over 2000 earnings. The table below represents a comparison of UIL Holdings' Net Income and Earnings Per Share for 2001 and 2000. 2001 more (less) than 2000 Year Ended Year Ended -------------------------- (In Thousands except per share data) Dec. 31, 2001 Dec. 31, 2000 Amount Percent - -------------------------------------------------------------------------------------------------- NET INCOME UI from Operations $48,036 $53,370 $(5,334) (10.0)% Nuclear Division 9,003 6,347 2,656 41.8% United Resources (Non-Utility) 2,324 182 2,142 1176.9% ------- ------- ------ TOTAL NET INCOME FROM OPERATIONS 59,363 59,899 (536) (0.9)% UI from One-time Items 0 858 (858) (100.0)% ------- ------- ------ TOTAL NET INCOME $59,363 $60,757 $(1,394) (2.3)% ====== ====== ===== EARNINGS PER SHARE UI from Operations $3.41 $3.80 $(0.39) (10.3)% Nuclear Division 0.64 0.45 0.19 42.2% United Resources (Non-Utility) 0.16 0.01 0.15 1500.0% ---- ---- ---- TOTAL EPS FROM OPERATIONS 4.21 4.26 (0.05) (1.2)% UI from One-time Items 0.00 0.06 (0.06) (100.0)% ---- ---- ---- TOTAL EPS - BASIC $4.21 $4.32 $(0.11) (2.5)% ==== ==== ==== TOTAL EPS - DILUTED (NOTE A) $4.19 $4.31 $(0.12) (2.8)% ==== ==== ==== Note (A): Reflecting the effect of dilutive stock options. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note (A), Statement of Accounting Policies - Earnings per Share, and Note (B), Capitalization - Common Stock." - 20 - The following is a line-by-line tabular summary of some lines of UIL Holdings' income statement, including comparisons between 2001 and 2000 by subsidiary. Significant variances are explained in the individual subsidiary sections that follow. 2001 more (less) than 2000 Year Ended Year Ended ---------------------------- (In Thousands) Dec. 31, 2001 Dec. 31, 2000 Amount Percent - ------------------------------------------------------------------------------------------------------- OPERATING REVENUE UI from operations, before sharing $669,476 $651,136 $18,340 2.8% UI sharing from operations (3,864) (12,701) 8,837 (69.6%) UI one-time items 0 9,642 (9,642) (100.0%) Nuclear Division 49,206 56,614 (7,408) (13.1%) URI 371,028 176,164 194,864 110.6% --------- ------- ------- Total $1,085,846 $880,855 $204,991 23.3% ========== ======== ======== FUEL AND ENERGY EXPENSE UI $264,954 $273,979 ($9,025) (3.3%) Nuclear Division 6,953 8,174 (1,221) (14.9%) --------- --------- --------- Total $271,907 $282,153 ($10,246) (3.6%) ======== ======== ========= OPERATION AND MAINTENANCE EXPENSE UI $154,460 $139,390 $15,070 10.8% Nuclear Division 22,700 32,980 (10,280) (31.2%) URI 350,797 163,617 187,180 114.9% ------- ------- ------- Total $527,957 $335,987 $191,970 57.3% ======== ======== ======== DEPRECIATION AND AMORTIZATION UI $27,448 $26,847 $601 2.2% Nuclear Division 1,485 1,714 (229) (13.3%) URI 3,878 3,278 600 76.7% ------- ------- ------- Subtotal depreciation 32,811 31,839 972 12.0% Amortization 63,317 37,874 25,443 61.6% ------- ------ ------ Total depreciation and amortization $96,128 $69,713 $26,415 37.9% ======= ======= ======= TAXES - OTHER THAN INCOME TAXES UI - Connecticut gross earnings tax $26,661 $23,715 $2,946 12.4% UI - other 15,440 16,896 (1,456) (8.6%) Nuclear Division - other 1,222 1,409 (187) (13.2%) URI - other 1,826 1,036 790 20.4% ------- ------- ------ Total $45,149 $43,056 $2,093 (7.0%) ======= ======= ====== INTEREST CHARGES UI $31,034 $31,661 ($627) (2.0%) Nuclear Division 1,777 2,111 (334) (15.8%) URI 10,728 10,727 1 0.0% ------ ------ ----- Total $43,539 $44,499 ($960) (2.2%) ======= ======= ===== INCOME TAXES UI $39,840 $43,416 ($3,576) (7.3%) Nuclear Division 6,091 4,173 1,918 46.0% URI 2,260 440 1,820 374.3% ------- -------- ----- Total $48,191 $48,029 $162 0.1% ======= ======= ==== - 21 - United Illuminating Results of Operations: 2001 vs. 2000 - --------------------------------------------------------- Results for 2001 for UI, excluding the Nuclear Division and one-time items, decreased by $0.39 per share compared to 2000. The Nuclear Division earned $0.64 per share in 2001, an increase of $0.19 per share compared to 2000. 2001 more (less) than 2000 Year Ended Year Ended -------------------------- Dec. 31, 2001 Dec. 30, 2000 Amount Percent - ------------------------------------------------------------------------------------------------------- EPS FROM OPERATIONS (BASIC) UI excluding Nuclear Division and Sharing $3.72 $4.81 $(1.09) (22.7)% Sharing (0.31) (1.01) 0.70 - - ---- ---- ---- Subtotal UI excluding Nuclear 3.41 3.80 (0.39) (10.3)% Nuclear Division 0.64 0.45 0.19 42.2% ---- ---- ---- Total UI EPS from operations $4.05 $4.25 $(0.20) (4.7)% ==== ==== ==== RETAIL GWH SALES (MILLIONS OF KWH) 5,724 5,654 70 1.3% UI EXCLUDING THE NUCLEAR DIVISION Excluding the Nuclear Division, UI's net income from operations was $48.0 million, or $3.41 per share, in 2001 compared to $53.4 million, or $3.80 per share, in 2000. The $0.39 per share decrease was due primarily to the $8.0 million increase on a pre-tax basis ($6.8 million after-tax) in accelerated amortization expense that went into effect on January 1, 2001 as part of the retail electric Rate Plan, and to a $13.1 million decrease in pre-tax earnings ($7.7 million after-tax) as a result of lower investment returns on UI's pension plan assets. These increased costs caused almost all of UI's pre-sharing earnings reduction in 2001 compared to 2000, and were partly offset by an attendant $0.70 per share reduction in "sharing." In 2001, earnings for the Distribution Division that exceeded 11.5%, on an annual basis, were "shared," one-third for customer bill reductions, one-third to accelerate amortization of assets, and one-third retained as earnings. The details below explain the variances for all of UI excluding the Nuclear Division. It should be noted that changes to income and expense items in the Distribution Division had an immediate net income impact in 2001, while changes to those items in "other unbundled utility divisions" did not. Those divisions include the Competitive Transition Assessment (CTA) and the Systems Benefits Charge (SBC), both of which earned an 11.5% return on the equity portion of their respective rate bases. That return was achieved by either accruing additional amortization expenses, or by deferring such expenses, as required. Amortization expenses in those divisions impacted earnings indirectly through changes to rate base. The "other unbundled utility divisions" also include the Generation Service Charge (GSC), the Conservation and Load Management (C&LM) charge, and the Renewables charge. Those were pass-through charges. Except for a small management fee earned in the C&LM division, expenses were either accrued or deferred such that there was no net income associated with those divisions. Overall, UI's total revenue increased by $17.5 million in 2001, from $648.1 million in 2000 to $665.6 million in 2001. Details of this change in revenue are: - 22 - In Millions From From Retail Revenue Increase/(Decrease) Operations One-Time Items Total - ----------------------------------------------------------------------------------------------- Revenue from Distribution Division: Estimate of operating Distribution Division component of "weather corrected" retail sales growth, 0.2% $0.5 $0.5 Estimate of operating Distribution Division component of weather effect on retail sales, 1.4% 4.1 4.1 Impact of Leap Year 2000, (0.3)% (0.8) (0.8) Impact of mix of sales on average price and other 0.3 0.3 Sharing revenues 8.8 $5.3 14.1 ----- ---- ---- TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION 12.9 5.3 18.2 REVENUE FROM OTHER UNBUNDLED UTILITY DIVISIONS 6.6 - - 6.6 ----- ---- ---- TOTAL UI RETAIL REVENUE 19.5 5.3 24.8 Other Operating Revenue Increase (Decrease) NEPOOL transmission revenues 6.3 6.3 Other transmission 1.0 1.0 Millstone Unit 3 litigation settlement (2000) (15.0) (15.0) Other (0.5) - - (0.5) --- ----- --- TOTAL UI OTHER OPERATING REVENUES 6.8 (15.0) (8.2) UI WHOLESALE PASS-THROUGH REVENUE 0.9 - - 0.9 --- ----- --- TOTAL UI REVENUES $27.2 $(9.7) $17.5 ==== === ==== Retail fuel and energy expense decreased by $9.7 million in 2001 compared to 2000. UI has received, and expects to 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 GSC portion of UI's unbundled retail customer rates. It should be noted that a small number of customers have selected alternate suppliers to provide generation services, but this has no effect on UI's financial results. UI's wholesale energy expense increased by $0.6 million, but these costs are passed on to customers through the CTA. UI's operation and maintenance expense increased by $15.1 million, from $139.4 million in 2000 to $154.5 million in 2001. The principal components of these expense changes included: In Millions Increase/ Operating Distribution Division: (Decrease) - -------------------------------------------------------------------------- Investment returns on UI's pension plan assets (Note A) $13.1 NEPOOL transmission expense 4.5 Severance costs 4.5 Other (1.4) --- TOTAL OPERATING DISTRIBUTION DIVISION $20.7 O&M AND CAPACITY FROM OTHER UNBUNDLED UTILITY DIVISIONS (5.6) --- TOTAL O&M EXPENSE $15.1 ==== Note A: This cost increase reflects deteriorating conditions in the financial markets over the past twenty-one months. Amortization of regulatory assets increased in 2001 compared to 2000 by $22.4 million ($12.7 million after-tax). The principal components of this change were: - 23 - In Millions Increase in Amortization of regulatory assets: As Booked After-tax - -------------------------------------------------------------------------------- Distribution Division: Accelerated amortization $8.0 $6.8 "Sharing" from operations (5.7) (4.9) --- --- TOTAL DISTRIBUTION DIVISION 2.3 1.9 Amortization in CTA and SBC 23.5 13.8 ---- ---- AMORTIZATION OF REGULATORY ASSETS EXCL./ ONE-TIME 25.8 15.7 One-time "Sharing" amortization (3.4) (3.0) --- --- TOTAL AMORTIZATION OF REGULATORY ASSETS $22.4 $12.7 ==== ==== NUCLEAR DIVISION The Nuclear Division contributed net income of $9.0 million, or $0.64 per share, in 2001 compared to $6.3 million, or $0.45 per share, in 2000. The earnings improvement was driven by O&M expense reductions of $10.3 million in 2001 compared to 2000. About $3.5 million of the reduction occurred at the Seabrook nuclear generating unit, primarily due to the absence of major outage costs incurred at the end of 2000; and $6.8 million of the reduction occurred at the Millstone Unit 3 nuclear generating unit, primarily due to the sale of that unit on March 31, 2001. Wholesale sales margin (revenues less energy expense) decreased by $6.2 million in 2001 compared to 2000. Wholesale sales revenues decreased by about $7.4 million in 2001 compared to 2000. Revenues for Seabrook increased by $3.1 million, but revenues for Millstone Unit 3 decreased by $10.5 million as a result of its sale. Energy expense decreased by $1.2 million, due to a $1.5 million decrease at Millstone partly offset by a $0.3 million increase at Seabrook. UI's ownership share of Millstone Unit 3 was sold on March 31, 2001. There was no direct impact on financial results in 2001, and net-of-tax proceeds from the sale that were in excess of the market value of the plant, as set by the DPUC, were credited to the CTA plant balances and rate base. That amount was approximately $15.3 million and is subject to true-up by the DPUC. United Resources Results of Operations: 2001 vs. 2000 - ------------------------------------------------------ 2001 more (less) than 2000 Year Ended Year Ended -------------------------- Dec. 31, 2001 Dec. 31, 2000 Amount Percent - --------------------------------------------------------------------------------------------------------- EPS FROM OPERATIONS (BASIC AND DILUTED) Operating Businesses American Payment Systems, Inc. (APS) $(0.01) $0.15 $(0.16) (107)% Xcelecom, Inc. (Xcelecom) 0.44 0.15 0.29 193% ---- ---- ---- SUBTOTAL OPERATING BUSINESSES 0.43 0.30 0.13 43% Passive Investments United Bridgeport Energy, Inc. (UBE) 0.26 (0.19) 0.45 - - United Capital Investments, Inc. (UCI) (0.28) 0.11 (0.39) (355)% ---- ---- ---- SUBTOTAL PASSIVE INVESTMENTS (0.02) (0.08) 0.06 - - URI HEADQUARTERS (NOTE A) (0.25) (0.21) (0.04) (19)% ---- ---- ---- TOTAL NON-UTILITY EPS FROM OPERATIONS $0.16 $0.01 $0.15 1500% ==== ==== ---- Note (A): Includes financial leveraging, strategic and administrative costs of the non-utility business units. - 24 - Overall, the consolidated non-utility businesses operating under the parent, URI, earned approximately $2.3 million, or $0.16 per share in 2001 compared to about $0.2 million, or $0.01 per share in 2000. Operating revenue for the URI businesses increased by $194.9 million, or 111%, from $176.2 million in 2000 to $371.0 million in 2001. Expenses for the URI businesses, including cost of goods sold, selling and administrative expenses, increased by $187.2 million in 2001 compared to 2000. Operating revenue and expense increases were due primarily to the acquisition of other companies. The results of each of the subsidiaries of URI for 2001, 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. The targeted capital structures for each of URI's subsidiaries are: 100% equity for APS and UCI, 65% equity and 35% debt for Xcelecom, and 30% equity and 70% debt for UBE. URI absorbs interest charges on the equity portion of its investments in its subsidiaries to the extent those investments are financed with debt. URI may incur other expenses necessary to manage its investments from time to time. The following is a detailed explanation of these variances by URI subsidiary. URI OPERATING BUSINESSES AMERICAN PAYMENT SYSTEMS, INC. APS lost $0.01 per share in 2001 compared to earnings of $0.15 per share in 2000. Earnings at the core business improved by $0.04 per share year-over-year, to $0.19 per share, but overall earnings decreased due to higher business development and selling expenses, including the marketing, sales and information technology staffing and infrastructure associated primarily with the implementation of APS's strategic growth plans. Overall, the number of transactions processed by APS increased by 5% in 2001 compared to 2000, and revenues increased by 55%, from $37.9 million to $58.6 million. XCELECOM, INC. Xcelecom earned $0.44 per share in 2001 compared to $0.15 per share in 2000. The increase was due primarily to acquisitions made by Xcelecom during 2001 and an overall improvement in profitability from 1.6% to 2% of sales. Operating revenue increased by $174 million from $138 million in 2000 to $312 million in 2001, due primarily to acquisitions but also to a 14.8% growth in same store sales. URI PASSIVE INVESTMENTS UNITED BRIDGEPORT ENERGY, INC. UBE contributed $0.26 per share in 2001 compared to a loss of $0.19 per share in 2000. The loss in 2000 was due to mild weather that depressed energy sales prices, high gas prices that further reduced margins, an extended shutdown throughout the first half of the year, and a contract termination charge. In 2001, UBE entered into an agreement with Duke Energy Trading and Marketing that effectively eliminated the operating and margin risks that occurred in 2000, resulting in the improved performance. See the "Looking Forward" section for more information on issues involving UBE's Installed Capacity revenues. UNITED CAPITAL INVESTMENTS, INC. UCI lost $0.28 per share in 2001 compared to earnings of $0.11 per share in 2000. The loss in 2001 was due to losses on passive investments. The earnings in 2000 were due to unrealized gains on passive investments. URI HEADQUARTERS URI Headquarters incurred an after-tax loss of $3.4 million, or $0.25 per share, in 2001 compared to a loss of $2.8 million, or $0.21 per share, in 2000. The results of each of the subsidiaries of URI, as presented above, reflect - 25 - 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. The loss increase at URI Headquarters reflects additional administrative expenses incurred for managing investments. 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 - 26 - portions of the decreases in miscellaneous operation and maintenance expense, depreciation and property taxes due to the sale of generating plants. 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: - 27 - $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 has created a regulatory asset and noncurrent liability to reflect the above market costs of its wholesale purchased power agreements, 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. - 28 - 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 stock equity. Beginning in 2000, these accelerated amortizations are charged to the operating Distribution Division, and 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 its 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-UTILITY 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-utility business units. Overall, the consolidated non-utility 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 - 29 - $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-utility 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. 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, - 30 - 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 OF UIL HOLDINGS CORPORATION (UIL HOLDINGS). 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 2002 - -------------- UIL HOLDINGS' CONSOLIDATED EARNINGS ESTIMATES FOR 2002 UIL Holdings expects that its 2002 earnings will be $4.10-$4.25 per share. The negative impact on UBE earnings due to a budget change made by Duke Bridgeport Energy, LLC (an indirect wholly-owned subsidiary of Duke Energy Corporation), the managing partner of Bridgeport Energy LLC (BE), offset in part by an expected earnings improvement in The United Illuminating Company's Nuclear Division, leads UIL Holdings to a current expectation that earnings for 2002 will be in the lower end of this range for the year, and in the lower end of the range estimated for the first quarter of 2002. Compared to 2001 results, the annual range reflects lower earnings estimates for UI, the effects of the slowing economy, and lowered results and expectations from passive investments at United Resources, Inc. (URI). URI's operating businesses are expected, overall, to produce an increase in earnings in 2002. See below for further details. UIL HOLDINGS' CASH FLOW UIL Holdings' cash flow available for dividends, investment and reduction of capital is expected to remain strong in 2002. UIL Holdings employs a balanced approach of maintaining its strong dividend yield while prudently investing internally generated cash in growth potential businesses or, if such investment opportunities are not available, in reducing its capital costs. THE UNITED ILLUMINATING COMPANY (UI) RATE-RELATED REGULATORY PROCEEDINGS In an October 31, 2001 decision, the Connecticut Department of Public Utility Control (DPUC) found that UI's return on regulated utility common stock equity was not expected to exceed 11.5% in 2002, but that just and reasonable retail electric rates for UI could only be determined in the context of a full Rate Case proceeding, which is currently in progress. UI filed Rate Case schedules in November 2001, together with supporting pre-filed sworn written testimony. DPUC hearings have been scheduled for March and April 2002. UI anticipates a final decision in this Rate Case proceeding by mid-2002. UI cannot predict the outcome of the Rate Case, but strongly supports a rate plan that is similar to the plan that is presently in place. UI's earnings guidance for 2002 assumes that retail rates will not change as a result of the Rate Case proceeding, and that UI will be allowed to earn an 11.5% return on the regulated utility common stock equity portion of its rate base, the same return it was allowed in 2001. Current earnings estimates for UIL Holdings anticipate that UI will earn an 11.5% allowed return. UI also currently estimates that it will not exceed that return in 2002 and that there will be no "sharing" earnings in 2002. UI EARNINGS ESTIMATES FOR 2002 Overall, UI, including the Nuclear Division, is expected to contribute $3.75-$3.90 to UIL Holdings' earnings per share in 2002. This reflects projections presented by UI in its Rate Case filing. If UI were to earn an 11.5% return on regulated utility common stock equity, excluding the Nuclear Division, that level of earnings would generate $3.30-$3.40 per share for UIL Holdings. - 31 - Under the current rate plan, UI is allowed to earn an 11.5% return on the equity portions of the Competitive Transition Assessment (CTA) and the Systems Benefits Charge (SBC) rate bases (the latter is minimal), no more and no less. Amortization of the regulatory assets that are being recovered in the CTA includes several parts: straight-line amortization of generation regulatory assets based on what would be the remaining normal book lives of those assets, amortization of other regulatory assets as prescribed by the DPUC, any accelerated amortization and/or sharing amortization incurred by the Distribution Division, and a "true-up" amount of amortization. This true-up, comprised of deferred accounting or accelerated amortization, occurs if CTA revenues and expenses, including amortization expense, would produce a return more or less than the allowed return. In either case, the true-up amortization impacts the rate base, keeping it higher than it would otherwise be in the case of a shortfall in return, and reducing it in the case that the return would be higher than 11.5%. The true-up also adjusts for sales volume fluctuations as well as pricing factors. A similar adjustment, on a much less significant scale, applies to the SBC component. In the long-term, the amortization and other expenses associated with these regulatory assets continue only until all of the regulatory assets are recovered. The generation services, conservation and renewables charges are pass-through charges, based on retail rates that were set by the DPUC for the standard offer period through 2003. In the case of generation service, UI has contracted with Virginia Electric and Power Company for the supply of all of UI's retail customer standard offer service requirements through December 31, 2003, on a fixed-price basis. This arrangement is intended to protect UI's retail customers and UIL Holdings' shareowners from the type of market and pricing volatility that has been experienced in California. The only retail electricity sales volume fluctuations that directly impact UI's net income are those that apply to the operating Distribution Division component of rates. Thus, a 1% sales volume increase would produce additional sales margin of about $2.4 million, $2.1 million after gross earnings tax, in 2002. NUCLEAR DIVISION EARNINGS ESTIMATES FOR 2002 The Nuclear Division contributed $0.64 per share to UIL Holdings' results for 2001. A refueling outage is scheduled for the second quarter of 2002 at the Seabrook nuclear generating unit. Assuming the unit operates normally for the remainder of the year, the contribution to earnings in 2002 of the unit should be about $0.50-$0.55 per share. It is possible for earnings to improve slightly from the estimated level if the unit operates at or near its full capacity. The 2002 estimate assumes that UI's share of Seabrook Station will be sold around the end of 2002. There will be no direct impact on financial results at the time of sale. As with the Millstone Unit 3 sale in 2001, net-of-tax proceeds from the sale that are in excess of the market value of the plant, as determined by the DPUC, will be credited to the CTA plant balances and rate base. UNITED RESOURCES, INC. (URI) EARNINGS ESTIMATES FOR 2002 UIL Holdings' non-utility businesses, under the parent URI, are expected to earn $0.15-$0.30 per share for UIL Holdings in 2002. AMERICAN PAYMENTS SYSTEMS, INC. (APS) APS is expected to earn between $(0.05) and $0.00 per share for UIL Holdings in 2002. The expected results reflect anticipated strategic expenses designed to produce future earnings enhancements in the non-contracted payment and financial services segments of its business. Management's experience with Xcelecom, Inc. 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. APS has made acquisitions and investments in 2001, giving it the ability to both grow its agent base and to diversify further its products and services. APS's earnings from its traditional core business grew by approximately 27% in 2001. - 32 - XCELECOM, INC. Earnings for Xcelecom are expected to grow to approximately $0.60-$0.65 per share for UIL Holdings in 2002 from the $0.44 per share earned in 2001. This estimate reflects a $0.15 per share increase due to a reduction in the amortization of goodwill from the implementation of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." It also takes into account the impact of the slowing economy on the construction and systems integration industry, and the completion of several large, non-recurring contracts in 2001. Backlog in Xcelecom's construction units amounted to approximately four months of work at December 31, 2001. In the course of operations, Xcelecom is subject to certain risk factors, including but not limited to: exposure to downturns in the economy, risks related to its acquisition strategy, risks related to management of internal growth, availability of qualified employees, competition, seasonality, risks associated with contracts, significant fluctuations in quarterly results, recoverability and possible impairment of goodwill, collectibility of receivables, dependence on key personnel, and risks associated with the availability of capital and with debt service. URI PASSIVE INVESTMENTS Losses from URI's passive investments, including headquarters' costs, are expected to be $0.30-$0.45 per share for UIL Holdings in 2002. This estimate contemplates no investment income at United Capital Investments, Inc. URI's passive investment in United Bridgeport Energy, Inc. (UBE) is expected to lose from $0.00-$0.10 per share for UIL Holdings in 2002. This reduction from the estimated UBE earnings contribution of $0.05-$0.10 per share announced on January 28, 2002 is due to the impact of a subsequent budget change made by Duke Bridgeport Energy, LLC (an indirect wholly-owned subsidiary of Duke Energy Corporation), the managing partner of Bridgeport Energy LLC (BE). UBE's expected results also assume the realization of UBE's 33 1/3% portion of the revenues of BE related to the market value of the Installed Capacity (ICAP) of its merchant wholesale electric generating facility in Bridgeport, Connecticut. BE's ICAP customer is currently disputing its contract with BE. The Federal Energy Regulatory Commission (FERC), in an order issued August 28, 2001, re-affirmed the value of the ICAP market in New England as a necessary reliability function. The FERC order also set a deficiency charge price for ICAP at a level that supports BE's contract price. The ICAP revenues accrued from June 2000 through December 2001 that are in dispute are equivalent to approximately $0.49 per share for UIL Holdings. Management believes that BE will prevail on this issue, although there can be no assurance that it will. BE is continuing to record ICAP revenues pursuant to the existing terms of the ICAP contract, and the loss of these revenues would reduce UIL Holdings' earnings in 2002 by approximately $0.29 per share. UBE's agreement with Duke Energy Trading and Marketing that mitigated UBE's exposure to operating and margin risks in 2001 expired at the end of the year. Another agreement is currently being negotiated for 2002. However, if an agreement is not reached, UBE will have increased exposure to these risks, which include mild weather, volatility in energy and gas prices and operational issues at the BE generating facility. QUARTERLY EARNINGS PATTERN FOR 2002 - ----------------------------------- The 2002 quarterly earnings pattern for UIL Holdings is expected to be somewhat different from the 2001 pattern. A nuclear generating unit outage scheduled for the second quarter of 2002, and an outage at BE beginning in March 2002 are expected to reduce second quarter earnings compared to the second quarter of 2001. The elimination of UI earnings "sharing" in the third and fourth quarters of 2002 is expected to enhance earnings compared to the comparable quarters of 2001. Actual 2002 results may vary from estimates depending on changes due to weather, economic conditions, sales mix (the usage pattern of the UI Distribution Division's retail customers), the ability to control expenses, the outcome of the UI Rate Case, and other unanticipated events. These factors can change from quarter to quarter. UIL Holdings' current overall estimate of earnings per share from operations for 2002 is $4.10-$4.25, and the estimates of quarterly results are as follows: - 33 - Earnings per share from operations: Estimated Actual Quarter 2002 Range* 2001 ------- ---------- ---- 1 $0.65 -$0.70 $0.67 2 $0.55 -$0.65 $1.08 3 $1.85 -$1.95 $1.77 4 $0.95 -$1.05 $0.69 ---- $4.21 * Quarterly high and low range estimates are not additive, that is, the sums of the low and high range values should not be construed as representing any estimate other than UIL Holdings' annual estimate of $4.10-$4.25 per share. - 34 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. UIL HOLDINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 1999 ---- ---- ---- OPERATING REVENUES (NOTE G) Utility $ 714,818 $ 704,691 $ 679,975 Non-utility businesses 371,028 176,164 70,755 ----------- ----------- ----------- Total Operating Revenues 1,085,846 880,855 750,730 ----------- ----------- ----------- OPERATING EXPENSES Operation Fuel and energy 271,907 282,153 159,403 Operation and maintenance 527,957 335,987 290,158 Depreciation and amortization (Note G) 96,128 69,713 97,434 Taxes - other than income taxes (Note G) 45,149 43,056 47,140 ----------- ----------- ----------- Total Operating Expenses 941,141 730,909 594,135 ----------- ----------- ----------- OPERATING INCOME 144,705 149,946 156,595 ----------- ----------- ----------- OTHER INCOME, NET (NOTE G) 6,388 3,339 4,921 ----------- ----------- ----------- INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 151,093 153,285 161,516 ----------- ----------- ----------- INTEREST CHARGES, NET Interest on long-term debt 42,848 38,199 42,104 Interest on Seabrook obligation bonds owned by UI (6,319) (6,470) (6,844) Dividend requirement of mandatorily redeemable securities - 3,529 4,813 Other interest, net (Note G) 4,854 5,253 4,927 ----------- ----------- ----------- 41,383 40,511 45,000 Amortization of debt expense and redemption premiums 2,156 3,988 2,392 ----------- ----------- ----------- Interest Charges, net 43,539 44,499 47,392 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 107,554 108,786 114,124 ----------- ----------- ----------- INCOME TAXES (NOTE F) 48,191 48,029 61,900 ----------- ----------- ----------- NET INCOME 59,363 60,757 52,224 Premium on preferred stock redemptions - - 53 Dividends on preferred stock - - 66 ----------- ----------- ----------- INCOME APPLICABLE TO COMMON STOCK $ 59,363 $ 60,757 $ 52,105 =========== =========== =========== AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,097 14,073 14,052 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,159 14,098 14,055 EARNINGS PER SHARE OF COMMON STOCK - BASIC $ 4.21 $ 4.32 $ 3.71 EARNINGS PER SHARE OF COMMON STOCK - DILUTED $ 4.19 $ 4.31 $ 3.71 CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 2.88 $ 2.88 $ 2.88 - ---------------------------------------------------------------------------------------------------------- UIL HOLDINGS CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 1999 ---- ---- ---- NET INCOME $ 59,363 $ 60,757 $ 52,105 OTHER COMPREHENSIVE INCOME, NET OF TAX: UNREALIZED GAIN ON INVESTMENT 519 - - ----------- ----------- ----------- COMPREHENSIVE INCOME $ 59,882 $ 60,757 $ 52,105 =========== =========== =========== The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. - 35 - UIL HOLDINGS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Thousands of Dollars) 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 59,363 $ 60,757 $ 52,224 --------------- --------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 81,134 66,068 83,374 Deferred income taxes (18,053) 10,435 17,451 Deferred income taxes-generation asset sale - - (70,222) Deferred investment tax credits - net (658) (735) (467) Amortization of nuclear fuel 5,497 6,521 8,425 Allowance for funds used during construction (1,913) (2,609) (2,235) CTA and SBC regulatory deferral (2,016) (23,098) - Amortization of deferred return - - 12,586 Changes in: Accounts receivable - net (23,130) (12,646) 7,334 Materials and supplies (2,378) (457) (1,202) Prepayments (408) 181 4,368 Settlement assets 24,062 (37,047) 1,415 Accounts payable (13,330) (4,737) (24,226) Interest accrued 2,591 95 (1,770) Taxes accrued 1,844 1,275 (6,446) Settlement obligations (2,752) 38,880 26,251 Other assets and liabilities 47,095 (1,565) (8,387) --------------- --------------- -------------- Total Adjustments 97,585 40,561 46,249 --------------- --------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 156,948 101,318 98,473 --------------- --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuances of: Common stock 2,536 517 1,157 Long-term debt 75,000 - 25,000 Notes payable (78,056) 93,568 (69,761) Securities redeemed and retired: Preferred stock - - (4,299) Long-term debt (665) (26,609) (218,008) Company obligated mandatorily redeemable securities of subsidiary holding solely parent debentures - (50,000) - Discount on preferred stock redemptions - - (53) Expenses of issuances (825) - (550) Lease obligations (405) (376) (348) Dividends Preferred stock - - (116) Common stock (40,576) (40,517) (40,450) --------------- --------------- -------------- NET CASH USED IN FINANCING ACTIVITIES (42,991) (23,417) (307,428) --------------- --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired (22,995) (49,371) - Non-utility passive investments (3,773) - (88,489) Net cash received from sale of generation assets - - 270,590 Plant expenditures, including nuclear fuel (47,370) (54,191) (34,772) Investment (retirement) in debt securities, net (1,162) 4,778 5,447 --------------- --------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (75,300) (98,784) 152,776 --------------- --------------- -------------- CASH AND TEMPORARY CASH INVESTMENTS: NET CHANGE FOR THE PERIOD 38,657 (20,883) (56,179) BALANCE AT BEGINNING OF PERIOD 47,439 68,322 124,501 --------------- --------------- -------------- BALANCE AT END OF PERIOD 86,096 47,439 68,322 LESS: RESTRICTED CASH 56,596 33,202 29,223 --------------- --------------- -------------- BALANCE: UNRESTRICTED CASH AND TEMPORARY CASH INVESTMENTS $ 29,500 $ 14,237 $ 39,099 =============== =============== ============== CASH PAID DURING THE PERIOD FOR: Interest (net of amount capitalized) $ 37,980 $ 35,252 $ 40,020 =============== =============== ============== Income taxes $ 64,300 $ 36,900 $ 121,450 =============== =============== ============== The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. - 36 - UIL HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 AND 2000 ASSETS (Thousands of Dollars) 2001 2000 ---- ---- Current Assets Unrestricted cash and temporary cash investments $ 29,500 $ 14,237 Restricted cash 56,596 33,202 Utility accounts receivable less allowance of $1,500 and $1,500 58,607 53,453 Other accounts receivable less allowance of $1,522 and $1,069 105,576 65,525 Settlement assets 47,119 71,181 Unbilled revenues 35,737 36,694 Materials and supplies, at average cost 14,528 10,938 Prepayments 3,299 2,875 Other 1,005 201 -------------------- -------------------- Total Current Assets 351,967 288,306 -------------------- -------------------- Other Property and Investments Investment in United Bridgeport Energy facility 92,059 90,284 Nuclear decommissioning trust fund assets 26,269 32,844 Marketable securities 3,954 - Other 6,575 7,862 -------------------- -------------------- Total Other Property and Investments 128,857 130,990 -------------------- -------------------- Property, Plant and Equipment at original cost In service 914,085 962,485 Less, accumulated depreciation 420,743 466,635 -------------------- -------------------- 493,342 495,850 Construction work in progress 32,103 30,267 Nuclear fuel 20,973 24,536 -------------------- -------------------- Net Property, Plant and Equipment 546,418 550,653 -------------------- -------------------- Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS THROUGH THE RATEMAKING PROCESS) Nuclear plant investments-above market 477,396 497,829 Income taxes due principally to book-tax differences 86,114 123,043 Long-term purchase power contracts-above market 112,250 128,328 Connecticut Yankee 21,291 24,272 Unamortized redemption costs 21,172 22,293 Other 44,752 44,628 -------------------- -------------------- Total Regulatory Assets 762,975 840,393 -------------------- -------------------- Deferred Charges Goodwill 63,456 51,508 Unamortized debt issuance expenses 5,208 5,477 Other 5,050 1,227 -------------------- -------------------- Total Deferred Charges 73,714 58,212 -------------------- -------------------- Total Assets $ 1,863,931 $ 1,868,554 ==================== ==================== The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. - 37 - UIL HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 AND 2000 LIABILITIES AND CAPITALIZATION (Thousands of Dollars) 2001 2000 ---- ---- Current Liabilities Notes payable $ 33,215 $ 110,699 Current portion of long-term debt 100,000 - Accounts payable 40,716 54,046 Settlement obligations 92,348 95,100 Dividends payable 10,163 10,135 Accrued liabilities 103,374 63,988 Taxes accrued 6,373 3,845 Interest accrued 11,119 8,528 Obligations under capital leases 438 405 -------------------- -------------------- Total Current Liabilities 397,746 346,746 -------------------- -------------------- Noncurrent Liabilities Purchase power contract obligation 112,250 128,328 Nuclear decommissioning obligation 26,269 32,844 Connecticut Yankee contract obligation 14,969 17,157 Long-term notes payable 12,788 9,774 Obligations under capital leases 15,288 15,725 Other 13,689 14,432 -------------------- -------------------- Total Noncurrent Liabilities 195,253 218,260 -------------------- -------------------- Deferred Income Taxes (FUTURE TAX LIABILITIES OWED TO TAXING AUTHORITIES) 221,727 252,809 -------------------- -------------------- Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS THROUGH THE RATEMAKING PROCESS) Accumulated deferred investment tax credits 13,764 14,422 Deferred gains on sale of property 29,827 15,978 Customer refund 3,657 17,976 Other 3,405 1,097 Commitments and Contingencies (Note L) - - -------------------- -------------------- Total Regulatory Liabilities 50,653 49,473 -------------------- -------------------- Capitalization (Note B) Long-term debt Long-term debt 579,264 604,856 Investment in Seabrook obligation bonds (80,707) (82,635) -------------------- -------------------- Net long-term debt 498,557 522,221 -------------------- -------------------- Common Stock Equity Common stock (no par value, 14,115,781 and 14,076,697 shares outstanding at December 31, 2001 and 2000) 291,788 291,342 Paid-in capital 2,760 2,483 Unrealized gain on investment 519 - Capital stock expense (2,170) (2,170) Unearned employee stock ownership plan equity (7,361) (8,310) Retained earnings 214,459 195,700 -------------------- -------------------- Net Common Stock Equity 499,995 479,045 Total Capitalization 998,552 1,001,266 -------------------- -------------------- Total Liabilities and Capitalization $ 1,863,931 $ 1,868,554 ==================== ==================== The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. - 38 - UIL HOLDINGS CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY DECEMBER 31, 2001, 2000 AND 1999 (DOLLAR AMOUNTS IN THOUSANDS) UNREALIZED CAPITAL UNEARNED COMMON STOCK PREFERRED STOCK PAID-IN GAIN ON STOCK ESOP RETAINED SHARES(A) AMOUNT SHARES(B) AMOUNT CAPITAL INVESTMENT EXPENSE EQUITY EARNINGS TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- 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 - - 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 4,616 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 - - 2,483 - (2,170) (8,310) 195,700 479,045 - ----------------------------------------------------------------------------------------------------------------------------------- Net income for 2001 59,363 59,363 Cash dividends on common stock - $2.88 per share (40,604) (40,604) Issuance of 11,144 shares common stock - no par value 11,144 446 40 486 Unrealized gain on investment 519 519 Allocation of benefits - ESOP 27,940 237 949 1,186 - ----------------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 2001 14,115,781 $291,788 - $- $2,760 $519 $(2,170) $(7,361) $214,459 $499,995 - ----------------------------------------------------------------------------------------------------------------------------------- (a) There were 30,000,000 shares authorized in 2001, 2000 and 1999. (b) There were 5,000,000 shares authorized in 2001 and 2000 and 1,119,612 shares authorized in 1999. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. - 39 - 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). 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 730,000, 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 140,000) 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 2001 retail electric revenues, approximately 42% were derived from residential sales, 41% from commercial sales, 15% from industrial sales and 2% from other sales. URI serves as the parent company for UIL Holdings' four non-utility businesses, each of which is wholly-owned. American Payment Systems, Inc. (APS) is a service company providing electronic bill payment service to companies throughout the United States. Xcelecom, Inc. (Xcelecom) and its subsidiaries provide general and specialty electrical and voice-data-video design, construction, systems integration and related services in regional markets of the Eastern United States. A third subsidiary, United Capital Investments, Inc., invests 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. (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-utility subsidiaries are maintained in conformity with accounting principles generally accepted in the United States of America. BASIS OF 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 the current year presentation. - 40 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 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 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 utility property, plant and equipment retired or otherwise disposed of and the cost of removal, less salvage, are charged to the accumulated provision for depreciation. Upon disposal or retirement of depreciable non-utility businesses' property, the appropriate plant accounts and accumulated depreciation are reduced by the related costs. Any resulting gain or loss is recognized in the income statement. - 41 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) UIL Holdings' property, plant and equipment as of December 31, 2001 and 2000 was comprised as follows: 2001 2000 ---- ---- (In Thousands) Utility: Nuclear plant $196,852 $269,750 Transmission plant 151,280 152,218 Distribution plant 443,773 430,620 General plant 46,162 44,246 Software 29,292 28,211 Other plant 2,302 2,356 ------------ ------------- Subtotal 869,661 927,401 Non-utility business units 44,424 35,084 ------------ ------------- $914,085 $962,485 ============ ============= See Note (C), "Rate-Related Regulatory Proceedings" for a discussion of 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 2001, 2000 and 1999 were approximately 3.28%, 3.05% and 3.29%, respectively, of the original cost of depreciable property. Depreciation on non-utility businesses' plant for book purposes is recorded on a straight-line basis over the estimated useful lives of the assets, which range from three to seven years. INCOME TAXES In accordance with 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 for services rendered but not billed is accrued. - 42 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Revenues from construction contracts entered into by Xcelecom 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. Revenues generated by other business units are recognized when earned. 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. RESTRICTED CASH UI is required to maintain an operating deposit with the project disbursing agent related to its 17.5% ownership interest in Seabrook Station. 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 $3.2 million and $3.3 million at December 31, 2001 and 2000, respectively. APS 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, 2001 and 2000 was $53.0 million and $29.9 million, respectively. Xcelecom maintained restricted cash, related to future debt payments, of $0.4 million at December 31, 2001. SETTLEMENT ASSETS AND OBLIGATIONS Accounts receivable due from APS's agents and clients, as well as payables due to APS's agents and clients, are classified as settlement assets and obligations, respectively. The majority of these assets and liabilities result from timing differences between APS agents reporting the transactions to APS and depositing the funds collected into the field accounts. Additionally, settlement assets and obligations arise due to APS's reporting of transactions to its clients prior to fulfilling the payment obligation. INVESTMENTS UI's investment in the Connecticut Yankee Atomic Power Company, a nuclear generating company in which UI has a 9.5% stock interest, is accounted for on an equity basis. This investment amounted to $6.3 million and $7.1 million at December 31, 2001 and 2000, 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." MARKETABLE SECURITIES UIL Holdings accounts for its investment securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement requires the classification of debt and equity securities into one of three categories: held to maturity, available for sale, or trading. The statement also provides guidelines on accounting for debt and equity securities in accordance with their classifications. During 2001, Anthem Insurance Companies, Inc. (Anthem) completed a conversion from a mutual company, owned by policyholders, to a publicly traded company, owned by shareholders. As a result of this conversion, UIL Holdings received 62,435 shares of Anthem common stock, a portion of which was allocated to employees based on the employees' share of the premiums paid to Anthem during the period used to determine the number of shares - 43 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) issued to UIL Holdings. At December 31, 2001, the closing price for Anthem common stock was $49.50 per share. UIL Holdings recorded an investment and realized gain of approximately $3.1 million, which represented the value of the shares at December 31, 2001. In January 2002, UIL Holdings sold the 62,435 shares of Anthem common stock at a price of $50.66 and recorded a realized gain of approximately $72,000. On August 9, 2001, APS entered into a secured convertible note agreement with Q Comm International, Inc. (Q Comm), in the amount of $200,000. The note accrues interest at a rate of 6% and is due on May 31, 2002. Under terms of the note, APS has the right to convert this note into shares of Q Comm common stock. APS recorded an investment and unrealized gain of approximately $0.9 million, which represented the difference between the market price of the shares as of December 31, 2001 and the conversion price. GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accountings Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement, which modifies the accounting and reporting of goodwill and intangible assets, is effective for fiscal years beginning after December 15, 2001. Certain provisions of the statement must be applied to any acquisition consummated after June 30, 2001 ahead of full adoption of the new standards. The pronouncement requires entities to discontinue the amortization of goodwill, reallocate all existing goodwill among its reporting units based on criteria set by SFAS No. 142 and perform initial impairment tests by applying a fair-value-based analysis on the goodwill in each reporting unit. Any impairment at the initial adoption date shall be recognized as the effect of a change in accounting principle. Subsequent to the initial adoption, goodwill shall be tested for impairment annually or more frequently if circumstances indicate a possible impairment. Under SFAS No. 142, entities are required to determine the useful life of other intangible assets and amortize the value over the useful life. If the useful life is determined to be indefinite, no amortization will be recorded. For intangible assets recognized prior to the adoption of SFAS No. 142, the useful life should be reassessed. Other intangible assets are required to be tested for impairment in a manner similar to goodwill. 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 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 encompasses eligibility to receive such benefits. The recovery of annual incremental cost of this accrual has been allowed in retail rates in accordance with a 1992 rate decision of the DPUC. - 44 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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, 2001, UI's remaining share of the obligation, based on its ownership and leasehold interests in Seabrook Station, was approximately $0.6 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 $3.3 million into the decommissioning trust fund for Seabrook Unit 1 in each of 2001 and 2000. At December 31, 2001, UI's share of the trust fund balance for Seabrook Station, which included accumulated earnings on the funds, was $26.3 million. This fund balance is included in "Other Property and Investments" and the accrued decommissioning obligation is included in "Noncurrent Liabilities" on the Consolidated Balance Sheet. On March 31, 2001, UI sold its ownership interest in Millstone Unit 3 to Dominion Resources, Inc. and, as a result, its share of the trust fund balance for Millstone Unit 3 was transferred to the new owner. UI's share of the market value of the trust fund transferred was $8.5 million. IMPAIRMENT OF LONG-LIVED ASSETS 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, 2001 and 2000, UI did not have any assets that are impaired under this standard. EARNINGS PER SHARE The following table presents a reconciliation of the basic and diluted earnings per share calculations for the years 2001, 2000 and 1999: - 45 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) INCOME APPLICABLE TO AVERAGE NUMBER OF EARNINGS COMMON STOCK SHARES OUTSTANDING PER SHARE ------------ ------------------ --------- (In Thousands, except per share amounts) 2001 - ---- Basic earnings per share $59,363 14,097 $4.21 Effect of dilutive stock options - 62 (.02) ------- ------ ---- Diluted earnings per share $59,363 14,159 $4.19 ====== ====== ==== 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 ====== ====== ==== STOCK-BASED COMPENSATION UIL Holdings accounts for employee stock-based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." 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. COMPREHENSIVE INCOME Comprehensive income for 2001 included an unrealized pre-tax gain of $863,000 on APS's convertible note (see Marketable Securities). Comprehensive income for 2000 and 1999 was equal to net income as reported. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued SFAS No. 141, "Business Combinations." SFAS No. 141, which applies to all business combinations initiated after June 30, 2001, would result in UIL Holdings accounting for any business combinations initiated after that date under the purchase method of accounting. The adoption of SFAS No. 141 will not change the method of accounting used in previous business combinations. The Financial Accounting Standards Board has issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, which was adopted by UIL Holdings on January 1, 2002, UIL Holdings will no longer be amortizing its existing goodwill. At December 31, 2001, goodwill associated with its non-utility businesses was approximately $63.5 million. The elimination of goodwill amortization in 2002 will increase earnings per share by approximately $0.15 compared to 2001. In addition, UIL Holdings will be required to measure goodwill for impairment effective January 1, 2002 as part of the transition provisions. SFAS No. 142 requires goodwill to be allocated to reporting units and measured for impairment under a two-step test. The first step of the test is required to be completed by June 30, 2002 and the second step, if necessary, no later than December 31, 2002. Any impairment resulting from the transition test will be recorded as of January 1, 2002 and will be recognized as a cumulative effect of a change in accounting principle. - 46 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) UIL Holdings does not anticipate the impairment test results will have a material adverse impact on its financial condition and results of operations. The Financial Accounting Standards Board has issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement, which is effective for fiscal years beginning after June 15, 2002, requires that an asset retirement obligation be recognized at the time when an entity faces a legal obligation to retire an asset. The asset retirement cost would be capitalized as part of the related long-lived asset and initially measured at fair value and adjusted in subsequent periods when necessary. Upon adoption of the statement, a cumulative effect approach will be used to recognize transition amounts for any existing asset retirement obligations. UIL Holdings has not assessed the impact this standard will have on its financial position and results of operations. (B) CAPITALIZATION COMMON STOCK UIL Holdings had 14,332,321 shares of its common stock, no par value, outstanding at December 31, 2001 and 14,321,177 shares of its common stock, no par value, outstanding at December 31, 2000, of which 216,540 shares and 244,480 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, 2001 and 2000, 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 UIL Holdings' 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, 2001, 216,540 shares, with a fair market value of $11.1 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. 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. - 47 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Stock option transactions for 2001, 2000 and 1999 are as follows: WEIGHTED AVERAGE NUMBER OPTION PRICE EXERCISE OF SHARES PER SHARE PRICE --------- ------------- --------- Balance - December 31, 1998 16,300 $30.00-$42.38 $38.37 Granted - - - Forfeited - - - Exercised - - - --------- Balance - December 31, 1999 16,300 $30.00-$42.38 $38.37 Granted 334,605 (1) $39.41-$53.13 $41.15 Forfeited (9,100) $39.38-$50.31 $40.59 Exercised (9,075) $43.22 $43.22 --------- Balance - December 31, 2000 332,730 $30.00-$53.13 $41.00 Granted 176,633 (1) $43.22-$49.84 $45.30 Forfeited (5,333) $39.41-$43.22 $40.48 Exercised (12,023) $39.41-$43.22 $41.00 --------- Balance - December 31, 2001 492,007 $30.00-$53.13 $42.55 ========= Exercisable at December 31, 1999 16,300 $30.00-$42.38 $38.37 Exercisable at December 31, 2000 58,730 $30.00-$43.22 $41.58 Exercisable at December 31, 2001 186,822 $30.00-$53.13 $41.38 (1) One third of the options granted became exercisable on each of the first three anniversaries of the grant date. 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 2001 and 2000 would have been as follows: 2001 2000 ---- ---- (In Thousands, except Earnings per Share) Net income As reported $59,363 $60,757 Pro forma $58,732 $60,490 Earnings per share-Basic As reported $4.21 $4.32 Pro forma $4.17 $4.30 Earnings per share-Diluted As reported $4.19 $4.31 Pro forma $4.15 $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: - 48 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2001 2000 ---- ---- Risk-free interest rate 5.75% 5.08% Expected volatility 21.92% 16.51% Expected lives 7.59 years 9.09 years Expected dividend yield 6.11% 6.13% The weighted average fair value of options granted during 2001 was $6.09 per share. As of December 31, 2001, the weighted average remaining contractual life for those options outstanding was 7.4 years. The weighted average fair value of options granted during 2000 was $3.16 per share. As of December 31, 2000, the weighted average remaining contractual life for those options outstanding was 8.4 years. 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, 2001, 48,000 phantom stock options were exercisable. During 2001, $166,060 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 $94.9 million were free from such limitations at December 31, 2001. - 49 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LONG-TERM DEBT December 31, 2001 2000 ---- ---- (In Thousands) Other Long-Term Debt Pollution Control Revenue Bonds: 4.35%, 1996 Series, due June 1, 2026 (1) $ 7,500 $ 7,500 5 7/8%, 1993 Series, due October 1, 2033 64,460 64,460 Pollution Control Refunding Revenue Bonds: 4.35%, 1997 Series, due July 1, 2027 (2) 27,500 27,500 4.55%, 1997 Series, due July 1, 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 7.23% Senior Notes, Series A, due February 15, 2011 30,000 - 7.38% Senior Notes, Series B, due February 15, 2011 45,000 - Obligation under the Seabrook Unit 1 sale/leaseback agreement 208,900 209,565 ------- ------- Long-Term Debt 679,360 605,025 Unamortized debt discount less premium (96) (169) ------- ------- 679,264 604,856 Less: Current portion included in Current Liabilities 100,000 - Investment-Seabrook Lease Obligation Bonds 80,707 82,635 ------- ------- Net Long-Term Debt $498,557 $522,221 ======= ======= (1) The interest rate for these Bonds was fixed on February 1, 1999 for the five-year period ending January 31, 2004. (2) The interest rate for these Bonds was fixed on February 1, 1999 for the three-year period ending January 31, 2002. (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 million 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 million, and 7.38% Senior Notes, Series B, due February 15, 2011, in the principal amount of $45 million. Under the Senior Notes, Series A, UIL Holdings is required to prepay the principal amount of $4.3 million 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. On February 1, 2002, the interest rate on $27.5 million principal amount of Pollution Control Refunding Revenue Bonds, 1997 Series, due July 1, 2027, issued by the Business Finance Authority (BFA) of the State of New Hampshire was reset from 4.35% to 3.75%. The new interest rate will remain in effect for a two-year period through January 31, 2004. UI is obligated, under its borrowing agreement with the BFA, to pay the interest on the Bonds. Interest is payable semi-annually on August 1 and February 1. - 50 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The expenses to issue long-term debt are deferred and amortized over the life of the respective debt issue. Maturities and mandatory redemptions/repayments are set forth below: 2002 2003 2004 2005 2006 ---- ---- ---- ---- ---- (In Thousands) Maturities $100,000 $100,000 $ - $4,286 $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 retail rates regulation plan for the years 1997 through 2001 (the Rate Plan). The Rate Plan accelerated the amortization and recovery of regulatory assets if UI's common stock equity return on regulated utility investment exceeded 10.5% after recording the amortization. UI's authorized return on regulated utility common stock equity during the period was 11.5%. Earnings above 11.5%, on an annual basis, were utilized one-third for customer bill reductions, one-third to accelerate amortization of regulatory 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 superseded the rates that were included in the Rate Plan. The decision also reduced the required amount of accelerated amortization of assets in 2000 and 2001. Under this 1999 decision, all other components of the 1996 Rate Plan remained in effect through 2001. On February 13, 2001, the Connecticut Attorney General and the Office of Consumer Counsel petitioned the DPUC to initiate a proceeding and hold a hearing concerning the need to decrease UI's rates by reason of UI having earned a return on regulated common equity more than 1% above the authorized level of 11.5% for at least six consecutive months. The DPUC docketed such a proceeding and, by a letter dated July 3, 2001, stated its intention to combine a full review of UI's retail rates (a Rate Case) in the same docket as the overearnings proceeding. Following hearings on August 8, 2001 and August 27, 2001, the DPUC issued a final decision on October 31, 2001 holding that as a result of the earnings sharing mechanism embedded in UI's Rate Plan, UI's customers have directly benefited when UI has earned over its 11.5% authorized return on regulated common equity during the Rate Plan period. Because the earnings sharing mechanism was scheduled to end, with the Rate Plan, on December 31, 2001, the DPUC ordered that the earnings sharing mechanism be extended effective January 1, 2002 until the conclusion of the Rate Case proceeding. The DPUC's decision also found that UI's earnings are not expected to exceed 11.5% in 2002, but that just and reasonable rates for UI at this point in time can only be determined in the full Rate Case proceeding. UI filed Rate Case schedules in November 2001, together with supporting pre-filed sworn written testimony. DPUC hearings have been scheduled for March and April 2002. UI anticipates a final decision in the Rate Case proceeding by mid-2002. 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. - 51 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. 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 Connecticut electricity customers are able to choose their power supply providers. Through December 31, 2003, UI is required to offer fully bundled retail service to its customers under a regulated "standard offer" rate 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 agreements with Enron Power Marketing, Inc. (EPMI), a subsidiary of Enron Corp. (Enron), Houston, Texas, for the supply of all of the power needed by UI to meet its standard offer obligations at fixed prices until the end of the four-year standard offer period on December 31, 2003. On December 2, 2001, Enron, and many of its subsidiaries, including EPMI, commenced bankruptcy proceedings seeking protection from their creditors while they attempt to reorganize under federal bankruptcy law. This action by EPMI was an event of default under its agreements with UI and effective January 1, 2002, UI terminated all of its agreements with EPMI. On December 28, 2001, UI entered into an agreement with Virginia Electric and Power Company for the supply of all of UI's standard offer generation service needs from January 1, 2002 through December 31, 2003. The Restructuring Act requires that, in order for UI to recover any stranded costs, it must attempt to divest its ownership interests in its nuclear-fueled power plants prior to 2004. 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 planned to divest its nuclear generation ownership and leasehold interests (17.5% of Seabrook Station in New Hampshire and 3.685% of Millstone Unit 3 in Connecticut) by the end of 2003, in accordance with the Restructuring Act. The sale of UI's ownership in Millstone Unit 3 was consummated on March 31, 2001. UI's share of the proceeds from the sale, including nuclear fuel, was $34.4 million. There was no direct impact on UI's financial results, and net-of-tax proceeds from the sale that were in excess of the market value of the plant, as set by the DPUC, were credited to reduce stranded cost rate base. That amount is approximately $15.3 million and is subject to true-up by the DPUC. On December 15, 2000, UI and The Connecticut Light and Power Company filed with the DPUC for approval of their plan to divest their respective interests in Seabrook Station by an auction process. On October 10, 2001, the DPUC issued its final decision approving the plan with certain modifications. The New Hampshire Public Utilities Commission, in coordination with the DPUC, has retained an investment banking firm as the exclusive financial advisor to conduct the auction of Seabrook Station, which is expected to be completed around the end of 2002. Based on the decisions in the regulatory proceedings described above, the sale of UI's fossil-generation assets and its ownership interest in Millstone Unit 3, and the planned divestiture of its ownership and leasehold interests in Seabrook Station by the end of 2003, UI ceased applying Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," 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. - 52 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (D) RESTRUCTURING UI is currently undergoing a workforce restructuring and process redesign in order to align more properly its services and costs. As part of this effort, UI undertook an involuntary severance and enhanced retirement benefit program (Program) under which 28 employees had received or were scheduled to receive benefits as of December 31, 2001. In 2001, UI accrued and expensed $4.1 million associated with the Program as an operation and maintenance expense. Of this amount, $1.7 million represented severance payments and $2.4 million represented curtailment gains and losses associated with UI's pension and post-retirement benefit plans. As of December 31, 2001, UI had an accrued liability of $0.6 million under the Program. (E) SHORT-TERM CREDIT ARRANGEMENTS UIL Holdings has a money market loan arrangement with JPMorgan Chase Bank. This is an uncommitted short-term borrowing arrangement under which JPMorgan Chase Bank may make loans to UIL Holdings for fixed maturities from one day up to six months. JPMorgan 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, 2001, UIL Holdings had no loans outstanding under this arrangement. UIL Holdings has a revolving credit agreement with a group of banks, which extends to August 1, 2002. The borrowing limit of this facility is $70 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 (LIBOR). If a material adverse change in the business, operations, affairs, assets or condition, financial or otherwise, or 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, 2001, UIL Holdings had $18.0 million in short-term borrowings outstanding under this facility. Xcelecom has a revolving working capital credit agreement with a bank. This agreement provides for a $25 million revolving working capital facility, available to meet working capital needs and to support standby letters of credit issued by Xcelecom in the normal course of its business. This agreement also provides for the payment of interest at a rate, at the option of Xcelecom, based on the bank's prime interest rate or LIBOR. As of December 31, 2001, the outstanding balance on this facility was $12.9 million. In addition, Xcelecom had outstanding standby letters of credit of $4.3 million at December 31, 2001. APS has a $10 million revolving credit agreement with a bank that will expire on June 28, 2002. This agreement is available for working capital needs, acquisition of fixed assets and investments in acquired companies. The terms of this agreement allow APS to select the interest rate on its short-term borrowings based on either the bank's prime interest rate or LIBOR. As of December 31, 2001, APS had $0.7 million in short-term borrowings outstanding under this agreement. - 53 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Information with respect to short-term borrowings of UIL Holdings, Xcelecom and APS are as follows: 2001 2000 1999 ---- ---- ---- (In Thousands) UIL HOLDINGS - ------------ Maximum aggregate principal amount of short-term borrowings outstanding at any month-end $129,000 $114,000 $80,000 Average aggregate short-term borrowings outstanding during the year* $43,421 $42,511 $45,300 Weighted average interest rate* 5.8% 7.2% 5.5% Principal amounts outstanding at year-end $18,000 $109,000 $17,000 Annualized interest rate on principal amounts outstanding at year-end 2.9% 7.6% 7.0% Fees* $297 $386 $291 XCELECOM - -------- Maximum aggregate principal amount of short-term borrowings outstanding at any month-end $13,800 - - Average aggregate short-term borrowings outstanding during the year* $7,746 - - Weighted average interest rate* 3.3% - - Principal amounts outstanding at year-end $12,930 - - Annualized interest rate on principal amounts outstanding at year-end 2.7% - - Fees* $25 - - APS - --- Maximum aggregate principal amount of short-term borrowings outstanding at any month-end $824 $500 $6,287 Average aggregate short-term borrowings outstanding during the year* $143 $29 $2,557 Weighted average interest rate* 5.1% 9.7% 8.6% Principal amounts outstanding at year-end $685 $ - $ - Annualized interest rate on principal amounts outstanding at year-end 4.8% - - Fees* $36 $11 $ - *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 are excluded from the calculation of the weighted average interest rate. - 54 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (F) INCOME TAXES 2001 2000 1999 ---- ---- ---- (In Thousands) Income tax expense consists of: Income tax provisions: Current Federal $ 55,706 $ 31,650 $ 91,247 State 11,196 6,679 23,891 ------------ ------------ ----------- Total current 66,902 38,329 115,138 ------------ ------------ ----------- Deferred Federal (14,083) 9,152 (39,767) State (3,970) 1,283 (13,004) ------------ ------------ ----------- Total deferred (18,053) 10,435 (52,771) ------------ ------------ ----------- Investment tax credits (658) (735) (467) ------------ ------------ ----------- Total income tax expense $ 48,191 $ 48,029 $ 61,900 ============ ============ =========== Income tax components charged as follows: Operating tax expense $ 52,368 $ 52,298 $ 65,042 Nonoperating tax expense (4,177) (4,269) (3,142) ------------ ------------ ----------- Total income tax expense $ 48,191 $ 48,029 $ 61,900 ============ ============ =========== The following table details the components of the deferred income taxes: Gain on sale of utility property $ (9,680) $ - $ (70,573) Seabrook sale/leaseback transaction (2,546) (2,599) (69) Pension benefits 729 6,878 4,192 Accelerated depreciation (2,891) (3,006) 4,996 Tax depreciation on unrecoverable plant investment 202 235 5,902 Unit overhaul and replacement power costs 939 326 1,523 Conservation and load management (107) (107) (2,181) Displaced worker protection costs (333) (909) 2,329 Bond redemption costs (1,026) (585) (1,014) Cancelled nuclear project (467) (467) (467) Restructuring costs (538) 1,132 490 Regulatory deferrals 804 9,210 - Other - net (3,139) 327 2,101 ------------ ------------ ----------- Deferred income taxes - net $(18,053) $ 10,435 $ (52,771) ============ ============ =========== - 55 - 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: 2001 2000 1999 ---- ---- ---- (In Thousands) Computed tax at federal statutory rate $37,654 $38,075 $39,943 Increases (reductions) resulting from: Deferred return-Seabrook Unit 1 - - 4,405 ITC taken into income (658) (735) (467) Allowance for equity funds used during construction (393) (402) (201) Fossil plant decommissioning reserve - (4) (92) Amortization of regulatory asset 14,000 14,433 7,922 Book depreciation in excess of non-normalized tax depreciation (3,445) (3,565) 5,654 State income taxes, net of federal income tax benefits 4,697 5,176 7,076 Other items - net (3,664) (4,949) (2,340) ------- ------- ------- Total income tax expense $48,191 $48,029 $61,900 ====== ====== ====== Book income before income taxes $107,554 $108,786 $114,124 ======= ======= ======= Effective income tax rates 44.8% 44.1% 54.2% ===== ===== ===== At December 31, 2001, UIL Holdings had deferred tax liabilities for taxable temporary differences of $310 million and deferred tax assets for deductible temporary differences of $88 million, resulting in a net deferred tax liability of $222 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, $175 million; tax liabilities on normalization of book/tax depreciation timing differences, $113 million and tax assets on the disallowance of plant costs, $35 million. - 56 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (G) SUPPLEMENTARY INFORMATION 2001 2000 1999 ---- ---- ---- (In Thousands) OPERATING REVENUES - ------------------ Utility Retail $ 627,178 $ 602,347 $ 639,596 Wholesale 61,570 67,990 24,334 Proceeds from Millstone Unit 3 settlement - 14,960 - Other 26,070 19,394 16,045 Non-utility business unit revenues American Payment Systems 58,649 37,940 35,595 Xcelecom 312,556 138,267 35,423 Other/Eliminations (177) (43) (263) -------------- -------------- -------------- Total Operating Revenues $1,085,846 $ 880,855 $ 750,730 ============== ============== ============== SALES BY CLASS(MEGAWATT-HOURS) - UNAUDITED - ------------------------------------------ Retail Residential 2,119,976 2,056,366 2,053,927 Commercial 2,476,027 2,403,212 2,388,240 Industrial 1,082,394 1,146,295 1,161,856 Other 46,073 47,852 48,027 -------------- -------------- -------------- 5,724,470 5,653,725 5,652,050 Wholesale 2,030,365 2,237,805 1,009,866 -------------- -------------- -------------- Total Sales by Class 7,754,835 7,891,530 6,661,916 ============== ============== ============== DEPRECIATION AND AMORTIZATION - ----------------------------- Utility property, plant, and equipment $ 25,549 $ 24,575 $ 53,347 Non-utility business property, plant and equipment 3,878 3,278 3,689 Nuclear Decommissioning 3,384 3,986 4,004 -------------- -------------- -------------- Total Depreciation 32,811 31,839 61,040 -------------- -------------- -------------- Amortization of goodwill 4,456 1,439 - Amortization of nuclear plant regulatory assets 27,650 2,851 22,636 Amortization of purchase power contracts 26,115 26,744 - Amortization of other regulatory assets 3,924 5,668 - Amortization of cancelled plant 1,172 1,172 1,172 Amortization of deferred return - - 12,586 -------------- -------------- -------------- Total Amortization 63,317 37,874 36,394 -------------- -------------- -------------- Total Depreciation and Amortization $ 96,128 $ 69,713 $ 97,434 ============== ============== ============== - 57 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (G) SUPPLEMENTARY INFORMATION 2001 2000 1999 ---- ---- ---- (In Thousands) TAXES - OTHER THAN INCOME TAXES - ------------------------------- Connecticut gross earnings $ 26,661 $ 23,715 $ 24,518 Local real estate and personal property 12,334 13,939 17,745 Payroll taxes 6,154 5,402 4,877 -------------- -------------- -------------- Total Taxes - Other than Income Taxes $ 45,149 $ 43,056 $ 47,140 ============== ============== ============== OTHER INCOME, NET - ----------------- Interest income $ 692 $ 1,723 $ 1,801 Allowance for funds used during construction 1,913 2,609 2,235 Equity earnings from Connecticut Yankee 288 1,913 36 Miscellaneous other income and (deductions) - net 3,495 (2,906) 849 -------------- -------------- -------------- Total Other Income, net $ 6,388 $ 3,339 $ 4,921 ============== ============== ============== OTHER INTEREST, NET - ------------------- Notes Payable $ 2,507 $ 3,078 $ 2,662 Other 2,347 2,175 2,265 -------------- -------------- -------------- Total Other Interest, net $ 4,854 $ 5,253 $ 4,927 ============== ============== ============== - 58 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (H) PENSION AND OTHER BENEFITS UI's qualified pension plan covers substantially all of its employees, the employees of UIL Holdings and APS, and certain management employees of Xcelecom and UCI. 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 expense (income) for these plans for 2001, 2000 and 1999 was $0.8 million, $(14.7) million, and $(8.0) 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. No contributions were made in 1999. In 2000, $2.5 million was contributed for 1999 funding requirements. In 2001, $2.6 million was contributed for 2000 funding requirements. UI has established a supplemental retirement benefit trust and through this trust purchased life insurance policies on officers of UI to fund the future liability under the supplemental plan. The cash surrender value of these policies is included in Other Property and Investments 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 2001, 2000 and 1999. UI did not make a contribution to the 401(h) account in 2001 or 1999. UI contributed $0.2 million to the 401(h) account in 2000. Plan assets for both the union VEBA and 401(h) account consist primarily of equity and fixed-income securities. The following table represents the change in benefit obligation, change in plan assets and the respective funded status of UI's pension and postretirement plans as of December 31, 2001 and 2000. - 59 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) AT DECEMBER 31, PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS 2001 2000 2001 2000 ---- ---- ---- ---- (In Thousands) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $233,840 $232,392 $32,710 $31,591 Service cost 4,415 4,052 477 442 Interest cost 17,241 16,669 2,385 2,336 Amendments - 8,698 - - Actuarial (gain) loss 13,591 (6,476) 1,034 910 Curtailment (1,418) - 94 - Special termination benefits 1,149 - 40 - Settlement (2,346) - - - Benefits paid (including expenses) (18,480) (21,495) (2,553) (2,569) ------- -------- ------ ------- Benefit obligation at end of year $247,992 $233,840 $34,187 $32,710 ======= ======= ====== ====== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $247,040 $277,987 $20,534 $20,681 Actual return on plan assets (19,299) (12,109) 749 1,615 Employer contributions 5,085 2,657 597 807 Benefits paid (including expenses) (20,826) (21,495) (2,553) (2,569) ------- -------- ------ ------- Fair value of plan assets at end of year $212,000 $247,040 $19,327 $20,534 ======= ======= ====== ====== Funded Status at December 31: Projected benefits (less than) greater than plan assets $35,992 $(13,200) $14,860 $12,176 Unrecognized prior service cost (10,026) (11,553) (258) (280) Unrecognized transition asset 3,687 4,741 (10,936) (12,345) Unrecognized net gain (loss) from past experience (32,362) 21,717 2,547 5,464 -------- ------- ------ ------ Accrued benefit obligation $ (2,709) $ 1,705 $ 6,213 $ 5,015 ======= ====== ====== ====== The following actuarial assumptions were used in calculating the benefit obligations at December 31: Discount rate 7.25% 7.50% 7.25% 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% - 60 - 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 2001 2000 2001 2000 ---- ---- ---- ---- (In Thousands) Components of net periodic benefit cost: Service cost $4,415 $ 4,052 $477 $ 442 Interest cost 17,241 16,669 2,385 2,336 Expected return on plan assets (22,821) (29,735) (1,860) (2,227) Amortization of: Prior service costs 1,172 876 11 11 Transition obligation (asset) (1,054) (1,054) 1,090 1,089 Actuarial (gain) loss (424) (5,471) (518) (687) Settlements and curtailments 2,256 - 210 - ------ --- ---- --- Net periodic benefit cost $ 785 $(14,663) $1,795 $ 964 ==== ======= ===== ==== The following actuarial assumptions were used in calculating net periodic benefit cost: Discount rate 7.25% 7.50% 7.25% 7.50% Average wage increase 4.50% 4.50% 4.50% 4.50% Return on plan assets 9.50% 11.00% 9.50% 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 ----------- ----------- (In Thousands) Aggregate service and interest cost components $388 $(317) Accumulated postretirement benefit obligation $3,799 $(3,161) UI has a 401(k)/Employee Stock Ownership Plan (KSOP) in which substantially all of its employees, the employees of UIL Holdings and APS, and certain management employees of Xcelecom and UCI, 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 2001, 2000 and 1999 were $1.6 million, $1.8 million and $1.5 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 2001, 2000 and 1999 were $295,000, $293,000 and, $319,000 respectively. Xcelecom's subsidiaries make contributions to union-administered benefit funds, which cover the majority of the subsidiaries' union employees. Governmental regulations require that, in the event of plan termination or employer withdrawal, an employer may be liable for a portion of the plan's unfunded vested benefits, if any. Xcelecom is not aware of any liabilities resulting from unfunded vested benefits related to union-administered benefit plans. Xcelecom does not anticipate withdrawal from the plans, nor is Xcelecom aware of any expected plan terminations. - 61 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Non-union employees at each of the Xcelecom subsidiaries participate in profit sharing, 401(k) or other retirement plans that were in place at the time of the acquisition of the subsidiary by Xcelecom. Employees at the Xcelecom corporate level participate in both the UI qualified pension plan and the UI KSOP. In December of 2001, Xcelecom established the Xcelecom, Inc. 401(k) Plan. It is Xcelecom's intention to merge each of the separate subsidiary non-union retirement plans into this single company-wide plan in a staged manner. Beginning on January 1, 2002, Xcelecom non-union employees in subsidiaries merged into this plan are eligible to participate upon completing six months of service and attaining age twenty-one. Participants become vested in matching contributions immediately upon entry into the plan. Certain of Xcelecom's subsidiaries maintain separate defined contribution employee retirement plans that have not yet been merged into Xcelecom's 401(k) Plan. These plans are open to certain employees after various lengths of service. Employee contributions and employer matching contributions occur at different rates, and the matched portions of the funds vest over a period of years. Contributions for the profit sharing portion of the Plans are generally at the discretion of the individual subsidiary. (I) JOINTLY-OWNED PLANT At December 31, 2001, UI had the following interests in a jointly-owned plant: OWNERSHIP/ LEASEHOLD PLANT ACCUMULATED SHARE INVESTMENT (1) DEPRECIATION ------------- ---------- ------------ (In Millions) Seabrook Unit 1 17.5% $654 $197 (1) Of the plant investment amount, $456 million for Seabrook Unit 1 is reflected on the Consolidated Balance Sheet as a regulatory asset. UI's share of the operating costs of Seabrook Unit 1 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 2007. (K) LEASE OBLIGATIONS UIL Holdings and its wholly-owned direct and indirect subsidiaries have 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 the capital lease and the related obligation of - 62 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) this lease as of December 31, 2001 are recorded on the Consolidated Balance Sheet. The Seabrook sale/leaseback transaction is being treated as a long-term financing. Future minimum lease payments under the capital lease are estimated to be as follows: (In Thousands) 2002 $1,696 2003 1,696 2004 16,000 (1) 2005 - 2006 - After 2006 - ------ Total minimum capital lease payments 19,392 Less: Amount representing interest 3,666 ----- Present value of minimum capital lease payments $15,726 ====== (1) Represents anticipated buyout option payment. 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: (In Thousands) 2002 $10,355 2003 11,037 2004 10,807 2005 11,302 2006 10,521 2007 - after 71,965 ------ Total $125,987 ======= Rental payments charged to operating expenses in 2001, 2000 and 1999, including rental payments for its corporate headquarters, were $13.0 million, $11.3 million and $11.0 million, respectively. - 63 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (L) COMMITMENTS AND CONTINGENCIES CAPITAL EXPENDITURE PROGRAM (UNAUDITED) UIL Holdings' 2002-2006 estimated capital expenditure program, excluding UI's allowance for funds used during construction, is budgeted as follows: 2002 2003 2004 2005 2006 Total ---- ---- ---- ---- ---- ----- (In Thousands) UI Distribution and Transmission $68,243 $54,076 $35,846 $26,354 $22,427 $206,946 ------ ------ ------ ------ ------ ------- United Resources, Inc. (URI) Xcelecom 39,838 5,898 9,433 10,395 10,321 75,885 American Payment Systems 31,751 9,846 11,925 12,794 8,627 74,943 United Capital Investments 1,450 890 250 - - 2,590 -------- ------- ------- ------ ------ ------- Total URI 73,039 16,634 21,608 23,189 18,948 153,418 -------- ------- ------- ------ ------ ------- Total UIL Holdings $141,282 $70,710 $57,454 $49,543 $41,375 $360,364 ======= ====== ====== ====== ====== ======= Note: Any nuclear fuel capital expenditures made during 2002 will be recovered through the sale of UI's interest in Seabrook Station, expected to be completed around the end of 2002. These expenditures are not included above. 2002 expenditures for URI include estimates for acquisitions and investments similar to those previously completed. There is no guarantee that such acquisitions or investments will take place, and none are forecast beyond 2002. 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 the one operating nuclear generating unit in which UI has an interest, UI will be obligated to pay its ownership and leasehold share of any statutory assessment resulting from a nuclear incident at any nuclear generating unit. Based on its interest in this nuclear generating unit, UI estimates its maximum liability would be $14.7 million per incident. However, any assessment would be limited to $1.8 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 the one operating nuclear generating unit in which UI has an interest, UI is required to pay its ownership and leasehold share of the cost of purchasing such insurance. Although this unit has purchased $2.75 billion of property insurance coverage, representing the limits of coverage - 64 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 $3.4 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. A decision by the FERC that became effective on August 1, 2000 allows Connecticut Yankee to collect through the power contracts with the unit's owners, the FERC-approved decommissioning costs, other costs associated with the permanent shutdown of the Connecticut Yankee Unit, the unrecovered investment in the Connecticut Yankee Unit, and a return on equity of 6%. UI's estimate of its remaining share of Connecticut Yankee costs, including decommissioning, less return of investment (approximately $6.3 million) and return on investment (approximately $1.4 million) at December 31, 2001, is approximately $15.0 million. This estimate, which is subject to ongoing review and revision, has been recorded as an obligation with an offsetting regulatory asset of $21.3 million, which includes the $6.3 million return of investment. 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, 2001, UI's guarantee liability for this debt was approximately $5.0 million. CROSS SOUND CABLE PROJECT United Capital Investments (UCI), an indirect wholly-owned subsidiary of UIL Holdings, has a 25% interest ($0.9 million investment) in Cross-Sound Cable Company, LLC, which proposes to install, own and operate a 330-megawatt merchant transmission line connecting Connecticut and Long Island under Long Island Sound. UCI is obligated to furnish a direct guarantee for its participating share of the debt financing during construction of this project. Under a separate agreement, UIL Holdings is an indirect guarantor of the obligation of UCI. As of December 31, 2001, UCI's guarantee liability for this debt was approximately $7.9 million. This project has been opposed by a number of public officials and private groups who have participated actively in governmental permitting proceedings relative to the project. In December 2001, the Connecticut Department of Environmental Protection (CTDEP) issued a notice of intent to grant a permit for the project. A final decision from the CTDEP is expected in the first quarter of 2002. In January 2002, the Connecticut Siting Council (CSC) approved a permit application for siting the cable; but the Connecticut Attorney General and the City of New Haven have appealed the CSC's decision to the Connecticut Superior Court. UCI management believes that the CSC decision will be upheld on appeal, although there can be no assurance that it will. In addition, a permit application for siting the cable is pending before the United States Army Corps of Engineers. A final decision on this application is also anticipated in the first quarter of 2002. - 65 - 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 and its wholly-owned direct and indirect subsidiaries may incur substantial capital expenditures for equipment modifications and additions, monitoring equipment and recording devices, and it may incur additional operating expenses. The total amount of these expenditures is not now determinable. 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, 2001, 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 pending Rate Case proceeding, based on actual remediation costs and actual gain on UI's disposition of the property. Concurrent with the closing of Steel Point Station, a new East Main Street Station was created to replace it. The East Main Street Station cost $11.1 million, of which $10.6 million is reimbursable from the City of Bridgeport. UI expects that the receivable will be collectible from the City of Bridgeport through anticipated redevelopment grants or similar funding by the State of Connecticut. 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 and the remaining estimated cost of $9.3 million was expensed. 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, with UI acting as the project manager. 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 minimum Connecticut environmental standards. QE intends to reactivate the generation facilities on the site as a merchant electric generating plant. 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 minimum Connecticut environmental standards. The purchaser of the plants has agreed to undertake and pay for the remediation of the purchased properties. With respect to the portion of the New Haven Harbor Station site that UI has retained, UI has performed an additional environmental investigation. That investigation has refined what UI knows about the site conditions; and UI is in the process of evaluating what steps may be necessary to remediate the retained portion of the site in compliance with governing requirements. At this time, UI is unable to estimate the scope or the cost of the remediation that will be required. 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 - 66 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 currently available. (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 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 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, which has been retired from commercial operation, are deemed adequate. Storage facilities for Seabrook Station are projected to be adequate until 2008, and modifications to the facilities could expand their storage capabilities to accommodate the spent fuel from a limited number of additional operating cycles. However, facilities for the dry storage of spent fuel are projected to be needed before the end of the current licensed life of the Seabrook plant if a DOE permanent repository does not become available. 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 and Seabrook Station for disposal of LLW. The Envirocare LLW facility at Clive, Utah, is also open to these generating plants for portions of their LLW. Both plants have contracts in place for LLW disposal at these disposal facilities. In the event access to LLW disposal facilities is interrupted, Seabrook Station has on-site storage capability for at least five years. 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. Connecticut, New Jersey and South Carolina have formed the Atlantic Compact, which should ensure that the Connecticut Yankee Unit will have access to the Chem Nuclear LLW facility at Barnwell, South Carolina, through the end of their decommissioning. - 67 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Nuclear Regulatory Commission 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 that the funds required to finance the decommissioning of nuclear generating units in that state be managed by the State Treasurer. The New Hampshire Nuclear Decommissioning Financing Committee (NDFC) has established $584.7 million (in 2002 dollars) as the decommissioning cost estimate for Seabrook Station, of which UI's share would be approximately $102.3 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 2001 was $3.3 million. UI's share of the fund at December 31, 2001 was approximately $26.3 million. 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. As of January 1, 2000, the estimate of future decommissioning costs to be incurred subsequent to that date for the Connecticut Yankee Unit, assuming the prompt removal and dismantling of the unit, was $393.3 million. As of December 31, 2001, $135.3 million of this amount had been expended for decommissioning. The projected remaining decommissioning cost is $258.0 million, of which UI's share is $24.5 million. For UI's 9.5% equity ownership in Connecticut Yankee, decommissioning costs of $1.6 million were funded by UI during 2001, and UI's share of the fund at December 31, 2001 was $27.0 million. 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. (Dominion) agreed to purchase Millstone Units 1 and 2, and 93.47% of Millstone Unit 3. The sale was consummated on March 31, 2001. UI's share of the Millstone Unit 3 decommissioning payments made during 2001 was $1.2 million. UI's share of the fund at March 31, 2001 was $8.5 million. This balance was transferred to Dominion on that date, along with the decommissioning obligation; and UI has paid Dominion an additional $0.2 million as a final adjustment due under the Purchase and Sale Agreement. (N) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of UIL Holdings' financial instruments are as follows: 2001 2000 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ----- (In Thousands) (In Thousands) Unrestricted cash and temporary cash investments $29,500 $29,500 $14,237 $14,237 Long-term debt (1)(2)(3) $470,460 $475,372 $395,460 $384,838 (1) Excludes the obligation under the Seabrook Unit 1 sale/leaseback agreement. (2) The fair value of UIL Holdings' long-term debt is estimated by investment bankers based on market conditions at December 31, 2001 and 2000, respectively. (3) See Note (B), "Capitalization - Long-Term Debt." - 68 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (O) QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for 2001 and 2000 are set forth below: OPERATING OPERATING NET EARNINGS PER SHARE OF QUARTER REVENUES INCOME INCOME COMMON STOCK(1) - ------- --------- --------- ------ --------------------- (In Thousands) Basic Diluted ----- ------- 2001 - ---- First Quarter $242,198 $28,846 $9,476 $0.67 $0.67 Second Quarter 262,509 36,955 15,220 1.08 1.08 Third Quarter 313,613 53,439 24,929 1.77 1.76 Fourth Quarter 267,526 25,465 9,738 0.69 0.68 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 0.46 0.46 -------------------- (1) Based on weighted average number of shares outstanding each quarter. - 69 - UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (P) SEGMENT INFORMATION UIL Holdings has two reportable operating segments, UI, its regulated electric utility business engaged in the purchase, transmission, distribution and sale of electricity, and Xcelecom, its non-utility, indirect, wholly-owned subsidiary, which provides specialized contracting services in the electrical, communications and data network infrastructure industries. Revenues from inter-segment transactions are not material. All of UIL Holdings' revenues are derived in the United States. The following table reconciles certain segment information with that provided in UIL Holdings' Consolidated Financial Statements. In the table, Other includes the information for the remainder of UIL Holdings' non-utility businesses and inter-segment eliminations. 2001 2000 ---- ---- Total Assets (In Thousands) - ------------ Utility $1,536,802 $1,602,327 Xcelecom -Non-utility business 180,794 136,951 Other 146,335 129,276 ---------- ---------- Total UIL Holdings $1,863,931 $1,868,554 ========= ========= 2001 2000 1999 ---- ---- ---- Revenues from External Customers (In Thousands) - -------------------------------- Utility $714,818 $704,691 $679,975 Xcelecom -Non-utility business 312,556 138,267 35,423 Other 58,472 37,897 35,332 ----------- -------- -------- Total UIL Holdings $1,085,846 $880,855 $750,730 ========= ======= ======= 2001 2000 1999 ---- ---- ---- Income (Loss) before Income Taxes (In Thousands) - --------------------------------- Utility $102,971 $108,039 $117,902 Xcelecom -Non-utility business 10,869 3,944 (4,805) Other (6,286) (3,197) 1,027 --------- --------- --------- Total UIL Holdings $107,554 $108,786 $114,124 ======= ======= ======= - 70 - PRICEWATERHOUSECOOPERS - ------------------------------------------------------------------------------- PRICEWATERHOUSECOOPERS LLP 1301 Avenue of the Americas New York NY 10019-6013 Telephone (646) 471 4000 Facsimile (646) 394 5324 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Shareholders of UIL Holdings Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of UIL Holdings Corporation and its subsidiaries (the "Company") at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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 28, 2002 New York, NY - 71 - PRICEWATERHOUSECOOPERS - ------------------------------------------------------------------------------- PRICEWATERHOUSECOOPERS LLP 1301 Avenue of the Americas New York NY 10019-6013 Telephone (646) 471 4000 Facsimile (646) 394 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 28, 2002 appearing in the 2001 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 28, 2002 New York, NY - 72 - 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 Corporation's (UIL Holdings') definitive Proxy Statement, dated April 5, 2002 for the Annual Meeting of the Shareowners to be held on May 15, 2002, which Proxy Statement will be filed with the Securities and Exchange Commission on or about April 5, 2002, 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 2001 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 5, 2002, for the Annual Meeting of the Shareowners to be held on May 15, 2002, which Proxy Statement will be filed with the Securities and Exchange Commission on or about April 5, 2002, 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 5, 2002 for the Annual Meeting of the Shareowners to be held on May 15, 2002, which Proxy Statement will be filed with the Securities and Exchange Commission on or about April 5, 2002, is incorporated by reference in answer to this item. Item 13. Certain Relationships and Related Transactions. Under a lease agreement dated May 7, 1991, The United Illuminating Company (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 2001, UI's lease payments to CFCALP totaled $7.6 million. A subsidiary of United Resources, Inc., United Capital Investments, Inc. (UCI), has invested $3.75 million to purchase a minority ownership interest in Gemini Networks, Inc. (Gemini). Gemini proposes to develop, build and operate an open-access, hybrid fiber coaxial communications network serving business and residential customers in the Northeastern United States. Gemini is a corporation controlled by the David T. Chase family; and Arnold L. Chase is the President and a Director of Gemini. Since January 1, 2001, there has been no other transaction, relationship or indebtedness of the kinds described in Item 404 of Regulation S-K. - 73 - 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, 2001, 2000 and 1999 Consolidated statement of cash flows for the years ended December 31, 2001, 2000 and 1999 Consolidated balance sheet, December 31, 2001 and 2000 Consolidated statement of changes in shareholders' equity for the years ended December 31, 2001, 2000 and 1999 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, 2001, 2000 and 1999. - 74 - 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 UIL Quarterly Report (Form 10-Q) for fiscal quarter ended September 30, 2001. (3) Filed with UI Registration Statement No. 33-40169, effective August 12, 1991. (4) Filed with UI Registration Statement No. 33-35465, effective August 1, 1990. (5) Filed with UI Registration Statement No. 2-57275, effective October 19, 1976. (6) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31, 1995. (7) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31, 1996. (8) Filed with UI Registration Statement No. 2-60849, effective July 24, 1978. (9) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31, 1991. (10) Filed with UI Registration Statement No. 2-54876, effective November 19, 1975. (11) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June 30, 1997. (12) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31, 1997. (13) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31, 1998. (14) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31, 1999. (15) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended September 30, 1997. (16) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended March 31, 1998. (17) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June 30, 2001. (18) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June 30, 1999. (19) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31, 2000. - 75 - 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 (2) Copy of Bylaws of UIL Holdings Corporation, as amended through September 24, 2001. (Exhibit 3.2a) (4) 4.1 (3) 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 (4) 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 (5) 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 (5) 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 (6) Copy of Additional Power Contract, dated as of April 30, 1984, between Connecticut Yankee Atomic Power Company and The United Illuminating Company. (Exhibit 10.2f) (10) 10.2c (7) 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 (7) Copy of 1996 Amendatory Agreement, dated as of December 4, 1996, amending Exhibits 10.2b and 10.2c. (Exhibit 10.2d) (10) 10.2e (7) Copy of First Supplement to 1996 Amendatory Agreement, dated as of February 10, 1997, supplementing Exhibit 10.2d. (Exhibit 10.2e) (10) 10.3 (5) 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 (8) 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 (9) 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 (10) Copy of Transmission Support Agreement, dated as of May 1, 1973, among the Seabrook Companies. (Exhibit 5.9-2) (10) 10.5c (7) 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) - 76 - Exhibit Table Exhibit Reference Item No. No. No. Description - ------- ------- --------- ----------- (10) 10.6a (8) 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) 10.6b (9) Notice, dated April 24, 1978, of The United Illuminating Company's intention to extend term of Transmission Line Agreement dated January 13, 1966, Exhibit 10.6a. (Exhibit 10.9b) (10) 10.6c (9) Copy of Letter Agreement, dated March 28, 1985, between The United Illuminating Company and National Railroad Passenger Corporation, supplementing and modifying Exhibit 10.6a. (Exhibit 10.9c) (10) 10.6d (11) Copy of Notice, dated April 22, 1997, of The United Illuminating Company's intention to extend term of Transmission Line Agreement, Exhibit 10.6a, as supplemented and modified by Exhibit 10.6c. (Exhibit 10.9d) (10) 10.7a (12) 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) 10.7b (13) 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) 10.7c (14) 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) 10.8a* (15) 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) 10.8b* (16) 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. (Exhibit 10.14a) (10) 10.9a* (15) Copy of Employment Agreement, dated as of March 1, 1997, between The United Illuminating Company and Charles J. Pepe. (Exhibit 10.31) (10) 10.9b* (14) 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) 10.9c* (17) Copy of Third Amendment to Employment Agreement between The United Illuminating Company and Charles J. Pepe, dated as of June 1, 2001. (Exhibit 10.11c*) (10) 10.10a* (16) Copy of Employment Agreement, dated as of February 23, 1998, between The United Illuminating Company and Nathaniel D. Woodson. (Exhibit 10.28) (10) 10.10b* (14) 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) 10.11a* (16) 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) 10.11b* (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. (Exhibit 10.21b+) (10) 10.12* (1) Copy of Employment Agreement, made as of June 12, 2000, between The United Illuminating Company and Gregory E. Sages. (Exhibit 10.28+) - 77 - Exhibit Table Exhibit Reference Item No. No. No. Description - ------- ------- --------- ----------- (10) 10.13* (1) Copy of Employment Agreement, made as of June 26, 2000, between The United Illuminating Company and Susan E. Allen. (Exhibit 10.29+) (10) 10.14* (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 10.8a*, 10.9a*, 10.10a*, 10.12 and 10.13. (Exhibit 10.30+) (10) 10.15* Copy of Employment Agreement, made as of May 1, 2001, between United Capital Investments, Inc. and Richard J. Nicholas. (10) 10.16a* (7) 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) 10.16b* (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. (Exhibit 10.23b+) (10) 10.17a* (18) Copy of The United Illuminating Company 1999 Stock Option Plan. (Exhibit 10.29) (10) 10.16c*, 10.17b* (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 10.15a*, 10.15b*, and 10.16a*. (Exhibit 10.23c+ and 10.24a+) (10) 10.18* (2) Copy of UIL Holdings Corporation Change In Control Severance Plan (As Amended and Restated Effective September 24, 2001). (Exhibit 10.21+) (10) 10.19* (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. - 78 - 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 - 79 - 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 11, 2002 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, President /s/ Nathaniel D. Woodson and Chief Executive Officer March 11, 2002 - ------------------------------------- (Nathaniel D. Woodson) (Principal Executive Officer) Director, Vice Chairman of the Board of Directors and /s/ Robert L. Fiscus Chief Financial Officer March 11, 2002 - ------------------------------------- (Robert L. Fiscus) (Principal Financial and Accounting Officer) /s/ John F. Croweak Director March 11, 2002 - ------------------------------------- (John F. Croweak) /s/ F. Patrick McFadden, Jr. Director March 11, 2002 - ------------------------------------- (F. Patrick McFadden, Jr.) /s/ Betsy Henley-Cohn Director March 11, 2002 - ------------------------------------- (Betsy Henley-Cohn) /s/ James A. Thomas Director March 11, 2002 - ------------------------------------- (James A. Thomas) /s/ David E.A. Carson Director March 11, 2002 - ------------------------------------- (David E.A. Carson) /s/ John L. Lahey Director March 11, 2002 - ------------------------------------- (John L. Lahey) /s/ Marc C. Breslawsky Director March 11, 2002 - ------------------------------------- (Marc C. Breslawsky) - 80 - SIGNATURE TITLE DATE --------- ----- ---- /s/ Thelma R. Albright Director March 11, 2002 - ------------------------------------- (Thelma R. Albright) /s/ Arnold L. Chase Director March 11, 2002 - ------------------------------------- (Arnold L. Chase) /s/ Daniel J. Miglio Director March 11, 2002 - ------------------------------------- (Daniel J. Miglio) /s/ William F. Murdy Director March 11, 2002 - ------------------------------------- (William F. Murdy) - 81 - THE UNITED ILLUMINATING COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 2001 AND 2000 (Thousands of Dollars) COL. A. COL. B. COL. C COL. D. COL. E. ------- ------- ------ ------- ------- Additions --------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Classification of Period Expenses Accounts Deductions of Period - ---------------------------------- --------- -------- -------- ---------- ---------- RESERVE DEDUCTION FROM ASSETS TO WHICH IT APPLIES: Reserve for uncollectible accounts (consolidated): 2001 $ 2,569 $ 6,721 $ - $ 6,268 (A) $ 3,022 2000 $ 2,308 $ 5,790 $ - $ 5,529 (A) $ 2,569 Reserve for uncollectible accounts (American Payment Systems, agent collections (B)): 2001 $ 206 $ 545 $ - $ 398 (A) $ 353 2000 $ 170 $ 408 $ - $ 372 (A) $ 206 NOTE: (A) Accounts written off, less recoveries. (B) Included in consolidated amounts above. S-1